UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF NEW YORK IN RE STEVEN MADDEN LTD. ) SECURITIES LITIGATION ) Lo c9 - I q 5- #^ J4 CIVIL ACTION NO. CV-00-3676 (JG) Hon. John Gleeson JURY TRIAL DEMANDED CONSOLIDATED AMENDED CLASS ACTION COMPLAINT BASIS OF ALLEGATIONS - ° 1. Plaintiffs allege the following based upon the investigation of their counsel, including a review of federal grand jury 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 of defendant 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 a reasonable opportunity for discovery. NATURE OF THE ACTION 2. This is a class action on behalf of purchasers of the 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 of the 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.
Transcript
UNITED STATES DISTRICT COURT
FOR THE EASTERN DISTRICT OF NEW YORK
IN RE STEVEN MADDEN LTD. )SECURITIES LITIGATION )
Lo c9 - I q 5-
#^ J4
CIVIL ACTION NO. CV-00-3676 (JG)
Hon. John Gleeson
JURY TRIAL DEMANDED
CONSOLIDATED AMENDED CLASS ACTION COMPLAINT
BASIS OF ALLEGATIONS - °
1. Plaintiffs allege the following based upon the investigation of their
counsel, including a review of federal grand jury 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 of defendant 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 a reasonable
opportunity for discovery.
NATURE OF THE ACTION
2. This is a class action on behalf of purchasers of the 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 of the 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 ExhibitsA, B and C, respectively.
more fully below, defendants engaged in a course of conduct designed to conceal the fact that a
large block of SHOO common stock was secretly owned by a group of investors who acted as
principals of a 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 of SHOO and other companies. When the truth concerning these events became public
following grand jury indictments and the commencement of an SEC action against Steve
Madden, the price of SHOO'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) of the 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 has jurisdiction over the subject matter of this action pursuant
to Section 27 of the 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 of the Exchange
Act, and 28 U.S.C. § 1391(b). SHOO maintains its principal place of business in this district
and many of the acts and practices complained of herein 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 of interstate commerce, including, but not
limited to, the mails, interstate telephone communications and the facilities of the national
securities markets.
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PARTIES
7. By Order of this 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 of SHOO common stock during the
Class Period at artificially inflated prices and were damaged thereby.
8. Additional plaintiffs James Connor, Jeffrey Dempster, Leigh Curry, on
Behalf of Guerrilla Partners, Maurice Blumenthal, Ann Baker Salafia, Michael Fahey and Diana
Fahey, and Morris Willner purchased shares of SHOO 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
Steve Madden ("Madden")
Rhonda J. Brown ("Brown")
Arvind Dharia ("Dharia")
Positions at SHOO
Chairman, Chief Executive Officer and, untilFebruary 29, 2000, President
Chief Operating Officer, Director and (as of
February 29, 2000), President
Chief Financial Officer, Secretary andDirector
11. Because of the 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 of actual operations compared thereto), conversations and connections
with other corporate officers and employees, attendance at management and Board of Directors
meetings and committees thereof and 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 that the materially false, misleading and incomplete information
conveyed in the Company's public filings and statements as alleged herein are the collective
actions of the narrowly defined group of Individual Defendants identified above. Each of the
Individual Defendants, by virtue of his or her high-level position with the Company, directly
participated in the management of the Company, was directly involved in the day-to-day opera-
tions of the 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 of the federal securities laws.
13. As officers and controlling persons of a publicly-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
of the 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
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prospects and to correct and update any previously-issued statements that were materially
misleading or untrue, so that the market price of the 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 of the various public filings and statements complained of herein and were aware of, or
recklessly disregarded, the misstatements contained therein and omissions therefrom, and were
aware of their materially false and misleading nature. Because of their senior positions at
SHOO, each of the 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 behalf of SHOO materially false and misleading.
15. The Individual Defendants, by virtue of their positions of control and
authority, were able to and did control the content of the various SEC filings and other public
statements pertaining to the Company. Each Individual Defendant, during the time of his or her
association with the Company, was provided with copies of the 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 of the Individual
Defendants is responsible for the accuracy of the public filings and statements detailed herein
and is primarily liable for the representations and omissions contained therein.
16. Each of the defendants is liable as a participant in a fraudulent scheme and
course of business that operated as a fraud or deceit on purchasers of SHOO common stock by
disseminating materially false and misleading statements and/or concealing material adverse
facts. The scheme, among other things, (i) deceived the investing public regarding the true
ownership of a significant block of SHOO common stock; (ii) deceived the investing public
concerning defendant Madden's role in the fraudulent acts undertaken in connection with the
initial public offerings of numerous companies (including SHOO), (iii) deceived the investing
public regarding SHOO' s business, operations and the intrinsic value of SHOO common stock;
(iv) enabled defendants to sell significant amounts of SHOO common stock at artificially inflated
prices; and (v) caused plaintiffs and the other members of the 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 behalf of a Class consisting of all 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 of the Company,
members of each of the 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 of the Class are so numerous that joinder of all members is
impracticable. Throughout the Class Period, SHOO common stock was actively traded on the
NASDAQ. While the exact number of Class members is unknown to plaintiffs at this time and
can only be ascertained through appropriate discovery, plaintiffs believe that there are hundreds
or thousands of members of the Class. Record owners and other members of the Class may be
identified from records maintained by SHOO or its transfer agent and may be notified of the
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pendency of this action by mail, using the form of notice similar to that customarily used in
securities class actions..
19. Plaintiffs' claims are typical of the claims of the members of the Class as
all members of the 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 of the members of
the Class and have retained counsel competent and experienced in class and securities litigation.
21. Common questions of law and fact exist as to all members of the Class
and predominate over any questions solely affecting 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 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 of SHOO common stock was artificially
inflated during the Class Period; and
e. to what extent the members of the Class have sustained damages
and the proper measure of damages.
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.
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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 redress the wrongs done to them. There will be no difficulty in the management ofthis
action as a class action.
SUBSTANTIVE ALLEGATIONS
Background Facts and Madden's Participation in Fraudulent PracticesInvolving the Initial Public Offerings of SHOO 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, a New York-based broker dealer during the period from
1989 to 1996, was, in the words of the SEC, "one of the largest and most notorious illegal boiler
room operations in history." See SEC Complaint at ¶ 11. Daniel Porush ("Porush"), a childhood
friend of Madden, was president and chief executive officer of Stratton 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 of Stratton Oakmont, Monroe
Parker Securities, Inc. ("Monroe Parker"), "so that he would have another brokerage firm from
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which to continue defrauding investors in Stratton-style IPO manipulations in the event that
Stratton was forced to go out of business." Id. at ¶ 14. Monroe Parker closed down in December
1997.
26. Prior to 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 grand jury 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 of the IPOs. See id. at 111. As the February 26, 2001 edition of New York
Magazine reported in an article entitled "Steve Madden: Crisis of the Sole," Porush recently
testified at the trial of Stratton 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 of two practices known as "flipping" and the secret unlocking of "lockup agreements."
a. In the "flipping" practice, Madden received substantial allotments
of shares 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 of the IPO shares even after the
offerings. The boiler room firms, in turn, had a ready source of shares to sell to unsuspecting
aftermarket investors at prices that had been manipulated to artificially high prices.
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b. In the second practice, Madden made loans to issuers in return for
shares of the 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
of the 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 of his 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 of SHOO 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 of SHOO
stock for their investments in SHOO and for their activities in connection with SHOO's IPO.
The National Association of Securities Dealers ("NASD"), however, refused to list SHOO
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common stock on its Automatic Quotation System so long as the Belfort Group owned more than
4.9%, or 251,728 shares of SHOO' s outstanding stock. In order to satisfy NASD, Madden
arranged to have his wholly-owned shell company, BOCAP Corp. ("BOCAP"), purportedly
purchase 1,284,815 shares of SHOO stock from the Belfort Group in return for a promissory note
issued by BOCAP. SHOO' s IPO prospectus identified BOCAP as the owner of the shares, and
the stock was listed for trading on the Automatic Quotation System. Madden and the Belfort
Group, however, "secretly agreed that the BOCAP stock still belonged to Belfort, Porush, and
Greene and that neither BOCAP nor Madden would be obligated to pay off the promissory note."
SEC Complaint at 17 32. Moreover, "Madden never disclosed to investors , in SHOO's prospectus
or elsewhere , the fact that the BOCAP stock still belonged to Belfort, Porush , and Greene, and
that neither BOCAP nor Madden would be obligated to repay the promissory note." Id. at ¶ 33.
30. On the morning of June 20, 2000, defendant Madden was arrested on
charges of securities fraud and money laundering, following his indictments by federal grand
juries in the Eastern and Southern Districts of New York. See Exhs . A and B . On that same
date , the SEC filed its complaint against Madden for violations, inter alia , of Section 10(b) of the
Exchange Act and Rule I Ob-5. See Exh. C. The criminal charges and the SEC's complaint
against Madden arose out of Madden's illegal conduct in connection with the IPOs of numerous
companies -- including his own company, SHOO -- as described above.
31. At 10: 59 a.m. on June 20, 2000 , NASDAQ halted trading in the
Company's stock, after it had dropped to $11 3/16 per share, from the previous day's close of
$13 1/8 per share.
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32. On June 21, 2000, the Company's stock was downgraded by Chase H&Q
and by Wasserstein Perella. The next day, June 22, 2000, the stock was downgraded by Ferris
Baker.
33. After the stock resumed trading on June 22, 2000, it closed at $6 11/16 per
share, plummeting $4 1/2 per share -- i.e., more than 40 percent. The stock's trading volume on
June 22 reached 11.7 million shares, more than 60 times its average daily trading volume. Less
than two months earlier, on April 25, 2000, the Company's stock closed at $22 7/16 per share.
Materially False and Misleading StatementsIssued Before the Class Period , Which Remained"Alive" at the Commencement of the Class Period
34. On or about May 29, 1997, SHOO filed with the SEC a proxy statement
(the "1997 Proxy Statement), which was signed by Madden . The 1997 Proxy Statement ,
purported to set forth a listing of persons "known by the Company to beneficially own five
percent or more of the outstanding shares." The listing identified BOCAP as the beneficial
owner of 2,374,816 shares, or 29.9%, of the Company's outstanding common stock. The 1997
Proxy Statement, however, did not reveal ownership of any of those shares by the Belfort Group,
or any of its members.
35. The foregoing statements in the 1997 Proxy Statement were materially
false and misleading because:
a. they falsely attributed to Madden's wholly owned company,
BOCAP, ownership of 2,374, 816 shares , or approximately 29.9%, of the Company' s outstanding
common stock;
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b. they failed to disclose that the Belfort Group, or its members,
owned 1,284,815, or approximately 16% of the Company's outstanding common stock, thus
making the Belfort Group and its members SHOO's largest stockholders; and
they failed to disclose that Madden had entered into a secret
agreement with the members of the Belfort Group to conceal their ownership interest in the
Company.
36. The 1997 Proxy Statement also stated that BOCAP had delivered to
Belfort a promissory note in the amount of $3,237,737. This statement was materially false and
deceptive because , pursuant to a secret agreement among Madden and the Belfort Group,
Madden had no obligation to pay off the note. See SEC Complaint at ¶ 32.
37. The material misrepresentations described in the 1997 Proxy Statement
were not corrected or updated and remained "alive" as of the commencement of the Class Period.
Materially False and MisleadingStatements Issued During the Class Period
38. On January 5, 1998, NASD Regulation, Inc. announced that it had issued a
complaint on December 23, 1997, charging Monroe Parker and its president (a former Stratton
Oakmont employee) and its head trader with price manipulation and excessive markups in the
trading of SHOO Class A Warrants. The announcement stated that Monroe Parker acquired the
majority of these warrants from Stratton Oakmont. In response to this announcement, on January
5, 1998, SHOO issued a press release "disclaim[ing ] any affiliation of any kind with Monroe
Parker." Defendant Brown was listed as a contact person in the press release.
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39. The January 5, 1998 press release was materially false and misleading
because it disclaimed an affiliation with Monroe Parker, and failed to disclose that Madden had
an affiliation with Monroe Parker and had participated with Monroe Parker and its affiliate,
Stratton Oakmont, in fraudulent activities, including fraudulent activities in connection with the
IPOs of SHOO and numerous other companies.
40. On or about February 17, 1998, the Company filed with the SEC the 1998
Registration Statement (including a prospectus) with respect to the registration of 1,284,816
shares of SHOO common stock and the offering of those shares plus up to 2,235,000 additional
shares to be sold by the Company upon the exercise of various warrants and options. Upon
exercise of the warrants and options, SHOO would receive $12,238,500. The 1998 Registration
Statement was signed by defendants Madden, Brown and Dharia.
41. The 1998 Registration Statement was materially false and misleading in
the following respects:
a. it incorporated by reference the 1997 Proxy Statement and thus,
was materially false and misleading for the reasons set forth in paragraphs 34-36, above;
b. it represented that certain of the options were held by "two (2)
individuals" -- Jordan Belfort and Nancy Porush (Daniel Porush's former wife) -- "that are not
affiliated to the Company," when, in fact, Jordan Belfort and Daniel Porush were affiliated with
the Company;
c. it represented that the offered shares included 1,128,816 shares
owned by BOCAP when, in fact, those shares, or substantially all of those shares, were owned by
the Belfort Group or its members; and
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d. it stated:
The Company is dependent, in particular, upon the services ofSteven Madden, its Chief Executive Officer, President, Chairman of theBoard and chief designer and Rhonda Brown, its Chief Operating Officer.If Mr. Madden or Ms. Brown are unable to provide services to theCompany for whatever reason, the business would be adversely affected.
This statement was materially misleading because it failed to disclose the material risk that
Madden would be unable to continue to provide services to SHOO, in light of his unlawful
conduct in connection with the IPOs underwritten by Stratton Oakmont and Monroe Parker.
42. On or about March 29, 1999, SHOO filed with the SEC its annual report
on Forum 10-K for thefiscal year ending December 31, 1998. The report was signed by Madden,
Brown and Dharia. The report stated, in pertinent part:
DEPENDENCE ON KEY PERSONNEL. The Company isdependent, in particular, upon the services of Steven Madden, itsChief Executive Officer, President, Chairman of the Board andchief designer and Rhonda Brown, its Chief Operating Officer. IfMr. Madden or Ms. Brown are unable to provide services to theCompany for whatever reason, the business would be adverselyaffected.
This statement was materially misleading because it failed to disclose the material risk that
Madden would be unable to continue to provide services to SHOO, in light of his unlawful
conduct in connection with the IPOs underwritten by Stratton Oakmont and Monroe Parker.
43. On December 10, 1999, Madden appeared on the CNBC television
program "Power Lunch," and was questioned by Tyler Mathisen. Madden made the following
statements in response to Mathisen's questions:
MATHISEN:.... There have been persistent concerns,Steve, that your Company and the associations with those twogentleman [Porush and Belfort], that the problems that they have
15
had legally might some day come home to roost and become your
problems , and that federal investigations into their activities might
become a federal investigation into you . Any thought, any truth to
those? Do you have reason for the concern?
MADDEN : No, they took us public, but we don't think that
we'll be tainted by that brush.
MATHISEN: But some have said in the investment
community , that there has been a kind of weight over the stock of
Steve Madden, Limited . True or false?
MADDEN: Could be . I don't know . Right now,
everything seems to be going well . And so I don' t know about any
of those things.
44. Madden's statements during the CNBC program were materially false and
misleading because he stated falsely that there was no truth to the concerns and that "we don't
think that we'll be tainted by that brush;" additionally, he knew but failed to disclose that he had
participated with Porush and Belfort in unlawful activities, including fraudulent activities in
connection with the IPOs of numerous companies, including SHOO.
45. On February 18, 2000, the Wall Street Journal reported that, at a recent
trial against former brokers at Monroe Parker for stock fraud, a former Monroe Parker executive
testified that he received a paper bag containing $80,000 from defendant Madden at a private
Long Island golf club. The article quoted Madden's earlier statement of December 10, 1999,
made during a CNBC television program and described in paragraph 43 above, that "we don't
think we'll be tainted by that brush."
46. On February 29, 2000, Prudential Securities issued a report concerning
statements made by defendant Madden during SHOO's year-end 1999 conference call with
analysts. According to the report:
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In response to a recent Wall Street Journal article implying CEOSteven Madden was under investigation for his relationship withindividuals involved in a stock fraud case[,] Madden emphaticallydenied any wrongdoing in the company's fourth quarter conferencecall. While it is possible that further information may come outabout the case, we believe the company should not be furtherimpacted.
47. Madden' s statements during the conference call, in which he denied any
wrongdoing, were materially false and misleading. As described above, Madden was a crucial
participant in fraudulent conduct with Stratton Oakmont and Monroe Parker in connection with
numerous IPOs, including SHOO's IPO.
40. On or about March 28, 2000, SHOO hied with the SEC its annual report
on Form 10-K for the fiscal year ending December 31, 1999. The report was signed by Madden,
Brown and Dharia. The report stated, in pertinent part:
DEPENDENCE ON KEY PERSONNEL. The Company is
dependent, in particular, upon the services of Steven Madden, its
Chief Executive Officer, Chairman of the Board and chief designer
and Rhonda Brown, its President and Chief Operating Officer. IfMr. Madden or Ms. Brown are unable to provide services to the
Company for whatever reason, the business would be adverselyaffected.
This statement was materially misleading because it failed to disclose the material risk that
Madden would be unable to continue to provide services to SHOO, in light of his unlawful
conduct in connection with the IPOs underwritten by Stratton Oakmont and Monroe Parker.
Unraveling of the Fraud
49. As described above, on June 20, 2000, following indictments by two
federal grand juries, Madden was arrested on charges of securities fraud and money laundering.
On that same day , the SEC filed its complaint against Madden; the complaint seeks to "bar[]
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Madden from serving as an officer and director of a public company." See SEC Complaint at
p. 19. Wayne Carlin, associate director of the SEC's New York regional office, was quoted by
Bloomberg on June 20, 2000 as stating: "Anyone who engages in conduct this bad over this
length of time should not be in a position of authority in a public company."
50. On June 21, 2000, Steven Marotta, an analyst at Wasserstein Perella
Securities, was quoted in the Wall Street Journal Interactive Edition as stating:
"[Madden] is the visionary and the leader in so many ways that it's
hard to even quantify it. Something of this magnitude can't beunderstated as it relates to the company."
51. The New York Times , on June 21, 2000, reported that Marotta dropped
SHOO's rating from buy to underperform and quoted him as stating:
"[Madden] is the key visionary .... He has a team of designers whoexecute his orders, but he is the key guy. It is difficult to overstatehis importance."
52. Following the suspension of trading on June 20, 2000, SHOO's common
stock resumed trading on June 22, 2000, and closed at $6 11/16 per share, a dramatic drop from
its June 19 close of $13 1/8 per share.
Undisclosed Adverse Information
53. The market for SHOO' s securities was open, well-developed and efficient
at all relevant times. As a result of these materially false and misleading statements and failures
to disclose, SHOO's common stock traded at artificially inflated prices during the Class Period.
Plaintiffs and other members of the Class purchased SHOO common stock relying upon the
integrity of the market price of the stock and market information relating to SHOO, and have
been damaged thereby.
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54. Prior to and during the Class Period, defendants materially misled the
investing public, thereby inflating the price of SHOO's common stock, by publicly issuing false
and misleading statements and omitting to disclose material facts necessary to make defendants'
statements, as set forth herein, not false and misleading. Said statements and omissions were
materially false and misleading in that they failed to disclose material adverse information and
misrepresented the truth about the Company, its business and operations, including the Belfort
Group's ownership of a substantial block of SHOO common stock and Madden's secret
agreement with the Belfort Group concerning that block, and Madden's participation with
Stratton Oakmont and Monroe Parker in fraudulent conduct with respect to numerous
companies' IPOs, including SHOO's IPO.
55. At all relevant times , the material misrepresentations and omissions
particularized in this Complaint directly or proximately caused or were a substantial contributing
cause of the damages sustained by plaintiffs and other members of the Class. These material
misstatements and omissions had the cause and effect of creating in the market an unrealistically
positive assessment of SHOO, thus causing the Company's common stock to be overvalued and
artificially inflated at all relevant times. Defendants' materially false and misleading statements
resulted in plaintiffs and other members of the Class purchasing SHOO common stock at
artificially inflated prices, thus causing the damages complained of herein.
Additional Scienter Allegations
56. As alleged herein, defendants acted with scienter in that defendants knew
that the public documents and statements issued or disseminated, as described herein, were
materially false and misleading; knew that such statements or documents would be issued or
19
disseminated to the investing public; and knowingly and substantially participated or acquiesced
in the issuance or dissemination of such statements or documents as primary violations of the
federal securities laws. Defendants , by virtue of their receipt of information reflecting the true
facts regarding SHOO, their control over, and/or receipt and/or modification of SHOO's
allegedly materially misleading misstatements and/or their associations with the Company which
made them privy to confidential proprietary information concerning SHOO, participated in the
fraudulent scheme alleged herein.
57. In making the material misrepresentations and omissions complained
herein, defendants were motivated, among other things, to: (i) inflate the price of SHOO common
stock, in order to maximize the proceeds of stock sales by the Individual Defendants (described
herein), and SHOO' s proceeds in connection with the transactions described in the 1998
Registration Statement and to minimize dilution of the Individual Defendants' shareholdings; (ii)
protect defendant Madden from criminal and civil charges arising out of his unlawful
participation with Stratton Oakmont and Monroe Parker in the unlawful acts with respect to the
IPOs of numerous companies, including SHOO's IPO; (iii) protect Madden's ability to continue
to serve as SHOO's chief executive officer;'(iv) conceal the Belfort Group's ownership of a
substantial block of SHOO common stock ; and (v) protect SHOO's NASDAQ listing.
58. The Individual Defendants, at times relevant herein, collectively sold
millions of dollars of SHOO stock, thereby directly benefitting from the artificial inflation in
SHOO's stock price. These sales were as follows:
20
Defendant Madden
DATE SHARES SOLD PRICE PROCEEDS
May 31, 2000 100,000 $16.00 $1,600,000
November 5, 1999 100,000 $12.38 $1,238,000
January 29, 1998 350,000 $6.88 $2,408,000
October 22, 1997 23,900 $7.00 $167,300
October 20, 1997 12,300 $7.06 $86,838
October 20, 1997 35,000 $7.00 $245,000
October 20, 1997 67,000 $7.00 $469,000
October 17, 1997 15,000 $7.00 $105,000
October 17, 1997 28,900 $7.19 $207,791
October 15, 1997 6,800 $7.64 $51,952
October 15, 1997 11,100 $7.22 $80,142
TOTAL 750,000 $6,659,023
Defendant Brown
DATES SHARES SOLD PRICE PROCEEDS
May 31, 2000 100,000 $16.00 $1,600,000
June 4, 1998 10,000 $10.00 $100,000
June 3, 1998 12,000 $10.00 $120,000
TOTAL 122,000 $1,820,000
Defendant Dharia
DATE SHARES SOLD PRICE PROCEEDS
November 5, 1999 40,000 $12.38 $495,200
21
DATE SHARES SOLD PRICE PROCEEDS
May 31, 2000 15,000 $16.00 $240,000
April 15, 1998 3,000 $9.68 $29,040
April 15, 1998 3 ,000 $9 .93 $29,790
April 15, 1998 5 ,000 $10.43 $52,150
April 14, 1998 3,000 $9.43 $28,290
April 13 , 1998 3 , 000 $9.18 $27,540
April 9, 1998 3 ,000 $9 .06 $27,180
TOTAL 75,000 $929,190
59. On June 26, 2000, First Call/Thomson Financial Insiders ' Chronicle
reported:
[W]e were as surprised as anyone to hear that Steve Madden,chairman and chief executive of designer shoe company StevenMadden Ltd. (SHOO), had been arrested on charges of securitiesfraud. Neither Steve Madden Ltd. nor any other officers is thus farimplicated. It is curious, however, that four Madden insiders,including Madden and company president Rhonda Brown sold acombined 230,000 shares in May. Talk about a stroke of fortune.
In fact, a great majority of the shares were sold on May 31.... At least now that trading has resumed ordinary investors canfollow suit. But then, what's the use?
60. On June 26, 2000, Crain's New York Business reported that: "Some
investors have raised concerns because senior managers and board members sold or filed to sell
shares a few weeks before Mr. Madden's arrest."
61. Moreover, according to a June 21, 2000 report in the The Wall Street
Journal Interaction Edition , on June 15, 2000, five days before his arrest, defendant Madden
"filed an intention to sell an additional 100,000 shares."
22
Applicability of the Presumption of Reliance:Fraud-On-The-Market Doctrine
62. At all relevant times , the market for SHOO' s securities was an efficient
market for the following reasons , among others:
a. SHOO's stock was listed and actively traded on the NASDAQ, a
highly efficient and automated market;
b. As a regulated issuer, SHOO filed periodic public reports with the
SEC and the NASDAQ;
c. SHOO regularly communicated with public investors via
established market communication mechanisms, including through regular disseminations of
press releases on the national circuits of major newswire services and through other wide-ranging
public disclosures, such as communications with the financial press and other similar reporting
services; and
d. SHOO was followed by several securities analysts employed by
major brokerage firms who wrote reports which were distributed to the sales force and certain
customers of their respective brokerage firms. Each of these reports was publicly available and
entered the public marketplace.
63. As a result of the foregoing, the market for SHOO common stock
promptly digested current information regarding SHOO from all publicly available sources and
reflected such information in SHOO's stock price. Under these circumstances, all class members
suffered similar injury through their purchase of SHOO common stock at artificially inflated
prices and a presumption of reliance applies.
23
No Safe Harbor
64. The statutory safe harbor provided for forward-looking statements under
certain circumstances does not apply to any of the allegedly false statements pleaded in this
complaint, as the statements were not forward-looking, and were not identified as "forward-
looking statements" when made. To the extent there were any forward- looking statements, there
were no meaningful cautionary statements identifying important factors that could cause actual
results to differ materially from those in the purportedly forward-looking statements.
Alternatively, to the extent that the statutory safe harbor does apply to any forward-looking
statements pleaded herein, defendants are liable for those false forward-looking statements
because at the time each of those forward-looking statements was made, the particular speaker
knew that the particular forward-looking statement was false, and/or the forward-looking
statement was authorized and/or approved by an executive officer of SHOO who knew that those
statements were false when made.
FIRST CLAIM
(Against All Defendants for Violations of Section 10(b) and Rule 10b-5)
65. Plaintiffs repeat and reallege each and every allegation contained above as
if fully set forth herein.
66. During the Class Period, defendants carried out a plan, scheme and course
of conduct which was intended to and, throughout the Class Period, did: (a) deceive the investing
public, including plaintiffs and other Class members, as alleged herein ; (b) artificially inflate and
maintain the market price of SHOO common stock; and (c) cause plaintiffs and other members
of the Class to purchase SHOO common stock at artificially inflated prices. In furtherance of
24
this unlawful scheme, plan and course of conduct, defendants, and each of them, took the actions
set forth herein.
67. 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 SHOO common stock in an effort to
maintain artificially high market prices for the stock in violation of Section 10(b) of the
Exchange Act and Rule I Ob-5 promulgated thereunder.
68. Defendants, individually and in concert, directly and indirectly, by the use,
means or instrumentalities of interstate commerce and/or of the mails, engaged and participated
in a continuous course of conduct to conceal adverse material information about SHOO, as
specified herein.
69. Defendants employed devices, schemes and artifices to defraud, while in
possession of material adverse non-public information and engaged in acts, practices, and a
course of conduct as alleged herein in an effort to assure investors of SHOO' s value, which
included the making of, or the participation in the making.of, untrue statements of material facts
and omitting to state material facts necessary in order to make the statements made about SHOO
in the light of the circumstances under which they were made, not misleading, as set forth more
particularly herein, and engaged in transactions, practices and a course of business which
operated as a fraud and deceit upon the purchasers of SHOO common stock during the Class
Period.
25
70. Each of the Individual Defendants' primary liability arises from the
following facts: (a) the Individual Defendants held senior positions at the Company during the
Class Period; (b) each of these defendants, by virtue of his or her responsibilities and activities as
a senior officer and/or director of the Company was privy to and participated in the creation,
development and reporting of the Company's disclosures; (c) each of these defendants enjoyed
significant personal contact and familiaritywith the other defendants and was advised of and had
access to other members of the Company's management team and information about the
Company at all relevant times; and (d) each of these defendants was aware of the Company's
dissemination of information to the investing public which they knew or recklessly disregarded
was materially false and misleading.
71. The defendants had actual knowledge of the misrepresentations and
omissions of material facts set forth herein, or acted with reckless disregard for the truth in that
they failed to ascertain and to disclose such facts, even though such facts were available to them.
Defendants' material misrepresentations and/or omissions were made knowingly or recklessly
and for the purpose or causing or supporting the artificially inflated price of SHOO common
stock . Defendants , if they did not have actual knowledge of the misrepresentations and
omissions alleged, were reckless in failing to obtain such knowledge by deliberately refraining
from taking those steps necessary to discover whether those statements were false or misleading.
72. As a result of the dissemination of the materially false and misleading
information and failure to disclose material facts, as set forth above, the market price of SHOO
common stock was artificially inflated during the Class Period. In ignorance of the fact that
market price of SHOO common stock was artificially inflated, and relying directly or indirectly
26
on the false and misleading statements made by defendants, or upon the integrity of the market in
which the stock trades, and/or on the absence of material adverse information that was known to
or recklessly disregarded by defendants but not disclosed in public statements by defendants
during the Class Period, plaintiffs and the other members of the Class purchased SHOO common
stock during the Class Period at artificially high prices and were damaged thereby.
73. At the time of said misrepresentations and omissions, plaintiffs and other
members of the Class were ignorant of their falsity, and believed them to be true. Had plaintiffs
and the other members of the Class and the marketplace known the true facts, which were not
disclosed by defendants, plaintiffs and other members of the Class would not have purchased
SHOO common stock, or, if they had purchased such stock during the Class Period, they would
not have done so at the artificially inflated prices which they paid.
74. By virtue of the foregoing, defendants have violated Section 10(b) of the
Exchange Act and Rule I Ob-5 promulgated thereunder.
75. As a direct and proximate result of defendants' wrongful conduct,
plaintiffs and the other members of the Class suffered damages in connection with their
purchases of SHOO common stock during the Class Period.
SECOND CLAIM
(Against the Individual Defendants for Violations of Section 20(a))
76. Plaintiffs repeat and reallege each and every allegation contained above as
if fully set forth herein.
77. The Individual Defendants acted as controlling persons of SHOO within
the meaning of Section 20(a) of the Exchange Act. By virtue of their high-level positions and
27
stock ownership, the Individual Defendants had the power to influence and control and did
influence and control, directly or indirectly, the decision-making of the Company, including the
content and dissemination of the various statements which Plaintiffs contend are false and
misleading. The Individual Defendants, at the time they occupied their senior positions at the
Company, were provided with or had unlimited access to copies of the Company's reports, press
releases, public filings and other statements alleged by Plaintiffs to be misleading prior to and/or
shortly after these statements were issued and had the ability to prevent the issuance of the
statements or cause the statements to be corrected.
78. in particular, the individual Defendants, at the time they held their
positions at the Company, had direct and supervisory involvement in the day-to-day operations of
the Company and, therefore, are presumed to have had the power to control or influence the
particular transactions giving rise to the securities violations as alleged herein, and exercised the
same.
79. By virtue of their positions as controlling persons . of SHOO, the Individual
Defendants are liable , pursuant to Section 20 (a) of the Exchange Act, for SHOO's violations of
Section 10(b) of the Exchange Act and Rule I Ob-5 promulgated thereunder, as alleged in the
First Claim.
WHEREFORE, plaintiffs pray for judgment, as follows:
a. Determining that the instant action is a proper class action maintainable
under Rule 23 of the Federal Rules of Civil Procedure;
b. Awarding damages in favor of plaintiffs and the Class against all
defendants, in an amount to be proven at trial, including interest thereon;
28
c. Awarding plaintiffs and the Class their reasonable costs and expenses
incurred in this action, including counsel fees and expert fees; and
d. Such other and further relief as the Court may deem just and proper.
JURY TRIAL DEMANDED
Plaintiffs hereby demand a trial by jury.
Dated: New York, New YorkFebruary 26, 2001
Respectfully submitted,
MILBERG WEISS BERSHADHYNES & LERACH LLP
By:
Robert A. Wallner (RW-5109)One Pennsylvania PlazaNew York, NY 10119(212) 594-5300
STULL, STULL & BRODY
By: /<, )W AL IfiAl(dMark Levine (ML- 180)
6 East 45th StreetNew York, NY 10017(212) 687-7230
SCHIFFRIN & BARROWAY, LLP
By: r "'r- 4 , 0^4mVA IRA-r t/
Stuart L. Berman (SB-,918)Three Bala Plaza East, Suite 400Bala Cynwyd, PA 19004(610) 667-7706
Plaintiffs' Lead Counsel
29
ABBEY, GARDY & SQUITIERI, LLP212 East 39th StreetNew York, NY 10016(212) 889-3700
BERMAN, DEVALERIO & PEASE LLPOne Liberty SquareBoston, MA 02109(617) 542-8300
Thermacell Technologies, Inc. March 14, 1997All Communications Corp. April 30, 1997Isonics Corporation , September 23, 1997Flemington Pharmaceutical Corp. November 20, 1997
Following each of the Subject IPOs, the securities began publicly
trading on either the NASDAQ National Market System or on the
NASD's Over-the-Counter Bulletin Board market. Public trading
immediately following an IPO is generally referred to in the
securities industry as "aftermarket" trading. In addition to
participating in the Subject IPOs, Monroe Parker and Stratton
Oakmont often served as "market makers" in those securities in
aftermarket trading.
11. In connection with nearly all. of the Subject IPOs,
Bryan Herman, Alan Lipsky, Jordan Belfort, Daniel Porush and
others agreed in advance artificially to manipulate upward the
market price of the securities involved in the IPOs as soon as
aftermarket trading in chose securities began. Among other
manipulative means, Herman, Lipsky, Belfort,.Porush and others:
(i) caused brokers employed by Monroe Parker and Stratton Oakmont
to make false and fraudulent representations,to retail customers.
in order to induce those customers to purchase securities in the
aftermarket; (ii) paid brokers excessive, undisclosed commissions
and sales credits to sell shares in the aftermarket; (iii)
unlawfully required retail customers to purchase securities in
aftermarket trading as a condition to receiving allocations of
5
LO'd %86 bb: 9t 0002-bZ-130
IPO sharps; (iv) refused to execute, or failed to execute in a
timely fashion, customer sell orders during aftermarket trading;
and (v) retained undisclosed control over substantial numbers of
securities involved in the Subject IPOs held'in the names of
nominees or otherwise held subject to undisclosed prearrangements
concerning the sale or disposition of those ^ecuritips. As a
result of this and other deceptive and manipulative conduct, the
market price of the securities involved in the Subject IPOs
generally increased dramatically on the day of the IPO. In many
instances the closing price in aftermarket trading on the day of
the IPO was more than twice the IPO offering' price.
MADDEN'S PARTICIPATION IN THE PCHEME
TO MANXPULATE INITIAL PUBLIC OFFERINGS
12. In order to effect the upward manipulation of the
prices of the securities involved in the subject IPOs, and in
order to benefit therefrom, STEVEN MADDEN, the defendant, Bryan
Herman, Alan Lipsky, Monroe Parker, Jordan Belfort, Daniel
Porush, and others engaged in a number of schemes designed to
allow them to profit from aftermarket sales of securities
involved in the Subject IPOs while concealing their beneficial
ownership and control over substantial quantities of such
securities. Two of the schemes, the "Nominee Scheme" and "Bridge
Loan" scheme, are set forth below.
6
80'd %86 bb:91 0002-VZ-100
The Nominee Scheme
13. From in or about January 1994 through in or about
March 1997, STEVEN MADDEN, the defendant, participated in an
unlawful scheme with Bryan Herman, Alan Lipsky, Monroe Parker,
and others, to manipulate the public market for securities sold
in connection with certain of the Subject IPOp, and to defraud
purchasers of those securities. In furtherance of this scheme,
MADDEN and others (collectively the "Flippers.") entered into a
secret and unlawful agreement to act as undisclosed nominees for
Herman, Lipsky, Monroe Parker, and others in 'connection with
certain of the Subject IPOs.
14. Pursuant to this unlawful arrangement, Bryan
Herman and Alan Lipksy agreed to allow the Flippers to purchase a
substantial number of the securities offered'in each IPO and
agreed to allow the Flippers to sell those securities in the*
aftermarket under circumstances which would allow the Flippers to
earn net profits'of between fifty cents and two dollars per
security. The Flippers, in turn, agreed to sell those shares
whenever directed by Herman and Lipsky and to share with Herman
and Lipsky any profits in excess of between fifty cents and two
dollars per security. As a result, Herman and Lipsky.were able
to exercise undisclosed control over the substantial number of
IPO shares held by the Flippers once aftermarket trading began.
As a further result, the Flippers, Herman, Lipsky and Monroe
7
60. d i86bt':9t 0002-bZ-. 0
Parker, were able to earn substantial profits^by selling the IPO
securities once the market price was manipulated upward in
aftermarket trading.
15. In furtherance of this scheme and pursuant to
their secret agreement , Alan Lipsky and Bryan Herman allocated
substantial quantities of the securities in dertain of the
::ub j t c t IPOs to STEVEN MADDEN, the defendant,, and to" other
entities that MADDEN controlled, including 340 Central
Corporation ("360 Central") and Bocap Corporation ("Bocap"), two
Florida corporations controlled by MADDEN and used by MADDEN as
vehicles for personal investments. As part'of this secret
arrangement, MADDEN agreed in advance to resell those'securities
shortly after trading in the aftermarket commenced or.at such
other times as Herman or Lipsky directed. MADDEN also agreed in
advance to share a portion of the profits from those sales with
Herman, Lipsky and Monroe Parker.
16. In furtherance of this scheme', STEVEN MADDEN, the
defendant, maintained brokerage accounts in his own name and in
the names of 360 Central and Bocap (collectively the "MADDEN
Accounts") at Biltmore' s New York Branch and Monroe Parker. From
time to time thereafter, MADDEN used the MADDEN Accounts to
purchase securities sold in the Subject IPOs and to later sell
those securities under circumstances agreed*to between MADDEN,
Bryan Herman, and others.
8
0t'd x86 Sb:9t 0902-OZ-100
17. From time*to time, STEVEN MADDEN, the defendant,.
and Bryan Herman caused securities purchased in the MADDEN
Accounts during the Subject IPOs to be sold back to Monroe Parker
shortly after aftermarket trading began. In dome instances, the
prices at which the securities were sold back1to Monroe. Parker
were between twenty-five cents and two dollarq per share higher
than the IPO offering price. In those instances, MADDEN
generally kept all the profits from the sales., Bryan Herman and
Alan Lipsky then caused Monroe Parker to hold,the shares
purchased from MADDEN in inventory for later dale to retail
customers at even higher prices.
18. In certain other instances, STEVEN MADDEN, the
defendant, sold securities from the Subject IBOs shortly after
aftermarket trading began at prices substantially more than two
dollars per share higher than the IP.O offering price. In those
instances, MADDEN agreed to and did convey a portion of the
profits back to Bryan Herman, Alan Lipsky and Monroe Parker
through two means designed to hide their secret arrangement and
conceal the fact that MADDEN.was sharing profits from his trading
with Herman, Lipsky and Monroe Parker. First,* MADDEN conveyed
the profits by delivering large 'sums of cash to Herman. Second,
MADDEN and Herman entered into prearranged "losing trades"
pursuant to which MADDEN would purchase certain securities from
Monroe Parker in the MADDEN Accounts and later, sell those
9
TI d %86 Sb:9T e00Z-bZ-130
securities back to Monroe Parker at prices that guaranteed a loss
to MADDEN and a corresponding gain to Monroe Parker.
19. At various times relevant to the Indictment, and
in furtherance of this scheme, STEVEN MADDEN,'the defendant, in
addition to acting illegally as a nominee for'Bryan Herman, Alan
Lipsky and Monroe Parker, entered into a secrgt and unlawful
agreement with Lipsky, Herman, and Jordan Beliort to Iact as a
nominee for Belfort in connection with certain of the Subject
IPOB through transactions effected through Monroe Parker. As
part of this arrangement, STEVEN MADDEN, the defendant, agreed to
and did use the MADDEN Accounts to purchase and sell securities
in connection with certain of the Subject IPOs, including the
IPOs for Big City Bagels, Inc. ("Big City Bagpls"), as an
undisclosed nominee for Jordan Belfort.
20. As a result of the nominee trading on behalf of
Bryan Herman, Alan Lipksy, Monroe Parker and Uordan Belfort,
conducted by STEVEN MADDEN, the defendant, the MADDEN Accounts
earned gross profits of more than approximately $4.4 million
through purchases and sales of securities acquired in connection
with certain of the Subject IPOs.
21. At various times relevant to this indictment, in
furtherance of this nominee scheme, STEVEN MADDEN, the defendant,
Alan Lipsky , Bryan Herman, Monroe Parker , Jordan Belfort and
others, unlawfully failed to make complete and accurate
10
Zt,d i86 Sv:9t 0002-VZ-100
disclosure, as required by federal law and applicable rules and
regulations, of the existence and the terms of, among other
material matters: (i) MADDEN's conduct as a Nominee for the
underwriters and control persons of the underidriters.in
connection with certain of the Subject IPOs; i(ii) MADDEN's
agreement in advance to sell securities acquired in connection
with certain of.the Subject IPOs at times and, prices determined
by the underwriters and control persons of the underwriters; and
(iii) Alan Lipsky, Bryan Herman, Monroe Parker, and Jordan
Belfort' s beneficial interest in securities held in the MADDEN'-
Accounts and the profits from sales of those 'securities.
The Bridge Loan Scheme
22. As a further means of benefitting from the
manipulation of certain of the Subject IPOs, STEVEN MADDEN, the
defendant, Bryan Herman, Alan Lipsky, Monroe 'Parker, and others
engaged in a scheme involving bridge loan financing arrangements
and sham "lock-up" agreements with respect to securities issued
by Big City Bagels, among others.
23. In furtherance of this scheme,' prior to the
anticipated date of the IPO for Big City Bagels, Alan Lipsky,
Bryan Herman, and others induced the officers and directors of
Big City Bagels to enter into certain "Bridge Loan" financing
arrangements with certain "Bridge Lenders." Pursuant to the
terms of the arrangements, the Bridge Lenders loaned funds to Big
11
EZ'd i66 9b:91 0002-bZ-100
city Bagels in advance of the anticipated IPO. The company, in
turn, promised to repay the loans from the proceeds of the
anticipated IPO. in addition, Big City Bage.s agreed to convey
to the Bridge Lenders one share of common stock, one "Class All
warrant (together "the Bridge Units"), and two "Class B" warrants
for each two dollars loaned to the company. 'Big City Bagels also
promised to register the Bridge Units and the common stock
underlying the Class A and Class B Warrants for public sale in
connection with the anticipated IPOs.
24. In furtherance of this scheme,, Alan Lipsky, Bryan
Herman, and others exercised discretion and'control in selecting
the persons who became Bridge Lenders for the companies, and Big
City Bagels in particular.
25. In or about January 1996, several months prior to
the Big City Bagels IPO, STEVEN MADDEN, the,defendant', entered
into a secret agreement with Bryan Herman, Alan Lipsky, Monroe
Parker and others in connection with the Bij City Bagels Bridge
Financing. Pursuant to the terms of that agreement, Herman
agreed to arrange for MADDEN to participate^as a Bridge Lender.
MADDEN agreed to sell any Bridge Units he received at such times
and prices as Herman directed following the anticipated IPO. It
was a further part of this secret understanding that MADDEN would
enter into a sham "lock-up" agreement, pursuant to which MADDEN
would purportedly agree not to sell the Bridge Units for a period
12
VT•^ %66 9V. 9T 6002-bZ-i30
of thirteen months following the date of the-anticipated IPO,
without the written consent of Monroe Parker'as the underwriter.
In truth and in fact, as MADDEN, Herman, Lipbky and others agreed
in advance of the IPO, Herman and Lipsky would cause Monroe
Parker to consent to a release'of the sham ")ock-up" agreement
shortly after the IPO became effective and repurchase MADDEN's
Bridge Units.
26. In or about January 1996, STEVEN MADDEN, the
defendant, became a Bridge Lender for Big City Bagels by loaning
approximately $200,000 to the company. In return, Big City
Bagels promised to
annual interest of
promised to convey
those securities f4
anticipated IPO.
repay the principal sum of,$200,000_plus
eight percent. In addicioi, Big City Bagels
to MADDEN 100,000 Bridge Units and to register
Dr public sale at the time of Big City Bagels'
27. Thereafter, pursuant to their secret agreement, on
or about May 8, 1996, within hours after the Big City Bagels IPO
was declared effective, STEVEN MADDEN, the defendant, at Bryan
Herman's request, caused 100,000 Bridge Units-to be sold from one
of the MADDEN Accounts to Monroe Parker at a price of $2 per
Unit.
28. At all times relevant to this indictment, the
terms of the "lock-up" agreements with the Bridge Lenders were
13
SZ'd %86 9t' :91 0002-VZ-130
material to investors because, among other things, unless Monroe
Parker released the Bridge Lenders from the "Lock-up" agreements:
(a) for a substantial period of time, thesupply of freely tradeable stock of, Big CityBagels in the marketplace would not includethe securities owned by the Bridge Lenders,thereby reducing the supply of thosesecurities in the market; and
(b) for a substantial period of.time, the iselling Bridge Lenders would be expLcted toremain investors in Big City Bagels, andtherefore maintain a continued interest inthe financial performance, and stock price,of the company.
29. In furtherance of this agreement and in order to
conceal it from the SEC, the NASD and investors, STEVEN MADDEN,
the defendant, Alan Lipsky, Bryan Herman and others, caused Big
City Bagels to include in the prospectus for the Big City Bagels
IPO, false and fraudulent misrepresentations and omissions
concerning the "lock-up" agreement. For example, the prospectus
falsely stated that "the Selling Securityholders may not sell the
Registered Bridge Securities prior to 13 months from the date of
this Prospectus without the prior consent of the underwriter."
As MADDEN, Herman, Lipsky and others well knew, in truth and in
fact, the "lock-up" agreements were a sham anti the prospectus
falsely and fraudulently omitted to disclose the secret
prearrangement that Monroe Parker would release the "lock-up" and
repurchase MADDEN's Bridge Units shortly after the IPO became
effective.
14
9S'd %66
i
9b:9T 0002-bZ-100
THE CONSPIRACY :
30. From in or about January 1994; through in or about
December 1997, in the Southern District of Npw York and
elsewhere; STEVEN MADDEN, the defendant, Jordan Belfort, Daniel
Porush, Alan Lipsky, and Bryan Herman, togetier with others known
and unknown, unlawfully, willfully, and knowingly did. combine,
conspire, confederate, and agree together and with 'each other to
commit offenses against the United States, to wit, to commit
securities fraud, in violation of Sections 7$j(b) and 78ff of
Title 15, United States Code, and Section 24b.10b-5 of Title 17,
Code of Federal Regulations.
OBJECTS OF THE CONSPIRACY
Securities Fraud
31. It was a part and object of the conspiracy that
STEVEN MADDEN, the defendant, Jordan Belfort{ Daniel Porush, Alan
Lipsky, and Bryan Herman, and their co-consp.rators known and
unknown, unlawfully, willfully, and knowingly, by the.use of the
means and instrumentalities of interstate commerce and of the
mails, directly and indirectly, would and did use and employ
manipulative and deceptive devices and contrivances in violation
of Title 17, Code of Federal Regulations, Section 240:1Ob-5, by
(a) employing devices, schemes, and artifices to defraud; (b)
making untrue statements of material facts and omitting to state
material facts necessary in order to make the statements made, in
15
Lt d Z86 L': 9i 0002-bZ-io0
the light of the circumstances under which they were-made, not
misleading; and (c) engaging in acts, practicbs, and courses of
business which operated and would operate as a fraud and deceit
upon a person in connection with the purchase: and sale of
securities, all in violation of Title 15, United States Code,
Sections 78j (b) and 78ff.
MEANS AND METHODS OF THE CONSPIRACX
32. Among the means and methods by'which STEVEN
MADDEN, the defendant , Alan Lipsky , Bryan Herman , Jordan Belfort,
Daniel Porush , and their co-conspirators , known and unknown,
would and did carry out the conspiracy were the following:
a. Alan Lipsky, Bryan Hermany and their co-
conspirators caused Monroe Parker to allocate large quantities of
securities offered in the Subject IPOs to MADbEN and other
Flippers subject to an illegal, undisclosed prearrangement
pursuant to which MADDEN and the other Flippers would sell their
IPO shares back to Monroe Parker shortly after trading in the
aftermarket began, thereby enabling Monroe Packer to earn large
profits when it resold the shares to other retail customers after
the price of the IPOs increased substantiallyduring the first
day of aftermarket trading.
b. MADDEN provided bridge financing to Big City
Bagels, and received Bridge Units from Big City Bagels subject to
certain "lock-up" restrictions, in connection :with a secret,
16
ST d %86 L': 91 0002-bZ-100
undisclosed arrangement with Alan Lipsky , .Bryan Herman, and
others, pursuant to which Monroe Parker.would and did waive the
"lock- up" restrictions and purchase MADDEN's Bridge Units shortly
after the IPO became effective.
c. MADDEN agreed to and did use the MADDEN
Accounts to purchase and sell securities in connections with an
IPO as a nominee for Jordan Belfort in furtherance of a secret
arrangement pursuant to which Jordan Belfort;receiveli undisclosed
compensation for assisting Alan Lipsky and Bryan Herman's
acquisition and financing of Monroe Parker.
OVERT ACTS
33. In furtherance of said conspiracy and to effect
the objects thereof, the following overt' acts , among others, were
committed in the Southern District of New York and elsewhere:
a. In or about January 1994; STEVEN MADDEN, the
defendant, caused a brokerage. account in the, name of Bocap to be
opened at Biltmore's New York Branch in Purchase, New York.
b. On or about January 19, 2.994, MADDEN sold
approximately 35,050 IPO units issued by M.H-. Myerson, Inc.,
through the Bocap account at Biltmore's New York Branch.
c. On or about February 16,,1994, MADDEN sold
approximately 30,000 IPO units issued by Octagon, Inc., through
the Bocap account at Biltmore ' s New York' Branch.
17
6^'d 266 0:9T 0002-VZ-100
d. On or about August 18,'1994, MADDEN opened a
brokerage account in his own name at Monroe Parker.
e. On or about August 18, 1994, MADDEN sold
approximately 60,000 IPO units issued by Select Media
Communications, Inc., through an account in his name at Monroe
Parker.
f. On or about February 14, ,.995, MADDEN sold
approximately 123,400 shares of common stock and 123,400 warrants
issued by Dualstar Technologies Corporation through an account in
his name at Monroe Parker.
g. On or about June 9, 1995,' MADDEN sold
approximately 204,200 shares of common stock :and 204,2:00 warrants
issued by Czech Industries, Inc., through an,account in his name
at Monroe Parker.
h. On or
approximately 115,700 IPO
account in his name at MO:
i. On or
approximately 241,700 IPO
through an account*in his
j. In or
subscription agreement in
about August 15, 1996, MADDEN sold
units issued by MVSI, Inc., through an
roe Parker.
about November 2, ;995, MADDEN sold
units issued by Hemispherx Biopharma,
name at Monroe Parker.
about. January 1996, MADDEN signed a
connection with bridge financing
provided to Big City Bagels.
18
ez•d %66 Gb:9T 0002-bZ-130.
k. On or about February 27, 11996, MADDEN sold
approximately 61,500 shares of.common stock And 300,000 warrants
issued by Sonics and Materials, Inc., through an account in his
name at Monroe Parker.
1. On or before May 8, 1996, Alan Lipsky and
Bryan Herman allocated 181,350 IPO units issued by Big City
Bagels to MADDEN.
M. On or about May 8, 1996,,Alan Lipsky and
Bryan Herman caused Monroe Parker to underwrite an IPO of the
securities of Big City Bagels. '
n. On or about May 8, 1996,'MADDEN sold
approximately 150,000 IPO units issued by Bid City Bagels through
an account in his name at Monroe Parker, at price of
approximately $8.63 per unit.
o. On or about May 8, 1996,,MADDEN sold
approximately 31,450 IPO units issued by Big,City Bagels through
an account in his name at Monroe Parker, at a price of
approximately $13.00 per unit.
p. On or about May 8, 1996,, MADDEN caused 360
Central to sell approximately 100,000 Bridge:Uni-ts issued by Big
City Bagels to Monroe Parker.,
19
Zz*d X668P:91 0002-b8-lam
q. On or about March 14, 1997, MADDEN sold
approximately 74,000 IPO units issued by The±macell Technologies,
Inc., through an account in his name,at Monroe Parker.
(Title 18, United States Code, Section 371.)
COUNTS TWO THROUGH EIGR
(Securities Fraud In Connection With
Certain IPO's)
The Grand Jury further charges:
34. The allegations contained in paragraphs 1 through
30 and 34 of this Indictment are repeated and, realleged as if
fully set forth herein.
THE CHARGE,
35. From in or about June 1995 up'to and including
March 1997, in the Southern District of New York and elsewhere,
STEVEN MADDEN', the defendant, unlawfully, willfully, and
knowingly, directly and indirectly, by the yse of means and
instrumentalities ofinterstate commerce and the mails, did use
and employ manipulative and deceptive devices and contrivances in
violation of Title 17, Code of Federal Regulations, Section
240.10b-5 by: (a) employing devices, schemes, and artifices to
defraud; (b) making untrue statements of material facts and
omitting to state material facts necessary in order to make the
statements made, in light of the circumstances under.which they
were made, not misleading; and (c) engaging'in acts,'practices,
and courses of business which operated and would operate as a
20
zz d ,668b:9T @@@z-bz_j.yj
fraud and deceit upon a person, in connectiontwith the purchases
and sales of the securities listed below:
Count IPO Issuer Date Purchas ed mom Sold Amount
TWO Czech Indus - 06/09 / 95 Units 102,10¢ Common 204,200
tries-Inc.Warrants 204,200
THREE MVSI , Inc. 08 / 15/95 Units 115,70b Units 115,700
FOUR Hemispherx 11/02/ 95 Units 241 , 700 Units 241,700
Biopharma, Inc.
FIVE Sonics and 02 /27/96 Common 61,500 Common 61,500Materials, Inc.
Warrants 300,000 Warrants 300,000
six Big city 05/08/96 Bridge 100,000 Bridge 100,000Bagels, Inc. Units Units
SEVEN Big City 05 / 08/96 Units 161,350 Units- 181,350Bagels, Inc.
EIGHT Thermacell Tech 03 /14/97 Units 74,000 Units - 74,000
Inc.
(Title 15, United States Code, Sections 7Bj,(b) and 78ff ; Title
17, Code of Federal Regulations , Section 240.10b-5; and
Title 18, United States Code , Section 2.)
CO Th NINE
(Conspiracy to Launder Money)
The Grand Jury further charges:
36. The allegations set forth in paragraphs 1 to 29,
32, 33, and 35 are repeated and realleged as-if set forth fully
herein.
37. At all times relevant to this Indictment, Monroe
Parker was a "financial institution," within the meaning of Title
21
£z d i868V':9T 0002-bZ-1^0
31, United States Code, Section 5312(a)(2)(0), engaged in
interstate commerce in connection. with, among other activities,
the underwriting-of securities sold-to retail customers
throughout the United States.
38. From in or about August 1994 'through in or about
March 1997, STEVEN MADDEN, the defendant, earned gross profits of
approximately $4.4 million in the MADDEN Accounts at Biltmore's
New York Branch and Monroe Parker that constituted the proceeds
of the securities fraud schemes alleged in paragraphs 1 to 29,
32, 33, and 35, above. As part of those fraudulent schemes,
MADDEN agreed to and did share with Bryan Herman, Alan Lipsky,
Monroe Parker, and others, a substantial portion of the proceeds
of those schemes.
39. In order to promote the continued successful
operation of those schemes and in order to conceal the true
beneficial ownership and control of a substantial portion of
those proceeds, STEVEN MADDEN, the defendant, together with Bryan
Herman, Alan Lipsky, Monroe Parker, and others, agreed to and did
engage in certain financial transactions.
40. In furtherance of this agreement, from time to
time from in or about January 1994 through-in or about December
1995, MADDEN delivered large sums of cash,:representing proceeds
of securities fraud, to Bryan Herman at locations in the Southern
District of New York and elsewhere. The amount of cash delivered
22
bZ'd i666b:9t 0002-bZ-1JQ
on each occasion ranged from approximately $10,000 to $ 80,000..
The proceeds were distributed in cash so as to conceal the
sources and recipients of the funds.
41. In addition to cash deliveries, on numerous
occasions from in or about March 1996 through in or about March
1997, STEVEN MADDEN, the.defendant, used the ' proceeds. and profits
generated in the MADDEN Accounts from the securities fraud
schemes set forth above to engage in other prearranged securities
transactions designed to shift a substantial:po,rtion of those
proceeds and profits from the MADDEN Accounts to Monroe Parker's
proprietary trading accounts. To effect such transactions,
MADDEN used profits and proceeds held in the MADDEN Accounts to
purchase other securities from Monroe Parker,s proprietary
trading accounts. Later, MADDEN resold those same securities to
Monroe Parker at lower prices, thereby generating losses for the
MADDEN Accounts totaling approximately $1.2 trillion and
corresponding profits of approximately the same amount for Monroe
Parker. Bryan Herman and Alan Lipsky, from time to time, then
used portions of the profits from these prearranged losing trades
with MADDEN for, among other purposes, funding Monroe, Parker's
continuing operations, including payment of:commissions and other
compensation to brokers involved in furthering the continuing
securities fraud schemes alleged above.
23
Sz•d X666b:9t 0002-bz-10O
STATUTORY ALLEGATIONS
42. From in or about January 1994 through in or about
March 1997, in the Southern District of New York and elsewhere,
STEVEN MADDEN, the defendant, together with Btyan Herman, Alan
Lipsky, and Monroe Parker, co-conspirators not named as
defendants herein, and others known and unknown to the Grand
Jury, unlawfully, wilfully, and knowingly did, combine, conspire,
confederate and agree together and with each other to commit
offenses against the United States, to wit, violations of
Sections 1956 (a) (1) (A) (i) and 1956(a) (1) (B) (i) of Title 18,
United States Code.
43. It was a part and an object of, the conspiracy that
STEVEN MADDEN, the defendant,.Bryan Herman, Alan Lipsky, Monroe
Parker and others, in an offense involving and affecting
interstate and foreign commerce, knowing that the property
involved in certain financial transactions represented the
proceeds of some form of unlawful activity, ynlawfully, wilfully,
and knowingly would and did conduct and attempt to conduct such
financial transactions, namely (i) the delivery of United. States
currency to Bryan Herman and (ii) purchases and sales of
securities through the MADDEN Accounts, which in fact involved
the proceeds of specified unlawful activity,`to wit, the proceeds
of fraud in the sale of securities set'forth'in Counts One
through Eight of this Indictment, with the iitent to promote the
24
9Z'd X66 6b :9i 0002-bZ-100
• 1
carrying on of specified unlawful activity, ip violation of Title
18, United States Code, Section 1956(a) (1) (A) :(i) .
44. It was a further part sand an object of the
conspiracy that STEVEN MADDEN, the defendant,'Bryan Herman, Alan
Lipsky, Monroe Parker and others, in an offen'ee involving and
affecting interstate and foreign commerce, knowing that the
property involved in certain financial transactions represented
the proceeds of some form of unlawful activity, unlawfully,
wilfully , and knowingly would and did conduct, and attempt to
conduct such financial transactions , namely ('i).the delivery of
United States currency to Bryan Herman and (i'i) purchases and
sales of securities through the MADDEN Accounts , which. in fact
involved the proceeds of specified unlawful activity, to wit, the
proceeds of fraud in the sale of securities set forth in Counts
One through Eight of this indictment, knowing that the
transactions were designed in whole and in part to conceal and
disguise the nature , the location, the source , the ownership,
the control of the proceeds of the specified ,unlawful activity
violation of Title 18, United States Code, Section
1956 (a) (1) (B) (i) .
OVERT ACTS
and
in
45. In furtherance of the conspiracy and to effect its
unlawful objects, STEVEN MADDEN, the defendant , Bryan Herman,
Alan Lipsky, Monroe Parker and others , committed the following
25
Lz'd X66 6P:9T 0002-b2-1X
x ........ _....... - -. ...._.^..- ^..r-...- ............. ... ter..
overt acts, among others, in the Southern District of New York
and elsewhere:
a. In or about 1994, MADDEN delivered more than
approximately $10,000 in United States currency to Bryan Herman
at a restaurant in New York, New York.
b. On or about November 25, 1,995, MADDEN
delivered more than approximately $10,000 in United States
currency to Bryan Herman at a hotel in Miami, 'Florida.
c. On or about March 11, 1996, MADDEN purchased
approximately 250,000 warrants issued by Terrace Holdings, Inc.,
from Monroe Parker at a price of approximately $ 2.00 per warrant.
d. On or about March 12, 1996;, MADDEN sold
approximately 250,000 warrants issued by Terrace Holdings, Inc.,
to Monroe Parker at a price of approximately $:1.50 per warrant.
e.. On or about May 14, 1996, MADDEN purchased
approximately 150,000 shares of United Leisure'Corp. from Monroe
Parker at a price of approximately $2.00 per siare.
f.. On or about May 20, 1996, MADDEN sold
approximately 150,000 shares of United Leisure Corp. to Monroe
Parker at a price of approximately $1.44 per share.
g. On or about March 19,.1996:, MADDEN purchased
approximately 100,000 warrants issued by Sonics.& Materials,
Inc., from Monroe Parker at a price of approximately $2.75 per
warrant.
26
8Z'd %86 OS:91 000Z-tVZ-100
h. On or about March 24, 196, MADDEN sold
approximately 100,000 warrants issued by SonJcs & Materials,
Inc., to Monroe Parker at a price of•approximately $1.50 per
warrant.
(Title 18, United States Code, Sectibn 1956(h).)
Forfeiture Allegation
46. The allegations contained in count Nine of this
Indictment are hereby realleged and, incorporated by reference for
the purpose of alleging forfeiture pursuant to the provisions of
Title 18, United States Code, Section 982.
47. As a result of the aforesaid iiolations of Title
18,.United States Code, Section 1956, STEVEN:MADDEN, the
defendant, shall forfeit to the United States pursuant to Title
18, United States Code, Section 982(a)(1)(A),. all right, title
and interest in any property, real and personal, involved in the
aforesaid offenses, and any and all property' traceable to such
property, including but not limited to:
48. The sum of approximately $1,228,943.75, and all
interest and proceeds traceable thereto, in that such sum in the
in violation of Title 18, United States Code, Section 1956, or is
property traceable to such property;
49. If any of the property described above as being
subject to forfeiture, as a result of any act or omission of
27
6z'd Z66 0S:9Y 0^0^-b^-1^0
STEVEN MADDEN, the defendant, (a) cannot bd located upon the
exercise of due diligence; (b) has been transferred or sold to,
or deposited with, a third party; (c) has been placed beyond the
jurisdiction of the court; (d) has been substantially diminished
in value; or (e) has been commingled with othir property which
cannot be divided without difficulty, it is t4'e intention of the
United States, pursuant to Title 18, United States Code, Section
982(b), to seek forfeiture of any other property of MADDEN, up to
the value of the forfeitable property.
fOREPERSON MARY J HITEUnited States Attorney
r V 1
Exhibit C
J
Edwin I1. Nordlinger (EN-6258)Deputy Regional Director
Attorney for PlaintiffSECURITIES AND EXCHANGE COMMISSIONNortheast Regional Office7 World Trade Center
C VNew York, New York 10048
Telephone No.: (212) 748-8038
UNITED STATES DISTRICT COURTEASTERN DISTRICT OF NEW YORK
_ 'p ST
• r 3632
SECURITIES AND EXCHANGE COMMISSION,
Plaintiff,0 Civ. ( )
v. ,
STEVE MADDEN, C MPLAINT
Defendant.
Plaintiff Securities and Exchange Commission ("Commission'!
against defendant Steve Madden ("Madden"), alleges as follows:
INTRODUCTION
). for its Complaint
1. Madden played a crucial role in the fraudulent manipulation of several initial
public offerings ("the IPOs") underwritten by Stratton Oakmont, Inc. (`Stratton") and
Monroe Parker Securities, Inc. ("Monroe") between May 1991 and Ma ch 1997. Stratton
and Monroe were notorious boiler room operations that manipulated at least twenty-two
1POs. which they would not have been able to do without the participation ofa few
carefully screened "flippers." Flippers arc individuals who pu
quickly sold it back to Stratton or Monroe, thereby hiding the fact
retained control over almost all of the outstanding shares for each
Madden was considered a reliable flipper by both Stratton and
participated in the manipulation of at least twenty-two IPOs.
the IPO stock, then
t Stratton or Monroe
they brought public.
and, as such,
2. Madden' s role in the Stratton and Monroe manipulations took two forms. In
the majority of the IPOs, Madden acted as a flipper . Pursuant to undisclosed repurchase
agreements , he received substantial allotmen ts of shares in the IPOs. Then, shortly after
trading in the aftermarket commenced, Madden sold the shares back to Stratton or Monroe
at pre-arranged prices (usually slightly above Madden's purchase pries). These secret
arrangements earned Madden a stream of illegal profits and helped Stratton and Monroe
control most of the IPO shares. Once in control of the "float," Stratton and Monroe were
able to manipulate the IPO stocks' prices higher before selling the sh res to unsuspecting
investors at inflated prices.
3. In at least five of the IPO manipulations. Madden play d a second, similar
role. In these IPOs. Madden received "bridge" units as part of his coripensation for
making bridge loans to the issuers . Although Madden signed "lock-up' agreements
precluding him from selling his shares in these issuers for at least one gear after an IPO, he
entered into secret agreements with Stratton and Monroe by which theyf would release him
from the lock-up agreements in order to sell his shares back to Stratton Or Monroe as soon
as trading began in the aftermarket .. Thus, Madden earned a quick prof$ on the bridge units
while helping Stratton and Monroe to control the outstanding float of th^ IPOs. Also, by
2
immediately putting the bridge units back into the hands of Stratton and Monroe, Madden
gave the firms more IPO stock to later resell to their customers at a ificially inflated prices.
4. Madden also participated in the fraudulent manipula ion of the stock of his
own company, Steve Madden Ltd. ("SHOO"), during its December 1993 IPO. -
Furthermore, Madden made material false statements and omissionj in the prospectuses
that SF100 supplied to investors in connection with the IPO and a s bsequcnt sale of
SHOO securities.
VIOLATIONS 1
5. Madden , directly or indirectly , singly or in concert , knowingly or recklessly,
engaged in transactions , acts, practices , and courses of business that constitute violations of
Section 17(a) of the Securities Act of 1933 (" Securities Act"), 15 U. C. § 77q(a), Section
10(b) of the Exchange Act of 1934 (" Exchange Act"). 15 U.S.C. § 8j(b), and Rule IOb-5,
17 C.F.R. 240.10b- 5 thereunder . Unless Madden is enjoined, he wi I again engage in
transactions , acts, practices , and courses of business of similar purp rt and object.
JURISDICTION AND VENUE
6. The Commission brings this action pursuant to the a thority conferred upon
it by Section 20(b) of the Securities Act, 15 U.S.C. § 77t(b), and Sc tion 21 (d) of the
Exchange Act. 15 U.S.C. § 78u(d), to obtain a final judgment permanently enjoining
Madden from future violations of the federal securities laws and ordering Madden to
account for and to disgorge his ill-gotten gains , plus prejudgment interest. The
Commission also brings this action pursuant to Section 20(d) of the Securities Act, 15
U.S.C. § 77t( d). and Section 21(d)(3) of the Exchange Act, 15 U. S. . § 78u(d)(3), for a
- ,._.-
. . ..... _ ...... . ... ....
final judgment ordering Madden to pay civil money penalties. F pally. the Commission
brings this action pursuant to Sections 20( c) of the Securities Act 15 U.S.C. § 77t(e), and
21(d)(2) of the Exchange Act, 15 U.S.C. § 78u(d)(2), to obtain a order barring Madden
from serving as an officer or director of a public company.
7. This Court has jurisdiction over this action , and ve ue is proper, pursuant to
Sections 20 (d) and 22 (a) of the Securities Act, 15 U.S.C. §§ 77t(d and 77v(a), and
Sections 21 (d), 21(e), and 27 of the Exchange Act, 15 U.S.C. § § 7 u(d), 78u (e), and 78aa.
8. Madden, directly or indirectly, singly or in concert . made use of the means
or instruments of transportation or communication in, and the mea s or instrumentalities of,
interstate commerce, or of the mails , in connection with the transa tions, acts , practices,
and courses of business alleged herein . Certain of the transactions , acts, practices, and
courses of business alleged herein took place in the Eastern District of New York,
including. but not limited to , purchasing the IPO securities , and usi g the telephone to
communicate with the principals of Stratton and Monroe while they were located in this
District.
DEFENDANT
9. Madden , age 42 , ofNew York, New York, is the,
SF100. As described below, Madden maintained brokerage ace
and CEO of
at Stratton and
Monroe, and used these accounts to execute manipulative purchases $nd sales of securities.
10. 1S 100 is a New York corporation headquartered in L ng Island City, NY.
SH00 securities are registered with the Commission pursuant .to Sec ion 12(g) of the
Exchange Act. 15 U.S.C. §§ 781(g), and are traded on the National A sociation of
4
Securities Dealers' (the "NASD's") Automated Quotation System ("NASDAQ"). The
company, whose current market capitalization is approximately $180 million, designs,
sources, and sells fashion footwear under the Steve Madden, Lci, and David Aaron brands.
11. Stratton was, from 1989 to 1996, a broker-dealer I Gated in Lake Success,
New York, and was registered with the Commission pursuant to ection 15(b) of the
Exchange Act, 15 U.S.C. §§ 78o(b). Stratton was one of the larg st and most notorious
illegal boiler room operations in history. Stratton underwrote dozens of IPOs, including
SHOO's IPO. virtually all of which were illegal market manipulations designed to defraud
unsuspecting investors. After numerous lawsuits filed by the Co mission, Stratton was
closed down in. December 1996. and declared bankruptcy in Janua 1997.
12. Jordan Belfort ("Belfort"), age 37, of New York, N w York, was Stratton's
founder and chairman until he was permanently barred from the se urities industry in 1994.
13. Daniel Porush , age 43. of Boca Raton. Florida. was President and CEO of.
Str.1ttont until it was shut down in 1996. l-Ic was permanently barr d.lrom the securities
industry in 1996. Porush has known Madden since childhood.
14. Monroe was , from 1994 to 1997, a broker-dealer to ated in Purchase, New
York. and was registered with the Commission pursuant to Section 15 (b) of the Exchange
Act. 15 U.S.C. §ti 78o(b). Monroe was founded by two former Stratton brokers, Bryan
Herman ("Herman") and Alan Lipsky , in 1993 under the supervise n of Belfort . Belfort
formed Monroe so that he would have another brokerage firm from which to continue
defrauding investors in Stratton-style IPO manipulations in the ever
forced to go out of business. Monroe was a boiler room operation
that Stratton was
ihich participated in
5
several Stratton IPOs and underwrote three 1POs of its own. Mo
December 1997
15. Bryan Herman ("Herman"), age 34, of New York, N
registered representative of and equity-holder in Stratton before he
1993.
FACTS
adden to Partici
voluntarily closed in
York, was a
to start Monroe in
16. In the spring of 1991, Madden was recruited by his childhood friend Potush
to assist him in manipulating Stratton IPOs. With the understandin, that he would incur no
risk, Madden agreed to buy stock in Stratton IPOs, and then sell tha stock back to Stratton.
Madden understood that the Stratton IPOs were rigged, and he afire d to follow the
instructions of Porush and Belfort.
17. Madden understood that Stratton would make illegal profits by manipulating
the prices of Stratton IPO stocks. In particular, Madden understood that, once Stratton
bought the IPO stock back from Madden and other "flippers," Stratt n would control
almost all of the IPO company's outstanding stock (the "float"). St atton would then be
able to drive the stock's price up by directing other confederates to continuously buy small
lots of the stock "at the market." Once the price rose to a certain le 1. the stock would be
sold to Stratton's customers. Madden understood how the Stratton oiler room operation
worked, and knew that unsuspecting Stratton customers were, convi
salesmen to buy the Stratton IPO stocks at the artificially high pric(
18. Porush also explained that Madden would be allowe
by aggressive
to earn a
predetermined profit on each transaction . If Madden sold a stock ba:k to Stratton at a price
6
higher than the predetermined price (because. for example,. trading it1 the aftermarket had
moved the price of the stock up too quickly), Madden agreed to retu n the excess profits to
Stratton by allowing Porush to execute "losing" transactions betwee Madden's brokerage
accounts and Stratton's proprietary trading accounts.
Madden Acts as aflipper for Stratton
19. Madden first participated in the manipulation of a Str tton IPO by buying
2.000 units (packages of shares and warrants) of Ropak Laboratories, a Stratton IPO, on or
about May 23, 1991. Madden made the purchase with money lent to him by Porush.
T3ctvvccn May 1991 and August 1995. Madden acted as a flipper in at least fifteen Stratton
manipulations. The following trades were made by Madden while ac ing as a Stratton
flipper:
IPO Stock Name Date of Units Purchase Amount of Date o Sale Proceeds Madden'sPurchase Purchased Price Investment Sale
