Opinion ID: 790831
Heading Depth: 2
Heading Rank: 1

Heading: introduction

Text: 3 PwC, or its predecessor Coopers & Lybrand, LLP, served as Telxon's outside auditors from October 1990 until the relationship was terminated in July 1999. Telxon designs, manufactures, and distributes transaction-based wireless and mobile information systems (including, for example, retail bar-code scanners). Although Telxon became a wholly owned subsidiary of Symbol Technologies (Symbol) in November 2000, Telxon was an independent company whose stock was traded on the NASDAQ exchange at all times relevant to WPMC's fraud claims. 4 WPMC alleges that the Telxon defendants acted with PwC to falsely inflate Telxon's financial results in the audited financial statements for fiscal year (FY) 1996, FY 1997, and FY 1998, as well as the unaudited statements for the first two quarters of FY 1999 (ending June 30 and September 30, 1998). The individual defendants were officers during the alleged fraud. Frank Brick was promoted to president of Telxon in June 1996, and then served as chairman and CEO from February 1997 until his termination in March 1999. Kenneth Haver was Telxon's CFO and senior vice-president of finance and administration from March 1995 until his termination in March 1999. WPMC named two other former officers as defendants: James Cleveland, who was president from February 1997 through January 2000; and Gary Grant, who served as controller from 1997 through September 2001. 1 5 During Brick's tenure, Telxon reported improved financial results and purported to meet or beat expectations for eleven consecutive quarters. In April 1998, Symbol Technologies made its first offer to buy out Telxon stock at a premium—offering $38 per share at a time when the stock was trading at $24.75. Brick touted Telxon's improved financial condition and its ability to generate consistent and predictable growth in the future. In May 1998, Telxon rejected Symbol's offer as too low. On June 2, 1998, Symbol offered $40 per share, or $42 per share in cash and stock. Telxon rejected the offer the same day, and WPMC began buying Telxon stock. 6 WPMC alleges that its decision to invest in Telxon was based on Brick's public statements about Telxon's financial results, the audited financial statements for FY 1996 and FY 1997, and PwC's certifications that the statements were prepared in compliance with Generally Accepted Auditing Principles (GAAP) and that its audits were conducted in accordance with Generally Accepted Auditing Standards (GAAS). WPMC even inputed the data from the FY 1996 and FY 1997 statements into a computer modeling program and analyzed the results before deciding to accumulate Telxon stock. 7 Between June 2 and June 11, 1998, WPMC purchased 730,000 shares of Telxon stock, representing 4.9% of the outstanding shares, and launched a proxy fight to force a change in the board of directors. The proxy fight resulted in litigation, which was settled in August 1998. Telxon agreed that it would not invoke a poison pill if it received a fully financed cash offer for more than a specified premium. As a result of the settlement, WPMC's candidate joined the board of directors in November 1998. By December 11, 1998, WPMC had purchased nearly 900,000 shares of Telxon stock for more than $28 million. 2 8 In November 1998, Telxon advised Symbol that it would accept $40.25 per share if the deal were closed quickly and without an examination of the books. As was reported in the Wall Street Journal on December 24, 1998, Symbol insisted on looking at the books and what they found not only helped derail a $900 million takeover, but also was followed within a single week by a restatement of Telxon's earnings for the quarter ending September 30. 9 Symbol advised Telxon that its due diligence uncovered $14 million in improperly recognized revenue at the close of the second quarter (2Q) of FY 1999 (ending September 30, 1998), for purported sale of equipment to one of its value added retailers when there was no end buyer and the sale was indirectly guaranteed by Telxon. This, WPMC claims, was a clear violation of GAAP and accounted for a 47% jump in profits before nonrecurring items for 2Q FY 1999. Without this treatment, Telxon revenue would have been flat and Telxon would have shown a quarterly loss. 3