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Campbell Soup Co. has agreed to pay $35 million to settle a spate of federal class action securities suits brought by shareholders who said the company artificially inflated its sales figures for 1997 and 1998 to create the false impression that it was routinely meeting Wall Street’s quarterly sales projections. If the settlement is approved by U.S. District Judge Joseph E. Irenas of New Jersey, the team of plaintiffs’ lawyers will be entitled to a petition for fee of up to 20 percent of the fund. A spokeswoman for Campbell said the company was not admitting any wrongdoing and that the settlement would be paid by insurance. The case is In re Campbell Soup Co. Securities Litigation. Attorney Sherrie R. Savett of Philadelphia’s Berger & Montague, who served as co-lead counsel for the plaintiffs, said the settlement was the largest ever in a securities case that alleged “channel stuffing” — the practice of artificially boosting sales at the end of a fiscal quarter or year by offering distributors and dealers special incentives to purchase more goods than they need. In the suit, shareholders alleged that Campbell concocted the scheme in 1997 after supermarkets stocked up on its products in anticipation of a price increase. Since its customers’ inventories were full, the suit said, Campbell was finding it difficult to maintain its sales growth. To remedy the problem, the suit alleged, Campbell began offering increasing discounts to its customers to convince them to buy increasing amounts of product. Under pressure to meet analysts’ earnings estimates, Campbell President and CEO Dale F. Morrison allegedly ordered executives to generate revenue needed to meet the estimates. The executives would then give target numbers to salesmen, including authorization for increasing discounts to ensure that targets were met. To hide the discounts and their impact on revenue, the suit alleged that the company reported the discounts not as a deduction from revenue but as “SG&A,” or selling, general and administrative expenses. The scheme worked at first, but ultimately backfired, the suit alleged. When Campbell’s customers could no longer store any more product, the suit alleged that the company arranged to ship “bought” product to warehouses owned or rented by Campbell until the customers’ inventories decreased. Product was also stored on trucks parked in lots at Campbell’s facilities. The suit alleged that Campbell even rented trucks from third parties to accommodate the volume of product “sold” but not shipped at the end of each quarter. As the scheme continued, the suit alleged that Campbell began offering “guaranteed sales,” in which product could be returned if not sold within 90 days. But the suit said Campbell failed to account for the practice properly. At times, the suit said, the sales efforts were so successful that some supermarkets had acquired an entire year’s worth of inventory. Shareholders complained that Campbell not only failed to disclose the practice, but misled investors by falsely stating that its sales remained strong because consumer demand was high. After having consistently met analysts’ estimates for several quarters in a row, Campbell’s stock price dropped 16 percent on Jan. 11, 1999, after the company revealed that sales and earnings would fall short of estimates. Savett said investors suffered losses estimated at $200 million. Share prices had peaked at slightly above $60 in March 1998, but tumbled to $40 by February 1999. (In recent days, Campbell was trading at about $24.) Campbell’s lawyers — Alan E. Kraus of Latham & Watkins’ Newark, N.J., office, along with Paul C. Saunders and Max R. Shulman of Cravath, Swaine & Moore in New York — moved for dismissal of the suit, arguing that the shareholders failed to state a claim for securities fraud because they had no evidence that company executives didn’t truly believe that the sales practices would buoy sales. Instead, the defense team argued, the plaintiffs had alleged nothing more than “fraud by hindsight” — effectively arguing that Campbell must have misled investors because its business plan did not work. In a significant victory for the plaintiffs, Judge Irenas refused to dismiss the suit, saying the allegations in it offered “a detailed picture of the improper practices in which defendants knowingly engaged to achieve ever-increasing sales and meet analysts’ estimates.” Irenas found that the suit portrayed a version of reality at Campbell’s executive offices that was a “startling contrast to the rosy picture consistently presented to Wall Street and the public.” In a 60-page opinion handed down in June 2001, Irenas succinctly outlined the alleged scheme: “Campbell’s executives and the sales force scrambled and schemed to convince their customers to purchase more and more product, far more than those customers needed. And then the company engaged in financial legerdemain to realize the sales as revenue and mask the improprieties of their sales tactics,” Irenas wrote. “Campbell’s employees allegedly even raised with senior management their concerns that the practices were wrong. Meanwhile, throughout this period, defendants allegedly failed to disclose any of this information to its investors,” Irenas wrote. Irenas found that the plaintiffs had not only “substantial circumstantial evidence” of the scheme, but had also properly alleged both “motive and opportunity.” “Plaintiffs assert that Campbell’s new management was determined to continue the company’s growth and meet Wall Street’s expectations, and have identified statements to support this. These allegations clearly give rise to a strong inference that the company acted with scienter in failing to disclose material aspects of its operations and performance,” Irenas wrote. Savett was joined on the plaintiffs’ team by co-lead counsel Andrew M. Schatz of Schatz & Nobel in Hartford, Conn.

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