Drugstore.com Sued By Shareholders

Drugstore.com (Nasdaq: DSCM) became the latest e-tailer to be taken to court Wednesday, as investors filed a lawsuit that also names Amazon chief executive officer Jeff Bezos as a co-defendant.

The suit, filed in New York City, charges that underwriters of Drugstore.com’s 1999 initial public offering (IPO), including Morgan Stanley & Co., Donaldson, Lufkin & Jenrette and Thomas Weisel Partners, agreed to buy shares of the company’s stock at prices above the offering level of US$18.

In exchange, the complaint alleges, the underwriters were given access to additional shares but were required to “kick back” some of their profits to the company in the form of what the suit calls “secret commissions.” The process is known on Wall Street as “laddering.”

Way Up and Way Down

“This artificial price inflation enabled both the underwriters and their customers to reap enormous profits,” the complaint alleges.

Drugstore.com went public on July 28, 1999. The stock quickly shot up to $70 on the first day of trading and closed as high as $67.50 on August 27th of that year.

The suit is seeking class-action status to represent all investors who bought Drugstore.com stock from the day of the IPO until June 15th of this year, when the stock closed at $1.31. Drugstore.com was at $1.11 in early trading Thursday.

Amazon, Et Al.

Bezos is named in the suit because Amazon.com (Nasdaq: AMZN) is a major owner of Bellevue, Washington-based Drugstore.com. Amazon bought a 46 percent stake in Drugstore.com in February 1999 as an early part of its strategy to push beyond books and music and become a one-stop e-tailer.

Other defendants named in the suit include several venture capitalists, Drugstore.com chairman Peter Neupert, and Howard Schultz, chairman of Starbucks (Nasdaq: SBUX), another investor.

Amazon itself faces a spate of lawsuits involving charges of stock-price manipulation. Priceline.com (Nasdaq: PCLN) has also been the target of shareholder action involving IPO laddering, and online grocer Peapod (Nasdaq: PPOD) has been sued for allegedly misleading stock investors as well.

Growing Caseload

The Drugstore.com suit is being waged by New York-based Stull, Stull & Brody, which is already taking on Cisco Systems (Nasdaq: CSCO), Commerce One (Nasdaq: CMRC) and other tech firms in similar suits.

The Stull law firm has also filed a separate suit on behalf of investors against a group of underwriter powerhouses on similar grounds.

Struggling Sector

As for Drugstore.com, the e-tailer has yet to become profitable, despite its first-mover status in the online pharmacy market and the alliance with Amazon. The company also recently got a boost when rival PlanetRx.com shut down and referred its customers to the Drugstore.com site.

Last year, Drugstore.com broadened its reach into the potentially massive market for online health and beauty aids by acquiring Beauty.com in a stock deal worth $42 million.

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