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Foundry Slapped With Shareholder Suit

Shareholders claim execs kept quiet about customer trouble while they sold off their stock

December 29, 2000

3 Min Read
Foundry Slapped With Shareholder Suit

Milberg Weiss, a law firm specializing in class action litigation, announced late last night that it was filing a class action suit in the U.S. District Court for the Northern District of California on behalf of Foundry Networks Inc. (Nasdaq: FDRY) shareholders.

Foundry, which makes Layer 2-7 switching and routing equipment for enterprises and Internet service providers, has seen its stock price plunge after an earnings warning was announced by the company on December 19 (see Foundry Slammed After Warning).

The complaint claims that some Foundry executives concealed and misrepresented difficulties caused by some of its service provider customers having problems obtaining funding.

The complaint also alleges that Foundry kept this information under wraps so that individual executives and officers could sell additional shares of their Foundry stock before the bottom fell out of the company’s stock price, according to a press release issued by Milberg Weiss.

Between October 20 and November 6, 2000, CEO and co-founder Bobby Johnson sold 850,000 shares of stock, worth over $70 million. The complaint alleges that Foundry executives and directors sold or had registered to sell up to $113 million worth of stock during the class period. Earl Ferguson, VP of engineering and co-founder, sold roughly $8 million worth of shares. Wilburn “Dean” McGill, VP of manufacturing, sold about $7 million worth of stock. During this period, shares had risen to as high as $89. Today the stock is trading at about $15 a share.

In mid-November 2000 -- after Johnson, Ferguson, McGill, and other directors had completed the bulk of their sales -- Foundry issued a Form 10-Q which contained many new disclosures about funding problems that some of its service providers might be having. In the company’s conference call on October 17, it stated that 65 percent of its customers were service providers.

The 10-Q stated the following: “Many of these customers are finding it increasingly difficult to obtain financing on attractiveterms, if at all. If these companies are unable to raise adequate capital, they may significantly reduce or even cease their purchases of our products or may be unable to pay or delay payment for products they had previously purchased. Such reductions in spending or payment defaults could have a material adverse effect on our operating results, which could cause our stock price to decline.”

The 10-Q also said that Foundry’s new vendor financing program was being used to help fuel growth and might have some potential risks to investors.

“Although vendor financing programs can increase customer opportunities, they can also bedifficult and costly to administer and may be utilized by customers who carry heightened credit risk. If we are unable to effectively administer vendor financing programs on a broad basis, or if we incur material losses due to customer defaults under the programs, our business could be harmed which could cause our stock price to decline,” said the 10-Q.

All of this information seemed to be a prelude to the December 19 announcement, when Foundry sent out a press release reducing its revenue outlook for the fourth quarter to around $100 to $110 million. Analysts were expecting $129 million in revenue. After the release went out Foundry’s stock plunged about 50 percent; it has struggled to gain ground ever since.

Foundry declined to comment on the lawsuit, but a spokesperson said the company hasn’t been served with any papers yet.

This is the second law suit filed against the company and CEO Bobby Johnson in the past two months. The company’s former VP of marketing is suing for sexual harassment (see Ex Foundry VP Sues Company, CEO).

--Marguerite Reardon, senior editor, Light Reading, http://www.lightreading.com

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