Yahoo Lawsuits: Very Revealing

| About: Yahoo! Inc. (YHOO)

During May 2007, five different class action lawsuits were filed in U.S. District Courts in California against Yahoo! (NASDAQ:YHOO), Terry Semel, Sue Decker et al., making some very interesting claims.

The five law firms are listed below:

  • Scott & Scott, San Diego Cal.
  • Brodsky & Smith LLC, Bala Cynwyd, Pa.
  • Spector, Roseman 7 Kodroff P.C, Philadelphia, Pa.

  • Schatz Nobel Izard P.C., Hartford Conn.
  • Lerach Coughlin Stoia Geler Rudman & Robbins LLP, San Francisco.
  • These lawsuits, representing holders of Yahoo! stock, essentially claim that Yahoo!, Terry Semel, and Sue Decker misrepresented to the public sales and earnings of the company beginning April 7, 2004, when higher than expected earnings and a 2/1 stock split were announced. The suits claim that the misrepresentation continued till July 18, 2006 (and the stock dropped from 32 to 26).

    Some quotes from the Scott & Scott suit are:

    "During the class period, Defendants made false and misleading statements regarding the Company's business prospects, financial results and forward guidance"

    "As a result of defendant's false satements, Yahoo! stock traded at artificially inflated prices during the class period."

    The causes arise under section 27 of the 1934 Securities Act and Rule 10-b-5. "Defendants fraudulent scheme and course of business" operated as a fraudulent scheme and course of business."

    Pretty strong statements, which if true will make those signing the annual reports guilty of felonies.

    Closing low on March 10, 2004 of $41.70 (pre split) the stock opened at 56 (pre split) on April 8, 2004. That was Holy Thursday, with the market closed on Good Friday, Saturday and Easter Sunday. On April 12, 2004, Terry Semel sold 2,000,000 shares at 55.25. It is quite interesting that Semel received a grant of 2,900,000 options on March 10 at $41.70 that was not focused upon.

    Little noticed was a suit filed against Terry Semel on July 12, 2006 arising under Section 16b of the 1934 Act, alleging violation of what is called the short swing rule. Section 16b requires that profits made from purchases and sales made by an executive of a public company within 6 months of each other are recoverable by the company. Grants of options to CEOs are considered purchases by the rules and the rules therefore make profits from any sales of the underlying equity security, which are matched off with "purchases" within 6 months recoverable by the company.

    Semel, if you believe the Section 16b claim, owes $50 million plus interest to Yahoo!. Yahoo! winked at the 2,900,000 purchase and sales and some minor ones by Sue Decker, Dan Rosensweig and Farzad Nazem (who has just apparently left Yahoo! to spend more time with his family), similar to what some of Bush's staff did.

    Is the ship getting ready to collapse or is it rising like the Hindenburg and Nazem just got off early?

    Disclosure: Author has a short position in YHOO