Investors have launched a class action in Northern California against Quantum Corporation and two former board members, ex-CEO Jon Gacek, and ex-CFO Fuad Ahmad.
The lead plaintiff Globis Capital Advisors L.L.C. accuses the defendants of deliberately violating GAAP rules to artificially boost Quantum’s share price which subsequently collapsed and left investors facing losses.
The class action alleges that Quantum recognised revenues in certain large and multi-year transactions for a large cloud project before they should have been recognised under GAAP rules.
It accuses the defendants of improperly and prematurely booking $20m revenues from this project in the first half of Quantum’s fiscal 2017. Further, they “expected to book a second $20 million of revenue from the Large Public Cloud Project during the second half of fiscal 2018.”
This project revenue booking enabled Quantum to report that scale-out storage revenues were growing faster than its legacy data protection revenues were declining. Also the second $20m of revenue from the large public cloud project did not materialise.
The complaint says “Quantum’s share price more than doubled during the initial portion of the Class Period, rising from below $4.00 per share in April 2016 to above $8.00 per share in April 2017.”
Investors, who thought the rising Quantum share price was justified, were misled. They saw the share price decline as the “Defendants’ prior representations concerning Quantum’s financial results and internal controls were revealed to have been materially false and misleading by corrective disclosures beginning on February 8, 2018.”
Gacek left Quantum in November 2017. Ahmad went in June 2018.
The lead plaintiff will file an amended complaint when Quantum posts accurate accounts and SEC reports for the affected periods.
Separately, Quantum yesterday settled an investor lawsuit alleging breach of fiduciary duty. The deal sees the company improve its corporate governance and is subject to shareholder approval.
Quantum told the SEC it believes the company mis-recognised revenues from sales transactions and investors and the SEC cannot rely on its stated accounts since its fourth fiscal 2015 quarter through to the fourth fiscal 2017 quarter.
The company first revealed the likely mis-statements affecting up to $60m of previously recognised revenue in September 2018, following an SEC subpoena, and set up a special committee to investigate. Quantum admitted deficient financial reporting and controls, dismissed accounting firm PriceWaterhouseCoopers as its auditor and hired Armanino LLC to re-audit accounts. The company will refile for the affected and subsequent periods as soon as possible but it is still unable to say when this will be completed.
Because of this reporting failure the NYSE stopped listing Quantum shares, in January this year.
As of December 31, 2018, the end of Quantum’s most recently completed fiscal quarter, approximately $5m and $15m of prematurely recognised revenue in the historical periods may be recognised in future periods, subject to GAAP rules.
But to investors the company will remain the same-old, same-old until it sorts out this awful accounting mess. The class-action plaintiffs have a strong case.
The case is 3:18-cv-000923-RS in the Northern District of California.