When the IPO was issued, Sterling Foster bought up the majority of the shares, and then resold 3.375 million shares, 2.3 million more than it actually owned. At the time the IPO registration became effective, 2.4 million insider shares had been sold and pre-registered, but that sale was locked up for a 12-month period. About a week later, the underwriter waived the lockup period. Sterling Foster had bought the shares for $3.25 each, and was thus able to meet its obligation to deliver the additional shares to Bear Stearns.

After the case was dismissed at the district court level, the U.S. Court of Appeals recently reinstated it. The court noted that when Sterling Foster and covered its short position, it made a profit consisting of the difference between the price at which it sold the shares to the public ($24 to $15 per share) and the price it paid to the Selling Insiders ($3.25 per shares), a total of approximately $24 million.

According to the court, the market manipulation scheme --plus misrepresentations in the offering documents that underwriter Patterson Travis did not have an agreement with the selling insiders regarding the lockup period-- caused the investing public to believe that only 1.1 million shares of ML Direct were being offered. In fact," the court recounted, "three times that number of shares were being sold, most via short sale at inflated prices. ... Indeed, the investing public believed that the market had set the price of $13 to $15 per share when, in fact, that price had been artificially created by Sterling Foster, which was at the same time purchasing shares from the Selling Insiders at only $3.25 per share."

The action contends that Bear Stearns knew of Sterling Foster's role in the fraud and facilitated the improper transactions through its role as clearing broker. Bear Stearns allegedly received $23 for each trade of ML Direct by Sterling Foster that it cleared.