EarthLink Charges Law Firm Co. Stock Slip-up Cost $1M

November 29, 2004 ( - EarthLink Inc. filed suit in a Georgia state court charging that a law firm caused a $1 million repurchase of employee stock in EarthLink's 401(k) by not properly registering the share offer with the Securities and Exchange Commission (SEC).

Defendant Powell Goldstein, an Atlanta-based law firm, then turned around and filed its own suit against the law firm it said was actually responsible for the filing slip-up: Hunton & Williams of Richmond, Virginia, according to a New York Lawyer report.

The New York Lawyer report includes the following case history:

The dispute stems from the Feb. 4, 2000, merger of EarthLink, which was then based in Pasadena, California with Atlanta-based Internet service provider MindSpring. The new company made Atlanta its headquarters and became known as EarthLink Inc.  

After the merger, the new company wanted to allow all of its employees to invest a portion of their 401(k) savings in EarthLink stock. However, because it was the first time participants were able to purchase EarthLink common stock in the K plan, the suit alleged, the newly formed company was required by the SEC to file a Form S-8 registration statement. In addition, the company was to offer a prospectus to the potential employee-investors as part of the registration of the securities. The suit says that in mid-April 2002 EarthLink discovered that Powell Goldstein had not filed the Form S-8. The company then instructed Hunton & Williams to complete the form and file it with the SEC.

EarthLink Inc. was later forced to offer to repurchase the shares from participants because the shares obtained up to that point were not properly registered. According to the buyback offer, participants who had company stock losses could voluntarily return their shares to EarthLink in exchange for the purchase price of the securities plus interest. Anyone who made money on EarthLink’s stock was not eligible for the rescission offer, but presumably few investors saw gains since share prices deflated from $24.56 per share immediately after the merger to $6.09 per share at the close of trading on July 15, 2002.

For employees who previously sold their shares for a loss, the company offered to credit their 401(k) accounts with an amount based on the original purchase price of the stock minus the lower sales price. All in all, EarthLink charged in its suit, it had to pay $1 million in damages as a result of Powell Goldstein’s actions in pursuing proper SEC stock registration – $600,000 to the employee investors and about $400,000 in legal fees.

For its part, Powell Goldstein claimed it maintained a limited role in legal matters at EarthLink. The firm, according to its own lawsuit, did not perform key work for the corporate merger, nor was the firm included on the distribution list of merger documents, checklists, securities issues, SEC filings or other matters. In addition, the merger plan and related documents were never shared with Powell Goldstein, the company said.