Irked Investors Sue Musicmaker, Emi

LOS ANGELES-While Wall Street continues to be charmed by highflying Internet stocks, a group of disgruntled investors has sued custom CD compilation maker Musicmaker.com and equity investor EMI.
The class action suit, filed oon Feb. 25 in U.S. District Court for the Central District of California, claims Musicmaker misled investors about its future earnings and inflated its stock price based on an exclusive content deal with EMI for custom CDs and a nonexclusive deal for digital downloads (BillboardBulletin, Feb. 28).
The lawsuit, which also names Musicmaker executives Robert Bernardi, Devarajan Puthukarai, and Irwin Steinberg, alleges that much of the content most likely will never be made available because of "no coupling" provisions in many artist contracts.
"The Company knew or recklessly disregarded that it was unlikely that they could secure major artists' sound recordings, because major artists' record contracts generally contain clauses limiting or prohibiting recompilation . . . and because "A-list' artists would not consent to such usage of their sound recordings," the suit says. The suit also claims an "exclusive five-year licensing agreement" Musicmaker made with Zomba Music has similar restrictions.
"The main problem is that EMI cannot release a lot of the top music because of the licensing agreement," says plaintiff attorney Michael Goldberg. "Coupling is only part of it."
The lawsuit states that in a Nov. 2 press release, Musicmaker "partially disclosed problems plaguing the Company" and that EMI senior VP of new media Jay Samit "admitted that "complexities with record contracts' were the cause of Musicmaker.com's floundering program." Samit is named in the suit along with EMI executives Jonathan Smith and John Skolas. EMI Recorded Music and EMI Recorded Music North America are also named.
In a prepared statement released March 2, Musicmaker says it believes it has made "full and complete disclosures as required by law."
While many top acts have provisions that limit or prohibit compilations, another entertainment lawyer says other factors may be in play. "The fact is that the plaintiffs don't know what the reality of the situation is," he says. "The claim is probably not accurate, because they have not seen all of the recording agreements. The lawsuit is kind of a stretch, because each agreement must be looked at on a case-by-case basis." In addition, he notes that most coupling clauses exclude compilations made by the public.
Goldberg says that while he did not prepare that section of the complaint, all coupling issues were thoroughly researched by music "experts."
Co-counsels Lionel Glancy and Michael Ackerman, who prepared the coupling section, were not available for comment.
The claim also alleges that Musicmaker and EMI, which sold its shares in the company, "concocted a deal" where Musicmaker "bolstered" its credibility with the EMI deal and "fanned the flames of demand of their [initial public offering]."
In return, the lawsuit says, EMI sold its shares in the company for $40 million, continued to own 40% of the company, and Musicmaker "would still have to pay . . . royalties as well as license fees to songwriters and/or publishers for sales."
Regardless of the claims in the class action suit, there is no denying that Musicmaker.com's stock has taken a dive.
On Feb. 29, the stock recorded a 52-week low when it closed at $4.12. On its first day of trading on July 7, 1999, the stock closed at $23.94.
On the other hand, losses for the company soared to more than $27 million for the year ending Dec. 31, compared with $4.7 million in December 1998. The company recorded year-end revenue of $1,044,000, compared with $74,000 in 1998.
The company has also hired investment banking firm Allen & Co. to explore strategic partnerships.
The lawsuit, which was filed by Paul Rosenfeld individually and on behalf of other Musicmaker.com stockholders, seeks unspecified financial damages.
A spokeswoman for EMI would not comment on the lawsuit.
In a statement, Musicmaker.com said it would not comment on the allegations.