The Complaint alleges that during the Class Period, defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 by publicly issuing a series of false and misleading statements regarding the Company's business and financial results, thus causing IRF's common stock to trade at artificially inflated prices. In particular, the Complaint alleges that, unknown to investors, during the Class Period, defendants knew or recklessly disregarded that IRF's: (i) revenues, (ii) gross profits (iii) earnings, and (iv) accounts receivable were false and misleading, in violation of generally accepted accounting principles. In addition, the Complaint alleges that the Company's internal controls were inadequate.
The Complaint further alleges that on April 9, 2007, before the markets opened, IRF disclosed, among other things, that an internal investigation at the Company revealed "accounting irregularities" at one of the Company's foreign subsidiaries. The Company further disclosed that the accounting irregularities included among other things premature revenue recognition of product sales. In addition, according to the Complaint, based on an interim report of the investigation, the Audit Committee of the Board of Directors concluded that the Company's financial statements for the quarters ended December 31, 2006, September 30, 2006, March 31, 2006, December 31, 2005 and September 30, 2005, and for the year ended June 30, 2006, should no longer be relied upon. Furthermore, the Complaint alleges that the Company cited "material weaknesses in the internal control over financial reporting at a foreign unit."
On April 9, 2007, in reaction to IRF's surprising disclosure, its shares declined from $38.80 per share at the close of trading on April 5, 2007, to close at $35.97 per share, a decline of $2.83 per share or approximately 7.3%, on unusually heavy volume.
The Complaint also alleges that certain individual Defendants collectively sold approximately 364,000 IRF shares at artificially inflated prices for proceeds of approximately $13 million.
According to the Company’s FORM 10-K for the fiscal year ended June 28, 2009, following the Company's disclosure on April 9, 2007, that its Audit Committee was conducting an Internal Investigation into certain revenue recognition matters, a series of putative class action lawsuits was filed against the Company in the United States District Court for the Central District of California. The complaints were filed on behalf of a putative class of purchasers of Company stock from October 27, 2005 through April 9, 2007, and named as defendants the Company and certain of its present and former officers and directors. The complaints alleged violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 arising out of alleged accounting irregularities at the Company's Japan subsidiary. On July 22, 2007, the court consolidated all of the actions under the caption In re International Rectifier Corporation Securities Litigation (formerly Edward R. Koller v. International Rectifier Corporation, et., al.) , No. CV 07-02544-JFW (VBKx) (C.D. Cal.), and appointed the Massachusetts Laborers' Pension Fund and the General Retirement System of the City of Detroit (together, "Lead Plaintiffs") as co-lead plaintiffs.
On January 14, 2008, Lead Plaintiffs filed a Consolidated Class Action Complaint, which named as defendants several of the Company's former officers, but did not name any of its past or present directors except Eric Lidow and Alex Lidow. On May 23, 2008, the Court issued an order granting defendants' motions to dismiss, without prejudice, on the ground that Lead Plaintiffs failed to plead detailed facts sufficient to give rise to a strong inference of defendants' scienter.
On October 17, 2008, Lead Plaintiffs filed a second amended consolidated class action complaint ("SACC") alleging causes of action for securities fraud and control person liability against the Company, Alex Lidow, Michael P. McGee, and Robert Grant, and, for control person liability only, against Eric Lidow and purporting to bring suit on behalf of a putative class of investors who purchased Company securities between July 31, 2003 and February 11, 2008. On November 10, 2008, the Company filed a motion to dismiss the SACC on the grounds that plaintiffs had failed to plead with particularity facts raising a strong inference that the individuals who spoke on the Company's behalf during the putative class period knew, or were reckless in not knowing, that the Company's financial statements were inaccurate. On December 31, 2008 the District Court issued an order granting the Company's motion to dismiss plaintiffs' claim for control person liability and granting, in its entirety, defendant Robert Grant's motion to dismiss. These dismissals were with prejudice. The District Court denied the Company's motion to dismiss the securities fraud count and denied in their entirety motions to dismiss brought by defendants Alex Lidow, McGee, and Eric Lidow.
On January 7, 2009 the Court issued orders referring the matter for mediation, setting September 1, 2009 as the last day for a settlement conference, October 26, 2009 as the discovery cutoff, and January 12, 2010 as the first day of trial. On March 17, 2009 plaintiffs filed a motion for certification of the putative class, which was set for hearing on August 10, 2009.
On July 29, 2009, an agreement in principle was reached to settle the action. The proposed settlement is subject to negotiation and execution of a formal settlement agreement and is dependent upon final approval by the United States District Court for the Central District of California. The proposed settlement would resolve all class members' claims against the Company and certain of its former officers and directors. It would provide for a payment to the plaintiffs of $90 million, of which $45.0 million is to be paid by the Company's insurance carriers and $45.0 million by the Company. Class members will receive notice and have a right to object to and/or opt out of the settlement. Final consummation of the settlement will occur upon the entry of final judgment by the court approving the settlement as fair to all class members. The timing of approval process is dependent upon the court's calendar. However, the Company expects that the approval process will be completed before the end of the calendar year 2009. The parties have agreed to suspend all discovery and other litigation activity in this case while the settlement papers are being prepared. The Company has accrued a reserve of $45.0 million in fiscal year 2009 for this settlement.
On September 25, 2009, Judge John F. Walter signed the Order preliminarily approving the settlement and providing for notice. The Final Approval Hearing was set for February 8, 2010. On February 8, 2010, the Court entered the Final Judgment and Order of Dismissal with Prejudice approving the settlement. The Court also approved the plan of allocation and awarded attorneys’ fees and expenses.