Market-leading CRM software developer Siebel Systems Inc. this week has been hit with a class-action shareholder lawsuit that accuses the company of exaggerating its new software upgrade levels and customer satisfaction claims.
The lawsuit, filed in U.S. District Court for the Northern District of California, accuses the San Mateo, Calif., company and three of its executives of misrepresenting information about the state of the companys business, violating the Exchange Act, and in turn artificially inflating Siebels stock price, according to the lawsuit.
The company executives named in the suit are Thomas Siebel, chairman and CEO; Kenneth Goldman, senior vice president and chief financial officer; and R. David Schmaier, executive vice president. The suit accuses the three of making “material misrepresentations” between Oct. 1, 2001, and July 17, 2002, and seeks to represent any shareholder who bought Siebel common stock within that time period.
According to the lawsuit, the company overstated customer acceptance of its new product offerings, including Siebel 7 CRM. The suit also touches on a past point of contention with Siebel—the customer satisfaction surveys conducted by Satmetrix Systems Inc., a company in which Siebel Systems is a minority investor. Siebel also resells Satmetrixs customer loyalty survey technology.
Those surveys consistently showed Siebel with a customer satisfaction rate well over 90 percent, although the methodology of the surveys, including lack of anonymity, has been criticized by some industry analysts. Research conducted by Nucleus Research Inc. in 2002 concluded that 14 of 23 customers referenced on Siebels Web site are actually dissatisfied with the return on investment theyve gotten from deploying the software.
The lawsuit cites the Nucleus study and accuses Siebel of failing to disclose its relationship to Satmetrix. The lawsuit says the Satmetrix surveys convinced investors that a “vast majority” of Siebels customers would purchase products from the company in the future.
On the last day of the class period for the lawsuit, July 17, 2002, Siebel announced its second-quarter earnings, with revenues and earnings down considerably from what analysts had forecast. Analysts chided Tom Siebel during the call for not warning in advance of the earnings release that Siebels earnings would fall so far below estimates.
The company also adjusted its guidance for the remainder of the year downward, by $600 million from the guidance it had issued six months prior, according to the lawsuit. The next day, Siebels stock dropped by $2.13 to close at $9.61. The stock trades at $11.63 as of this writing.
The second-quarter 2002 results prompted Siebel to cut 1,100 jobs, or 15 percent of its workforce. During that earnings call, company officials announced that Siebel had 60 customers live on its Siebel 7 applications, which had shipped the previous November, and 700 customers in the process of upgrading to that version.
Siebel officials declined to comment on the lawsuits, beyond issuing a statement that the plaintiffs claims were “absurd” and pledging to defend itself “vigorously.”
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