The weak economy has turned profit into loss, changed workers into job applicants and dropped high stocks into the tank.
Now, it seems to have transformed love into poison between some vendors and some of their shareholders as demonstrated by a series of class-action lawsuits filed in the last six months.
Vendors fell out of favor with some of their investors over what the shareholders have characterized as disingenuous statements designed to mislead the shareholders and the public about their financial situations.
The first target was Murray N.J.-based Lucent Technologies Inc., which had revised its first-quarter projections because of what it said was an accounting error. Steep stock declines shortly followed.
Nortel Networks, which was having a near-fable ride through the first month of the year, also suddenly jolted the market with a warning that its rosy profile was no longer a reason to rejoice because of a drop in orders and a tardy economy.
Cisco Systems Inc., which only recently announced its first round of layoffs in 17 years, is also not immune from the anger of its shareholders. They filed a lawsuit accusing the networking giant, which just launched into the wireless space last year, of disseminating false and misleading information about its financial results.
Deana Peck, co-chair of the class-actions committee of the section of litigation of the American Bar Association, said investors need strong evidence to make their cases against the companies.
She cites the 1995 Private Securities Litigations Act, which, she said, was enacted to protect public companies from the tendency by investors to file lawsuits when stock prices drop.
She said before a lawsuit could be brought against a company, the investors must establish good grounds for a case, which could include company records, financial data, press releases, depositions from company officers or minutes from the board of directors’ meetings.
“The plaintiff must establish these grounds before filing a lawsuit,” she said.
She also noted that a profit warning or forecast was not necessarily grounds for a lawsuit unless the plaintiff proves that the company deliberately misled its investors with its statements.
A class-action lawsuit was filed against Lucent Technologies in November of last year in U.S. District Court for the District of Columbia. The lawsuit was brought on behalf of Lucent’s common stock purchasers by the law offices of Dennis J. Johnson.
The shareholders allege that Lucent violated sections 10(b) and 20(a) of the Securities and Exchange Act of 1934 and the 10b-5 by misrepresenting its fourth-quarter expectations.
The company, which was reeling under management problems and drops in stock value, had issued a fourth-quarter result projecting 18 cents per-share fourth-quarter earnings. Lucent later ate its words because of an error in its books, which it promptly acknowledged in a press release and with a notification to the Securities and Exchange Commission. The telecom equipment manufacturer also said it could not confirm earlier guidance for that quarter.
The lawsuit is seeking to recover damages that might have resulted from alleged misrepresentation.
Nortel Networks was besieged with three separate lawsuits over alleged insider trading over its first-quarter profit warning. The shareholders accused Nortel of misleading investors when it reaffirmed its optimistic revenue in its fourth-quarter report.
The three lawsuits were filed by New York law firm Milberg Weiss Bershad Hynes & Lerach, Baltimore-based law firm Charles J Piven and Los Angeles firm Stull, Stull and Brody.
The lawsuits claim that William Conner, president of Nortel’s e-business solutions division, and Chahram Bolouri, president of global operations, sold $7 million of stock to profit from the company’s rising stock. Nortel, which only a couple of weeks ago reported a negative quarterly report, denied ever misleading its investors.
The company’s chief executive, John Roth, chalked up the about-face to deferred spending by carriers and a sudden southward movement of the general economy. The company also accompanied its profit warning with a 10,000-job cut.
Cisco Systems’ lawsuit was filed on behalf of angry shareholders by the San Diego-based law firm of Milberg Weiss Bershad Hynes & Lerach, one of the law firms involved in the lawsuit against Nortel. The lawsuit alleges that John Chambers, the company’s chief executive officer, along with other top officers, misled investors over an 18-month period from August 1999 to February of this year, stating that the executives profited to the tune of $595 million by selling Cisco stock over the same time frame for up to $80 a share.
The complaints also allege that Cisco exaggerated its sales and net income, which included loans to small telephone carriers and Web providers.
