Cases

In re VeriFone Holdings, Inc. Derivative Litigation

On March 5, 2008, Johnson Bottini LLP filed a shareholder derivative case against former and current officers and directors of VeriFone Holdings, Inc. and against GTCR Rauner, LLC, a company that invested in VeriFone and appointed two individuals to VeriFone’s board.

Click here to view a copy of the complaint.

The case concerns wrongdoing that occurred between September 1, 2006 and November 30, 2007 (the “Relevant Period”). Plaintiffs assert state law claims for breach of fiduciary duty against defendants.

VeriFone designs, markets, and services transaction automation systems that enable secure electronic payments among consumers, merchants, and financial institutions.

On December 3, 2007, VeriFone announced that following a review by and on the recommendation of management, the Company’s unaudited interim financial statements for the three months ended January 31, 2007, the three and six months ended April 30, 2007, and the three and nine months ended July 31, 2007 should no longer be relied upon, principally due to errors in accounting related to the valuation of in-transit inventory and allocation of manufacturing and distribution overhead to inventory. As a result of the false financial statements previously filed by VeriFone, the Company announced that it was delaying the filing of its Annual Report on Form 10-K for the fiscal year ending October 31, 2007. The Company anticipates that the restatement will result in a reduction of reported inventories that amounted to $30 million at July 31, 2007 and a reduction to previously-reported pre-tax income aggregating approximately $30 million for the interim periods through July 31, 2007.

In its December 3, 2007 revelation of false financial statements, VeriFone also stated that when the Company eventually files the 2007 Form 10-K, and files amended financial statements for previous periods to correct admitted accounting errors, “management expects VeriFone to report one or more material weaknesses in VeriFone?s internal controls over financial reporting.” Moreover, VeriFone's market capitalization has been damaged by over $2.6 billion.

The Company’s December 3, 2007 announcement was necessary because, during the Relevant Period, defendants had caused VeriFone to issue false and misleading statements regarding the Company’s business and prospects. Plaintiffs allege that the true facts, which were known by each of the defendants but concealed from the investing public during the Relevant Period, were as follows:

(a) The Company’s in-transit inventory was grossly overvalued due to accounting errors related to allocation of manufacturing and distribution overhead to inventory, each of which affects VeriFone’s reported costs of net revenues. This fraud was revealed by a cost accounting manager in the Company’s Sacramento, California office;
(b) The Company’s gross margins were not 45-47% but were closer to 40%;
(c) The Company was not on track to achieve profitability in 2007, but rather losses due to problems related to the Company’s acquisition of Lipman Electronic Engineering, Ltd. (“Lipman„ ), which problems the Company discovered during the due diligence pertaining to the Company’s acquisition of Lipman in 2006;
(d) The Company’s gross margin projections were overstated;
(e) The Company’s supply chain management was severely deficient;
(f) The Company’s accounting during the Relevant Period was false and misleading;
(g) The Individual Defendants failed to adopt and implement adequate internal controls over accounting and financial reporting; and
(h) That as a result of (a)-(g) above, the Company’s estimates of an eleventh consecutive quarter of double digit revenue growth for the first quarter of 2007 and beyond and income per share growth of 20% or more were grossly inflated and the Company’s reported assets and inventory were materially overstated.

As a result of the false statements, VeriFone’s stock price traded at inflated levels during the Relevant Period, increasing to as high as $50 just one month before the end of the Relevant Period. The artificial inflation of the Company’s stock allowed the defendants to sell more than $469 million worth of their VeriFone stock at artificially inflated prices.

Plaintiffs allege that the Individual Defendants’ misconduct has damaged VeriFone and its shareholders. VeriFone has been named as a defendant in class action securities fraud lawsuits. VeriFone is currently incurring millions of dollars in costs due to required internal investigations into the accounting errors, false financial statements, and insider selling. The Company has been forced to hire outside attorneys (Simpson Thacher & Bartlett, LLP) and forensic accountants (Navigant Consulting, Inc.) to serve as advisors to the internal investigation. The Company’s goodwill and reputation have been materially undermined and tarnished.

The Individual Defendants’ wrongdoing has also significantly damaged VeriFone in that it has caused VeriFone to default on its credit agreements. As a result, the Company has been damaged in that it has been forced to (1) pay significant amounts of money to its lenders in exchange for their agreement to waive the defaults; and (2) pay an extra 0.25% on the interest rate applicable to its term loans and revolving credit agreements. VeriFone and VeriFone Intermediate Holdings, Inc., a wholly-owned subsidiary of VeriFone, are parties to an October 31, 2006 Credit Agreement. VeriFone has defaulted on this Credit Agreement due to its failure to timely file financial statements for the three months ended January 31, 2007, April 30, 2007, July 31, 2007, the year ended October 31, 2007, and the three-month period ended January 31, 2008. As a result, VeriFone was forced to enter into a First Amendment to Credit Agreement and Waiver (“First Amendment”) with its lenders on January 25, 2008. Pursuant to the First Amendment, VeriFone had to pay its lenders (1) a fee of 0.25% of the aggregate amount outstanding under the loans and revolving credit agreements; (2) pay the lenders an increased rate of interest on the term loan – an additional 0.25%; and (3) pay all the legal fees and costs of Fried, Frank, Harris, Shriver & Jacobson LLP (legal counsel to the Administrative Agent of the lenders) relating to the First Amendment.

If you are a current VeriFone shareholder, and would like more information about the case or your rights, please contact us at (619) 230-0063 or contactus@johnsonbottini.com.