MILBERG WEISS BERSHAD
HYNES & LERACH LLP
WILLIAM S. LERACH (68581)
DARREN J. ROBBINS (168593)
600 West Broadway, Suite 1800
San Diego, CA 92101
Telephone: 619/231-1058
619/231-7423 (fax)
SPECTOR & ROSEMAN, P.C.
ROBERT M. ROSEMAN
2000 Market Street
12th Floor
Philadelphia, PA 19103
Telephone: 215/864-2400
215/864-2424 (fax)
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ELLEN GUSIKOFF STEWART (144892)
DIANE P. DOHERTY (175350)
600 West Broadway, Suite 1800
San Diego, CA 92101
Telephone: 619/338-4514
619/231-7423 (fax)
Attorneys for Plaintiff
[Additional counsel appear on signature page.]
UNITED STATES DISTRICT COURT
CENTRAL DISTRICT OF CALIFORNIA
WESTERN DIVISION
STEVEN T. MOORE, On Behalf of ) No. [SACV98-400 AHS(EEx)]
Himself and All Others Similarly ) [filed May 6, 1998]
Situated, ) CLASS ACTION
)
Plaintiff, )
) COMPLAINT FOR VIOLATIONS OF
vs. ) THE SECURITIES EXCHANGE ACT
) OF 1934
SHOPPING.COM, INC., ROBERT J. )
McNULTY, DOUGLAS HAY, WALDRON & CO. )
and CERY PERLE, )
)
Defendants. ) Plaintiff Demands A
___________________________________ ) Trial By Jury
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INTRODUCTION AND OVERVIEW
1. This is a securities fraud class action on behalf of all
persons who purchased the common stock of Shopping.com, Inc.,
("IBUY" or the "Company") between November 25, 1997 and March 26,
1998, inclusive (the "Class Period"), alleging violations of the
anti-fraud provision of the federal securities laws against IBUY,
its senior executives and the investment banking firm which
together with IBUY's senior executives manipulated the trading
price of IBUY's shares.
2. IBUY holds itself out as an innovative Internet-based
electronic retailer that markets an immense selection of brand name
consumer and commercial products at low prices via its website
using state-of-the-art proprietary technology. During the Class
Period, the defendants, including IBUY, its senior-most officers
and directors and its underwriter Waldron & Co. ("Waldron"),
participated in a scheme and wrongful course of business to
manipulate the price of IBUY stock, which scheme included: (i)
defendant Waldron's refusal to execute sell orders; (ii) the use of
illegal stock parking; (iii) the use of illegal above-market buy-
ins to intimidate and dissuade potential short sellers from selling
IBUY stock short; (iv) the sale of IBUY shares to discretionary
accounts without regard to suitability; and (v) the dissemination
of materially false and misleading statements about IBUY's
operating performance and its future prospects. The defendants'
scheme in connection with and subsequent to the Company's November
1997 initial public offering ("IPO"), enabled the defendants to
raise $11.7 million by selling 1.3 million IBUY shares to the
public at $9 per share and thereafter drive the price of IBUY's
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stock to an all time high of over $32 per share in March 1998. The
defendants engaged in this illegal scheme in order to bring IBUY
public and thereafter avoid a total collapse in the price of IBUY
stock as the truth about the Company's misconduct came to light.
3. As part of defendants' scheme to avert a collapse in
IBUY's stock price, once the Company became public, Waldron
employed various illegal tactics which included fraudulent refusals
to execute customers' sales orders, stock parking and forced buy-
ins at prices more than 50% above IBUY's trading price. The effect
of these illegal practices was to stimulate artificial activity in
the stock and manipulate its price. As a result of this
coordinated manipulation by the defendants, the market
capitalization for IBUY, a company with minimal sales and a
history of losses, came to exceed $200 million.
4. In order to successfully complete IBUY's IPO, the
defendants needed to prime the market about IBUY's success prior to
and in connection with the issuance of the prospectus for IBUY's
IPO. To this end, IBUY secretly arranged to sell $250,000 of
product to Waldron as part of defendants' effort to have IBUY post
revenue growth prior to IBUY's planned IPO. IBUY also made a
series of announcements of hires and the execution of agreements
with several companies to help promote the Company. Each of the
very positive statements which accompanied these announcements were
designed to foment interest in the Company and its planned IPO.
Additionally, the defendants hoped that this would result in future
investors valuing IBUY as a "growth stock," allowing it to trade at
huge multiples of revenues. However, the defendants also realized
that they had to take IBUY public quickly as its existing business
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was weak and that IBUY was not and could not internally generate
the rate of growth needed to drive the Company's stock price once
it became public.1
5. On November 25, 1997, IBUY completed its IPO, selling 1.3
million shares at $9 per share, for proceeds of $11.7 million.
Following the IPO, the defendants continued to hype the Company and
its prospects, issuing false and misleading information about: (i)
IBUY's newly implemented marketing campaign, which purportedly was
attracting substantial additional traffic to the Company's website;
(ii) IBUY's implementation of a new business model which
purportedly would allow IBUY to "grow rapidly while maintaining no
physical inventories resulting in lower costs than traditional
retailers"; (iii) IBUY's execution of a marketing agreement which
would enable the Company to tap into the $120 billion a year
automotive after market; and (iv) the launch of IBUY's national
radio campaign. In conjunction with the issuance of the false and
misleading information by defendants, defendant Waldron and others
employed a sophisticated market manipulation scheme designed to
control transactions in IBUY stock in order to manipulate the
market price of IBUY so that it would continue to trade at
artificially inflated levels. As a result thereof, the defendants
were able to manipulate the price of IBUY as it rose from its IPO
____________________
1 To assist in preparing the Registration Statement, IBUY also
hired counsel who held tens of thousands of IBUY shares in order
to avoid having a thorough due-diligence investigation of IBUY
and its operations completed in connection with the Company's
IPO.
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price of $9 per share to over $32 per share in a little over three
months.2
6. However, contrary to defendants' positive statements
concerning IBUY's operations, customer base and prospects (and
despite the defendants' manipulation of IBUY's stock price), the
true facts began to emerge as the Securities and Exchange
Commission ("SEC") announced on March 25, 1998 the suspension of
trading of the Company's stock on suspicions of stock manipulation.
In a press release it was reported that:
On March 24, the Commission temporally suspended,
pursuant to Section 12(k) of the Securities Exchange Act
of 1934, over-the-counter trading of the securities of
IBUY, Inc. (IBUY), of Corona Del Mar, California. The
suspension is effective from 9:30 a.m. (E.S.T.) On March
24, 1998 to 11:59 p.m. (EDT) on April 6, 1998.
The Commission suspended trading, temporarily,
because of concerns that there was a lack of current and
accurate information regarding the securities of IBUY due
to recent market activity in the stock that may have been
the result of manipulative conduct. (Rel.34-39786)
7. On March 26, 1998, another bombshell was dropped on
IBUY's shareholders when Kristine Webster, the Company's Chief
Financial Officer, stunned investors, disclosing that 23% of the
____________________
2 The actual price of IBUY stock is subject to debate, as
Waldron has charged short sellers seeking to deliver borrowed
shares at prices that are 50% higher than the current trading
price of IBUY shares in the open market. This tactic has been
used to "punish" short sellers and intimidate potential short
sellers from even attempting to sell IBUY stock short. As of
April 13, 1998, quoted trading prices for IBUY shares are
illusory as no broker/dealer is willing and able to make a market
in IBUY stock.
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Company's revenues since the inception of its business had not been
obtained from the sale of product to third party customers, but
rather via Waldron's purchases of computer equipment and other
office equipment valued at more than $250,000! This was not
disclosed to the investing public in IBUY's Prospectus or any other
IBUY public filing. The reaction to these shocking revelations was
swift and severe. Despite defendants' continued efforts to
manipulate IBUY stock by refusing to sell shares for customers who
had ordered the sale of such shares, IBUY lost 30% of its value,
falling from $30 to $21.
8. Each of the positive statements about IBUY's business
made during the Class Period was materially false and misleading
when issued, and failed to disclose, inter alia, the following
adverse information which was then known only to defendants due to
their access to internal IBUY data:
(a) Since the inception of its business, 23% of the
Company's revenues had come via sales of computers and other office
equipment to Waldron, the primary underwriter of IBUY's IPO;
(b) IBUY began the IPO process with Waldron before it
had ever closed a sale. As part of the IPO underwriting
arrangement between defendant IBUY, its CEO and COO and Waldron,
Waldron secretly arranged to purchase $250,000 in product from
IBUY, thereby enabling IBUY to post substantial pre-IPO revenue
growth;
(c) The price of the Company's stock following the IPO
was being manipulated by defendants as a result of defendant
Waldron's utilization of fraudulent sales practices including
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refusals to execute customer's sales orders, stock parking and
other manipulative practices;
(d) IBUY was, in fact, having difficulty attracting
customers and providing a high enough level of safety for them to
buy;
(e) IBUY was not generating sufficient revenue to
support the 1998 revenue numbers claimed by defendant Waldron in
connection with IBUY's IPO;
(f) IBUY's revenues were not meeting the Company's
business plan and, as a result, the Company was not achieving the
earnings which were projected in IBUY's planning reports;
(g) The Company's revenues are actually "pass-through"
in nature and post-costs of goods sold income more accurately
represents the Company's revenues. Therefore, net sales for the
nine months ended October 31, 1997 were $18,841 as opposed to the
$376,822 reported;
(h) As a result of the foregoing, defendants did not
believe that IBUY would continue to sustain sequential earnings
growth and defendants' publicly made forecasts that IBUY would
achieve sequential earnings per share increases in the fourth
quarter of 1997 and beyond were known by defendants to be false as
such earnings per share were impossible to achieve in light of
these undisclosed problems; and
(i) The publicly made forecasts of IBUY's sequential
earnings growth were false and were not genuinely believed by the
defendants, as they were aware of the adverse information set forth
above which contradicted these forecasts.
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JURISDICTION AND VENUE
9. Jurisdiction is conferred by õ27 of the Securities
Exchange Act of 1934 ("1934 Act"). The claims asserted herein
arise under õõ10(b) and 20(a) of the 1934 Act and Rule 10b-5.
Venue is proper in this District pursuant to õ27 of the 1934 Act.
10. IBUY is a California corporation with executive offices
and its principal place of business located at 2101 East Coast
Highway in Corona Del Mar, California. Defendant Waldron has
offices in this District. The individual defendants reside in
and/or conduct business in this District. The defendants' acts
giving rise to the causes of action alleged herein occurred within
this District.
THE PARTIES
11. Plaintiff Steven T. Moore purchased 350 shares of IBUY
stock on March 17, 1998 at $23.21875 per share and was damaged
thereby.
12. Defendant IBUY is incorporated in the State of California
and maintains its principal place of business in Corona Del Mar,
California. IBUY began operations in February 1996, and commenced
selling on the Internet on July 11, 1997. The Company is an
Internet-based electronic wholesaler/retailer specializing in
retail marketing of a broad range of top brand-name consumer
products and services at wholesale prices to both consumer and
trade customers. Utilizing proprietary technology, the Company
designed a fully-scalable systems architecture for the Internet
shopping marketplace. The Company's strategy is to become a
dominant low-price leader in "wholetailing" on the Internet by
utilizing the warehousing, purchasing and distribution strengths of
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multiple manufacturers and distributors. As of January 9, 1998,
IBUY had approximately 4 million shares outstanding. During the
Class Period, IBUY shares were actively traded on the NASD OTC
Electronic Bulletin Board, even though it met NASDAQ OTC
requirements.
13. Defendant Robert J. McNulty ("McNulty") was, at all
relevant times, the President and Chief Executive Officer of IBUY
and a member of its Board of Directors. Because of his position
with IBUY, McNulty knew the adverse, non-public information about
its business, finances, products, markets and present and future
business prospects via access to internal corporate documents
(including IBUY's operating plans, budgets and forecasts and
reports of actual operations compared thereto), conversations and
connections with other corporate officers and employees, attendance
at management and Board of Directors' meetings and committees
thereof and via reports and other information provided to him in
connection therewith. McNulty knew or recklessly disregarded that
the statements particularized herein were false and misleading when
made and would affect trading in IBUY securities and/or would
create a false and misleading appearance with respect to the market
for IBUY securities before the truth about its products and
financial condition was revealed to the public. In October 1995,
McNulty settled an action brought by the SEC, consenting to a
judgment providing for a civil penalty, which included disgorgement
of his illegally obtained profits from a prior fraud. Defendant
McNulty participated in the fraud complained of herein despite the
injunction which prohibits him from violating the antifraud
provisions of the federal securities laws. In fact, because of
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defendant McNulty's prior shenanigans, Waldron was compelled to
sell IBUY shares only to certain qualified investors, i.e., those
who made certain threshold earnings and asset requirements and only
after having such persons execute required documentation.
Defendant McNulty prepared, reviewed and signed the false
Registration Statement and Prospectus.
14. Defendant Douglas Hay ("Hay") was, at all relevant times,
the Chief Operating Officer of IBUY and a member of its Board of
Directors. Because of his position with IBUY, Hay knew the
adverse, non-public information about its business, finances,
products, markets and present and future business prospects via
access to internal corporate documents (including IBUY's operating
plans, budgets and forecasts and reports of actual operations
compared thereto), conversations and connections with other
corporate officers and employees, attendance at management and
Board of Directors' meetings and committees thereof and via reports
and other information provided to him in connection therewith. Hay
participated in the scheme complained of herein and knew that the
statements particularized herein were false and misleading when
made and would affect trading in IBUY securities and/or would
create a false and misleading appearance with respect to the market
for IBUY securities before the truth about its products and
financial condition was revealed to the public. Defendant Hay
prepared, reviewed and signed the false Registration Statement and
Prospectus.
15. Defendant Waldron purportedly was founded in 1939. In
fact, Waldron was a near-bankrupt shell when acquired by defendant
Cery Perle and his cohorts in 1996. Waldron is a California
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corporation, and was at all relevant times a securities
broker/dealer and purported NASD member with its principal place of
business located at 100 Bush Street, San Francisco, California.
Waldron claims to be a full service banking and brokerage firm,
focusing its corporate finance efforts in Southern California's
high technology community. Waldron maintains offices within this
District. Defendant Waldron was the lead underwriter for the
Company's IPO and issued analysts' reports on IBUY during the Class
Period.
16. Defendant Cery Perle ("Perle") is and was at all relevant
times the principal officer of defendant Waldron and a primary
participant in the scheme complained of herein. Defendant Perle
controlled Waldron in fact and was a control person of that firm
pursuant to õ20 of the 1934 Act.
17. During the Class Period, the defendants, individually and
in concert, directly and indirectly, engaged and willfully
participated in a fraudulent course of business to misrepresent the
results of IBUY's operations, and to conceal adverse material
information regarding IBUY as specified herein in order to sell 1.3
million IBUY shares in IBUY's November 1997 IPO. The defendants
employed devices, schemes, and artifices to defraud, and engaged in
acts, practices, and a course of conduct as herein alleged in an
effort to increase and maintain an artificially high market price
for IBUY shares. This included the formulation of, making, and/or
participation in the making of untrue statements of material facts,
and the omission to state material facts necessary in order to make
the statements made, in light of the circumstances under which they
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were made, not misleading, which operated as a fraud and deceit
upon plaintiff and the other members of the Class.
DEFENDANTS' MOTIVE TO
PARTICIPATE IN THE SCHEME TO DEFRAUD
18. Each defendant had the opportunity to commit and
participate in the fraud. Defendants Hay and McNulty were the top
officers and/or directors of IBUY and they controlled its press
releases, corporate reports, SEC filings and its communications
with analysts. Thus, they controlled the public dissemination of,
and could falsify, the information about IBUY's business, products,
financial results and future prospects that reached the public and
impacted the price of its stock.
19. Each of the defendants also had the motive to commit and
participate in the fraud. Completing IBUY's IPO was extremely
important to defendants McNulty, Hay, Waldron and Perle because
prior to becoming a publicly traded company, these defendants had
received warrants and preferred stock so that they stood to obtain
huge benefits if the defendants could complete the IPO and keep the
price of IBUY stock inflated through 1998. These defendants also
participated in the scheme in order to cover up the problems with
and deterioration in IBUY's business to make it appear as if IBUY's
business was succeeding and achieving the strong growth they had
forecasted prior to the IPO, so that its stock would trade at
artificially high levels, high enough so that they could sell their
IBUY stock once the "lock-up" period expired. These defendants
also were motivated to conceal the serious problems IBUY was having
in attracting new customers in an attempt to maintain IBUY's
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competitive position in its markets, which was increasingly
impaired by aggressive competitors.
BACKGROUND TO CLASS PERIOD
20. On July 15, 1997, the Company announced through defendant
McNulty the hiring of Mark S. Winkler as Chief Information and
Technology Officer of the Company who would be responsible for the
management of the Company's proprietary computer systems and
ensuring that the web-based retailer "remains on the cutting edge"
of Internet commerce.
21. The Company announced on July 16, 1997 that it had
retained Waldron to assist the Company with financing, strategic
acquisitions and the management of a possible IPO.
22. In August of 1997, the Company issued Series B Preferred
stock. First it sold 8,333 shares of its Series B Preferred stock
in a private placement at a price of $3 per share to Webster (CFO
and Secretary). In connection with this offering, Webster was
issued five warrants to purchase 4,166 shares of common stock with
an exercise price of $3 per share as well as registration rights
providing for one demand and unlimited piggyback registration
rights.
23. Also in August 1997, 193,167 shares of Series B Preferred
Stock were issued. In connection therewith, five-year warrants
were issued to purchase 96,583 shares (including those issued to
Webster) of common stock with an exercise price of $3 per share as
well as registration rights providing for one demand and unlimited
piggyback registration rights. The Series A and Series B Preferred
Stock issued and outstanding prior to the Company's IPO were
converted into common stock in connection with the IPO.
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24. On August 26, 1997, the Company announced that it had
signed an agreement with CitySearch (which was co-founded by Bill
Gross who is Chairman of the Board of the Company), a market
innovator in providing community-based on-line information services
for the Web. The announcement stated that CitySearch would provide
"shopping cart" tools, customer credit authentication and
verification, coordination with the merchant that an order has been
placed, communication with the customer when the order will be
shipped, collection of payment from the user and disbursement of
payments to the merchant. CitySearch planned to develop, manage
and monitor the electronic commerce program, select customers for
participation in the pilot program, as well as market the program
through it's Austin CitySearch Website.
25. On September 15, 1997, En Pointe Technologies, Inc. ("En
Pointe") made an investment in the Company by purchasing $600,000
worth of subordinated notes. The Company issued 399,600 warrants
to purchase the Company's common stock at $2.25 per share. As a
result of these warrants being issued with an exercise price of
less than fair market value of similar warrants, the Company
announced it would recognize additional financing costs of $299,700
over the nine-month term of this subordinated note with the
unamortized portion at the closing of the IPO being expended
immediately.
26. On September 16, 1997, the Company announced through
defendant McNulty the hiring of Dr. Ogden M. Forbes as Chief
Knowledge and Research Officer of the Company, who would be
responsible for researching electronic commerce trends, tracking
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the competition and providing corporate representation to both the
media and the Government.
27. On September 29, 1997, the Company announced that it had
selected En Pointe to be its exclusive supplier for computer
hardware, software and peripherals under a five-year agreement.
Under the agreement, the Company would use the computing equipment
for their internal infrastructure as well as for resale to their
Internet customers. In exchange for the five-year license, the
Company gave En Pointe 250,000 shares of the Company's common stock
valued at $3 per share, and agreed to pay an annual maintenance and
upgrade fee of $100,000.
DEFENDANTS' FRAUDULENT SCHEME
28. On or about November 25, 1997, defendants completed
IBUY's IPO, selling 1.3 million shares of IBUY common stock at $9
per share, via a Registration Statement and Prospectus which was
prepared, reviewed and/or signed by defendants McNulty and Hay.3
All of the shares were being offered and sold via defendant
Waldron.
29. Concealing that almost 25% of IBUY's total revenue from
its inception had been obtained via the "sale" of product to
Waldron and claiming that the offering price of IBUY shares
reflected "the results of operations of the Company in recent
periods" as well as "estimates of the business potential of the
Company" the Registration Statement and Prospectus stated:
____________________
3 Following the IPO, IBUY had 4,002,000 shares outstanding.
This figure includes the conversion of Series A and B Preferred
Stock into 1,286,500 shares of common stock. The 1,286,000
shares are subject to a 12-month "lock-up" period following the
date of the IPO.
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The Company anticipates that sales from the Company's Web
Site will constitute substantially all of the Company's
sales.
30. The Prospectus also discussed the emergence of commerce
on the Internet and the potential positive impact on the Company.
It cited a report by International Data Corporation which estimates
that the number of users accessing the Web will grow from 28
million in 1996 to 175 million in 2001 and that the amount of
commerce conducted over the Web will increase from approximately
$2.6 billion in 1996 to $220 billion in 2001.
31. IBUY's Registration Statement and Prospectus were false
and misleading. The true facts were that IBUY had obtained much of
its pre-IPO revenue by arranging with Waldron, the underwriter of
IBUY's planned IPO, to buy $250,000 worth of equipment from IBUY as
part of defendants' efforts to cause IBUY to show revenue growth.
32. On January 12, 1998, the Company announced that it had
entered into an 18-month agreement with @Home Network, the "leader"
in high-speed Internet services via cable, which, according to the
press release, "will give [the Company] a significant presence as
a shopping supplier, offering over one million brand name products
on the @Home service." The agreement consisted of a "broadband
strategic promotion of [the Company] across @Home Guide pages, Home
page and other areas on the @Home Network." The press release
further stated that:
"In addition to conventional Internet access, web
shoppers will soon have high-speed, direct access to
IBUY's Superstore through @Home service," stated Douglas
Hay, Chief Operating Officer at IBUY. "We are very
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excited about the @Home opportunity. During the first
three days of our promotional program on @Home, we
achieved more 'hits' from @Home to our site than we
received from customers using the AOL browser."
33. On February 3, 1998, the Company announced financial
results for the third quarter ended October 31, 1997, reporting net
sales of $321,281 as compared to $55,541 reported for the second
quarter ended July 31, 1997; a net loss of $1.3 million or $.19 per
share compared to a net loss in the quarter ended July 31, 1996 of
$726,000 or $.21 per share. Commenting on the results defendant
McNulty stated:
"We began selling products on our Web site on July
11, 1997, these results reflect the progress achieved
without significant advertising in the quest to capture
additional sales in the exploding Internet marketplace.
. . . Our business model allows us to grow rapidly while
maintaining no physical inventories resulting in lower
operating costs than traditional retailers. Since the
completion of our public offering in November, we have
implemented a marketing campaign to attract additional
traffic to our website, established more vendor
relationships, made key management additions and are
making IS improvements to handle substantially higher
volumes of sales orders."
34. On February 9, 1998, the Company announced that it had
signed an agreement with Profit Pro, Inc. for the use of that
company's cataloging software which will look up auto parts on
IBUY's website. The software will allow web shoppers to search for
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an auto part and receive a part number with a price. The press
release stated:
"We are pleased to be part of the $120 billion
automotive after-market as the agreement with Profit Pro,
Inc. gives our customers the convenience of shopping for
their auto parts on-line without the hassle of calling or
driving around to parts stores and enforces our goal of
being a one-step online shopping center to Web consumers.
We will continue to expand and strengthen our
relationship with vendors like Profit Pro Inc. to offer
even larger selection of merchandise," stated Bob
McNulty, Chief Executive Officer at IBUY.
35. On February 10, 1998, the Company announced that it had
signed a two-year marketing and distribution agreement with En
Pointe, a provider of information technologies and services. Under
the agreement, En Pointe' |
