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Electronics firm's securities fraud case reinstated

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A federal appeals court has reinstated a securities fraud class action lawsuit against an electronics company and three of its officers, who were charged with “knowingly and recklessly” propping up the company’s stock price when it was being considered for an acquisition that eventually fell through.

Tuesday’s ruling by the U.S. Court of Appeals for the District of Columbia Circuit in In Re: Harman International Industries Inc. Securities Litigation focused on two statements officials of Stamford, Connecticut-based Harman allegedly made during conference calls with analysts in April and September 2007, and a third that was made in its annual report in August 2007.

On April 26, 2007, the company had announced its potential acquisition by private equity firm Kohlberg, Kravis, Roberts & Co., New York, and an unnamed private equity affiliate of New York-based The Goldman Sachs Group Inc.

On the same day and on the two subsequent occasions, Harman made statements about the past and forecasted sales of its products, including its personal navigational devices, according to the ruling.

Harman’s stock price rose markedly, but when it announced in September 2007 the acquisition plan had been abandoned, its shares fell by more than 24%; fell again in January 2008 when it lowered its projected earnings per share; and once more in February 2008, when it announced its second-quarter financial results, including lower sales on its personal navigational devices, according to the ruling.

The lead plaintiff in the case, the Little Rock-based Arkansas Public Employees Retirement System, sued the company and the three officers charging securities fraud.

The U.S. District Court for the District of Columbia dismissed the case in 2014, stating two of the alleged statements during the analysts’ calls “fell within the statutory safe harbor for forward-looking statements accompanied by meaningful cautionary language, and the third statement was ‘puffery’ and thus inactionable,” said the appeals court ruling.

But a three-judge panel of the D.C. Circuit unanimously disagreed. The complaint “plausibly alleges” that the statements made during the analysts calls “were not entitled to safe harbor protection because the accompanying cautionary statements were misleading insofar as they failed to account for historical facts about the (personal navigational devices) that would have been important to a reasonable investor,” said the ruling.

“We also hold that the third statement, in the company’s annual report, is plausibly understood, in the alleged circumstances, as a specific statement about the recent financial performance and not mere ‘puffery,’” said the panel in reversing the complaint’s dismissal and remanding the case for further proceedings.

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