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Sierra sued over 'flawed' Voq smart phone

Allegedly misled shareholders

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Sierra Wireless has been targeted with a class action lawsuit that alleges the company violated its duties to its shareholders when it launched its "flawed" Voq Pro smart phone last year.

The complaint was filed by law firm Lerach, Coughlin, Stoia, Geller, Rudman & Robbins with the US District Court for Southern New York. That said, as of yesterday, the legal eagles had no one to stand up an be the public face of the lawsuit, which came to light when the company made a public request for a suitable individual to take on the role of lead plaintiff.

Without such a character, the complaint may fall by the wayside in 60 days' time. Lerach Coughlin is looking for anyone who held Sierra stock between 28 January 2004 and 26 January 2005.

The lawsuit follows Sierra's Q4 results, posted just over a week ago, in which the company reported revenues well below the level it had previously forecast. Not surprisingly, perhaps, the company's Nasdaq-traded SWIR shares plunged in price the next day, from almost $15 to just under $9, a year low, on heavy trading. Since then the stock has rallied a little, rising to $9.5 and closing yesterday at $9.43.

Essentially, the lawsuit seeks damages for the loss in value of shareholder's stakes as a result of the dip, which the complaint alleges, arose because senior Sierra executives misled investors.

The Voq smart phone is singled out for attention. According to the Lerach Coughlin complaint, Sierra bosses "made statements [that] were materially false and misleading" and "failed to disclose... material adverse facts which were then known to defendants or recklessly disregarded by them". Specifically:

(i) That Sierra's strategy to correct its deficiency in technology as compared to its competitors by introducing the Voq Smartphone was flawed and its business model was not working;

(ii) That Sierra was facing increasing competition, intensified by its failure to enter into the WCDMA (wideband code-division multiple access) market;

(iii) That Sierra's recent venture into the Smartphone market with the introduction of its new Voq line was a serious misstep, as it did little to add revenue and further seriously harmed Sierra's relationship with a prime customer PalmOne as its Voq Smartphone would compete with PalmOne's Treo - the product for which Sierra was a supplier;

(iv) That Sierra's dependence on revenue from PalmOne in its OEM business - selling embedded modules that allow other device manufacturers to give their products wireless connectivity - was substantially greater than had been reported;

(v) That Sierra's customers were materially over-inventoried, which would lead to greatly diminished orders and sales in future quarters.

How bad were Sierra's numbers. Well the company had forecast Q4 revenues of $63m - in fact, it made $58.5m, just 6.7 per cent below expectations and up 70 per cent year on year but down half a percentage point on the previous quarter. Operating expenses were below expectations, but the quarter's net income was $7.3m, just shy of the $7.7m forecast.

For the full year - the period of the class action - revenue hit $211.2m, up 108 per cent year on year. Earnings were $24.9m, up from just $2.3m the year before. Sierra described the year as one of "extraordinary growth and profitability" for the company. The Voq Pro is by no means the only or even key Sierra product.

Sierra has yet to respond to the Lerach Coughlin - presumably it's waiting to see whether the law firm is able to find a lead plaintiff. ®

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