SOX SUIT: Holding Feet To The Fire - InformationWeek

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Software // Information Management

SOX SUIT: Holding Feet To The Fire

Shareholders are making sure the law is enforced.

Let the lawsuits begin! Now that all the deadlines have passed for mid- to large-sized companies to comply with the Sarbanes-Oxley Act (SOX), shareholders are making sure the law is enforced. On December 3, a class action lawsuit was filed against network services firm UTStarcom, alleging that the company misled investors and violated SOX Section 404.

The suit complains that UTStarcom falsely reported record results and projected continuous profitability in publicly disseminated press releases and SEC filings, attributing the positive results and guidance to growing demand for its products and services, particularly in China. However, says the complaint, the company's statements failed to disclose that it had massive supply chain constraints that delayed the recognition of millions of dollars in revenue, that it was experiencing weakening demand for its products and services in China and that it lacked adequate internal controls.

The suit, filed on behalf of shareholders, alleges that UTStarcom concealed from investors that it was in violation of Nasdaq rules requiring an independent majority in the membership of its board of directors, and that it may be in violation of SOX Section 404 requiring the company to inform investors about its internal control structures, which must be tested and verified by independent auditors. The suit alleges these violations resulted in inflated share prices.


SOX increases investor confidence in corporate ethics (37%)

Compliance creates cost burden that suppresses stock price (33%)

SOX boosts shareholder value by building market confidence (25%)

Compliance costs decrease ability to pay dividends (14%)

—From an Oversight Systems survey of corporate financial leaders

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