Investors File Class Action Suits Against SmarTalk

SmarTalk, a DRTV vendor of calling cards and prepaid wireless services, is being sued by investors in at least two class action suits filed by investors last month.

Investors allege the company’s stock prices were artificially inflated, according to one of the complaints filed by the Connecticut law firm Schatz & Nobel, which represents a client who purchased 300 shares of SmarTalk stock at about $31.56 a share.

The complaint follows SmarTalk’s postponement of its quarterly release due to “potentially significant issues with the company’s accounting treatment for acquisitions during 1997 and other items relating to 1997,” the company said in a press release. The company was expected to announce revenues of $51.8 million with a net income from continuing operations of $1.9 million, however, it also announced second quarter year-end, and prior quarterly results “could be materially effected by any adjustments from this quarterly review.”

The company said the issues were discovered by its independent accountants Price, Waterhouse, Coopers Llp.

The complaint filed by Schatz & Nobel alleges several company officers profited from the sale of significant portions of their stock. Robert L. Lorsch, chairman of the board, for SmarTalk, sold 1.3 million of his shares of company stock on Nov. 10 for $23 per share, allegedly earning him a profit of about $30 million. The complaint also alleges that other officers and directors of SmarTalk sold significant portions of their holdings at artificially inflated prices this year.

“The fraud on the market doctrine states that when officers disseminate information and make statements, prior to the sale, which are inaccurate to inflate the price of stock then that is fraudulent,” said Andrew M. Schatz, partner of Schatz & Nobel. “It is a violation of insider trading laws to sell stock on the marketplace while withholding information on the company.”

The complaint is made up of two charges. The first alleges that corporate officers acted as individuals and in concert to commit fraud on the plaintiffs in violation of the Exchange Act. The second charge alleges that the officers caused SmarTalk to engage in illegal and improper conduct by concealing or failing to disclose information from the plaintiffs and the trading public which caused the price of the company’s stock to become artificially inflated.

Schatz said Lorsch and others committed these acts because “they wanted to profit from them.”

It is unclear how many stockholders are members of the class action. No court date was announced as of press time.

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