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Business Metric Manipulation

In addition to quarterly and annual financial statements, many companies also publish non-Generally Accepted Accounting Principles (or non-“GAAP”) business metrics (or “metrics” for short). Such metrics are non-GAAP since their calculation and presentation is not dictated by GAAP. Common non-GAAP metrics include: total customers, adjusted EBITDA, average revenue per user, total contracts, backlog, and many other measures of a company’s performance not included in standard GAAP financial statements.

A company may be held liable for publishing false or misleading business metrics that deceive the investing public. The simplest examples of such fraud include inflating customer counts or inflating the number of contracts in the company’s backlog. But sometimes the fraud may be more subtle—for example, the company may change the way its metrics are calculated from period to period without disclosing the change, or the company may change the underlying definition of certain metrics to manipulate the units included in calculating the metric, in order to create a false appearance of growth.

Proving that metrics are misleading can sometimes be more complicated than proving the falsity of figures governed by GAAP. Standard balance sheet, income statement, and other GAAP figures are misleading when they are not properly calculated according to GAAP, but there is no similar clear rule for non-GAAP metrics. Instead, the misleading nature of non-GAAP metrics must be evaluated on a case-by-case basis, with special attention paid to the particular definitions of the metrics over time. Although the SEC has taken a more critical stance towards non-GAAP metrics in recent years, they are still fertile ground for manipulation and dishonesty. Identifying how exactly metrics are misleading and presenting that evidence to a court often requires skilled forensic analysis by experienced securities lawyers.

If you believe that a company is publishing or has published false or misleading business metrics, please contact the securities class action attorneys at Glancy Prongay & Murray LLP.

Court Recognition

“And without question, the Court is of the opinion that the value of benefit that’s been conferred to the class is extremely sizable and that this Court is certainly aware that the skill and efficiency of plaintiff’s counsel is what attributed to this settlement, and they are learned securities counsel. The Court is mindful of that, and as a result they were able to sort of weed their way through the complex issues in this case, and also to bring this about — bring about a settlement rather in short order as these matters go. So the Court certainly attributes that to counsel’s skill and efficiency, as well as the ability to work with the adversaries in this matter.”

–Hon. Susan D. Wigention, U.S. District Judge, District of New Jersey

“Class Counsel has conducted the litigation and achieved the Settlement in good faith and with skill, perseverance and diligent advocacy”

— Hon. Donovan W. Frank, U.S. District Judge, District of Minnesota

“The court finds that the Settlement Fund… created by Class Counsel is an exceptional result… The settlement is significantly above the average securities class action settlement when measured as a percentage of losses recovered… The court finds that Class Counsel, particularly Co-Lead Counsel, exerted tremendous effort on behalf of the class in the prosecution of this action… The Court finds that Class Counsel skillfully prosecuted this action, particularly given that this case was unusually complex relative to most securities fraud class actions. ”

–Hon. Dickran M. Tevrizian (Ret.), U.S. District Court Judge, Central District of California

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