Compaq Gets Hit With Class-Action Suit

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April 18, 1998 (12:00 AM EDT)

By Joe Wilcox,

Compaq has been hit with a class-action suit alleging the No. 1 PC maker "defrauded the market" by stuffing the channel, then withholding information on the state of channel inventory.

The suit, filed in U.S. District Court in Houston, comes on the heels of disappointing first quarter results from Houston-based Compaq (company profile).

The suit contends Compaq also "defrauded the market" by withholding information about the company's return on vested capital, its days sales outstanding, and the company's success cutting costs.

New York law firm Wolf Haldenstein Adler Freeman & Herz filed the suit on behalf of defendant Mark Berger, who said he "was damaged" by purchasing 100 shares of Compaq stock at $62 per share Oct. 30, 1997. The suit, which demands a jury trial, was filed on behalf of anyone purchasing Compaq common stock between July 10, 1997, and March 6, 1998.

A number of executives are named in the suit, including Compaq CEO Eckhard Pfieffer and chief financial officer Earl Mason, for allegedly issuing "false and misleading statements during the class period." The suit charges other executives, including chairman Ben Rosen and vice president John T. Rose sold significant amounts of Compaq shareholdings "at artificially inflated prices during the Class Period in order to profit from the defendants' fraudulent scheme."

The suit alleges Compaq failed to move successfully from a build-to-forecast to a build-to-order model, and Compaq "intentionally misled the market concerning the loss of revenue" and "stuffed the channel to make quarterly results for the second half of 1997 more attractive."

The suit reads: "Defendants deliberately and fraudulently mischaracterized their quarterly results and failed to inform the market the true reasons for these results." The suit alleges executives used this inside information and deception to unload stock before the bottom fell out of Compaq's earnings.

According to the suit, Compaq's "channel stuffing should have in the normal course have been detectable to the public by examining the company's receivable figures. However, the company was able to mask its channel stuffing by factoring out bloated receivables at a discount, thus giving the impression that not only was the product moving through its channels efficiently, but also that its customers were providing a quick payment turnaround or days outstanding."

As a result of Compaq's channel stuffing and deceptions, the suit contends the activity caught up with company and led to: "(i) clogged channels; (ii) reduced inventory turns; (iii) reduced sales; (iv) reduced market share; (v) the need to offer incentives to stimulate sell through; (vi) lessened flexibility to react to market changes, such as the release of new, and perhaps more attractive products from its competitors; and (vi) lessened price flexibility in the channel due to dealers' need to reduce prices in the event of a fall off in the popularity of Compaq products held in distributors' inventory."

Compaq officials were unavailable for comment.