Company's Share Prices Drop After Alleged Performance Manipulation

Case Overview

This is a securities class action case on behalf of purchasers of a company’s common stock from the company’s initial public offering over the course of 5 years. It was alleged that the company manipulated its performance by engaging in self-dealing, altering loan applications, and misleading institutional directors. As a result, the company was forced to amend its annual report, which rendered prior SEC filings unreliable. As a result, share prices dropped 65% from when they traded during the week of the company’s IPO. An expert in IPO due diligence was sought to opine on the requirements for reasonable investigations by the board of directors to the truth and accuracy of registration statements for initial public offers.

Questions to the Economist expert and their responses

Please describe your experience serving on a board of directors for a company undergoing an IPO.

I worked on IPOs as a board member, an executive, and an investment banker. I served on the board of a leading coffee company before its IPO. I also served on the board of a company that develops and licenses intellectual property through its IPO. I am extremely familiar with the current SEC and Sarbanes Oxley requirements for publicly traded companies.

What are reasonable investigations that a board of directors would undertake in order to verify the accuracy of registration statements for an IPO, if any?

The audit committee should have done proper audit due diligence to assure the board of directors that the audits that were being done for the SEC filings (S-1 and subsequent 10-Ks) were conducted properly and that should have included due diligence on whether there was an opportunity for fraud or misstatement of the financial statements. Additionally, the audit committee should have been heavily involved in the Sarbanes Oxley Section 404a analysis which would have uncovered any material weaknesses in the company's financial controls as well as the tone at the top. This SOX work, if done properly, by the internal auditor and/or outside consultants with no relation to the auditors and overseen by the audit committee of the board of directors, would have uncovered whether there was any self-dealing or altering of loan applications.

About the expert

This qualified expert earned his BA in economics from Claremont McKenna College and his MBA from Harvard Business School, and became a certified director at UCLA Anderson School of Management. He formerly served as a vice president of investment banking at Lufkin and Jenrette and at Wertheim Schroder and Company. He went on to serve as a co-founder and CEO of DDD Group and as CEO and CFO of Hypertension Diagnostics Inc. He has served on the board of various large private companies, and his currently a board member of two large private retailers in Washington and Texas.