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Corel Corp., the Canadian software company whose products include WordPerfect, has agreed to pay $7 million to settle a class action shareholders’ suit that alleged its stock price plunged in late 1999 and early 2000 when investors learned the truth about its financial health. In court papers filed last week, lead plaintiffs’ attorneys Paul J. Scarlato of Weinstein Kitchenoff Scarlato Karon & Goldman and Robert P. Frutkin and Deborah R. Gross of the Law Offices Bernard M. Gross urged U.S. District Judge Anita B. Brody to grant final approval of the settlement. In a separate brief, the plaintiffs’ team asked Brody to award them fees equal to one-third of the settlement fund, or more than $2.3 million. The suit alleged that Corel hid the truth about its financial problems for several months — all the while misleading investors with positive statements. Historically, Corel had operated in the Windows market, generating all of its revenue from the sale of software for use on the Microsoft Windows operating system, the suit said. But in 1999, the suit said, Corel announced that was destined to become a major force in developing products for the new Linux operating system, which was billed as a competitor to Microsoft Windows. Plaintiffs’ lawyers said Corel led investors to believe that its Windows business was a “cash cow” that would support its entry into the Linux marketplace. The positive comments led investors to expect that Corel would report profits for the final quarter of 1999, the suit said. But “in a dramatic about face,” the suit said, Corel announced in late 1999 that it would be posting a loss for the quarter that had ended the month before. The news led to a precipitous drop in Corel’s stock price — from $18.56 to $13.18 in a single day, the suit said. And the misleading statements continued, the suit alleged, as Corel told investors to discount the expected loss because it was related to Corel’s “old” Windows business. “Defendants told investors to focus instead on Corel’s leadership position in the burgeoning Linux market and to view Corel as a Linux company,” plaintiffs’ lawyers argued. Plaintiffs alleged that Corel claimed that its “financial future rested on the shoulders of its Linux business.” As a result, the plaintiffs said, Corel “falsely and misleadingly conditioned the market to expect … a small loss in its first quarter of fiscal 2000.” But in late March 2000, plaintiffs alleged, Corel “again shocked the market by reporting a large loss” for the first quarter, and announced that its results “would not improve for the foreseeable future.” The news led to another plunge in the stock price — from $13.38 to $10.37. In their brief seeking approval of the settlement, plaintiffs lawyers said a damages expert estimated that investors suffered losses of about $46.3 million. The $7 million settlement, they said, therefore represents about 15 percent of the maximum provable damages. Plaintiffs’ lawyers argued that a 15 percent recovery is fair and reasonable considering the risks of losing at trial or winning a larger judgment they would be unable to collect. “Even if a proposed settlement amounts to only a fraction of the potential recovery, it does not necessarily follow that the settlement is inadequate,” the plaintiffs’ team wrote. “The court should not only look at plaintiffs’ estimate of damages when evaluating a settlement, but should also look to the damages estimated by defendants. In this case, defendants contended that the losses of the class due to fraud were zero, and any losses that the class members suffered were due to speculation surrounding Linux-related stocks.” They also argued that there was a strong risk that Corel would not be able to withstand a greater judgment. “Corel’s financial fortunes never recovered,” the plaintiffs’ team wrote. Since early 2000, they said, Corel has “reported a string of disappointing quarterly results, including dramatically declining revenues and losses,” and has sold its Linux business. In recent months, the brief says, Corel “has depended on outside financing to sustain its operations, including raising $135 million from a desperately needed equity investment by Microsoft Corp.” And throughout the litigation, they said, Corel’s defense lawyers suggested that if plaintiffs were successful in obtaining a judgment, the company would seek the protection of the Canadian bankruptcy court. As a result, the plaintiffs’ team argued, even if the plaintiffs took the case to trial and won a hefty verdict, there was “a very real risk that the class would obtain no recovery at all.” The brief also says the maximum amount available to fund the judgment could have been limited to the $25 million available insurance — a sum that would have been reduced by the substantial defense costs of taking the case through trial and appeals. But even the insurance funds were not guaranteed, the plaintiffs’ team noted, since Corel’s insurer, AIG, had reserved its rights under the policy.

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