Investors Obtain $95 Million in VeriFone Securities Class Action
In February 2014, United States District Court Judge Edward M. Chen approved a $95 million settlement in In re VeriFone Holdings, Inc. Securities Litigation, one of the largest securities class action settlements ever achieved in the Northern District of California.
Led by lead plaintiff National Elevator Industry Pension Fund and their counsel at Robbins Geller and O’Donoghue & O’Donoghue LLP, the settlement was the result of over seven years of tenacious litigation, including lead plaintiff’s successful efforts to reverse the district court’s dismissal of the action with prejudice.
The action was brought on behalf of purchasers of VeriFone stock between August 31, 2006 and April 1, 2008. VeriFone, based in San Jose, California, designs, manufactures, and sells electronic payment devices that enable acceptance and processing of electronic and point-of-sale payments for goods and services. During the class period, VeriFone’s shares were dual-listed on both the New York Stock Exchange and the Tel Aviv Stock Exchange (the “TASE”).
The complaint alleged that during the class period, VeriFone issued financial statements that were materially false and misleading and not prepared in accordance with GAAP because VeriFone (a) recorded millions of dollars of intercompany in-transit inventory that did not exist; (b) double-booked millions of dollars of manufacturing and distribution overhead costs; (c) failed to eliminate millions of dollars in intercompany profit in inventory; (d) improperly capitalized overhead into inventory; and (e) failed to write off excess and obsolete inventory.
As a result of this conduct, VeriFone was able to report significant increases in gross margins during the class period, which defendants told investors were the most important measure of the company’s financial performance – indeed, “the ultimate barometer of the operational Excellence of this business.” Defendants boasted that the better-than-expected gross margins were the result of “supply chain efficiencies in Israel that we never experienced before,” “procurement synergies,” “better commercial execution,” and declines in fixed costs that provided VeriFone with a “structural gross margin advantage” and assured them the reported gross margins were accurate, stating that “we have tremendous transparency, financial transparency into the true cost of manufacturing and all the little nuanced items that roll up into that.”
On December 3, 2007, VeriFone shocked investors by reporting that its financial results for the first through third quarters of 2007 should no longer be relied upon, principally due to errors in accounting related to the valuation of in-transit inventory and allocation of manufacturing and distribution overhead to inventory, each of which caused VeriFone to understate reported costs of net revenues and overstate gross margins and net income. VeriFone disclosed that its first through third quarter 2007 financial statements would therefore need to be restated, and that the final restatement would result in reductions to previously reported inventories of approximately $13.3 million, $23.9 million and $40.6 million in the first, second and third quarters of 2007, respectively, and corresponding reductions to previously reported net income of approximately $4.7 million, $9.7 million and $55.8 million. This, as well as other subsequent disclosures, caused VeriFone’s stock price to plummet, resulting in millions of dollars of losses to investors.
Between October 15, 2008 and September 15, 2010, lead plaintiff filed four separate complaints in the district court, incorporating facts and allegations from an exhaustive investigation, including testimony obtained by the United States Securities and Exchange Commission (“SEC”) from certain defendants in connection with the SEC’s investigation of similar allegations, which ultimately yielded no fraud charges against VeriFone. Notwithstanding lead plaintiff’s dogged efforts, on March 8, 2011, the district court dismissed the case with prejudice, finding that plaintiffs had failed to meet the stringent pleading standards for federal securities fraud claims.
Lead plaintiff appealed the district court’s dismissal to the United States Court of Appeals for the Ninth Circuit, contending that the district court’s dismissal was erroneous and that plaintiffs had more than adequately stated a claim against defendants. On December 21, 2012, the Ninth Circuit reversed the district court’s dismissal, concluding that the “logical inference” was that “VeriFone’s priority was meeting projections even at the expense of accuracy.” Additionally, the Ninth Circuit found that defendants’ attack on “individual allegations in isolation . . . cannot overcome the overwhelming inference drawn from a holistic view” that defendants were “deliberately reckless to the truth or falsity of the financial reports.”
Following the remand of the action to the district court, the parties began to participate in discovery. As part of the discovery process, VeriFone produced hundreds of thousands of pages of documents to plaintiffs regarding the claims at issue, as well as additional transcripts of testimony taken by the SEC. The parties participated in mediation efforts during the discovery process, and in June 2013, an agreement was reached to resolve the action for $95 million.
Judge Chen approved the proposed settlement in February 2014, finding it “fair, adequate and reasonable,” and noting that lead plaintiff had faced “very substantial risks” and performed “extensive work on the case.” Significantly, the court rejected contentions that the Supreme Court’s decision in Morrison v. Nat’l Australia Bank Ltd., 130 S. Ct. 2869 (2010), which limited the reach of U.S. securities laws to “[1] transactions in securities listed on domestic exchanges, and [2] domestic transactions in other securities,” should bar foreign investors who purchased VeriFone shares on the TASE from recovering. The court found that neither Morrison nor any other authority addressed “the situation where, as here, a foreign investor purchases domestic securities on a foreign exchange which is also listed on a domestic exchange,” and held that investors who purchased on the TASE were indeed eligible to participate in the settlement.
Robbins Geller attorney Christopher M. Wood was responsible for obtaining this settlement on behalf of the plaintiffs.
In re VeriFone Holdings, Inc. Securities Litigation, Master File No. C-07-6140 EMC, Order Granting Plaintiff’s Motion for Final Approval and for Attorneys’ Fees (N.D. Cal. Feb. 18, 2014).
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