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With the recent $113.7 million settlement of a securities fraud class action, the leaders of MicroStrategy Inc. hope they have put a heap of trouble behind them. But the company’s legal woes are far from settled. The unusual accord, announced Oct. 24, postpones the payout of cash and stock to plaintiffs until 2005. So while the deal may have spared Vienna, Va.-based MicroStrategy some short-term pain, it assures that the case will shadow the business software company for years to come. The class action is also not the only hard-fought case facing MicroStrategy, which has seen its stock value fall far in the past few months. An executive’s discrimination complaint, filed around the same time the stock troubles surfaced, has quickly cost the company around $500,000 in attorney fees. While the case involving former MicroStrategy human resources executive Betty Lauricia may not prove as central to the company’s long-term health, it has already led to litigation in three different courts. Between the class action and the employment case, it may be a while before MicroStrategy puts a tumultuous and litigious 2000 behind it. FIVE-YEAR PLAN The stock fraud litigation began in March, when the company announced it had overstated quarterly revenues and profits over the past three years. Stockholder suits quickly followed in the U.S. District Court for the Eastern District of Virginia, as well as a derivatives complaint in Delaware, as the company’s shares plummeted to one-tenth their previous value. In addition, the Securities and Exchange Commission launched an investigation following the restatement of earnings. Last week, the company announced an unusual settlement of the two civil matters. It will issue notes to shareholders for $80.5 million in cash and distribute shares of company stock, some of it coming directly from company executives, guaranteed to be worth $16.5 million. While the money won’t be paid out completely until 2005, the company will make interim payments of $3 million every six months. The lead plaintiffs’ counsel, from New York’s Milberg, Weiss, Bershad, Hynes & Lerach, declined comment on the settlement. But veterans of securities class actions say the company’s saga is far from over. Several issues remain to be resolved, including court approval of the settlement and attorney fees. Counsel have not submitted the terms of the deal or their fee requests to the courts in Delaware or Alexandria. In addition, the class action litigation is still continuing against PricewaterhouseCoopers, which served as MicroStrategy’s outside adviser on its accounting practices. The issue that has caught the attention of class action lawyers, though, is the delayed payment schedule. “It is relatively unusual to see payments stretched over such a protracted period of time,” says Joseph Grundfest, a former Securities and Exchange Commission member who is now a professor at Stanford Law School. “But the company is in a difficult financial position, and you can’t get blood from a stone.” MicroStrategy General Counsel Jonathan Klein looks at the settlement in a positive light, saying the class members “have a strong incentive for us to do well and for our stock to go up.” But Grundfest characterizes the class members’ position as a “gamble,” noting that the deal essentially makes them creditors of the company. Grundfest also says that “a wide variety of legal and ethical issues” could surface if the plaintiffs’ lawyers are paid earlier — or with a different mix of promissory notes and stock — than the stockholders they represent. In most stock fraud suits resolved with both cash and stock, attorney fees are paid out in the same proportion as the total settlement, says a local lawyer who specializes in stock fraud suits and who is not involved in this case. Typically, this attorney says, legal fees comprise about 20 to 30 percent of the total settlement. Other class action lawyers say it would be highly unusual if the attorneys agreed to wait five years to receive all their fees. TROUBLE ON THE JOB On the employment front, Betty Lauricia’s case against MicroStrategy does not appear close to a resolution. Lauricia, 47, alleged in a complaint before the Equal Employment Opportunity Commission that MicroStrategy discriminated against her on the basis of sex and age when the company passed her by and chose someone younger for a promotion. She also claims MicroStrategy gave her only a fraction of the stock options offered to a male employee in a similar job. According to court files, Lauricia gave notice to MicroStrategy of the EEOC complaint on March 13. The next day, she was put on administrative leave after a meeting with Klein and MicroStrategy’s outside employment counsel, David Shaffer, a partner in the Washington, D.C office of Thelen Reid & Priest. Then, on March 16, MicroStrategy sued Lauricia and her lawyer, Alexandria solo Claude Convisser. The complaint sought a declaratory judgment that MicroStrategy did not act illegally when it put Lauricia on administrative leave and asked for an emergency injunction blocking release of what the company termed trade secrets in her possession. While Klein refused to comment on what Lauricia allegedly took, in technology circles plans for future growth, new products and even employee salaries are often closely held. On April 24, Judge Leonie Brinkema dismissed MicroStrategy’s suit. Brinkema’s dismissal is on appeal to the 4th Circuit. MicroStrategy has since filed a motion to withdraw the appeal, as it filed similar claims in federal court in June. A few days after Brinkema ruled, MicroStrategy’s lawyers went to Circuit Court in Alexandria, Va., with the trade secret claims. Chief Judge Donald Haddock ruled that the documents in question could not be made public and ordered a sheriff to retrieve them from Convisser’s office. That case is on hold pending action on the 4th Circuit appeal. In May, the EEOC sent Lauricia a right-to-sue letter stating that the commission found it reasonable to conclude that MicroStrategy put her on leave and “filed suit against [Lauricia] in retaliation … in an attempt to produce a chilling effect to deter future allegations of employment discrimination.” She filed a federal retaliation complaint in June, but not before MicroStrategy filed a second case in the Eastern District seeking a finding that it had not violated federal employment statutes in the Lauricia matter. The company added new allegations against Lauricia and Convisser of conspiracy to injure MicroStrategy’s business reputation. Convisser is no longer a defendant to those claims, but they are still pending against Lauricia. Brinkema consolidated the cases, and on Sept. 13, U.S. District Judge T.S. Ellis III ruled on several elements of the case. From his comments, it is clear that MicroStrategy’s litigation plan has not gone over well at the Rocket Docket. In his opinion denying MicroStrategy’s motion to dismiss Lauricia’s suit on the grounds that she is bound by an arbitration agreement, Ellis wrote that “MicroStrategy has been remarkably aggressive in pursuing litigation against plaintiff, resulting in the discovery of information unobtainable in arbitration and causing unnecessary delay and expense.” Ellis concluded that MicroStrategy itself “waived its right to invoke arbitration” and rejected a related argument that Lauricia had failed to exhaust her administrative remedies with the EEOC. Immediately following Ellis’ decision, MicroStrategy filed an interlocutory appeal to the 4th Circuit. That appeal is pending and no briefing schedule has been set. But it appears that after all this, including approximately $400,000 in fees paid to Thelen Reid and $70,000 to Alexandria’s Young, Goldman & Van Beek, MicroStrategy would like to resolve the matter out of court. “We certainly believe that the questions involving Lauricia’s employment and termination can be resolved through arbitration,” says Klein. But Convisser says he has never seen indications that his opponent is ready to negotiate. “In seven months, I have briefed 52 separate motions and made 25 separate court appearances,” he says. “MicroStrategy has never made any kind of settlement offer.”

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