A proposed class action lawsuit has been filed against Microsoft on behalf of its shareholders, alleging that the firm lied about the financial performance of its Surface RT tablet. The surprise revelation that sales were much less than expected came months later than required by law, the suit says, and immediately “eviscerated” $34 billion of Microsoft’s market value, materially impacting shareholders.
The suit names Microsoft as well as Steve Ballmer, Peter Klein, Frank Brod, and Tami Reller as defendants.
“[Microsoft] led the market to believe that the launch of Surface RT had been executed in a measured and conservative fashion so that it could observe and understand its progress and outcome,” the suit charges. “What Defendants knew but failed to disclose to investors, however, was that Microsoft’s foray into the tablet market was an unmitigated disaster, which left it with a large accumulation of excess, over-valued Surface RT inventory.”
The suit continues: “While the investment community speculated that Microsoft was sitting on a half million unsold Surface RT devices, in reality the Company was saddled with millions of Surface RT units that, at its then current $500 price point, were generally unsalable. As a result, Defendants knew or recklessly ignored that the market value of Microsoft’s Surface RT inventory had declined precipitously and that the Company, pursuant to applicable accounting rules, was required to write down the value of its Surface RT inventory during the quarter ended March 31, 2013.” Microsoft wrote down nearly $1 billion related to Surface RT inventory in the subsequent quarter.
The suit says that Surface RT’s failure is due, in large part, to “the limitations associated with its operating system, Windows RT.” It runs through a list of these limitations, which include incompatibility with the millions of available desktop Windows applications.
More to the point, the suit charges Microsoft with secretly hiding its excess Surface RT inventory from shareholders and regulators in violation of the firm’s publicly disclosed inventory accounting policies, generally accepted accounting principles (GAAP), and US Security and Exchange rules and regulations. The firm also issued “false and misleading” financial statements and financial disclosures that misrepresented the true financial effect of Surface RT during the first calendar quarter of 2013, the suit claims.
“Microsoft’s all-important entry into the tablet market [has] been a failure,” the suit alleges. And in the second quarter of 2013, the firm tried to hide this fact by artificially spurring demand for the excess Surface RT inventory by introducing a series of sales and giveaways. It includes an interesting array of quotes by Microsoft executives made during a time in which they knew that Surface RT was a disaster but were claiming otherwise.
Plaintiffs seek to recover damages on behalf of all purchasers of Microsoft common stock during the Class Period, which runs from April 18, 2013, through July 18, 2013.