Arthur V. Cervantes, individually and on behalf of all v. Chad Dickerson

(CN) - The online marketplace Etsy and its backers misled potential investors in the company's IPO, hiding the fact much of its merchandise was counterfeit. When the truth became know, the share price plummeted, a class action claims.

In a complaint filed on Tuesday, lead plaintiff Arthur Cervantes claims Etsy, its executives, and the financial firms that handled its IPO, including Goldman Sachs and Morgan Stanley, knew that a large number of the goods sold through the online marketplace were counterfeits and knockoffs of established, international brands.

Despite being well aware of this fact, Cervantes says, Etsy filed a prospectus with the Securities and Exchange Commission on Arpil 16, 2015, that falsely touted the company as having a seller base of individuals - most of them women -- some of whom required "help scaling with the assistance of responsible manufacturers."

According to the complaint, the IPO claimed Etsy built personal relationships with its sellers, visiting their shops, inviting them to Etsy's offices and celebrating with them at in person events.

"Unbeknownst to buyers in the IPO, Etsy was 'a go -to destination for counterfeits' which it gladly listed ... to earn a wide variety of fees," the complaint says.

Cervantes says Etsy also falsely claimed that it had intellectual property complaint and takedown procedures to deal with legitimate complaints that might arise. Namely, he says, the company would removal problem items from its marketplace and close the shops of sellers who repeatedly violate its policies.

But "with millions of counterfeit items listed for sale," the complaint says, "Etsy did not have the manpower to review complaints and relevant facts to determine whether to take the appropriate action, including removal of the counterfeit items or closing the shops of Etsy sellers who repeatedly violate Etsy' s policies.

"The statements referenced above were materially false and/or misleading because they misrepresented and failed to disclose the following adverse facts, including that: (a) more than 5% of all merchandise for sale on Etsy' s website may be either counterfeit or constitute trademark or copyright infringement; ( b) Brands are increasingly pursuing sellers on Etsy for trademark or copyright infringement, jeopardizing listing fees and commissions; and ( c) as a result of the foregoing, Etsy' s public statements were materially false and misleading at all relevant times."

Cervantes says the truth became known on May 11, 2015, when Bloomberg and the Associated Press reported Gil Luria, an equity analyst at Wedbush Securities, issued a note downgrading Etsy to " Underperform."

As a result, Cervantes says, the value of his shares and those of similarly situated investors dropped over eight percent in a single day.

Because of "Defendants' wrongful acts and omissions, and the precipitous decline in the market value of the Company' s securities, Plaintiff and other Class members have suffered significant losses and damages," the complaint says.

Cervantes seeks compensatory and punitive damages on claims of multiple violations of the Securities Act of 1933.

He is represented by Patrice Bishop of Stull, Stull & Brody of Beverly Hills, Calif.

Representatives of Etsy could not immediately be reached for comment Thursday morning.

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