Publicly owned corporations enjoy many benefits, but those benefits carry with them a cost. Specifically, they face higher standards of scrutiny and may come under fire for even innocent mistakes. In that vein, California readers may be interested to hear of a shareholder lawsuit alleging that Groupon committed fraudulent business practices.
Recently, Groupon informed investors that the company had made a mistake in its accounting for refund reserves. The mistake meant that the fourth quarter revenue last year was $14.3 million less than believed. The discrepancy was evidently caused by a failure on Groupon’s part to take customer refunds properly into account. There were more refunds than usual at the end of last year.
The company has previously been upfront about its inexperience in the public securities market, and it has noted that as a risk factor in its financial filings. Nevertheless, it is now facing a shareholder lawsuit that claims that the CFO and CEO of Groupon purposefully kept “adverse facts” from investors. The suit claims they acted fraudulently.
However, while Groupon’s mistake may have been a serious error, it may not necessarily constitute fraudulent business practices. Indeed, as many business owners across California know, complying with financial documents is often difficult and even bewildering at times. It is easy to commit a mistake, particularly when a company is young and inexperienced. Here, the company has been honest that its inexperience is a risk factor, which investors presumably took into account. Moreover, in order for the CEO and CFO to have acted fraudulently, they would have had to purposefully done so, and that could be difficult for the plaintiff in the shareholder lawsuit to prove.
Source: CFO, “Groupon Shareholder Cries Foul,” Sarah Johnson, April 4, 2012