BellSouth, Scientific-Atlanta Hit with Company Stock Suits

The latest to get slapped with the company stock suits are BellSouth Corp. and Scientific-Atlanta Inc., which were both charged with covering up operational problems while encouraging employees to buy company shares for their plan accounts, the Atlanta Business Chronicle reported.

The lawsuit against Scientific-Atlanta contends CEO James McDonald and four other executives disposed of shares worth $64 million, of which McDonald’s part was $57 million, while the company plan was acquiring stock at “inflated prices.”

Similarly, the suit against BellSouth   accuses CEO F. Duane Ackerman and Chief Financial Officer Ronald Dykes of selling shares while the company retirement plans bought at “inflated” prices. Stock sales by Ackerman and Dykes each generated net proceeds of $2.9 million, the lawsuit contends.

Attorneys for the plaintiffs are seeking class-action status for the lawsuits, both of which are filed in US District Court in Atlanta. If granted by the court, the lawsuits would represent thousands of past and current employee members of the retirement plans.

Separate lawsuits alleging securities fraud, also seeking class-action status, have been filed against both companies.

Jeff Battcher, a spokesman for BellSouth, told  the Atlanta Business Chronicle , “The claims reflected in the complaint we received several months ago are without merit and we plan to defend against those claims vigorously.” BellSouth would not comment further. Sara Stutzenstein, a spokeswoman for Scientific-Atlanta, said the company would not comment on ongoing litigation. However, the company’s attorneys are seeking to have the lawsuit dismissed.

Conflict of Interest

The basic argument of both lawsuits is that there is an inherent conflict of interest for an executive whose job is to look out for a company to serve, and at the same time, act as a fiduciary of a retirement plan. The conflict has to do with recommending that a plan sell off the company’s shares when it could hurt the company, when not selling the shares could hurt the plan.

The lawsuits allege that plan participants, like other investors, were not informed of the companies’ operational problems as they became apparent to executives and that those issues later resulted in decreases in the companies’ stock prices.

For example, the lawsuit against BellSouth contends Dykes knew, or should have known, as BellSouth’s CFO, that the company was in trouble with its South America business, and that a heavy investment in the company was imprudent at that time. The Scientific-Atlanta lawsuit charges that company officials engaged in “channel stuffing,” inducing customers to purchase larger volumes of product than purchased ordinarily, pulling orders forward into present fiscal quarters that otherwise would be placed in future quarters.

The lawsuit contends Scientific-Atlanta pumped up sales and other performance criterion – in violation of generally accepted accounting principles (GAAP) – in order to meet personal performance goals. Meeting those goals resulted in hundreds of thousands of shares of stock for McDonald alone, according to the lawsuit.