Military contractor fails to dismiss shareholder lawsuit over accounting

(Reuters) — A federal judge rejected L-3 Communications Holdings Inc.’s bid to dismiss a lawsuit by shareholders seeking to recoup losses stemming from the defense contractor’s alleged accounting fraud in its aerospace systems business.

In a Wednesday night decision, U.S. District Judge Valerie Caproni in Manhattan said shareholders led by two Michigan pension plans can pursue claims that L-3 hid improprieties tied to a contract to service U.S. Army C-12 airplanes, including those raised by an internal management-level whistleblower.

The judge also dismissed related claims against CEO Michael Strianese and Chief Financial Officer Ralph D’Ambrosio, finding a lack of evidence that they acted recklessly or intended to defraud.

L-3 shares slid 12.3% on July 31, 2014, wiping out roughly $1.3 billion of market value, after the New York-based company said it would restate two years of results, take a charge against earnings, and fire four people over problems with the C-12 contract, including cost overruns and inflated sales.

Judge Caproni said the firings, including of the aerospace systems unit’s CFO, for what Mr. Strianese called “misconduct” gave rise to a “strong inference” that L-3 intended to defraud shareholders. She also said L-3’s alleged misstatements could be material.

The judge did not rule on the merits of the lawsuit, which seeks class-action status.

Neither L-3 nor lawyers for the company and its executives, immediately responded on Thursday to requests for comment.

The plaintiffs were led by the City of Pontiac General Employees’ Retirement System, Local 1205 Pension Plan, and the City of Taylor Police and Fire Retirement System.

David Rosenfeld, a lawyer for the plaintiffs, said his clients are pleased that the case against L-3 can go forward.