NEW YORK (GenomeWeb) – A pair of investors has filed a class action lawsuit against Illumina alleging fraud through artificial inflation of stock price in connection with Illumina's earnings for the third quarter of 2016.
In a complaint filed late last week with the US District Court for the Southern District of California, plaintiffs Braden Van Der Wall and Steven Romanoff allege that Illumina, CEO Francis deSouza, and CFO Marc Stapley violated federal securities laws by providing material information that suggested the company's revenues and EPS for Q3 2016 would be substantially higher than they actually were.
Specifically, the plaintiffs, who are filing suit on behalf of others who bought Illumina stock between July 26, 2016, and Oct. 10, 2016, claim that the defendants made "overwhelmingly positive statements" about the firm's sales pipeline prior to and during Q3 2016 that supported a revenue forecast of $625 million to $630 million for the quarter and an increase in its earnings per share estimates for fiscal year 2016 from between $3.35 and $3.45 per share to between $3.48 and $3.58 per share. For FY 2016, Illumina reported non-GAAP EPS of $3.33.
According to the suit, the defendants' statements "prompted an immediate and dramatic increase in the price of Illumina's common stock," from a closing price of $150.10 per share on July 26, 2016, to $162.25 the following day.
At the same time, the plaintiffs claim, Illumina neglected to tell the public that its internal
controls and forecasting processes were materially flawed. "Prior to and during the third quarter of fiscal 2016, Illumina had been experiencing a material decline in sales of its traditional HiSeq sequencing instrument," the plaintiffs wrote in their complaint. "The decline in sales, which defendants would later refer to as a 'trend' that had been 'building' for some time and 'didn't show up suddenly' during the third quarter, went unnoticed during the forecasting process."
Illumina eventually reported Q3 revenues of $607 million, significantly lower than forecasts, and also revealed that the revenue shortfall was due to a larger-than-anticipated year-over-year decline in high-throughput sequencing instruments. Illumina's stock price fell almost immediately on the news, from a closing market price of $184.85 per share on Oct. 10, 2016, to $138.99 per share on Oct. 11, an almost 25 percent decline in a single day that resulted in a market cap loss of more than $6.6 billion.
The plaintiffs claim that Illumina made materially false and misleading misrepresentations and omissions with scienter; that the company has demonstrated a history of providing flawed guidance to investors and analysts; that the defendants knew that Illumina's HiSeq sales were declining; and that defendants deSouza and Stapley were aware of these past issues and still provided Q3 2016 guidance "knowing that the guidance was the product of flawed internal controls that previously provided inaccurate guidance on numerous occasions."
The plaintiffs further claim that the statutory safe harbor provided for forward-looking statements under certain circumstances does not apply to the alleged misrepresentations because the "defendants’ liability stems from the fact that they provided investors with forecasts while at the same time failing to maintain adequate forecasting processes." Further, they claim that certain of the statements alleged to be misleading or inaccurate were not identified as forward-looking statements when made.
The lawsuit demands judgment against the defendants determining that the complaint may be maintained as a class action; requiring defendants to pay damages sustained by the plaintiffs and class; awarding plaintiffs and other members of the class pre- and post-judgment interest, as well as attorneys' fees, expert fees, and other costs; and awarding further relief as deemed just and proper by the court.
Illumina declined to comment on the lawsuit as per company policy.