Sirius XM Wins Consumer Lawsuit, Digs In Against Stern and Shareholders

Sirius XM (NSDQ: SIRI), flying high on a brighter balance sheet, received more good news after a California judge tossed a class action lawsuit over its advertising. But the satellite radio company is not out of the legal woods yet. It is still confronting other high stakes lawsuits involving its star host and alleged fraud by its executives.

In an order last week, a federal court in San Diego rejected plaintiff Joel Broida’s claim that a Sirius XM ad tricked him and others into over-paying for a two year subscription. In throwing out the suit for the second time, the judge said Broida, a Colorado resident, could not rely on New York law to bring the lawsuit and also pointed out that Broida was unable to even produce the advertisement in question.

The judge dismissed the case with prejudice, meaning that Sirius XM finally seems to be clear of a series of consumer lawsuits that have dogged it for years. In August, the company agreed to pay $180 to settle a class action that accused it of breaching federal antitrust rules related to the 2008 merger between Sirius XM.

Still, several major lawsuits still hang over the company, including one involving shock-jock Howard Stern. His company, One Twelve Inc, claims Sirius XM owes millions in bonus payments related to surging subscriber numbers. According to Michael Oberman, a lawyer for Sirius XM, the terms of Stern’s contract do not provide for the bonus he is claiming. The parties argued their case in New York Supreme Court in September but are still waiting for a ruling about whether the case should be dismissed.

The most intriguing lawsuit, however, is the ongoing shareholder suit that accuses CEO Mel Karmazin and other executives of fraud by lining their pockets at the time the company was rescued by Liberty Media (NSDQ: LINTA) during the height of the financial crisis in 2009. In late August, a New York federal judge trimmed certain claims and defendants but allowed the core of the lawsuit to go forward. The judge did not release reasons at that time but finally did so in November in an order explaining why the suit should not be dismissed.

Though little reported at the time, the judge’s reasons appear to favor the shareholders’ claims (the lawsuit is a derivative claim which means shareholders launch a suit on behalf of a company whose directors can’t or won’t take action) :

One proposal, set forth by Charles Ergen, who had previously offered defendants a premium over the market price, offered defendants $500 million if Karmazin and existing board members relinquished their positions. The other proposal imposed a high interest rate of 15%, returned $17 million to the lender as a “bonus,” and heaped benefits worth $119 million on Karmazin, the CEO under whose leadership Sirius XM had verged on bankruptcy. Given these allegations, one can reasonably conclude that the defendants chose the latter transaction despite its allegedly unfavorable terms because it allowed them to retain their positions.

The most recent entry on the court docket shows that the case is going forward. If the shareholders’ prevail, Karmazin and other directors could be ordered to disgorge millions in bonuses they acquired as a result of the Liberty media investment. This would not likely have a big financial impact on the executives themselves because such penalties are typically covered by insurance.

But a fraud finding could undermine Karmazin’s authority as head of company. This might not matter, however, because the colorful CEO has already dropped hints that he may be heading for the exits. Last week, he told a Reuters summit that he doesn’t like playing second fiddle and suggested he might bolt if Liberty Media exercises its option to increase its stake in the company which it is expected to do next year.

According to one recent report, analysts are predicting that Sirius XM will earn 7 to 8 cents a share in 2012. The report also suggests that, even though new players like Pandora (NYSE: P) and Spotify are sending ripples in the audio market, Sirius XM remains well poised in the coming years because of vehicle subscriptions.