Capital Markets

Settle Your Suit, Win an S&P Upgrade

Rating on Xerox's credit is boosted after it wins court approval to end an 8-year-old investor action charging accounting fraud.
Stephen TaubApril 22, 2008

Standard & Poor’s raised its credit rating on Xerox Corp. securities to BBB from BBB-, reflecting in part a pending securities lawsuit settlement that “removes a material financial uncertainty.”

Xerox announced on Friday that it received preliminary court approval to settle the suit, dating back to 2000. The company took an after-tax first-quarter charge of $491 million, or 54 cents per share, to cover the settlement and to reserve for other pending securities-related cases.

In raising its rating on Xerox debt, S&P also cited strong annual free operating cash flow and its expectation that Xerox will maintain a stable, moderately leveraged financial profile.

Standard & Poor’s also removed the rating from CreditWatch, where it had been placed with positive implications on March 27. It added that the outlook is stable.

“The ratings reflect Xerox’s good position in its core document management business, large base of recurring post-sales revenues, and moderate leverage,” said S&P credit analyst Molly Toll-Reed. “These factors are offset partially by mature and highly competitive industry conditions, which are expected to constrain any increase in total revenue.”

In March, Xerox said it would pay $670 million, and KPMG LLP would pay $80 million, to settle an eight-year-old securities lawsuit filed on behalf of Xerox investors who claimed that Xerox committed accounting fraud to meet Wall Street earnings expectations. Xerox said at the time that it had agreed to settle without admitting to any wrongdoing.

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.

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.