Sprint Nextel is facing a class-action shareholder lawsuit alleging the company concealed systemic problems with its purchase of Nextel Communications, keeping the company’s stock artificially inflated.
The lawsuit was filed this week in the U.S. District Court of Kansas by a single shareholder, Cora Bennett. It seeks class-action status and would cover shareholders who owned the company’s common stock between Oct. 26, 2006, and Feb. 27, 2008. Damages have not been specified.
“Sprint has and will continue to operate in complete adherence with all federal securities laws,” said Sprint spokesman Matt Sullivan.
In the complaint, Bennett states that Sprint’s merger with Nextel “turned out to be a disaster” when the two companies failed to integrate their technologically disparate networks, hemorrhaging customers in the process.
At the time of the merger, Nextel operated its wireless system over its proprietary iDEN network, which proved extremely difficult to integrate with Sprint’s legacy CDMA network. The suit states that during the first year after the merger, Nextel experienced severe technical glitches due to degrading call quality and rebanding necessary to limit interference between the iDEN network and public safety radio systems.
Despite a loss of customers and plummeting stock price, the complaint states that the company whitewashed problems with its network, churn and customer service, assuring the market that initiatives were working and the company was poised for a turnaround.
But by the end of 2007, the company conceded that its initiatives were not working and that it had experienced significant deterioration in its subscriber base. In its fourth-quarter earnings release on Feb. 28, 2008, the company reported it lost $29.5 billion, due in large part to a $29.7 billion write-down related to its Nextel acquisition. The company’s stock fell 10 percent on the news, and Fitch downgraded Sprint’s credit ratings for long-term and short-term debt. Shortly afterward, Standard & Poor cut Sprint’s credit rating to junk status.
“Given the increased volatility in the subprime market, the intense competition in the wireless industry, and the problems facing Sprint due to its failure to integrate legacy Sprint and legacy Nextel operations, the company had no reasonable basis to make projections about its ability to maintain and grow its subscriber base, its ability to decrease and then maintain its churn rate to a level of 2 percent by year-end 2007, its ability to recognize $14.5 billion in merger synergies, and its ability to deliver two to three million hybrid dual-mode phones into the market by year-end 2007,” states the complaint. “As a result, the company’s projections issued during the Class Period about its earnings for 2007 and 2008 were, at a minimum, reckless.”