A lawsuit has been filed against Cross Media Marketing Corp. board members alleging that the firm misrepresented its financial position, causing harm to the corporation.
The suit was filed Aug. 22 in the U.S. District Court for the Southern District of New York by plaintiff Richard Pardo, a Cross Media shareholder in Florida.
The suit names Ronald Altbach, Cross Media’s CEO and chairman of the board, and seven board members. Several earlier class-action lawsuits filed against the firm contain similar allegations.
According to the complaint, the board downplayed the impact of a lawsuit filed in April by the Federal Trade Commission. The stock price fell on news of the suit and magazine orders for the second quarter ended June 30 were negatively impacted, dropping by more than 20% below budget, the complaint said. The complaint quoted statements by Altbach that magazine sales would make up about 50% of overall revenue in fiscal 2002.
Marc Roth, general counsel and vice president for Cross Media, said the firm was unaware of the lawsuit and declined comment.
The suit said that the action is based on board members’ conduct between the periods of Nov. 5, 2001 and July 11, 2002.
The FTC lawsuit alleged that the firm’s postal mailers invited consumers to enter sweepstakes and do not disclose that the purpose is to sell magazines. In addition, Cross Media failed to disclose the total cost of each magazine, the down payment required, the number of all subsequent payments, and the right to cancel within three business days. The FTC also accused the firm of billing consumers for magazines they did not order, or in amounts they did not agree to pay, and of failing to honor cancellation requests.
The Pardo complaint also alleges that National Syndications Inc., a large Sunday print advertiser acquired by Cross Media in January 2002, engaged in illegal conduct which continued after the purchase. The documents stated that revenues and earnings from that conduct were used to meet revenue projections.
“While defendants portrayed Cross Media as a successful company with rising revenues and earnings, in fact it was obtaining a material portion of those revenues and earnings from illicit sources as opposed to having been earned from lawful business operations,” the papers stated.
According to the complaint, as the FTC lawsuit continued the board on numerous occasions stated publicly that the company would meet a revised revenue projection of $200 million for fiscal 2002 which ends in December. Altbach, in an interview with the OTC Journal in June, stated that the company was “absolutely on track” to meet the revenue projections. But in July the defendants revised downward Cross Media’s guidance for the balance of 2002, projecting revenue to be between $165 million to $175 million. Altbach also stated the negative impact of the FTC lawsuit. The stock price dropped from $6.54 on July 10 to $2.71 on July 12, the complaint said.
Other board members listed as defendants are: Richard Kaufman, Jonathan Bulkeley, Richard Cohen, William Morrissey, Bruce Dorskind, Kenneth Lambert and Douglas Lindgren.
This lawsuit follows at least seven class-action lawsuits filed since July by shareholders alleging that Cross Media and Altbach issued a series of misleading statements, including press releases, with regard to its finances and the FTC proceedings.
Cross Media intends to “vigorously” defend itself against the class-action lawsuits, attorney Roth said.
Cross Media reported revenue of $37.1 million and a loss of $2.9 million for the second quarter ended June 30. First quarter revenue was $44 million and net income was $1.1 million. The firm’s stock was trading at a high of $11.99 in May and closed yesterday at about $1.40.
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