Spitzer: I Spy Intermix

Updated from 5:43 p.m. EDT

New York's bulldog Attorney General Eliot Spitzer, whose aggressive investigations have shaken firms such as Merrill Lynch and American International Group (AIG Quote), is now taking aim at the Web.

The attorney general's office is suing Intermix Media(MIX Quote), a Los Angeles-based company that runs a network of Web sites and marketing services, for secretly installing its spyware onto millions of computers in New York.

"We tested a lot of sites for spyware, and Intermix was one of the worst offenders," says Justin Brookman, an attorney in the Internet Bureau of Spitzer's office. "This is a shot across the bow to the rest of industry and to companies that advertise through the them. This is a warning that liability is across the board."

Spyware has ranked second only to spam in Internet annoyances, resulting in everything from pop-up ads to hijacking browsers and from collecting private data to causing countless computer crashes.

The news shakes Intermix in the midst of a delicate turnaround. Under new CEO Richard Rosenblatt, who had founded and sold off two successful start-ups and shepherded drkoop.com through its postbankruptcy period, Intermix had been hoping to catch the attention of a lot more customers and investors. But it couldn't have imagined it would get attention this way.

Intermix's stock fell 83 cents, or 17%, to $3.97 Thursday after falling as low as $3.22. Volume of 3.3 million shares was nearly 10 times the average daily volume for the microcap stock. Intermix shares had been steadily gaining in recent months, climbing to a high of $9.20 in March from $2 last summer.

Rosenblatt took control of Intermix in February 2004 after the previous management, led by founder Brad Greenspan, had steered the company into rough waters. In 2003, the company restated $39 million in revenue and was delisted from Nasdaq. Under Rosenblatt, the company shed many of its controversial and unprofitable businesses, was renamed Intermix (from eUniverse) and found a new listing on the American Stock Exchange.

But according to Spitzer's office, Intermix continued, until at least late last year, to bundle spyware with the games and other features it allowed visitors to its sites to download at no charge. And the suit filed Thursday turns Intermix into the poster child for spyware, a publicly traded face to attach to a scourge that has vexed Internet surfers around the world.