Pet Quarters said it was seeking $400 million in damages.
Ivan Kronenfeld, a spokesman for a consortium of three Texas law firms that filed the suit, said it was one of more than 20 similar cases filed by the group. The cases charge involvement of some investment firms in various forms of stock fraud that target small companies throughout the United States.
Sherwood, Arkansas-based Pet Quarters, a former pet supply company, claims the parties named in the suit posed as investors by acquiring convertible securities, common stock and warrants then profited by deliberately driving down the company's stock price. The tactic is commonly referred to as "death spiral" finance.
In "death spiral" finance, the lower the stock price, the more shares can be acquired at conversion, which gives some investors incentive to pressure the issuer's stock price.
A company's stock price can plunge if ensnared in the scheme.
New York-based investment bank Ladenburg Thalmann & Co, Inc is one of several firms named in the suit, which was filed on July 21 in the US District Court for the Eastern District of Arkansas, Western Division. Ladenburg Thalmann representatives did not immediately return calls seeking comment.
Badian and Rhino Advisors were the subject of a US Securities and Exchange Commission civil action, which they settled for $1 million in February 2003. In a statement at the time of the settlement, the SEC said Badian directed a series of manipulative short sales aimed at shares of software company Sedona Corp. A short-seller profits from betting that a stock will fall. According to Pet Quarters' suit, Badian is a fugitive.