According to the Company’s FORM 10-Q for the quarterly period ended June 30, 2001, MP3.com and the representatives of the various plaintiffs for both the class action lawsuits and derivative lawsuit executed Stipulations of Settlement dated as of March 20, 2001 (the “Stipulations”). Under the terms of the Stipulations, the defendants, while continuing to deny all liability, have paid into an escrow account $35,000,000 and agreed to issue 2.5 million shares of MP3.com common stock which MP3.com valued at $5,391,000, in exchange for complete dismissals and releases of all claims with prejudice. In addition, under the Stipulations, MP3.com agreed to institute certain corporate governance enhancements. On June 29, 2001, the State Superior Court issued final approval of the settlement of the derivative cases. The Federal District Court entered final approval of the settlement of the class action on July 16, 2001. As part of the settlement agreement, counsel for the plaintiffs are to receive 27.5% of the total settlement fund. Plaintiffs’ counsel’s portion of the 2.5 million shares was issued to plaintiffs’ counsel on July 31, 2001.
MP3.com and certain of its employees, officers, and directors have been named as defendants in several lawsuits alleging violations of the federal securities laws. The complaints, which were filed between September 19, 2000 and November 15, 2000 in the United States District Court for the Southern District of California, each purport to be brought on behalf of a class of stockholders. The complaints allege that MP3.com and the other defendants violated the federal securities laws by issuing materially false and misleading statements and failing to disclose material information regarding its My.MP3 service and the litigation surrounding the service. Between September 14, 2000 and October 26, 2000, certain stockholders of MP3.com filed shareholder derivative suits against MP3.com and certain of its employees, officers, and directors in the Superior Court of the State of California, County of San Diego. These complaints allege various statutory and common law claims relating to the My.MP3 service, including breach of fiduciary duty, abuse of control, constructive fraud, gross mismanagement, unjust enrichment, and waste of corporate assets.
The original complaint charges MP3.com and certain of its officers and directors with violations of the Securities Exchange Act of 1934. The complaint alleges that defendants' false and misleading statements about strong sales and the growth of MP3.com's existing Internet services, which generated more than 90% of MP3.com's revenue, and the strong continuing growth of its products for the next several quarters, which would result in 350% revenue growth for MP3.com for the 1stQ, 2ndQ, 3rdQ and 4thQ fiscal 2000 over fiscal 1999, artificially inflated MP3.com's stock to a Class Period high of $36-1/2. On 9/7/00, it was revealed that, due to MP3.com's willful illegal acts, including violations of United States copyright laws, its financial results were going to be much worse than earlier forecast and that MP3.com would be the subject of a potentially lethal damage award. Upon this revelation, trading in MP3.com's stock was halted, last trading at $5-21/32, a decline of over 85% from the Class Period high.