interactive.wsj.com
January 19, 2001
Investor Suit Against 2TheMart
Underscores Power of the Web
By AARON ELSTEIN and PETER EDMONSTON
WSJ.COM
In the annals of volatile Internet stocks, few can match 2TheMart.com Inc.
In January 1999, the company's shares
soared from less than $2 to $50 in just one
week. At that time, many highflying Net
stocks lacked profits, but 2TheMart had yet
to get off the ground with its online auction site.
In a press release issued a day before its stock peaked on Jan. 20,
2TheMart said its site, intended to compete with the one run by eBay Inc.,
"is currently in final development" and would be operating by June 30,
1999. The site finally launched in November 1999, but not before a series
of class-action lawsuits were filed, alleging that 2TheMart had issued false
and misleading statements.
The case of 2TheMart illustrates how important the Web has become in
the resurgence of shareholder class-action suits. This comeback, the
subject of WSJ.com's Heard on the Net column of Jan. 17, has defied
mid-1990s legislation intended to rein shareholder suits. And it has
coincided with the popularity of online-message boards.
These Web forums bring disgruntled investors together and make it easier
to identify a class of potentially wronged shareholders. Also, lawyers have
discovered these message boards are a happy-hunting ground for leads
and evidence for their cases.
Many of the allegations contained in the suit against 2TheMart first
surfaced on the Silicon Investor (www.siliconinvestor.com), an online
forum for investors. "Message boards are a great place to gauge
shareholder sentiment and maybe get a few tidbits to help develop a suit,"
says Mr. Braun, whose firm frequently files class actions on behalf of
shareholders. He says visits to Silicon Investor, Raging Bull, Yahoo!,
America Online and other message boards have become a vital part of his
job.
"The Internet has opened up a whole new area for researching possible
class actions," says Michael Braun, a lawyer with Stull, Stull & Brody in
Los Angeles. The attorney, who prepared a class action against 2TheMart,
says a client first brought the company to his attention. But there's no
question that Web message-boards have made his life a whole lot easier.
Mr. Braun's class-action suit, filed in federal court in Santa Ana, Calif., has
survived several motions to dismiss.
In its most recent annual report, 2TheMart says the claims in the class
action suit are "without merit."
On Silicon Investor, several posters said they learned that 2TheMart of
Irvine, Calif., was the successor to a company called CD-Rom Yearbook
Inc. They discovered that its president had been denied a casino license by
Nevada regulators because of tax problems and had been placed on
probation for one year by the Nevada bar association.
After publishing their findings online, 2TheMart's stock began a steady fall.
It was quoted at seven cents at 4 p.m. Thursday on the OTC Bulletin
Board.
Attorneys who defend companies against class actions say Web message
boards cut both ways. For lawyers defending investors, "it gives them an
ability to put together a complaint that, at least on the surface, seems more
substantial," acknowledges Lisa Wager, a partner in the securities-litigation
and technology groups at Morgan, Lewis & Bockius in New York.
But David Furbush, a partner with Brobeck, Phleger & Harrison in Palo
Alto, Calif., says he often asks investors to disclose which online
stock-discussion boards they visit because their messages could be used to
refute their case.
For example, if a company is being sued for allegedly failing to give
adequate warnings about coming financial problems, messages on the
boards might provide evidence that investors were aware of the difficulties.
"You can see how message-board posts might provide an indication that
the warnings the company put out earlier were very clear," Mr. Furbush
says.
The suit against 2TheMart alleges that officials made "materially false and
misleading statements" by saying in a press release that the company would
launch its Web auction site in the second quarter of 1999. The suit says
that regulatory filings show a contract with International Business Machines
Corp. to develop the site wasn't signed until June 1 of that year and
envisioned the project could take six months.
The suit also alleges that 2TheMart's top executives failed to tell investors
material information about past endeavors. The company's president,
Dominic J. Magliarditi, had been denied a casino license by the Nevada
Gaming Commission after he testified that he owed the Internal Revenue
Service $24,000 for under-reporting his 1994 income by $70,000,
according to court papers. In 1998, the suit says, Mr. Magliarditi was
placed on one year's probation by the Nevada State Bar Association for
conflicts of interest in representing a client.
Mr. Magliarditi, who lives in Newport Beach, Calif., declined to comment.
Investors in the class action against 2TheMart are seeking unspecified
compensatory damages, plus court costs. Keith Bardellini, a lawyer
representing 2TheMart, estimates that "thousands" of shareholders have
joined the suit, now in its discovery phase. Mr. Bardellini says the
company's allegedly false press releases were "basically accurate."
According to 2TheMart's most recent financial statements, the company
had assets of $13.6 million, but only $31,000 in cash as of March 31,
2000. The rest is computer hardware and software. Since its inception in
December 1998, the company has recorded $131,000 in "sales and
interest income" and posted a net loss of $13.9 million.
Internet companies, whose shares suffered some of the biggest blows in
last year's market decline, have become a magnet for shareholder suits.
The number of Internet-related businesses hit by securities lawsuits more
than doubled in 2000 from the previous year, making up nearly 15% of all
such suits filed, according to estimates from the securities-litigation group at
accounting and consulting firm PricewaterhouseCoopers.
Write to Aaron Elstein at aaron.elstein@wsj.com or Peter Edmonston at
peter.edmonston@wsj.com
KJC |
