Daily discount deals provider Groupon Inc. (GRPN - Analyst Report) failed to convince a federal judge to dismiss a lawsuit filed by an individual investor Michael Carter Cohn. The order, issued by the U.S. District Judge Charles Norgle, confirmed that Groupon will have to face the lawsuit filed against it.
The lawsuit, accuses Groupon of misleading investors by giving improper information about the financial prospects and internal control issues of the company.
Per the lawsuit filed by the investors in Apr 2012, Groupon has been accused of securities fraud and for manipulating the accounts, using illegal refund accounting policies. This helped the company to inflate its revenues in the prospectus issued for the IPO and provided to the U.S. Securities and Exchange Commission.
Groupon announced its IPO on Nov 4, 2011. A few months later, Groupon surprised the investor community by reporting a larger net loss in its fourth-quarter 2011 results, citing "material weakness" in its internal controls. It also stated its failure to set aside enough money for customer refunds.
This news dragged down the stock price, which bottomed at $2.60 last November, although it recovered subsequently.
This incident influenced a group of investors, led by Cohn, to initiate a lawsuit against the company. Now Cohn is trying to turn it into a class action suit. On the other hand, Judge Norgle has postponed his decision to allow Cohn to be the representative for a class, as he did not actually buy his shares during the IPO.
Moreover, the federal judge also turned down the requests made by Credit Suisse (CS - Snapshot Report), Goldman Sachs (GS - Analyst Report) and Morgan Stanley (MS - Analyst Report), to give them a clean chit in the IPO-related proceedings.
Groupon has been making an effort to turn itself into a serious e-commerce business and replaced Andrew Mason with Eric Lefkofsky as chief executive.
Although we believe that Groupon is well positioned to gain from rising e-commerce spending on mobile devices, a profitable domestic market and an under-penetrated international market, this pending lawsuit may affect the goodwill and may put a financial burden on the company if proved guilty.
Currently, Groupon carries a Zacks Rank #3 (Hold).