Shareholder suit alleges deceptive practices at EAI

February 25, 1994|By Ian Johnson | Ian Johnson,New York Bureau of The Sun

NEW YORK -- Two shareholders of Education Alternatives Inc. filed suit against the company, some of its officers and its accountants, claiming that they had used irregular accounting methods and made unfulfilled promises to jack up EAI's stock price last fall for personal gain.

The suit, filed Wednesday in federal district court in Minneapolis, claims that shareholders who bought EAI stock between Sept. 20, 1993, and Feb. 8 were misled by the company.

Taking advantage of investors' interest and the resulting high stock price, company officials sold thousands of shares of stock and reaped windfall profits.

The lawsuit claims the company oversold itself two ways. First, EAI made misleading claims that its revenues would increase over the coming months. The suit claims, for example, that in early October, EAI Chairman John Golle said EAI would have $100 million in revenues by the end of this June because it would sign on several new schools.

In fact, EAI was only able to add two more Baltimore public schools last fall -- its first significant new business since signing on nearly two years ago to manage the original nine "Tesseract" public schools in Baltimore.

Shareholders also claim that the company and its auditors, Arthur Andersen & Co., used "unusual or fraudulent" accounting methods to calculate revenue they received from the nine original Baltimore schools.

To manage the original nine schools, Baltimore pays EAI a fixed amount per pupil, which works out to about $30 million this year. Most of that money, however, is returned to the city to pay for teachers' salaries and for administrative chores performed by the school system.

EAI claims that it is allowed to book the full $30 million because it is fully responsible for the nine schools, while critics say this method only serves to artificially inflate revenues.

The suit says the unfulfilled promises and high revenues encouraged investors to buy the stock, which rocketed from $20 a share last June to $48 a share in November.

The stock price has since dropped nearly 60 percent, handing many investors huge losses.

News of the suit reached investors yesterday after the markets had closed; the stock closed up $1 at $20.50.

The suit claims that company officers took advantage of the stock's dramatic spike upward to sell thousands of shares and earn six- to seven-figure one-time profits.

Besides Mr. Golle, board member Gale Mellum and President David Bennett, who sold stock last fall, the suit also names as defendants auditors Arthur Andersen and chief financial officer Frank Kuhar, who were responsible for the accounting practices.

The suit was filed by shareholders Seymour Lazar and Daniel Zani, who want to make the suit into a class-action lawsuit by bringing in other shareholders who bought last fall.

The lawsuit caught Wall Street analysts and company officials by surprise, but Mr. Kuhar said the accounting practices had been "well-documented" in company filings with the Securities and Exchange Commission.

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