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Investor Lawsuits Filed Against Best Buy

21 Nov, 2003 By: Holly J. Wagner

Three law firms have filed investor lawsuits against Best Buy, alleging the chain misled investors about the prospects for the Musicland group in general and the Sam Goody chain in particular, then lost 36 percent of Best Buy's stock value because of the drag the Musicland stores put on Best Buy.

Firms that have filed cases and plan to seek class action status include Lasky & Rifkind, Ltd.; Schiffrin & Barroway and Cauley Geller Bowman & Rudman. The potential class is investors who bought Best Buy stock between between Jan. 9, 2002 and Aug. 7, 2002. Best Buy stock plummeted from $30.80 Aug. 7 to $19.55 the next day.

“We have completed an initial review of the allegations in the lawsuit and believe they are without merit,” a Best Buy spokeswoman said. “The company intends to vigorously defend against this action.”

All three law firms allege in papers filed with the U.S. District Court in Minnesota that Best Buy executives violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 by not disclosing to analysts and potential investors that Sam Goody Stores were performing below the company's expectations, requiring Best Buy to shrink the sizes of some Sam Goody stores and close others. The law firms also allege that Best Buy's effort to remerchandise Sam Goody stores “was failing badly, depressing the company's operations and earnings, and that the company's increases in capital expenditures to modernize the look of Sam Goody stores was not yielding the desired financial effect.”

Claims by Schiffrin & Barroway and Cauley Geller go further, alleging that Best Buy executives were obligated to tell investors that the Musicland acquisition was a failure that left Best Buy saddled with a money-losing chain of stores, even as Wal-Mart and other mass merchants were putting pressure on Best Buy with advertising to lure customers away.

The firms go on to claim that Best Buy's strategy of capital expenditures to enhance the high-tech look of its stores and raise the service level was not yielding expected revenue increases, and that Best Buy hid the bad news from investors by not revising earnings projections in a timely manner.

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