Leidos, parent company to SAIC, Inc., a provider of defense and intelligence consulting to federal, state and local government agencies, will have to face securities fraud claims regarding its work for New York City on its CityTime payroll system project. On March 29, the United States Court of Appeals for the Second Circuit put the shareholder claims back on the docket with what plaintiffs’ attorneys Robbins Geller Rudman & Dowd say is a potentially precedent-setting opinion.
In 2012 SAIC, after more than four decades of operation as one of Washington biggest consulting firms, split in two. The parent company rebranded itself as Leidos and retains the liability for the CityTime litigation. A spokeswoman from SAIC referred an inquiry from MarketWatch to Leidos. A Leidos spokeswoman declined comment on the Appeals Court decision.
The appeals court judges agreed with plaintiffs that SAIC should go to trial on allegations it failed to disclose in march 2011 10K that there was a “reasonable possibility” of a large liability relating to claims it defrauded the city. In March 2012, SAIC agreed to pay New York City $500.4 million to resolve a federal criminal complaint alleging it defrauded the city.
The Second Circuit’s opinion says there’s enough evidence to move the case forward. SAIC’s investors who are leading the case, the Indiana Public Retirement System, Indiana State Teachers’ Retirement Fund, Indiana Public Employees’ Retirement Fund, say that SAIC failed to comply with Generally Accepted Accounting Principles, GAAP, by failing to disclose material loss contingencies associated with its CityTime project, in violation of Financial Accounting Standard No. 5.
The lawsuit also alleges SAIC failed to disclose a known trend or uncertainty—the pile of civil and criminal charges piling up against it for the fraud— that SAIC reasonably expected to have a material impact on its financial condition, in violation of SEC Regulation S– K, Item 303. The court rejected SAIC’s materiality argument, which focused only on seventeen quantitative factors “only in the narrowest light” in estimating the impact of losing the CityTime project due to the fraud, and ignore qualitative factors.
The appeals court said that “the allegations support the inference that SAIC acted with at least a reckless disregard of a known or obvious duty to disclose when, as alleged, it omitted this material information from its March 2011 10‐K in violation of FAS 5 and Item 303.”
Sam Rudman, who represents the plaintiffs, told MarketWatch, “We were delighted with the judges’ decision. We believe it’s an important step forward for more timely and complete disclosure of loss contingencies and will help companies make those decisions with investors in mind.”
The Financial Accounting Standards Board introduced two proposals related to material and financial disclosures last fall that would, in the view of critics, may decrease the amount of information disclosed. The new guidelines are intended to give companies more discretion for determining their disclosure, which FASB says may reduce the proliferation of irrelevant information, thereby improving disclosure effectiveness. Critics, however, believe that a reduction in the amount of information disclosed may render financial statements less informative and markets less efficient. FASB plans to address the criticisms of the proposals by summarizing the numerous comment letters received and holding roundtables in the fall.
Both Leidos and SAIC use Deloitte LLP in McLean VA as their external auditor.