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Global Eagle Lack of Controls over Financial Reporting Securities Class Action

Global Eagle Annual Report Cover

This securities class action revolves around allegedly misleading statements Global Eagle Entertainment made about its new acquisition, Emerging Markets Communications (EMC). According to the complaint, Global Eagle gave investors updates on EMC’s integration without knowing whether the statements were true, this violating Securities Exchange Act of 1934.

The class for this action is all persons or entities who acquired Global Eagle common stock between July 27, 2016 and March 16, 2017.

Global Eagle provides content, connectivity, and digital media products for the travel industry. It operates in two segments: Connectivity (which offers wifi Internet connections through satellite transmission for in-flight, maritime, and land-based markets) and Content (which offers licensed or wholly-owned content, video and music programming, and video games to away-from-home, non-theatrical markets).

According to the complaint, the company has grown by acquiring other companies, and its 2015 Form 10-K admitted that it did not have internal control over financial reporting for four businesses it had acquired that year. Still, on July 27, 2017, Global Eagle acquired EMC, even though, the complaint claims, it still did not have proper control over reporting or adequate ability to integrate its acquisitions.

The complaint says that Global Eagle told investors it was successfully integrating EMC and even estimated revenue, while confidential witnesses have claimed the company was in disarray and did not perform due diligence on EMC. For example, the complaint quotes the company as saying it was “on track” for $15 million in savings in 2017, when it did not have a way of knowing whether this was true.

Even so, the company’s filings report no changes in internal control over financial reporting.

On March 13, 2017, the company reported the resignation of a high-ranking accountant, the fourth high-ranking executive in just seven months. Global Eagle’s stock price fell by over 5%.

A few days later, on March 16, the end of the class period, the company announced its inability to file its 2016 annual report on time, due to “additional material weaknesses in internal control over financial reporting in the areas of revenues, license-fee expenses, inventory, internally developed software, goodwill impairment and accounting for business combinations…” At this news, the stock price fell by another 14%.

In May, the company announced that it would not be able to file its first-quarter 2017 results on time either. In August, it announce it had uncovered still more material weaknesses.

NASDAQ gave Global Eagle until September 12, 2017 to file its 2016 Form 10-K, but the company filed a Form 8-K less than a week before that saying it would be unable to meet that deadline. Again, the company’s stock price fell.

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