MusicSource U.S.A. Sues Over Alleged Stock Scam : Courts: Newport sheet music retailer says it lost millions when New York investment firm dumped 1.6 million shares on market.

An Orange County company that makes computerized retail kiosks for dispensing sheet music is suing a New York investment company and several law firms and individuals over what it alleges was a massive stock swindle that cost it and its investors millions of dollars in seed money.

MusicSource U.S.A. Inc., based in Newport Beach, alleges in its lawsuits that investment firm Marsh Block & Co. participated in a scheme to defraud it of 1.6 million shares, or slightly more than half its total stock. The shares subsequently were dumped onto the market, the suits allege, causing the value to plunge.

Jeffrey S. Benice, whose Irvine law firm is handling the case, said what happened to MusicSource “is an example of what regularly goes on” in the so-called small-cap market, where start-up companies hungry for working capital generally go to look for funds.

One suit seeks $5 million in damages for MusicSource. A second, class-action suit seeks up to $8 million on behalf of individual investors whose stock plummeted because of the dumping.

In a motion filed earlier this week, MusicSource asked U.S. District Judge Alicemarie Stottler to declare that Marsh Block principal Kenneth Marsh illegally took the stock from an escrow account and helped dump more than 1 million of MusicSource’s common shares on the market from December through early February.

The massive selloff caused the price of MusicSource’s shares to plummet from $2 a share to just 30 cents, the suit alleges.

“Dumping that much stock has caused serious problems for MusicSource,” said Anton Rosandic, one of the company’s lawyers. “It has been hard for them to find new investors because people see what happened to the stock prices and think they are poor managers.”

Marsh Block, which has two offices and 15 brokers, has denied the allegations.

Shares of MusicSource, which went public at $5 in February, 1993, had dropped to as low as 19 cents by this February, Rosandic said. In Wednesday’s trading on the Nasdaq market, the stock closed at 37.5 cents a share.

Stottler is considering a motion for a so-called summary judgment against Marsh Block and Kenneth Marsh and has not said when she expects to issue a ruling. Actions against the other defendants will be pursued in the original suit, filed in February and awaiting a trial date.

In that suit, MusicSource seeks $5 million in actual damages and unspecified punitive damages against 16 defendants--everyone who participated in the complicated private stock issue that Marsh Block allegedly helped arrange.

The company’s suit and the class action filed last month in the federal court’s Santa Ana office allege that Marsh Block persuaded MusicSource to raise working capital in November by issuing 1.6 million shares of its common stock to a new company called M&M; Investments for $1.44 million cash--90 cents a share--and a variety of management and financial consulting services. The stock was trading at about $2 a share at the time, according to the suits. M&M; was formed to help execute a stock scam, the suit alleges.

The negotiable share certificates were placed in an escrow account handled by Kenneth Marsh, who was not to release the shares to M&M; until the cash was received by MusicSource, the suit states.

But MusicSource alleges that Marsh, who also was a principal of M&M;, violated the written escrow instructions and transferred the shares to M&M;, which immediately sold most of them on the open market at steeply discounted prices.

M&M; subsequently denied selling the shares, and a principal of the investment company attempted in December to call a special meeting of MusicSource shareholders and M&M; to use the 1.6-million-share block of stock to vote MusicSource chairman Dale Jacobs out of office, the suit alleges. The company’s other directors blocked the move, however.

“If they’d been able to oust the regular management and taken over the company,” Benice said, “the entire scam could have been camouflaged.”