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Ericsson Overstated Revenues and Delayed Expenses Securities Class Action

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Telefonaktiebolaget LM Ericsson did not prepare its financial statements according to International Financial Reporting Standards (IFRS), claims the complaint for this securities class action. As a result, it says, it overstated service revenues and improperly delayed reporting at least a billion dollars of expenses on long-term service projects, making its public statements false and misleading under the Securities Exchange Act of 1934.

The class for this action is all persons or entities who acquired Ericsson American Depositary Shares (ADSs) between April 8, 2013 and July 17, 2017.

Ericsson, a Swedish company, offers software, hardware, and services for computer networking to telecommunications companies worldwide. The company’s services include systems integration, network rollouts, and consulting projects that may be structured as contracts that run over a period of years. In 2015, more than half the company’s revenues came from services.

The company claimed to use IFRS in preparing its financial reports, but the complaint claims that this was not true; it claims that the company published misleading figures by both prematurely recognizing revenue and improperly delaying the recognition of costs for service contracts. According to the complaint, this led to a material overstatement of its revenues, margins, and profits during the class period.

The disclosures of this problem did not come all at once. The complaint cites a number of occasions in which it offered news that was worse than expected, with its stock price falling after each.

On April 21, 2016, the company announced disappointing results for the first quarter of that year, because of lower revenues from service projects, including poor execution of network rollouts and consulting projects.

On July 19, it announced disappointing results for the second quarter, blaming them on lower revenues from service projects and higher-than-expected costs from restructuring.

On October 21, the announcement was for lower-than-expected revenues and margins for the third quarter, with the poor results again attributed to service projects, and with an overall loss of $26 million, much larger than analysts had expected.

On March 28, 2017, the company said it would be recording a loss provision of up to $1.7 billion “related to certain large customer projects” which the company claimed came from only a few of its contracts.

On July 18, the company announce more disappointing results and said it had identified forty-two long-term service projects so far, involving total annual sales of nearly a billion dollars, that the company would have to “exit, renegotiate, or transform” as the complaint put it.

All of these negative announcements resulted in the company’s share price falling from $9.75 to $6.07 per share at the end of the class period.

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