24. On June 20, 2000, defendant Madden was arrested on charges of securities fraud and money laundering. According to news reports concerning the arrest, federal prosecutors in Manhattan and Brooklyn allege that defendant Madden participated in schemes to manipulate more than 20 initial public offerings ("IPOs") - including Steven Madden - that were underwritten by the defunct brokerage firms, Stratton Oakmont and its affiliate, Monroe Parker, Inc. ("Monroe"). Specifically defendant Madden was charged with receiving stock in IPOs which he quickly sold back to Stratton or Monroe at low, pre-arranged prices once trading started in the aftermarket. This conduct, known as "flipping," enabled the firms to maintain a supply of shares at favorable prices while hiding the fact that they retained control of almost all of the outstanding shares for each sale. The firms would profit by selling the stock to their own customers at artificially inflated prices through high-pressure sales tactics. It is thus clear that defendant Madden will be distracted from operating Steven Madden as he attempts to defend himself against the charges and that the Company has been irreversibly tainted by the incident.
25. During the Class Period, defendants failed to disclose the following material adverse facts:
a. that defendant Madden had participated in a scheme to manipulate the market for various initial public offerings of common stock of certain companies and that he had done so in conjunction with Stratton - a securities brokerage that was censured and fined by the NASD and SEC for securities fraud and is now defunct;
b. that the Company's projections of future success were lacking in a reasonable basis at all times because defendant Madden's ability to continue in his roles at the Company were subject to increased risk and uncertainty given his involvement in the aforementioned scheme; and
c. that, given defendant Madden's involvement in the aforementioned scheme, his ability to continue to operate and direct the operations of the Company were subject to increased and heightened risk in that he would be unable to continue in his roles at the Company and, accordingly, the Company's operations would be adversely affected.
Materially False And Misleading
Statements Issued During The Class Period
26. On November 3, 1999, Steven Madden issued a press release announcing its financial results for the third quarter of 1999, the period ended September 30, 1999. The Company reported that revenues for the third quarter of fiscal 1999 increased 104% to $48,963,000 as compared to $23,991,000 for the same period the prior year and that net income rose 83% to $3,448,000 as compared to net income of $1,880,000. Defendant Brown was quoted in the press release in pertinent part as follows:
We are very pleased with our third quarter results , which were well above plan and demonstrate the continuing momentum that we are experiencing in all facets of our business.
* * *
We are very excited by the success of our unique business model that is operating well and exceeding expectations in all divisions.
* * *
In all, we believe we are very well positioned as we enter the fourth quarter holiday selling season.
Defendant Madden also commented on the third quarter results in pertinent part as follows:
I am very proud of the Steven Madden Ltd. team and their ability to execute our business strategies. We have built a strong foundation comprised of a growing portfolio of exciting brands, a very high level of consumer recognition, and strong, long-standing partner relationships within our multi-channel distribution strategy. We plan to further enhance these competitive strengths as we move into the years ahead, and are confident in our creative potential and our opportunities for profitable future growth.
27. Following the November 3, 1999, earnings announcement, Harry G. Katica, an analyst at Prudential Securities, raised his rating on Steven Madden common stock to "Strong Buy" from "Accumulate" and set a 12-month target price of $18 per share.
28. In an interview conducted on December 10, 1999 by Tyler Mathison on CNBC's Power Lunch, defendant Madden was questioned about his past association with Stratton:
MATHISON: There have been persistent concerns, Steve, that your company and the associations with those two gentleman [Dan Porash and Jordan Belfort of Statton Oakmond], that the problems that they have had legally might some day come home to roost and become your problems, and that federal investigations into their activities might become a federal investigation into you. Any thought, any truth to those? Do you have reason for the concern?
MADDEN: No, they took us public, but we don't think that we'll be tainted by that brush.
MATHISON: But some have said in the investment community, that there has been a kind of weight over the stock of Steve Madden, Limited. True or false?
MADDEN: Could be. I don't know. Right now, everything seems to be going well. And so I don't know about any of those things.
(Emphasis added).
29. On February 29, 2000, Steven Madden issued a press release announcing its financial results for the fourth quarter and fiscal year ended December 31, 1999. The Company reported that revenues for the fourth quarter increased 86% to $49,286,000 compared to $26,548,000 for the fourth quarter of fiscal 1998 and that net income for the fourth quarter rose 122% to $4,243,000, compared to net income of $1,913,000 in the same period of 1998. The Company reported that for the year ended December 31, 1999, revenues increased 90% to $163,036,000, up from $85,783,000 the previous year and that net income rose 111% to $11,466,000, compared to $5,447,000 in 1998. Defendant Dharia was quoted in the press release in pertinent part as follows:
Our fourth quarter results were exceptional. Sales for our fourth quarter selling season were well above plan and are attributable to the very strong demand for all of our brands.
Defendant Brown commented on her satisfaction with the year-end results as follows:
We are very pleased with our year-end results along with the initiatives which are contributing to our ongoing success.
Defendant Madden also commented on the year-end results:
The fundamentals of our business are the strongest in our history. We are continuing to successfully execute our business strategies which position us well for growth.
30. On March 28, 2000, Steven Madden filed its Form 10-K for the fiscal year ending December 31, 1999 with the SEC which confirmed the previously announced financial results. In the section of the Form 10-K entitled "Dependence on Key Personnel," the Company stated:
The Company is dependent, in particular, upon the services of [defendant] Madden, its Chief Executive Officer, Chairman of the Board and chief designer . . . . If [defendant] Madden [is] unable to provide services to the Company for whatever reason, the business would be adversely affected.
31. On May 3, 2000, Steven Madden issued a press release announcing its financial results for the first quarter of 1999, the period ended March 31, 2000. The Company reported that net income rose 126% to $3,182,000 from $1,411,000 and that revenues rose 65% to $44,109,000 from $26,731,000. Defendant Dharia was quoted in the press release in pertinent part as follows:
We are very pleased to announce that our first quarter sales were above plan. We continue to accomplish our top-line results by methodically executing our business strategy, strengthening the brands and increasing our market share.
Defendant Brown added that the results stem from "better than expected sales gains and the operating leverage that resulted from holding the line on costs." Defendant Madden concluded by saying that, "Our business continues [to] perform above plan and is positioned for continued growth."
UNRAVELING OF THE FRAUD
32. On June 20, 2000, defendant Madden was arrested on charges of securities fraud and money laundering. According to news reports concerning the arrest, federal prosecutors in Manhattan and Brooklyn allege that defendant Madden participated in schemes to manipulate more than 20 IPOs - including Steven Madden - that were underwritten by the defunct brokerage firms, Stratton and its affiliate, Monroe. Specifically defendant Madden was charged with receiving stock in IPOs which he quickly sold back to Stratton or Monroe at low, pre-arranged prices once trading started in the aftermarket. This conduct, known as "flipping," enabled the firms to maintain a supply of shares at favorable prices while hiding the fact that they retained control of almost all of the outstanding shares for each sale. The firms would profit by selling the stock to their own customers at artificially inflated prices through high-pressure sales tactics.
33. In response to the news reports, the price of Steven Madden common stock fell from 13 1/8 to 11 3/16 before trading was halted on the Nasdaq. A press release issued by the Company stated:
The Company has been assured by Mr. Madden's personal attorney that [defendant] Madden denies any improper conduct and will vigorously defend himself against any and all charges. The Company's management and Board of Directors are closely monitoring the situation. The Company's business remains strong and it plans to continue to execute its long-term strategies.
34. In a separate civil action, the SEC filed a complaint seeking to bar defendant Madden from heading any public company, including his own. Steven Marotta, an analyst at Wasserstein Perella securities, was reported in the Wall Street Journal on June 21, 2000, as saying:
"[Defendant Madden] is the visionary and the leader in so many ways that it's hard to even quantify if something of this magnitude can't be understood as it relates to the Company."
In the June 21, 2000, issue of the New York Times, Marotta was quoted in pertinent part as follows:
"He [defendant Madden] is the key visionary, . . . He has a team of designers who execute his orders, but he is the key guy. It is difficult to overstate his importance."
Undisclosed Adverse Information
35. The market for Steven Madden's securities was open, well-developed and efficient at all relevant times. As a result of these materially false and misleading statements and failures to disclose, Steven Madden's common stock traded at artificially inflated prices during the Class Period. The artificial inflation continued until the time defendant Madden was alleged to have been involved in a massive securities fraud and this information was communicated to, and/or digested by, the securities markets, resulting in the halting of the Company's stock by the Nasdaq. Plaintiff and other members of the Class purchased or otherwise acquired Steven Madden securities relying upon the integrity of the market price of Steven Madden's securities and market information relating to Steven Madden, and have been damaged thereby.
36. During the Class Period, defendants materially misled the investing public, thereby inflating the price of Steven Madden's securities, by publicly issuing false and misleading statements and omitting to disclose material facts necessary to make defendants' statements, as set forth herein, not false and misleading. Said statements and omissions were materially false and misleading in that they failed to disclose material adverse information and misrepresented the truth about the Company, its business and operations, including, inter alia:
a. that defendant Madden had participated in a scheme to manipulate the market for various initial public offerings of common stock of certain companies and that he had done so in conjunction with Stratton - a securities brokerage that was censured and fined by the NASD and SEC for securities fraud and is now defunct;
b. that the Company's projections of future success were lacking in a reasonable basis at all times because defendant Madden's ability to continue in his roles at the Company were subject to increased risk and uncertainty given his involvement in the aforementioned scheme; and
c. that, given defendant Madden's involvement in the aforementioned scheme, his ability to continue to operate and direct the operations of the Company were subject to increased and heightened risk in that he would be unable to continue in his roles at the Company and, accordingly, the Company's operations would be adversely affected.
37. At all relevant times, the material misrepresentations and omissions particularized in this Complaint directly or proximately caused or were a substantial contributing cause of the damages sustained by plaintiff and other members of the Class. As described herein, during the Class Period, defendants made or caused to be made a series of materially false or misleading statements about Steven Madden's business, prospects and operations. These material misstatements and omissions had the cause and effect of creating in the market an unrealistically positive assessment of Steven Madden and its business, prospects and operations, thus causing the Company's securities to be overvalued and artificially inflated at all relevant times. Defendants' materially false and misleading statements during the Class Period resulted in plaintiff and other members of the Class purchasing the Company's securities at artificially inflated prices, thus causing the damages complained of herein.
SCIENTER ALLEGATIONS
38. As alleged herein, defendants acted with scienter in that defendants knew that the public documents and statements issued or disseminated in the name of the Company were materially false and misleading; knew that such statements or documents would be issued or disseminated to the investing public; and knowingly and substantially participated or acquiesced in the issuance or dissemination of such statements or documents as primary violations of the federal securities laws. As set forth elsewhere herein in detail, defendants, by virtue of their receipt of information reflecting the true facts regarding Steven Madden, their control over, and/or receipt and/or modification of Steven Madden's allegedly materially misleading misstatements and/or their associations with the Company which made them privy to confidential proprietary information concerning Steven Madden, participated in the fraudulent scheme alleged herein.
39. While Steven Madden insiders were issuing false and misleading statements about Steven Madden and its business, and omitting material information concerning defendant Madden's illegal behavior, the Individual Defendants, directly or indirectly, disposed of over 355,000 shares of the stock they owned worth more than $3.5 million, benefitting from the artificial inflation in Steven Madden's stock price their fraudulent scheme had created. In addition, on November 5, 1999, defendant Brown filed an intention to sell $60,000 shares of restricted stock for estimated proceeds of $806,250. Moreover, on June 15, 2000, five days before his arrest, defendant Madden filed an intention to sell an additional 100,000 shares of restricted Steven Madden stock. Notwithstanding their access to non-public information as a result of their positions with the Company, the Individual Defendants directly or indirectly disposed of the following amounts of Steven Madden common stock:
INSIDER NAME DATE SHARES PRICE VALUE
Brown, Rhonda J. 05/31/00 100,000.00
_________
$16.00 (exercised options at $5.50/share) $1,036,860.00
___________
100,000.00 $1,036,860.00
Dharia, Arvind 05/31/00 15,000.00 $16.00 (exercised options at $5.50/share) $157,500.00
11/05/99 40,000.00
________
$12.38 (exercised options at average of $5.75/share) $265,200.00
__________
55,000.00 $422,700.00
Madden, Steven 05/31/00 100,000.00 $16.00 (exercised options at $3.31/share) $1,269,000.00
11/05/99 100,000.00
_________
$12.38 (exercised options at average of $3.85/share) $853,200.00
__________
200,000.00 $2,112,200.00
GRAND TOTAL 415,000 $3,581,760.00
Applicability Of Presumption Of Reliance:
Fraud-On-The-Market Doctrine
40. At all relevant times, the market for Steven Madden's securities was an efficient market for the following reasons, among others:
a. Steven Madden's stock met the requirements for listing, and was listed and actively traded on the Nasdaq, a highly efficient and automated market;
b. As a regulated issuer, Steven Madden filed periodic public reports with the SEC and the Nasdaq;
c. Steven Madden regularly communicated with public investors via established market communication mechanisms, including through regular disseminations of press releases on the national circuits of major newswire services and through other wide-ranging public disclosures, such as communications with the financial press and other similar reporting services; and
d. Steven Madden was followed by several securities analysts employed by major brokerage firms who wrote reports which were distributed to the sales force and certain customers of their respective brokerage firms. Each of these reports was publicly available and entered the public marketplace.
41. As a result of the foregoing, the market for Steven Madden's securities promptly digested current information regarding Steven Madden from all publicly available sources and reflected such information in Steven Madden's stock price. Under these circumstances, all purchasers of Steven Madden's securities during the Class Period suffered similar injury through their purchase of Steven Madden's securities at artificially inflated prices and a presumption of reliance applies.
NO SAFE HARBOR
42. The statutory safe harbor provided for forward-looking statements under certain circumstances does not apply to any of the allegedly false statements pleaded in this complaint. Many of the specific statements pleaded herein were not identified as "forward-looking statements" when made. To the extent there were any forward-looking statements, there were no meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those in the purportedly forward-looking statements. Alternatively, to the extent that the statutory safe harbor does apply to any forward-looking statements pleaded herein, defendants are liable for those false forward-looking statements because at the time each of those forward-looking statements was made, the particular speaker knew that the particular forward-looking statement was false, and/or the forward-looking statement was authorized and/or approved by an executive officer of Steven Madden who knew that those statements were false when made.
FIRST CLAIM
Violation Of Section 10(b) Of
The Exchange Act Against And Rule 10b-5
Promulgated Thereunder Against All Defendants
43. Plaintiff repeats and realleges each and every allegation contained above as if fully set forth herein.
44. During the Class Period, defendants carried out a plan, scheme and course of conduct which was intended to and, throughout the Class Period, did: (i) deceive the investing public, including plaintiff and other Class members, as alleged herein; (ii) artificially inflate and maintain the market price of Steven Madden's securities; and (iii) cause plaintiff and other members of the Class to purchase Steven Madden's securities at artificially inflated prices. In furtherance of this unlawful scheme, plan and course of conduct, defendants, and each of them, took the actions set forth herein.
45. Defendants (a) employed devices, schemes, and artifices to defraud; (b) made untrue statements of material fact and/or omitted to state material facts necessary to make the statements not misleading; and (c) engaged in acts, practices, and a course of business which operated as a fraud and deceit upon the purchasers of the Company's securities in an effort to maintain artificially high market prices for Steven Madden's securities in violation of Section 10(b) of the Exchange Act and Rule 10b-5. All defendants are sued either as primary participants in the wrongful and illegal conduct charged herein or as controlling persons as alleged below.
46. Defendants, individually and in concert, directly and indirectly, by the use, means or instrumentalities of interstate commerce and/or of the mails, engaged and participated in a continuous course of conduct to conceal adverse material information about the business, operations and future prospects of Steven Madden as specified herein.
47. These defendants employed devices, schemes and artifices to defraud, while in possession of material adverse non-public information and engaged in acts, practices, and a course of conduct as alleged herein in an effort to assure investors of Steven Madden's value and performance and continued substantial growth, which included the making of, or the participation in the making of, untrue statements of material facts and omitting to state material facts necessary in order to make the statements made about Steven Madden and its business operations and future prospects in the light of the circumstances under which they were made, not misleading, as set forth more particularly herein, and engaged in transactions, practices and a course of business which operated as a fraud and deceit upon the purchasers of Steven Madden's securities during the Class Period.
48. Each of the Individual Defendants' primary liability, and controlling person liability, arises from the following facts: (i) the Individual Defendants were high-level executives and/or directors at the Company during the Class Period and members of the Company's management team or had control thereof; (ii) each of these defendants, by virtue of his responsibilities and activities as a senior officer and/or director of the Company was privy to and participated in the creation, development and reporting of the Company's internal budgets, plans, projections and/or reports; (iii) each of these defendants enjoyed significant personal contact and familiarity with the other defendants and was advised of and had access to other members of the Company's management team, internal reports and other data and information about the Company's finances, operations, and sales at all relevant times; and (iv) each of these defendants was aware of the Company's dissemination of information to the investing public which they knew or recklessly disregarded was materially false and misleading.
49. The defendants had actual knowledge of the misrepresentations and omissions of material facts set forth herein, or acted with reckless disregard for the truth in that they failed to ascertain and to disclose such facts, even though such facts were available to them. Such defendants' material misrepresentations and/or omissions were done knowingly or recklessly and for the purpose and effect of concealing Steven Madden's operating condition and future business prospects from the investing public and supporting the artificially inflated price of its securities. As demonstrated by defendants' overstatements and misstatements of the Company's business, operations and earnings throughout the Class Period, defendants, if they did not have actual knowledge of the misrepresentations and omissions alleged, were reckless in failing to obtain such knowledge by deliberately refraining from taking those steps necessary to discover whether those statements were false or misleading.
50. As a result of the dissemination of the materially false and misleading information and failure to disclose material facts, as set forth above, the market price of Steven Madden's securities was artificially inflated during the Class Period. In ignorance of the fact that market prices of Steven Madden's publicly-traded securities were artificially inflated, and relying directly or indirectly on the false and misleading statements made by defendants, or upon the integrity of the market in which the securities trade, and/or on the absence of material adverse information that was known to or recklessly disregarded by defendants but not disclosed in public statements by defendants during the Class Period, plaintiff and the other members of the Class acquired Steven Madden securities during the Class Period at artificially high prices and were damaged thereby.
51. At the time of said misrepresentations and omissions, plaintiff and other members of the Class were ignorant of their falsity, and believed them to be true. Had plaintiff and the other members of the Class and the marketplace known of the true financial condition and business prospects of Steven Madden, which were not disclosed by defendants, plaintiff and other members of the Class would not have purchased or otherwise acquired their Steven Madden securities, or, if they had acquired such securities during the Class Period, they would not have done so at the artificially inflated prices which they paid.
52. By virtue of the foregoing, defendants have violated Section 10(b) of the Exchange Act, and Rule 10b-5 promulgated thereunder.
53. As a direct and proximate result of defendants' wrongful conduct, plaintiff and the other members of the Class suffered damages in connection with their respective purchases and sales of the Company's securities during the Class Period.
SECOND CLAIM
Violation Of Section 20(a) Of
The Exchange Act Against Defendants
54. Plaintiff repeats and realleges each and every allegation contained above as if fully set forth herein.
55. The Individual Defendants acted as controlling persons of Steven Madden within the meaning of Section 20(a) of the Exchange Act as alleged herein. By virtue of their high-level positions, and their ownership and contractual rights, participation in and/or awareness of the Company's operations and/or intimate knowledge of the false financial statements filed by the Company with the SEC and disseminated to the investing public, the Individual Defendants had the power to influence and control and did influence and control, directly or indirectly, the decision-making of the Company, including the content and dissemination of the various statements which plaintiff contends are false and misleading. The Individual Defendants were provided with or had unlimited access to copies of the Company's reports, press releases, public filings and other statements alleged by plaintiff to be misleading prior to and/or shortly after these statements were issued and had the ability to prevent the issuance of the statements or cause the statements to be corrected.
56. In particular, each of these defendants had direct and supervisory involvement in the day-to-day operations of the Company and, therefore, is presumed to have had the power to control or influence the particular transactions giving rise to the securities violations as alleged herein, and exercised the same.
57. As set forth above, Steven Madden and the Individual Defendants each violated Section 10(b) and Rule 10b-5 by their acts and omissions as alleged in this Complaint. By virtue of their positions as controlling persons, the Individual Defendants are liable pursuant to Section 20(a) of the Exchange Act. As a direct and proximate result of defendants' wrongful conduct, plaintiff and other members of the Class suffered damages in connection with their purchases of the Company's securities during the Class Period.
WHEREFORE, plaintiff prays for relief and judgment, as follows:
1. Determining that this action is a proper class action, designating plaintiff as Lead Plaintiff and certifying plaintiff as a class representative under Rule 23 of the Federal Rules of Civil Procedure and plaintiff's counsel as Lead Counsel;
2. Awarding compensatory damages in favor of plaintiff and the other Class members against all defendants, jointly and severally, for all damages sustained as a result of defendants' wrongdoing, in an amount to be proven at trial, including interest thereon;
3. Awarding plaintiff and the Class their reasonable costs and expenses incurred in this action, including counsel fees and expert fees; and
4. Such other and further relief as the Court may deem just and proper.
JURY TRIAL DEMANDED
Dated: June 21, 2000
__________________
MILBERG WEISS BERSHAD
HYNES & LERACH LLP
Steven G. Schulman (SS-2561)
Samuel H. Rudman (SR-7957)
One Penn Plaza- 49th Floor
New York, NY 10119
(212) 594-5300
Robert Lax (RL-8413)
Jerome Noll (JN-7542)
551 Fifth Avenue
New York, New York 10176
Attorneys for Plaintiff
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