InfoSoncis Corp. Case 08/12/2008
On Tuesday, August 12th 2008, InfoSonics Corporation (IFON: InfoSonics) announced that it has agreed without admitting any wrongdoing to settle securities class action and derivative lawsuits with shareholders. The settlement would resolve both cases , which are pending in the United States District Court for the Southern District of California.
Reportedly the Company settled these lawsuits to avoid the expense and continued disruption to the business of protracted litigation and the Company and its current and former officers and directors deny any liability or responsibility for the claims made and make no admission of any wrongdoing.
According to a press release as part of the settlements, and in exchange for dismissals of the lawsuits and releases, in the securities class action InfoSonics Corp. reportedly agreed to authorize total payment of $3.8 million and in the derivative action to make certain corporate governance changes and to authorize payment of up to $350,000 for plaintiffs’ attorneys’ fees. The funds for the payments will be funded entirely by the InfoSonics Corp.’s insurer. The securities class action lawsuit relates to the Company’s restatement of first quarter 2006 financial statements and claims relating to the Company’s distribution of a former manufacturer’s cellular phone in the U.S. The derivative lawsuit relates to the Company’s restatement of its first quarter 2006 financial statements and a grant of stock options in December 2005. The original complaint alleged that InfoSonics and its top officers engaged in a scheme to defraud InfoSonics investors in violation of the federal securities laws by reporting false financial results on May 8, 2006 for its first quarter ended March 31, 2006. Specifically, the Complaint alleged that defendants knew, or with deliberate recklessness disregarded, that the Company had improperly accounted for warrants issued in connection with a January 2006 private placement which enabled it to report net income of $1.738 million for that quarter. Before the market opened on Monday, June 12, 2006, InfoSonics shocked the market when it disclosed that it would need to restate its previously reported net income for the first quarter down to $1.173 million, a decrease of 32.5%, due to the improper accounting treatment of the warrants. InfoSonics stock immediately plunged more than 28% that day on extraordinarily high volume.
The Complaint further alleged that, while in possession of material nonpublic information concerning InfoSonics accounting for the warrants, defendants sold massive amounts of their personal holdings between May 11, 2006 and June 7, 2006 for proceeds exceeding $3 million. Indeed, as the Company admitted in a Form 8-K filed on June 12, 2006 with the SEC, InfoSonics had determined by Monday, June 5, 2006 that it would need to restate its previously reported financial results because it had improperly accounted for the warrants. Nevertheless, its Chief Financial Officer and the President of the Company’s Latin American operations continued to sell their personal InfoSonics stock even after that determination.