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Nokia hit with suit over weak smartphone transition

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UPDATED: Nokia (s nok) has hit a rough patch as it tries to resurrect its smartphone business around Microsoft’s Windows Phone platform (s msft) , with disappointing first quarter Lumia sales and lowered guidance for the coming quarter. But does that constitute fraud on the part of Nokia’s leadership, which has been preaching a turnaround based on the Windows Phone strategy? That question is being tested by a new class action lawsuit filed in New York, alleging that Nokia misled investors on how well it would do with its Lumia smartphones.

Plaintiff Robert Chmielinski alleges that Nokia and its CEO Stephen Elop and CFO Timo Ihamuotila deceived the market by issuing false claims about how well the company’s migration to Windows Phone was going. The defendant bought shares of Nokia following Nokia’s launch of the Lumia smartphone in October. But shares of Nokia dropped 16 percent on April 11 after the company said first quarter performance was worse than expected and it lowered second quarter guidance.

The plaintiff said the defendants perpetrated fraud because they either knew they were offering misleading information or acted with reckless disregard for the true information known to them. The lawsuit is looking to represent all Nokia shareholders who were affected during the class action period. Here’s a quote from the complaint:

During the Class Period, defendants had both the motive and opportunity to conduct fraud. They also had actual knowledge of the misleading nature of the statements they made or acted in reckless disregard of the true information known to them at the time. In so doing, the defendants participated in a scheme to defraud and committed acts, practices and participated in a course of business that operated as a fraud or deceit on purchasers of Nokia securities during the Class Period.

I’m not sure how far a lawsuit like this can go. Companies are always going to be bullish about their prospects and are going to represent themselves in the best light. The results don’t always track with expectations. But the lawsuit is trying to get at the idea that Nokia knew more about the true performance of its smartphone business and didn’t share that information in order to make it seem like its Windows Phone strategy was doing better than it actually was.

That could be hard to prove. But it adds another headache for Nokia, which lost $1.7 billion last quarter and has seen its credit rating slashed to junk status. Nokia has a lot of catching up to do and the early struggles are just going to prompt more people to wonder why it made the leap to Windows Phone. At this point, Nokia has to just focus on getting back on track with its smartphone business. If it fails to do that, a lawsuit will be the least of its worries.

UPDATE: Nokia has responded to the lawsuit saying it will defend itself. “Nokia is reviewing the allegations contained in the complaint and believes that they are without merit.”

2 Responses to “Nokia hit with suit over weak smartphone transition”

  1. Pete Kleinschmidt

    It is doubtful Chmielinski really plans to follow through on the suit. More likely there is a group of investors (probably a big one given how much money has been lost) who want to open a dialog with management about the future direction of Nokia. Elop of course is probably desperately trying to prove himself and refuses to discuss the matter. Given the opportunity he will let Nokia sink rather than admit he screwed up and try to change course before it is too late. So a lawsuit is the only way to force the matter.

    The Windows Phone strategy is clearly dead in the water. WP offers nothing of significance beyond what Android and iOS already offer (or could easily offer if necessary).

    Android and iOS each target one of two main approaches to developing an OS. iOS is the pretty, safe, walled garden approach. It is to the mobile market what Disney World is to vacations. Android is the relatively open, cheap, wild west approach. In the mobile world it is the vacation equivalent of throwing a tent in the back seat of your car and hitting the road.

    Each approach appeals to a different group of people and neither is good or bad. This is why both are likely to succeed over the long run. The problem with WP, BB10, MeeGo, etc, is the various manufactures keep looking for a third large group of potential users. Unfortunately for them it doesn’t seem to exist. All they can do is try to steal market share from either iOS or Android.

    So I agree with Karan that the only real viable alternative is for Nokia to shift to Android. It is the only way I can see Nokia keeping its factories open. The Android market is likely to consolidate over the next few years and given Nokia’s strong manufacturing capability it is possible it could remain a significant player. The alternative is to shut down most of its factories and become a bit player making a few phones for disgruntled iOS or Android users.