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Microsoft Sued over Surface RT Sales Reports

Microsoft faces a class-action lawsuit over its Surface RT sales disclosures.

The complaint comes from law firm Robbins Geller Rudman & Dowd LLP, which is accusing Microsoft of "materially false and misleading conduct" in disclosing Surface RT sales information to investors. Microsoft is said to have misrepresented Surface RT's market performance to its shareholders by withholding information or giving misleading statements. The complaint calls Surface RT "an unmitigated failure," citing poor reviews of both the device itself and the Windows RT operating system on which it runs.

The complaint (full PDF) was filed on Monday with the U.S. District Court of Massachusetts. It was first reported by Neowin.net on Tuesday.

The lawsuit claims that Microsoft knew that it had excess and overvalued Surface RT inventory as early as its fiscal 2013 third quarter, but it delayed releasing that information until its Q4 financial report. Microsoft reported across-the-board gains in its Q3 report, including a 23 percent year-over-year increase in the Windows Division. However, no new data on Surface RT revenue was indicated. The Q4 report, in contrast, showed that Microsoft had taken a $900 million write-down to cover "Surface RT inventory adjustments."

"Defendants' materially false and misleading conduct enabled Microsoft to forestall Surface RT's day of reckoning and delay what would be tantamount to an admission by the Company that its all-important entry into the tablet market had been a failure," the complaint reads.

The complaint noted that Microsoft's stock dropped by $4.04 per share the day after it announced the $900 million write-down in its Q4 report, making it the worst single-day loss for the company in four years and putting a $34 billion dent in its market value.

The suit is seeking an unspecified amount of damages from Microsoft on behalf of shareholders who purchased common stock between April 18 and July 18 of this year -- the time between Microsoft's filing of its Q3 financial report and its Q4 financial report. The complaint names Gail Fialkov as the main plaintiff, and four top Microsoft executives as defendants: Microsoft CEO Steve Ballmer; then-CFO Peter Klein, who stepped down in May this year; Chief Accounting Officer Frank H. Brod; and then-Windows Division CFO Tami Reller, who is now the executive vice president of Microsoft marketing.

Because of their high positions within the company, the complaint claims these Microsoft executives were privy to relevant financial information concerning Surface RT sales, including the existence of a significant amount of excess and overvalued inventory, but they failed to adequately relay that information to investors. Additionally, the complaint claims the executives continued to make positive public statements about the Surface devices, even though they "lacked a reasonable basis," in an effort to inflate the company's stock. The complaint states:

"The Individual Defendants are liable as participants in a fraudulent scheme and course of conduct that operated as a fraud or deceit on purchasers of Microsoft common stock by disseminating materially false and misleading statements and/or concealing material adverse facts. The scheme: (i) deceived the investing public regarding Microsoft's business, operations and management and the intrinsic value of Microsoft common stock; and (ii) caused Plaintiff and members of the Class to purchase Microsoft common stock at artificially inflated prices."

Other complaints include violation of Securities and Exchange Commission (SEC) rules and regulations, as well as violation of generally accepted accounting principles (GAAP) and Microsoft's own inventory accounting policy.

The suit claims that Surface RT's poor sales were tied to low demand for Windows RT in general, as do many industry watchers. Windows RT, which is designed to run on ARM-based machines, has several limitations compared to Windows 8, which is designed to run on x86-based computers. For instance, Windows RT systems can't run older Windows 7 apps and have less computing power than Windows 8 machines. A few of Microsoft's hardware partners, citing low demand, have either discontinued their Windows RT product lines or slashed the prices of their Windows RT devices.

Those partner reactions are signs that Windows RT was failing in the market, according to the lawsuit. Microsoft purportedly knew of Windows RT's and Surface RT's poor market reception "just weeks" after the operating system was released in October 2012, according to the complaint.

To date, Microsoft has not broken out how much revenue it has earned from Surface RT sales, although its latest SEC 10-K filing indicates it earned $853 million in fiscal-year 2013 from combined Surface RT and Surface Pro sales. Reportedly, Microsoft is planning a second generation of the Surface RT product.

About the Author

Gladys Rama is the site editor of RCPmag.com.

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