IPG fails to thwart shareholder lawsuit

By Published on .

Interpublic Group of Cos., trying to rebuild following financial losses and accounting problems, has suffered a legal setback as its effort to quash shareholder lawsuit failed.

A federal judge May 29 denied most of Interpublic's motion to dismiss a class-action suit brought by shareholders alleging Interpublic and top executives misled investors by overstating net income and earnings per share from 1997 through 2000. The overstatements were disclosed from August through October 2002, ultimately totaling $181.3 million. The suit seeks unspecified damages. The decision allows attorneys for both sides to move into the next phase of the legal process, discovery.

eight executives

In addition to Interpublic, the eight executives named in the suit are former Chairman-CEO John J. Dooner, now head of McCann Erickson WorldGroup; Chief Financial Officer Sean Orr; former Chairman-CEO Philip Geier; former Chief Financial Officer Eugene Beard; former VP-Controller Joseph Studley; Frederick Molz, VP-financial planning and analysis; David Weatherseed, former VP-controller; and current VP-Controller Richard Sneeder.

A spokesman for Interpublic declined to comment except to say the company would "vigorously" defend the action.

Of the four counts alleged in the complaint, the judge allowed three and part of the fourth allegation to move forward. Dismissed was the allegation that each of the eight executives acted with an intent to defraud investors.

Attorneys for the shareholders argued that executives' sales of stock over several years showed evidence of a reason for misleading investors, but Judge Denise Cote said that those "sales were not sufficiently unusual."

The attorneys also pleaded that each of the eight defendants' "roles ... in IPG's affairs gave them an intimate knowledge of corporate affairs, and imposed on each of them the duty to be familiar with IPG's finances."

The judge said claims in the lawsuit-made by a former McCann Colombia chief financial officer and a McCann New York controller-that there was a culture of pressure within the agency that encouraged falsification of finances, were "dramatic" and "very serious." But she nonetheless concluded that "the bulk of [Interpublic's] restatement ... is unrelated to the problems described by" the former McCann executives. The judge decided that the complaint "does not contain allegations that would fairly support an inference that these errors were intentional, much less ordered by or known to any of the individual defendants."


In contrast to the judge's conclusion about the individuals, the judge found Interpublic's decision "to grow by acquisition," using its shares and stock-for-stock transactions, "motivated Interpublic to inflate its reported earnings ... in order to have a higher stock price than it would otherwise have had." In short, the judge said plaintiffs adequately alleged that Interpublic had a motive and intent to defraud investors. Moreover, the judge ruled that the plaintiffs adequately argued that each of the eight defendants who controlled Interpublic during the time frame discussed in the court case are also liable.

Both parties are slated to attend a scheduling conference on June 16, when a timetable for litigation will be set. The process, say legal experts, will likely take months and the majority of cases settle prior to going to trial.

The class comprises two categories: investors who purchased Interpublic stock between October 1997 and October 2002 and those who acquired Interpublic stock in exchange for their shares of True North Communications stock during Interpublic's 2001 purchase of that company.

In this article:
Most Popular