(CN) – Directors of VeriFone Holdings Inc. did not ignore red flags about accounting and inventory errors, a federal judge ruled in dismissing a consolidated shareholder lawsuit against the world’s largest provider of electronic payment services.
Judge Marilyn Hall Patel rejected arguments from lead plaintiff Charles King that VeriFone’s board of directors ignored unexpected inventory increases and warnings of inventory and accounting problems. The issues lead to a revision of quarterly statements which reduced operating income by 129 percent and caused prices to fall more than $20 a share.
In order to avoid the requirement that plaintiffs in shareholder derivative lawsuits first demand action from the corporate directors, King would have to show that the directors “were conscious of the fact that they were not doing their jobs,” Patel wrote.
The judge found, however, that the directors responded to concerns raised by Ernst & Young about problems with inventory control and deficient valuations made by a mid-level controller, which prompted the re-statement of quarterly reports.
The company claimed it would step up training programs, remove poor performing employees, fill key personnel positions and streamline its reporting process, among other adjustments.
According to Patel, the seven “red flags” raised by King “suggest at most that there were weaknesses in the accounting division of VeriFone and difficulties with the [the acquisition of Lipman Electronic Engineering LTD], not that the directors were conscious of the fact that they were not doing their jobs.”
Patel found that King’s allegations “do not suggest the director defendants had actual or constructive notice of the accounting errors that led to VeriFone’s restatement. Thus, plaintiff has not alleged particularized facts that create a reasonable doubt as to the disinterestedness of the directors. Because he has failed to show that demand is futile, the consolidated complaint must be dismissed.”