Friday, August 27, 2010

San Francisco Judge Dismisses Class Action Against VeriFone

Marketwatch has an article about this case where Judge Marilyn Hall Patel has dismissed a shareholder derivative suit against Verifone.

Publicly traded companies are owned by shareholders who vote at annual meetings to elect a Board of Directors who elect the corporate officers. Shareholders have an interest because they have invested capital into the company, the corporate officers run the company. The Board of Directors make most large decisions for the company and are responsible for maintaining some oversight of the company.

If a shareholder thinks the Board of Directors are remiss in their duties to the company that shareholder (or many as in this case) can sue the board of directors on behalf of the company to compel them to do something. Whatever that something is, the shareholder needs to make a formal written demand to the company or explain that making such a demand would be futile before the court has jurisdiction to hear the case.

In this case, Charles R. King sued the board of directors on behalf of VeriFone for accounting irregularities that resulted in a restatement of earnings in 2007 stating that the Board of Directors systematically lacked controls to prevent these irregularities. Those problems caused VeriFone's stock price to plummet. Mr. King argued that notifying the Board of Directors would be futile because they had several interests in not executing oversight, among them, that they wanted to sell their stock during the misreporting period.

Judge Patel disagreed. She noted that there was no indication that the Board of Directors had knowledge of the situation and disregarded it to sell stock or that they intentionally avoided the bad news. She dismissed the second amended complaint with prejudice ending the lawsuit.

The case is: In re VeriFone Holdings Inc. Shareholder Derivative Litigation No. C 07-6347

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