PEC Solutions faces lawsuits following stock drop

PEC Solutions Inc. has been hit with several class-action lawsuits filed on behalf of shareholders after the company's stock plunged 38 percent in a single trading day in March.

At least five lawsuits have been filed, according to the Stanford Law School Securities Class Action Clearinghouse Web site.

The first lawsuit was filed March 18 in U.S. District Court in Alexandria, Va., after the stock's share price dropped from $15.80 to $9.81 the day before. By comparison, the NASDAQ Composite Index, the exchange upon which PEC is traded, jumped 51.94 points, or 3.9 percent, to 1,392.27 March 17.

PEC spokesman John McNeilly said: "The company believes the lawsuits are completely baseless, and we intend to defend ourselves vigorously."

Several Wall Street analysts said they did not expect the lawsuits to hurt the company's business. The stock has since recovered considerable ground, closing at $13.98 May 9.

The analysts, who requested anonymity, described the law firms involved as akin to ambulance chasers, watching the stock market for sharp declines and issuing press releases encouraging disappointed shareholders to sue.

But Samuel Rudman with Cauley Geller Bowman Coates & Rudman LLP, the first firm to file a class-action suit, dismissed the analysts' comparison of his firm's actions to personal-injury attorneys. "The investors called us, and we filed on their behalf," he said.

PEC's share price first took a hit Feb. 12, dropping from $28.80 to $18.48, a 36 percent decline. An analyst that tracks the company said that during a analysts' conference call Feb. 11 to discuss the company's fourth quarter 2002 results, PEC officials also discussed their expectations for the first quarter of 2003, which were below Wall Street expectations.

On March 17, the share price took another precipitous drop, from $15.80 to $9.81, when PEC announced after the market closed March 14, it was revising further downward its guidance on first quarter 2003 results. In its statement, the company blamed the revision on the failure of Congress to pass the fiscal 2003 budget, and "a discontinuity in certain engagements related to application of biometric identification technologies." The company did not elaborate.

In its annual report, filed March 28, PEC said it had been working as a subcontractor for an undisclosed federal agency on a biometric identification system, and the work represented 13 percent of 2002 revenue. "The program was unexpectedly curtailed late in 2002," the company reported.

Elsewhere in the annual report, the company said it was trying to collect on an account receivable, totaling roughly $5.6 million, from the unidentified prime contractor on that project.

"The prime contractor has indicated they would like to reduce the amount due to us by $3.7 million, but we believe there is no basis for a reduction and expect to receive full payment," the annual report stated.

Then in the first quarter 2003 report to the Securities and Exchange Commission, filed May 5, PEC said the outstanding account receivable still had not been collected.

PEC, based in Fairfax, Va., went public in April 2000. The stock has been doing well since then, getting as high as $43.62 in January 2002 before settling in the $20 to $30 per share range.

"Federal companies have traded at a premium to the market over the last several years because of growth, [and] PEC was trading at a premium to these federal guys because of even faster growth," one analyst said. "The expectations were that they were going to continue to do so. Now, of course, the expectations are that they'll make less money than last year."

Analysts and investor relations experts said it is unusual to see that kind of share price volatility in the government technology sector. Several said the company might have avoided the huge market drop and legal action if it had better managed its announcement of the change in guidance.

"There was no malice aforethought," one analyst said. "The general scuttlebutt is they could have handled this better."

An investor relations consultant said PEC created suspicion by announcing bad news after a Friday market close. "It just ain't good style to look like you're trying to hide news late in the day at the beginning of the weekend," he said.

The company's leadership team includes the three men who founded the business in 1985 and together own a majority interest. But the different analysts said the three all have engineering and program management backgrounds.

"These guys have really focused on running the business rather than learning Wall Street's rules," one financial analyst said. "They really haven't got anybody on board who's experienced on the Street, either full-time or a consultant."

PEC has benefited in the past from Wall Street appreciation of the company's rapid growth, especially compared to other companies in the government technology sector. But another analyst said that has created much higher expectations and the potential for a backlash when the company fails to meet them.

The company also suffers from volatility because "there's not much stock out there to trade," said a third financial analyst. "It's got a small float, or it is thinly traded." This means the company's leadership team holds a majority of the shares, leaving fewer available for trading.

As for the class-action lawsuits, Rudman said they are likely to be consolidated into a single one, with one firm named as the lead. The consolidation is expected to take place some time around May 19, 60 days after the first action was filed, Rudman said.

Laura Simmons, a principal with Cornerstone Research, a Menlo Park, Calif., economics research firm, said most securities class-action lawsuits are settled before they come to trial. Anecdotal evidence suggests that the courts dismiss 25 percent or so of such lawsuits, and only one to three ever go to trial each year¸ she said.

Simmons said lawsuits alleging accounting misrepresentations and shareholder lawsuits targeting companies under investigation by the Securities and Exchange Commission usually result in the highest settlements to shareholders, according to a statistical analysis by her firm.

It is not possible to apply historic trends to a specific case, such as the PEC lawsuits, she said, but the lack of these two factors "would certainly support expectations of a lower settlement relative to other cases."