Xerox Brass Ditches Shareholder Lawsuit Over Unit's Accounting

Xerox Brass Ditches Shareholder Lawsuit Over Unit's Accounting
By Jody Godoy

Law360, New York (July 29, 2016, 8:37 PM ET) — A New York federal court on Friday tossed a derivative suit claiming Xerox Corp. executives should have detected irregularities in Affiliated Computer Services Inc.'s financials before Xerox bought the company, saying Xerox had faithfully probed the claims before refusing to sue its officers. 

Shareholder Matthew Sciabacucchi had claimed the Xerox board had impure motives in refusing his demand that the company sue Xerox CEO Ursula Burns and other company brass for failing to catch ACS accounting problems later flagged by the U.S. Securities and Exchange Commission. But U.S. District Judge P. Kevin Castel saw no bad faith in the scenario Sciabacucchi had described.

Instead, the facts in Sciabacucchi's complaint showed that “the board’s investigation of Sciabacucchi’s demand was more than procedurally adequate” and that the board and a demand review committee it appointed had “actively and conscientiously engaged in investigating the shareholder demand,” the judge said.

Sciabacucchi filed suit in September, claiming the executives breached their fiduciary duties by filing financial statements premised on inflated ACS revenue figures from before the $6.4 billion deal. Two former ACS executives settled with SEC for $675,000 in 2014 over claims that they padded ACS’ revenue by arranging to redirect pre-existing transactions through the company.

Xerox’s leadership should have discovered ACS’ bad accounting through due diligence ahead of the acquisition and the fudged figures should not have been reflected in Xerox’s financial statements, Sciabacucchi claimed.

Xerox disclosed in October 2013 that the SEC was investigating accounting practices at ACS, focusing on the question of whether revenue associated with ACS’ equipment resale transactions should have been presented on a net rather than a gross basis. ACS' former CEO and chief financial officer later agreed to collectively give up more than a half a million dollars to settle the SEC claims.

On Friday, Judge Castel said the facts set out in Sciabacucchi's suit show the company took his allegations seriously by appointing an independently led demand review committee and hiring Levine Lee LLP to conduct an investigation. The internal probe took nine months and involved review of thousands of pages of materials from the SEC probe and resulting in-house inquiry, along with interviews with more than a dozen individuals employed by ACS, Xerox and its auditor.

Sciabacucchi had alleged that the effort was inadequate because the investigators failed to speak with SEC officials involved in the regulatory probe, but Judge Castel found that measure was neither legally required nor needed.

“There is no reasonable basis to infer that the [demand review committee] would have obtained a more complete understanding of the facts and circumstances underlying the shareholder demand if they interviewed any of the SEC employees who worked on the ACS investigation,” the judge said.

Counsel for the parties did not immediately reply to requests for comment on Friday.

Sciabacucchi is represented by Robert I. Harwood, Samuel K. Rosen and Daniella Quitt of Harwood Feffer LLP, Robert B. Weiser, Brett D. Stecker and James M. Ficaro of The Weiser Law Firm PC and Katharine Ryan and Richard A. Maniskas of Ryan & Maniskas LLP.

Xerox and the executives are represented by Sandra C. Goldstein, Rachel G. Skaistis and J. Wesley Earnhardt of Cravath Swaine & Moore LLP.

The case is Sciabacucchi v. Burns et al., case number 1:15-cv-07506, in the U.S. District Court for the Southern District of New York.

–Additional reporting by Jeff Zalesin. Editing by Kelly Duncan.
http://www.law360.com/articles/823197/xerox-brass-ditches-shareholder-suit-over-unit-s-accounting