UNITED STATES DISTRICT COURT

EASTERN DISTRICT OF PENNSYLVANIA

QINGSHAN (JACK) ZENG,

Plaintiff,

Civil Action No.______v.

CDNOW, INC., JONATHAN DIAMOND, , JOEL SUSSMAN, MATTHEW OLIM, JOHN REGAN AND PATRICK KERINS,

Jury Trial Demanded

Defendants.

CLASS ACTION COMPLAINT

Plaintiff, by his attorneys, as and for his Class Action Complaint, alleges the following upon personal knowledge as to himself and his acts and as to all other matters upon information and belief based upon, inter alia, the investigation made by and through his attorneys, including a review of the public filings of CDnow, Inc. ("CDnow" or the "Company") with the United States Securities and Exchange Commission ("SEC"), as well as published reports and news articles.

JURISDICTION AND VENUE

1. This Court has jurisdiction over the subject matter of this action pursuant to Section 27 of the Securities Exchange Act of 1934 (the "Exchange Act"), 15 U.S.C. §78aa, and 28 U.S.C. §1331. The claims asserted herein arise under Sections 10(b), 14(e) and 20(a) of the Exchange Act, and Rules 10b-5 and 14D-9, promulgated thereunder by the SEC.

2. Venue is proper in this Judicial District pursuant to Section 27 of the Exchange Act and 28 U.S.C. §1391(b). Many of the acts and transactions giving rise to the violations of law complained of herein, including the preparation and dissemination to the investing public of false and misleading information, occurred in this Judicial District. In addition, CDnow maintains its principal executive offices within this Judicial District.

3. In connection with the acts, conduct and other wrongs alleged in this Complaint, the defendants, directly and indirectly, used the means and instrumentalities of interstate commerce, including the mails, telephone communications and the facilities of national securities exchanges.

NATURE OF THE ACTION

4. This is a securities class action brought by plaintiff on behalf of himself and all persons as described below (the "Class"), other than the defendants and related parties, who purchased CDnow securities from January 28, 2000 to March 28, 2000, with respect to Counts I and II. Count III is brought on behalf of all holders of CDnow common stock on July 26, 2000 and their successors in interest until the August 22, 2000 close of the tender offer by , Inc. ("Bertelsmann").

5. Defendants' public misrepresentations and omissions of material adverse information regarding CDnow's financial condition were known to them, or were recklessly disregarded by them and caused the market price of CDnow securities to be artificially inflated during the Class Period.

6. Each of the defendants either knew or recklessly disregarded that the statements and omissions described below were false and misleading; that such statements would adversely affect the integrity of the market for CDnow's securities; and that such statements would deceive investors into purchasing CDnow securities at artificially inflated prices.

THE PARTIES

7. During the Class Period, plaintiff and each member of the Class purchased CDnow securities without knowledge of the false and misleading statements and omissions of the defendants and without knowledge that the price of CDnow securities was artificially inflated during the Class Period, and has suffered damages as a result. During the Class Period, plaintiff and each member of the Class directly or indirectly relied upon the defendants' public reports, press releases, filings with the SEC and other public statements, as more fully described below, and the fact that CDnow securities were fairly priced and/or upon the integrity of the market for CDnow securities. As a result, plaintiff and each member of the Class has been damaged by the defendants' wrongful conduct.

8. Plaintiff Qingshan Zeng purchased shares of CDnow common stock during the Class Period for Counts I and II, and is a present holder of CDnow common stock, as set forth in its accompanying certification, and was damaged thereby as set forth herein. 9. Defendant CDnow is a corporation organized and existing under the laws of the State of Pennsylvania, with its principal executive offices located at 1005 Virginia Drive, Ft. Washington, PA 19034. It is a leading retailer of CDS and other music-related products which it sells through its online retail store. CDnow became a public company in February 1998 when it sold approximately 4.56 million shares of its common stock at $10.00 per share a secondary offering of 1.25 million shares at $18.50 per share followed in July 1998. A leading electronic commerce retailer of pre-recorded music, including compact discs ("CDS"), its revenue is derived from the sale of pre-recorded music, other entertainment-related products and advertising on the Internet.

10. Jonathan Diamond ("Diamond") is and was, at all relevant times, the Chairman of CDnow's Board of Directors. He is the beneficial owner of 663,382 shares of CDnow common stock and warrants to purchase 335,646 shares, or 3% of the Company.

11. Defendant Jason Olim ("Olim") is and was, at all relevant times, a co-founder of CDnow with his brother Matthew and the President and Chief Executive Officer of CDnow. He is the beneficial owner of 2,960,025 shares of CDnow common stock, or 9% of the Company.

12. Defendant Joel Sussman ("Sussman") is and was, at all relevant times, the Vice President and Chief Financial Officer of CDnow. He is the beneficial owner of 37,731 shares of CDnow common stock and warrants.

13. Defendant Matthew Olim ("Matthew Olim") is and was, at all relevant times, a co-founder of CDnow with his brother Jason Olim, its Technical Head and a CDnow director. He beneficially owns 2,960,025 shares of CDnow stock, or 9% of the Company.

14. Defendant John Regan ("Regan") is and was, at all relevant times, a CDnow director and a member of the Audit Committee of its board of directors.

15. Defendant Patrick Kerins ("Kerins") is and was, at all relevant times and until his June 14, 2000 resignation, a member of the Company's board of directors and of its Audit Committee.

16. The Company's Audit Committee was charged with a number of responsibilities including, as stated in its CDnow's Schedule 14D-9 filed with the SEC on July 26, 2000, "review[ing] with CDnow's independent public accountants the plans for and results of their auditing engagement . . " Thus, defendants Kerins and Regan were aware, at least as early as January 28, 2000, of Andersen's "going concern" qualification, discussed in detail below.

17. Defendants Diamond, Jason Olim and Matthew Olim, Sussman, Regan and Kerins are sometimes collectively referred to herein as the "Individual Defendants."

18. As officers, directors and/or controlling persons of a publicly-held company, including the Company's Chief Executive Officer, Chief Operating Officer and Chairman of the Board of Directors, and members of the Audit Committee with the above-specified duties, the Individual Defendants had a duty to promptly disseminate accurate and truthful information with respect to the Company's operations, finances, financial condition and present and future business prospects, to correct any previously issued statements from any source that had become untrue, and to disclose any trends that would materially affect earnings and the present and future financial operating results of CDnow, so that the market price of the Company's publicly traded securities would be based upon truthful and accurate information.

19. During the Class Period, the Individual Defendants, as CDnow's top executives (including co-founders Jason and Matthew Olim who, working closely together, were integrally involved in the day-to-day management of CDnow), and members of its Audit Committee (and Diamond as its Chairman of the Board) were privy to confidential and proprietary information concerning CDnow, its operations, finances, financial condition, trends and present and future business prospects, including the status of its merger with Columbia House (discussed in detail below). Because of their possession of such information, each of these defendants knew or recklessly disregarded the fact that the adverse facts specified herein had not been disclosed to, and were being concealed from, the public. Because of their executive and managerial positions (and Diamond's position as Chairman of CDnow's Board, and Regan and Kerins membership on the Audit Committee), each of the Individual Defendants had access to adverse non-public information about CDnow's operations, finances and financial condition via access to internal corporate documents, ongoing conversations and connections with other corporate officers and employees, attendance at management and Board of Directors meetings and committees thereof, and via reports and other information provided to them in connection therewith. Because of their possession of such information, each of these defendants knew or recklessly disregarded that the adverse facts specified herein had not been disclosed to, and were being concealed from, the public.

20. 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 contents of the various quarterly reports, SEC filings, press releases and presentations to securities analysts pertaining to the Company. Each of the Individual Defendants was provided with copies of CDnow's management reports, press releases and SEC filings alleged herein to be misleading prior to, or shortly after their issuance and had the ability and opportunity to prevent their issuance or cause them to be corrected. As a result, each of the Individual Defendants is responsible for the accuracy of the public reports and releases detailed herein as "group published" information, and is therefore responsible and liable for the representations contained therein.

21. Each of the defendants is liable as a direct participant in, and a co-conspirator with respect to the wrongs complained of herein. In addition, the Individual Defendants, by reason of their status as directors and officers of CDnow as well as their large stock holdings (with Diamond, Jason Olim and Matthew Olim owning a total of 21% of the Company's common stock), were "controlling persons" within the meaning Section 20 of the Exchange Act and had the power and influence to cause CDnow to engage in the unlawful conduct complained of herein. Because of their positions of control, these defendants were able to and did, directly or indirectly, control the conduct of CDnow's business, the information contained in its filings with the SEC, and public statements about its business.

22. During the Class Period, the defendants, individually and in concert, directly and indirectly, engaged and participated in a continuous course of conduct to misrepresent the results of CDnow's operations, and to conceal adverse material information regarding the financial condition of CDnow and its impact on its announced merger with Columbia House, as specified herein. The defendants employed devices, schemes, and artifices to defraud, and engaged in acts, practices, and a course of conduct as herein alleged in an effort to increase and maintain an artificially high market price CDnow securities. This included the formulation, making, and/or participation in the making of untrue statements of material facts, and the omission to state material facts necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading, which operated as a fraud and deceit upon plaintiffs and the other members of the Class.

CLASS ACTION ALLEGATIONS

23. Plaintiff brings this case as a class action pursuant to Rule 23 of the Federal Rules of Civil Procedure. With respect to Counts I and II, the claims are brought on behalf of himself and all other persons who purchased CDnow securities from January 28, 2000 through March 28, 2000 and who were damaged thereby. With respect to Count III, the claims are brought on behalf of all owners of CDnow common stock on July 26, 2000 and their successors in interest until the August 22, 2000 vote on the Bertelsmann, Inc. tender offer. Excluded from the Classes are CDnow, its subsidiaries and affiliates, the Individual Defendants, members of the immediate families of each of the Individual Defendants, any entities in which any of the defendants have a controlling interest, and the legal representatives, heirs, successors, predecessors in interest, affiliates or assigns of any of the defendants.

24. This action is properly maintainable as a class action because: a. During the Class Periods, in excess of 32.9 million shares of CDnow were outstanding. Its stock was actively traded on the NASDAQ during the Class Periods, an impersonal and efficient trading market. The members of the Class for whose benefit this action is brought are dispersed throughout the United States, and are so numerous that joinder of all Class members is impracticable. Thousands of CDnow shares were publicly traded during the Class Periods and, upon information and belief, there are hundreds of members of the Class; b. Plaintiff's claims are typical of the claims of the other members of the Class, and plaintiffs and all members of the Class sustained damages as a result of the defendants' wrongful conduct complained of herein; c. Plaintiff is a representative party who will fairly and adequately protect the interests of the other members of the Class, and has retained counsel competent and experienced in class action securities litigation. Plaintiff has no interests antagonistic to, or in conflict with, the Class he seeks to represent; d. A class action is superior to other available methods for the fair and efficient adjudication of the claims asserted herein, because joinder of all members is impracticable. Furthermore, because the damages suffered by the individual Class members may be relatively small, the expense and burden of individual litigation make it virtually impossible for the Class members to separately redress the wrongs done to them. The likelihood of individual Class members prosecuting separate claims is remote;

e. Plaintiff anticipates no unusual difficulties in the management of this action as a class action; and f. The questions of law and fact common to the members of the Class predominate over any questions affecting any individual members of the Class.

25. The questions of law and fact which are common to the Class include, among others:

a. Whether the federal securities laws were violated by the defendants' acts as alleged herein; b. Whether the documents, releases, reports and/or statements disseminated to the investing public and to CDnow security holders during the Class Period applicable to Counts I and II omitted or misrepresented material facts about the financial condition, business and income of CDnow and whether with respect to Count III, the Schedule 14D-9 omitted or misrepresented material facts about the reason for the termination of its merger with Columbia House, as described below;

c. Whether the defendants acted with knowledge or with reckless disregard for the truth in omitting to state and/or misrepresenting material facts;

d. Whether, during the Class Period applicable to Counts I and II, the market price of CDnow securities were artificially inflated due to the non-disclosures and/or material misrepresentations complained of herein; e. Whether the defendants participated in and pursued the common course of conduct complained of herein; and f. Whether the members of the Class have sustained damages and, if so, what is the proper measure thereof.

26. With respect to Counts I and II, plaintiff will rely, in part, upon the presumption of reliance established by the fraud-on-market doctrine. The market for CDnow common stock was at all times an efficient market for the following reasons, among others: a. CDnow met the requirements for listing, and was listed on the Nasdaq, a highly efficient and automated market; b. As a regulated issuer, CDnow filed periodic public reports with the SEC; c. CDnow's trading volume was substantial during the Class Period; d. CDnow was followed by various securities analysts who wrote reports which were available through various automated data retrieval services; e. CDnow information was disseminated on a market-wide basis through various electronic media services, including issuing press releases through various wire services; and

f. The market price of CDnow securities reacted efficiently to new information entering the market.

27. The foregoing facts clearly indicate the existence of an efficient market for trading of CDnow and make applicable the fraud-on-the-market doctrine. Similarly, plaintiffs and the other members of the Class are entitled to a presumption of reliance with respect to the misstatements and omissions alleged herein.

SUBSTANTIVE ALLEGATIONS

28. On July 13, 1999, CDnow, Corporation of America ("Sony") and Time Warner, Inc. ("Time Warner") announced that on July 12, 1999, they had entered into a merger agreement pursuant to which they would combine the business of CDnow with that of Columbia House, the leading club-based retailer of music and videos, which is owned equally by Sony and Time Warner.

29. Pursuant to the July 12, 1999 Agreement of Merger and Contribution ("Merger Agreement"), CDnow, Time Warner Inc. and Sony agreed to combine the businesses of CDnow and Columbia House. The new company was to be owned 26% by CDnow's shareholders immediately before the merger, 37% by Time Warner and 37% by Sony. The new company was to be organized to include two separate divisions: an online/retail division and a club division.

30. Under the Merger Agreement, CDnow would be merged with a subsidiary of a new holding company formed for that purpose. Upon consummation of the merger, CDnow shareholders would receive one share of Class A common stock of the new company for each share of CDnow common stock they owned. The Class A common stock would be publicly traded. The Merger Agreement also provided that, simultaneously with the merger, Time Warner and Sony would cause their relevant subsidiaries to contribute their interests in Columbia House to the new company, in exchange for shares of Class B common stock of the new company which, together with other of their interests in the new company, would represent 74% ownership and control of the new company. The Class B common stock would not be publicly traded, but will be convertible into Class A common stock on a 1-for-1 share basis. After the closing, CDnow and Columbia House will become wholly-owned subsidiaries of the new company.

31. Upon the signing of the Merger Agreement, CDnow entered into a Stock Option Agreement granting Time Warner and Sony an irrevocable option to purchase 4,531,721 shares of CDnow common stock at an exercise price of $17.9689 per share, Time Warner and Sony could only exercise the option under circumstances where they would be entitled to receive a termination fee. Time Warner and Sony would be entitled to a $19 million termination file only if CDnow received another takeover proposal and other additional conditions are met.

32. The Merger Agreement provides, inter alia, at Section 3.06, that

CDnow has no liabilities or obligations required by GAAP to be disclosed in its balance sheets or the notes thereto, that could reasonably be expected to have a "Material Adverse Affect." (defined as being on the "business, assets, condition . . . or results of operations of such party.)

33. Section 8.01 of the Merger Agreement, which addresses the preparation of the Form S-4 and the Proxy Statement, provided that "as soon as practicable" following the date of the Merger Agreement, that CDnow, Time Warner, Sony and Holdco (the Sony-Time Warner merger vehicle) would prepare and file, with the SEC, the Form S-4 (in which the Proxy Statement would be included), Section 8.01(d) provides that, as soon as practicable after the date of the Merger Agreement, CDnow was to establish a record date for, and call for and hold a meeting of its shareholders to obtain shareholder approval for the Merger. However, to the best of plaintiffs' knowledge, no such S-4 filing was made, and CDnow never called a meeting of its shareholders regarding the merger.

34. Section 8.01(e) of the Merger Agreement provided that CDnow was to deliver to Sony and Time Warner, within two days before the date on which the S-4 was to become effective, a comfort letter from LLP ("Andersen"), CDnow's independent auditors, in the customary form for independent public accountants, and that CDnow would receive the same letter from Ernst & Young LLP, Columbia House's independent auditors.

35. Section 8.02 provided that CDnow was to provide to Time Warner and Sony, and Columbia House was to provide to CDnow, access to one another's books and records.

36. Section 8.03 provided that CDnow must give "prompt notice" to Time Warner and Sony of any representation or warranty made by it that is qualified as "to materially becoming untrue or inaccurate" or its failure to satisfy, in any material respect, any condition to be complied with or satisfied by it under any of the Transaction Agreements.

37. Section 8.08 provided, in pertinent part:

Public Announcements. Time Warner and Sony, on the one hand, and CDnow, on the other hand, shall consult with each other before issuing, and provide each other the opportunity to review and comment upon, any press release or other public statements with respect to the Transactions, and CDnow shall not issue any such press release or make any such public statement without the prior approval of each of Time Warner and Sony.

38. Section 8.14 of the Merger Agreement provided that if the merger has not been consummated by December 15, 1999 Columbia House, or Time Warner and SMEI (the latter whose general partners are Time Warner and Sony entities) on a 50-50 basis, "shall make available to CDnow" a $30 million credit facility for working capital on December 15, 1999. This commitment was made "provided that the obligations of Columbia House, or Time Warner and SMEI shall be reduced, on a dollar for dollar basis, by the amount of any committed CDnow financing"; i.e., financing obtained by another lender(s).

39. Article IX of the Merger Agreement is entitled "Conditions Precedent" and addressed the conditions to the parties' obligations to consummate the Merger. They include that CDnow shall have obtained its shareholders' approval of the Merger, that the S-4 shall have become effective and that CDnow shall provide Time Warner and Sony with a certificate, signed by its chief executive and chief financial officers, that CDnow's representations and warranties and materially true and correct (Section 9.02(a). Pursuant to Sections 9.02 and 9.03, there can not have been any event or change that "has had or could reasonably be expected to have a Material Adverse Effect on CDnow or Columbia House."

40. Article X of the Merger Agreement provided for the termination of the agreement, inter alia,: a) by mutual consent of Time Warner, Sony and CDnow, or by Time Warner and Sony, on the one hand, or CDnow on the other, if the Merger, related transactions and contributions (of Time Warner and Sony to Hold Co.) are not consummated before March 13, 2000, unless the party seeking termination has breached any aspect of the Merger or related agreements; b) by Time Warner and Sony if CDnow breached or fails to perform under its representations and warranties in a material way; and c) by CDnow if Sony or Time Warner breaches or fails to perform under its representations or warranties in a material way.

41. In connection with the Merger Agreement, CDnow asked Time Warner and Sony ("Lenders") to make certain financing available to it to satisfy its working capital needs. The parties' agreement with respect thereto is reflected in their convertible Loan Agreement of July 12, 1999. That agreement provides for loans to CDnow of up to $30 million, beginning on December 15, 1999. If CDnow's aggregate cash and cash equivalents were less than $7.5 million, the Lenders had the option to convert the sum owed into CDnow shares, using a specified formula.

42. Pursuant to Section 5(c) of the Convertible Loan Agreement, CDnow agreed to provide the Lenders, no later than five (5) business days after receipt thereof, of

. . . copies of all management letters and reports submitted to the Borrower or any of its Subsidiaries by independent certified public accountants in connection with any annual, interim or special audit of the Borrower or any Subsidiary made by such accounts;

Thus, CDnow was required to notify Sony and Time Warner, no later than February 4, 2000, that on January 28, 2000 Andersen had advised CDnow of its "going concern" qualification, as set forth more fully below. 43. Similarly, pursuant to Section 5(e) of the Convertible Loan Agreement, CDnow was obligated to notify Sony and Time Warner, once it became aware of the existence of any Event of Default (defined to include each of CDnow's representations and warranties under Section 3 of the Merger Agreement). Since CDnow was obligated to notify the Lenders of any Material Adverse Effect, CDnow's receipt of Andersen's "going concern" qualification would have triggered CDnow's obligation to notify the Lenders immediately (and in any event within two business days which would have been February 1, 2000), in writing, of its receipt of Andersen's opinion and advise the Lenders what action it was taking, or was proposing to take, with respect thereto.

44. On July 13, 1999, the Merger was publicly announced. Time Warner's news release described it as follows:

Backed by two of the world's largest media companies, the merger will create a major entertainment, e-commerce and direct marketing company by bringing together a leading music web destination and the largest music and video club in the U.S. and Canada. Sony and Time Warner will make the new company an integral part of their overall e-commerce activities. CDnow shareholders will benefit from the new company's ability to leverage the cross- promotional strengths and full resources of Sony and Time Warner to lower its customer acquisition costs and boost its customer base, providing an e-commerce model with a sound economic basis.

45. Gerald Levin, Time Warner's Chairman and Chief Executive Officer, described the new company as "the centerpiece of our strong and growing presence in music and video e- commerce," as well as providing "an important platform for offering consumers the opportunity to order or download music instantly."

46. The July 13, 1999 release further explained that Columbia House would continue to operate as a "club membership" company, with CDnow continuing as an online retailer. The combination was viewed as capitalizing the companies' strengths - an enormous number of music titles, "e-tailing" and Columbia House's huge membership base - resulting in vast distribution channels for the product, as well as cross-promotional opportunities offered by the Sony and Time Warner combination.

47. Following CDnow's August 5, 1999 announcement of a $1.06 per share loss for the quarter ended June 30, 1999 (versus $.55 in the same quarter of the prior year), on September 22, 1999, it was announced that former president of MacMillin Publishing USA, Scott N. Flanders, was named to lead the planned integration of CDnow and Columbia House and become Chairman and CEO of the new company.

48. On November 12, 1999, CDnow filed its Form 10-Q for the quarter ended September 30, 1999 with the SEC. The filing followed its October 26, 1999 announced third quarter $1.13 per share loss (versus a loss of $.74 per share in the 1998 third quarter). In that filing, CDnow discussed the $30 million working capital commitment it received under the Merger Agreement and stated that the merger "is expected to be completed in the fourth quarter of 1999 or the first quarter of 2000." CDnow, Sony and Time Warner apparently believed that they could, as early as December 31, 1999 (just 1 1/2 months away) complete the work necessary to have the required documentation approved by the SEC and have the transaction approved by its shareholders. Thus, at that point in time, the parties to the merger believed SEC approval of their submitted documentation was imminent. However, due to the events that followed, the entire complexion of the Merger changed.

The Class Period Begins

49. On or before January 28, 2000, Andersen expressed, to defendants, its "substantial doubt" about CDnow's ability to stay in business to CDnow management. As set forth above, the terms of the Merger Agreement set forth above required that CDnow immediately inform its Merger partners of this material adverse event.

50. Despite the existence of Andersen's January 28, 2000 "going concern" qualification and related concerns, there was no disclosure of this material fact. In fact, less than one week later, CDnow issued its fourth quarter and 1999 year-end results with absolutely no mention thereof, and addressed the Merger status as though it was business as usual.

51. On February 3, 2000, CDnow issued a press release in which it reported that its revenues for the fourth quarter ended December 31, 1999 rose 154% from the same period in 1998, and that its net loss was $34.3 million, or $1.13 per share, compared to $12.9 million, or $.73 per share in the 1998 fourth quarter. For the full year 1999, the net loss was reported to be $119.2 million, or $4.32 per share, compared with $43.9 million, or $2.79 per share, for 1998. Despite Andersen's January 28, 2000 "going concern" qualification and related concerns, Jason Olim termed it "by many measures, our strongest quarter ever." The Company further stated that it "anticipates that the Merger will close in the second quarter of 2000, following receipt of regulatory approval by the FTC, clearance from the SEC, and shareholder approval. Thus, the market was given no indication of CDnow's "going concern" qualification and was assured the Merger was going forward.

52. On February 7, 2000, Columbia House issued a press release in which it said it would reorganize to place greater emphasis on electronic commerce. It said that when the CDnow merger is completed, there would be three divisions: Columbia House, Columbiahouse.com and CDnow.

53. Despite defendants' knowledge of Andersen's "going concern" qualification and other concerns, they failed to disclose it. Instead, while defendant Jason Olim made affirmatively misleading statements, the other defendants stood mute, despite their duty to disclose.

54. On March 13, 2000, the "drop dead" date for the Merger, Sony, Time Warner and CDnow announced that they had mutually agreed to terminate the Merger and entered into a Termination Agreement pursuant to 10.01(a) of the Merger Agreement (which allows for mutual termination of the transaction if it is not consummated by March 13, 2000). Under the Termination Agreement, Sony and Time Warner purchased 2,405,500 shares (1,202,750 shares each) of CDnow common stock for $21 million ($10.5 million each) and replaced their previously made $30 million short-term loan commitment with $30 million of long-term convertible debt (convertible at the holder's option at $10 per share). While the Merger Agreement requires no payment by Time Warner and Sony to CDnow if the agreement is mutually terminated, Time Warner and Sony purchased those shares in order to protect their existing investment in CDnow and to be released from the Merger Agreement.

55. Beginning on March 13, 2000, CDnow made repeated statements to the news media, including CNBC and , that the Merger termination was due to the poor financial condition of Columbia House. As reported by Dow Jones News Service on March 13, "CDnow said the merger termination was the best move for the company and its shareholders" and "Jason Olim said the merger with Columbia House fell apart because it didn't make financial sense to his company." Olim was quoted as stating, "we expected Columbia House to have adequate cash flow to fund the growth of the company," and that Columbia House's cash flows "are not what they were at the time of the agreement."

56. Olim told the news media, including the Philadelphia Inquirer and , that "All of us learned in the last 30 days that its [Columbia House] cash flow position and debt level were not what we thought it would be."

57. On March 13, 2000, CDnow held a teleconference in which Jason Olim reiterated the statements set forth above regarding Columbia House's financial condition being the cause of the Merger termination. During that call, he and defendant Sussman commented on, and answered questions relating to, the Company's financial condition. At no time did they disclose the Andersen "going concern" qualification.

58. Astoundingly, in a March 14, 2000 Hollywood Reporter interview, Jason Olim said that CDnow was disappointed the merger would not go through, "However, we feel the termination of the merger is the best move for CDnow and its shareholders."

59. In a March 15, 2000 article in the Philadelphia Inquirer, Jason Olim was quoted as saying "Ultimately, CDnow as a standalone entity is not going to create the same amount of value" as a combined company, but that the Company would "absolutely" survive without a partner." He added, "All in all, we're very comfortable that we have a viable plan to move forward." The statements were made despite Andersen's expressed view that CDnow was on the verge of bankruptcy.

60. While Olim was quick to blame Columbia House as the cause for the scrapped merger, Scott Flanders, Chairman and CEO of Columbia House was quoted in the March 25, 2000 issue of Billboard magazine as saying that while his company's revenue and profit declined "slightly" in 1999 from 1998, it is "strongly cash flow positive."

61. The statements made by Jason Olim and Sussman were materially false and misleading since, at the time they were made, each of them knew that: on or before January 28, 2000, Andersen had articulated its "going concern" qualification and related concerns; that the Andersen "going concern" qualification would impede the Merger with Columbia House because of CDnow's lack of certified financial statements; that Columbia House's financial condition was not the sole cause of the termination of the Merger; there was no way that CDnow could survive without an immediate merger partner; and that any CDnow merger type transaction would now be at a "bargain basement" price. At no time during the Class Period did defendants disclose any of the foregoing material information, despite their duty to do so.

62. The Merger had been viewed as an opportunity to shore up CDnow and give it greater marketing ability, while boosting Columbia House's online business. In July 1999, when the Merger was announced, CDnow had a market capitalization of $673 million, versus its $286 million market capitalization on March 13, 2000. When the Merger was announced, CDnow's stock price was at $22 1/4 per share, just off a 52-week high. When the Merger termination was announced, its stock price fell from a March 10, 2000 close (the last trading day before March 13, 2000) of $9-7/16 per share to a $6 31/32 per share close on March 14, 2000. CDnow's price dropped again, to a $3.50 per share closing price by March 29, 2000 (its 52 week low), following the announcement of its 1999 financials and Andersen's "going concern" qualification (described below), a $1.56 per share, or 31% drop.

63. Knowing or recklessly disregarding the materially misleading statements made by CDnow representatives, no defendant made any attempt to correct CDnow's statements about the termination of the Merger or disclose the contents of the Andersen opinion.

64. In its Form 10-K for the year ended December 31, 1999, filed with the SEC on March 28, 2000 ("1999 10-K"), the Company stated its belief that its current cash and cash equivalents were sufficient to meet its payment obligations until approximately September 30, 2000 and that it was actively seeking third party financing or another merger transaction. Its cash and cash equivalents were $20.6 million at December 31, 1999 (including the Time Warner - Sony infusion), compared to $49 million at December 31, 1998.

65. Without the funds it received under the Termination Agreement, CDnow would have been unable to continue in business. It had incurred significant net losses since its February 12, 1994 inception ($11.2 million, $43.9 million and $119.2 million in 1997, 1998 and 1999, respectively), and had a $37.2 million working capital deficit by December 31, 1999. Its cost of sales jumped 161% from $45.35 million in 1998 to $118 million in 1999 and its operating expenses nearly tripled, from approximately $57 million in 1998 to approximately $150.7 million in 1999. The Company's operating and development expenses jumped $15.4 million, or 193%, to $23.4 million from the year ended December 31, 1998 to December 31, 1999. Its sales and marketing expenses doubled from $44.6 million for the year ended December 31, 1998 to $89.7 million for the year ended December 31, 1999.

66. Included in CDnow's 1999 10-K is Andersen's "Report of Independent Public Accountants" ("Andersen Letter"). While the 1999 10-K was filed with the SEC on March 28, 2000, the Andersen Letter is dated January 28, 2000 except, as Andersen noted, "with respect to matters discussed in Note 1, as to which the date is March 16, 2000." (Note 1, entitled "The Company" simply describes CDnow and certain historical business and financial information). The Andersen Letter states that "the company has suffered recurring losses from operations, has a working capital deficiency and significant payments due in 2000 related to marketing agreements that raise substantial doubt about its ability to continue as a going concern." The Materially False and Misleading 14D-9

67. After the close of Nasdaq trading on July 19, 2000, CDnow announced the proposed acquisition of the Company by a wholly-owned subsidiary of Bertelsmann, Inc. for $3.00 per share. In addition to the merger agreement, CDnow and Bertelsmann entered into a convertible loan agreement whereby Bertelsmann will loan CDnow up to $42 million. The proceeds will be used to repay all amounts due Sony and Time Warner and to meet working capital needs. As stated in CDnow's July 26, 2000 Schedule 14D-9, filed with the SEC in response to the Bertelsmann offer (the "14D-9"), at page 4:

CDnow publicly stated on several occasions since the announcement of the termination of the proposed merger between CDnow and Columbia House on March 13, 2000 that it only had sufficient cash reserves to last until September 2000. CDnow's independent auditor issued a "going concern" qualification to its audit report in connection with its examination of CDnow's financial statements for the year ended December 31, 1999. CDnow's sources of cash include operating revenues and borrowings under the convertible loan agreement with Time Warner and Sony. As of July 13, 2000, CDnow had borrowed the maximum amount allowed under the Time Warner and Sony loan. CDnow's expenditures exceed revenue and no additional amounts are available to CDnow from Time Warner and Sony. Therefore, CDnow needed to find additional sources of cash.

68. The 14D-9, however, fails to disclose that Columbia House's financial condition was not, as CDnow representatives have said, the reason for the termination of the Columbia House merger, nor does it disclose any of the material information set forth in paragraph 61 above. Instead, it states the following:

TERMINATION OF COLUMBIA HOUSE TRANSACTION. On March 13, 2000, CDnow announced that the proposed transaction with Time Warner, Inc. and Sony Corporation of America which would have combined CDnow and Columbia House was terminated. The board and management, based, in part, upon advice from CDnow's financial advisor, Allen & Company, determined that the best interest of CDnow and its shareholders would be served by pursuing an alternative business combination or investment transaction, as opposed to staying independent. As a result, CDnow management and Allen & Company sought potential investors and merger partners.

69. Pursuant to the Bertelsmann agreement, CDnow will continue to be headquartered in Fort Washington and its management team is expected to remain with the Company. Thus, the Individual Defendants will benefit from the transaction. Pursuant to a March 20, 2000 employee retention bonus adopted by CDnow, defendant Sussman will receive a $182,000 bonus for remaining with the merged Company.

COUNT I AGAINST ALL DEFENDANTS FOR

VIOLATION OF SECTION 10(b) OF THE

SECURITIES EXCHANGE ACT AND RULE 10b-5 THEREUNDER

70. Plaintiff repeats and realleges each and every allegation above as if set forth in full herein.

71. Throughout the Class Period, the defendants, singly and in concert, engaged in a common plan, scheme and course of conduct described herein, pursuant to which they knowingly or recklessly engaged in acts, transactions, practices and a course of business which operated as a fraud upon plaintiff and the other members of the Class; made various false statements of material facts and omitted to state material facts to make the statements made not misleading to plaintiff and the other members of the Class; and employed manipulative or deceptive devices and contrivances in connection with the purchase and sale of CDnow securities.

72. The Company's financial condition had rapidly deteriorated and it could not continue without a merger partner. The purpose and effect of the defendants' plan, scheme and course of conduct in not disclosing the receipt of Andersen's January 28, 2000 "going concern" qualification, the fact that the Merger with Columbia House would not proceed, and subsequently blaming Columbia House's financial condition for the Merger termination, was to artificially inflate and maintain the market price of CDnow securities to create the illusion of a viable company so that CDnow could seek out another merger partner and keep CDnow's stock price as high as possible while doing so.

73. The Individual Defendants, comprised of the Company's top executives who include its Chief Financial Officer, and both members of its Audit Committee, the Company's Chief Executive Officer and his brother and Company co-founder, and Chairman of its Board of Directors (amongst whom the critical issues of the Andersen "going concern" qualification and Columbia House Merger and termination were discussed, being of paramount importance to the Company's viability), had actual knowledge of the material omissions and/or the falsity of the material statements set forth above, and intended to deceive plaintiff and the other members of the Class, or, in the alternative, acted with reckless disregard for the truth when each failed to ascertain and disclose the true facts in the statements made by Jason Olim, Sussman or other CDnow personnel to the SEC, and the investing public.

74. The facts alleged herein provide a strong inference that the defendants made material false and misleading statements to the investing public with scienter, in that the defendants knew or recklessly disregarded that the public statements identified above were materially false and misleading.

75. As a result of the foregoing, the market price of CDnow securities was artificially inflated during the Class Period. In ignorance of the falsity of the reports and statements, and the deceptive and manipulative devices and contrivances employed by the defendants, plaintiff and the other members of the Class relied, to their damage, on the reports and statements described above and/or the integrity of the market price of CDnow securities during the Class Period in purchasing CDnow securities at prices which were artificially inflated as a result of the defendants' false and misleading statements.

76. Had plaintiff and the other members of the Class known of the material adverse information which the defendants did not disclose, they would not have purchased CDnow securities at the artificially inflated prices that they did.

77. Defendants' concealment of this material information served only to harm plaintiff and the other members of the Class who purchased CDnow securities in ignorance of the financial risk to them as a result of such nondisclosures.

78. As a result of the wrongful conduct alleged herein, plaintiff and other members of the Class have suffered damages in an amount to be established at trial.

79. By reason of the foregoing, the defendants have violated Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder and are liable to plaintiff and the other members of the Class for the substantial damages which they suffered in connection with their purchase of CDnow securities during the Class Period.

COUNT II

AGAINST THE INDIVIDUAL DEFENDANTS FOR

VIOLATION OF SECTION 20(A)

OF THE SECURITIES EXCHANGE ACT

80. Plaintiff repeats and realleges each and every allegation above as if set forth in full herein.

81. During the Class Period, each of the Individual Defendants, by virtue of his office or offices at, and/or directorship of CDnow and his specific acts, as well as the ownership of 21% of the Company's common stock by Diamond, Jason Olim and Matthew Olim, was a controlling person of CDnow within the meaning of Section 20(a) of the Exchange Act.

82. Each of the Individual Defendants' position made him privy to, and provided him or her with actual knowledge of, the material facts which CDnow concealed from plaintiff and the other members of the Class during the Class Period.

83. Each of the Individual Defendants had the power and influence, and exercised the same, to cause CDnow to engage in the unlawful conduct and practices complained of herein by causing CDnow to disseminate the false and misleading information referred to above.

84. By virtue of the foregoing, the Individual Defendants have violated Section 20(a) of the Exchange Act. 85. By virtue of the conduct alleged above, the defendants are liable to plaintiff and the other members of the Class for the substantial damages which they suffered in connection with their purchase of CDnow common stock during the Class Period.

COUNT III

AGAINST CDNOW AND THE INDIVIDUAL DEFENDANTS

FOR VIOLATION OF EXCHANGE ACTION SECTION 14(E)

86. Plaintiff repeats and realleges each and every allegation above as if fully set forth herein, except that this count is brought on behalf of CDnow shareholders on July 26, 2000.

87. Section 14(e) of the Exchange Act provides that it is unlawful "for any person to make any untrue statement of facts or omit to state any material fact necessary in order to make the statements made, in light of the circumstances in which they are made, not misleading ... in connection with any tender offer ..."

88. The CDnow 14D-9 constitutes a communication made under circumstances reasonably calculated to result in the procurement of tenders from CDnow shareholders in favor of the tender offer.

89. The CDnow 14D-9 contains untrue statements of fact and omits to state material facts necessary in order to make the statements made, in light of the circumstances in which they are made, not misleading, as set forth in detail above.

90. The aforementioned untrue statements of fact and omissions of material facts were made with knowledge or in reckless disregard of the truth.

91. As a direct and proximate result of the untrue statements of fact and omissions of material facts set forth in detail above, CDnow shareholders are being asked to tender their shares without being possessed of complete and accurate information with which they must be provided.

WHEREFORE, plaintiff, on behalf of himself and the other members of the Class, demands judgment against the defendants as follows:

A. Determining that this action is properly maintainable as a class action pursuant to Rule 23 of the Federal Rules of Civil Procedure;

B. Certifying plaintiff as the Class Representative and his counsel as Class Counsel;

C. Declaring and determining that the defendants violated the federal securities laws by reason of their conduct as alleged herein; D. Awarding monetary damages against all of the defendants, jointly and severally, in favor of plaintiff and the other members of the Class for all losses and damages suffered as a result of the acts and transactions complained of herein, including punitive damages where appropriate, together with prejudgment interest from the date of the wrongs to the date of the judgment herein;

E. Directing CDnow to issue a true and accurate Schedule 14D-9 and enjoin the Bertelsmann tender offer for an appropriate time so that CDnow's shareholders may consider such Schedule 14D-9.

F. Awarding plaintiff the costs, expenses, and disbursements incurred in this action, including reasonable attorneys' and experts' fees; and

G. Awarding plaintiff and the other members of the Class such other and further relief as the Court may deem just and proper in light of all the circumstances of this case.

JURY DEMAND

Plaintiff demands a trial by jury.

Dated: September ___, 2000

Respectfully submitted,

LAW OFFICES BERNARD M. GROSS, P.C.

By:

Deborah R. Gross (I.D. NO. 44542) Susan R. Gross (I.D. NO. 60547)

1500 Walnut Street

6th Floor

Philadelphia, Pennsylvania 19102

(215) 561-3600 - TELEPHONE

(215) 561-3000 - FAX

Local Counsel for Plaintiffs

OF COUNSEL

WOLF HALDENSTEIN ADLER

FREEMAN & HERZ LLP

Fred Taylor Isquith, Esq.

270 Madison Avenue

New York, New York

(212) 545-4600

LAW OFFICES OF CHARLES J. PIVEN, P.A.

CHARLES J. PIVEN

The World Trade Center, Suite 2525 401 East Pratt Street

Baltimore, Maryland 21202

(410) 332-0030

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