According to a press release dated May 27, 2005, Novell's $13.9 million settlement of a class-action shareholder securities fraud lawsuit has been finalized in federal court. U.S. District Judge Tena Campbell granted final approval to the settlement Thursday. Novell, a networking software and Linux distribution firm that originated in Utah but relocated its headquarters to Waltham, Mass., last year, continued to deny all claims by plaintiffs Domenico Pirraglia, Bella and Bernard Pasternak and other shareholders. But it said its attorneys had concluded further litigation would be protracted and expensive and payment of the settlement was justified given the uncertainty and risk of such a complex case
On February 7, 2005, the Court entered the Stipulation for settlement. On February 24, 2005, the Court entered the Order by U.S. District Judge Tena Campbell, preliminarily approving the settlement. A hearing on the Final Approval of settlement is set for May 26, 2005.
As reported in Novell’s Form 10-K For the Fiscal Year Ended October 31, 2003, after a first dismissal of the suit on November 3, 2000 and a subsequent amendment to the complaint filed on February 20, 2001, the U.S. District Court dismissed the amended complaint with prejudice for failure to state a claim. Much of the District Court’s Order of Dismissal was recently affirmed by the Tenth Circuit Court of Appeals while certain claims were remanded for the District Court’s further review.
On December 6, 1999, U.S. District Judge Jeremy Fogel issued an Order transferring the case to the U.S. District Court for the District of Utah.
The complaint alleges the defendants, Novell and its top officers and directors and Novell's outside auditor and accounting firm, engaged in a fraudulent scheme and course of business that operated as a fraud or deceit on purchasers of Novell stock. Novell sells computer software products for use by business enterprises.
Specifically, the complaint alleges that during 95-96, Novell's business became very troubled due to the failure of several acquisitions it had made and the weakening of its competitive position as its products lost ground in the marketplace. Novell's revenues stagnated and/or declined, it lost several top executives and accumulated huge amounts of excessive inventories in its distribution channels. Due to these problems and the resulting doubts over Novell's continuing ability to achieve revenue and earnings per share ("EPS") growth, Novell's stock was a very poor performer, declining from $23-$24 in 95 to less than $15 per share in early 96, notwithstanding the strong overall advance of stocks -- especially technology stocks -- over this time period. During its 2ndQ F96 ended 4/27/96, Novell suffered a large revenue decline and a loss, as it had to completely cease shipping product into its indirect distribution channels to try to "clean out" the "boxed software" in its channel. However, it assured investors that this extraordinary step would eliminate Novell's excessive channel inventories of "boxed software" and result in stronger and more predictable revenue and EPS growth for Novell going forward. However, when Novell's 3rdQ F96, ended 7/27/96, revenues and EPS continued to show declines, analysts and Novell stockholders were furious over this continued poor performance of Novell and, as a result, its stock continued to fall, ultimately reaching an all-time low of $8-3/4 per share.
In order to conceal the serious problems with Novell's business and thus support and artificially inflate Novell's stock price, Novell's insiders concealed the true nature and extent of the problems which were adversely impacting Novell's business and affirmatively misrepresented the success and state of demand for Novell's products and its prospects for revenue and EPS growth during F97. Defendants manipulated and inflated Novell's reported EPS for the 4thQ of F96, ended 10/26/96, and the 1stQ of F97, ended 1/31/97, making Novell appear profitable when, in fact, it had suffered losses. Novell improperly and prematurely recognized revenue on shipments of products into its distribution channel and dumped millions of dollars worth of product on the gray market. Novell also failed to record required losses for future product returns and uncollectible accounts receivables which they knew would occur as a result of their improper accounting practices. By these financial manipulations, Novell exceeded its 4thQ F96 forecasted EPS "numbers" and was able to show the quarter-over-quarter revenue and EPS growth it had forecasted and to report 1stQ F97 revenues and EPS of $375 million and $.15, respectively.
The complaint further alleges that on or around 3/18/97, Novell announced that Eric Schmidt had been named Chairman of Novell's Board and its Chief Executive Officer. Then, on 4/22/97, just weeks after Schmidt joined Novell, Novell revealed that its 2ndQ F97 results -- the quarter to end 4/30/97 -- would be much worse than earlier forecast, with revenues of only about $300 million, a sharp decline from 1stQ F97 revenues of $375 million, due to poor sales to Novell's OEMs and distributors of boxed software products. Schmidt stated he would make the changes needed to better manage and control Novell's business -- especially product inventories in the distribution channel! Upon this revelation, which one analyst called "brutal" and "not pretty," on 4/23/97, Novell's stock fell to $7 on huge volume of 16.6 million shares.
