Liberty Tax Stock Shareholders: Alleged Ineffective Internal Controls & Inaccurate Financial Reporting
Liberty Tax, Inc. (NASDAQ:TAX)
Kehoe Law Firm, P.C. continues its investigation to determine whether Liberty Tax and certain of its officers or directors engaged in securities fraud or other unlawful business practices to the detriment of Liberty Tax stockholders.
On January 12, 2018, a class action lawsuit was filed in United States District Court, Eastern District of New York, on behalf of all persons and entities, other than the Defendants and their affiliates, who purchased Liberty Tax securities between June 29, 2016 and December 11, 2017, both dates inclusive (the “Class Period”).
The Liberty Tax shareholder class action (Mauro v. Liberty Tax, Inc., et al, No. 18-00245) seeks to recover damages caused by the Liberty Tax Defendants’ alleged violations of federal securities laws.
According to the Liberty Tax class action complaint:
Throughout the Class Period, [Liberty Tax] Defendants made a series of false and misleading statements regarding [Liberty Tax’s] disclosure controls and procedures. For example, although [Liberty Tax] Defendants told the investing public that [Liberty Tax] maintained effective internal controls to ensure the accuracy of its financial reporting, investors ultimately learned the opposite was true, i.e. [Liberty Tax’s] internal controls were ineffective and did not ensure accurate financial reporting. The market learned the truth on December 11, 2017, when Liberty Tax filed a Form 8- K with the SEC announcing the sudden resignation of its independent registered public accounting firm, and stated that [Liberty Tax] would delay the filing of its quarterly report on Form 10-Q for the quarter ended October 31, 2017. The market was shocked by this revelation, which caused Liberty Tax stock to react violently, losing 6.3% of its value that day. [Emphasis added]
Liberty Tax Discloses Resignation of Independent Registered Public Accounting Firm KPMG LLP
On December 11, 2017, Liberty Tax, Inc. issued a press release disclosing that KPMG LLP resigned as the independent registered public accounting firm of Liberty Tax and that Liberty Tax will delay the filing of its Quarterly Report on Form 10-Q for the quarter ended October 31, 2017.
According to Liberty Tax’s Form 8-K, dated December 11, 2017 (Liberty Tax_Form 8-K):
KPMG expressed to the Audit Committee and [Liberty Tax] management its concern that the actions of former Chief Executive Officer John T. Hewitt . . . have created an inappropriate tone at the top which leads to ineffective entity level controls over the organization. Prior to the termination of Mr. Hewitt’s employment as Chief Executive Officer of the Company on September 5, 2017, the Audit Committee oversaw an investigation of allegations of misconduct by Mr. Hewitt. In particular, KPMG noted that Mr. Hewitt took actions to replace two independent members of the Board around the time information relating to this investigation appeared in media reports. KPMG also noted that following the replacement by Mr. Hewitt of two Class B directors, the chair of the Audit Committee retired from the Board, the Company’s Chief Financial Officer announced her intention to resign from the Company, and another independent member of the Board announced that he would not stand for reelection at the Company’s next annual meeting. Further, KPMG was made aware that following his termination as Chief Executive Officer, Mr. Hewitt may have continued to interact with franchisees and area developers of the Company. Although Mr. Hewitt stated to KPMG during a meeting on November 9, 2017 that he would not reinsert himself into the management of the Company, in light of Mr. Hewitt’s actions and his ability to control the Board as the sole holder of the Class B common stock, KPMG informed the Audit Committee and management that it has concerns regarding the Company’s internal control over financial reporting as related to integrity and tone at the top and such matters should be evaluated as potential material weaknesses. [Emphasis Added]
Specifically, KPMG informed the Audit Committee and management that Mr. Hewitt’s past and continued involvement in the Company’s business and operations, including his continued interactions with franchisees and area developers of the Company, has led it to no longer be able to rely on management’s representations, and therefore has caused KPMG to be unwilling to be associated with the Company’s consolidated financial statements. In notifying the Company of its resignation, KPMG advised the Audit Committee and management that it is not aware of any information that cause it to question the integrity of current management, but rather that the structural arrangement by which Mr. Hewitt controls the Company is the cause of KPMG’s concerns. KPMG also noted that because certain information known to the Board regarding the reasons that the Board terminated Mr. Hewitt as Chief Executive Officer had not been disclosed to the current Chief Executive Officer and Chief Financial Officer, KPMG was uncertain as to whether it could continue to rely on management’s representations. [Emphasis Added]
On this news, the share price of Liberty Tax stock fell $0.80 per share, which was more than 6% from the previous Liberty Tax stock closing price, to close at $11.15 per share on December 11, 2017.
Liberty Tax Post Class Period Developments – Bloomberg Reports & Notice of Delinquent Filing
According to the class action complaint, Bloomberg published an article, “Liberty Tax Sec Scandal Draws Investor Suit Targeting Hewitt,” which, among other things, stated that “[a] pension fund is asking a judge to order Hewitt to relinquish his controlling stake in the national tax-preparation service after an internal review found that while running the company, he had sex in his office and hired relatives of female employees with whom he’d had romantic relationships.” Bloomberg also, according to the class action complaint, reported that “Liberty Tax has tumbled 15 percent since Sept. 5, the day before the company fired Hewitt as CEO without disclosing the reasons.” [Emphasis added]
Additionally, according to the class action complaint, Liberty Tax issued a press release on December 19, 2017 advising that Liberty Tax, as a result of its failure to timely file its Form 10-Q for the fiscal quarter ending October 31, 2017, received a delinquent filing compliance notice from Nasdaq.
Have You Purchased or Acquired Liberty Tax Stock Shares?
If you purchased or otherwise acquired Liberty Tax (NASDAQ:TAX) stock shares between June 29, 2016 and December 11, 2017, both dates inclusive, and would like to speak privately with a securities attorney to learn whether you may have legal claims, please complete the form to the right or contact John Kehoe, Esq., (215) 792-6676, Ext. 801, [email protected] or send an e-mail to [email protected].