Lawyers sue Microsoft over Surface RT 'unmitigated disaster'

Allege that execs knew of tablet's failure months before taking massive write-off, deceiving investors

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Several law firms joined forces on Monday to sue Microsoft, accusing the company of misleading shareholders about sales of the Surface RT tablet and calling its entry into the tablet market an "unmitigated disaster."

The lawsuit, which seeks class-action status, named several Microsoft executives as co-defendants, including CEO Steve Ballmer, former CFO Peter Klein, current marketing leader Tami Reller, and Frank Brod, the company's chief accounting officer.

After detailing a brief history of the Surface tablet's rollout, the lawsuit charged that Microsoft knew the launch had gone badly: "What Defendants knew, but failed to disclose to investors, however, was that Microsoft's foray into the tablet market was an unmitigated disaster, which left it with a large accumulation of excess, over-valued Surface RT inventory."

"Defendants caused Microsoft to issue materially false and misleading financial statements and financial disclosures for the quarter ended March 31, 2013," the lawsuit charged. "Defendants' materially false and misleading conduct enabled Microsoft to forestall Surface RT's day of reckoning and delay what would be tantamount to an admission by the Company that its all-important entry into the tablet market had been a failure." first reported on the complaint earlier today.

Last month, Microsoft acknowledged that it had overstocked its Surface RT inventory, and reduced the price by $150 to $349 for the entry-level model. To account for the discounting, as well as excess inventory of components and accessories, Microsoft recorded a $900 million charge against earnings in the second quarter.

In the same regulatory filing, Microsoft said that revenue generated by its tablet line -- which includes the more-expensive Surface Pro as well as the Surface RT -- had totaled $853 million since the October 2012 launch.

Last month was the first time Microsoft publicly disclosed Surface revenue. It has never revealed unit sales, although research firm IDC has estimated that the company shipped approximately 2.1 million of the devices between late October 2012 and the end of June 2013.

The lawsuit contended that Microsoft knew of its Surface RT problem long before, and should have written off the loss in the first quarter of 2013.

"Defendants knew or recklessly ignored, that the market value of Microsoft's Surface RT inventory had declined precipitously and that the Company, pursuant to applicable accounting rules, was required to write-down the value of its Surface RT inventory during the quarter ended March 31, 2013," the complaint stated.

After Microsoft's July 18 notice that it had taken a $900 million write-off, the company's share price plunged by 11.4% in next-day trading. The stock has not yet recovered: As of 3 p.m. Eastern time today, Microsoft shares were still selling for 8.6% less than they were at the close of trading July 18.

The class, if certified by the court, would be made up of stockholders who purchased Microsoft shares between April 18 and July 18, inclusive.

Several law firms were listed on the complaint, which was filed with a Massachusetts federal court. They include Robbins Geller Rudman & Dowd LLP in San Diego and Hutchings Barsamian Mandelcorn & Zeytoonian LLP in Wellesley Hills, Mass.

Microsoft declined to comment today when asked to respond to the complaint.

Gregg Keizer covers Microsoft, security issues, Apple, Web browsers and general technology breaking news for Computerworld. Follow Gregg on Twitter, at  @gkeizer, and on Google+, or subscribe to Gregg's RSS feed . His email address is

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