The suit, filed yesterday in U.S. District Court in Pennsylvania, charges that the directors of publicly traded CDNow misled shareholders by delaying the disclosure of a negative report from the company's auditors that questioned CDNow's viability. Doing so, the suit said, violated federal securities laws.
According to the law firm representing the shareholders, on or before Jan. 28, the company's auditor advised management of its "substantial doubt about CDNow's ability to continue as a going concern," and that information was withheld from shareholders.
For most of the year, CDNow teetered close to insolvency until German media conglomerate Bertelsmann agreed to buy the cash-strapped retailer last month for $117 million, or about $3 a share. The Fort Washington, Pa.-based company had seen a 52-week high of more than $19.
CDNow chief executive Jason Olim did not return phone calls today seeking comment.