Regulation

Xerox, KPMG Settle Investor Suit

Eight-year-old action had claimed the copier maker committed accounting fraud to hit earnings targest.
Stephen TaubMarch 27, 2008

Xerox Corp. said it will pay $670 million, and KPMG LLP will pay $80 million, to settle an eight-year-old securities lawsuit filed on behalf of Xerox investors who claimed Xerox committed accounting fraud to meet Wall Street earnings expectations.

Xerox said it agreed to settle without admitting to any wrongdoing. A KPMG spokesman confirmed the settlement in an E-mail to CFO.com, saying that it believes “it’s important to put this matter behind us, to avoid the further cost and distraction resulting from protracted litigation.”

The case of Carlson v. Xerox Corp., filed on behalf of purchasers of Xerox common stock and bonds from between February 1998 and June 27, was something of a high profile one for the pre-Enron era.

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In April 2002, Xerox agreed to pay a $10 million fine as part of a settlement with the Securities and Exchange Commission. The fine was the largest ever paid by a company to settle with the SEC at that time.

The SEC charged that the copier company schemed to defraud investors during a four-year period by using what it called “accounting actions” and “accounting opportunities” to meet or exceed Wall Street expectations and disguise its true operating performance. The commission stated at the time that most of the actions violated generally accepted accounting principles, and thus accelerated the company’s recognition of equipment revenue by more than $3 billion and increasing its pretax earnings by approximately $1.5 billion.

In 2005, KPMG agreed to pay $22.5 million to settle SEC charges related to its audits of Xerox from 1997 through 2000. Under that arrangement, the firm agreed to relinquish the $9.8 million in fees it received for auditing Xerox’s books during that time, and pay $2.7 million in interest and a $10 million civil penalty. The total package was the largest payment ever made to the SEC by an audit firm.

In the civil case just settled, plaintiffs alleged that Xerox, a number of its officers, and KPMG orchestrated a four-year scheme to disguise the company’s true operating performance, and to create the illusion that its operating results were substantially better than they really were.

“Our strong financial position gives us the flexibility to resolve this issue while continuing to deliver shareholder value through share repurchase, dividends and acquisitions,” said Anne Mulcahy, Xerox chairman and CEO.

Xerox will take an after-tax charge of $491 million in the first-quarter of 2008 to cover the settlement and adequately reserve for other pending securities-related cases. The charge factors in expected recovery from Xerox’s insurance carriers.

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