Software company Red Hat has agreed to pay $20 million to settle a 6-year-old class action suit that accused it of deceiving investors by falsifying its finances.
The settlement, approved Friday by U.S. District Judge W. Earl Britt in Raleigh, brings to a close a shareholder lawsuit. The suit was triggered by the company's 2004 restatement of its earnings for the prior three fiscal years and the subsequent nosedive of its stock.
"We think it was a good settlement," said Raleigh lawyer Bruce McDaniel, a member of the legal team that represented shareholders. "It was going to be a hard case to try. ... It was a multimillion-dollar case, but those can go both ways. I think it is fair to the shareholders."
Raleigh-based Red Hat denied the allegations leveled by shareholders in court filings.
Raleigh lawyer Pressly Millen, who represented Red Hat, referred questions to the company. Red Hat officials declined to comment.
The $20 million settlement will be distributed to shareholders who purchased Red Hat stock between Dec. 17, 2002, and July 12, 2004 - less $6 million in lawyers' fees and up to $350,000 in expenses.
In July 2004, Red Hat announced that it was changing the way it recognized revenue and would restate its financial results for the fiscal years 2004, 2003 and 2002 because it hadn't been properly booking revenue from software subscriptions. The company's shares plummeted 23 percent on the day of the announcement.
The company's CEO at the time, Matthew Szulik, called the accounting switch a "technical correction" recommended by auditors that had no effect on the company's overall revenue.
Red Hat's open-sourceLinux software is free, but the company makes money by charging customers for maintenance and support.
Under the old accounting method, if a software subscription started at the end of May, Red Hat would recognize a month's worth of revenue. The method it implemented in 2004 called for it not to recognize revenue until the starting date of the subscription contract.
Within days of the company's restatement announcement, a flurry of lawsuits was filed on behalf of investors against Red Hat and its top executives at the time, including Szulik. Those lawsuits were consolidated in a class action suit.
Szulik said Tuesday that he had done nothing wrong but, other than that, had no comment about the settlement.
The class action suit contended that the company "knowingly and systematically booked revenue before it was actually earned" in violation of securities law and"secretly backdated Red Hat's revenue, even though it was not earned until later, and then used that backdated revenue to issue false financial reports to Red Hat investors."
The lawsuit also alleged that the company "devised various techniques to falsely recognize revenue in other ways."
In addition, the suit claimed, Szulik and four other top executives took advantage of "the unsuspecting market" by reaping more than $94 million from the sale of Red Hat stock "at artificially inflated prices" during this period.
Red Hat shares fell 77 cents Tuesday to close at $47.68. The stock is up 63 percent in the past year.
