Daily deal site Groupon is fast clinching its reputation as the bad boy of the IPO circuit. Less than four months after going public, Groupon is already facing an SEC probe – and now its new shareholders are suing it for gimmicky accounting practices.
In the first of what is likely to be a parade of lawsuits, a Chicago man is seeking compensation on behalf of shareholders who were allegedly tricked into buying the stock at artificially high prices.
The accounting issues turn on Groupon’s failure to set aside adequate reserves for customers seeking refunds through its “Groupon Promise” program. As Reuters’ Felix Salmon explained, Groupon began to offer more expensive daily deals while at the same time making more generous refund promises. This formula meant Groupon’s liabilities were sure to increase — yet the company’s financial forms predicted the refund amount would shrink.
The issue attracted media attention on Friday after Groupon revealed “material weakness in its internal controls.”
In the lawsuit, plaintiff Fan Zhang says the company violated federal securities law when it made misleading statements that reportedly led him to buy 3,000 shares for $61,800 in February. Zhang is suing Groupon, CEO Andrew Mason, directors, executives and merchant banks like Goldman Sachs that participated in the company’s IPO.
A Groupon spokesperson told Reuters that it had no comment about the lawsuit.
This isn’t Groupon’s first brush with accounting irregularities. Prior to its IPO, the company was forced to amend an SEC filing over criticism over the way it reported receivables. The company is also facing a nasty brew of other lawsuits that accuse it of patent infringements and labor violations.
The Zhang lawsuit is likely to be the first of a series of lawsuits. These type of class action suits typically involve various lawyers racing to the court house and then jostling for position over who will play lead violin in the case.