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Hitsgalore.com: Lawsuits Based On False, Misleading Report

No stranger to IAR press, Hitsgalore.com Inc. this week issued a statement saying that the recent class action lawsuits filed against the company are "without merit" and appear to be based upon certain "false and misleading" statements in a news story.

The company said the statements were contained in a May 11 Bloomberg News article entitled "Hitsgalore.com Omitted Founder's Link to Fraud in SEC Filing." That story was widely picked up in the Internet community and the company's stock tanked.

"We are aware of three lawsuits filed against Hitsgalore.com in the past few weeks that allege violations of the federal securities laws and that request class action treatment," said Steve Bradford, CEO of the company. "Although we believe that these lawsuits are entirely without merit, we wouldn't be surprised if there were others similarly based on the misinformation contained in Mr. (David) Evans' story," Bradford said.

A Bloomberg spokesman said the company stands by its story.

Bloomberg had reported that the founder and majority shareholder of Hitsgalore.com, Dorian Reed, spent 10 months in a federal prison after being convicted of wire fraud in 1992. Earlier it was reported that a federal judge ordered Reed and his wife Audrey to pay $613,110 to 100 customers they defrauded at another Internet company two years ago. The Reeds were sued by the Federal Trade Commission.

Bloomberg said the company was founded by Reed last July. In March, Reed and minority shareholders merged it with Systems Communications Inc., a Florida-based shell company, in exchange for 37.7 million Systems Communications shares. The surviving company is called Hitsgalore.com.

The 10-K said Reed was unaware of the FTC's judgment against him until he learned about it through news reports. Reed maintains he filed an answer to the FTC's complaint in April 1998 and assumed the matter was over, Bloomberg said.

Reed has left the company, but not before the stock took a steep nose-dive. The stock closed yesterday at 5 3/16; at one time it had traded in the $20 range.

The company, which operates a porn-free search engine, has claimed on its Web site that customers can invest as little as $99 and make up to 400 percent returns.

"Often times, what you see in the situation where a publicly traded company's stock price drops significantly after the release of a negative news article about the company is that several different lawsuits are filed by various class action attorneys within days of the story, which lawsuits are based solely upon the assumption that the statements and inferences made in the news release are truthful and accurate," said Carl F. Schoeppl, a Boca Raton, FL attorney hired by Hitsgalore.com to defend against the lawsuits. The company also said it has filed a $20 million lawsuit against litigation against certain Internet posters for allegedly defamatory statements made on electronic bulletin boards.

Schoeppl stated in the company's press release that: "Unfortunately, in many instances the news article allegedly reporting negative information about a company and which spurs the filing of class action lawsuits is itself based on false and misleading information. That appears to be the situation here."

"Although Dorian Reed was appointed as a director of Hitsgalore.com on March 31, 1999, after the merger with Systems Communications was completed, Mr. Reed was not an officer, director or employee of the company in February 1999, when the Form 8-K and the merger agreement were filed," Bradford said.

"Any statements made by Mr. Evans or anyone else implying that Hitsgalore.com lied about or intentionally failed to omit the FTC's civil action against Dorian Reed in SEC filings, press releases or other public statements are simply false. We believe that the company will be successful in proving the falsity of the claims that Hitsgalore.com somehow violated the federal securities laws, both through the defense of the class action lawsuits as well as the successful prosecution of the company's recently filed defamation suit against the individuals who published and republished these false and negative statements on the Internet bulletin boards."