Shareholders drag EDS into court

Lawyers representing shareholders in Electronic Data Systems plan to file a class-action lawsuit against the company, alleging that it artificially inflated its stock price with misleading financial reporting statements.

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Accountant and fraud investigator Ron Zahn, retained by  lawyers for the shareholders, said he is looking into EDS's handling of what it recently described as "problem contracts", including the $6.9bn Navy/Marine Corps Intranet (N/MCI) deal.

In May EDS reported a quarterly net loss of $126m, blaming it on those problem contracts, and a $334m pretax loss stemming from difficulties with the N/MCI program.

In a recent interview, David Wennergren, Navy chief information officer, said he believed that EDS was finally starting to "generate cash for themselves" from the N/MCI contract. "They had a huge capital expenditure that they had to make to get this thing going," he said. "I'm sure it was tough."

The shareholders' complaint stems from an announcement last September that EDS expected its third-quarter 2002 earnings to fall short of its previous guidance by about 80%.

A week later, securities analysts discovered that EDS had not disclosed some financial obligations related to the sale of  "put" contracts on its own stock which would require it to pay $225m. As a result, the price of its shares tumbled, and shareholders lost about $11.bn.

Dan Verton writes for Computerworld