Michael D. Braun (167416)
STULL, STULL & BRODY
10940 Wilshire Boulevard
Suite 2300
Los Angeles, CA 90024
Telephone: (310) 209-2468

Kevin J. Yourman (147159)
WEISS & YOURMAN
10940 Wilshire Boulevard
24th Floor
Los Angeles, CA 90024
Telephone: (310) 208-2800

Attorneys for Plaintiff


UNITED STATES DISTRICT COURT

CENTRAL DISTRICT OF CALIFORNIA

SOUTHERN DIVISION


MARY ELLEN HARRINGTON, On Behalf of
Herself and All Others Similarly Situated,

Plaintiff,

vs.

2THEMART.COM, INC., STEVEN W. REBEIL,
and DOMINIC J.
MAGLIARDITI,

Defendants.
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CASE NO.

CLASS ACTION

CLASS ACTION COMPLAINT
FOR THE VIOLATION OF
FEDERAL SECURITIES LAWS

JURY TRIAL DEMANDED



Plaintiff, through her attorneys, brings this action on behalf of herself and all others similarly situated, and on personal knowledge as to herself and her activities, and on information and belief as to all other matters, based on investigation conducted by counsel, hereby alleges as follows:

NATURE OF THE CASE


1. This is a class action on behalf of all purchasers of the securities of 2TheMart.Com Inc., ("2TheMart" or the "Company") between January 19, 1999 and August 26, 1999 inclusive (the "Class Period"), seeking remedies under the Securities Exchange Act of 1934 (the "Exchange Act"). Defendants include 2TheMart, Steven W. Rebeil, and Dominic J. Magliarditi.

2. 2TheMart was conceived in January 1999 through a reverse merger with an unrelated Oklahoma corporation. Its proclaimed business strategy was to launch an E-commerce auction web site that would provide a dynamic person to person auction environment, in direct competition to those established by eBay, Onsale Inc., Excite Inc. and Ubid Inc.

3. From its inception, 2TheMart represented that the web site, which was the core of its business, was "currently in final development" and was expected to be running before the end of the second quarter 1999. Defendants said the site would then offer direct, meaningful, competition with established sites such as eBay. These representations were made continuously throughout the Class Period and caused the Company's stock price to soar as high as $50.00.

4. Throughout the Class Period, defendants assured the investing community that the web site was on schedule and that it would prove to be worthy competition to larger and better funded companies that already had or were developing similar sites.

5. Notwithstanding their positive statements to the investing community, defendants knew the following information which belied their representations:

a. The management of 2TheMart did not include a "full team of operational, finance, marketing and technical personnel." Rather it consisted of two men, Rebeil, and Magliarditi, who had a long checkered history of real estate dealings in Nevada. Most of 2TheMart's support came through contractual dealings with third parties.

b. The website, which is the mainstay of the 2TheMart, was not currently in "final development" and, in truth, had not yet been started. The Company's August 26, 1999 public filing on Form 10 reveals that: (a) a basic IBM Customer Agreement had not been entered into until February 3, 1999; (b) it would not be until February 2, 1999 that IBM would agree to take the preliminary steps of identifying 2TheMart's business, technical and design requirements; (c) The preliminary plan consisting of a high level application design, a budget planning estimate and schedule for the implementation had not even been delivered to 2TheMart until April 30, 1999; and (d) IBM and 2TheMart would not sign a contract for IBM to "[d]esign, build, and test the 2TheMart.com Web Site" until June 1, 1999. This was almost five months after 2TheMart began touting that its web site was in "final development."

c. The Form 10 also revealed that 2TheMart had not signed an IBM Customer Agreement until February 3, 1999. The Agreement was for a Phase 0 Solution Design which amounted to no more than an analysis and proposal for a Web Site. The contract which was signed by Magliarditi stated that this project would take an estimated "eight weeks" from the initial "three day Joint Requirements Definition" session which happened sometime after February 3, 1999. The proposal resulting from the Phase 0 Solution Design were delivered by IBM to 2TheMart on April 30, 1999. Not until June 1, 1999 was a contract entered into parties for the actual "development of an online auction web site." The final agreement gave a 6 month production plan for the completion of the site. In light of these facts, defendants representations throughout the Class Period that the web site was in "final development" or that it would be "active by the second quarter 1999" were patently false when made.

d. "2TheMart expects competition to intensify further in the future. Barriers to entry are relatively low, and current and new competitors can launch new sites at a relatively low cost using commercially available software." The Form 10 goes on to identify eBay, Amazon.com, Auction Universe, Yahoo Auctions, Excite, uBid, First Auction, Surplus Auction as competitors concluding that, "[m]any of the Company's current and potential competitors have longer operating histories, larger customer bases, greater brand recognition and significantly greater financial, marketing and other resources. Competitive pressures created by any one of these companies, or by the Company's competitors collectively, could have a material adverse effect on the Company's business, results of operations and financial condition."

e. 2TheMart's principals had already been determined to be not of good character, honesty and integrity and not suitable to act as officers or directors of public companies.

i. Magliarditi and Rebeil have been business associates for more than six years. On Feb. 19, 1997, the Nevada Gaming Commission denied their applications for a casino license. The commission found both men "not of good character, honesty and integrity. " It also found that both lied to investigators for the State Gaming Control Board, and thus each "failed to meet the burden of proving his qualifications and suitability as an officer, director or controlling shareholder of a publicly traded corporation."

ii. According to a transcript of testimony before the Gaming Control Board in 1997, investigators for the agency also discovered that Magliarditi, an attorney who previously practiced tax law, under reported his income by about $70,000 in 1994. "The board felt this wasn't an honest mistake, but purposeful underreporting," Steve DuCharme, chairman of the Nevada Gaming Control Board, said in an interview. Magliarditi testified that he owed the IRS an additional $24,000 after he amended his federal tax return to include the previously unreported income.

iii. Furthermore Magliarditi admitted that he altered K-1 tax schedules reporting Rebeil's partnership income after they were prepared and signed by the accounting firm of Arthur Andersen LLC. Magliarditi said the adjustments he made, at Rebeil's request, lowered Rebeil's 1994 income tax bill. "I think they were whited out and then the numbers were inserted," Magliarditi testified. He said more than a year passed before the accounting firm received a copy of the altered document.

iv. Separately, in December 1998, Magliarditi was fined $4,000, publicly reprimanded and placed on one-year probation by the Nevada State Bar Association. That followed his conditional guilty plea to allegations he had a conflict of interest when he represented clients on both sides of an issue.

v. Control Board investigators also found that Rebeil diverted "millions of dollars" from a homebuilding company in which he was a partner to finance construction of his personal residence. Rebeil allegedly directed subcontractors to overcharge the builder and use the excess payments as credits toward work on his house. Magliarditi testified that there "could possibly be" criminal wrongdoing by Rebeil in connection with the diversion. Frank Schreck, Rebeil's former attorney, testified that at first he believed Rebeil's denials about the skimming. However, after interviewing a concrete subcontractor, he said he became "100 percent" certain that Rebeil was lying when he denied the skimming. At that point, he said, he resigned as his attorney. The Control Board alleged that Magliarditi told its investigators Rebeil's actions were a "complete surprise" to him, even after he'd been alerted to the activity by Rebeil's business partner and by subcontractors.

f. The Company had not "secured funding" for the "final development" of the website. The Form 10, filed on August 26, 1999 demonstrates that the Company will need millions of dollars more to complete the web site. Moreover, "[A]fter the launch of the Company's Web site, there can be no assurance that the Company will generate positive cash flow and there can be no assurances as to the level of revenues, if any, the Company may actually achieve from its web operations."

g. Defendants knew that its public accountant, Deloitte & Touche, LLP ("Deloitte"), had serious concerns over the financial representations to be included in the Company's upcoming public filing, which ultimately resulted in their withdrawal from the 2TheMart account. Although defendants also knew that Deloitte withdrew from the audit because of these issues, they purposefully hid this fact from the investing community. Defendants did not reveal the material loss of Deloitte & Touche, LLP until they had secured another auditor and still have not acknowledged the reasons Deloitte left.

h. The Company was suffering huge losses and was no where near releasing its web site -- its only source of revenue. As a result, the continued viability of the Company was in serious doubt -- a fact confirmed by 2TheAmrt's outside auditors, Grant Thorton LLP. "The Company is not yet generating revenues and, as shown in the financial statements, has incurred losses in its development stage. Also. . .the Company has incurred substantial obligations and will need to raise capital to complete its development activities. These factors, among others. . .raise substantial doubt about the Company's ability to continue as a going concern."

6. On August 27, 1999 2TheMart released its long anticipated public filing on Form 10 which revealed, among other things, that their highly touted web site which was supposedly in the final stages of development, had not even been started until April, 1999 and now would not be running until October, 1999. Moreover, defendants revealed that they did not have the money to pay for the web site and their auditors questioned the Company's future viability. These disclosures caused the stock price of 2TheMart to plummet from $11 9/16 per share on August 26, 1999, to $7 5/16 per share on August 27, 1999, on volume of 412,200 shares representing a drop of over 30% in one day and a drop of over 80% from the stock's high of $50 on January 20, 1999.

7. Due to defendants' deceptive and illegal conduct, plaintiff and the other class members purchased their 2TheMart securities at grossly inflated prices. Had plaintiff and the other class members been aware of the truthful condition of the Company and the adverse impact that defendants' statements and omissions were having on the Company, they would not have purchased their shares, or at least not at artificially inflated prices.

JURISDICTION AND VENUE


8. This Court has jurisdiction over the subject matter of this action pursuant to 28 U.S.C. §§1331 and 1337, and §27 of the Securities Exchange Act of 1934 (the "Exchange Act") (15 U.S.C. §78aa).

9. This action arises under §§10(b) and 20(a) of the Exchange Act and Rule 10b-5 promulgated thereunder (17 C.F.R. §240.10b-5).

10. Venue is proper in this district pursuant to §27 of the Exchange Act and 28 U.S.C. 1391(b) because the acts charged herein, including the dissemination of materially false and misleading information, occurred in this district. Defendant 2TheMart also maintains its principal place of business in this district at 18301 Von Karman Avenue, 7th Floor, Irvine, California, 92612.

11. In connection with the conduct complained of herein, defendants, directly or indirectly, used the means and instrumentalities of interstate commerce, including the mails and interstate telephone communications, and the facilities of a national securities exchange.


PARTIES


12. Plaintiff Mary Ellen Harrington purchased shares of 2TheMart common stock, as indicated in her certification attached hereto and was damaged thereby.

13. Defendant 2TheMart is an Internet based electronic commerce ("e-commerce") company. Defendants purport to be developing an e-commerce site in which buyers and sellers will be brought together to buy and sell a variety of goods in an auction format. Once fully functional, the 2TheMart service will enable sellers to list items for sale, buyers to bid on those items and allow 2TheMart users to browse through all items in a fully automated, topically arranged, online service that is expected to be available 24 hours a day, seven days a week.

14. Defendant Steven W. Rebeil, ("Rebeil") was at all relevant times was Chairman of the Board, Chief Executive Officer and a Director of the Company. He owns 8,500,000 shares of company stock (34.79%).

15. Defendant Dominic J. Magliarditi ("Magliarditi") was at all relevant times was President, Chief Operating Officer and a Director of the company. He also owns 8,500,000 shares of company stock (34.79%).

16. Rebeil and Magliarditi (collectively the "Individual Defendants") were at all relevant times during the Class Period controlling persons of 2TheMart within the meaning of Section 20(a) of the Exchange Act. By reason of their stock ownership, management positions, and/or membership on 2TheMart's Board, the Individual Defendants were controlling persons of 2TheMart and had the power and influence, and exercised the same, to cause it to engage in the illegal conduct complained of herein. The Individual Defendants are liable for the false statements pleaded herein, as those statements were each "group published" information, the result of the collective action of the Individual Defendants.

17. As officers, directors and/or controlling persons of a Company whose common stock is traded NASD OTC and governed by the provisions of the federal securities laws, the Individual Defendants each had a duty to disseminate truthful information promptly and accurately with respect to the Company's operations, products, markets, management, earnings and business prospects, to correct any previously issued statements that had become materially misleading or untrue, and to disclose any trends that would materially affect earnings and the financial results of 2TheMart, so that the market price of the Company's publicly traded securities would be based upon truthful and accurate information.

18. Under rules and regulations promulgated by the SEC under the Exchange Act, the Individual Defendants also had a duty to report all trends, demands or uncertainties that were likely to influence: 2TheMart's net sales, revenues and/or income, and the Individual Defendants' representations during the Class Period violated these specific requirements and obligations.

19. The Individual Defendants, because of their positions with the Company, controlled and/or possessed the power and authority to control the contents of 2TheMart's reports, press releases and presentations to the public. Each defendant was provided with copies of the Company's reports and press releases alleged herein to be misleading prior to or shortly after their issuance and had the ability and opportunity to prevent their issuance or cause them to be corrected.

20. Because of their positions and access to material non-public information available to them but not to the public, each of these defendants knew that the adverse facts specified herein had not been disclosed to, and were being concealed from, the public and that the positive representations which were being made were then materially false and misleading.

21. Defendants are also each liable as individual participants in a fraudulent scheme and course of conduct that operated as a fraud and/or deceit upon the class. Because of their executive, managerial and/or directorial positions with the Company, each of the defendants had access to the adverse, non-public information about the business, finances and future business prospects of 2TheMart as particularized herein and acted to misrepresent, misstate or conceal such information from plaintiff and the investing public.

22. It is also appropriate to treat the defendants as a group for pleading purposes under the federal securities laws and the Federal Rules of Civil Procedure and to presume that the false and misleading information complained of herein was disseminated through the collective actions of the defendants. Defendants were involved in the drafting, producing, reviewing, and/or disseminating of the false and misleading information detailed herein, knew that such materially misleading statements were being issued by the Company, and/or approved or ratified these statements in violation of the federal securities laws. Defendants' false and misleading statements and omissions of fact consequently had the effect of, both on their own and in the aggregate, artificially inflating the price of the common stock of 2TheMart at all times during the Class Period.

BACKGROUND


23. The Company was originally incorporated under the laws of the State of Oklahoma on December 2, 1992 as S.K.B. Design, Inc. Between 1992 to 1996, the Company was inactive. On October 1, 1996, the Company acquired certain technology and assets with the intention of developing a cd-rom based multimedia yearbook product. On December 22, 1997, the Company changed its name from S.K.B. Design, Inc. to CD-Rom Yearbook Company, Inc. ("CD-Rom"). CD-Rom ceased its operations in the fall of 1998. Effective January 8, 1999, CD-Rom acquired all of the outstanding common stock of 2TheMart.com, Inc., a Nevada corporation ("2TheMart- Nevada"), in a maneuver called a "reverse merger," in which a privately held company buys a publicly traded one and then disposes of the name, assets and management of the publicly traded company while retaining its access to the public markets. The reverse merger enabled 2TheMart to avoid the requirements of becoming public yet retain access to public monies. Through the reverse the merger, CD-Rom changed its name to 2TheMart.com, Inc.

SUBSTANTIVE ALLEGATIONS


24. On or about January 19, 1999, defendants made the following announcement over the PR News Wire:

25. In an attempt to demonstrate their fiscal viability in a highly competitive market, defendants announced that they obtained $3.2 million worth of new funding. As reported in the January 20, 1999 Business Wire:


26. These announcements resulted in an immediate and dramatic increase in the price of 2TheMart's stock from a low of $8 1/2 on January 19, 1999 to an all time high of $50 on January 21, 1999.

27. Unfortunately for the investing community, the myriad of positive statements made by defendants in these releases were undermined by the existence of material adverse information known to defendants. Defendants failed to disclose, among other things, the following facts:

a. The management of 2TheMart did not include a "full team of operational, finance, marketing and technical personnel." Rather it consisted of two men, Rebeil, and Magliarditi, who had a long history of checkered real estate dealings in Nevada.

b. The web site, which is the mainstay of the 2TheMart, was not currently in "final development" and, in truth, had not yet been started. The Company's August 26, 1999 public filing on Form 10 revealed that: (a) not until February 2, 1999 did 2TheMart enter into contractual relations with IBM to take the preliminary steps of identifying 2TheMart's business, technical and design requirements. The Form 10 also revealed that only "[s]hortly following the completion of the Company's merger. . .the Company began work on its planned internet auction web site."

c. A comprehensive site designed to be "one of the largest," "preeminent" auction sites on the web, would take at least 6 months to complete. Moreover, a web designer had not yet been hired to design the site and neither principal had any background in web site design or the operations of an internet company, making the representation that the site was expected to be active by the second quarter 1999 impossible.

28. On January 21, 1999 the Orange County Edition of the Los Angeles Times printed a story concerning the run up of the Company's stock. The article, by Jonathan Gaw, Times Staff Writer stated:



29. In an attempt to explain the dramatic increase in stock price and maintain momentum, 2TheMart's attorney provided a four page business plan and assured investors the site would be operational by early March. As reported by the January 22, 1999 Orange County Edition of the Los Angeles Times:

* * *

* * *

He insisted that the company is preparing a Web site "that is technologically superior to EBay." The site should be up by the end of February or early March, he said, and will "improve the value of the product and the delivery systems." Defendants endorsed these representations although they knew that such a comprehensive site would take at least 6 months to complete, and they had not even started, much less reached, preliminary agreements with web designers.

30. In response to the Los Angeles Times article, defendants released another statement touting not only 2TheMart's business, but the abilities of its president. As reported in the January 27, 1999 Business Wire:

* * *

31. These statements were false and misleading because, among other reasons, defendant's press release did not contain the following information which was material to investors:

a. The Company had not "secured funding" for the "final development" of the web site. As revealed in 2TheMart's Form 10, the Company will need millions more to fully develop the web site. Moreover, at the time of the statement, they had not even obtained an estimate from IBM as to how much the site would cost. Coupled with the fact Magliarditi ad Rebeil had no technology background representation as to funding were not made with a reasonable basis.

b. The Company was not "finalizing agreements with a variety of consultants." As revealed in the August 26, 1999 Form 10, the only agreement made before June 16, 1999 with a consultant was IBM.

c. Magliarditi had already been determined to be not of good character, honesty and integrity and not suitable to act as an officer or director of a public company.

d. February 19, 1997, the Nevada Gaming Commission denied Magliarditi's application for a casino license. The commission found both men [Magliarditi and Rebeil] "not of good character, honesty and integrity." It also found that both lied to investigators for the State Gaming Control Board, and thus each "failed to meet the burden of proving his qualifications and suitability as an officer, director or controlling shareholder of a publicly traded corporation."

e. According to a transcript of testimony before the Gaming Control Board in 1997, investigators for the agency also discovered that Magliarditi, an attorney who previously practiced tax law, under reported his income by about $70,000 in 1994. "The board felt this wasn't an honest mistake, but purposeful underreporting," Steve DuCharme, chairman of the Nevada Gaming Control Board, said in an interview. Magliarditi testified that he owed the IRS an additional $24,000 after he amended his federal tax return to include the previously unreported income.

f. Furthermore Magliarditi admitted that he altered K-1 tax schedules reporting Rebeil's partnership income after they were prepared and signed by the accounting firm of Arthur Andersen LLC. Magliarditi said the adjustments he made, at Rebeil's request, lowered Rebeil's 1994 income tax bill. "I think they were whited out and then the numbers were inserted," Magliarditi testified. He said more than a year passed before the accounting firm received a copy of the altered document.

g. Separately, in December of 1998, Magliarditi was fined $4,000, publicly reprimanded and placed on one-year probation by the Nevada State Bar Association. That followed his conditional guilty plea to allegations he had a conflict of interest when he represented clients on both sides of an issue.

32. On January 30, 1999 Edmund Sanders, of The Orange County Register commented that "most new investors seem to have bought the company's stock based solely on its news releases, in which it promises to launch a new person-to-person auction Web site within the next six months."

33. In light of 2TheMart's dramatic rise, defendant Magliarditi went to stock message boards to assure investors that 2TheMart was a legitimate company which would be fully reporting in a few weeks. On February 11, 1999, Magliarditi, using the screen name Nicmags (nicmags@aol.com and nicmags@2themart.com) posted the following message on the Silicon Investor:



34. On February 24, 1999 the Company released another statement over the Business Wire which re-emphasized the timing of the web site launch:


35. On March 1, 1999 the Company announced the addition of a Chief Technology Officer and confirmed that the web site was still scheduled for a second quarter release as reported in the Business Wire of that day:



36. These statements were false and misleading because, among other reasons, defendant's press release did not contain the following information which was material to investors:

a. The management of 2TheMart did not include a "full team of operational, finance, marketing and technical personnel." Rather it consisted of two men, Rebeil and Magliarditi.

b. The web site, which is the mainstay of the 2TheMart, was not currently in "final development" and, in truth, had not yet been started. The Company's August 26, 1999 public filing on Form 10 reveals that: (a) a basic IBM Customer Agreement had not been initiated until January 25, 1999; (b) it would not be until February 2, 1999 that IBM would agree to take the preliminary steps of identifying 2TheMart's business, technical and design requirements; (c) The preliminary plan consisting of a high level application design, a budget planning estimate and schedule for the implementation had not even been delivered to 2TheMart until April 30, 1999; and (d) IBM and 2TheMart would not sign a contract for IBM to "[d]esign, build, and test the 2TheMart.com Web Site" until June 1, 1999. This was almost five months after 2TheMart began touting that its web site was in "final development."

c. The facts that: (a) a comprehensive site described by defendants would take at least 6 months to complete; (b) a web designer had not yet been hired to design the site (IBM was not hired to implement design until June 1, 1999); and (c) neither principal had any background in web site design or the operations of an internet company

37. In light of the surge in stock price from their public statement, defendants desperately began trying to raise capital for the web site. As reported by the Securities Data Publishing Private equity Week, April 19, 1999, 2TheMart was now seeking to raise $4.9 million through a private placement of common stock. According to the terms of the offering, a minimum investment of $10,000 was required. The Company claimed that the proceeds would be used as working capital.

38. Magliarditi continued to e-mail shareholders, representing that the web site was on schedule and that the Form 10 would soon be filed:


39. In an effort to prove the Company's legitimacy, defendants continued to put out releases regarding new employees and strategic relationships. As reported in the May 10, 1999 Business Wire:

* * *

40. As reported in the May 18, 1999 Business Wire:


41. These statements concerning the "Company's completion of the development of its technology road map for its global Internet operations" were false and misleading because it reinforced defendants' earlier representations that the Internet site would be up and running by June 30, 1999, the end of the second quarter. However, unknown to investors, IBM and 2TheMart would not sign a contract for IBM to "[d]esign, build, and test the 2TheMart.com Web Site" until June 1, 1999. At this time IBM had told 2TheMart.com that building its web site would take another 4 months to complete. The contract stated: "The target delivery date for the 2TheMart.com Web Site is currently 10/8/99, a date well outside the second quarter.

42. Defendants' scheme suffered a temporary setback when Bloomberg News reported the following on June 3, 1999:

SHARE SOAR

 

WEB SITE

NEVADA INVESTIGATION

 

"MILLIONS OF DOLLARS"



43. After the defendants' backgrounds were exposed to the public eye, 2TheMart shares dropped from $22 3/4 to $15 1/2 on heavy trading.

44. In an attempt to prevent further deterioration in stock price and to allay investor concerns, defendants' released a series of false and misleading press releases. As reported by Business Wire on June 4, 1999:

45. On the same day, June 4, 1999, the Company released another press release over Business Wire, which said in part:



46. These statements were false and misleading when made because:

a. Defendants knew that the accounting firm of Deloitte & Touche, LLP was not in the process of "finalizing the audit of the Company's financial statements" nor would the Form 10 be released by June 9, 1999, five days away. Instead, Deloitte had serious disagreements with the Company concerning the results of the Company's audit. These disagreements would eventually lead to Deloitte's refusal to sign off on the audit and ultimate withdrawal from the audit.

b. Defendants knew that IBM has not been "constructing the 2TheMart.com web site since January 1999." The Company had only contracted with IBM to do a preliminary design analysis on February 2, 1999. IBM's proposal was not submitted until April 30, 1999 and not accepted until June 1, 1999 when actual construction began.

47. On June 10, 1999, the Company released an announcement over the Business Wire that the second quarter launch of the web site would be postponed to the fourth quarter.

48. On June 10, 1999 the Los Angeles Times reported the following story:


49. These representations were false and misleading when made because defendants knew the following material adverse information:

a. Deloitte & Touche, LLP was not going to sign off on the Company's financial audit due to serious disagreements or financial information contained in the draft Form 10. As such, it was clear that the Form 10 would not be filed "next week"

b. The Company was suffering huge losses and was no where near releasing its web site -- its only source of revenue. As a result, the continued viability of the Company was in serious doubt -- a fact confirmed by 2TheAmrt's outside auditors, Grant Thorton LLP. "The Company is not yet generating revenues and, as shown in the financial statements, has incurred losses in its development stage. Also. . .the Company has incurred substantial obligations and will need to raise capital to complete its development activities. These factors, among others. . .raise substantial doubt about the Company's ability to continue as a going concern."

50. In an effort to ward off suspicions about possible financial improprieties associated with the delayed Form 10, defendants announced the appointment of a Vice President of Finance. This also bought them time to scramble for new accountants in light of their disagreements with Deloitte. As reported in the Business Wire for July 1, 1999:



51. On July 15, 1999, Deloitte & Touche LLP announced it had severed its relationship with 2TheMart.com. In a story printed in the July 16, 1999, edition of the Los Angeles Times, the effect of the departure on the Company's stock was noted:


52. In an effort to divert public attention from its financial woes, defendants announced new strategic relationships in an attempt to lend legitimacy to its operations. As reported by the July 22, 1999 Business Wire:


53. On August 26, 1999, the Company finally filed the Form 10 that had been promised in June. The Form 10 itself is false and misleading because it does not mention the departure of Deloitte & Touche LLP, nor does it say anything of the circumstances of the accounting firm's departure. However, the release of the Form 10 revealed that the Company was experiencing sever financial difficulty. As demonstrated in the August 28, 1999 edition of The Orange County Register:


54. As the market digested information revealed in the Form 10, 2TheMart's stock price plummeted. As reported by the Los Angeles Times on August 28, 1999:


55. As reported by the Orange County Register on August 31, 1999:

DEFENDANTS' INSIDER TRADING


56. While defendants were issuing the materially false and misleading statements alleged throughout the Complaint, certain insiders were taking advantage of their knowledge of the adverse facts not disclosed to the public until the end of the Class Period. The extent of their trades, the timing of their trades and the nature of their trading habits all establish that defendants had possession of the material adverse facts alleged herein. Specifically, 2TheMart insiders sold more than 300,000 shares of the 2TheMart stock they owned for proceeds of over $5 million. 2TheMart insiders sold the following amounts of 2TheMart shares at artificially inflated prices throughout the Class Period while in possession of material non-public information that was not disclosed to the investment community at the time of such transaction:


Insider Name Date No. of Shares

Proceeds
PFZ Holdings 09/08/99 100,000 $918,750.00
Gayde, Christopher 09/03/99 18,750 $152,343.75
Reed, Stephen 09/03/99 18,750 $152,343.75
438292 BC Ltd. 06/22/99 3,000 $39,375.00
Bechard, Marie 06/07/99 1,500 $26,250.00
Dr Doug Evans Ltd 06/07/99 15,000 $262,500.00
Jackson, Margaret Ivy 06/07/99 3,000 $52,500.00
McEwen, Donald\& Edith 06/07/99 15,000 $262,500.00
Monford, Lorne 06/07/99 3,000 $52,500.00
Showtime Realty Ltd 06/07/99 1,500 $26,250.00
Smith, Myrtle 06/07/99 3,000 $52,500.00
Wayne Holdings Ltd 06/07/99 3,000 $52,500.00
Found, Margaret 06/02/99 3,000 $68,250.00
Kiewicz, Kalen\& Sheryl 06/02/99 18,750 $426,562.50
Lewis, Thomas 06/02/99 3,000 $68,250.00
Scott, Marquerite 06/02/99 3,000 $68,250.00
Wilson John\& Leslie 06/02/99 3,000 $68,250.00
Woinoski, Brian 06/02/99 3,000 $68,250.00
Kalenkiewicz, Sheryl 05/28/99 18,750 $525,000.00
Gayde, Christopher 05/27/99 18,750 $525,000.00
Reed, Stephen 05/25/99 18,750 $494,531.25
Delgrosso, James A. 04/26/99 14,000 $294,000.00
Gayde, Christopher 03/23/99 18,750 $481,640.62
Gayde, Christopher 03/12/99 18,750
Reed, Stephen 03/12/99 18,750
Total Shares Sold: 345,750 Total Proceeds: $5,168,765.62

DEFENDANTS' SCIENTER


57. During the Class Period, each of the Individual Defendants, who were senior executives and/or directors of 2TheMart were privy to confidential and proprietary information concerning 2TheMart, its operations' finances, financial condition, products and present and future business prospects. These defendants also had access to and knew of, material adverse non-public information concerning 2TheMart's present and future financial condition.

58. Each of the Individual Defendants was provided with copies of 2TheMart's management reports, and press releases alleged herein to be misleading prior to, or shortly after their issuance. All of the Individual Defendants had the ability and opportunity to prevent their issuance or cause them to be corrected. As a result, each of the Individual Defendants is responsible for the accuracy of the public reports and releases detailed herein as "group published" information and are therefore responsible and liable for the representations contained therein.

59. During the Class Period, defendants directly and indirectly engaged and participated in a continuous course of conduct to misrepresent the results of 2TheMart's operations and to conceal adverse material information regarding the finances, financial condition, and results of operations of 2TheMart as specified herein. 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 prices for the common stock of the Company. This included the formulation, 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 were made, not misleading, which operated as a fraud and deceit upon plaintiff and the other members of the Class.

60. The defendants are liable, jointly and severally, as direct participants in the wrongs complained of herein. Defendants had a duty promptly to disseminate accurate and truthful information with respect to 2TheMart's products, operations, financial condition and future business prospects or to cause and direct that such information be disseminated so that the market price of 2TheMart stock would be based on truthful and accurate information.

61. As officers, directors and/or controlling persons of a publicly held company whose common stock is registered with the SEC under the Exchange Act, traded on the NASDAQ OTC Market System, and governed by the provisions of the Exchange Act, defendants had a duty to promptly disseminate accurate and truthful information with respect to the Company's operations, business, products, markets, management, earnings and present and future business prospects, to correct any previously issued statements from any source that had become untrue, and to disclose any trends that would materially affect earnings and the present and future financial operating results of 2TheMart, so that the market price of the Company's publicly traded securities would be based upon truthful and accurate information.

STATUTORY SAFE HARBOR


62. The statutory safe harbor providing for forward-looking statements under certain circumstances does not apply to any of the false forward-looking statements pleaded in this Complaint. None of the forward-looking statements pleaded herein were sufficiently identified as a "forward-looking statement" when made. Nor did meaningful cautionary statements identifying important factors that could cause actual results to differ materially from that in the forward-looking statements accompany those statements. To the extent that the statutory safe harbor does apply to any forward-looking statements pleaded, the defendants are liable for those false forward-looking statements because at the time each of those statements was made, the speaker actually knew the forward-looking statement was false and the forward-looking statement was authorized and/or approved by an executive officer of 2TheMart who actually knew that those statements were false when made.

PLAINTIFF'S CLASS ACTION ALLEGATIONS


63. Plaintiff brings this action as a class action pursuant to Rule 23(a) and (b)(3) of the Federal Rules of Civil Procedure on behalf of a Class consisting of all persons and entities who purchased or otherwise acquired 2TheMart common stock from January 19, 1999 through August 26, 1999, inclusive, and who were damaged thereby. Excluded from the Class are defendants, officers and directors of the Company, members of their immediate families, and their legal representatives, heirs, successors or assigns and any entity in which defendants have or had a controlling interest.

64. During the Class Period, thousands of shares of common stock of 2TheMart were traded on an efficient and developed securities market. Thousands of brokers nationwide have access to trading information about 2TheMart.

65. The members of the Class are so numerous that joinder of all members is impracticable. While the exact number of Class members is unknown to plaintiff at this time and can only be ascertained through appropriate discovery, plaintiff believes that there are hundreds of members of the Class. 2TheMart has over 20,000,000 million shares of common stock outstanding and actively traded on the NASD OTC, an efficient market, under the ticker symbol "TMRT".

66. Plaintiff's claims are typical of the claims of the members of the Class as all members of the Class are similarly affected by defendants' wrongful conduct in violation of federal law that is complained of herein.

67. Plaintiff will fairly and adequately protect the interests of the members of the Class and have retained counsel competent and experienced in class and securities litigation. Plaintiff has no interests that are adverse or antagonistic to those of the Class.

68. A class action is superior to other available methods for the fair and efficient adjudication of this controversy. Because the damages suffered by many individual Class members may be relatively small, the expense and burden of individual litigation make it virtually impossible for the Class members to individually seek redress for the wrongful conduct alleged herein.

69. Common questions of law and fact exist as to all members of the Class and predominate over any questions affecting solely individual members of the Class. Among the questions of law and fact common to the Class are:

a. whether the federal securities laws were violated by defendants' acts as alleged herein;

b. whether defendants participated in and pursued the common course of conduct complained of herein;

c. whether documents, press releases and other statements disseminated to the investing public and the Company's shareholders during the Class Period misrepresented the business condition of 2TheMart;

d. whether defendants failed to correct prior statements when subsequent events rendered those prior statements untrue or inaccurate;

e. whether defendants acted willfully or recklessly in misrepresenting and/or omitting to state material facts;

f. whether the market price of 2TheMart's common stock during the Class Period was artificially inflated due to the misrepresentations and/or non-disclosures complained of herein; and

g. whether the members of the Class have sustained damages, and, if so, what is the proper measure thereof.

70. Plaintiff will rely, in part, upon the presumption of reliance established by the fraud-on-the-market doctrine in that:

a. defendants made public misrepresentations or omitted material facts during the Class Period, as alleged herein;

b. the misrepresentations and/or omissions were material;

c. 2TheMart's common stock was traded in an efficient market;

d. the misrepresentations and/or omissions alleged tended to induce reasonable investors to misjudge the value of 2TheMart shares; and

e. plaintiff and members of the Class acquired their shares between the time defendants made the misrepresentations and/or omissions and the time the truth was revealed, without knowledge of the falsity of the misrepresentations.

COUNT I

(Violations of Section 10(b) of the Exchange Act

and Rule 10-5 Promulgated Thereunder)




71. Plaintiff repeats and realleges the allegations above as though fully set forth herein.

72. During the Class Period, the defendants, and each of them, 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 the other class members, as alleged herein; (ii) artificially inflate and maintain the market price of 2TheMart; and (iii) cause plaintiff and other members of the Class to purchase 2TheMart securities at inflated prices. In furtherance of this unlawful scheme, plan and course of conduct, defendants, and each of them, took the actions set forth herein.

73. 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 stock in an effort to maintain artificially high market prices for 2TheMart securities in violation of section 10(b) of the Exchange Act and Rule 10b-5.

74. The statements made by defendants during the Class Period were materially false and misleading because at the time they were made, the Company and persons acting as corporate officers knew or recklessly ignored, but failed to disclose, the matters set forth herein.

75. In ignorance of the artificially high market prices of 2TheMart's publicly traded securities, and relying directly on defendants or indirectly on the false and misleading statements made by defendants, upon the integrity of the market in which the securities trade, on the integrity of the regulatory process and the truth of representations made to appropriate agencies throughout the Class Period and/or on the absence of material adverse information that was known to defendants but not disclosed in public statements by defendants during the Class Period, plaintiff and the other members of the Class acquired 2TheMart securities during the Class Period at artificially high prices and were damaged thereby.

76. Had plaintiff and the other members of the Class and the marketplace known of the true financial condition, business prospects and character of leadership of 2TheMart which were not disclosed by defendants, plaintiff and other members of the Class would not have purchased or otherwise acquired their 2TheMart securities during the Class Period, or would have not done so at the artificially inflated prices which they paid. Hence, plaintiff and the Class were damaged by defendants' violations of Section 10(b) and Rule 10b-5.

COUNT II

(Violation of Section 20(a) of the Exchange Act

Against the Individual Defendants)




77. Plaintiff incorporates by reference the above paragraphs above as if set forth fully herein. This Count is asserted against the Individual Defendants.

78. Defendants acted as controlling persons of 2TheMart within the meaning of Section 20 of the Exchange Act as alleged herein. By reasons of their executive, managerial positions with 2TheMart, defendants Magliarditi and Rebeil had the power and authority to cause the Company to engage in the wrongful conduct complained of herein.

79. By reasons of the aforementioned wrongful conduct, defendants Magliarditi and Rebeil are liable pursuant to Section 20(a) of the Exchange Act. As a direct and proximate result of their wrongful conduct, plaintiff and the other members of the Class suffered damages in connection with purchasing 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, certifying plaintiff as class representative under Rule 23 of the Federal Rules of Civil Procedure and her counsel as class 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 DEMAND


Plaintiff hereby demands a trial by jury.

Dated: September 13, 1999 Michael D. Braun
STULL, STULL & BRODY



By: ________________________
Michael D. Braun
10940 Wilshire Boulevard
Suite 2300
Los Angeles, CA 90024
Telephone: (310) 209-2468

Kevin J. Yourman
WEISS & YOURMAN
10940 Wilshire Boulevard
24th Floor
Los Angeles, CA 90024
Telephone: (310) 208-2800

Attorneys for Plaintiff

 

Source: http://www.secfraud.com/