Class Action Lawsuit Takes Aim at Company's Accounting Practices

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NEW YORK ( -- Omnicom Group shares dropped sharply again today, as the company faced a shareholder lawsuit and analyst downgrades.

Omnicom, still reeling from a Wall Street Journal story that questioned its accounting practices, closed at $54.60, down 12.3% in heavy trading, after dropping to a low of $50.94 earlier in the day. The company's market capitalization has dropped 30% in two days to $10.2 billion, below rivals Interpublic Group of Cos. and WPP Group.

Class action suit
Meanwhile, Wolf Popper,

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a New York-based shareholder litigation firm, today said it filed a class action lawsuit on behalf of Omnicom shareholders. The suit, filed in U.S. District Court for the Southern District of New York, charges Omnicom misrepresented its financial results and misled investors regarding its organic revenue, future payments due on acquisitions and its investment in an entity that holds its interactive investments.

An Omnicom spokeswoman said company officials have only seen the press release issued by Wolf Popper, but that "we completely disagree with that they said."

Calculating revenue
A major focus of the Journal article was on how Omnicom calculated organic growth as it related to its many acqisitions of smaller marketing agencies. Omnicom executives justified the companies accounting methods, saying new acquisitions are expected to show revenue growth from the start, therefore including their post-acquisition revenues in Omnicom's organic total is in keeping with that expectation. Organic growth refers to revenue growth excluding acquisitions.

Fueling speculation was the resignation last month of board member Robert Callander, head of the board's audit committee. He reportedly stepped down after disagreeing with management over its limited disclosure of Omnicom's stake in Seneca Investments LLC, an e-services holding company formed last year.

Battered stock
Omnicom stock was battered by a downgrade from Standard & Poor's, which lowered its outlook on the company to "negative" from "stable." Analyst Alyse Michaelson affirmed all other ratings for the company, including its "A" credit rating, but warned that restoring investor confidence will be key to Omnicom's ratings.

William Warmington, advertising analyst at Suntrust Robinson Humphrey, reduced the stock to "neutral" from "outperfom," saying the events have created a "crisis of confidence among investors" that will drag down the stock near-term. At UBS Warburg, Catherine Kim reaffirmed her "buy" rating, but lowered her target price to $82 per share from $100, saying the controversy will bring Omnicom down to the average pricing for agency stocks in the short term before rebounding.

Separately, Omnicom became the latest advertising client to replace embattled Arthur Andersen as its auditor. In a document filed today with the Securities and Exchange Commission, Omnicom disclosed it hired KPMG LLP, effective today. The shift to KPMG follows widespread speculation that Omnicom would instead hire Ernst & Young; the Andersen team that worked on Omnicom recently moved to that auditor.

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