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Razorfish took heavy fire from analysts early last week for not issuing pink slips after missing earnings expectations. On Dec. 14, it felt the heat again, this time from investors who have charged in a class action lawsuit that Razorfish executives made misleading statements about the consulting firm’s health and traded stock before releasing bad news about the company. During last week’s conference call, analysts asked incredulously why the company was not cutting staff after Razorfish unexpectedly announced that it would miss quarterly earnings by as much as 24 cents a share and why only 35 percent to 40 percent of staff consultants were working for paying clients during the quarter. CEO Jeff Dachis said that, despite the bad news, the company would not lay off any staff. Several analysts took issue with that strategy. “I’m a little perplexed about your decision not to cut headcount,” Robertson Stephens analyst Steven Birer said at the outset of the call. “Can you give us a better reason as to why you’re not facing up to what the business prospects are?” Toward the end of the call, Prudential Securities’ analyst Jim Dougherty called Razorfish losses “absolutely staggering if you can’t give us some sense of detail.” Not long after, Morgan Stanley Dean Witter analyst Michael Sherrick asked Razorfish executives why the company wouldn’t “consider a more dramatic restructuring.” Razorfish executives likely were still reeling from the hard line of questioning when they were hit with news of the lawsuit. The plaintiffs in the class action, filed in the U.S. District Court for the Southern District of New York, says Razorfish made misleading statements about their success in integrating employees from acquisitions, attracting top professionals and improving its ability to serve clients. The suit further alleges that Razorfish reported revenue and earnings warnings that resulted in a 91 percent drop in the stock’s value, from a high of $55 per share to a low of $5 during the class period of Feb. 15 to Oct. 5. It also says Razorfish executives Jeffrey Dachis, Craik Kanarick, Jean-Philippe Maheau, Michael Pehl and John Roberts traded $12.8 million worth of the company’s stock before disclosing the “truth” about the company’s health. The plaintiffs are faced with proving that Razorfish willfully misled investors and that executives traded on that knowledge. An investor lawsuit is never good news for a company and is especially damaging at a time when analysts are already questioning the wisdom of the company’s decisions and investors are bidding down its stock. Razorfish lost almost 20 percent of its value Dec. 14, trading at $1.44. Since the close of trading Dec. 12, before the revenue warning, the company’s stock is off 54 percent, falling from $3.09 to its current level. Though Dachis is standing by his claims that there are no plans to lay off consultants, the company’s low use of its consultants on paying projects, combined with the strong concerns of both investors and analysts, may force Razorfish to think twice about its staffing plans. Related Articles from The Industry Standard: Bad News for 3 More Net Firms Razorfish Walks the Razor’s Edge on Wall Street Razorfish Sinks on News of Big Fish’s Departure Copyright � 2000 The Industry Standard

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