One of Microsoft’s shareholders has alleged the company misled the public to how bad the Surface and Windows RT were doing leading up to Microsoft’s fourth quarter financial report.

Microsoft Makes Major Announcement In Los Angeles

Microsoft has found itself the target of a shareholder class action lawsuit which alleges the company made false and misleading statements about the sales of the Surface RT.

Filed by shareholder Gail Fialkov, on behalf anyone who held or purchased Microsoft stock between April 18, 2013 and July 18, the lawsuit alleges that Microsoft’s executive team mislead investors when it issued a press release on April 18 announcing that during its third quarter of 2013 it reported a 23 percent year-over-year increase in revenue in its Windows division due its family of Surface devices — which grew that quarter with the introduction of the Surface Pro.

Shortly after Microsoft published its third quarter earnings press release, the company hosted a conference call where Chris Suh, Microsoft’s General Manager of Investor Relations, stated while the Windows Division’s revenue was flat that quarter, non-OEM revenue grew by 40 percent that quarter driven by sales of the Surface and continued double-digit growth in volume licensing.

During the earnings call Peter Klein, Microsoft’s Chief Financial Officer, said that Microsoft was “expanding” the distribution of the Surface beyond the existing countries and retailers it was currently in.

The company’s quarterly report filed with the SEC, known as a 10-Q, published the same day as the earnings call said, “Revenue from Surface and increased commercial sales of Windows was offset by the impact on revenue of a decline in the x86 PC market,” meaning the company reported that Surface was acting as a buoy, keeping the company’s revenue afloat to offset losses from the decline of the PC market.

Peter Klein resigned shortly after the 10-Q was filed, and the company appointed Amy Hood to serve as its CFO.

During a technology conference hosted by JP Morgan on May 14, acting CFO Hood said that the Surface had “really strong momentum in China” and Microsoft had found that customers to date had a “strong satisfaction rate”.

Fast forward a few months and Microsoft finally issues a mea culpa in its fourth quarter earnings call, and says that it will be taking a $900 million loss on unsold Surface inventory.

The lawsuit points out that Hood’s statements at the conference were contrary to the facts, specifically that sales had been lackluster around the world, reception of the device by customers and the press was poor, and, at that time, the company had accumulated a large excess of known, but undisclosed, overvalued Surface RT inventory.

Further, the lawsuit points out, statements made by former CFO Peter Klein, CEO Steve Ballmer and Chris Suh (amongst others) in Microsoft’s 10-Q and during earnings calls were untrue and constituted a breach of fiduciary duty.

The lawsuit is seeking damages for “loss causation” by the rapid drop in Microsoft’s stock after its most recent earnings report. The lawsuit also says the plaintiff is demanding a trial by jury.

Microsoft is yet to file a statement in response to the suit.

Source: Robbins Geller Rudman & Dowd LLP