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Interpublic Group of Cos., a New York holding company that ranks as the second-largest owner of advertising agencies in the world, must defend a class action accusing it of defrauding investors, a Manhattan federal judge ruled Friday. In a 34-page decision, Southern District of New York Judge Denise Cote denied the bulk of the defendants’ motion to dismiss the complaint, rejecting only one count against the eight individual defendants named in the suit. The lawsuit alleges that Interpublic issued misleading financial statements tied largely to questionable accounting practices at its flagship McCann-Erickson agency, the world’s largest advertising network. The class, which has yet to be certified, consists of stockholders of both Interpublic and True North Communications, an advertising network acquired in 2001. The charges stem from a restatement announced last August by Interpublic for the five years from 1997 to 2001 correcting inter-company charges that had been wrongly declared as income in the European offices of McCann-Erickson. Since then, the company has issued five more restatements, each time ratcheting up the amount of money involved until a figure of $347 million was reached in March 2003. The plaintiffs allege that during the course of the five restatements company executives continued to assure investors that each new amount represented the total and final charge for the accounting irregularities. Shares of Interpublic have declined from the mid-$30s a year ago to about $11 currently, sinking as low as $7.20 in early March. During the five years at issue, Interpublic had been on a buying spree, gobbling up more than 300 properties worldwide to create a far-flung advertising and marketing empire. The plaintiff investors allege that in conjunction with the spending binge, Interpublic deliberately misstated its finances to boost its stock price. In turn, they say, the inflated stock price benefited the company by allowing it to issue fewer shares of stock in stock-swap purchases, minimizing stock dilution and prompting positive analyst reports. Judge Cote found that the complaint adequately pleaded a case against Interpublic and the eight individual defendants, all of whom are former or current executives at the company. They are former CEOs John J. Dooner Jr. and Phillip H. Geier Jr.; CFO Sean F. Orr and former CFO Eugene P. Beard; and former controllers Joseph M. Studley, Frederick Molz and David I.C. Weatherseed and Controller Richard P. Sneeder. “The Complaint sufficiently alleges that the decision to grow by acquisition motivated [Interpublic] to inflate its reported earnings over that same period in order to have a higher stock price than it would otherwise have had,” she wrote. The court dismissed only the claims against the individual defendants under � 10(b) of the Securities and Exchange Act of 1934, finding that the executives’ insider sales were not sufficiently unusual to show knowledge of financial irregularities. The lawsuit is only one of myriad problems the company is facing. It is also contending with a Securities and Exchange Commission probe of its finances, and struggling under a crushing $2.9 billion debt built up during its spending jag. And like the rest of the industry, Interpublic is feeling the pressure of advertising cutbacks, and canceled its dividend in February. The company’s legal and financial problems cost former CEO John Dooner his job earlier this year. He was replaced by David Bell, who landed at Interpublic when it bought out the True North holding company in 2001. Interpublic is represented by Lewis Clayton, Andrew Gordon and Lauren McMillen of Paul, Weiss, Rifkind, Wharton & Garrison. Lead counsel for the plaintiffs are Katharine Ryan and Marc Willner of Schiffrin & Barroway in Bala Cynwyd, Pa. Sandy Liebhard and Joseph Seidman of Bernstein Liebhard & Lifshitz are serving as liaison counsel for the plaintiffs.

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