Hard disk drive maker Seagate was recently slapped with a $300 million fine by the U.S. Department of Commerce for violating US sanctions that applied export controls on products sold to Huawei, but that may be just the tip of the iceberg. Over the course of the last two weeks, a slew of law firms have filed class action suits against Seagate on behalf of shareholders who allege they were misled about the company selling millions of hard drives to the banned Huawei.
Those sales totaled $1.1 billion in revenue, of which Seagate profited an estimated $150 million. After paying $300 million for that transgression, the toll will become higher as the class action proceeds, alleging that Seagate made materially false and/or misleading statements to its shareholders about its business dealings with the Chinese tech company.
The U.S. government banned sales of a broad class of devices to Huawei back in 2019. Seagate's competitors, Western Digital and Toshiba, immediately ceased providing hard drives to Huawei. However, Seagate contended that its HDD sales were legal, even though Western Digital insisted the devices fell under the umbrella of US sanctions.
Seagate continued selling 7.4 million drives to Huawei from August 2020 to September 2021, even inking a rather unneeded deal to become Huawei's 'sole supplier (no one else would sell to Huawei anyway). The issue eventually caught the attention of a U.S. Senator who called for an investigation. That finally lead to the $300 million fine that was levied against Seagate by the US Department of Commerce (payable in $15 million increments every quarter for five years).
These sorts of fines aren't good for the bottom line or for shareholder value. As such, multiple law firms are now soliciting lead plaintiffs for a class action lawsuit that has been filed against Seagate. We've seen calls for lead plaintiffs from 14 law firms over the last two weeks (1, 2, 3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 13, 14), so there's no shortage of legal representatives for those impacted.
To qualify, litigants will have to have experienced a loss on Seagate stock that was purchased between September 15, 2020, and October 25, 2022. The court will select a lead plaintiff on September 8, 2023, and the class action lawsuit will then proceed against Seagate. The lawsuit alleges that Seagate issued false and/or misleading statements about:
- The nature and magnitude of Seagate’s HDD sales to Huawei, including that Seagate experienced a significant acceleration in sales to Huawei immediately after the BIS rules went into effect and Seagate’s competitors stopped selling to Huawei; and
- That the underlying details of Seagate’s HDD manufacturing process, including the use of covered U.S. software and technology in “essential ‘production'” processes, rendered its sales to Huawei in violation of the BIS export rules
- As a result, Seagate was in blatant violation of the BIS export rules which resulted in an ongoing investigation by the U.S. Department of Commerce and exposed Seagate to hundreds of millions of dollars in fines and penalties.
- As a result, Defendants’ positive statements about the company’s business, operations, and prospects were materially misleading and/or lacked a reasonable basis at all relevant times.
The lawsuit comes amidst what could be easily defined as a challenging time for Seagate, as the industry-wide slump has led the company to recently announce sweeping layoffs. We've reached out to Seagate for comment and will update as necessary.