According to the Company’s FORM 10-Q for the quarterly period ended June 30, 2006, in July 2004, a series of four purported class action lawsuits, now consolidated, were filed in the U.S.D.C. for the Northern District of Illinois, in connection with the company’s restatement of its consolidated financial statements, previously announced in July 2004, naming Baxter and its current Chief Executive Officer and then current Chief Financial Officer and their predecessors as defendants. The lawsuits allege that the defendants violated the federal securities laws by making false and misleading statements regarding the company’s financial results, which allegedly caused Baxter common stock to trade at inflated levels during the period between April 2001 and July 2004. As of August 2, 2007, the District Court had dismissed the last of the remaining actions and the matter remains in appeal.
The original complaint charges Baxter and certain of its officers with violations of the Securities Exchange Act of 1934. More specifically, the complaint alleges that during the Class Period defendants issued false and misleading statements concerning its business and financial condition. Specifically, defendants failed to disclose and misrepresented the following material adverse facts which were known to defendants or recklessly disregarded by them: (1) that the Company’s financial results during the Class Period were materially overstated; (2) that the overstatement occurred because the Company improperly and “incorrectly” recognized $40 million in revenues and maintained inadequate and “incorrect” provisions for bad debts relating to its Brazilian operations; (3) that as a result of this, the Company’s financial results were in violation of Generally Accepted Accounting Principles (“GAAP”); (4) that the Company lacked adequate internal controls; and (5) that as a result of the above, the Company’s financial results, including its net income figures, were materially and artificially inflated at all relevant times.
The complaint further alleges that on July 22, 2004, Baxter announced that it planned to restate its financial results for the years 2001 through 2003, and for the first quarter of 2004. The restatement was primarily the result of incorrect revenue recognition and inadequate provisions for bad debts in Brazil during that period, which would result in a decrease in net income over the restatement period by an amount expected to be no more than $40 million, or $0.07 per diluted share. The restatement was expected to result in adjustments to sales over the period of an amount not more than $70 million, representing less than 0.5 percent of sales in any year. News of this shocked the market. Shares of Baxter fell $1.48 per share, or 4.59 percent, to close at $30.79 per share on unusually heavy trading volume.