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Cisco Systems Inc. is facing a class action lawsuit by investors alleging executives with the networking equipment giant intentionally manipulated its stock price to help pay for its aggressive acquisition strategy. Further, the suit alleges some of the company’s executives profited by selling their holdings at artificially inflated prices. Several class actions have been filed against the San Jose, Calif.-based company in recent weeks in the U.S. District Court for the Northern District of California, claiming the company lied to investors about its products, financial results and business. Such class action suits are not uncommon against publicly traded companies. They often are spurred by losses investors suffer from a downturn in the stock market. Although often without merit, companies usually settle such suits rather then spend money on expensive litigation. Cisco spokesman Steve Langdon said the company does not comment on specifics of litigation, but added, “These lawsuits are without merit.” The suits against Cisco allege inflation in the company’s stock price was essential to its main corporate strategy — growth through acquisition — which Cisco accomplished through the exchange of inflated Cisco shares. The acquisitive company completed more than 20 acquisitions between September 1999 and December 2000 by issuing more than 400 million shares of its stock. The costs of those deals range from $19 million paid in April 2000 to buy Seagull Semiconductor Ltd. of Herzliya, Israel, to the $5.7 billion deal in May 2000 to buy ArrowPoint Communications Inc. of Acton, Mass. The company was able to inflate the price of its stock, according to the lawsuits, through a series of vendor-financing agreements with Internet service providers and competitive local telephone companies that had technology to deploy but little capital to spend. Cisco provided capital financing to those companies and increased its sales by making the financing contingent upon the purchase of Cisco products. But through the shipment of defective or incomplete products, as well as Cisco’s failure to adequately account for excess and overvalued inventory and uncollectible finance receivables, Cisco was able to report “record” earnings each quarter during the class action period between Aug. 10, 1999 and April 16, 2001, according to the suits. However, Cisco recently reported a $2.5 billion write-down of excess inventory, one of the largest inventory write-downs in U.S. history, according to the law firms. Cisco stock dropped to a 52-week low of $13.62 in April following its disappointing third-quarter earnings report, coupled with the news the company would lay off 8,500 jobs, or 17 percent, of its work force. The lawsuits also claim executives with the company were motivated to boost Cisco’s stock price in order to profit from insider trading. According to the suits, the executives sold $595 million worth of their own Cisco shares at prices as high as $80.24 per share, or 84 percent higher than the price Cisco shares dropped to following the market downturn. Shares in Cisco rose $2.20 to close at $20 Wednesday, an increase of 12.36 percent, following a report by Morgan Stanley Dean Witter analyst Christopher Stix saying the company’s finances are stabilizing. Copyright (c)2001 TDD, LLC. All rights reserved.

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