Risk Management

Judge Certifies Omnicom Class Action

Plaintiffs allege that some of the company's Internet investments suffered ''serious, non-temporary impairment'' but that the losses were not prope...
Dave Cook and Stephen TaubMay 8, 2007

A judge has certified a class action against Omnicom Group regarding the company’s accounting for losses in Internet-related investments, reported the New York Law Journal.

The plaintiffs reportedly alleged that certain investments had suffered “serious, non-temporary impairment” but that the losses were not written down in accordance with generally accepted accounting principles. FAS 142, Goodwill and Other Intangible Assets,
issued by the Financial Accounting Standards Board in 2001, requires companies to annually review the value of acquired goodwill and book impairment charges if that value drops.

According to the Law Journal, beginning around 1996, Omnicom acquired a minority interest in five Internet businesses, three of which went public in 1999 or 2000. But when the tech bubble burst in March 2000, the value of Omnicom’s investments crumbled, according to the report, which cited Judge John Keenan of the U.S. District Court for the Southern District of New York.

“In May 2001, one source claimed that Omnicom’s Internet investments had depreciated from $2 billion in value to less than $100 million,” the judge reportedly stated.

Even so, Omnicom’s 2000 end-of-year financial statements did not include this information, the plaintiffs reportedly maintained. Rather, they alleged, the company “engaged in improper accounting machinations so as to remove these investments from their books without causing any negative impact on Omnicom’s bottom line.”

Indeed, the plaintiffs reportedly also alleged that in May 2001, Omnicom formed another company, Seneca Investments, to move the underperforming assets from its balance sheet. “Plaintiffs claim that Seneca’s creation was a sham designed to obscure Omnicom’s true financial state, which entailed losses exceeding $20 million attributable to its investments in e-services companies,” the judge stated, according to the Law Journal.

In June 2002, a series of articles in The Wall Street Journal detailed Omnicom’s relationship with Seneca. By June 28, Omnicom’s share price had fallen to $44.30, less than half its 52-week high of $97.35, according to a Journal report at the time.

Upon certifying the class, Judge Keenan also appointed lead plaintiff New Orleans Employees’ Retirement System as the representative of the class and Bernstein Litowitz Berger & Grossmann as lead counsel, the Law Journal reported.

In a May 2005 regulatory filing, Omnicom maintained that the plaintiffs’ allegations are baseless and that the company intends “to vigorously oppose the lawsuits.”