Steve Madden, Ltd. Securities Litigation 00-CV-3676 -Consolidated Amended Class Action ...

120 Pages·2007·4.27 MB·English

Lo c9 - I
q 5-
#^J4
UNITED STATES DISTRICT COURT
FOR THE EASTERN DISTRICT OF NEW YORK
CIVIL ACTION NO. CV-00-3676 (JG)
IN RE STEVEN MADDEN LTD. )
SECURITIES LITIGATION ) Hon. John Gleeson
JURY TRIAL DEMANDED
CONSOLIDATED AMENDED CLASS ACTION COMPLAINT
BASIS OF ALLEGATIONS - °
1. Plaintiffs allege the following based upon the investigation oftheir
counsel, including a review offederal grandjury indictments against defendant Steve Madden, a
complaint filed against Steve Madden by the Securities and Exchange Commission ("SEC"),'
filings, press releases and other public statements ofdefendant Steven Madden Ltd. ("SHOO" or
the "Company"), and securities analysts' and media reports, and plaintiffs believe that substantial
additional evidentiary support will exist for the allegations set forth herein after areasonable
opportunity for discovery.
NATURE OF THE ACTION
2. This is a class action on behalfofpurchasers ofthe common stock of
SHOO between June 21, 1997, and June 20, 2000, inclusive (the "Class Period"), seeking to
pursue remedies under the Securities Exchange Act of 1934 (the "Exchange Act"). As described
' Copies ofthe indictments in U.S. v. Madden, Cr. No. 00-601 (U.S.D.C., E.D.N.Y.), and
U.S. v. Madden, 00 CRIM. 0557 (U.S.D.C., S.D.N.Y.), and the complaint in SEC v. Madden,
CV 00 3632 (U.S.D.C., E.D.N.Y.) (hereafter, "SEC Complaint"), are annexed hereto as Exhibits
A, B and C, respectively.
more fully below, defendants engaged in a course ofconduct designed to conceal the fact that a
large block ofSHOO common stock was secretly owned by a group ofinvestors who acted as
principals ofa stock brokerage firm that had been closed down by regulators, and that SHOO's
principal employee, Steve Madden, had committed fraudulent acts in connection with the public
offering ofSHOO and other companies. When the truth concerning these events became public
following grandjury indictments and the commencement ofan SEC action against Steve
Madden, the price ofSHOO's common stock dropped substantially, damaging plaintiffs and
other investors.
JURISDICTION AND VENUE
The claims asserted herein arise under and pursuant to Sections 10(b) and
20(a) ofthe Exchange Act [15 U.S.C. §§ 78j(b) and 78t(a)], and Rule lob-5 promulgated
thereunder [17 C.F.R. § 240.10b-5].
4. This Court hasjurisdiction over the subject matter ofthis action pursuant
to Section 27 ofthe Exchange Act [15 U.S.C. § 78aa], and 28 U.S.C. §§ 1331 and 1337.
5. Venue is proper in this district pursuant to Section 27 ofthe Exchange
Act, and 28 U.S.C. § 1391(b). SHOO maintains its principal place ofbusiness in this district
and many ofthe acts and practices complained ofherein occurred in substantial part in this
district.
6. In connection with the acts alleged in this complaint, defendants, directly
or indirectly, used the means and instrumentalities ofinterstate commerce, including, but not
limited to, the mails, interstate telephone communications and the facilities ofthe national
securities markets.
2
PARTIES
7. By Order ofthis Court dated December 8, 2000, plaintiffs Process
Engineering Services, Inc., Michael Fasci, and Mark and Libby Adams were appointed Lead
Plaintiffs in this action. Lead Plaintiffs purchased shares ofSHOO common stock during the
Class Period at artificially inflated prices and were damaged thereby.
8. Additional plaintiffs James Connor, Jeffrey Dempster, Leigh Curry, on
BehalfofGuerrilla Partners, Maurice Blumenthal, Ann Baker Salafia, Michael Fahey and Diana
Fahey, and Morris Willner purchased shares ofSHOO common stock during the Class Period at
artificially inflated prices and were damaged thereby.
9. Defendant SHOO is a Delaware corporation with its principal executive
offices located at 52-16 Barnett Avenue, Long Island City, New York 11104. SHOO designs and
markets footwear for women.
10. The individual defendants identified below (the "Individual Defendants")
served at all relevant times herein in the positions set forth opposite their names:
Name Positions at SHOO
Steve Madden ("Madden") Chairman, ChiefExecutive Officer and, until
February 29, 2000, President
Rhonda J. Brown ("Brown") ChiefOperating Officer, Director and (as of
February 29, 2000), President
Arvind Dharia ("Dharia") ChiefFinancial Officer, Secretary and
Director
11. Because ofthe Individual Defendants' positions with the Company, they
had access to the adverse undisclosed information about its business, operations and prospects
via access to internal corporate documents (including the Company's operating plans, budgets
and forecasts and reports ofactual operations compared thereto), conversations and connections
with other corporate officers and employees, attendance at management and Board ofDirectors
meetings and committees thereofand via reports and other information provided to them in
connection therewith.
12. It is appropriate to treat the Individual Defendants as a group for pleading
purposes and to presume thatthe materially false, misleading and incomplete information
conveyed in the Company's public filings and statements as alleged herein are the collective
actions ofthe narrowly defined group ofIndividual Defendants identified above. Each ofthe
Individual Defendants, by virtue ofhis or her high-level position with the Company, directly
participated in the management ofthe Company, was directly involved in the day-to-day opera-
tions ofthe Company at the highest levels and was privy to confidential proprietary information
concerning the Company and its business, operations and prospects. Said defendants were
involved in drafting, producing, reviewing, approving and/or disseminating the materially false
and misleading statements and information alleged herein, were aware or recklessly disregarded
that the false and misleading statements were being issued regarding the Company, and approved
or ratified these statements, in violation ofthe federal securities laws.
13. As officers and controlling persons ofapublicly-held company whose
common stock was, and is, registered with the SEC pursuant to the Exchange Act, and was
traded on the NASDAQ National Market System ("NASDAQ"), and governed by the provisions
ofthe federal securities laws, the Individual Defendants each had a duty to disseminate promptly,
accurate and truthful information concerning the Company and its business, operations and
4
prospects and to correct and update any previously-issued statements that were materially
misleading or untrue, so that the market price ofthe Company's publicly-traded securities would
be based upon truthful and accurate information. The Individual Defendants' misrepresentations
and omissions during the Class Period violated these specific requirements and obligations.
14. The Individual Defendants participated in the drafting, preparation, and/or
approval ofthe various public filings and statements complained ofherein and were aware of, or
recklessly disregarded, the misstatements contained therein and omissions therefrom, and were
aware oftheir materially false and misleading nature. Because oftheir senior positions at
SHOO, each ofthe Individual Defendants had access to the adverse undisclosed information as
particularized herein and knew or recklessly disregarded that these adverse facts rendered
representations made by or on behalfofSHOO materially false and misleading.
15. The Individual Defendants, by virtue oftheir positions ofcontrol and
authority, were able to and did control the content ofthe various SEC filings and other public
statements pertaining to the Company. Each Individual Defendant, during the time ofhis or her
association with the Company, was provided with copies ofthe documents alleged herein to be
misleading prior to or shortly after their issuance and/or had the ability and/or opportunity to
prevent their issuance or cause them to be corrected. Accordingly, each ofthe Individual
Defendants is responsible for the accuracy ofthe public filings and statements detailed herein
and is primarily liable for the representations and omissions contained therein.
16. Each ofthe defendants is liable as a participant in a fraudulent scheme and
course ofbusiness that operated as a fraud or deceit on purchasers ofSHOO common stock by
disseminating materially false and misleading statements and/or concealing material adverse
facts. The scheme, among other things, (i) deceivedthe investing public regarding the true
ownership ofa significant block ofSHOO common stock; (ii) deceived the investing public
concerning defendant Madden's role in the fraudulent acts undertaken in connection with the
initial public offerings ofnumerous companies (including SHOO), (iii) deceived the investing
public regarding SHOO's business, operations and the intrinsic value ofSHOO common stock;
(iv) enabled defendants to sell significant amounts ofSHOO common stock at artificially inflated
prices; and (v) caused plaintiffs and the other members ofthe Class to purchase SHOO common
stock at artificially inflated prices.
PLAINTIFFS' CLASS ACTION ALLEGATIONS
17. Plaintiffs bring this action as a class action pursuant to Federal Rule of
Civil Procedure 23(a) and (b)(3) on behalfofa Class consisting ofall those who purchased
SHOO common stock during the Class Period and who were damaged thereby. Excluded from
the Class are defendants and all present and former officers and directors ofthe Company,
members ofeach ofthe Individual Defendant's immediate families, each defendant's legal repre-
sentatives, heirs, successors or assigns and any entity in which any defendant has had a control-
ling interest.
18. The members ofthe Class are so numerous thatjoinder ofall members is
impracticable. Throughout the Class Period, SHOO common stock was actively traded on the
NASDAQ. While the exact number ofClass members is unknown to plaintiffs at this time and
can only be ascertained through appropriate discovery, plaintiffs believe that there are hundreds
or thousands ofmembers ofthe Class. Record owners and other members ofthe Class may be
identified from records maintained by SHOO or its transfer agent and may be notified ofthe
6
pendency ofthis action by mail, using the form ofnotice similar to that customarily used in
securities class actions..
19. Plaintiffs' claims are typical ofthe claims ofthe members ofthe Class as
all members ofthe Class were similarly affected by defendants' wrongful conduct in violation of
federal law, as described herein.
20. Plaintiffs will fairly and adequately protect the interests ofthe members of
the Class and have retained counsel competent and experienced in class and securities litigation.
21. Common questions oflaw and fact exist as to all members ofthe Class
and predominate over any questions solely affecting individual members ofthe Class. Among
the questions oflaw and fact common to the Class are:
a. whether the federal securities laws were violated by defendants'
acts as alleged herein;
b. whether defendants issued statements that contained material
misrepresentations or omissions;
c. whether defendants acted knowingly or recklessly in omitting
and/or misrepresenting material facts;
d. whether the market price ofSHOO common stock was artificially
inflated during the Class Period; and
e. to what extent the members ofthe Class have sustained damages
and the proper measure ofdamages.
22. A class action is superior to all other available methods for the fair and
efficient adjudication of this controversy since joinder of all members is impracticable.
7
Furthermore, as the damages suffered by individual Class members may be relatively small, the
expense and burden of individual litigation make it impossible for members of the Class to
individually redressthewrongs donetothem. Therewillbeno difficulty inthemanagement ofthis
action as a class action.
SUBSTANTIVE ALLEGATIONS
Background Facts and Madden's Participation in Fraudulent Practices
Involvingthe Initial Public Offerings ofSHOO and Other Companies
23. SHOO designs and markets footwear for women. The Company's shoes
are sold through SHOO retail stores, department stores, apparel and footwear specialty stores,
and on the Internet. The Company was founded by defendant Madden in 1990. In December
1993, SHOO "went public" in an initial public offering underwritten by Stratton Oakmont, Inc.
("Stratton Oakmont")
24. Stratton Oakmont, aNew York-based broker dealer during the period from
1989 to 1996, was, in the words ofthe SEC, "one ofthe largest and most notorious illegal boiler
room operations in history." See SEC Complaint at¶ 11. Daniel Porush ("Porush"), a childhood
friend ofMadden, was president and chiefexecutive officer ofStratton Oakmont until it was
closed down in 1996; in that same year he was permanently barred from the securities industry.
Stratton Oakmont's founder, Jordon Belfort ("Belfort"), served as that firm's chairman until
1994, when he was "permanently barred from the securities industry." Id. at ¶¶ 11-13. Stratton
Oakmont closed down in December 1996, and declared bankruptcy in January 1997.
25. In 1993, Belfort helped found an affiliate ofStratton Oakmont, Monroe
Parker Securities, Inc. ("Monroe Parker"), "so that he would have another brokerage firm from
8
which to continue defrauding investors in Stratton-style IPO manipulations in the event that
Stratton was forced to go out ofbusiness." Id. at¶ 14. Monroe Parker closed down in December
1997.
26. Priorto the Class Period, defendant Madden participated with Stratton
Oakmont and Monroe Parker in fraudulent activities involving at least 22 initial public offerings
("IPOs"). As it would later be revealed in federal grandjury indictments against Madden filed in
the Southern and Eastern Districts ofNew York, and in a civil complaint against Madden filed by
the SEC in the Eastern District ofNew York, Madden played a "crucial role" in the fraudulent
manipulation ofthe IPOs. See id. at 111. As the February 26, 2001 edition ofNew York
Magazine reported in an article entitled "Steve Madden: Crisis ofthe Sole," Porush recently
testified at the trial ofStratton Oakmont's former auditor that Madden was "deep into the fraud
with us." And, as Belfort put it, Madden was "a'rat hole,' a place to hide stock." Id.
27. Madden's fraudulent role in the IPO manipulations essentially took the
form oftwo practices known as "flipping" and the secret unlocking of"lockup agreements."
a. In the "flipping" practice, Madden received substantial allotments
ofshares in IPOs and then, pursuant to secret repurchase agreements, sold back the shares to
Stratton Oakmont and Monroe Parker shortly after trading in the aftermarket commenced.
Through this unlawful practice, Madden was able to earn illegal profits and help insure that
Stratton Oakmont and Monroe Parker would control most ofthe IPO shares even after the
offerings. The boiler room firms, in turn, had a ready source ofshares to sell to unsuspecting
aftermarket investors at prices that had been manipulated to artificially high prices.
9
b. Inthe second practice, Madden made loans to issuers in return for
shares ofthe issuers and other consideration prior to their IPOs. Madden signed a "lockup
agreement" with the companies, which, according to the issuers' prospectuses, prohibited him
from selling his shares for at least one year following the IPOs. However, pursuant to secret,
undisclosed agreements with Stratton Oakmont and Monroe Parker, Madden's purportedly
locked up stock was immediately released following the IPOs and sold back to the underwriter
(Stratton Oakmont or Monroe Parker), thereby enabling the underwriter to control a large amount
ofthe issuers' shares immediately following the IPOs for sale to unsuspecting investors in the
afteiiuarket at artificially inflated prices.
28. Madden also engaged in fraudulent conduct in connection with the
December 1993 IPO ofhis own company, SHOO. Madden knew, but failed to disclose, that
SHOO's underwriter, Stratton Oakmont, had secretly agreed that, immediately following the
SHOO IPO, it would unlock selling restrictions on bridge units that had been given to Don Jen,
Inc. and Albert Honigmen even though, according to SHOO's IPO prospectus, those units could
not be sold without Stratton Oakmont's permission for thirteen months following the IPO. See
SEC Complaint at¶ 29.
29. In addition, SHOO's IPO prospectus contained misrepresentations
concerning the ownership ofSHOO stock immediately following the IPO. Prior to the IPO,
Belfort, Porush, and another Stratton Oakmont principal, Kenneth Greene ("Greene''') (sometimes
collectively referred to as the "Belfort Group"), had planned to receive large blocks ofSHOO
stock for their investments in SHOO and fortheir activities in connection with SHOO's IPO.
The National Association ofSecurities Dealers ("NASD"), however, refused to list SHOO
10