Out-Law / Your Daily Need-To-Know

Cisco sued over alleged misconduct costing $400 billion

23 Apr 2001, 12:00 am

An institutional investor is suing Cisco Systems for damages claiming that violations of US securities laws inflated its share price. According to the lawsuit, $400 billion was then wiped from its market capitalisation when the true state of the business became apparent.

The investor, Plumbers and Pipefitters Local 572 Pension Fund, is being represented by the law firm Milberg Weiss, a San Diego-based class action specialist. The case is being brought in the United States District Court for the Northern District of California and Milberg Weiss is inviting all purchasers of Cisco shares during the period between August 10, 1999 and February 6, 2001 to join a class action.

The complaint charges Cisco and certain of its officers and directors with violations of the Securities Exchange Act of 1934. The complaint alleges that by August 1999, ISPs and competitive local telephone companies had technology to deploy but little capital, and Cisco used this as an opportunity to increase its sales by providing capital financing to such companies but making such financing conditional upon the purchase of large amounts of Cisco product.

According to the lawsuit, through this alleged manipulation and the shipment of defective or incomplete products, as well as Cisco's failure to adequately accrue for excess and overvalued inventory and uncollectable finance receivables, Cisco was able to report “record” earnings each quarter until February this year. Therefore, the lawsuit argues, Cisco and its officers thus made positive but false statements about the company’s products, financial results and business during the period. As a result, Cisco's stock traded as high as $82.

The inflation in Cisco's stock price was essential to its main corporate strategy, that of growth through acquisition, which Cisco accomplished through the exchange of inflated Cisco shares. In addition, the company and its officers had the motive and the opportunity to perpetrate the fraudulent scheme and course of business described herein in order to sell $595 million worth of their own Cisco shares at prices as high as $80.24 per share, or 84% higher than the price to which Cisco shares dropped by February 2001, as the true state of Cisco's business and prospects began to reach the market.

After completing more than 20 major acquisitions between September 1999 and February 2001, by issuing more than 400 million shares of Cisco stock, and selling more than 10 million shares of their personal Cisco holdings, on 6th February 2001, Cisco announced extremely disappointing second quarter results, including earnings per share of only $0.18. This disclosure shocked the market, causing Cisco's stock to decline to less than $30 per share before closing just over $31 per share on 7th February, on record volume of more than 279 million shares, inflicting billions of dollars of damage investors. Cisco later admitted that third quarter 2001 sales would be less than $4.8 billion, or lower than any quarter since the second quarter 2000.

The misconduct by the company and its officers has wiped out over $400 billion in market capitalisation as Cisco stock has fallen 84% from its high during the class action period of $82 per share as the truth about Cisco, its operations and prospects began to reach the market. Cisco stock has dropped below $14.