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Investors Suing Microsoft Over Misleading Surface RT Info

By - Source: Robbins Geller Rudman & Dowd | B 31 comments

It seems that the press wasn't the only entity unaware of how dismal Surface RT sales were until Microsoft's fourth quarter and full year results report back in July. The company revealed a $900 million "inventory adjustment" thanks to a stockpile of unsold Surface RT tablets, and now Microsoft investors are suing the company, claiming that they were "misled" because Microsoft failed to fully disclose sales figures of the Surface RT tablet during a specific window.

The class action lawsuit was filed by the Robbins Geller Rudman & Dowd law firm in the United States District Court for the District of Massachusetts. It was on behalf of purchasers of Microsoft common stock during the period between April 18, 2013 and July 18, 2013, aka the "Class Period". It claims that Microsoft violated the Securities Exchange Act by providing materially false and misleading statements regarding financial performance related to the ARM-based tablet.

According to the lawsuit, Microsoft misrepresented and failed to make public the fact that Surface RT was suffering poor demand and lackluster sales, that the overall inventory experienced a material decline in value during the quarter ending March 31, and that the financial statements for the same quarter were materially false and misleading. This non-disclosure of actual facts violated Generally Accepted Accounting Principles and Microsoft’s publicly disclosed policy of accounting for inventories.

The class-action lawsuit also alleges that Microsoft's Form 10-Q for its third quarter failed to disclose then presently known trends, events or uncertainties associated with the Surface RT that would likely have a material effect on Microsoft’s future operating results. Ultimately Microsoft is accused of having no basis for making positive statements about Surface RT during the defined Class Period knowing full well that Surface tablet sales overall were extremely poor.

The icing on the cake, according to the lawsuit, was the financial results for the fiscal 2013 fourth quarter and year end. The company reported revenue of $19.9 billion and net income of $4.97 billion, or $0.59 per share. These results were impacted by the $900 million inventory charge which amounted to $.07 per share. Thus common stock took the biggest hit in four years, dropping $4.04 per share, or 11.4 percent.

Adding to that, in late July, Microsoft admitted that the combined revenue of Surface RT and Surface Pro tablets was only $853 million since the tablet series launched in October 2012  (Surface Pro didn't appear until February 2013). That's less than the charge Microsoft took thanks to the stockpile of Surface RT tablets, thus the tablet division was nearly $50 million in the hole due to the Surface RT model.

Plaintiffs seek to recover damages on behalf of all purchasers of Microsoft common stock during the Class Period, the firm said. In addition to Microsoft on a whole, individual defendants named in the lawsuit include CEO Steve Ballmer, former CFO Peter Klein, VP of Finance Frank Brod and Executive VP of Marketing Tami Reller.

The actual lawsuit can be read in pdf format here. Microsoft shareholders wanting a piece of the Redmond pie are encouraged to contact the law firm via its website no later than October 11, 2013.

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  • 2 Hide
    sean1357 , August 14, 2013 12:02 PM
    Give me a break and look at Ballmer face...
  • 0 Hide
    gamerk316 , August 14, 2013 12:02 PM
    Knew this was coming down eventually. This could be big, because this lawsuit, unlike so many others, has legs.

    MSFT would be wise to settle, ASAP.
  • 0 Hide
    dextermat , August 14, 2013 12:35 PM
    What's up with industries always lying to sell their stuff. That's too bad
  • 7 Hide
    gggplaya , August 14, 2013 12:44 PM
    It's clear to me that microsoft's first priority is figuring out ways to make more money instead of actually predicting what consumers want. They need to build a new roadmap, and design their products and financial model around their customers. It seems now they are trying to copy the competition, build products to try and draw in new customers but alienate existing customers, and nickel and dime for fees on everything.

    Not the way to do business.
  • 3 Hide
    jimmysmitty , August 14, 2013 12:46 PM
    Honestly I find the Surface to be a better option than the iPad but the truth is that the masses are blind sheep and appeal to mass marketing. Microsofts current RT adverts have been pretty good but its going to be hard for anyone, even MS, to break Apples hold on the public.

    As for the lawsuit, this is normal. When there is leftover inventory the company liquidates it and pulls it from profits. Not sure how this will go but it makes me feel like this is investors suing a company who started something new but failed. At least in the old days you used to invest with the risk of total loss. But I guess now you just sue to get your money back.
  • 5 Hide
    gggplaya , August 14, 2013 1:00 PM
    Quote:
    Honestly I find the Surface to be a better option than the iPad but the truth is that the masses are blind sheep and appeal to mass marketing. Microsofts current RT adverts have been pretty good but its going to be hard for anyone, even MS, to break Apples hold on the public.

    As for the lawsuit, this is normal. When there is leftover inventory the company liquidates it and pulls it from profits. Not sure how this will go but it makes me feel like this is investors suing a company who started something new but failed. At least in the old days you used to invest with the risk of total loss. But I guess now you just sue to get your money back.


    Surface pro yes, but not the surface RT. It fails as a tablet due to the lack of apps in comparison to IPAD and Android and it fails as a PC because you can't install windows programs on it. Then you get to the price, and you're like no thanks!!!!

    Now if the surface pro came down to ipad/android price level, then we're talking. But as it stands now, you can buy a dedicated tablet with better battery life as a tablet, as well as a cheaper PC that outperforms the surface pro for the same amount of money.
  • 5 Hide
    JPNpower , August 14, 2013 1:28 PM
    Ugh Microsoft! We're supposed to make unfair amounts of money easily! what you expect us to work and earn our money like peasants!? We invested in you for free money and we'll get it from you some way or other. My third Rolex ain't gonna pay for itself!

    Cheers
    Investors
  • 1 Hide
    cRACKmONKEY421 , August 14, 2013 1:53 PM
    whoopsies
    should have just stuck with x86. duh.
  • 1 Hide
    pedro_mann , August 14, 2013 2:11 PM
    Intel had Itanium. Microsoft has Windows 8/Surface RT. Looks like coming out with a device that costs too much, has an ugly sounding name, and doesn't support Group Policy, among other things - could be considered a disaster. All these decisions to alienate existing customer bases and push the new app store model, where M$ gets a bigger chunk of the pie.

    I actually believe there is a way to do both, elegantly. But this isn't it.
  • 3 Hide
    aevm , August 14, 2013 2:44 PM
    LOL, "Microsoft failed to make public the fact that Surface RT was suffering poor demand and lackluster sales". Didn't everybody know that even BEFORE Surface RT was released?
  • 4 Hide
    killerclick , August 14, 2013 2:49 PM
    If was fairly obvious how Surface RT was selling.
  • 2 Hide
    ethanolson , August 14, 2013 2:49 PM
    So... the investors are stupid and want someone to pay for their stupidity? Sounds like an enticement made available by a liberalized legal system. Not good.
  • 3 Hide
    sykozis , August 14, 2013 3:04 PM
    Quote:
    Honestly I find the Surface to be a better option than the iPad but the truth is that the masses are blind sheep and appeal to mass marketing. Microsofts current RT adverts have been pretty good but its going to be hard for anyone, even MS, to break Apples hold on the public.

    As for the lawsuit, this is normal. When there is leftover inventory the company liquidates it and pulls it from profits. Not sure how this will go but it makes me feel like this is investors suing a company who started something new but failed. At least in the old days you used to invest with the risk of total loss. But I guess now you just sue to get your money back.


    Microsoft misrepresented the risk, which is illegal. That's the only reason this class-action suit has an extremely high probability of succeeding in court. Had MS presented their financial information accurately, most of those investors would have steered clear. Since MS misrepresented their financial information by not accurately reporting sales data for Surface and SurfaceRT, many investors believed the stock was safe.

    Quote:
    LOL, "Microsoft failed to make public the fact that Surface RT was suffering poor demand and lackluster sales". Didn't everybody know that even BEFORE Surface RT was released?


    Not all investors read tech news prior to buying stock. If they did, there'd be much less shock when things like this happen.

    Quote:
    So... the investors are stupid and want someone to pay for their stupidity? Sounds like an enticement made available by a liberalized legal system. Not good.


    The investors are stupid for believing financial information that's required by law to be as accurate as possible? MS intentionally hid financial data from investors knowing full well what the outcome would be once it was made public. The investors had no way of knowing that MS was falsifying financial data as it's an illegal act to do so. MS could actually end up facing criminal charges by the time this is over....if the DoJ even cares anymore...
  • 1 Hide
    DavidC1 , August 14, 2013 3:29 PM
    Microsoft DID mislead investors in Surface sales. There were rumors once that Surface RT alone in 2012(since that was the only Surface) would sell close to 4 million, when its clear the COMBINED sales of Surface Pro and RT amounted to approximately only 1 million*. Microsoft did not ONCE try to repute the fact, rather pushing with irrelevant news like how there were xx millions of Windows 8 licenses sold.

    *$853 million in revenue, and assume most of the sales are Surface Pro. Surface Pro's cheapest model is $800, but because its likely majority of the sales, the Average Selling Price won't be much lower than $800. The Surface RT's starting price(sans the recent price cut) is $499 now? Even assuming the ASPs of combined RT/Pro is $499, it means they have sold only 1.7 million. Likely the ASP is close to $700 and therefore end up with only 1.1-1.2 million in sales.

    That's pathetic. Unfortunately it'll take more than that to convince Board to fire Ballmer.
  • 0 Hide
    jdwii , August 14, 2013 3:33 PM
    I said it over and over again yet microsoft fanboys would not listen, Nobody want a surface tablet not too many people want windows 8, no one wants a windows phone and people are already used to the android OS and IOS because their smartphones have it why change?
  • 0 Hide
    JPNpower , August 14, 2013 3:41 PM
    I'm confused how people believe that sacking Ballmer must be the great solution that would change everything. Why?
  • 0 Hide
    teknic111 , August 14, 2013 5:13 PM
    Microsoft should have introduced the Surface RT for $300 and the Pro for $500. Their number one goal in the beginning, should have been building a user base, not sell tablets for profit!
  • 0 Hide
    STravis , August 14, 2013 6:23 PM
    The Ballmer pic is just funny.
  • 1 Hide
    nuvon , August 14, 2013 7:11 PM
    The real winners are the fxxxing greedy lawyers
  • 0 Hide
    Avus , August 14, 2013 8:14 PM
    With so many RT tablet piled up, MS should consider bundle them with Xbox180 and made them like a Wii U controller....
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