According to the firm's 10-K filing dated May 8, 2002, on May 26, 2000, a settlement agreement was executed regarding a class action lawsuit related to accounting irregularities announced in April 1997. The plaintiff claimed that the Company and certain of its current and former officers violated the federal securities laws and were aware of, or recklessly disregarded, material misstatements that were made in MSC's publicly filed financial reports. The Court entered an order preliminarily approving the agreement on May 31, 2000 and ordered that the class be advised of the proposed settlement. On August 1, 2000, the class members were afforded the opportunity to present any objections at a fairness hearing, at which time the settlement was approved with no objections, and the case was dismissed. The costs of the settlement and related legal fees were covered under the Company's insurance policies, net of retention (expensed in fiscal 1998).
The original complaint alleged that defendants were exposed to substantial evidence of Sutton's [defendant] fraudulent activity. According to the second amended complaint, for example, Sutton did not total his manual adjustments to monthly inventory reports. Totals from these reports were supposed to correspond to figures in the General Ledger, but did not. Moreover, inventory quality statements, which were generated and provided to senior management at Material Sciences on at least a monthly basis, showed a rapid and unexplained increase in the cost per pound of carried inventory. This rapid and unexplained increase -- which plaintiff claimed is a classic "red flag" of fraud -- was also discussed in written and oral presentations as a part of quarterly business reviews.