The original complaint charges that defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and Rule 10b-5 promulgated thereunder. Throughout the Class Period, in each Form 10-Q and Form 10-K filed with the SEC, Defendants falsely reported that they 'ratably' recognized revenue from subscriptions. In fact, as the market learned on July 13, it did not. Instead, Defendants recognized revenue from subscriptions on a monthly basis, rather than on a daily basis. For example, if a subscription was signed on the last day of a month, a full month's revenue would have been recognized on that day, rather than a day's worth of revenue. After the auditor within PriceWaterhouse Cooper rotated, the new auditor required recognition of revenue from subscriptions on a daily basis as Generally Accepted Accounting Principles ('GAAP') requires. This change in accounting practice resulted in Red Hat's having to restate its financial results for fiscal years 2002, 2003 and the first quarter of 2004. The restatement, Defendants have admitted, 'is expected to result in significant percentage differences in certain items such as quarterly operating profit and net income.' During the short seven month class period, Defendants Buckley and Szulik sold over $34 million and $37 million respectively, while the other defendants collectively sold an additional $8 million in Red hat securities. As a result of defendants' allegedly fraudulent scheme, the price of Red Hat's securities was artificially inflated, allowing insiders to sell Red Hat's securities for millions of dollars in proceeds, and causing plaintiff and other class members to suffer damages.
The Company also announced that the SEC has made an inquiry into the Company's results as filed in their Form 10-K. On Monday, June 14, 2004, Red Hat announced unexpectedly that its Chief Financial Officer ('CFO') was resigning 'to pursue other interests.' The Company claims that its restatement is unrelated to its former CFO's resignation. Red Hat stock plummeted $4.62 or 22.7% per share, losing $600 million in market capitalization to close at $15.73 per share.
According to the Company’s FORM 10-K for the fiscal year ended February 28, 2009, in the summer of 2004, 14 class action lawsuits were filed against the Company and several of its former officers on behalf of investors who purchased the Company’s securities during various periods from June 19, 2001 through July 13, 2004. All 14 suits were filed in the U.S. District Court for the Eastern District of North Carolina. In each of the actions, plaintiffs seek to represent a class of purchasers of the Company’s common stock during some or all of the period from June 19, 2001 through July 13, 2004. All of the claims arise in connection with the Company announcement on July 13, 2004 that it would restate certain of its financial statements (the “Restatement”). One or more of the plaintiffs assert that certain former officers (the “Individual Defendants”) and the Company violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended (the “Securities Exchange Act”), and Rule 10b-5 thereunder by issuing the financial statements that the Company subsequently restated. One or more of the plaintiffs seek unspecified damages, interest, costs, attorneys’ and experts’ fees, an accounting of certain profits obtained by the Individual Defendants from trading in the Company’s common stock, disgorgement by the Company’s former chief executive officer and former chief financial officer of certain compensation and profits from trading in the Company’s common stock pursuant to Section 304 of the Sarbanes-Oxley Act of 2002 and other relief. As of September 8, 2004, all of these class action lawsuits were consolidated into a single action referenced as Civil Action No. 5:04-CV-473BR and titled In re Red Hat, Inc. Securities Litigation. On May 6, 2005, the plaintiffs filed an amended consolidated class action complaint. On July 29, 2005, the Company, on behalf of itself and the Individual Defendants, filed a motion to dismiss the action for failure to state a claim upon which relief may be granted. Also on that date, PricewaterhouseCoopers LLP (“PwC”), another defendant, filed a separate motion to dismiss. On May 12, 2006, the Court issued an order granting the motion to dismiss the Securities Exchange Act claims against several of the Individual Defendants, but denying the motion to dismiss the Securities Exchange Act claims against the Company, its former chief executive officer and former chief financial officer. The Court dismissed the claims under the Sarbanes-Oxley Act in their entirety, and also granted PwC’s motion to dismiss. On November 6, 2006, the plaintiffs filed a motion for class certification. Subsequent to the filing of that motion, several plaintiffs withdrew as potential class representatives, and the Company opposed the certification of the remaining proposed class representatives. On May 11, 2007, the Court entered an order denying class certification and denying all other pending motions as moot. Thereafter, on July 13, 2007 Charles Gilbert filed a renewed motion for appointment as lead plaintiff and approval of selection of lead counsel. On November 13, 2007, the Court entered an Order allowing Gilbert’s motion, appointing him lead plaintiff and adding him as a party plaintiff and appointing lead counsel. On January 14, 2008, Gilbert’s counsel filed a motion to certify the action as a class action, which has since been briefed by the parties and now awaits disposition by the Court.
On August 28, 2009, Judge W. Earl Britt certified the action as a class action.
According to an article dated December 15, 2009, Red Hat said Tuesday it has reserved $8.8 million to settle a class action lawsuit brought by shareholders four years ago. The Raleigh-based Linux company said it plans to exclude this one-time charge from the non-GAAP results for the quarter ended Nov. 30 that the company will report on Dec. 22. The lawsuit brought in the U.S. District Court for the Eastern District of North Carolina focuses on Red Hat’s restatement of financial results in July 2004. The suit claimed that Red Hat misled investors prior to announcing its earnings. The settlement, details of which are yet to be disclosed, is subject to final court approval, Red Hat said.
On March 29, 2010, the plaintiff filed a motion for preliminary approval of the proposed settlement. On July 8, 2010, the motion was approved. The Final Fairness Hearing is set for December 7, 2010. On December 10, 2010, Judge W. Earl Britt signed the Order granting the motion for final approval of the class action settlement.