US e-payments firm CheckFree has been hit with a class action lawsuit alleging that directors deliberately misled investors by issuing false and misleading statements between 4th April and 1st August last year that artificially inflated the company's share price. The news comes amid rumours that CheckFree stands to lose a major part of a lucrative contract with its biggest customer, Bank of America.
CheckFree founder, chairman and CEO Peter Kight and chief financial officer David Magnum are named as defendants in the suit, which is pending in the US District Court for the Northern District of Georgia.
The case alleges that the defendents violated federal securities laws by issuing materially false and misleading statements, with material ommissions, to the market between 4th April 2006 and 1 August 2006. As a result the price of CheckFree's stock was artificially inflated during the class period.
In April 2006 the defendants allegedly issued "objectively unreasonable guidance" regarding the month-over-month growth of the firm's electronic commerce business, which included the projection of 25% annual transaction growth. This led analysts to raise CheckFree's target price, as well as FY 2006 and 2007 EPS estimates, says the claim.
But on 1 August 2006 CheckFree reported fourth quarter revenues below market expectations, including a two per cent decline at its payment services division. As a result the vendor's shares plummeted 21% in after hours trading that day. The following day the stock dropped 15.9 to close at $37.20.
News of the suit comes amid speculation that CheckFree is set to lose one of its most valuable contracts with its biggest customer Bank of America.
The vendor's stock fell 7.2% to $35.39 yesterday after the release of a client note by a JMP Securities analyst stating that Bank of America is looking to shifting its online bill payments - which are currently handled by CheckFree - to an in-house system.
BoA is thought to account for around 20% of CheckFree's revenues, but the analyst note says that the move could end up reducing CheckFree's annual earnings per share by 25 cents to 30 cents.
In a statement issued after the US markets closed yesterday CheckFree says: "We have had discussions with a large customer regarding the possibility of pursuing an in-house approach for portions of our services."
The vendor did not identify the customer and says there have been no changes to any material customer contracts.