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Earlier this week I wrote about the accounting scandal that has hit the UK-based grocer, Tesco, and the securities class action lawsuit against the company that followed in its wake. Now another company has reported accounting irregularities – and the company involved has also been hit with a securities class action lawsuit.
On October 29, 2014, before the markets opened, real estate investment trust American Realty Capital Properties issued a press release (here) in which it disclosed the existence of an accounting error and subsequent cover-up relating to its financial statements for this year’s first two quarters. The company announced that adjusted funds from operations had been overstated for the first quarter. (“Adjusted funds from operations” is a key metric of a REIT’s performance and cash flow.) The press release stated that the “error was identified but intentionally not corrected,” and that other adjusted funds from operations and financial statement errors “were intentionally made,” resulting in an overstatement of adjusted funds from operations and understatement of net loss for first three and six months of the year. In the press release, the company also said that its audit committee is investigating the company’s 2013 financial statements as well.
The company further announced that the company’s audit committee’s discovery of these accounting errors had forced the resignation of Brian Block, the company’s CFO, and Lisa McAlister, the company’s chief accounting officer.
An October 30, 2014 Wall Street Journal article about these developments (here) reported that the SEC intends “to launch an inquiry into the accounting irregularities” at the company. According to the Journal article the total amount by which the adjusted funds from operations was overstated in the first quarter was $12 million, or 8.8%, and for the second quarter was $10.9 million, or 5.6%. The Journal article also quotes a statement from the company’s CEO that the audit committee began its investigation of the company’s accounting in September after “an employee altered the company’s audit committee about the irregularities.”
When I read the Journal article, I wondered how long it would be before plaintiffs’ lawyers filed a securities class action based on these developments at the company. I didn’t have to wait long to find out the answer.
Within a few hours, on October 30, 2014, plaintiffs’ lawyers filed a securities class action lawsuit in the Southern District of New York against the company. Block, and McAlister. A copy of the complaint in the action can be found here. The complaint relies heavily on the company’s October 29 press release and also cites the Journal article cited above. The complaint also relies heavily on the fact that the company released its now withdrawn first quarter financial results on May 8, 2014, just days before the company’s May 28, 2014 secondary offering, in which the company raised net proceeds of approximately $1.59 billion. The plaintiff’s lawyers October 30, 2014 press release about the complaint can be found here.
Another shareholder filed a second complaint yesterday, as well, The second complaint, which can be found here, names defendants the company’s founder and its CEO as wel as Block and McAlister.
It is interesting to note that in this case, as was also the case with Tesco, the account problems first came to light as a result of an internal whistleblower. As I also noted with respect to Tesco, it is interesting that the whistleblower chose to report the concerns internally rather than reporting the issue to the SEC and potentially lining up a whistleblower bounty payment.
In any event, this new lawsuit along with the one filed against Tesco late last week represent the latest examples of a something that I think we will be seeing a lot more of — that is, securities class action suits being filed after a whistleblower’s revelation of accounting or other improprieties. As I noted in an earlier post (here), particularly in light of the incentives that the Dodd-Frank whistleblower bounty provides, we will likely see many more securities suits following after whistleblower reports.
One final thought has to do with larger patterns in securities class action lawsuit filings. The ebb and flow of securities class action lawsuit filings is the source of a great deal of discussion as commentators (including even this blog) attempt to explain what may be driving a reported increase or decrease in the number of securities class action lawsuit filings. One thing is for sure about the number of lawsuits, if more companies are reporting accounting miscues, there will be more lawsuits. While it is far too early based solely on this case and the Tesco case to proclaim that there has been an increase in the number of companies reporting accounting problems leading to lawsuits, it is nevertheless interesting to note that these two high-profile accounting-related suits have arisen in quick succession.
The problems at the two companies are obviously entirely unrelated, but if there were to be more companies reporting accounting issues (perhaps as a result of increased whistleblower activity), it could certainly lead to an accompanying upsurge in securities suit filings.
Read other items of interest from the world of directors & officers liability, with occasional commentary, at the D&O Diary, a blog by Kevin LaCroix.
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