DeCode Genetics made several “materially false and misleading statements” that artificially inflated its stock price during a 10-month period in 2003 and 2004, according to at least six separate class-action lawsuits brought against the Icelandic pharmacogenomics company.
Each of the suits, which also name as defendants CEO Kari Stefansson and CFO Lance Thibault, claim DeCode committed fraud by deliberately issuing inaccurate quarterly earnings statements, news releases, and other information between Oct. 29, 2003, and Aug. 26, 2004.
The suits — the most recent one was filed on Oct. 12 — also allege that DeCode’s independent auditor, PriceWaterhouseCoopers, resigned after certain undisclosed “reportable conditions” relating to its accounting practices were unresolved. At least one of the suits claims that DeCode “did not adequately disclose” these reportable conditions.
The plaintiffs allege that these actions caused the value of their investments in DeCode to fall, and universally blame Stefansson and Thibault for fiduciary recklessness and defrauding investors.
As is typical for the initial stages of such claims, there is a near lack of corroborative details, according to an attorney familiar with one of the cases. Along with various unique accusations, the six suits charge DeCode with “misrepresentation or omission” of “materially deficient” period-end closing procedures; of a lack of “adequate internal controls;” and of reporting “improperly recognized revenue” that violate Generally Accepted Accounting Principles.
Each suit is waiting for a later stage of the litigation process before incorporating more specific information about these conditions, said the attorney familiar with the case.
All of the claims have one thing in common: They all use statements made by PricewaterhouseCoopers, as well as the firm’s unusual resignation, as a lynchpin in their cases. Before the accounting firm resigned Aug. 19, it brought to DeCode’s attention certain “reportable conditions,” including internal control deficiencies that can affect consistency between management assertions and the handling of financial data. DeCode made public the existence of those conditions on Aug. 26, but has not yet publicly disclosed their nature.
DeCode released its third-quarter 2003 earnings on Oct. 19, the beginning of the class period, and disclosed PricewaterhouseCoopers’ resignation on Aug. 26, 2004, the last day of that period. The lawsuits were filed between Sept.1 and Oct. 12; the filing window for new plaintiffs closes Nov. 1.
Several DeCode officers did not return repeated calls for comment, and attorneys familiar with specific case details interviewed for this article asked not to be named.
“These initial complaints are based on public information — whatever caused the stock to drop in the first place, whether it was a news article, an SEC filing, or some kind of insider disclosure, whatever,” said an attorney unrelated to the case but who is familiar with class-action litigation. He asked not to be named. “All these lawsuits are substantially the same.”
A judge will choose a lead plaintiff by Nov. 1 from among a number of filings not limited to the six current suits, which may open the door for additional suits, said this attorney. Generally, he said, the lead plaintiff is the entity with the greatest potential loss, often an institutional investor. The lead counsel will then file an “amended consolidated complaint” and begin to look for evidence using in-house investigators, forensic accountants, and interviews with former employees to find non-public information, he added.
Because of high pleading standards, “20 to 30 percent” of these kinds of cases are ultimately dismissed, while almost all of those remaining will be settled out of court, said this attorney. Plaintiffs must prove either reckless negligence or knowledge of fraud.
Several attorneys interviewed for this article said settlement payments that DeCode might expect to pay were impossible to estimate because they involve rival calculations of experts from both sides of the disagreement. (The high watermark for a securities class-action suit was established in 1999, when the California Public Employees Retirement System and two New York-based pension funds won $2.8 billion in its case against Cendant Corp.)
A key complaint of the suits is that DeCode’s stock was artificially inflated because investors were misled after reading overly optimistic statements and financial figures released by the company. If a settlement is struck, it will be based at least in part on the price drop experienced by the company’s stock during the class period.
Stock price inflation can be difficult to discern. But in this case it appears that investors largely reacted negatively — not positively — following three out of four quarterly earnings reports DeCode released within the class period (see chart, p.4). For example, the company released its third-quarter 2003 report after the Nasdaq market closed. That afternoon, the first day of the class period, the company’s stock price closed at $7.21. The next day, the stock closed down at $7.01. In another example, DeCode issued its fourth-quarter earnings after the market closed on Feb. 17. That afternoon, the stock closed at $13.12, but fell to $12.30 the following day after investors had had a chance to digest the information.
Similarly, first-quarter 2001 earnings were announced on April 28 after the Nasdaq closed for the day. That day, DeCode stock closed at $9.25, but fell to $9.11 the following afternoon.
In fact, the only quarterly earnings report that saw an increase in share price was the second quarter 2004, which was released on July 29. On this day, the stock closed at $6.84. It closed at $6.92 the following day.
The six suits also imply a drop in share price on Aug. 27, the day after the last day of the class period and the day PricewaterhouseCoopers resigned. DeCode announced the resignation after the Nasdaq market closed that day, and the stock closed down to $6.30 from $6.58. The following day — the first day investors were able to respond to the resignation — shares in DeCode fell to $5.70 and had a trading volume of nearly 4 million — a 13-fold increase over the previous day’s volume, and the second-highest single-day trading volume during the current 52-week period.
Eight days later, on Sept. 8, DeCode announced that it hired Deloitte and Touche to replace PricewaterhouseCoopers, which had represented DeCode since 1996. DeCode shares closed at $5.90 that day, and by Sept. 10 surpassed their Aug. 26 price, closing at $6.90. On Oct. 18, the last day before Pharmacogenomics Reporter went to press, the company’s stock closed at $6.61, having reached as high as $8 in intra-day trading.
The fact that PricewaterhouseCoopers resigned and that it discovered “reportable conditions” is enough to alert law firms specializing in securities law — which maintain a stable of clients — that financial data DeCode reported might be incorrect, said the first attorney familiar with one of the cases.
“It's that people kept stuff from the market that they shouldn't have, or they actually misled the market [...] if the market had known, then the price would have never been as high,” said a lawyer familiar with one of the cases. “When everybody found out about it, the whole stock took a hit and we ended up losing a bunch of money, and we never should have lost that money.”
— CW, JK