On the heels of stock prices that slipped following recent reports that federal investigators will investigate its accounting, Boeing has been targeted by a federal class action alleging the aerospace manufacturer misled investors using alleged accounting tricks to hide potential losses.
Boeing shareholder Tribhuwan K. Bisht alleged Boeing violated federal securities law. Also named as defendants are Dennis Muilenberg, the Boeing CEO who the company has announced will become chairman March 1; Gregory D. Smith, Boeing’s chief financial officer; and W. James McNerney Jr., who was CEO from July 2005 to July 2015. He is retiring as chairman at the end of the month.
In the lawsuit filed on Feb. 22 in Chicago federal court, Bisht asked the court to approve a class of investors to include anyone who purchased Boeing stock between Feb. 9, 2012, and Feb. 11, 2016, saying that in that period Boeing issued “materially false and misleading statements regarding the company’s business, operational and compliance policies.”
The complaint centered on Boeing’s use of “program accounting,” a method that allows companies like aircraft manufacturers to spread costs over the entire cost of a particular product program.
Per the complaint, Boeing’s commercial airplanes division had used program accounting since 2003, “in which the company does not attribute costs for producing a unit to that same unit, but rather divides those costs over an entire jetliner program, essentially allowing Boeing to average out costs and anticipated profits over the duration of the ‘program’ for a specific jet, a period that can last decades and encompass hundreds or even thousands of aircraft.”
Particularly, the complaint took aim at Boeing’s financial reporting for the programs producing its 787 Dreamliner and 747 jumbo jets, saying the company’s use of the method had caused its quarterly and annual financial reports covering the years 2011-2015 to include “false and misleading statements” which relied on “inflated sales forecasts” and “understated estimates of production costs.”
The accounting method was also at the heart of a report published by Bloomberg News indicating the federal Securities and Exchange Commission was “investigating whether Boeing properly accounted for the costs and expected sales of its 787 Dreamliner and 747 jumbo aircraft.”
The article quoted JPMorgan Chase analyst Seth Seifman, who said “any impact on our 787 cash flow forecasts for the coming years” could be a significant detrimental factor on the value of Boeing stock.
According to the Bloomberg report, the SEC investigation was launched after a “tipster” provided the federal agency with internal Boeing accounting documents and data.
Bisht cited dozens of Boeing quarterly financial reports from the period in question to bolster his claim the company made intentionally misleading statements. Annual reports for the period in question, for instance, showed Boeing’s net income had increased from $4 billion in 2011 to nearly $5.2 billion in 2015, and total revenue had jumped from $68.74 billion to more than $96 billion.
The complaint contended the use of overly optimistic forecasts and potentially inaccurate estimates of declining production costs incited a “precipitous decline in the market value” of Boeing stock following news of the pending SEC investigation.
On Feb. 11, the date of the Bloomberg report, Boeing shares fell 6.8 percent, or $7.92, closing at $108.44. Boeing stock has since recovered, trading near $118 a share on Feb. 23. But it is well off the $145-$149 per share price the stock fetched in late 2015.
The complaint said the class might include hundreds or thousands of members.
In addition to class certification and a jury trial, Bisht asked the court to award unspecified damages with interest, and legal fees.
Bisht and the putative class are represented in the action by attorneys from the firm of Pomerantz LLP, with offices in Chicago and New York.