April 5, 2012, 11:39 AM

A Groupon stockholder claims he got a bad deal

He filed suit following the daily deal operator’s earnings restatement.

Zak Stambor

Managing Editor

Lead Photo

Groupon Inc. is facing a lawsuit from a shareholder after last Friday’s restatement of its fourth quarter earnings showed the company, which is still not profitable, had a worse quarter than it previously reported.

The suit, filed on behalf of shareholder Fan Zhang in the U.S. District Court for the Northern District of Illinois, alleges that Groupon overstated its revenue, issued false and misleading financial results and concealed that its business was not growing as fast as it had suggested.

 “Groupon’s internal controls were so poor and inadequate that Groupon’s reported results were not reliable,” the suit claims.

The daily deal operator last week noted that its auditors, Ernst & Young LLP, found that the company had a material weakness in its internal controls, which means the internal controls Groupon has in place to prevent financial statement irregularities were ineffective. Groupon explained that it had not adequately set aside reserves to cover refunds on the more expensive vouchers it had begun selling late last year.

The complaint claims that Groupon failed to reveal its "poor and inadequate" internal controls, and did not disclose in its registration statement and prospectus for its November 2011 initial public offering that it did not comply with various countries' laws. Groupon last month came under fire from the U.K. regulatory agency the Office of Fair Trading. The regulator claimed that Groupon U.K. subsidiary MyCityDeal Ltd., which operates Groupon.co.uk, offered deals the regulatory agency deemed misleading, breaching consumer protection regulations.

Groupon initially priced its stock at $20 per share. It then rose to a high of $26.19. But since Friday, March 30 its shares have plummeted, reaching a low of $14.01 a share today.

Zhang says he paid nearly $62,000 for 3,000 Groupon shares between Feb. 9 to March 6, then sold them in March for a loss of more than $9,000.

The suit also alleges that Groupon overstated its resistance to competition. The daily deal operator’s biggest competitor is Amazon.com Inc.-funded LivingSocial. And Amazon itself, as well as Google Inc., have both made big pushes in the space in the last few weeks.

In addition to CEO Andrew Mason and other key executives and board members, the lawsuit names IPO underwriters Goldman Sachs and Morgan Stanley as defendants.

The lawsuit seeks class-action status on behalf of shareholders who acquired Groupon shares between Nov. 4, 2011, and March 30, 2012. Meanwhile, several other firms have announced that they are also considering filing suit on behalf of shareholders.

Groupon declined to comment.

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