Risk & Compliance

Groupon Shareholder Cries Foul

The first shareholder lawsuit since the company&spamp;rsquo;s recent revenue restatement names the CFO and other executives.
Sarah JohnsonApril 4, 2012

Criticism of Groupon and CFO Jason Child is coming from every direction following the company’s admission last week that it messed up its accounting for refund reserves. In the latest development, Child and CEO Andrew Mason have been named in the first shareholder lawsuit filed against the company since it revealed the accounting problems in its 2011 annual report. More lawsuits are likely to follow.

The lawsuit, by a single plaintiff, claims the defendants acted fraudulently by making false statements and keeping “adverse facts” about the company from investors. The complaint names Groupon executives and board members, as well as financial institutions that provided the Chicago-based company with services and underwriting. It argues that they were complicit in the alleged fraud. The complaint does not name Groupon’s accounting firm, Ernst & Young, which noted in the 10-K filed last Friday that Groupon has a material weakness in its internal controls related to financial reporting.

Groupon does not comment on litigation, a company spokeswoman told CFO.

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Groupon’s 10-K filing revised the figures executives had presented during the company’s February earnings call. The revision shaved $14.3 million off fourth-quarter revenue (the new total was $492 million). The company’s stock fell on the news, dropping to $15.28 per share by the end of trading Monday. That price was down from the $26.11 per share close on the day of Groupon’s initial public offering last November.

The company blamed the mismatch between its February numbers and the figures in the 10-K on its failure to adequately account for customer refunds. Groupon experienced a higher number of theserefunds than expected toward the end of last year, partly due to the discounts it began offering on pricier services, such as LASIK surgery.

Groupon critics have pounced on the company since the restatement. Some commentators and analysts have suggested Child should resign. The accounting professors who write the “Grumpy Old Accountants” blog, longtime critics of Groupon, have written two told-you-so posts that tear apart the company’s accounting methods. The Securities and Exchange Commission, which pressed the company to drop a questionable accounting metric before its IPO, is reportedly probing this latest development as well, but it declined comment.

The lawyer for the plaintiff, Fan Zhang, filed the suit in the U.S. District Court for the Northern District of Illinois on Tuesday. The lawsuit claims Groupon’s prospectus misled investors and“contained untrue statements of material facts.”

Groupon was upfront about the fact that its executives were new to the public securities market and the requirements that come with it. One of the risk factors stated in Groupon’s S-1 filing was that its executives “have limited experience managing a publicly traded company and limited experience complying with the increasingly complex laws pertaining to public companies.” That risk factor was also given in the recent 10-K filing.

Child joined the company as its first CFO in December 2010 from Amazon.com, where he oversaw finance for the web retailer’s international business.