VMware to Pay $102.5M in Investor Lawsuit Settlement

Tech company VMware has reached a $102.5 million settlement agreement in a class action lawsuit where investors claimed the company made misleading statements that artificially boosted its stock value.

The case, which began in March 2020, represents thousands of investors who purchased approximately 55 million VMware shares during an 18-month period from August 2018 to February 2020. Once legal fees are resolved, the investor group is expected to receive around $75.6 million of the settlement amount.

The settlement proposal is currently awaiting both preliminary and final approval from a federal court in Northern California. This development comes several months after VMware was acquired by Broadcom in a major $61 billion deal that closed in November.

Previous SEC investigation

According to court documents, VMware maintains its innocence and continues to deny all allegations in the lawsuit.

This case bears striking similarities to a previous issue VMware faced with the Securities and Exchange Commission (SEC). In that separate matter, which was resolved in September 2022, VMware settled with the SEC over accusations that it had manipulated its financial reporting by deliberately delaying product deliveries to push revenue into later quarters, thereby misleading investors about its performance.

“VMware began delaying the delivery of license keys on some sales orders until just after quarter-end so it could recognize revenue from the corresponding license sales in the following quarter,” the SEC said in its deal with VMware, which issued a similar denial of liability for the matter.

Allegations of deceptive practices

In this case, the main plaintiff, a pension fund called Eastern Atlantic States Carpenters, claims VMware violated both the Securities Exchange Act of 1934 and SEC Rule 10b-5 by making false and misleading statements. According to the pension fund, these statements caused VMware’s stock price to become artificially high, misrepresenting the company’s true value to investors.

The pension fund leading the lawsuit claims VMware engaged in d accounting practices by “deceptively recording VMware’s sales as backlog so that the revenue from those sales could be recognized in subsequent quarters as opposed to the quarter in which they were actually made.” According to the updated lawsuit filing, the company artificially increased its backlog throughout the 2019 fiscal year by including sales that weren’t needed to meet that period’s financial targets. This practice allegedly “misled” investors about whether the company would achieve its projected financial goals for fiscal year 2020.

According to the lawsuit, VMware kept nearly $500 million in inflated backlog at the end of fiscal 2019, using it like a reserve fund throughout 2020. This allegedly allowed them to show strong earnings growth in 2020 despite facing business challenges.

The fallout and industry impact

The truth allegedly came out on February 27, 2020, when VMware revealed three major problems:

• Their backlog had dropped by 96% compared to the previous year
• They struggled to adapt to subscription-based products
• They couldn’t meet their financial targets for Q4 and fiscal year 2020

That same day, VMware disclosed that the SEC had begun investigating their backlog practices in December 2019, shortly after their chief accounting officer unexpectedly resigned. The SEC later charged VMware in September 2022 for misleading investors.

The lawsuit claims that when these issues became public, VMware’s stock price dropped significantly, causing financial losses for anyone who had bought shares during the specified period.

This case highlights potential ripple effects for MSPs, particularly those heavily invested in VMware’s platform. With VMware’s shift to subscription and SaaS models proving more challenging than expected (as revealed in the lawsuit), MSPs may need to carefully evaluate their virtualization and cloud service offerings.

Looking for an alternative to VMware? Compare the top competitors to find the right solution to meet your clients’ needs after the end of VMware Partner Connect.