SEC Probes Fraud Allegations Raised in Egghead Lawsuit
Egghead Discount Software, accused last month of stock fraud by disgruntled shareholders, said Thursday that the Securities and Exchange Commission has opened an investigation into allegations raised by the shareholders’ suit.
Matthew J. Griffin, executive vice president of the software retailing chain, said Egghead officials are cooperating with the SEC and have been told that the investigation should not be considered an indication of wrongdoing.
SEC officials, citing routine policy, declined to comment on the matter.
In July, Egghead shareholder Steven Goldman of Philadelphia filed a class-action suit against the company--the nation’s largest software retailer--claiming that he and other shareholders suffered unspecified financial damages when they purchased Egghead stock without being informed of behind-the-scene problems brewing at the 200-outlet chain. The suit charges that Egghead’s failure to disclose the information constitutes securities fraud.
Allegations Denied
Edward Gergosian, a San Diego attorney representing the plaintiffs, said Egghead should have told stockholders that its accounting procedures did not meet generally accepted standards, that it was accumulating inventories of outdated software, and that its inventory control procedures were not adequate to monitor the situation.
Officials of Egghead, based near Seattle, Wash., have denied the allegations in the suit and have said they intend to mount a vigorous defense.
The suit alleges that Egghead was obligated to reveal the information before the company had its initial public stock offering in June, 1988, and during the subsequent nine months preceding the company’s announcement of a $12-million loss for the 1989 fiscal year. In the previous fiscal year, the company posted a profit of $4.6 million.
When the company went public, the initial price of its stock was $17 per share. It closed Thursday at $11.125, down 12.5 cents, in the over-the-counter market.
The defendants in the shareholder suit include company founder and Chairman Victor Alhadeff, President Stuart Sloan and Controller Stuart Rosenwald, as well as Donaldson, Lufkin & Jenrette Securities Corp. and First Boston Corp., the underwriter of the company’s initial public offering.
Before founding Egghead, Alhadeff operated an oil and gas tax shelter firm, ENI Corp., that lost millions for its investors when the bottom fell out of the energy market in the early 1980s. Alhadeff has been the target of 23 lawsuits stemming from the collapse of ENI and stands to lose all his investment in Egghead if the still-unsettled ENI cases go against him.
