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Thursday
Sep162010

Telenav IPO Fraud and MF Global - What Do the Class Actions and Our Investigation Have In Common 

Our firm recently announced an investigation into potential fraud claims against TeleNav Inc. (Nasdaq: TNAV) relating to its May 13 initial public offering. We have now received information that leads us to believe that a strong case exists, worthy of consideration by investors. At the same time, the Second Circuit just issued a decision in  Iowa Pub. Employees' Ret. Sys. v. MF Global, Ltd., that favorably clarifies the applicable law. 

TeleNav provides cell phone carriers with navigation applications for their cell phones. Sprint Nextel Corp. provided TeleNav with more than 55 percent of its revenues. TeleNav's major competitors include Google, Garman and other companies providing their own navigation services. 

Just three months after the IPO, TeleNav revealed it was renegotiating a key contract with Sprint that would likely lead to substantially lower revenues. TeleNav's stock immediately plummeted nearly 40 percent.

 The usual barebones lawsuits were filed by several other law firms alleging TeleNav knew its shares would nosedive before going public in May. However, these lawsuits are the subject of criticism. For example, one blogger argued here that TeleNav disclosed it was renegotiating its contract with Sprint as early as October 2009 in a registration statement with the U.S. Securities and Exchange Commission: 

"Our current agreement with Sprint expires on December 31, 2011; however, our right to be Sprint’s exclusive provider of Sprint Navigation expires on December 31, 2010. Commencing on December 31, 2010, Sprint may terminate its agreement with us at any time by giving us 30 business days prior written notice. Our failure to renew or renegotiate this agreement on favorable terms or at all, a termination of our agreement by Sprint or our failure to otherwise maintain our relationship with Sprint would substantially reduce our revenue and significantly harm our business, operating results and financial condition."  

Other risk disclosures in the registration statement warn that the Sprint contract could be impacted by competitors offering equivalent or free competitive service: 

“Competitors could begin offering (location-based services) that have at least equivalent functionality to ours for free. For example, Google offers free voice guided, turn by turn navigation as part of its Google Maps product for mobile devices based on the Android 1.6 and higher operating system platform, and Nokia announced its latest version of Ovi Maps on its smartphones, which also provides turn by turn navigation functions. Competition from these free offerings may reduce our revenue and harm our business. If our wireless carrier partners can offer these (location-based services) to their subscribers for free, they may elect to cease their relationships with us, alter or reduce the manner or extent to which they market or offer our services, or require us to substantially reduce our subscription fees or pursue other business strategies that may not prove successful. 

The blogger goes on to write: 

“It is a common practice for specialized US law firms to seek class action status on such topics (GPS manufacturer SiRF faced the same type of complaint few years ago), but here their case seems particularly weak. It is however a pain in the neck for TeleNav.” 

Mighty strong risk disclosures, right? Wrong! This is where MF Global and our investigation come in to play. 

Suppose the facts show that prior to the IPO, TeleNav was so concerned about the upcoming contract negotiations with Sprint and the competition, that it wanted to go public before Sprint pulled the plug on their relationship.  If TeleNav knew nothing more than the risk disclosures above, it is doubtful that they could be held liable for not disclosing their fears and belief so long as they said nothing about their fears and belief. 

Suppose, however, that TeleNav knew before the IPO that Sprint was complaining about the resources it devotes to TeleNav's product – called "Sprint Navigation" – and told TeleNav management that it was in favor of Google's free navigation services instead of TeleNav's on Sprint's Android devices. Further, suppose Sprint told TeleNav it would not pre-load TeleNav’s product on Sprint's Android devices, but that TeleNav could sell their own services through Sprint Zone, forcing TeleNav to start its own branding efforts. 

Now we have a case! Just this week a federal appellate court clarified when risk disclosures are material misrepresentations or omissions. In Iowa Pub. Employees' Ret. Sys. v. MF Global, Ltd., the Second Circuit Court of Appeals stated: 

Investors are interested in issuer statements only insofar as those statements bear on the future. While it is true that predictions about the future can represent interpretations of present facts (and vice versa), there is a discernible difference between a forecast and a fact, and courts are competent to distinguish between the two.  

A forward-looking statement (accompanied by cautionary language) expresses the issuer's inherently contingent prediction of risk or future cash flow; a non-forward-looking statement provides an ascertainable or verifiable basis for the investor to make his own prediction. 

The line can be hard to draw, and we do not now undertake to draw one. However, a statement specifying the risk of default is distinct from a statement of present or historical financial instability, even though they both bear upon the same risk. And a statement of confidence in a firm's operations may be forward-looking and thus insulated by the bespeaks-caution doctrine -even while statements or omissions as to the operations in place (and present intentions as to future operations) are not. 

Thus, the Court found that characterizations of MF Global's risk-management system-that the system was “robust,” for example - invited the inference that the system would reduce the firm's risk. It went on to find that bespeaks caution did not apply insofar as those characterizations communicate present or historical fact as to the measures taken. Cautionary words about future risk cannot insulate from liability the failure to disclose that the risk has transpired. 

So too with TeleNav, the key question will be whether the "bespeaks caution" doctrine applies to TeleNav's description of its contract with Sprint, the expiration of that contract and the threat of the competitors. Our investigation causes us to believe that the risk of renegotiation of the Sprint contract was not just a possibility, but a current reality in which TeleNav's management knew they were in trouble. It was not a future risk, but one that had already transpired by the time of the IPO. 

I have lectured to corporate executives over the last 20 some years about this classic type of IPO fraud. It's often the one chance in a lifetime to cash in on millions by selling stock to the public. The temptation to hide or ignore bad news is great and accompanied by the mantra, “just get it done.” Risk disclosures are often written with this in mind, and the lawyers who draft them do a great disservice to their clients and the investors when the risks have already begun to manifest. 

Hagens Berman continues to investigate this matter, and to represent investors who purchased TeleNav stock before July 30, 2010. You may read more on the Hagens Berman website here, or read the press release here. To be eligible to be a lead plaintiff you must move by November 2, 2010. Contact Reed Kathrein at 510-725-3030 for a consultation or email Hagens Berman at tnav@hbsslaw.com.

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