Plaintiffs have filed a notice of appeal in the Ninth Circuit Court of Appeals.
According to a press release dated August 23, 2006, Digimarc Corporation announced the U.S. District Court of Oregon has dismissed the final of three consolidated securities class action lawsuits that were filed against the Company and certain of its current and former executive officers, arising from accounting errors discovered by the Company in 2004 and rectified through a restatement of certain prior period financial statements. The initial securities litigation was dismissed on August 4, 2006, and the two derivative lawsuits were dismissed on May 5 and August 11, 2006.
As disclosed by the Company’s FORM 10-Q for the quarterly period ended MARCH 31, 2006, beginning in September 2004, three purported class action lawsuits were commenced against the Company and certain of its current and former directors and officers by or on behalf of persons claiming to have purchased or otherwise acquired the Company’s securities during the period from April 17, 2002 to July 28, 2004. These lawsuits were filed in the United States District Court for the District of Oregon and were consolidated into one action for all purposes on December 16, 2004. On May 16, 2005, plaintiffs filed an amended complaint. On November 30, 2005, the Court granted the Company’s motion to dismiss the amended complaint on the grounds that plaintiffs had failed to allege facts sufficient to support their allegation that the defendants knowingly or recklessly acted in violation of the securities laws. Plaintiffs filed a second amended complaint on January 17, 2006. On February 14, 2006, the Company filed a motion to dismiss the second amended complaint on the grounds that plaintiffs still fail to allege facts sufficient to support their allegation that the defendants knowingly or recklessly acted in violation of the securities laws. This motion is pending.
The original complaint alleges that throughout the Class Period, Defendants issued, or caused to be issued, false and misleading statements in violation of Sections 10(b) and 20(a) of the Exchange Act, in order to artificially inflate the value of Digimarc stock while they sold millions of dollars of their personal holdings for tremendous personal gain. Under the direction of the CFO, the Company inflated its profitability during the class period by maintaining insufficient accounting controls which created the environment where improper accounting could be used to manipulate Company financial results. The Company now admits that it improperly accounted for software development costs and project capitalization at its Digimarc ID Systems business unit. In order to correct the misleading financial statements previously issued, the Company has indicated that it will need to restate all its financial reports for 2003 and 2004, and may also be required to restate earlier periods as well. Without the improper accounting manipulations, the restatement of which the Company indicates will be in the millions of dollars, the Company may not have been able to meet analysts' earnings per share estimates during the class period. In addition, while the accounting manipulations were ongoing, Company insiders sold over $10 million of Digimarc stock. When the Company substantially missed its earnings expectations on July 28, 2004, Digimarc's stock plummeted on usually high trading volume of 653,600 shares, from its closing price of $12.07 on July 28, 2004, to a closing price of $9.04 on July 29, 2004. Analysts from Morgan Keegan & Co., D.A. Davidson & Co. and Janney Montgomery Scott, LLP all downgraded the Company.