Business

Lawsuit alleges Lexmark misled investors and cost shareholders millions

Lexmark “made false and misleading statements” about demand, inventory and growth prospects for its supplies business in 2014-15 that cost shareholders more than half a billion dollars, according to a class-action lawsuit filed July 20 in United States District Court for the southern district of New York.

The suit was filed by the Oklahoma Firefighters Pension and Retirement System. Various law firms are making online pitches to former Lexmark investors to join the lawsuit.

Defendants in the lawsuit are Lexmark International; Paul Rooke, former president and chief executive officer of Lexmark International; David Reeder, formerly Lexmark vice president and chief financial officer who made a quick departure in June after being Lexmark CEO for just six months; Gary Stromquist, who had been an interim chief financial officer; and Martin Canning, former executive vice president and president, imaging solutions and services at Lexmark.

Lexmark spokesman Jerry Grasso said the company would have no comment on the lawsuit. Francis McConville with the New York law firm of Labaton Sucharow said that he would have no comment or further explanation of the suit.

Lexmark was acquired in 2016 by a consortium of investors led by Apex Technology Co. and PAG Asia Capital in a $3.6 billion all-cash transaction. The completion of the transaction meant that Lexmark stock ceased to be traded on the New York Stock Exchange.

The suit claims that Lexmark “made false and misleading statements regarding its end-user demand, channel inventory, and growth prospects for its high-margin supplies business.”

Lexmark “also failed to disclose deterioration in end-user demand and excessive inventory levels at its European wholesale distributors,” according to the suit.

Ultimately, according to the suit, in July 2015, Lexmark reported poor results for its second quarter, blaming the disappointing results on lower-than-expected supplies revenue from its European wholesale distributors. Lexmark “explained that the Company had increased supplies for its European distributors three times between October 2014 and June 2015.”

Rather than the growth that made investors want to buy the stock, the suit says that the prior increased sales were more attributable to European distributors trying to build up stock to get ahead of the next price increase.

That news sent Lexmark stock plummeting, the suit says. It dropped $9.57 a share, or 20.2 percent, “wiping out approximately $550 million in market capitalization.”

The suit contends that Lexmark’s claim that higher demand was driving growth was wrong because “end-user demand and growth for the Company’s supplies was deteriorating.”

In fact, the suit says, the company’s pricing increases were the primary driver of supplies revenue growth and customers had reacted by buying ahead of anticipated pricing increases, leaving excessive inventory levels at European wholesale distributors.

After Lexmark was acquired by the Asian investors’ consortium, Rooke, who had been with Lexmark since 1991, left the company and was succeeded by Reeder.

The suit says that the class action may ultimately include “hundreds of thousands of members” because during the period 2014-2015 Lexmark was actively traded on the NYSE. Several law firms have posted online notices since July 20 seeking Lexmark investors to join the lawsuit.

The suit seeks a jury trial and seeks compensatory damages as well as “other relief as deemed appropriate by the court.”

Under the federal Sarbanes-Oxley Act, certifying a misleading or fraudulent financial report can result in penalties of as much as $5 million in fines and 20 years in prison.

Cheryl Truman: 859-231-3202, @CherylTruman

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