Microsoft (NASDAQ:MSFT) has received a lot of negative press about Windows 8 and the Surface RT lately. Just last year investors had high hopes for the new tablets with the unmistakable "snap-on" color coordinated key board that made it function more like a laptop and less like a run of the mill iPad impersonator.
But last week a class action suit was filed against the company for allegedly misrepresenting facts about the success of those tablets and therefore violating SEC rules and regulations. It involves shareholders that purchased the stock between April 18 and July 18, 2013. According to the filing:
Specifically, defendants misrepresented and failed to make public the following adverse facts: (I) that the Company's Surface RT product was experiencing poor customer demand and lackluster sales; (ii) that the Company's Surface RT inventory experienced a material decline in value during the quarter ended March 31, 2013; (II) that the Company's financial statements for the quarter ended March 31, 2013 were materially false and misleading and violated Generally Accepted Accounting Principles and Microsoft's publicly disclosed policy of accounting for inventories; (iv) that the Company's Form 10-Q for its third quarter of 2013 failed to disclose then presently known trends, events or uncertainties associated with the Surface RT product that were reasonably likely to have a material effect on Microsoft's future operating results; and (V) that based on the foregoing, defendants lacked a reasonable basis for their positive statements about the Company's Surface RT product during the Class Period.
It went on to say that the negative information was reported to the public for the first time on July 18 in an earnings press release for the quarter ending June 30, 2013. This caused the stock to fall $4.04 per share, its biggest decline in over four years:
For the quarter, the Company reported revenue of $19.9 billion and net income of $4.97 billion, or $0.59 per share. The Company's results for the quarter were adversely impacted by a $900 million inventory charge, or an amount equal to $.07 per share, related to Surface RT "inventory adjustments."
According to the Seattle Times, the suit was filed in Massachusetts because it has jurisdiction over the SEC:
The suit, filed by a number of law firms including San Diego-based Robbins Geller Rudman & Dowd, was on behalf of plaintiff Gail Fialkov and others in her class. It was filed in the U.S. District Court for the District of Massachusetts, which has jurisdiction over the U.S. Securities and Exchange Commission.
Microsoft declined to comment on the suit. Every big company gets sued. And with most of the suits the outcome isn't announced for years, if ever. So it's really hard to quantify. However if the company is found to be in violation of SEC rules and regulations, that is a whole different story. Microsoft shareholders should stay tuned to the latest developments. The costs of fines and repayment of damages to that many shareholders would be astronomical.
Fund ownership for the quarter ending June 30 was made public on Thursday. And most of the Big Money Funds were very bullish on Microsoft. Almost 2,000 institutions owned close to 5.8 billion shares. The new and increased positions greatly outnumbered the decreased and sold out positions at the end of the quarter. Of course this was before the July 18 announcement of the $900 million inventory charge mentioned in the class action suit. Many of these institutional fund owners bought and owned shares during the "class time period" and they may join in the suit to try to recover any damages for their investors:
|Ownership Analysis||# of Holders||Shares|
|Total Shares Held:||1,950||5,779,870,755|
|Holders With Activity:||1,829||892,303,518|
|Sold Out Positions:||97||40,067,962|
Of the top 15 funds that currently own Microsoft, JPMorgan Chase was the only significant seller at almost 10%, while FMR and Capital World Investors greatly increased their positions. CWI added close to 90 million shares. Vanguard is the largest fund owner with shares that are valued at over $11.3 billion:
|Owner||Date||Shares Held||Chg Shares||Chg%||Value 1,000s|
|VANGUARD GROUP INC||06/30||357,946,067||3,862,016||1.09||11,382,685|
|STATE STREET CORP||06/30||328,873,653||(3,310,688)||(1)||10,458,182|
|CAPITAL RESEARCH GLOBAL INVESTORS||06/30||214,204,028||20,356,909||10.50||6,811,688|
|BARCLAYS GLOBAL INVESTORS UK HOLDINGS LTD||06/30||209,298,093||2,332,619||1.13||6,655,679|
|CAPITAL WORLD INVESTORS||06/30||192,598,100||89,467,100||86.75||6,124,620|
|BANK OF NEW YORK MELLON CORP||06/30||153,829,299||3,896,699||2.60||4,891,772|
|WELLINGTON MANAGEMENT CO LLP||06/30||141,454,611||30,735,749||27.76||4,498,257|
|NORTHERN TRUST CORP||06/30||111,566,073||2,345,165||2.15||3,547,801|
|JPMORGAN CHASE & CO||06/30||92,204,372||(9,994,222)||(9.78)||2,932,099|
|FRANKLIN RESOURCES INC||06/30||91,497,070||(623,252)||(0.68)||2,909,607|
|BLACKROCK FUND ADVISORS||06/30||86,654,220||2,821,835||3.37||2,755,604|
|DODGE & COX||06/30||77,260,349||(807,455)||(1.03)||2,456,879|
What will be the outcome of this suit? Right now no one knows for sure. Microsoft is still considered innocent until proven guilty. And it is hard to know what the evidence is. If the company is found guilty the punishment could range from a slap on the wrist, to fines and damages and even criminal charges if it is discovered that the defendants did anything illegal. In my opinion, if the company is guilty, then they should settle as soon as possible to avoid a huge mess.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.