According to a press release dated March 29, 2007, a federal judge Thursday dismissed a class action lawsuit alleging securities fraud against XM Satellite Radio Holdings Inc. Judge Ellen Segal Huvelle of the U.S. District Court for the District of Columbia said the suit, filed in May 2006, 'failed to identify any materially misleading statements or omissions' by the company that would support a lawsuit. A group of XM shareholders argued in the suit that the company's stock price in early 2006 was largely based on the number of its subscribers and its marketing costs for attracting those subscribers. The suit charged that XM executives predicted in mid-2005 that their marketing costs for acquiring new subscribers would decline or stabilize. When XM disclosed in February 2006 that its marketing expenses had significantly increased, its shares dropped almost 28.5 percent, the shareholders' complaint said. The investors sought to recover financial losses they incurred for stock or stock options purchased between July 28, 2005 and Feb. 16, 2006. But Huvelle ruled that the company's projections of its marketing costs were 'forward-looking statements...accompanied by meaningful cautionary language' and therefore shielded from lawsuits. The plaintiffs also failed to show that the company's statements 'lacked a reasonable basis when made,' Huvelle wrote.
On August 1, 2006, the Court entered the Memorandum Opinion and Order signed by U.S. District Judge Ellen S. Huvelle granting the motion to appoint lead plaintiffs. On September 26, 2006, a Consolidated Class Action Complaint was filed. On November 14, 2006, the defendants filed a motion to dismiss the Consolidated Class Action Complaint.
The original Complaint alleges that defendants violated federal securities laws by issuing a series of materially false statements. Specifically, defendants made misrepresentations regarding XM's ability to reduce the costs of its new subscribers as it reached its goal of 6 million subscribers by year end 2005. In reality, XM would be forced to spend extraordinarily large sums of money in the fourth quarter of 2005, in order to stay on track to achieve its stated goal. Despite defendants' knowledge that XM would be making those huge expenditures in the fourth quarter of 2005, defendants failed to disclose to the market that XM's cost of subscriber acquisition would rise to extraordinary levels, leading to huge increases in XM's net losses, which was in complete reversal of the trends of declining subscriber acquisition costs and net losses defendants were reporting. During the Class Period, several key insiders of XM made huge sales of their personal taking advantage of the artificial inflation of XM's common stock.
The complaint further alleges that on or around February 16, 2006, defendants issued a press release announcing XM's results for the fourth quarter 2005 and year 2005 results. In the release, they disclosed the truth about the skyrocketing level of XM's subscriber acquisition costs. On this news, XM's common stock fell 13% to close at $21.96 on February 17, 2006.