LOS ANGELES (AP) _ ArtistDirect's stock was down more than 40 percent a day after its initial public offering, apparently suffering from reports that a stock-option violation could eventually cost the online sales company more than $27 million.

ArtistDirect Inc. shares debuted on the Nasdaq Stock Market Tuesday at $12 per share before falling 22 percent to close at $9.40 5/8. The shares continued to fall Wednesday, closing at $7.93 3/4.

Analysts said the stock suffered from a very selective IPO market, plus news reports that ArtistDirect, which allows artists to sell merchandise directly to fans online, improperly issued stock options.

The Los Angeles-based business disclosed in an amended prospectus Monday that it had issued stock options to some artists and staff who may not have been eligible and that the total amount of options granted may have violated federal securities law. To remedy the problem, ArtistDirect said, it would offer to buy back the options _ a solution that could cost it more than $27 million, or a third of the $60 million raised in its IPO.

The violation was first reported by the company in its initial filings with the Securities and Exchange Commission last September. But that document did not include an estimate of how much it could cost to resolve the matter.

Despite the revelation, one Wall Street brokerage initiated coverage of the stock Wednesday with a ``buy'' recommendation.

``You're looking at a price right now that is appealing based on their potential,'' said Barry Sosnick, an analyst with Fahnestock and Co. in New York.

He said the company's true worth lies in its ability to collect data from its users _ data that could prove very valuable to the artists and record companies that are among ArtistDirect's backers.

He added that the options problem should not have come as a surprise to investors and should not hurt the company long term.

``Anyone who bought in the IPO was aware that this was an issue,'' he said.