Open Source

Red Hat restatement triggers legal attacks

Class-action parade begins after Linux seller tweaks three years of financial results.

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By Stephen Shankland
CNET News.com

At least nine law firms have announced legal actions on behalf of Red Hat investors in the wake of the Linux seller's restatement of three years of financial results.

Red Hat Chief Executive Matthew Szulik and Chief Financial Officer Kevin Thompson "intended to...deceive the investing public regarding Red Hat's business, operations, management, and the intrinsic value of Red Hat's publicly traded securities and enabled defendants to sell 1.9 million shares of their stock for proceeds exceeding $35.6 million," according to one suit, brought by Lerach Coughlin Stoia & Robbins in U.S. District Court in North Carolina. That and at least two other suits allege violations of the Securities Exchange Act of 1934.

In a response, Red Hat spokeswoman Leigh Day said, "As with any lawsuit, we are prepared to defend the company," but declined to comment further.

Following a June 16 recommendation from its auditor, PricewaterhouseCoopers, from , its primary money source. Previously, it recorded one-twelfth of an annual subscription each month regardless of when the subscription was sold; afterward it began booking revenue only on the day it was sold.

The result is that although the company received the same amount of revenue, it received much of it a few days or weeks later. The change meant that Red Hat had net income of 7 cents per share for fiscal 2004 instead of 8 cents, and in one quarter, ended Nov. 30, 2002, had a net loss of more than $440,000 instead of net income of $214,000.

Red Hat's stock plunged 23 percent Tuesday after the Raleigh, N.C.-based company announced the change and that the Securities and Exchange Commission had submitted a "comment letter" about Red Hat's annual report.

In other events mentioned in some lawsuits, , a move that also sent the company's stock down at the time. Red Hat said the SEC discussion, revenue change and resignation were unrelated events.

Other firms that have filed suits include Goodkind Labaton Rudoff & Sucharow; and Chitwood & Harley. The suits seek class-action status for investors and compensation from Red Hat.

The next phase in the cases likely will be a consolidation of the various suits under a lead plaintiff, said Christopher Keller, lead attorney for Goodkind Labaton's case, followed by a likely amendment to the complaint.

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