CHICAGO - Institutional investors are lining up to sue Mercury Finance Co., Mercury officials and former auditor KPMG Peat Marwick L.L.P. over alleged accounting fraud.
The Minnesota State Board of Investment, St. Paul; T. Rowe Price Associates Inc., Baltimore; the Ohio Public Employees' Retirement System, Columbus; and the Florida State Board of Administration, Tallahassee, all have filed suit or are likely to be part of lawsuits.
And Fidelity Investments, Boston, hasn't ruled out joining the legal fray.
Minnesota is seeking about $5 million, as it fights to be lead plaintiff of a class-action suit, while T. Rowe Price is seeking more than $180 million in compensatory and punitive damages and related interest.
Officials at Lake Forest, Ill.-based Mercury won't comment on the lawsuits.
But industry sources said a possible settlement is being sought by Mercury officials to keep the company from going into bankruptcy.
Shareholders are seeking compensation following the revelation earlier this year that Mercury had overstated profits for several years, which resulted in a steep tumble in the company's share price.
Christie Eller, assistant attorney general for the state of Minnesota, said she heard investors are seeking total damages of more than $1 billion.
George Ledwith, a spokesman for KPMG, declined comment, because the company doesn't discuss pending litigation.
Mr. Ledwith did say: "KPMG discovered the problem, and brought it to (Mercury's) attention."
Ms. Eller said the Minnesota board was affected significantly by Mercury's restatement of earnings.
While the actual amount of damages suffered by the roughly $34 billion board is being disputed, it is about $5 million, she said.
Minnesota paid as much as $22.25 per share and as low as $11.25 for its Mercury holdings during the time the class-action suit covers, according to the suit. The amount of shares held by Minnesota varied with purchases and sales, but it owned 563,678 shares as of Feb. 10.
As of the market close Aug. 28, Mercury shares traded for less than $2 a share.
The basic thrust of Minnesota's argument is that the issuance and distribution of false and misleading information was harmful to Minnesota as owner of its shares, Ms. Eller said.
It is suing on two counts of violations of the Securities Exchange Act of 1934 and Securities and Exchange Commission rules.
In addition to suing Mercury and KPMG, Minnesota is suing: John N. Brincat, former president and chief executive; John Doyle, Mercury's former, and now deceased, controller; and John N. Brincat Jr., Mr. Brincat's son and a vice president for the company.
(Mercury and the elder Mr. Brincat also are being sued by a group of Mercury 401(k) plan participants who invested in company stock.)
The Minnesota and T. Rowe Price suits were filed separately in U.S. District Court in Chicago.
Officials for T. Rowe Price declined comment, but issued a statement claiming KPMG, Mercury, its management team and directors violated federal securities law, state law and common law.
T. Rowe Price's case
According to its complaint, T. Rowe Price is suing on behalf of 21 funds it manages, under its own name and others, seeking $80 million in compensatory damages and $100 million in punitive damages, plus interest.
T. Rowe Price purchased 7.9 million shares for approximately $93 million between June 1995 and January 1997, the suit said.
The suit said the purchases were "induced by material misstatements and omissions regarding the financial condition, business and operations of Mercury during the times preceding Price's purchases."
Mercury's auditor, KPMG, is being sued over KPMG misstatements, according to the suit.
Financial statements audited by KPMG were not prepared in accordance with generally accepted accounting principles, and hadn't been audited in accordance with generally accepted auditing standards, the suit stated.
In addition to suing the three individuals named in Minnesota's suit, T. Rowe Price is suing three other former officers, as well as seven Mercury directors and the estate of a former director, Daniel J. Terra.
In addition to suing for violations of the Securities Exchange Act and SEC rules, T. Rowe Price sued over common law fraud and deceit, negligent misrepresentation and consumer fraud.
Any recovery will be treated as current income to T. Rowe Price's funds at the time of the receipt, the T. Rowe Price statement said. The T. Rowe Price-sponsored funds covered by the suit are: Mid-Cap Growth; Capital Opportunity; Personal Strategy Balanced; Growth & Income; Financial Services; Growth Stock; Personal Strategy Growth; Personal Strategy Income; New Horizons; New America Growth; Personal Strategy Balanced; Mid-Cap Equity Growth; New America Growth; and Mid-Cap Equity Growth.
Other investors might enlist
Other investors still might get involved.
Jennifer Detwiler, spokeswoman for the Ohio attorney general's office, said Ohio probably will participate in Minnesota's class-action suit. The Ohio employees' fund continues to own 5 million shares of Mercury Finance.
Joel Buck, investment director with the retirement system, said the fund paid an average of about $14 a share.
But even if the suits are successful, it's unclear how much the institutions would recover.
Mercury reported a first-quarter net loss of $33.2 million, including a $28.5 million loss from the sale of an insurance operation; second-quarter earnings are expected to be released any day. Mercury's current auditor has questioned the company's ability to continue as a going concern. Earnings for 1996 still are being calculated.
But KPMG, presumably, would have deeper pockets.
"I'm not sure where the money would come from," Mr. Buck said.
In addition to dealing with potential damage payouts, Mercury has had to negotiate deals with its creditors.
As of March 31, the company said it owed $1.4 billion, and had $1.5 billion in assets.
Florida eyes 'derivative' suit
I. Walton Bader of Bader & Bader, White Plains, N.Y., is an attorney working on a contingency basis on behalf of the Florida board.
He said he is preparing a lawsuit regarding Florida's damages of less than $1 million.
Florida's suit would be a derivative suit, meaning it is filed on behalf of Mercury, Mr. Bader said.
"The corporation is not bringing an action against their own accountants. They should," he said.
Moreover, their own officers aren't being prosecuted by the company, he said.
"The directors are grossly negligent," he said.
(Under a derivative suit, an entity other than the corporation brings suit against officers and directors on behalf of the corporation. The idea being that a company may not sue its own officers and directors, because they run it, so someone else has to. The company would get the proceeds from the suit, to the indirect benefit of shareholders, unless there's a settlement.)
Robin Stice, a spokeswoman for Fidelity Investments, said the firm hasn't filed its own suit. But outside attorneys for the company are watching the developments closely, she said. Fidelity sold 13.8 million shares of Mercury in the first quarter of this year, according to government 13(f) filings compiled by CDA Investment Technologies Inc., Rockville, Md.
Law paves way for Minnesota
Minnesota's class-action suit and battle for a lead plaintiff role is a direct result of a law passed in 1995 that gives larger shareholders a leg up on being named lead plaintiff, which can lower attorney's fees, Ms. Eller said.
A rival group of individual investors seeking to be lead plaintiffs contends Minnesota doesn't qualify as lead investor because it owned its shares through external managers - J.P. Morgan Investment Management Inc., New York; GEOCapital Corp., New York; and BZW Barclays (now Barclays Global Investors, San Francisco).
A spokeswoman for J.P. Morgan declined comment. Officials for GEOCapital didn't return phone calls.
Diane Paul, a spokesman for BGI, said officials there were unaware of Minnesota's suit.
Lead plaintiff has advantages
Horace Schow, general counsel for Florida, said large institutional investors, like Florida and Minnesota, have a strong interest in being lead plaintiff.
Typically, class-action plaintiffs who are successful get 10 cents to 12 cents on the dollar, with lawyers eating 20% to 30% of the total settlement.
As a lead plaintiff, institutions have more control of the fees, and the outcome, he said.