According to a press release dated March 31, 2006, Administaff, Inc., the nation's leading Professional Employer Organization (PEO), announced that the U.S. District Court for the Southern District of Texas ("Court") granted Administaff's motion to dismiss each of the securities fraud claims previously filed against Administaff and certain officers and directors. The Court's ruling, issued March 30, 2006, validates the company's previously disclosed position that the claims were without merit. In June 2004, the company filed a motion to dismiss the Consolidated Complaint, which was granted by the Court on March 30, 2006. The dismissal is with prejudice, however, is subject to appeal.
As previously reported by the Company’s FORM 10-K for the fiscal year ended December 31, 2005, on March 31, 2004, the court entered an order consolidating all of the cases and appointing Carpenters Pension Trust for South California as “lead plaintiff” and Lerach Coughlin Stoia Geller Rudman & Robbins LLP as “lead counsel.” The lead plaintiff alleges that its losses are $352,000, although the alleged damages of the purported class have not been specified. In May 2004, the lead plaintiff filed its Consolidated Complaint, which amended and consolidated the seven previously filed cases. In the consolidated complaint, the lead plaintiff has essentially abandoned the allegations of fraud contained in the initial seven lawsuits. Through the consolidated complaint, the lead plaintiff now generally asserts, among other things, that Administaff and certain of its officers and directors fraudulently made false and misleading statements regarding the cost of its health plan during 2001 and 2002. In June 2004, the Company filed a motion to dismiss the consolidated complaint.
The original Complaint alleges that defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and Rule 10b-5 promulgated thereunder, by issuing a series of material misrepresentations to the market between April 3, 2001 and July 31, 2002, thereby artificially inflating the price of Administaff securities. The Complaint alleges that these statements were materially false and misleading because they failed to disclose and misrepresented the following adverse facts, among others: (a) that Administaff had inadequate and deficient pricing and billing systems and was incorrectly calibrating pricing for clients that experienced declines in average payroll cost per worksite employee; (b) that Administaff was incorrectly matching the price and cost for health insurance on new and renewing client contracts; and (c) that, in violation of Generally Accepted Accounting Practices and in order to retain its coveted place on the Fortune 500 listing, Administaff was improperly recognizing revenue by failing to net Administaff's worksite employee payroll costs against revenues. On August 1, 2002, before the open of trading, Administaff shocked the investing public when it released its financial and operational results for the second quarter ended June 30, 2002, reporting "a net loss and diluted net loss per share of $3.2 million and $0.11" as compared to Thomson Financial/First Call estimates of $0.04 earnings per share. Market reaction was swift and negative, with Administaff stock falling from a close of $7.50 on July 31, 2002 to a close of $4.20 on August 1, 2002, or a single-day decline of 44% in heavy trading.