The Honorable Marsha J. Pechman - WordPress.com · 9-3-2007 · The Honorable Marsha J. Pechman 1 2 3 4 5 6 7 8 9 10 11 12 13 14 ... and sale of digital media content for media

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UNITED STATES DISTRICT COURT

WESTERN DISTRICT OF WASHINGTON

IN RE LOUDEYE CORPORATION SECURITIES LITIGATION

CASE NO. C06-1442 MJP

AMENDED CONSONSOLIDATED CLASS ACTION COMPLAINT FOR VIOLATIONS OF FEDERAL SECURITIES LAWS JURY TRIAL DEMANDED

INTRODUCTION

This is a federal class action on behalf of purchasers of the common stock of Loudeye

Corp. (“Loudeye” or the “Company”) between May 14, 2003 and November 9, 2005, inclusive

(the “Class Period”), seeking to pursue remedies under the Securities Exchange Act of 1934

(the “Exchange Act”). As alleged herein, defendants published a series of materially false and

misleading statements that defendants knew to be and/or deliberately disregarded the fact that

they were materially false and misleading at the time of such publication, and that omitted to

reveal material information necessary to make defendants’ statements, in light of such material

omissions, not materially false and misleading.

AMENDED CONSOLIDATED CLASS ACTION COMPLAINT FOR VIOLATION OF FEDERAL SECUIRITIES LAWS (CASE NO. C06-1442 MJP) - 1

KAHN GAUTHIER SWICK, LLC 12 E. 41st Street, 12th Floor

New York, New York 10017 TEL. 212.920.4310 • FAX 504.455.1498

Case 2:06-cv-01442-MJP Document 17 Filed 03/09/07 Page 1 of 103

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JURISDICTION AND VENUE

1. 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 10b-5 promulgated thereunder

by the United States Securities and Exchange Commission (“SEC”) [17 C.F.R. § 240.10b-5].

2. This Court has jurisdiction over the subject matter of this action pursuant to 28

U.S.C. §§ 1331 and 1337, and Section 27 of the Exchange Act [15 U.S.C. § 78aa].

3. Venue is proper in this District pursuant to Section 27 of the Exchange Act, and

28 U.S.C. § 1391(b). During the Class Period, Loudeye maintained 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.

4. 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.

PARTIES

5. Lead Plaintiffs Maria Corso, Steven Corso, and Louise Rehling (the “Corso

Group”) were appointed Lead Plaintiffs pursuant to a January 23, 2007 Order of the Court.

6. Lead Plaintiff Maria Corso resides in Palm Beach, Florida. As set forth in the

certification attached to her initial complaint against defendants, and incorporated by reference

herein, Maria Corso purchased the common stock of Loudeye at artificially-inflated prices

during the Class Period and has been damaged thereby.




7. Lead Plaintiff Steven Corso, Maria Corso’s spouse, also resides in Palm Beach,

Florida. As set forth in the certification attached to his initial complaint against defendants, and


incorporated by reference herein, Steven Corso purchased the common stock of Loudeye at

artificially-inflated prices during the Class Period and has been damaged thereby.

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8. Lead Plaintiff Louise Rehling resides in Chicago, Illinois. As set forth in the

certification attached to the Lead Plaintiff Motion of the Corso Group, and incorporated by

reference herein, Louise Rehling purchased the common stock of Loudeye at artificially-

inflated prices during the Class Period and has been damaged thereby.

9. During the Class Period, Defendant Loudeye Corporation was a Delaware

corporation, founded in 1997, with its principal place of business and chief executive offices

located in Seattle, Washington. According to the Company’s profile, during the Class Period,

Loudeye provided business-to-business digital media services that facilitate the distribution,

promotion, and sale of digital media content for media and entertainment, mobile

communications, consumer products, consumer electronics retail, and ISP customers

worldwide. The Company’s services included purported “turn-key,” outsourced digital media

distribution and promotional services, such as private-labeled digital media store services,

including mobile music services; and digital media content services, such as encoding, music

samples services, hosting, and Web casting, as well as Internet radio services. The Company’s

digital media store services included hosting, publishing, and managing digital media content,

and delivering such content to end-consumers on behalf of its customers; and digital rights

management and licensing, usage reporting, digital content royalty settlement, customer

support, and publishing-related services.




10. Defendant Jeffrey M. Cavins (“Cavins”) was during the Class Period, Chief

Executive Officer and President of the Company, having served in this capacity from early

2003 until on or about February 1, 2005 when he was forced to resign from the Company.


During the Class Period, defendant Cavins signed and/or certified the Company’s SEC filings,

including but not limited to Loudeye’s Form(s) 10-Q and Form(s) 10-K, and made and/or was

responsible for numerous additional false and misleading statements and omissions.

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11. Defendant Andrew Bay (“Bay”) was, during the Class Period, the chairman of

the Company. During the Class Period, Bay made and/or was responsible for numerous false

and misleading statements and omissions.

12. Defendant Michael A. Brochu (“Brochu”) was, beginning on or about February

1, 2005, Chief Executive Officer and President of the Company. During the Class Period,

defendant Brochu signed and/or certified the Company’s SEC filings, including but not limited

to Loudeye’s Form(s) 10-Q and made and/or was responsible for numerous additional false and

misleading statements and omissions.

13. Defendant Jerold J. Goade (“Goade”) was, prior to and during the Class Period

until on or around April 9, 2004, Interim Chief Financial Officer and Principal Accounting

Officer of the Company. Throughout the rest of the Class Period, Goade was Senior Vice

President of Finance. During the Class Period, defendant Goade signed and/or certified the

Company’s SEC filings, including but not limited to Loudeye’s Form(s) 10-Q and Form(s) 10-

K and made and/or was responsible for numerous additional false and misleading statements

and omissions. Goade is currently prohibited from practicing public accounting by the State of

Washington.




14. Defendant Lawrence J. Madden (“Madden”) was between April 9, 2004, and

April 7, 2005, Chief Financial Officer and Principal Accounting Officer of the Company.

During the Class Period, defendant Madden signed and/or certified the Company’s SEC filings,


including but not limited to Loudeye’s Form(s) 10-Q and Form(s) 10-K and made and/or was

responsible for numerous additional false and misleading statements and omissions.

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15. The defendants referenced above in ¶¶ 1-14 are referred to herein as the

“Individual Defendants.”

SUBSTANTIVE ALLEGATIONS Background

16. Throughout the Class Period, Loudeye purported to be a provider of business-to-

business digital media services that facilitate the distribution, promotion, and sale of digital

media content for media and entertainment, mobile communications, consumer products, retail

consumer electronics, and Internet service provider customers worldwide. Loudeye’s primary

products and services allowed its customers to outsource their digital media distribution and

promotional services - - such as private-labeled digital media store services, mobile music

services and Internet radio services.

17. In light of recent growing demand for the delivery of digital music across

different platforms and delivered to different devices, Loudeye’s promotion of itself as a

“worldwide leader in business-to-business digital media solutions” and services brought the

Company to investors’ attention and caused Loudeye shares to accelerate radically from the

inception of the Class Period.




18. Prior to the inception of the Class Period, on February 4, 2003, John T. Baker,

the former Chairman and Chief Executive Officer of Loudeye resigned, and the Board of

Directors of the Company engaged Regent Pacific Management Corporation to help Loudeye

find new senior management. On or about March 7, 2003, Regent Pacific’s engagement


concluded and Jeffrey M. Cavins was elected President and Chief Executive Officer of the

Company.

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19. At the time that Cavins was brought in, defendants’ goal was to have Cavins

rescue a failing enterprise and turn it around. According to Cavins’ own resume, attached

hereto as Exhibit A, defendants knew the Company was failing prior to the inception of the

Class Period and the objective was to take “the business from the brink of bankruptcy” and

make it “a leader in the digital media space.” While Cavins’ resume and defendants’ Class

Period representations touted Cavins’ alleged successes, the true adverse facts discussed herein

– concealed from investors during the Class Period – paint a very different picture.

20. In fact, throughout the Class Period, the Company was failing and Cavins’

“business model” of boosting gross margins and profits while representing that he had the

ability to control costs when in fact he failed to make essential expenditures to build

necessary infrastructure had no chance to succeed, particularly given that the Company was

growing at an exponential rate and needed to make significant investments and expenditures in

order to build necessary infrastructure and synergize its constantly-increasing assets --

including its major acquisitions.




21. In light of the foregoing failed strategy, defendants’ numerous statements

regarding successful cost-cutting measures were false and misleading when made; e.g.: “The

Company implemented an operational restructuring at the end of the first quarter of 2003 which

is expected to reduce future operating costs” (¶ 36); “restructuring plan which has already

resulted in significant cost savings” (¶37); “improvements in our cost structure, and building

on our progress to drive revenue, cash flow and profitability” (¶37); “improving our margins,

reducing cash operating expenses” (¶58); “Gross margins as a percentage of revenue increased


to 46%...This is the company’s best performance as a public company.” (¶57) “We were

successful in 2003 in achieving the goals we set for ourselves. We significantly improved our

gross margins, reduced our cost structure and improved our balance sheet.” (¶66); “We

remain highly focused on achieving profitability and believe we can achieve our worldwide

growth plans without sacrificing progress toward that important financial goal” (¶80).

[Emphasis added].

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22. Rather than acknowledging to the marketplace that its strategy was an abject

failure, defendants instead engaged in a scheme and course of conduct to artificially inflate the

price of Loudeye stock during the Class Period by issuing false and misleading positive

statements to investors – set forth in detail herein below -- and omitting to disclose the material,

adverse true facts, which enabled defendants, inter alia, to raise money through Private

Investment in Public Equity Stock Sales (“PIPE” sales), whereby the Company sold stock to a

group of private investors, usually with warrants provided as part of the deal.

23. Moreover, through their scheme and course of conduct, while defendants were

unable to salvage the Company, they ultimately saved themselves by selling the Company’s

assets to Nokia in exchange for complete indemnification for all defendants for the conduct as

issue in this case, as well as obtaining sweetheart deals for those executives who stayed at

Loudeye until the end, including defendant Brochu, who personally pocketed hundreds of

thousands of dollars in the Nokia deal, according to the Merger Prospectus, in addition to the

indemnification and other perks and benefits.




24. Up until the time the Company announced Cavins’ abrupt resignation in

February 1, 2005, and beyond, defendants vigorously stayed “on message” with respect to their

fraudulent scheme to conceal the fact that their strategy had failed utterly from the get-go under


Cavins’ “leadership.” E.g., “an aggressive restructuring plan which has already resulted in

significant cost savings (¶37); “During this quarter we set the foundation for our growth

strategy, by making strides in improving our margins, reducing cash operating expenses,

increasing our cash resources and further focusing on our core digital media services business

(¶58); “We were successful in 2003 in achieving the goals we set for ourselves.” (¶66);

Overpeer’s strong technology and products are a natural fit with our digital music and media

solutions” (¶68); “Beginning next quarter, we expect improving results for the remainder of

2004 as we deliver upon the opportunity in front of us (¶71); “The combination [with OD2]

approximately doubles Loudeye’s revenues on a pro forma basis and creates the largest

business to business focused digital media company in the world” (¶75).

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25. Throughout the Class Period, defendants falsely touted Mr. Cavins’ successes in

putting the pieces in place that would enable Loudeye to reach greater profitability and success

in the future, which defendants knew at the time would not happen, as they were already

searching for strategic alternatives to abandon the Company and enable defendants to save

themselves. The February 1, 2005 press release also stated:

“Mr. Cavins was appointed chief executive officer in March 2003 to develop and execute on a strategic plan that included focusing on a growing opportunity in digital media distribution and related services, and restructuring Loudeye's financial and operating performance. During his tenure, Loudeye developed its product offering significantly to offer online and mobile private-labeled digital music store solutions and expanded its reach to over 20 countries worldwide. In addition, Loudeye strengthened its balance sheet and grew revenue significantly, delivering successive record quarters of revenue performance in the third and fourth quarters of 2004…. Defendant Bay added: "Jeff was instrumental in Loudeye becoming a global platform, poised to capitalize upon the opportunities in digital media distribution. Mike inherits a stronger company due to Jeff's efforts and leadership."





26. The above statements were false and misleading when made because defendants

knew the business had been failing prior to and throughout the Class Period, knew that Cavins

had not successfully executed a strategic plan to grow the Company but rather had pushed the

Company to the breaking point, leading to the terminations of the entire accounting department

and ensuring that adequate internal controls were not possible and the Company could not

comply with GAAP, knew that the countless acquisitions by the Company were not and could

not be successfully integrated into the Loudeye platform, knew that Loudeye would never

become a global platform, and knew that the Company inherited by defendant Brochu as the

new CEO was not “stronger” due to “Jeff’s efforts and leadership” but rather required an

emergency change in direction in order to enable the Company to limp along just long enough

to sell off its assets in exchange for a golden ticket for the individual defendants: complete

indemnification for their fraudulent scheme and course of conduct as alleged herein by their

eventual merger partner, Nokia.

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27. Defendants also used the February 1, 2005 transition of leadership as an

opportunity to then explain to investors that this change followed the Company’s growth and

evolution after its Restructuring. Defendants used this release to condition investors to believe

that the Company was also successfully proceeding along its plan to develop a single, global

delivery platform, falsely noting that the future for Loudeye looked bright when defendants

knew that the Company could not survive, and further touting Cavins’ “several notable

successes” which were in fact complete failures, particularly the Overpeer, Inc. (“Overpeer”)

and OD2 acquisitions that could never be synergized or integrated into Loudeye:




"The opportunity for Loudeye has never been more compelling, with our industry in an early phase of growth, and Loudeye in a position of strength to capitalize on a global basis. I'm proud of what we've accomplished and excited about the opportunities ahead under Mike's leadership," said Mr. Cavins.


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Mr. Cavins leaves Loudeye after leading the company to achieve several notable successes during his tenure at Loudeye. Under Mr. Cavins' direction Loudeye positioned itself as a key player in the rapidly growing market for legitimate digital distribution of music, video and games. [Emphasis added]. 28. In stark contrast to prior statements made by the Company under Cavins’

leadership regarding platform integration, on May 3, 2005, during an Earnings Conference Call

for Q1:05, defendant Brochu – no longer able to fully hide the fact that gross margins were

being rapidly eroded by all the necessary expenditures that Cavins failed to undertake while at

the helm – stated in part:

“We are investing heavily in our platform and operational infrastructure and ahead of our current revenues [and indicate the Company] would move aggressively on areas such as integrating our U.S. and International operations, which have been running autonomously, resulting in higher costs.” [Emphasis added].

These statements -- while continuing to conceal the full scope of the effects of defendants’

scheme that were revealed on the last day of the Class Period, November 9, 2005 -- directly

contradicted prior statements by defendants that the Company’s acquisitions had been

integrated and had already resulted in immediate synergies.

The Highly-Touted Restructuring




29. According to the Company, during and subsequent to Regent Pacific’s

engagement, the Board of Loudeye also undertook a “strategic and operational analysis” of its

business and product lines. This analysis resulted in the development of a new strategic and

operational plan (the “Restructuring”), under which Loudeye purported to rationalize its

business and operations. In connection with the Restructuring, defendants also provided new

near-term forward-looking guidance for revenues, earnings, profits and margins.


30. In connection with these revised estimates, defendants also performed a

reassessment of the carrying value of all of its assets, both tangible and intangible, as well as

the value of its goodwill and other assets. As a result of the analysis that was purported to have

occurred in connection with the Restructuring, the Company recorded impairment charges for

goodwill, intangible assets, and property and equipment related to its enterprise communication

services and media restoration services businesses of $5.3 million, $685,000, and $601,000,

respectively.

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31. Loudeye’s alleged focused dedication to electronic music delivery coincided

with the Company’s major Restructuring – purported to have taken place immediately prior to

the inception of the Class Period. As “evidence” that the Company’s restructuring plan was

already showing early signs of success, Company CEO, defendant Cavins, stated in a May 14,

2003 Company press release announcing results for the first quarter of 2003 that the Company

had “implemented an aggressive restructuring plan which has already resulted in significant

cost savings. We are encouraged by our progress, as we took steps to reduce our cost

structure, reduce cash burn and tightly focus our business to deliver better financial results

in future quarters.” [Emphasis added].

32. Thereafter, throughout the Class Period, the Company repeatedly assured

investors that the Restructuring was effective and that Loudeye was operating according to its

revised plan, as discussed in detail below.




33. Moreover, throughout that time, defendants repeatedly stated that Loudeye

maintained adequate financial controls and operational procedures so as to reasonably assure

investors that the Restructuring was proceeding properly, that the Company was poised for

growth through acquisitions as well as organic growth, and that the Company was achieving


operational improvements and financial success; e.g., “our disclosure controls and procedures

are effective in timely alerting us to material information relating to the Company required to

be included in our periodic SEC filings (¶39); “Subsequent to the date of that evaluation, there

have been no significant changes in our internal controls or in other factors that could

significantly affect internal controls, nor were any corrective actions required” (¶40); “the

financial statements…fairly present …the financial condition, results of operations and cash

flows” (¶41); “Loudeye has assembled a strong asset base and has built a digital media

distribution infrastructure which I believe will be a vital component to the rising online digital

media business” (¶42); “We are focused intently on execution and are pleased to see the results

in our operating metrics and improved financial performance in the second quarter (¶45);

“the acquisition [of Overpeer] reaffirm[ed] Loudeye’s leadership position in the digital media

industry and is aimed at converting billions of unmonetized digital media transactions in

unauthorized distribution channels into growth and opportunity (¶67); (“the combination

[with OD2] ...creates the largest business-to-business focused digital media company in the

world” (¶75) [Emphasis added].

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34. For the reasons described in detail herein, the material, affirmative

representations and material omissions concerning Loudeye’s Restructuring, the integration of

its acquired assets, and the effectiveness of the Company’s systems and controls were patently

untrue when made, and Defendants, throughout the Class Period, knew and/or deliberately

disregarded the true, material, adverse facts that starkly contrasted with the material, positive

Class Period statements concerning the Company, which facts are discussed in detail herein.

As investors would ultimately learn, there were true but undisclosed adverse facts about the

Company which are discussed directly below.


MATERIAL, ADVERSE FACTS KNOWN AND CONCEALED BY DEFENDANTS 1

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Background Concerning Material, Adverse Facts

35. As investors ultimately learned on November 9, 2005, throughout the Class

Period, Loudeye was suffering from a host of undisclosed material adverse factors that were

negatively impacting Loudeye’s business. These issues would ultimately cause it to report

dramatically declining financial results -- materially less than the market expectations

defendants had caused and cultivated.

36. These concealed, adverse facts ultimately forced defendants to admit that

previously-reported financials were not true, accurate, or reliable and required adjustments; and

finally acknowledge that the financial and operation status of Loudeye was so dire that the

Company was forced to consider strategic alternatives. In truth, according to confidential

witness #4, defendants – knowing they were at the end of the road -- had already hired a

consultant no later than July of 2005 to propose strategic alternatives.

37. On May 1, 2006, Loudeye announced its agreement to sell all of its US

operations to Muze Media (“Muze”).

38. On August 8, 2006, the Company announced that it had agreed to sell what was

left of Loudeye to Nokia, a Finnish mobile phone and electronics manufacturer. The Nokia

deal struck by the defendants was their knight in shining armor: Nokia agreed to indemnify the

defendants for any claims – including securities fraud claims – for a six year period (longer

than the statute of limitations for an Exchange Act case), as well as to provide the Company’s

remaining executives, including defendant Brochu, with sweetheart stock and severance

packages (amounting to hundreds of thousands of dollars for defendant Brochu).





The Restructuring Was Not Proceeding According To Plan 1

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39. Loudeye’s purported restructuring was not proceeding according to plan and

defendants were not seeing early signs of success. The restructuring was not “already resulting

in significant cost savings” (¶5) and defendants were not, or should not have been,

“encouraged” by those results. (¶5).

40. In truth, in connection with the Restructuring, defendants failed to record all

proper and necessary charges and materially understated the true costs associated with building

the necessary and adequate internal controls and procedures so as to reasonably assure that the

Company’s financial statements and operational reports were prepared in accordance with

Generally Accepted Accounting Principles (“GAAP”) and Securities and Exchange

Commission (“SEC”) rules.

As Defendants Eventually Admitted, the Company Utterly Lacked Adequate Internal Controls and Its Financial

Statements Failed to Comply with GAAP and SEC Rules

41. With respect to internal controls, Loudeye had grossly inadequate systems of

internal operational or financial controls in place. In fact, as defendants would eventually

admit, reporting controls and operational procedures were so woefully deficient that Loudeye’s

financial and operational reporting was not true, accurate or reliable during the Class Period.

For example, material control weaknesses included:

-- “Insufficiently skilled personnel compounded by a lack of human resources” (¶82);

--“Insufficient analysis, documentation and review of the selection and application of [GAAP] to significant, non-routine transactions (¶82);

-- “Deficiencies related to insufficient review and approval and documentation of the review and approval of the work being performed by employees within our accounting and finance department” (¶99);





--“Loudeye does not have sufficient internal control over financial reporting to ensure underlying transactions are being appropriately and timely accounted for” (¶ 99);

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--“Insufficient number of effectively designed controls or there are ineffectively designed controls” (¶99);

-- Failure to appropriately assess and monitor the effectiveness of controls executed by third party service providers, and to adequately implement and/or maintain customer level controls” (¶99);

--“Inadequate entity-level controls” (¶99); -- Defendants materially overstated the Company’s profitability by underreporting Loudeye’s true financial and operational costs and expenses during the Class Period;

-- As noted by a former employee who worked in the accounting department during the Class Period (“Former Employee #1”), the Company failed to comply with the Sarbanes-Oxley Act;

-- After the abrupt resignation of PricewaterhouseCoopers LLP (“PWC”) as the Company’s auditors after completion of services related to review of Loudeye’s interim financial statements for the quarter ended June 30, 2004, the Company was forced, in its 2004 Form 10-K, to include a series of “adjustments” that revealed that the control deficiencies were not only operational but fiscal as well, including: (i) improper accounting for minority interest in OD2; (ii) improper accounting for OD2 escrow consideration, (iii) material weaknesses resulting in “deficiencies in the processes, procedures and competencies within our accounting and financial reporting functions”; and (iv) management’s assessment that “there were eight material weaknesses in Loudeye’s internal control over financial reporting [and] financial reporting was not effective as of December 31, 2004.” [Emphasis added]; and

-- PWC had chosen to “fire” Loudeye, according to Former Employee #2. [Emphasis added].




42. As a result of the severe limitations on the Company’s operations and its

significant lack of operational and financial controls, the myriad of deals announced regularly

by defendants during the Class Period were negatively impacting the Company and pushing

the Company and its employees to the breaking point, according to a former employee who

worked as a systems engineer during the class period (“Former Employee #2”).


43. Because of the numerous, serious internal deficiencies within the Company,

Loudeye could not capitalize upon these agreements and, accordingly, the publication of each

successive agreement was nothing more than a method used by defendants to deceptively

instill investors with confidence in Loudeye.

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The Acquisitions of OD2 and Overpeer Were Never Integrated or Synthesized into the Company

44. In part, as a result of the Company’s significant control deficiencies and other

technological, fiscal, and logistical problems, defendants could not integrate the Company’s

acquired assets, including, in particular, its highly-touted acquisitions of OD2 and Overpeer.

45. Despite defendants’ statements that the Company was achieving growth and

profitability, Loudeye utterly lacked the ability to integrate its assets – logistically, fiscally,

and technologically -- or to support them as non-integrated businesses, in part because of the

Company’s lack of sufficient cash flow from operations and organic internal growth and in

part because some of the acquisitions were incompatible with existing operations, due to

geographically disparate location of operations, and in part because the assets of the

acquisitions were fundamentally flawed.




46. The fact that OD2 was never synergized with Loudeye’s platform is confirmed

by reports from two sources. According to OD2 Former Employee #1 who worked at OD2

prior to and after Loudeye’s acquisition, “the OD2 platform was really good. I was never

really sure what Loudeye did to screw it up.” According to OD2 Former Employee #2,

“[i]nitially, after the merger, there was not much impact on OD2 employees. Over time, there

were some “frustrations because processes were not changed for the better soon enough. As

a result, there was poor cooperation between OD2 and Loudeye.” Loudeye “was not doing

well.”


47. As further revealed in the Merger Prospectus for the Nokia deal, described

herein below, defendants were never able to integrate OD2, and the combination of the

different technology platforms and content libraries was never possible. Because Loudeye

could not integrate both its platform and its acquired system platforms and because they could

never generate sufficient revenues to support both, Loudeye could not generate sufficient cash

from operations to sustain the Company over the long term. Further, the logistics of running

one half of the incompatible platform in Seattle, Washington and the other half of the

operations in the United Kingdom also proved impossible. In fact, defendants had begun

looking for strategic alternatives well before they belatedly disclosed that they were doing so.

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48. Overpeer, Loudeye’s alleged “anti-piracy/content protection unit” was a colossal

disaster and complete legal and technological liability. Instead of providing the anti-piracy

protections touted by defendants, Overpeer was responsible for poisoning some of the world’s

biggest P2P networks with useless digital audio files that often just play 5 second loops of

songs over and over (or intentionally corrupted files). As noted by PC World in a December

29, 2004 article entitled “Risk Your PC’s Health for a Song,” “by flooding file sharing services

with spoofed files, Overpeer makes finding real music files more difficult.” The Company

abruptly abandoned Overpeer entirely by shutting it down lock, stock, and barrel, exactly one

month after the end of the Class Period. In short, Overpeer’s technology was never able to

function properly independent of Loudeye, thus, defendants knew during the Class Period they

could not successfully integrate Overpeer’s technical platforms with its own.

Employee Turnover and Termination of Entire Accounting Department




49. Employees were surprised by the constant shift in directions, the number of new

ventures, and management’s insistence on pursuing many diverse markets and trying to “grab


too many pieces of the pie at once.” Each time after listening to management’s constantly

changing plan, employees would hold water cooler discussions wondering how management

was going to pull off the latest idea. Former Employee #2 noted, “we were way over our

heads” and “employees were very afraid of losing their jobs or of being worked to death.”

There was an “insane amount of work,” according to Former Employee #2.

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50. According to Former Employee #2, employee turnover was a tremendous

problem for the Company as a whole. The average term of employment at Loudeye was just

three months. Management regularly “ramped up” groups, only to fire them all later – at one

point, the entire Company consisted of just 30 employees. A manager named Joe Baldini

participated in the ramping up process. (F.E.#2). During the Class Period, the entire

accounting department was terminated by management and/or resigned. During one point

during the Class Period, Loudeye management “laid off almost the entire company with only

30 people remaining,” according to Former Employee #2. The building was “nearly

vacant.” Later, they “regrew the Company to 150 employees.” (F.E. #2).

51. As a result, it was impossible for trained accounting professionals to properly

oversee the Company’s financial statements and ensure compliance with GAAP and SEC rules,

further enabling defendants’ fraud through the simple removal of proper and adequate

accounting oversight.




52. While the accounting department, which used Great Plains Software, consisted

of talented employees, including Fred Angeles, Vonnie Vo, Jenifer Lopez, and Tom Lo, they

were in a situation in which they could not succeed because there was a “legacy of corruption”

that they had inherited. (F.E. #2) There was also an “old boy network” among management.

(F.E. #2). Management was “unethical” (F.E. #1).


Phantom Deals 1

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53. The Company churned out “phantom deals.” (F.E. #3). For example, the

Company would issue press releases or make statements to the press regarding big names and

touting positive changes for Loudeye when in fact the deals that had been struck were so small

as to be immaterial. (F.E. #3). For example, one “phantom deal” involved Gibson Audio, a

division of Gibson Guitars. (F.E. #3). Another involved a deal with Starbucks Coffee to allow

customers to acquire downloadable music in the physical store. With respect to this deal,

defendant Cavins stated that “"We’re at a tipping point. You are going to see a lot of well-

recognized brands make investments in digital music this year." However, the “investment” by

Starbucks Coffee and touted by defendant Cavins was worth only about $200 dollars to

Loudeye. (F.E. #3).

Defendant Cavins’ Improper Revenue Recognition and False and Misleading Resume, Which Reveals Defendants Knew the Company Was

a Near-Bankrupt Failure Prior To the Inception of the Class Period

54. Defendant Cavins was a “liar” (F.E. #1, who reported directly to Cavins), so

desperate to increase revenue recognition that he actually sold material to which the Company

did not have the rights, according to a Former Employee who worked in sales and business

development during the Class Period (“Former Employee #3). Therefore, improper revenue

was recognized during the Class Period in violation of GAAP and SEC rules.




55. Defendant Cavins’ resume, dated October 2, 2005 (just a few weeks after the

end of the Class Period) and obtained by plaintiffs’ counsel in the course of its investigation,

reveals that at the time of his appointment as CEO of Loudeye in March 2003, Cavins knew

that the Company was failing utterly and yet Cavins was responsible for numerous highly

positive, public statements touting the Company beginning no later than May 19, 2003 – just


weeks after taking the helm! The resume, attached hereto as Exhibit A, states that Cavins

“[t]ook the business from the brink of bankruptcy and turned it into a leader in the digital

media space. When I arrived, the company had $8M in cash on hand, was burning $6.5M

per quarter, had $13M in long term lease obligations, was being delisted from NASDAQ, had

no strategy, producing $2.7M in quarterly revenue with negative gross margins, very low

employee morale and was experiencing rapid customer flight.”

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56. Like his false and misleading public statements regarding the Company during

the Class Period, defendant Cavins’ resume also contains the following false description of his

purported accomplishments at Loudeye, which “facts” are belied by the true state of the

Company at the end of the Class Period as described herein: “Since my appointment as CEO

in March 2003, we set strategy, right sized the business fiscally, raised $57M, completed two

strategic acquisitions, expanded the company globally, grew the market capitalization by

more than 1,200% and drove share price increase by more than 775%. The company is now

a highly liquid NASDAQ traded company with a leadership position in the digital media

space.” Despite these representations in Cavins’ resume, Cavins did not right the sinking ship.

In dramatic contrast to the resume’s characterization, instead, after Cavins’ departure, the

Company promptly closed Overpeer (one of the “strategic acquisitions” touted in the resume)

and by the following summer had sold all of its U.S. assets to Muze and merged with Nokia.

The Truth Is Revealed




57. It was only at the end of the Class Period, however, that investors ultimately

learned that the Company was operating well below expectations, that Loudeye could not

support its operations with its cash flow, that Loudeye could not integrate its acquisitions, that

the Company’s restructurings had failed miserably, and that Loudeye was operating without


financial and operational controls such that its financial reports and results of operations were

unreliable and untrue. These sudden and shocking disclosures had a material and immediate

impact on the price of Loudeye stock, and following each of these disclosures shares of the

Company declined precipitously - - falling from a Class Period high of almost $30.00 per share

in late-2004, to less than $2.00 per share by the time that defendants announced that the

remaining assets of the Company would be sold to Nokia.

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58. Defendants were motivated to and did conceal the true operational and financial

condition of Loudeye, and materially misrepresented and failed to disclose the conditions that

were adversely affecting Loudeye throughout the Class Period, because: (i) it deceived the

investing public regarding Loudeye’s business, operations, management and the intrinsic value

of Loudeye common stock; (ii) it enabled defendants to raise almost $60 million through the

sale of stock and warrants to private equity investors during the Class Period; (iii) it enabled

defendants also to use almost $25 million of Loudeye’s artificially-inflated shares to purchase

the once-valuable assets of companies such as Overpeer and OD2 during the Class Period; and

(iv) it caused plaintiffs and other members of the Class to purchase Loudeye common stock at

artificially-inflated prices.




59. Moreover, in furtherance of this unlawful scheme, plan and course of conduct,

defendants, jointly and individually (and each of them) took the actions set forth herein. These

actions ultimately included negotiating the sale of the Company’s remaining assets to Nokia on

terms that were preferential to the Company’s insiders and under an agreement that provided

Loudeye’s management and former management with freedom from liability for any and all of

the illegal acts and practices complained of herein.


Defendants’ Materially False and Misleading Statements and Omissions During the Class Period1

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60. On May 14, 2003, at the inception of the Class Period, Loudeye published a

release announcing results for the first quarter ended March 31, 2003, with “Improved

revenues, gross margins and cash usage.” This release stated, in part, the following:

Revenues. Revenues increased by 28% compared to the fourth quarter of 2002 and 2% compared to the year earlier quarter;

Gross Margins. Gross margins as a percentage of revenue improved to 23% in the first quarter of 2003;

Cash and Investments. The Company reported $8.9 million in cash, short-term and restricted investments as of March 31, 2003. The $4.5 million decrease in cash, short-term and restricted investments in the first quarter was a 32% improvement compared to the $6.6 million change in cash, short-term and restricted investments in the fourth quarter 2002. The first quarter 2003 change was primarily due to restructuring items including severance, legal, consulting and lease settlement fees; and

Operational Restructuring and Special Charges. The Company implemented an operational restructuring at the end of the first quarter of 2003 which is expected to reduce future operating costs. Associated with the restructuring, the company recorded special charges of $8.4 million, of which $6.6 million were non-cash. [Emphasis added]. 61. As “evidence” that the Company’s aggressive restructuring plan was purported

to be showing early signs of success, Loudeye’s May 14, 2003 release also quoted the

Company’s CEO, as follows:

“In the first quarter we achieved improved sales bookings and billings and implemented an aggressive restructuring plan which has already resulted in significant cost savings,” said Jeff Cavins, Loudeye’s president and chief executive officer. “We are encouraged by our progress, as we took steps to reduce our cost structure, reduce cash burn and tightly focus our business to deliver better financial results in future quarters.” [Emphasis added.]





62. On or about May 20, 2003, defendants filed with the SEC the Company’s 1Q:03

Form 10-Q for the quarter ended March 31, 2003, signed and certified by defendants Cavins

and Goade. In addition to making statements concerning the Company’s operations and

financial condition the same as or substantially similar to those statements published previously

in the Company’s May 14, 2003 release, the 1Q:03 Form 10-Q also stated, in part, the

following:

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Unaudited Interim Financial Data …. The financial information included herein reflects all adjustments (consisting only of normal recurring adjustments) that are, in the opinion of management, necessary for a fair presentation of the results for interim periods. The results of operations for the quarters ended March 31, 2003 and 2002 are not necessarily indicative of the results to be expected for the full years. [Emphasis added.]

63. The Company’s 1Q:03 Form 10-Q also contained representations that attested to

the purported effectiveness and sufficiency of the Company’s controls and procedures. In this

regard, the 1Q:03 Form 10-Q stated, in part, the following:

Item 4 DISCLOSURE CONTROLS AND PROCEDURES We maintain a set of disclosure controls and procedures designed to ensure that information required to be disclosed by us in the reports filed under the Securities Exchange Act, is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms. Disclosure Controls are also designed with the objective of ensuring that this information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.




Within 90 days prior to the date of filing this report, we carried out an evaluation of our disclosure controls and procedures under the supervision and with the participation of management including the Chief Executive Officer and Chief Financial Officer. Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that our disclosure controls and procedures are effective in timely alerting us to material information relating to the Company required to be included in our periodic SEC filings.


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64. At that time, defendants did state that Loudeye would be unable to timely file its

year end 2002 Form 10-K for the year ended December 31, 2002, and its Form 10-Q for the

quarter ended March 31, 2003, however, defendants indicated that the filing delay was not a

significant cause for investor concern. Accordingly, the 1Q:03 Form 10-Q stated, in part, that:

Subsequent to the date of that evaluation, there have been no significant changes in our internal controls or in other factors that could significantly affect internal controls, nor were any corrective actions required with regard to significant deficiencies and material weaknesses. [Emphasis added.]

65. As noted above, the Company’s 1Q:03 Form 10-Q also contained Certifications

by each of defendants Cavins and Goade that attested to the purported accuracy and sufficiency

of Loudeye’s financial and operational controls and procedures, in relevant part as follows:

--Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; --Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; --The registrant’s other certifying officer and I … have:

…evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report …and

presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

--The registrant’s other certifying officer and I have disclosed…to the registrant’s auditors and the audit committee of registrant’s board of directors …):





all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

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..any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

--The registrant’s other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

66. On June 9, 2003, when defendants announced the addition of President of

Digital Distribution and Development at EMI Recorded Music, Jay Samit, to the Loudeye

Board of Directors, defendants provided more information about the success of the Company’s

purported restructuring. At that time, defendants also stated, in part, the following:

“For years, Loudeye has assembled a strong asset base and has built a digital media distribution infrastructure which I believe will be a vital component to the rising online digital media business,” said EMI’s Jay Samit. “I am pleased to become a member of Loudeye’s board of directors, and look forward to helping guide the Company’s direction and growth as a key outsourced provider of digital media services and infrastructure.” [Emphasis added.]

67. During the second quarter of 2003, defendants also announced the following

deals that were purported to further drive the foreseeable growth and performance of the

Company:

05/21/03 EMI Expands Relationship With Loudeye In Europe For Digital Music Fulfillment

05/28/03 Loudeye Provides Digital Media Services for AOL Online Radio

Products

05/22/03 Loudeye Providing Instant-On Music Samples Using Microsoft’s Windows Media 9 Series





06/03/03 The Orchard Selects Loudeye For Global Digital Music Fulfillment 1

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06/16/03 DMI Chooses Loudeye to Enable Digital Music Downloads and

Video Distribution In Japan 07/10/03 Loudeye Announces Strategy to Expand Into Wireless Digital

Music Distribution Market in North America, Europe and Japan 07/09/03 Loudeye Announces QuickClips with Real-Time Analytics

68. The statements contained in Loudeye’s May 14, 2003 release and those

statements contained in the Company’s 1Q:03 Form 10-Q, referenced above, were each

materially false and misleading when made, and were known by defendants to be false at that

time or were deliberately disregarded as such thereby, for the following reasons, among others:

• Loudeye’s Restructuring was not proceeding according to plan and

defendants were not seeing early signs of success. The restructuring was not “already

resulting in significant cost savings” and defendants were not, or should not have been,

“encouraged” by those results.

• Defendants failed to record all proper and necessary charges in

connection with the Restructuring and materially understated the true costs associated with

building the necessary and adequate internal controls and procedures so as to reasonably

assure that the Company’s financial statements and operational reports were prepared in

accordance with Generally Accepted Accounting Principles (“GAAP”) and Securities and

Exchange Commission (“SEC”) rules.




• Defendants could not integrate the Company’s acquired assets. Despite

defendants’ statements that the Company was achieving growth and profitability, that the

acquisitions were being synthesized into the Loudeye platform, Loudeye utterly lacked the

ability either to integrate and synthesize these assets or to support them as non-integrated


businesses, in part because of the Company’s dramatic lack of sufficient cash flow from

operations and organic internal growth and in part because some of the acquisitions were

incompatible with existing operations, due to location of operations or other hurdles.

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• Loudeye had grossly inadequate systems of internal operational or

financial controls in place. In fact, as defendants would ultimately admit, reporting controls

and operational procedures were so woefully deficient such that Loudeye’s financial and

operational reporting was not true, accurate or reliable. Ultimately, no fewer than eight

material control weaknesses were identified, and PWC, the Company’s auditors, “fired”

Loudeye.

• Defendants materially overstated the Company’s profitability by

underreporting Loudeye’s true financial and operational costs and expenses.

• The Company failed to comply with Sarbanes Oxley.

• Loudeye could not achieve guidance sponsored or endorsed by

defendants.

• As a result of the severe limitations on the Company’s operations and its

significant lack of operational and financial controls, the myriad of deals announced

regularly by defendants during the Class Period were negatively impacting the Company

and pushing the Company and its employees to the breaking point.




• Because of the numerous, serious internal deficiencies within the

Company, Loudeye could not capitalize upon these agreements and, accordingly, the

publication of each agreement was nothing more than a method used by defendants to

deceptively instill investors with confidence in Loudeye.


• The Company churned out “phantom deals.” For example, the

Company would issue press releases or make statements to the press regarding big names

and touting positive changes for Loudeye when in fact the deals that had been struck were so

small as to be immaterial. For example, one “phantom deal” involved Gibson Audio, a

division of Gibson Guitars. Another involved a deal with Starbucks Coffee to allow

customers to acquire downloadable music in the physical store. With respect to this deal,

defendant Cavins stated that “"We’re at a tipping point. You are going to see a lot of well-

recognized brands make investments in digital music this year." However, the “investment”

by Starbucks Coffee and touted by defendant Cavins was worth only about $200 dollars to

Loudeye.

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• Employees were surprised by the constant shift in directions, the number

of new ventures, and management’s insistence on pursuing many diverse markets and trying

to “grab too many pieces of the pie at once.” Each time after listening to management’s

constantly changing plan, employees would hold water cooler discussions wondering how

management was going to pull off the latest idea. One former employee noted, “we were

way over our heads.”




• Employee turnover was a tremendous problem for the Company as a

whole. The average term of employment at Loudeye was just three months. Management

regularly “ramped up” groups, only to fire them all later – at one point, the entire Company

consisted of just 30 employees. During the Class Period, the entire accounting department

was terminated by management and/or resigned. During one point during the Class

Period, Loudeye management “laid off almost the entire company with only 30 people


remaining. The building was “nearly vacant.” Later, they “regrew the Company to 150

employees.”

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• As a result, it was impossible for trained accounting professionals to

properly oversee the Company’s financial statements and ensure compliance with GAAP and

SEC rules, further enabling defendants’ fraud through the simple removal of proper and

adequate accounting oversight.

• While the accounting department consisted of talented employees, they

were in a situation in which they could not succeed because there was a “legacy of

corruption” that they had inherited. There was an “old boy network” among management.

Management was “unethical.”

• Defendant Cavins was so desperate to increase revenue recognition that

he actually sold material to which the Company did not have the rights. Therefore, improper

revenue was recognized during the Class Period in violation of GAAP and SEC rules.




• As revealed in the Merger Prospectus for the Nokia deal, described

herein, defendants were never able to integrate OD2, and the combination of the different

technology platforms and content libraries was never possible. Because Loudeye could not

integrate both its platform and its acquired system platforms and because they could never

generate sufficient revenues to support both, Loudeye could not generate sufficient cash

from operations to sustain the Company over the long term. Further, the logistics of running

one half of the incompatible platform in Seattle, Washington, and the other half of the

operations in the United Kingdom also proved impossible. In fact, defendants had begun

looking for strategic alternatives well before they belatedly disclosed that they were doing

so, and had hired a consultant to find such alternatives no later than July 2005.


• Overpeer, Loudeye’s alleged “anti-piracy/content protection unit” was a

colossal disaster and complete legal and technological liability from the start. Instead of

providing the anti-piracy protections touted by defendants, instead Overpeer was responsible

for poisoning some of the world’s biggest P2P networks with useless digital audio files that

often just play 5 second loops of songs over and over (or intentionally corrupted files). The

Company abruptly abandoned Overpeer entirely by shutting it down lock, stock, and barrel,

exactly one month after the end of the Class Period.

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• Defendant Cavins’ resume, dated October 2, 2005 (just a few weeks after

the end of the Class Period) and obtained by plaintiffs’ counsel in the course of its

investigation, reveals that at the time of his appointment as CEO of Loudeye in March

2003, Cavins knew that the Company was failing utterly and yet he was responsible for

numerous highly positive, public statements touting the Company beginning no later than

May 19, 2003 – a mere five weeks after taking the helm! The resume, attached hereto as

Exhibit A, states that Cavins “[t]ook the business from the brink of bankruptcy and turned it

into a leader in the digital media space. When I arrived, the company had $8M in cash on

hand, was burning $6.5M per quarter, had $13M in long term lease obligations, was being

delisted from NASDAQ, had no strategy, producing $2.7M in quarterly revenue with

negative gross margins, very low employee morale and was experiencing rapid customer

flight.

• Like his false and misleading public statements regarding the Company




during the Class Period, defendant Cavins’ resume also contains the following description of

his purported accomplishments at Loudeye, which “facts” are belied by the true state of the

Company at the end of the Class Period as described herein: “Since my appointment as CEO


in March 2003, we set strategy, right sized the business fiscally, raised $57M, completed

two strategic acquisitions, expanded the company globally, grew the market capitalization

by more than 1,200% and drove share price increase by more than 775%. The company is

now a highly liquid NASDAQ traded company with a leadership position in the digital

media space.”

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69. On July 7, 2003, Loudeye published a release announcing that the Company

had achieved purported “Record First Half Operating Metrics.” This release also stated, in

part, the following:

Loudeye Achieves Record First Half Operating Metrics and Expects Improved Second Quarter 2003 Financial Results Anticipates its Best Quarterly Performance in Net Loss and Net Loss Per Share as a Public Company Loudeye Corp. LOUD, a leading provider of services for the management, promotion and distribution of digital media, today announced record first half operating metrics serving more than 370 million digital music samples and 6.5 million encoded files to its customers. Additionally, the Company announced it expects second quarter 2003 financial results to include improved net loss and net loss per share results.

* * * As a result of this record operating performance in combination with a focused strategic plan, for the second quarter 2003 Loudeye anticipates that it will report its best quarterly financial performance as a public company in terms of net loss and net loss per share. This anticipated performance primarily reflects improvement in gross margins and reductions in operating expenses and special charges. In addition, the company expects to report that its total cash, short-term and restricted investments at the end of the second quarter 2003 increased from the end of the first quarter 2003, due primarily to its focused cost savings initiatives, improvements in gross margins, working capital financing and cash management programs….




The financial and operating results reflect the increasing demand for outsourced digital media services and the growing use of digital media among online retailers, music subscription and download services, record labels,


portals, wireless carriers and other companies building a business or brand around digital music or film. 1

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"We are focused intently on execution and are pleased to see the results in our operating metrics and improved financial performance in the second quarter," said Jeff Cavins, Loudeye's president and chief executive officer. "Several factors are driving this growth including the expansion of the digital music channel and the increased activity by our customers in digital media deployments. When customers outsource to Loudeye's highly scalable 'private-label' platform, we can help drive faster deployments at a lower cost, resulting in increased online sales, lower customer acquisition costs and higher return on investment." [Emphasis added.] 70. Following the publication of this release, the price of Loudeye common stock

rallied. On July 7, 2003, shares of the Company traded to a close of $11.50 per share—up

almost 35% over the prior day’s close of $8.50 per share. By the time defendants reported

1Q:03, Loudeye shares had also increased over 100% over the trading price of Loudeye shares

at the inception of the Class Period.

71. On July 30, 2003, Loudeye published a release announcing results for the

second quarter ended June 30, 2003, with purported “record” low net losses. This release also

stated, in part, the following:

Loudeye Announces Second Quarter 2003 Results

Company narrows net loss to a record low; Will focus on sales execution and profitability for second half of 2003 * Net Loss. GAAP net loss of $2.1 million or $0.04 per share, and pro

forma net loss of $1.6 million or $0.03 per share, the company’s best performance as a public company.

* Revenues. Revenues of $2.9 million. Deposits and deferred revenues

increased to $1.4 million, up 29% compared to the first quarter of 2003 and 349% over last six months.




* Gross Margins. Gross margins as a percentage of revenue increased to 42%, up from 23% in the first quarter 2003 and negative (13)% in the prior year quarter. Digital media services gross margins as a percentage


of digital media services revenue reached 50%. This is the company’s best performance as a public company. 1

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* Operating Expenses. Operating expenses of $3.4 million, a decrease of

37% compared to the first quarter of 2003 and 50% compared to the year earlier quarter. This is the company’s best performance as a public company.

* Cash and Investments. Cash, short-term and restricted cash and

investments increased to $10.4 million as of June 30, 2003, up from $8.9 million as of March 31, 2003, reflecting improvements in cash management, the benefits of reduced expenditures as well as funding from the company’s working capital facility.

72. The Company’s July 30, 2003 release also quoted the Company’s CEO,

defendant Cavins, who continued to lead investors to believe that the Company’s Restructuring

was proceeding according to plan. The release stated, in part, the following:

“Our stated goals for the second quarter were to manage cash and focus on improving profitability. We made important strides in both areas, and our record gross margins and narrowing net losses were the result,” said Jeff Cavins, Loudeye’s president and chief executive officer. “Toward the end of the second quarter we refocused on sales execution, profitable opportunities and winning new clients. In addition, we are booking deals with increased deferred revenue components, which we expect will enable us to provide higher levels of recurring revenue and improved visibility.” “Our focus in the second half of 2003 is on sales execution, further improvements in our cost structure, and building on our progress to drive revenue, cash flow and profitability,” Cavins concluded. [Emphasis added.] 73. Immediately prior to and following the publication of this release shares of

Loudeye continued to rally. Accordingly, on July 29, 2003, Company shares traded to a high

of $27.50 each—up almost an additional 55% over the $17.70 trading price of Loudeye shares

just three trading days before, on July 25, 2003. Moreover, during this short period, shares of

Company stock traded many times its recent average trading volume.




74. On or about August 12, 2003, defendants filed with the SEC the Company’s

2Q:03 Form 10-Q for the quarter ended June 30, 2003, signed and certified by defendants


Cavins and Goade. In addition to making statements concerning the Company’s operations and

financial condition that were the same as or substantially similar to those published previously

in Loudeye’s July 7, 2003 and July 30, 2003 releases, the 2Q:03 Form 10-Q also stated, in part,

the following:

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Item 4 DISCLOSURE CONTROLS AND PROCEDURES We maintain a set of disclosure controls and procedures designed to ensure that information required to be disclosed by us in the reports filed under the Securities Exchange Act, is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms.… Based upon their evaluation as of the end of the period covered by this report, the Chief Executive Officer and the Chief Financial Officer concluded that our disclosure controls and procedures are effective to ensure that information required to be included in our periodic SEC filings is recorded, processed, summarized, and reported within the time periods specified in the SEC rules and forms.

* * *

The 10Q for 2Q:03 was certified pursuant to 18 U.S.C. Section 1350, as adopted

pursuant to Section 906 of the Sarbanes Oxley Act (“SOX”). Defendants Cavins and

Goade certified, inter alia, that “The information contained in the Report fairly

presents, in all material respects, the financial condition and results of operations of

the Company.” [Emphasis added.]




75. Taking advantage in the artificial inflation in the price of Loudeye shares caused

as a result of defendants’ publication of materially false and misleading information about the

Company, on August 29, 2003—with shares of the Company trading near $18.90 each—

defendants announced that they had raised at least $12.2 million in private “equity financing.”

Pursuant to an agreement with certain institutional investors, defendants agreed to sell an

aggregate of 783,800 shares of common stock at $15.50 per share, in addition to granting


warrants to purchase an aggregate of almost 100,000 additional shares of common stock at an

exercise price of $20.00 per share.

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76. The same day, in connection with this announcement, defendants also published

a release that quoted defendant Cavins, as follows:

"This financing strengthens Loudeye's institutional shareholder base, cash position and balance sheet and puts us in a stronger position to increase our market share within the digital media distribution space," said Jeff Cavins, Loudeye's president and chief executive officer. "We are pleased with the confidence shown in Loudeye by these institutional investors." [Emphasis added.] 77. As shares of the Company continued to trade at artificially-inflated prices, on

September 8, 2003, Loudeye announced that it would participate at the Roth Capital Partners

New York Conference on September 9, 2003, at the St. Regis Hotel in New York City. At that

conference defendants reiterated many of the same or substantially similar materially false and

misleading statements as had been published in the Company’s previous press releases and

SEC filings, including the materially false and misleading guidance that had been made

previously.

78. Defendants’ reiteration of the materially false and misleading statements during

the Roth Conference had their intended effect. As evidence of this, that day shares of the

Company traded to $24.60 per share.

79. During the third quarter of 2003, defendants also announced the following deals

or agreements that were purported to further drive the foreseeable growth and performance of

the Company:

10/07/03 Loudeye Signs Contract to Provide Wireless Music Content for Cellus USA

08/25/03 Loudeye Launches Sound Effects Catalog of Rich Media Ringtones





08/20/03 T.O.S of Japan Chooses Loudeye for Wireless Music Delivery 1

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08/01/03 House of Blues Chooses Loudeye As Exclusive Provider of Online

Music Samples

80. The statements made by defendants and contained in the Company’s July 7,

2003 and July 30, 2003 releases and in Loudeye’s 2Q:03 Form 10-Q were each materially false

and misleading when made and were know by defendants to be false at that time, or were

deliberately disregarded as such thereby, for the reasons stated herein in ¶ 68, supra.

81. On November 6, 2003, Loudeye published a release announcing results for the

third quarter ended September 30, 2003, that purported to demonstrate a “significantly

improve[d] cash position.” This release also stated, in part, the following:

Company Increases Gross Margins and Significantly Improves Cash Position …Gross Margins. Gross margins as a percentage of revenue increased to 46%, up from 42% in the second quarter 2003 and up from 3% in the prior year quarter. Digital media services gross margins as a percentage of digital media services revenue reached 52%. This is the company's best performance as a public company…. Cash and Investments. Cash, short-term and restricted cash and investments increased to $20.5 million as of September 30, 2003, up from $10.4 million as of June 30, 2003. 82. In addition to the foregoing, the Company’s November 6, 2003 release also

quoted defendant Cavins as follows:

"During this quarter we set the foundation for our growth strategy, by making strides in improving our margins, reducing cash operating expenses, increasing our cash resources and further focusing on our core digital media services business. We continue to push toward profitability and made important progress in the third quarter," said Jeff Cavins, Loudeye's president and chief executive officer. "Now that we have developed this foundation, revenue growth is a critical focus of the management team, and we continue to work to show progress there as well." [Emphasis added.]





83. Also on November 6, 2003, the Company held its Q3:03 Earnings Conference

Call. During that call, defendant Cavins stated:

“We achieved our robust performance as a public company in important metric in Q3. Our improving margins combined with a strict focus on operating cost containment has led to continued progress toward profitability. We have had our best quarter in pro forma net income as a public company as well. We are very pleased with the way we’re trending on this metric.” [Emphasis added]. When asked about expansion plans, Defendant Goade stated: “I can tell you the expansion is immediate. The size of the expansion will be within very strict budgetary guidelines that we set internally. We have strategic internal budget numbers in which we operate G&A and selling expenses to. Right now we’re actually – we do not have a sales organization that is scaled for market share acquisition growth and over the course of the last two quarters, we focused on building the financial foundation and the technology foundation and making some key management hires to get the company poised for growth. The objective of the sales growth now is market share acquisition growth but to do it in high margins and do it with a drive to profitability. So it will be controlled growth. It will be very driven growth and it’s going to be operationally intelligent.” [Emphasis added].

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84. Again, the materially false and misleading statements published by defendants

had their intended effect. Immediately prior to the publication of the Company’s November 6,

2003 release and conference call, shares of Loudeye traded to a Class Period high of $27.20 per

share.

85. On or about November 14, 2003, defendants filed with the SEC the Company’s

3Q:03 Form 10-Q for the quarter ended September 30, 2003, signed and certified by defendants

Cavins and Goade. In addition to making statements concerning the Company’s operations and


in Loudeye’s November 6, 2003 release, the 3Q:03 Form 10-Q also stated, in part, the

following:

Item 4 DISCLOSURE CONTROLS AND PROCEDURES





We maintain a set of disclosure controls and procedures designed to ensure that information required to be disclosed by us in the reports filed under the Securities Exchange Act, is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms.…

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Based upon their evaluation as of the end of the period covered by this report, the Chief Executive Officer and the Chief Financial Officer concluded that our disclosure controls and procedures are effective to ensure that information required to be included in our periodic SEC filings is recorded, processed, summarized, and reported within the time periods specified in the SEC rules and forms.

* * *

The 10Q for 3Q:03 was certified pursuant to SOX. Defendants Cavins and Goade certified,

inter alia, that “The information contained in the Report fairly presents, in all material

respects, the financial condition and results of operations of the Company.” [Emphasis

added.]

86. During the fourth quarter of 2003, defendants also announced the following

deals that were purported to further drive the foreseeable growth and performance of the

Company:

11/06/03 Loudeye's Subsidiary Vidipax Enters Into Definitive Agreement to Sell Its Assets

12/15/03 Loudeye and Microsoft Join Forces to Enable Rapid Deployment

Of Third-Party Customized Digital Music Services

12/15/03 AT&T Wireless and Gibson Audio Deploying Loudeye's New Private Label Digital Music Solutions

12/18/03 Amazon.com Expands Music Samples Agreement With Loudeye




87. As shares of Loudeye continued to trade at levels artificially inflated by

defendants’ publication of materially false and misleading statements, on February 13, 2004,

defendants announced that the Company would participate at the Roth Capital Partners 16th

Annual Growth Stock Conference, to be held on February 17, 2004, at the St. Regis Monarch


Beach Resort and Spa in Dana Point, California. At that conference defendants reiterated many

of the same, or similar, materially false and misleading statements as had been published

previously in the Company’s press releases and SEC filings - - including the materially false

and misleading guidance that had been made previously by defendants.

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88. The statements made by defendants and contained in the Company’s November

6, 2003 release and in Loudeye’s 3Q:03 Form 10-Q were each materially false and misleading

when made and were know by defendants to be false at that time, or were deliberately

disregarded as such thereby, for the reasons stated herein in ¶ 68, supra.

89. Taking further advantage in the artificial inflation in the price of Loudeye shares

caused as a result of defendants’ publication of materially false and misleading information

about the Company, on February 17, 2004 - - with shares of the Company trading near $23.00

each - - defendants announced that they had raised an additional $20.0 million in private

“equity financing.” Pursuant to an agreement with certain institutional investors, defendants

agreed to sell an aggregate of 1.081 million shares of common stock at $18.50 per share in the

financing to “prominent institutional, strategic and accredited investors.” The following day,

February 18, 2004, shares of the Company traded even higher - - reaching an intra-day trading

high of $25.70, before settling at $24.90 per share that day.

90. On February 24, 2004, Loudeye published a release announcing results for the

fourth quarter and year end December 31, 2003, purporting to demonstrate “significant

improvements Over 2002.” This release also stated, in part, the following:

Fourth Quarter and Full-Year 2003 Show Significant Improvements Over 2002 Fourth Quarter 2003 Financial Results





Net Loss. GAAP net loss of $1.7 million or $0.03 per share, a significant improvement from the net loss of $11.2 million or $0.25 net loss per share in the prior year quarter. Pro forma net loss of $905,000 or $0.02 per share, a significant improvement from the pro forma net loss of $5.3 million or $0.12 per share in the prior year quarter. This is the company's best performance as a public company.

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Revenues. Revenues of $2.9 million, up 13% from the prior year quarter. Gross Margins. Gross margins as a percentage of revenue increased to 52%, a significant improvement from the negative (15)% in the prior year quarter. Digital media services gross margins as a percentage of digital media services revenue reached 56%. This is the company's best performance as a public company. Operating Expenses. Operating expenses decreased to $2.9 million, a 51% improvement compared to the prior year quarter. Cash and Investments. Cash, short-term and restricted investments increased to $22.3 million as of December 31, 2003, up from $13.3 million as of December 31, 2002.

91. The Company’s February 24, 2004 release also quoted defendant Cavins, as

follows:

"We were successful in 2003 in achieving the goals we set for ourselves. We significantly improved our gross margins, reduced our cost structure and improved our balance sheet. In addition, with marquee customer wins and partnership announcements at the end of the year, we have positioned the company for growth in 2004, both financially and operationally," said Jeff Cavins, Loudeye's president and chief executive officer. "We intend to support this growth opportunity through investing our sales and R&D teams further, and aggressively closing and deploying new customers of our outsourced digital media services. Our recent $20 million private placement of common stock will only serve to strengthen our resources to execute on that plan. We are excited about the prospects for 2004." [Emphasis added.]




92. Taking further advantage in the artificial inflation in the price of Loudeye shares

caused by defendants’ publication of materially false and misleading information about the

Company, on March 24, 2004 - - with shares of the Company trading near $20.00 each - -

defendants announced that they would acquire Overpeer Inc., then a “leading provider of


digital media data mining, anti-piracy and promotional solutions.” According to a release

published by defendants at that time, “the acquisition reaffirm[ed] Loudeye's leadership

position in the digital media industry and is aimed at converting billions of unmonetized

digital media transactions in unauthorized distribution channels into growth and opportunity

for digital media companies.” Pursuant to the terms of the definitive merger agreement,

Loudeye would acquire 100% of the stock of Overpeer, Inc. for approximately 170,000 shares

of Loudeye common stock, then valued at approximately $3.4 million.

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93. The same day, in connection with this announcement defendants published a

release that stated, in part, the following:

Founded in 2000 and headquartered in New York, Overpeer works with major record labels, film studios, television networks, game publishers, and software companies to provide market intelligence on the unauthorized digital distribution of their content assets as well as anti-piracy and promotional tools to capitalize on previously untapped revenue opportunities across distributed networks. Overpeer holds multiple patents in Asia and Europe, and has four patents pending in the U.S. for their proprietary technology, systems and software. "Overpeer's strong technology and products are a natural fit with our digital music and media solutions and we share a common goal of driving legitimate digital media revenue and monetizing content across all digital distribution channels," said Anthony Bay, Loudeye's chairman of the board. "As the digital media marketplace continues its rapid development, our partners and customers can utilize our unparalleled breadth of solutions to maximize their potential in this market." Overpeer's technology integrates seamlessly and transparently into the world's most popular distributed networks - which are responsible for 90% of file sharing traffic across the globe. Combined with Overpeer's intuitive, database management system for monitoring download activity, the service is highly effective in protecting digital media files from unauthorized distribution. Last month alone, Overpeer experienced 25 billion digital download hits against its servers, effectively blocking the illicit reproduction of copyrighted material across 150 million unique user sessions.

* * *





The combination of Overpeer's products and services with Loudeye's turnkey digital music and media solutions provides Loudeye's content and distribution partners with a full suite of tools for maximizing the return on their digital media investment. Content partners can utilize Overpeer's services to monitor digital music, video, game and software transmissions, hinder unauthorized distribution and reinforce the value of digital content through strong promotional tools. Distribution partners benefit from the potential conversion of millions of illicit transmissions into legitimate sales through their stores and services. [Emphasis added.]

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94. On or about March 22, 2004, defendants filed with the SEC the Company’s

2003 Form 10-K for the year ended December 31, 2003, signed and certified by defendants

Goade and Cavins. In addition to making statements concerning the Company’s operations and


in Loudeye’s February 24, 2004 release, the 2003 Form 10-K also stated, in part, the following:

Item 9A Controls and Procedures Our management, with the participation of the our Chief Executive Officer and Principal Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)) as of the end of the period covered by this report. Based on that evaluation, the our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, our disclosure controls and procedures are effective. There have not been any changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during our fiscal fourth quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

* * *




The Annual Report for the year ended December 31, 2003 was certified pursuant to SOX.

Defendants Cavins and Goade certified, inter alia, that “The information contained in the

Report fairly presents, in all material respects, the financial condition and results of

operations of the Company.” [Emphasis added.]


95. On April 29, 2004, with shares of the Company still trading well above $20.00

each, Loudeye published a release announcing results for the first quarter ended March 31,

2004, and also stated that defendants expected “Improved Results for the Remainder of 2004.”

This release also stated, in part, the following:

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Company Completes Strategic Acquisition, Strengthens Management Team and Balance Sheet, and Expects Improved Results for the Remainder of 2004 First Quarter 2004 Financial Results Net Loss. GAAP net loss narrowed to $2.8 million or $0.04 per share, an improvement from the net loss of $13.1 million or $0.28 per share in the prior year quarter. Pro forma net loss narrowed to $2.6 million or $0.04 per share, an improvement from the pro forma net loss of $4.1 million or $0.09 per share in the prior year quarter. Revenues. Revenues decreased to $1.9 million from $3.3 million in the prior year quarter. Gross Profit. Gross profit as a percentage of revenues increased to 30%, an improvement from 23% in the prior year quarter. Operating Expenses. Operating expenses decreased to $3.4 million, from $13.9 million in the prior year quarter. Cash and Investments. Cash, short-term investments and restricted investments increased to $34.8 million as of March 31, 2004, up from $22.3 million as of December 31, 2003. 96. In addition to the foregoing, the Company’s April 29, 2004 release also quoted

defendant Cavins, in part, as follows:




"This quarter's results were directly in line with our expectations. During the first quarter we made significant investments across all areas of our business, from establishing important strategic relationships and adding experienced executive staff to advancing our digital media production capacity and furthering our product and service development," said Jeff Cavins, Loudeye's president and chief executive officer. "I anticipate these achievements will help set the stage for future customer wins by aligning our digital media solutions with the core challenges facing customers and increasing the overall value we bring to current and future partners. Additionally, the acquisition of Overpeer


provides significant opportunity for our solutions and technical assets to play a role in shaping how new markets, including music, film, television, software and interactive gaming, enter the digital age."

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"We are optimistic about the growth prospects in 2004 provided by our expanding digital supply chain solution and the growing legitimate channel for digital music content across many connected devices and network protocols," continued Cavins. "Beginning next quarter, we expect improving results for the remainder of 2004 as we deliver upon the opportunity in front of us." [Emphasis added.] 97. On or about May 17, 2004, defendants filed with the SEC the Company’s 1Q:04

Form 10-Q for the quarter ended March 31, 2004, signed and certified by defendants Madden

and Cavins. In addition to making statements concerning the Company’s operations and


in Loudeye’s April 29, 2004 release, the 1Q:04 Form 10-Q also stated, in part, the following:

Item 4 DISCLOSURE CONTROLS AND PROCEDURES We maintain a set of disclosure controls and procedures designed to ensure that information required to be disclosed by us in the reports filed under the Securities Exchange Act, is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms.… Based upon their evaluation as of the end of the period covered by this report, the Chief Executive Officer and the Chief Financial Officer concluded that our disclosure controls and procedures are effective to ensure that information required to be included in our periodic SEC filings is recorded, processed, summarized, and reported within the time periods specified in the SEC rules and forms.

* * *




The Form 10-Q for the period ending March 31, 2004 was certified pursuant to SOX.

Defendants Cavins and Madden certified, inter alia, that “The information contained in the




98. The statements made by defendants and contained in the Company’s April 29,

2004 release and in Loudeye’s 1Q:04 Form 10-Q, were each materially false and misleading

and were know by defendants to be false at that time, or were deliberately disregarded as such

thereby, for the reasons stated herein in ¶68, supra.

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99. As shares of the Company continued to trade at levels artificially inflated by

defendants’ publication of materially false and misleading statements, following the Overpeer

acquisition, on June 21, 2004, defendants again took advantage of Loudeye’s artificially-

inflated share prices and arranged a very large - - approximate $20 million - - stock acquisition

of U.K.-based On Demand Distribution, Ltd. (“OD2”). According to defendants, the effect of

this acquisition was purportedly “to Create [the] World's Largest Business-to-Business Digital

Media Company.” At the time this acquisition was announced, on June 21, 2004, defendants

published a release that stated, in part, the following:

Loudeye Corp. LOUD, the worldwide leader in business-to-business digital media solutions, today announced that it has acquired privately held On Demand Distribution Ltd (OD2), the largest digital music provider in Europe. The combination approximately doubles Loudeye's revenues on a pro forma basis and creates the largest business-to-business focused digital media company in the world, providing outsourced digital media solutions to the vast majority of the world's digital media businesses. The combined company now serves more than 200 customers in 15 countries, adding premier European customers such as Coca Cola (UK), MSN (Pan-Europe), MTV (Pan-Europe),Tiscali (Pan-Europe), Wanadoo (Pan-Europe), Virgin Megastores (UK), HMV (UK), Karstadt (Germany), ninemsn (Australia) and numerous other significant retailers, portals, telcos, commercial radio stations and ISPs throughout Europe and Australia.




"By combining with OD2, the leading digital music service provider in Europe, we become the largest business-to-business digital media provider in the world with the largest licensed digital music catalog in the industry," said Jeff Cavins, Loudeye's president and chief executive officer. "This significantly strengthens our solutions for our customers globally and immediately expands our customer relationships and partner opportunities. Together OD2 and Loudeye deliver a powerful, next-generation digital media platform to enable companies to launch complete digital music offerings around the world. In


addition, this will globalize Loudeye's content management, piracy protection and promotion services and will enable us to leverage OD2's broad reach and strong customer relationships to expand our business into new markets."

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* * *

Large Market Opportunity Today's news supports Loudeye's commitment to providing global services by broadening its reach and capabilities into new, key geographic regions including Europe, the second largest music market in the world, and Australia. Annual sales of recorded music in Europe were $11 billion in 2003, with the digital download and subscription market segments growing very quickly. Forrester Research is forecasting that digital music sales in Europe will experience significant growth rates over the next three years, reaching approximately $1.6 billion by 2007.

* * *

"The first phase of the digital media revolution was the development of technology platforms that could deliver digital content in a high quality and protected manner. Today, the emphasis is rapidly shifting to the delivery of compelling electronic merchandising and monetization of digital content. Now for the first time there is a global company that can help any business extend their customer relationships with digital media merchandising, and launch their own branded customer experience" said Anthony Bay, Loudeye's chairman. "Loudeye offers content owners the means to truly achieve global distribution and protection of their digital content, and enables a wide variety of businesses the means to take advantage of the power of the digital media marketplace." Transaction Terms Initial consideration will total approximately $20.7 million, and will consist of up to [1.395] million Loudeye shares valued at approximately $18.4 million at closing, and an aggregate cash payment of approximately $2.3 million to retire certain liabilities. Loudeye also agreed to pay approximately $17.5 million over the next 18 months, and provided the selling OD2 shareholders the right to earn up to an additional $18.8 million based on OD2 achieving certain growth and profitability targets over the next 30 months…. [Emphasis added.]




100. At the time the OD2 acquisition was announced, defendants also published

purported “updated” financial guidance, in part, as follows:


As a result of the acquisition, Loudeye expects significant quarter-over-quarter revenue and gross profit growth for the remainder of 2004. Loudeye expects to incur increased expenses from integration costs, non-cash amortization charges required in connection with the transaction, and forecasted OD2 operating losses for the remainder of 2004. Due to the timing of the close of the acquisition, Loudeye's results for the second quarter ending June 30, 2004 will not materially reflect the effects of the transaction listed above….

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101. On a June 22, 2004 OD2 Acquisition Conference Call, defendant Cavins touted

the acquisition and its alleged immediate positive impact and synergies as follows:

“Today’s exciting news represents a truly transformative strategic acquisition for Loudeye and an acceleration of both companies’ goals to extend our respective leadership positions in the B2B digital media services space….This combination provides Loudeye with new avenues of strategic growth. We share a common vision, common business models, common goals, and there is very little overlap between Loudeye and OD2 in terms of geographies. We immediately expand our geographic reach, adding a robust European business with capabilities to enable customers, many who want to expand globally, as well as consumers in over 12 countries, including local catalog, localized platforms in multiple languages, and in multiple currencies. Secondly, we immediately combine our joint capabilities as we will benefit from OD2’s technology platform and proven best practices in supporting some of the largest customers in Europe. Further, OD2 will benefit from Loudeye’s capabilities in Europe…These synergies will globalize both companies’ solutions….Finally, this transaction approximately doubles our revenues and creates significant revenue growth opportunity on a combined basis….We stated that we intended to grow via aggressive customer acquisition but also via strategic growth through M&A and strategic expansion. Today’s acquisition is consistent with all of our prior stated goals and helps us to achieve our objectives in Europe far ahead of schedule to capture growth in this rapidly expanding market….This transaction gives us more reference customers, customers who want to expand globally, a larger pipeline to address, and in general greater scale in every way…. Loudeye should also see a significant increase in the coming quarters in the amount of marketing opportunities and announcements of wins and company developments which will aid our investors to measure our joint execution.” [Emphasis added].




102. During that same conference call, defendant Cavins also touted Overpeer

synergies as follows:

“Prior to completing a strategic acquisition, it is our practice at Loudeye to identify areas of a media revenue synergy to create, if you will, a 1 plus 1


equals 3 effect post closing. With our recent acquisition of Overpeer, we identified several such areas of execution, and are happy to report that we are seeing significant benefits of the synergies already.” [Emphasis added].

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Finally, in concluding his remarks, defendant Cavins touts the quality of his “team” and

notes that “one area that is critical to the success of any acquisition is the quality of the team

tasked with the execution.” [Emphasis added]. Of course, shortly thereafter, the entire

accounting department was terminated.

103. On July 8, 2004, Loudeye abruptly announced the disturbing news that its

relationship with PricewaterhouseCoopers LLP ("PWC"), the Company's independent

accounting firm, was ending after PWC informed Loudeye that it would resign as the

Company's independent auditor after completion of services related to review of Loudeye's

interim financial statements for the quarter ended June 30, 2004. According to defendants,

however, “Based on the results of a Company-initiated evaluation process that commenced

in April, Loudeye had expected to terminate its relationship with PWC and had begun the

process of evaluating alternative independent auditors prior to receiving notification of

PWC's resignation...”

104. At that time defendants made this announcement they were careful to assure

shareholders and investors that PWC’s abrupt resignation was not the result of any

disagreement over the Company’s accounting, and it did not reflect a lack of internal controls

or procedures. In this regard, the Company’s July 8, 2004 release stated, in part, the following:

“PWC's resignation was not the result of any disagreement between PWC and Loudeye on any matter of accounting principles, financial statement disclosures, or auditing scope or procedures and that PWC's resignation will not result in any issues relating to the completion of its second quarter 2004 audit.”

The release also quoted defendant Madden as stating:





"In their official notification to us, PWC expressed no concern about Loudeye's financial statements or accounting policies, and the resignation is in no way a reflection of our current operating results. []While we regret PWC's decision to sever the relationship prematurely, we are well down the path of engaging new independent auditors for the current fiscal year." [Emphasis added.]

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105. On August 5, 2004, Loudeye published a release announcing results for the

second quarter ended June 30, 2004. This release also stated, in part, the following:

Company Announces Increased Revenues in the Second Quarter and Provides Guidance for the Second Half of 2004

Revenues. Revenues increased to $3.1 million in the current quarter, compared with revenues of $2.0 million in the first quarter of 2004 and $2.9 million in the prior year quarter. Deferred revenues at quarter end totaled $2.7 million, an increase of more than $1.9 million, or 244% from March 31, 2004.

Gross Profit. Gross profit as a percentage of revenues was 42% in the current quarter, an improvement from 28% in the first quarter of 2004 and comparable to 42% in the prior year quarter.

Net Loss. For the quarter, GAAP net loss was $2.8 million or $0.04 per share compared to a net loss of $2.8 million or $0.04 per share in the first quarter of 2004 and $2.1 million or $0.04 per share in the prior year quarter.

Pro Forma Net Loss. Pro forma net loss for the quarter totaled $2.1 million or $0.03 per share compared to a pro forma net loss of $2.3 million or $0.04 per share in the first quarter of 2004 and $1.1 million or $0.02 per share in the prior year quarter.

Cash and Investments. Cash, short-term investments and restricted investments were $32.5 million as of June 30, 2004.

106. The Company’s August 5, 2004 release also quoted defendant Cavins, in part, as

follows:




"We delivered increased revenue growth in the second quarter, driven by organic growth in our core businesses and contribution from our new anti-piracy business, which is growing soundly. In addition, we completed an important strategic acquisition at the end of the quarter that expands our digital distribution business, our customer base and our rights portfolio, significantly increasing our addressable market. This acquisition globalizes Loudeye services and positions us uniquely to attract new customers with


global brands and greater reach," said Jeff Cavins, Loudeye's president and chief executive officer. 1

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* * *

The August 5, 2004 release also quoted defendant Madden, as follows:

"We expect aggressive top-line growth in the second half of 2004. We intend to focus on operational execution to maximize our financial performance in each of our service lines and geographic markets," said Larry Madden, Loudeye's chief financial officer. "We remain highly focused on achieving profitability and believe we can achieve our worldwide growth plans without sacrificing progress toward that important financial goal. With over $32 million of cash resources on our balance sheet, Loudeye remains well positioned to execute on our global operating plan. We intend to leverage this financial strength to continue to invest in new business development efforts that will help drive organic growth, as well as pursue strategic opportunities that can leverage our world-class infrastructure." [Emphasis added.]

107. This release also provided forward guidance, in part, as follows:

While future results are subject to fluctuation, Loudeye anticipates that revenues for the quarter ending September 30, 2004 will be approximately $5.5 million to $6.0 million, an increase of approximately 75% to 90% versus the second quarter of 2004 and approximately double the revenues of the prior year period.…

For the fourth quarter of 2004, the Company expects revenues to range between approximately $7.3 million and $8.0 million, an increase of approximately 150% to 175% versus the prior year period. Based on increased revenues, progress in the integration of OD2, and strict management of expenses, the Company expects pro forma net losses to decrease in the fourth quarter and range between approximately $2.0 million and $2.5 million. [Emphasis added.]




108. Also on August 5, 2004, the Company held its 2Q:04 Earnings Conference Call.

On that call, defendant Cavins touted the acquisition of OD2, stating:

“With the acquisition of On Demand Distribution, known as OD2, we are now the largest business-to-business digital media services company in the world. We hold the largest portfolio of licenses and rights for music distribution in the world, and we operate the world’s largest commercial archive of digital music now with the capabilities to provide catalog to hundreds of music retail sites around the world. We are the only company that can on an end-to-end basis launch a full consumer music experience for a customer on a global


level. We are delivering digital music at scale on a business to business basis worldwide providing end-to-end e-commerce music stores services to over 40 customers including operating, managing, and programming over 70% of all major digital music retail sites in Europe.” [Emphasis added].

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109. On or about August 31, 2004, defendants filed with the SEC the Company’s

2Q:04 Form 10-Q for the quarter ended June 30, 2004, signed and certified by defendants

Madden and Gavins. In addition to making statements concerning the Company’s operations

and financial condition that were the same as or substantially similar to those published

previously in Loudeye’s August 5, 2004 release, the 2Q:04 Form 10-Q also reported that two

issues had emerged, related to Loudeye’s disclosure controls. At that time, defendants

explained that these control issue were limited to two weaknesses that were substantially the

residual effects of Loudeye’s prior reorganization. In this regard, the 2Q:04 Form 10-Q stated,

in part, the following:

Item 4 CONTROLS AND PROCEDURES We maintain a set of disclosure controls and procedures designed to ensure that information required to be disclosed by us in the reports filed under the Securities Exchange Act, is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms…. Based upon their evaluation as of the end of the period covered by this report, our chief executive officer and chief financial officer concluded that, if we are able to successfully address the material weaknesses in our internal accounting controls as discussed below, our disclosure controls and procedures are effective to ensure that information required to be included in our periodic SEC filings is recorded, processed, summarized, and reported within the time periods specified in the SEC rules and forms.




Our audit committee was advised by PricewaterhouseCoopers LLP, or PwC, our independent registered public accounting firm for the period from June 6, 2002 through August 31, 2004, that during their performance of review procedures related to Loudeye’s unaudited interim financial statements for the quarter ended June 30, 2004 PwC identified two material weaknesses, as defined in Public Company Accounting Oversight Board Standard No. 2, in our internal control over financial reporting as follows:


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• Insufficiently skilled personnel compounded by a lack of human resources and expected near-term significant turnover within our accounting and financial reporting function. Also, we must improve controls surrounding adequate monitoring and oversight of the work performed by accounting and financial reporting personnel.

• Insufficient analysis, documentation and review of the selection and

application of generally accepted accounting principles to significant non-routine transactions, including the preparation of financial statement disclosures relating thereto. [Emphasis added.]

110. In addition to the foregoing, the 2Q:04 Form 10-Q also informed investors that

the Company had already taken significant remedial steps to assure that these weaknesses were

substantially addressed. Accordingly, this Form 10-Q also stated, in part, the following:

• We periodically review staffing of our accounting and financial reporting functions to ensure appropriate staffing and supervision of those functions. In March 2004 we hired a new chief financial officer. In May 2004, based on an evaluation of our existing accounting resources, management developed a plan to restructure the accounting and financial reporting function. This plan includes both the addition of new resources and the replacement of certain existing resources. At that time, we began recruiting efforts for various positions within our accounting department. In July 2004, and after details of the restructuring plan became known to members of our accounting staff, four individuals in our accounting department announced their intention to leave. Three of these individuals have agreed to remain with Loudeye in their current capacity through September 30, 2004, and we may negotiate longer periods with one or more of these individuals. We are continuing the recruitment process to hire appropriate replacements.

• During the third quarter of 2004, we will continue our internal control

review process to remediate the internal control material weaknesses identified above by PwC. In May 2004 we engaged an outside consulting firm to advise us on internal control matters and will utilize these advisors to assist in our process of remediation.

• Other than regarding the material weaknesses discussed above, there

have been no changes in our internal control over financial reporting during the period covered by this report that significantly affect our control environment.





The Form 10-Q for the period ending June 30, 2004, was certified pursuant to SOX.

Defendants Cavins and Madden certified, inter alia, that “The information contained in the



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111. In addition to the foregoing, during or immediately after the end of the second

quarter of 2004, defendants also announced the following deals that were purported to further

drive the foreseeable growth and performance of the Company:

06/08/04 Loudeye Signs Classical Music Label Naxos to Its IndieSource Program

06/21/04 Loudeye Acquires OD2 to Create World's Largest Business-to-

Business Digital Media Company

07/15/04 OD2 Announces Seven New Music Services Deals. 112. The statements made by defendants and contained in the Company’s August 5,

2004 release and conference call and in Loudeye’s 2Q:04 Form 10-Q, were each materially

false and misleading and were know by defendants to be false at that time, or were deliberately

disregarded as such thereby, for the reasons stated herein in ¶68, supra.

113. On November 4, 2004, Loudeye published a release announcing purported

“record” setting results for the third quarter ended September 30, 2004, with significant

increases in deferred revenues. This release also stated, in part, the following:

Revenues Increase 81% and Deferred Revenue Increases 340% From Prior Year Due to Digital Music Store Services …Revenues. Revenues increased to $5.1 million in the current quarter, compared with revenues of $3.1 million in the second quarter of 2004 and $2.8 million in the prior year quarter. This represents a 62% increase from the second quarter of 2004 and an 81% increase from the prior year period. The increase in revenues was primarily due to the inclusion of Loudeye's recent acquisition of OD2 for the full quarter.





Deferred revenue. Deferred revenue grew significantly to $5.5 million at quarter end, an increase of 99% from June 30, 2004 and 340% from September 30, 2003. This increase was primarily due to incremental license fees generated during the quarter from new customer contracts.

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Net Loss. For the quarter, GAAP net loss was $5.0 million or $0.06 per share, compared to a GAAP net loss of $2.6 million or $0.04 per share in the second quarter of 2004 and $2.3 million or $0.05 per share in the prior year quarter. Pro Forma Net Loss.* Pro forma net loss for the quarter totaled $4.3 million or $0.05 per share, compared to a pro forma net loss of $1.9 million or $0.03 per share in the second quarter of 2004 and $0.9 million or $0.02 per share in the prior year quarter. Cash and Investments. Cash, cash equivalents, marketable securities and restricted investments were $25.0 million as of September 30, 2004.

* * * The November 4, 2004 release also quoted Defendant Cavins as follows:

"We delivered a record quarter in terms of revenues and deferred revenue, launched the first full-song wireless music platform for one of the largest carriers in the United States, signed a strategic contract with the largest mobile handset provider in the world, and expanded relationships with some of the largest brands online such as MSN and Wanadoo," said Jeff Cavins, Loudeye's president and chief executive officer. "With these achievements, and our expanded R&D effort, we are positioned to benefit from increased adoption of digital music and media both online and through wireless networks. By deploying our digital media platform and leveraging our unique global reach, customers can deliver a next generation digital music experience on the major networks where users consume media."




114. On November 4, 2004, Loudeye held its 3Q:04 Earnings Conference Call.

During the call, defendant Cavins stated, with respect to an analyst’s question regarding

unification of platforms between Loudeye and its acquisitions OD2 and Overpeer:

“This quarter was quite significant, a lot of the Overpeer activities, in terms of, as we demonstrated, the significant increase in the number of titles that we are covering required a fairly large investment. But ongoing, our investment will be nowhere near this on a run rate quarter basis, including the efforts required to unify the platforms.” [Emphasis added].


115. On or about November 15, 2004, defendants filed with the SEC the Company’s

3Q:04 Form 10-Q for the quarter ended September 30, 2004, signed and certified by defendants

Cavins and Madden. In addition to making statements concerning the Company’s operations

and financial condition that were the same as or substantially similar to those statements that

had been published previously in Loudeye’s November 4, 2004 release, the 3Q:04 Form 10-Q

also contained statements regarding the two control deficiencies that were previously reported

in the 2Q:04 Form 10-Q.

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116. At that time, however, defendants did not report any additional material control

or operational deficiencies. In fact, rather than disclose the full scope of Loudeye’s lack of

internal financial or operation controls, the 3Q:04 Form 10-Q instead reported a series of

additional measures that defendants had purported to have already taken to rectify these

deficiencies. As evidence of this, the 3Q:04 Form 10-Q also stated, in part, the following:

Item 4: CONTROLS AND PROCEDURES We maintain a set of disclosure controls and procedures designed to ensure that information required to be disclosed by us in the reports filed under the Securities Exchange Act, is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms. Disclosure controls are also designed with the objective of ensuring that this information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.

* * * Management has assigned a high priority to the short-term and long-term improvement of our internal control over financial reporting. Specific initiatives with respect to our disclosure controls and procedures and actions to address the material weaknesses described above that we will undertake through December 31, 2004, include the following among others:




• Our first priority has been to hire additional qualified staff for our finance and accounting departments. We have engaged two outside recruiting firms to assist us in our search for qualified accounting and


finance personnel. Three individuals (including a director-financial planning and analysis, a director-financial reporting and an assistant controller) joined our finance and accounting staff on October 4, 2004. Each of these individuals has at least nine years of financial accounting experience, including experience working with companies subject to the reporting requirements of the Securities Exchange Act of 1934, as amended. To further augment our accounting and finance departments, we hired two additional individuals on November 1, 2004, and our goal is to hire one to two additional qualified individuals during the fourth quarter 2004. We anticipate that the integration process for our newly-hired individuals will continue into the first quarter 2005. Once our hiring process is completed, our accounting staff will consist of significantly more qualified accounting and finance personnel than was the case during the period that the material weaknesses were identified.

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• We continue to review and revise a number of our disclosure and

accounting policies and procedures, including internal employee training, to strengthen and establish greater uniformity in their application. We began implementing revised policies and procedures and training with respect thereto beginning in October 2004, coinciding with the start date of the additional personnel for our finance and accounting departments that we have hired. Our training programs are focused on our newly hired and continuing finance and accounting personnel, as well as other employees within our organization. These training programs are being designed to emphasize the duties and responsibilities of employees with respect to internal controls over financial reporting and disclosure controls and procedures. Specifically, our training programs include training regarding segregation of duties, contract approval processes and documentation, document retention policies and identification and treatment of public company disclosure matters.




• In May 2004, we engaged an outside consulting firm to advise us on internal control matters. Together with our outside consultants, we have established a multiple-phase remediation process. These phases include risk assessment and planning, control documentation, control gap remediation, information technology audit, identification of key controls, test plan development and testing and development of a monitoring plan. At present, we have substantially completed the risk assessment and planning and we are in the process of updating our control documentation. In September 2004, we began designing a plan to improve our staffing, documentation and segregation of duties functions within our finance and accounting departments. This process continued into November 2004. Our goal is to complete the remaining phases of the documentation and remediation process with our outside


consultants by the end of 2004. We will begin implementation of testing and monitoring of these controls and procedures, in particular as implemented among our new staff within the finance and accounting department, in the first quarter 2005.

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• During the fourth quarter 2004, we will continue our internal control

review process to remediate the internal control material weaknesses identified above by PwC.

The steps identified above, including the hiring of additional qualified accounting and finance personnel, are designed in part to ensure that our accounting with respect to any significant non-routine transactions is in accordance with generally accepted accounting principles. Management and our audit committee intend to closely monitor the implementation of our remediation plan and are prepared to take additional measures where necessary to ensure that we have the necessary resources in place to account for significant non-routine transactions, which measures may include hiring additional permanent employees, establishing additional training programs and/or engaging outside expert consultants. Management estimates that we will incur additional costs in connection with our remediation efforts …. Management estimates that these costs will amount to approximately $750,000 through the end of the first quarter 2005… Although we have undertaken the foregoing initiatives, the existence of a material weakness is an indication that there is more than a remote likelihood that a material misstatement of our financial statements will not be prevented or detected in a future period. In addition, we cannot assure you that we will not in the future identify further material weaknesses or significant deficiencies in our internal control over financial reporting that we have not discovered to date. We are taking steps to address the material weaknesses identified by PwC and to refine our internal controls and procedures to meet the internal control reporting requirements of Section 404 of the Sarbanes-Oxley Act and the rules adopted thereunder. The effectiveness of the steps we have taken to date and the steps we are still in the process of completing is subject to continued management review, as well as audit committee oversight, and we may make additional changes to our internal controls and procedures. Other than the foregoing initiatives, since the date of management’s evaluation, there have been no material changes in our disclosure controls and procedures, including our internal controls over financial reporting, that have materially affected, or are reasonably likely to materially affect, our disclosure controls and procedures, including our internal controls over financial reporting.

* * *





The Form 10-Q for the 3Q:04 was certified pursuant to SOX. Defendants Cavins and Madden

certified, inter alia, that “The information contained in the Report fairly presents, in all

material respects, the financial condition and results of operations of the Company.”

[Emphasis added.]

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117. The statements made by defendants and contained in the Company’s November

4, 2004 release, conference call, and in Loudeye’s 3Q:04 Form 10-Q were each materially false

and misleading and were know by defendants to be false at that time, or were deliberately

disregarded as such thereby, for the reasons stated herein in ¶68, supra.

118. By early December 2004, shares of the Company retraced the Class Period high

and traded above $27.00 each. Again, taking advantage of the artificial inflation in the price of

Loudeye shares caused as a result of defendants’ publication of materially false and misleading

information about the Company, on December 22, 2004, defendants announced that they had

raised an additional $25.2 million in private “equity financing.” Pursuant to an agreement with

certain institutional investors, defendants agreed to sell an aggregate of 1.68 million shares of

common stock together with warrants to purchase an aggregate of approximately 500,000

shares of common stock, for consideration valued at $25.2 million.




119. On February 1, 2005, defendants published a release announcing that the

Company had hired Michael Brochu as the Company’s new President and Chief Executive

Officer, following the sudden, unscheduled departure of defendant Cavins from these positions.

Defendants also used the transition of leadership as an opportunity to then explain to investors

that this change followed the Company’s growth and evolution after its Restructuring.

Defendants also used this release to condition investors to believe that the Company was also

successfully proceeding along its plan to develop a single, global delivery platform.


120. At the time defendants made this announcement, they also made the following

remarks and issued a release containing purported near-term forward guidance:

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"The opportunity for Loudeye has never been more compelling, with our industry in an early phase of growth, and Loudeye in a position of strength to capitalize on a global basis. I'm proud of what we've accomplished and excited about the opportunities ahead under Mike's leadership," said Mr. Cavins. "Mike has helped build large companies and create stockholder value in emerging technology and media markets, and he is the right person to lead Loudeye to the next level of success." Mr. Cavins leaves Loudeye after leading the company to achieve several notable successes during his tenure at Loudeye. Under Mr. Cavins' direction Loudeye positioned itself as a key player in the rapidly growing market for legitimate digital distribution of music, video and games. Mr. Cavins was appointed chief executive officer in March 2003 to develop and execute on a strategic plan that included focusing on a growing opportunity in digital media distribution and related services, and restructuring Loudeye's financial and operating performance. During his tenure, Loudeye developed its product offering significantly to offer online and mobile private-labeled digital music store solutions and expanded its reach to over 20 countries worldwide. In addition, Loudeye strengthened its balance sheet and grew revenue significantly, delivering successive record quarters of revenue performance in the third and fourth quarters of 2004. "Jeff was instrumental in Loudeye becoming a global platform, poised to capitalize upon the opportunities in digital media distribution. Mike inherits a stronger company due to Jeff's efforts and leadership," said Mr. Bay. "We wish the best for Jeff in his future endeavors."

* * *

The release also quoted defendant Madden as follows: "We generated record revenues in the fourth quarter due to strong performance in our digital music store business where we experienced a significant increase in transaction volumes. We directly benefited in the fourth quarter from new stores launched worldwide, increased marketing by our partners of existing stores, and increased user adoption of digital music download services," stated Larry Madden, executive vice president and chief financial officer of Loudeye. "The opportunity for Loudeye is significant, and our recent performance combined with positive industry trends leads us to anticipate continued growth in our business in 2005."





121. At that time, defendants also raised financial revenue guidance, in part, as

follows:

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Preliminary Fourth Quarter 2004 Results Loudeye expects to exceed its previously announced fourth quarter revenue guidance and anticipates revenue of approximately US$6.3 million for the fourth quarter 2004, which represents record quarterly revenue.

122. On March 1, 2005, Loudeye published a release announcing results for the

fourth quarter and year end December 31, 2004. In addition to announcing purported record

setting results, at that time defendants also boldly reported that revenues were expected to

double in 2005 compared to 2004. This release stated, in part, the following:

Fourth Quarter Revenues Increase 124% From Prior Year and 29% From Prior Quarter; Loudeye Guides That It Expects Revenues to More Than Double in 2005 Versus 2004 Fourth Quarter and Fiscal Year 2004 Financial Highlights Revenues. Revenues increased to $6.5 million in the fourth quarter, compared with revenues of $5.1 million in the third quarter of 2004 and $2.9 million in the prior year fourth quarter. This represents a 29% increase from the third quarter of 2004 and a 124% increase from the prior year fourth quarter. Contributing to the overall increase, revenues from Loudeye's digital music store services grew to $3.5 million in the current quarter, an increase of 87% from the third quarter of 2004. For the year ended December 31, 2004, Loudeye's revenues were $16.7 million, compared to $11.9 million in the prior year, an increase of 40%. Deferred revenue. Deferred revenue was $5.7 million at quarter end, compared with $5.5 million as of September 30, 2004 and $0.7 million as of December 31, 2003.

Net Loss. For the fourth quarter of 2004, GAAP net loss was $5.5 million or $0.07 per share, compared to a GAAP net loss of $5.3 million or $0.07 per share in the third quarter of 2004 and $1.7 million or $0.03 per share in the fourth quarter of 2003. For the year ended December 31, 2004, GAAP net loss was $16.3 million or $0.22 per share, compared to a GAAP net loss of $19.2 million or $0.39 per share for 2003. Included in GAAP net loss for the fourth quarter of 2004 and the year ended…





Cash and Investments. Cash, short-term, long-term and restricted investments were approximately $43.7 million as of December 31, 2004. 1

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123. The Company’s March 1, 2005 release also quoted the Company’s new CEO,

defendant Brochu, as follows:

"Our record revenues in the fourth quarter were primarily driven by growth in our digital music store business, which delivered a significant increase in consumer transactions through our white-labeled services globally. Revenues increased both due to new stores launched worldwide and increased traction with existing stores, benefiting from increased marketing and consumer adoption," said Mike Brochu, Loudeye's president and chief executive officer. "We were successful in 2004 in achieving our strategic goals of global expansion, record revenues and an improved balance sheet. With the market for digital media distribution growing rapidly via online and mobile services, our global deployments and advanced mobile platform have positioned the company well for continued financial and operational growth in 2005." [Emphasis added.]

124. The statements made by defendants and contained in the Company’s March 1,

2005 release and in Loudeye’s 3Q:04 Form 10-Q were each materially false and misleading

and were know by defendants to be false at that time, or were deliberately disregarded as such

thereby, for the reasons stated herein in ¶68, supra.




125. On or about March 31, 2005, defendants shocked investors when they filed with

the SEC the Company’s 2004 Form 10-K for the year ended December 31, 2004, signed and

certified by defendants Brochu and Madden, that revealed for the first time, the serious and

complete nature of the Company’s internal control deficiencies. Nevertheless the 10-K

continued to be false and misleading in that defendants omitted to disclose the true facts

regarding the bleak financial reality, outlook, and prospects for the Company that was not fully

revealed until November 9, 2005 – the last day of the Class Period – as discussed in detail

herein below.


126. Contrary to defendants’ prior statements that minimized the extent and impact of

these control deficiencies, the 2004 Form 10-K contained over 15 pages of information, all of

which related to the Company’s control deficiencies. These statements included, in part, the

following:

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Item 9A. Controls and Procedures. Disclosure Controls and Procedures Our principal executive and principal financial officers, after evaluating the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as of the end of the period covered by this annual report, have concluded that, based on such evaluation, our disclosure controls and procedures were not effective due to the material weaknesses in our internal control over financial reporting as of December 31, 2004, described below.

* * * Management has used the framework set forth in the report entitled “Internal Control — Integrated Framework” published by the Committee of Sponsoring Organizations (“COSO”) of the Treadway Commission to evaluate the effectiveness of Loudeye’s internal control over financial reporting. As a result of the material weaknesses described below, management has concluded that the Company’s internal control over financial reporting was not effective as of the end of the most recent fiscal year. Moss Adams LLP has issued an attestation report on management’s assessment of Loudeye’s internal control over financial reporting which appears in this annual report in Item 8 “Financial Statements.”

* * * • Remediation of control deficiencies (including significant deficiencies and material weaknesses). As discussed further below, we have identified material weaknesses in our internal control over financial reporting as of December 31, 2004… Material Weaknesses Identified Prior to December 31, 2004




As discussed above in this annual report under Item 9 “Changes in and Disagreements with Accountants on Accounting and Financial Disclosure — Change in Accountants,” we identified two material weaknesses in our quarterly report on Form 10-Q for the quarter ended June 30, 2004. In management’s


opinion, our assessment in August 2004 that we had the above-referenced material weaknesses in our internal controls over financial reporting resulted from the following circumstances. In March 2004, we hired a new executive vice president and chief financial officer. In May 2004, based on an evaluation of our existing accounting and finance resources, management developed a plan to restructure our accounting and financial reporting functions. This plan included both the addition of new personnel and the replacement of certain personnel. In July 2004, after details of the restructuring plan became known to our accounting and finance staff and following consummation of our acquisition of OD2, four of the five members of our accounting and finance departments announced their intention to leave. These included our senior vice president of finance, our financial reporting specialist, our assistant controller, and our accounts payable and payroll benefits manager. Our financial reporting specialist terminated his employment in July 2004. Although the other three individuals agreed to remain with Loudeye on an interim basis, the limited personnel within our accounting and finance departments during the period that we were preparing our financial statements for the second quarter of 2004 and their relative lack of experience and expertise in accounting for significant non-routine transactions, such as our acquisition of OD2, resulted in our inability to properly account for our acquisition of OD2 in the initial closing financial statements that were reviewed by PwC. In particular, our accounting and finance staff initially made the closing entries described below relating to our acquisition of OD2 in the accounts that were reviewed by PwC, which entries were ultimately adjusted prior to filing our quarterly report on Form 10-Q for the period ended June 30, 2004….

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127. The 2004 Form 10-K also contained a series of “adjustments” that revealed that

the control deficiencies were not only operational but fiscal as well. Accordingly, in addition

to the foregoing, the 2004 Form 10-K also included a series of “entries and adjustments” that

revealed the following:

• Accounting for OD2 minority interest.… We recorded approximately $1.5 million of both goodwill and minority to the fair value of the 7.32% of OD2’s shares which we had not acquired as of June 30, 2004. Following review by PwC, it was determined that… because the accounts of OD2 at the date of acquisition reflected an accumulated deficit, no amount should have been recorded for minority interest. Accordingly, we eliminated the minority interest entry from the balance sheet and reduced goodwill by a corresponding $1.5 million.




• We recorded a credit in our statement of operations for the period ended June 30, 2004 of $22,660 which represented the minority interest in


OD2’s loss for the period from June 22, 2004 through June 30, 2004. Following review by PwC and in accordance with Accounting Research Bulletin No. 51, paragraph 15, it was determined that this credit relating to minority interest was not appropriate because the accounts of OD2 at the date of acquisition reflected an accumulated deficit. Accordingly, we reversed this credit and recorded 100% of the operating loss …

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• We recorded approximately $17.5 million of additional deferred

consideration payable to the former OD2 shareholders through November 30, 2005 in our balance sheet as of June 30, 2004, which included approximately $1.2 million associated with the 7.32% minority interest that we did not own as of that date. Following review by PwC, it was determined that including the portion of this additional consideration relating to the minority interest that we had not yet acquired was not appropriate. Accordingly, we reduced the current and long term portion of accrued acquisition consideration initially recorded on the June 30, 2004 balance sheet by $921,000 and $324,000 respectively, and reduced goodwill on the balance sheet by a corresponding amount of approximately $1.2 million.

• Accounting for OD2 escrow consideration. In our initial closing

financial statements delivered to PwC, the stockholders’ equity portion of Loudeye’s balance sheet as of June 30, 2004 included 2,072,369 shares of common stock issued to certain of OD2’s principal shareholders which are being held in escrow by us for 18 months to satisfy claims we may have with respect to breaches of representations, warranties and covenants, indemnification claims and working capital adjustments. In the aggregate, these shares represented 15% of the total stock consideration initially payable in the transaction. In addition, the additional accrued acquisition consideration payable in connection with the transaction set forth in our initial closing financial statements delivered to PwC was approximately $17.5 million, and included approximately $2.6 million of consideration payable to these principal shareholders which, when payable, would also be placed in escrow to satisfy any of the aforementioned claims that may be made.

Following review of these entries by PwC and after further review of applicable accounting literature, we determined that these escrowed shares and the approximately $2.6 million of accrued acquisition consideration to be issued into escrow should be excluded from our financial statements as of June 30, 2004, because the outcome of the contingency related to the escrow amounts was not determinable beyond a reasonable doubt as of June 30, 2004. We adjusted these entries accordingly.





• Accounting for OD2 foreign exchange transaction gain.… Following review of these entries by PwC, we adjusted downward the amount of the deferred consideration payable to the OD2 shareholders and recorded $183,000 of foreign currency transaction gain in “other income” to account for exchange rate fluctuations during this period.

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Each of the above-referenced adjustments to our second quarter financial statements was made prior to the filing of our quarterly report on Form 10-Q for the period ended June 30, 2004, which we filed with the SEC on August 31, 2004, and each such adjustment is reflected in the financial statements included in such Form 10-Q. The material weaknesses described above resulted in deficiencies in the processes, procedures and competencies within our accounting and financial reporting functions which contributed to post-closing adjustments and delays in the completion and filing of our quarterly report on Form 10-Q for the period ended June 30, 2004. We delayed the filing of our quarterly report on Form 10-Q for the period ended June 30, 2004 to resolve the accounting issues relating to the OD2 acquisition and to ensure that our second quarter financial statements properly accounted for the transaction. 128. Defendants’ statements related to their complete lack of control over financial

reporting were no less shocking. These statements included the following:

Management’s Assessment Management has determined that, as of the December 31, 2004 measurement date, there were deficiencies in both the design and the effectiveness of our internal control over financial reporting. Management has assessed these deficiencies and determined that there were eight material weaknesses in Loudeye’s internal control over financial reporting. As a result of our assessment that material weaknesses in our internal control over financial reporting existed as of December 31, 2004, management has concluded that our internal control over financial reporting was not effective as of December 31, 2004.… Management and our audit committee have assigned a high priority to the short- and long-term improvement of our internal control over financial reporting. We have listed below the nature of the material weaknesses we have identified, the steps we are taking to remediate these material weaknesses and when we expect to have the material weaknesses remediated.




….During 2004 we experienced complete turnover of the personnel in our finance and accounting department….


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* * * Insufficient oversight of financially significant processes and systems, including deficiencies relating to monitoring and oversight of the work performed by our finance and accounting personnel. As described above, we first identified this material weakness in August 2004. Due primarily to the lack of human resources in our accounting and finance department during most of 2004, we noted deficiencies related to insufficient review and approval and documentation of the review and approval of the work being performed by employees within our accounting and finance department relating to the following matters:

• All journal entries. • Periodic reconciliations of sub ledgers, balance sheet and income

statement accounts. • Payroll and employee benefit related processing and accounting. • Royalty related tracking, reporting and accounting. • Processes related to the invoicing of customers and the processing of

credits to customers. • Processes related to the purchasing of and the payment for goods

and services received. • Accrual of expenses. • Documents supporting the monthly, quarterly and annual

consolidation and general ledger closing process. • Periodic financial reporting.

As a result, Loudeye does not have sufficient internal control over financial reporting to ensure underlying transactions are being appropriately and timely accounted for…

* * *

Deficiencies pertaining to the lack of controls or ineffectively designed controls.




We noted that there are an insufficient number of effectively designed controls or there are ineffectively designed controls to ensure that:


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• All revenue transactions occurred, are accurately calculated in accordance with the terms of the applicable contract, are processed properly and are accurately reflected in the proper period in the general ledger.

• All royalty transactions occurred, are accurately calculated in

accordance with the terms of the applicable contract, are processed properly and are accurately reflected in the proper period in the general ledger.

• All revenue transactions are properly authorized before entry into the

general ledger.

* * * Deficiencies in our general computer controls relating to financially significant applications and business processes, including application level design and documentation deficiencies. As a result of these deficiencies, we were unable to rely upon general computer controls to perform as expected over time and we were unable to demonstrate through testing that our internal controls that depend upon general computer controls were operating effectively.…

* * *

Material Weaknesses Identified Prior to December 31, 2004….

In addition, during the preparation of our financial statements for the year ended December 31, 2004, we made revisions of classification with regard to expenses incurred during the years ended December 31, 2003 and 2002. Such revisions of classification had no impact on net loss, stockholders’ equity or cash flows as previously reported. These revisions of classification are consistent with this material weakness and related to the following:

• Regent Fees. We revised our classification of $878,000 relating to

service fees paid to Regent Pacific Management Corporation during the year ended December 31, 2003, from special charges — other to general and administrative …

• Amortization of Intangible Assets. We revised our classification of

amortization of acquired technology and capitalized software costs totaling approximately $269,000 in 2003 and $1.3 million in 2002 from operating expenses — amortization of intangibles to cost of revenue…




• Impairment of Intangible Assets. We revised our classification of impairment charges related to acquired technology and capitalized


software costs totaling approximately $601,000 in 2003 and $694,000 in 2002 from operating expenses — special charges — other to cost of revenue…

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As a result, Loudeye does not have sufficient internal control over financial reporting to ensure that underlying non-routine transactions are appropriately and timely accounted for in the general ledger.

* * *

Failure to appropriately assess and monitor the effectiveness of controls executed by third party service providers, and to adequately implement and/or maintain customer level controls related to the provision of services by third party service providers. We identified design deficiencies in our customer level controls including:

• Failure to provide timely written notification to third party service

providers of changes in Loudeye authorized personnel that result from Loudeye employee terminations.

• Insufficient review and approval, and insufficient documentation of

review and approval, of input reports prior to their submission to the service provider and of output reports received from service providers.

* * *

Inadequate entity-level controls. As of December 31, 2004, we did not have effective entity level controls with respect to our overall control environment and monitoring efforts as defined in the COSO framework. The pervasive nature of the material weaknesses in our internal control over financial reporting in itself constitutes a material weakness. We failed to systematically communicate company-wide policies and procedures and to uniformly and consistently communicate the importance of controls…

* * *




Inability to demonstrate through testing that our internal control over financial reporting was effective as of December 31, 2004. We were unable to demonstrate through testing the effectiveness of our remediation efforts with respect to the material weaknesses described above. Our processes with respect to quarterly and annual controls, such as our control processes relating to general ledger close procedures and periodic financial reporting, were not fully implemented until the fourth quarter 2004. Although we believe these processes were designed effectively as of December 31, 2004, there was an insufficient sample base to enable us to demonstrate through testing that these controls were operating effectively as of December 31, 2004.


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* * * Management estimates that we will incur additional costs in connection with our remediation efforts including outside advisor fees and incremental personnel costs. Management estimates that these costs will aggregate approximately $1 million for the fiscal year ended December 31, 2005. 129. Following the publication of this disturbing report, shares of the Company fell

precipitously. Accordingly, on April 1, 2005, shares closed at $13.80 per share down from

$14.90 per share—down almost 10% in the single trading day. However, in the days that

immediately followed, as the market absorbed the significance of these copious, material

belated disclosures, shares of Loudeye continued to trade lower, reaching a low of $11.10 per

share on April 8, 2005—a decline of almost 35%.

130. In another blow to investors, shares of Loudeye would continue to trade lower

after defendants also reported the impact of the Company’s accounting changes and

reclassifications on Loudeye’s near-term financial performance. Accordingly, shares again

plummeted following defendants May 3, 2005 admission that results for 1Q:05 that were well

below plan and well below guidance previously sponsored and/or endorsed by defendants.

This release ultimately revealed, in part, the following:

First Quarter 2005 Financial Highlights Revenue. Revenue was $6.0 million in the first quarter, compared with revenue of $2.0 million in the prior year first quarter and $6.6 million in the fourth quarter 2004. Deferred revenue. Deferred revenue was $6.5 million at quarter end, compared with $5.7 million as of December 31, 2004 and $796,000 as of the end of the first quarter 2004.




Net Loss. For the first quarter 2005, GAAP net loss was $7.5 million or $0.07 per share, compared to a GAAP net loss of $5.6 million or $0.07 per share in the fourth quarter 2004 and $2.8 million or $0.04 per share in the first quarter 2004….


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131. Following the report of the Company’s lower-than expected financial results—

adversely impacted by the charges and expenditures necessary to bring the Company into the

minimal SEC reporting compliance—shares of Loudeye again plummeted. Accordingly, on

May 3, 2005, Company shares traded to a low of $8.10 per share to close at $8.90 per share—

down another 23% compared to the trading price of Loudeye shares prior to the filing of this

report. Moreover, in the days that followed, as the market absorbed the significance of these

material copious, belated disclosures, shares of Loudeye continued to trade lower, reaching a

low of just over $8.00 per share the following day, May 4, 2005, as over 120,000 shares traded,

many times the Company’s near-term average trading volume.

132. In stark contrast to prior statements made by the Company under Cavins’

leadership regarding platform integration, on May 3, 2005, during an Earnings Conference Call

for Q1:05, defendant Brochu – no longer able to fully hide the fact that gross margins were

being rapidly eroded by all the necessary expenditures the Cavins failed to undertake while at

the helm—stated in part:

“We are investing heavily in our platform and operational infrastructure and ahead of our current revenues [and indicate the Company] would move aggressively on areas such as integrating our U.S. and International operations, which have been running autonomously, resulting in higher costs.” [Emphasis added].

These statements, while continuing to conceal the full scope of the effects of defendants’

scheme that were revealed on November 9, 2005, directly contradicted prior statements by

defendants that the Company’s acquisitions had been integrated and had already resulted in

immediate synergies.




133. The final day of the Class Period was November 9, 2005. That day, defendants

finally revealed the full effects of defendants’ scheme and illegal course of conduct in a press


release and conference call with analysts. That day, shares of Loudeye again plunged after

defendants finally revealed quarterly results for the third quarter, that were extremely

disappointing with diminished cash reserves and larger than expected losses. In fact, at that

time, defendants revealed that Loudeye’s losses had ballooned to $8.5 million, up from a loss

of $5.3 million the prior year. Moreover, in addition to larger than expected losses, defendants

also revealed that revenues of $6.8 million were well below analysts estimates of $8 million in

revenues. Worse still, for the fourth quarter of 2005, defendants stated that revenues would

only be about $8 million—well below analyst’s estimate of $9 million for the quarter. In

addition, on the conference call that same day, defendants indicated to investors that:

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Defendant Brochu stated:

….The service investments we have made represent a major upgrade to our online digital media store platform. However, industry challenges surrounding content licensing, specifically dealing with music publishing rights for subscription services, are negatively impacting a number of new services, including ours. …

….The Loudeye team is focused on converting our investments into returns for our stockholders. Focus on our key initiatives and accelerating our path towards profitability are the mattress with which we are building our 2006 plan. In the third quarter we delivered solid revenue in our digital media store services and digital media content services, but we experienced further weakness in our content protection services which materially impacted our margins.

Content protection services represented only 4% of our total revenue, but nearly 14% of our operating loss. The content protection services market has experienced dramatic changes in recent months. In order to reduce the unacceptable drag on our growth businesses we are carefully evaluating our strategic alternatives for the over peer subsidiary.

We have developed several options to maximize the value of these assets, including the possible discontinuance or [divesture]. We intend to implement our best available alternative before the end of the fourth quarter. This represents part of our plan to rationalize our cost structure. Our current cash resources are not sufficient for us to reach our goal of profitability.




We have been assessing our opportunities to strengthen our balance sheet in order to reach our goals and realize returns on the investment that we've been making in this expanding market. We have hired a strategic advisor, Allen &


Company, to help us evaluate capital markets and review strategic options in order to position Loudeye for the best opportunity as this market continues to evolve and grow.

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Chris Pollack, VP of Finance, further reported that:

“Revenue for the third quarter was $6.8 million or 34% higher than Q3 2004 and 3% lower than Q2 2005.…

Finally, our Overpeer subsidiary, which offers content protection services, generated $295,000 in revenue in the quarter, a decrease of approximately $220,000 from the second quarter. This service generated just 4% of our total revenue during the third quarter, but had negative gross margins of approximately $900,000. Our total gross margins were negative $560,000, which was the result of the disappointing performance by our Overpeer subsidiary.…”

134. These final belated disclosures made on November 9, 2005 – the last day of the

Class Period—again caused shares of the Company to decline precipitously. Accordingly,

from a trading close of $7.70 per share, that day, Loudeye shares collapsed to a close of $4.80

per share the following day. Moreover, in the days that followed, shares of the Company

traded to below $4.00 as investors digested the seriousness consequences of these revelations.

135. In addition to this dramatic and sudden drop in response to the November 9,

2005 3Q:05 earnings announcement, the fact that the market was unaware of the true extent and

nature of Loudeye’s pervasive problems prior to the November 9, 2005 Loudeye press release

is strikingly illustrated by comparing a November 7, 2005 analyst report prepared by Ferris,

Baker Watts, Inc. (“Ferris”) analyst Murray J. Arenson (“Arenson”) regarding Loudeye,

entitled “Earnings Preview—Buy” with the November 10, 2005 Ferris report by Arenson that

appeared the day after the last day of the Class Period (just three days after the positive report

had been issued) entitled “Events Go Awry at a Critical Juncture—Downgrade to Neutral”:

The November 7, 2005 Ferris Report entitled “Earnings Preview—Buy” noted:




“Our estimates for the quarter are $7.6 million in revenue and a pro forma loss per share of $0.06…. For FY05, we expect Loudeye to report results generally


in line with expectations….In all, we continue to believe Loudeye’s stock has great potential, but is still a speculative play.” (Emphasis added). 1

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By marked contrast, just three days later, on November 10, 2005, another Ferris Report by the

same individual analyst, Arenson, painted a shockingly different picture in light of the

announcement of disappointing 3Q:05 results from the Company on November 9, 2006. The

November 10, 2005 Ferris Report, entitled “Events Go Awry at a Critical Juncture—

Downgrade to Neutral,” states in relevant part as follows:

“Loudeye reported disappointing 3Q05 results. The company reported a loss per share of $0.08 on revenue of $6.8 million, compared to our forecasts of a loss of $0.06 and revenue of $7.6 million…. Critical Items:…The results and outlook offered this quarter make it clear to us that the company’s critical path to profitability has morphed from an uphill climb to a grueling obstacle course. While we believe the industry offers great opportunity and Loudeye is competitively and technologically well-positioned to benefit over the long-term, the company is insufficiently capitalized and has lost much control over its own fate…. The Company’s planned launch with a major retailer has been postponed until next year…. Loudeye’s content protection business burned even more money that it did last quarter, at more than $1.2 million. The company clearly believes that this asset can be monetized well enough to justify the cash usage. However, time is money, and Loudeye has lost both, with uncertain prospects for whether or not the business can be monetized in a timely fashion. If the company cannot achieve this goal by year-end, it will cease operations of this business…. Given these issues, Loudeye announced that it has hired Allen and Company to help it pursue capital markets and strategic alternatives. We believe the company would be best served by securing a strategic investment from a partner – the most obvious choice being Nokia. However, no such investment has yet come to pass. In the absence of strategic funding, we expect Loudeye to look at divestitures or a flat-out sale of the company…. Unfortunately, now Loudeye has little control over its key service launches and little funding with which it can be patient. We are downgrading shares of Loudeye stock from buy to neutral.” (Emphasis added).




136. In light of the numerous false and misleading statements and omissions by

defendants during the Class Period, which are discussed in great detail above, the chart below

sets forth an illustrative sampling of the above-referenced materially false and misleading


statements, where and when the statement was made, the speaker, and the reasons that

particular statement was knowingly false and misleading when made:

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DATE MISREPRESENTATION SPEAKER & DOCUMENT(S)

CONCEALED ADVERSE FACTS

7/07/03

"We are focused intently on execution and are pleased to see the results in our operating metrics and improved financial performance in the second quarter,"

Cavins Press Release

* Restructuring was not proceeding according to plan. * Company could not integrate acquired assets * lack of sufficient internal controls * overstated profitability by underreporting true costs and expenses * improper revenue recognized due to selling material to which Loudeye did not have the rights. * Cavins indicated company was failing when he began as CEO, yet he made positive statements just weeks after taking the helm. * Cavins touted false and misleading accomplishments since his appointment at CEO

7/30/03

"In addition, we are booking deals with increased deferred revenue components, which we expect will enable us to provide higher levels of recurring revenue and improved visibility."


*Company could not integrate acquired assets *myriad of deals announced were negatively impacting company and pushing employees to breaking point * Loudeye could not capitalize on agreements * improper revenue recognized due to selling material to which Loudeye did not have the rights. * Cavins indicated company was failing when he began as CEO, yet he made positive statements just weeks after taking the helm * Cavins touted false and misleading accomplishments since his appointment at CEO

1) 8/12/03 2) 11/14/03 3) 5/17/04 4) 8/31/04

Based upon their evaluation as of the end of the period covered by this report, the Chief Executive Officer and the Chief Financial Officer concluded that our disclosure controls and procedures are effective...”

1) 2Q:03 Form 10-Q 2) 3Q:03 Form 10-Q 3) 1Q:04 Form 10-Q 4) 2Q:04 Form 10-Q

* failure to record charges in connection with Restructuring in accordance with GAAP * Company could not integrate acquired assets * lack of sufficient internal controls * could not achieve guidance sponsored or endorsed by defendants * myriad of deals announced were


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negatively impacting company and pushing employees to breaking point

1) 8/12/03 2) 11/14/03 3) 3/22/04 4) 5/17/04 5) 8/31/04 6) 11/15/04

"The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company."

1) 2Q:03 Form 10-K Cavins & Goade

2) 3Q:03 Form 10-Q Cavins & Goade

3) 2003 Form 10-K Cavins & Goade

4) 1Q:04 Form 10-Q Cavins & Madden



* failure to record charges in connection with Restructuring in accordance with GAAP * lack of sufficient internal controls * overstated profitability by underreporting true costs and expenses * failed to comply with Sarbanes Oxley * improper revenue recognized due to selling material to which Loudeye did not have the rights.

11/6/03

"during this quarter we set the foundation for our growth strategy, by making strides in improving our margins, reducing cash operating expenses, increasing our cash resources and further focusing on our core digital media services business. We continue to push toward profitability and make important progress in the third quarter."


* Restructuring was not proceeding according to plan. * Company could not integrate acquired assets * lack of sufficient internal controls * overstated profitability by underreporting true costs and expenses * improper revenue recognized due to selling material to which Loudeye did not have the rights. * Cavins indicated company was failing when he began as CEO, yet he made positive statements just weeks after taking the helm * Cavins touted false and misleading accomplishments since his appointment at CEO

3/24/04

"the acquisition [of Overpeer, Inc.] reaffirme[ed] Loudeye's leadership position in the digital medial industry and is aimed at converting billions of unmonetized digital media transactions in unauthorized distribution channels into growth and opportunity for digital media companies."

Press Release

* Restructuring was not proceeding according to plan. * Company could not integrate acquired assets * myriad of deals announced were negatively impacting company and pushing employees to breaking point * Loudeye could not capitalize on agreements * the Company churned out phantom deals * management tried to "grab too many pieces of the pie at once" and employees were "in over our heads"

3/24/04

"Overpeer's strong technology and products are a natural fit with our digital music and media solutions..."

Press Release

* myriad of deals announced were negatively impacting company and pushing employees to breaking point


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* Loudeye could not capitalize on agreements * the Company churned out phantom deals * management tried to "grab too many pieces of the pie at once" and employees were "in over our heads" * Overpeer was a colossal disaster that could not be integrated and that was ultimately abandoned entirely.

3/24/04

"The combination of Overpeer's products and services with Loudeye's turnkey digital music and media solutions provides Loudeye's content and distribution partners with a full suite of tools for maximizing the return on their digital media investment."

Press Release

* myriad of deals announced were negatively impacting company and pushing employees to breaking point * Loudeye could not capitalize on agreements * the Company churned out phantom deals * management tired to "grab too many pieces of the pie at once" and employees were "in over our heads" * Overpeer was a colossal disaster that could not be integrated and that was ultimately abandoned entirely.

4/29/04

"This quarter's results were directly in line with our expectations. During the first quarter we made significant investments across all areas of our business, from establishing important strategic relationships and adding experienced executive staff to advancing our digital media production capacity and furthering our product and service development." Cavins

Press Release

* Restructuring was not proceeding according to plan. * Company could not integrate acquired assets * lack of sufficient internal controls * myriad of deals announced were negatively impacting company and pushing employees to breaking point * Loudeye could not capitalize on agreements * the Company churned out phantom deals * management tried to "grab too many pieces of the pie at once" and employees were "in over our heads" * improper revenue recognized due to selling material to which Loudeye did not have the rights. * Cavins indicated company was failing when he began as CEO, yet he made positive statements just weeks after taking the helm * Cavins touted false and misleading accomplishments since


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his appointment at CEO

6/21/04

"In addition, this will globalize Loudeye's content management, piracy protection and promotion services and will enable us to leverage OD2's broad reach and strong customer relationships to expand our business into new markets."


* myriad of deals announced were negatively impacting company and pushing employees to breaking point * Loudeye could not capitalize on agreements * the Company churned out phantom deals * management tried to "grab too many pieces of the pie at once" and employees were "in over our heads" * defendants were never able to integrate OD2

7/8/04

"Based on the results of a Company-initiated evaluation process that commenced in April, Loudeye had expected to terminate its relationship with PWC and had begun the process of evaluating alternative independent auditors prior to receiving notification of PWC's resignation"

Press Release

* employee turnover was a tremendous problem; entire accounting department terminated * accountants could not oversee financials which enabled defendants’ fraud. * accountants inherited a legacy of corruption

7/8/04

"PWC's resignation was not the result of any disagreement between PWC and Loudeye on any matter of accounting principles, financial statement disclosures, or auditing scope or procedures and that PWC's resignation will not result in any issues relating to the completion of its second quarter 2004 audit."

Press Release

* lack of sufficient internal controls * overstated profitability by underreporting true costs and expenses * employee turnover was a tremendous problem; entire accounting department terminated * accountants could not oversee financials which enabled defendants’ fraud. * accountants inherited a legacy of corruption * improper revenue recognized due to selling material to which Loudeye did not have the rights.

7/8/04

"In their official notification to us, PWC expressed no concern about Loudeye's financial statements or accounting policies, and the resignation is in no way a reflection of our current operating results."

Madden Press Release

* failure to record charges in connection with Restructuring in accordance with GAAP * lack of sufficient internal controls * overstated profitability by underreporting true costs and expenses * employee turnover was a tremendous problem; entire accounting department terminated * accountants could not oversee financials which enabled


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defendants’ fraud. * accountants inherited a legacy of corruption * improper revenue recognized due to selling material to which Loudeye did not have the rights.

8/5/04

"We remain highly focused on achieving profitability and believe we can achieve our worldwide growth plans without sacrificing progress toward that important financial goal. With over $32 million of cash resources on our balance sheet, Loudeye remains well positioned to execute on our global operating plan."

Madden Press Release

* failure to record charges in connection with Restructuring in accordance with GAAP * overstated profitability by underreporting true costs and expenses * Loudeye could not capitalize on agreements * the Company churned out phantom deals * management tried to "grab too many pieces of the pie at once" and employees were "in over our heads" * improper revenue recognized due to selling material to which Loudeye did not have the rights. * Cavins indicated company was failing when he began as CEO, yet he made positive statements just weeks after taking the helm

2/1/05

"The opportunity for Loudeye has never been more compelling, with our industry in the early phase of growth, and Loudeye in a position of strength to capitalize on a global basis. I'm proud of what we've accomplished and excited about the opportunities ahead under Mike's leadership." Cavins

Press Release

* Restructuring was not proceeding according to plan. * could not achieve guidance sponsored or endorsed by defendants * Loudeye could not capitalize on agreements * the Company churned out phantom deals * employee turnover was a tremendous problem; entire accounting department terminated * improper revenue recognized due to selling material to which Loudeye did not have the rights. * Cavins indicated company was failing when he began as CEO, yet he made positive statements just weeks after taking the helm * Cavins touted false and misleading accomplishments since his appointment at CEO

2/1/05

"Jeff was instrumental in Loudeye becoming a global platform, poised to capitalize upon the opportunities in digital media distribution. Mike inherits a stronger

Bay Press Release

* Restructuring was not proceeding according to plan. * could not achieve guidance sponsored or endorsed by defendants * employee turnover was a


company due to Jeff's efforts and leadership."

tremendous problem; entire accounting department terminated * Cavins indicated company was failing when he began as CEO, yet he made positive statements just weeks after taking the helm * Cavins touted false and misleading accomplishments since his appointment at CEO

3/1/05

"We were successful in 2004 in achieving our strategic goals of global expansion, record revenues and an improved balance sheet. With the market for digital media distribution growing rapidly via online and mobile services, our global deployments and advanced mobile platform have positioned the company well for continued financial and operational growth in 2005."

Brochu Press Release

* Restructuring was not proceeding according to plan. * Company could not integrate acquired assets * lack of sufficient internal controls * overstated profitability by underreporting true costs and expenses * Loudeye could not capitalize on agreements * the Company churned out phantom deals * management tried to "grab too many pieces of the pie at once" and employees were "in over our heads" * improper revenue recognized due to selling material to which Loudeye did not have the rights.

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POST-CLASS-PERIOD EVENTS AND DISCLOSURES

137. On December 9, 2005, Loudeye announced what it called “an important step in

its effort to focus its business and reduce its cost structure. Loudeye announced that Overpeer,

Inc., Loudeye’s wholly-owned content protection subsidiary, has ceased operations effective

immediately and will continue to pursue options to maximize the value of its assets. Defendant

Brochu stated in the release:

“Our actions to exit content protection services will substantially improve our go-forward cost structure.” [Emphasis added].




138. A December 10, 2005 Dela article entitled “Loudeye Corp. dumps Overpeer”

notes that “Loudeye Corp. has announced that it is closing its anti-piracy/content protection

unit Overpeer Inc. Overpeer is responsible for poisoning some of the world’s biggest P2P


networks with useless digital audio files that often just play 5 second loops of songs over and

over (or intentionally corrupted files).” [Emphasis added].

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139. The fact that the Company abruptly abandoned Overpeer just 4 weeks after the

end of the Class Period, during which Defendants had touted Overpeer’s technological

capabilities and the manner it which it greatly improved Loudeye’s capabilities, services, and

customer reach, in the course of creating immediate, enhanced synergies, further emphasizes

that at the time defendants issued falsely positive statements about Overpeer during the Class

Period, defendants knew that Overpeer was nothing more than a colossal failure and a huge

technological and legal liability for the Company.

140. On March 23, 2006, Loudeye published a release announcing that, when the

Company filed its 2005 Form 10-K with the SEC on or about March 15, 2006, it contained a

“going concern qualification,” by its independent auditors, Moss Adams LLP. A going

concern designation reflects the opinion of the Company’s independent auditors that the cash

flows generated from a company’s operations are not sufficient to support its operations in the

near-term.

141. Thus, desperate to have money to fund operations, on May 1, 2006, defendants

announced that Loudeye had agreed to sell all of its US operations to Muze. Thus, that day,

defendants published a release that stated, in part, the following:

Loudeye to Focus on Expanding Global Operations With Its OD2 Services; Deal Significantly Enhances Muze's Digital Media Service Capabilities and Opens New Verticals




SEATTLE and NEW YORK — May 1, 2006 — Loudeye Corp. (Nasdaq: LOUD), a worldwide leader in business-to-business digital media solutions, and Muze, the leading provider of entertainment information services, announced today that Muze has acquired Loudeye's U.S.-based services and operations in an asset purchase transaction for $11.0 million in cash. The transaction closed April 30, 2006. Muze assumed Loudeye's web and mobile digital music


commerce services, operating on Loudeye's U.S.-based platform. The platform also has the capabilities to offer portable music subscription services to its customers. Live customers of the service are O2 Germany, ATT Wireless mMode MusicStore (now Cingular Wireless mMode Music) and BurnLounge. The acquisition by Muze also includes Loudeye's encoding services, including for EMI Music customers, and music sound samples services, along with its hosting and internet radio services.…

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142. With shares of the Company by then totally decimated and with Loudeye stock

trading well below $2.00 each, on August 8, 2006, defendants announced that they had agreed

to sell what was left of Loudeye to Nokia, a Finnish mobile phone and electronics

manufacturer. In a deal valued at under $60 million—approximately half the amount of money

that defendants had raised from private equity investors during the Class Period—Nokia would

acquire all of the assets of the Company for total consideration valued a slightly less than $60.0

million or approximately $4.50 per share in cash for each share of Loudeye common stock.

This acquisition would allow Nokia to provide digital music to its 150 customers with music

enabled cell phones.

143. In connection with the proposed Nokia acquisition, on or about September 1,

2006, the Company filed with the SEC pursuant to Schedule 14A a copy of the joint Proxy-

Prospectus and Merger Agreement, signed by defendant Brochu, among others. Upon receipt

of the Proxy, investors learned additional facts indicating the true scope of defendants’ deceit

and realized that the defendants intended to forever insulate themselves from liability for their

illegal acts and practices, by consummating the Nokia acquisition.




144. As investors then learned, not only did defendants negotiate lucrative severance

packages for themselves in connection with this proposed acquisition, but they also negotiated

indemnification agreements that provided for large increases in directors and officers liability


insurance for six years following the merger—longer than the statute of limitations for a

private right of action for securities fraud.

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As a result of their illegal and improper course of conduct throughout the Class Period,

and as a result of the enormous liability they faced if and when shareholders launched a class

action lawsuit against them, in connection with the Merger defendants negotiated for and

received complete indemnification and significant insurance increases, that relieved them of all

responsibility for their actions at the Company that pre-dated the Merger. As evidence of this

the Proxy stated, in part, the following:

“Nokia will cause the surviving corporation to fulfill and honor Loudeye’s obligations under the indemnification agreements between Loudeye and its current and former directors and officers…The merger agreement requires Nokia to provide the surviving corporation directors’ and officers’ liability insurance for a period of six years’ after closing of the merger with a premium limit of 200% of current annual premiums for facts and events occurring on or prior to the closing date of the merger.”

145. In addition to the significant indemnification provisions that were key to

defendants’ acquiescence in the Merger, the Proxy also reports the long list of interests that the

Company’s directors had in the Merger, that provided them significant benefits, including the

following:

• All unvested options … held by our employees (including executive officers) and non-employee directors will accelerate and vest in full in connection with the merger …

• All outstanding options to purchase shares of our common stock will be

cancelled at the effective time of the merger. The holder of an option to purchase shares of our common stock that is fully vested as of the effective time of the merger (including options that vest as a result of the merger) will receive a cash payment, without interest and less any applicable withholding taxes, equal to the product of (i) the excess, if any, of $4.50 over the applicable option exercise price and (ii) the number of shares of common stock subject to the option.…





• Michael Brochu, our President and Chief Executive Officer, Chris Pollak, our Chief Financial Officer and Edward Averdieck, our Managing Director — Europe, have entered into employment agreements with us that provide for severance payments in the event of a qualifying termination on or following a change of control, which would include the merger…

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• Messrs. Brochu, Pollak and Averdieck hold shares of our common stock,

some of which are unvested shares of restricted stock. In connection with the merger, the vesting of all unvested shares of restricted stock will accelerate in full.… [providing “Aggregate Merger Consideration To Be Received” by defendant Brochu in the amount of “$291,375.00.”

• Each person (including our officers) who was an employee of the

Company or its subsidiaries immediately prior to the effective time of the merger and who remains an employee of the surviving corporation or its subsidiaries or becomes an employee of Nokia immediately following the effective time, will continue to be provided for not less than one year after the closing date of the merger unless any such employee contracts otherwise with Nokia, with benefits that, in the aggregate, are no less favorable than, at Nokia’s election, either (i) those benefits provided to similarly situated employees of Nokia or (ii) each of annual base salary and the benefits provided to the employee by the Company and its subsidiaries immediately prior to the effective time of the merger (without taking into account the value of any equity or equity-related benefits or compensation).….

146. Also, in addition to the foregoing benefits not available to public shareholders,

following the Merger, certain Loudeye insiders also received lucrative personal employment

contracts.




147. In addition to the foregoing, the Merger Prospectus revealed additional

information about the proposed Merger that contradicted defendants’ prior representations. In

a section of the Prospectus entitled “Background to the Merger,” for the first time, defendants

also revealed that they were never able to integrate OD2, and that the combination of the

different technology platforms and content libraries was never possible. As defendants then

revealed, because Loudeye could not integrate both its platform and its acquired system

platforms and because they could never generate sufficient revenues to support both,


Loudeye could not generate sufficient cash from operations to sustain the Company over the

long term. It also appeared that the logistics of running one half of the incompatible

platform in Seattle, Washington and the other half of the operations in the United Kingdom

also proved impossible. At that time, defendants also revealed that they had begun looking

for strategic alternatives well before these belated disclosures.

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ADDITIONAL ALLEGATIONS CONCERNING INDIVIDUAL DEFENDANTS CAVINS, BAY, BROCHU, GOADE, and MADDEN

148. Because of the Individual Defendants’ positions with the Company, they had

access to the adverse undisclosed information about its business, operations, products,

operational trends, financial statements, markets and present and future business 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, and via reports and other information provided to them in connection

therewith.




149. Each of the above officers of Loudeye, by virtue of their high-level positions

with the Company, directly participated in the management of the Company, was directly

involved in the day-to-day operations of the Company at the highest levels, and was privy to

confidential proprietary information concerning the Company and its business, operations,

products, growth, financial statements, and financial condition, as alleged herein. Said

defendants were involved in drafting, producing, reviewing and/or disseminating the false and

misleading statements and information alleged herein, were aware, or deliberately 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.


150. 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, traded on the Nasdaq

National Market Exchange (the “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 with respect to the Company’s financial condition and performance,

growth, operations, financial statements, business, products, markets, management, earnings

and present and future business prospects, and a duty to correct any previously-issued

statements that had become materially misleading or untrue, so that the market price of the

Company’s publicly-traded common stock would be based upon truthful and accurate

information. The Individual Defendants’ misrepresentations and omissions during the Class

Period violated these specific requirements and obligations.

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151. The Individual Defendants participated in the drafting, preparation, and/or

approval of the various public and shareholder and investor reports and other communications

complained of herein, and they were aware of, or deliberately disregarded, the misstatements

contained therein and omissions therefrom, and they were aware of their materially false and

misleading nature. Because of their Board membership and/or executive and managerial

positions with Loudeye, each of the Individual Defendants had access to the adverse

undisclosed information about Loudeye’s business prospects and financial condition and

performance as particularized herein and knew (or deliberately disregarded) that these adverse

facts rendered the positive representations made by or about Loudeye and its business issued or

adopted by the Company materially false and misleading.




152. The Individual Defendants, because of their positions of control and authority as

officers and/or directors of the Company, were able to and did control the content of the


various SEC filings, press releases and other public statements pertaining to the Company

during the Class Period. Each Individual Defendant 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 reports and

releases detailed herein and is therefore primarily liable for the representations contained

therein.

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153. 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 Loudeye common stock

by disseminating materially false and misleading statements and/or concealing material adverse

facts. The scheme: (i) deceived the investing public regarding Loudeye’s business, operations,

management and the intrinsic value of Loudeye common stock; (ii) enabled defendants to raise

almost $60 million through the sale of stock and warrants to private equity investors during the

Class Period; (iii) enabled defendants also use its artificially inflated shares to purchase the

once valuable assets of companies such as Overpeer Inc and OD2 during the Class Period; and

(iv) caused plaintiffs and other members of the Class to purchase Loudeye common stock at

artificially inflated prices.

PLAINTIFFS’ CLASS ACTION ALLEGATIONS




154. Lead 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 or

otherwise acquired the common stock of Loudeye between May 14, 2003 and November 9,

2005, inclusive (the “Class”) and who were damaged thereby. Excluded from the Class are

defendants, the officers and directors of the Company, at all relevant times, members of their


immediate families and their legal representatives, heirs, successors or assigns and any entity in

which defendants have or had a controlling interest.

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155. The members of the Class are so numerous that joinder of all members is

impracticable. Throughout the Class Period, Loudeye common shares were actively traded on

the Nasdaq. As of May 1, 2006, the Company had over 13.259 million shares of common

stock issued and outstanding. 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 in the proposed Class. Record owners

and other members of the Class may be identified from records maintained by Loudeye or its

transfer agent and may be notified of the pendency of this action by mail, using the form of

notice similar to that customarily used in securities class actions.

156. Plaintiffs’ claims are typical of the claims of the members of the Class as all

members of the Class are similarly affected by defendants’ wrongful conduct in violation of

federal law that is complained of herein.

157. Plaintiffs will fairly and adequately protect the interests of the members of the

Class and has retained counsel competent and experienced in class and securities litigation.

158. 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:




• whether the federal securities laws were violated by defendants’ acts as

alleged herein;


• whether statements made by defendants to the investing public during

the Class Period misrepresented material facts about the business, operations and

management of Loudeye; and

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• to what extent the members of the Class have sustained damages and the

proper measure of damages.

159. 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. 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 of this action

as a class action.

CAUSATION AND ECONOMIC LOSS

160. During the Class Period, defendants materially misled the investing public,

thereby inflating the price of Loudeye 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, as alleged herein.




161. 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. As

described herein, during the Class Period, defendants made or caused to be made a series of

materially false or misleading statements about Loudeye’s business, prospects and operations.


These material misstatements and omissions had the cause and effect of creating in the market

an unrealistically positive assessment of Loudeye and its business, prospects and operations,

thus causing the Company’s common stock to be overvalued and artificially inflated at all

relevant times. Defendants’ materially false and misleading statements during the Class Period

resulted in plaintiffs and other members of the Class purchasing the Company’s common stock

at artificially-inflated prices, thus causing the damages complained of herein.

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162. During the Class Period, as detailed herein, defendants engaged in a scheme to

deceive the market, and a course of conduct that artificially inflated Loudeye’s stock price and

operated as a fraud or deceit on Class Period purchasers of Loudeye’s stock by misrepresenting

the Company’s financial results. Over a period of approximately thirty months, defendants

improperly inflated the Company’s financial results and then used this to raise money or use

Company stock as currency to acquire other assets. Ultimately, however, when defendants’

prior misrepresentations and fraudulent conduct came to be revealed and was apparent to

investors, shares of Loudeye declined precipitously—evidence that the prior artificial inflation

in the price of Loudeye’s shares was eradicated. As a result of their purchases of Loudeye

stock during the Class Period, plaintiffs and other members of the Class suffered economic

losses, i.e. damages under the federal securities laws.




163. By improperly characterizing the Company’s financial results and misrepresent-

ing its prospects, defendants presented a misleading image of Loudeye’s business and future

growth prospects. During the Class Period, defendants repeatedly emphasized the ability of the

Company to monitor and control its operations and consistently reported financial and

operational results that were better then expected, that were purported to demonstrate that

Loudeye’s Reorganization was succeeding according to plan. These claims caused and


maintained the artificial inflation in Loudeye’s stock price throughout the Class Period and

until the truth about the Company was ultimately revealed to investors.

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164. Defendants’ false and materially misleading statements had the intended effect

of causing Loudeye’s shares to trade at artificially-inflated levels throughout the Class Period—

reaching a Class Period high of over $30.00 per share in early December 2004.

165. On November 9, 2005, however, defendants revealed that the Company would

come nowhere near achieving guidance previously sponsored and/or endorsed by defendants.

That day, defendants reported a huge earnings and revenue miss for the third quarter of 2005

and revised full year guidance much lower than previous guidance. Thereafter, defendants also

announced that Loudeye’s cash flow from operations was insufficient to support the Company.

These belated disclosures had an immediate, adverse impact on the price of Loudeye shares.

166. These belated revelations also evidenced defendants’ prior falsification of

Loudeye’s business prospects due to defendants’ false statements. As investors and the market

ultimately learned, the Company’s prior business prospects had been overstated and its costs

understated. As this adverse information became known to investors, the prior artificial

inflation began to be eliminated from Loudeye’s share price, and plaintiffs and the other

members of the class were damaged as a result of the related share price decline.




167. As a direct result of defendants’ statements on November 9, 2005, which

indicated that Loudeye was performing well below guidance the Company’s stock price

collapsed to below $4.00 per share, from over $8.00 per share in the days prior to these

disclosures—a decline of almost 50%, on very heavy trading volume. This dramatic share

price decline eradicated much of the artificial inflation from Loudeye’s share price, causing real

economic loss to investors who purchased this stock during the Class Period. In sum, as the


truth about defendants’ fraud and illegal course of conduct became known to investors, and as

the artificial inflation in the price of Loudeye shares was eliminated, plaintiffs and the other

members of the Class were damaged, suffering an economic loss of approximately $4.00 to

$20.00 per share.

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168. The decline in Loudeye’s stock price at the end of the Class Period was a direct

result of the nature and extend of defendants’ fraud being revealed to investors and to the

market. The timing and magnitude of Loudeye’s stock price decline negates any inference that

the losses suffered by plaintiffs and the other members of the Class was caused by changed

market conditions, macroeconomic or industry factors or even Company-specific facts

unrelated to defendants’ fraudulent conduct. During the same period in which Loudeye’s share

price fell over 50% as a result of defendants’ fraud being revealed, the Standard & Poor’s 500

securities index was relatively unchanged. The economic loss, i.e. damages suffered by

plaintiffs and other members of the Class, was a direct result of defendants’ fraudulent scheme

to artificially inflate the price of Loudeye’s stock and the subsequent significant decline in the

value of the Company’s shares when defendants’ prior misstatements and other fraudulent

conduct was revealed.




169. The chart below graphically and dramatically illustrates how defendants’

fraudulent scheme caused plaintiffs’ and the class members’ economic loss:


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ADDITIONAL SCIENTER ALLEGATIONS




170. As alleged herein, defendants acted with scienter in that each defendant knew

that the public documents and statements issued or disseminated in the name of the Company

were materially false and misleading; knew that such statements or documents would be issued

or 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. As set forth elsewhere herein in detail, defendants, by

virtue of their receipt of information reflecting the true facts regarding Loudeye, their control

over, and/or receipt and/or modification of Loudeye’s allegedly materially misleading

misstatements and/or their associations with the Company which made them privy to

confidential proprietary information concerning Loudeye, participated in the fraudulent scheme

alleged herein.

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171. Defendants were motivated to materially misrepresent to the SEC and investors

the true financial condition of the Company because it: (i) deceived the investing public

regarding Loudeye’s business, operations, management and the intrinsic value of Loudeye

common stock; (ii) enabled defendants to raise almost $60 million through the sale of stock and

warrants to private equity investors during the Class Period; (iii) enabled defendants also to use

almost $25 million of its artificially-inflated shares to purchase the once valuable assets of

companies such as Overpeer, Inc. and OD2 during the Class Period; and (iv) caused plaintiffs

and other members of the Class to purchase Loudeye common stock at artificially-inflated

prices.

Applicability Of Presumption Of Reliance: Fraud-On-The-Market Doctrine




172. Throughout the Class Period, the market for Loudeye’s common stock was

open, well-developed and efficient. As a result of these materially false and misleading

statements and failures to disclose, Loudeye common stock traded at artificially-inflated prices

during the Class Period. Plaintiffs and other members of the Class purchased or otherwise

acquired Loudeye common stocking upon the integrity of the market price of Loudeye common

stock and market information relating to Loudeye, and have been damaged thereby.


173. At all relevant times, the market for Loudeye’s common stock was an efficient

market for the following reasons, among others:

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• Loudeye’s stock met the requirements for listing, and was listed and

actively traded on the Nasdaq national market exchange, a highly efficient and automated

market;

• As a regulated issuer, Loudeye filed periodic public reports with the SEC

and the Nasdaq;

• Loudeye 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

• Loudeye was followed by several securities analysts employed by major

brokerage firm(s) who wrote reports which were distributed to the sales force and certain

customers of their respective brokerage firm(s). Each of these reports was publicly available

and entered the public marketplace.




174. As a result of the foregoing, the market for Loudeye securities promptly

digested current information regarding Loudeye from all publicly available sources and

reflected such information in Loudeye stock price. Under these circumstances, all purchasers of

Loudeye common stock during the Class Period suffered similar injury through their purchase

of Loudeye common stock at artificially inflated prices and a presumption of reliance applies.


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NO SAFE HARBOR

175. 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.

Many of the specific statements pleaded herein 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 Loudeye who knew that

those statements were false when made.

BASIS OF ALLEGATIONS




176. Plaintiffs have alleged the following based upon the investigation of plaintiffs’

counsel, which included a review of SEC filings by Loudeye, as well as regulatory filings and

reports, securities analysts’ reports and advisories about the Company, press releases and other

public statements issued by the Company, and media reports about the Company, and plaintiffs

believe that substantial additional evidentiary support will exist for the allegations set forth

herein after a reasonable opportunity for discovery.


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COUNT I Violation Of Section 10(b) Of

The Exchange Act And Rule 10b-5 Promulgated Thereunder Against All Defendants

177. Plaintiffs repeat and reallege each and every allegation contained above as if

fully set forth herein.

178. During the Class Period, defendants carried out a plan, scheme and course of

conduct which was intended to and, throughout the Class Period, did: (i) deceive the investing

public regarding Loudeye’s business, operations, management and the intrinsic value of

Loudeye common stock; (ii) enable defendants to raise almost $60 million through the sale of

stock and warrants to private equity investors during the Class Period; (iii) enable defendants

also to use almost $25 million of Loudeye’s artificially-inflated shares to purchase the once-

valuable assets of companies such as Overpeer and OD2 during the Class Period; and (iv)

caused plaintiffs and other members of the Class to purchase Loudeye common stock at

artificially-inflated prices. In furtherance of this unlawful scheme, plan and course of conduct,

defendants, jointly and individually (and each of them) took the actions set forth herein.




179. 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 the Company’s common stock in an effort

to maintain artificially high market prices for Loudeye’s common stock in violation of Section

10(b) of the Exchange Act and Rule 10b-5. All defendants are sued either as primary

participants in the wrongful and illegal conduct charged herein or as controlling persons as

alleged below.


180. 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 the business,

operations and future prospects of Loudeye as specified herein.

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181. These 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 Loudeye’s value and

performance and continued substantial growth, 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 Loudeye and its business operations

and future prospects 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 Loudeye

common stock during the Class Period.




182. Each of the Individual Defendants’ primary liability, and controlling person

liability, arises from the following facts: (i) the Individual Defendants were high-level

executives and/or directors at the Company during the Class Period and members of the

Company’s management team or had control thereof; (ii) each of these defendants, by virtue of

his 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 internal

budgets, plans, projections and/or reports; (iii) each of these defendants enjoyed significant

personal contact and familiarity with the other defendants and was advised of and had access to

other members of the Company’s management team, internal reports and other data and


information about the Company’s finances, operations, and sales at all relevant times; and

(iv) each of these defendants was aware of the Company’s dissemination of information to the

investing public which they knew or deliberately disregarded was materially false and

misleading.

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183. The defendants had actual knowledge of the misrepresentations and omissions

of material facts set forth herein, or acted with deliberate disregard for the truth in that they

failed to ascertain and to disclose such facts. Such defendants’ material misrepresentations

and/or omissions were done knowingly and/or with deliberate disregard of the truth for the

purpose and effect of concealing Loudeye’s operating condition and future business prospects

from the investing public and supporting the artificially inflated price of its common stock. As

demonstrated by defendants’ overstatements and misstatements of the Company’s business,

operations and earnings throughout the Class Period, defendants, if they did not have actual

knowledge of the misrepresentations and omissions alleged, deliberately disregarded the truth

by failing to taking those steps necessary to discover whether those statements were false or

misleading.




184. 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

Loudeye common stock was artificially inflated during the Class Period. In ignorance of the

fact that market prices of Loudeye’s publicly-traded common stock were artificially inflated,

and relying directly or indirectly on the false and misleading statements made by defendants, or

upon the integrity of the market in which the securities trade, and/or on the absence of material

adverse information that was known to or deliberately disregarded by defendants but not

disclosed in public statements by defendants during the Class Period, plaintiffs and the other


members of the Class acquired Loudeye common stock during the Class Period at artificially-

high prices and were damaged thereby.

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185. 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 truth regarding

the problems that Loudeye was experiencing, which were not disclosed by defendants,

plaintiffs and other members of the Class would not have purchased or otherwise acquired their

Loudeye common stock, or, if they had acquired such common stock during the Class Period,

they would not have done so at the artificially inflated prices which they paid.

186. By virtue of the foregoing, defendants have violated Section 10(b) of the

Exchange Act, and Rule 10b-5 promulgated thereunder.

187. As a direct and proximate result of defendants’ wrongful conduct, plaintiffs and

the other members of the Class suffered damages in connection with their respective purchases

and sales of the Company’s common stock during the Class Period.

COUNT II Violation Of Section 20(a) Of

The Exchange Act Against Individual Defendants

188. Plaintiffs repeat and reallege each and every allegation contained above as if

fully set forth herein.




189. The Individual Defendants acted as controlling persons of Loudeye within the

meaning of Section 20(a) of the Exchange Act as alleged herein. By virtue of their high-level

positions, and their ownership and contractual rights, participation in and/or awareness of the

Company’s operations and/or intimate knowledge of the false financial statements filed by the

Company with the SEC and disseminated to the investing public, 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 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.

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190. In particular, each of these defendants had direct and supervisory involvement in

the day-to-day operations of the Company and, therefore, is 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.

191. As set forth above, Loudeye and the Individual Defendants each violated

Section 10(b) and Rule 10b-5 by their acts and omissions as alleged in this Complaint. By

virtue of their positions as controlling persons, the Individual Defendants are liable pursuant to

Section 20(a) of the Exchange Act. As a direct and proximate result of defendants’ wrongful

conduct, plaintiffs and other members of the Class suffered damages in connection with their

purchases of the Company’s common stock during the Class Period.

WHEREFORE, plaintiffs pray for relief and judgment, as follows:

A. Determining that this action is a proper class action and certifying

plaintiffs as class representatives under Rule 23 of the Federal Rules of Civil Procedure;




B. Awarding compensatory damages in favor of plaintiffs and the other

Class members against all defendants, jointly and severally, for all damages sustained as a

result of defendants’ wrongdoing, in an amount to be proven at trial, including interest thereon;


C. Awarding plaintiffs and the Class their reasonable costs and expenses

incurred in this action, including counsel fees and expert fees;

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D. Awarding extraordinary, equitable and/or injunctive relief as permitted

by law, equity and the federal statutory provisions sued hereunder, pursuant to Rules 64 and 65

and any appropriate state law remedies to assure that the Class has an effective remedy; and

E. Such other and further relief as the Court may deem just and proper.

JURY TRIAL DEMANDED

Plaintiffs hereby demand a trial by jury.

Dated: March 9, 2007

KAHN GAUTHIER SWICK, LLC By: /s/ Kim E. Miller Kim E. Miller (admitted pro hac vice) [email protected] Michael A. Swick [email protected]

12 E. 41st Street, 12th Floor New York, New York 10017 Tel: 212.920.4310 Fax: 504.455.1498 -and- Lewis S. Kahn

[email protected] 650 Poydras Street, Suite 2150 New Orleans, LA 70130 Telephone: 504.455.1400 Facsimile: 504.455.1498 Lead Counsel for Lead Plaintiffs and the Class TOUSLEY BRAIN STEPHENS PLLC David D. Hoff, WSBA #99 [email protected]




Janissa A. Strabuk, WSBA #21827


mailto:[email protected]

[email protected]

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1700 Seventh Street, Suite 2200 Seattle, Washington 98101 Tel: 206.682.5600 Liaison Counsel for the Class






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CERTIFICATE OF SERVICE

I hereby certify that on March 9, 2007, I filed this Amended Consolidated Complaint on

the CM/ECF system, which will send notification of such filing to the following person:

Stephen M. Rummage Email: [email protected]

Davis Wright Tremaine LLP 2600 Century Square 1501 Fourth Avenue

Seattle, WA 98101-1688 Tel: 206.628.7513 Fax: 206.628.7699

Dated this 9th day of March, 2007.

KAHN GAUTHIER SWICK, LLC By: /s/ Kim E. Miller Kim E. Miller (admitted pro hac vice) [email protected] Michael A. Swick [email protected]

12 E. 41st Street, 12th Floor New York, New York 10017 Tel: 212.920.4310 Fax: 504.455.1498 -and- Lewis S. Kahn

[email protected] 650 Poydras Street, Suite 2150 New Orleans, LA 70130 Telephone: 504.455.1400 Facsimile: 504.455.1498 Lead Counsel for Lead Plaintiffs and the Class




