A Philadelphia law firm filed what it hopes will become a class action lawsuit against XM Satellite Radio, accusing the Washington-based firm of misrepresenting its financial strategy to investors. The complaint also alleges that insiders sold stock with prior knowledge of the fact that the company was about to begin spending more to woo customers.
The complaint was filed May 3 in the U.S. District Court for the District of Columbia by the law offices of Bernard M. Gross of Philadelphia on behalf of those investors who purchased stock between July 28, 2005, and February 15, 2006.
According to the complaint, XM made misrepresentations regarding its ability to reduce the cost of obtaining new subscribers in order to reach its goal of 6 million subscribers by the end of 2005.
XM came under fire after the release of its fourth-quarter 2005 financial results, which showed the company increased spending to counter the arrival of disc jockey Howard Stern at competitor Sirius Satellite Radio of New York. The company’s subscriber acquisition costs, which includes such things as advertising and discounts on hardware, was $89 per customer during that quarter, compared to $64 per customer during the same time period in 2004.
Since the fourth-quarter spike, XM’s spending has declined. In first-quarter 2006, the company reported subscriber acquisition costs were back down to 2004 levels, coming in at $62.
The suit accuses XM insiders of making large sales of their personal holdings during the fourth quarter of 2005 before the high spending figures were disclosed. XM Chief Executive Officer Hugh Panero himself sold 413,334 shares on December 6, 2005, at prices ranging between $28.37 and $28.95, reaping proceeds of more than $11 million and selling 99 percent of his XM holdings, the complaint alleges.
XM spokesman David Butler said in a statement May 4, “XM believes the allegations are without merit and we will vigorously defend the matter.”
