StorMedia files suit against Hyundai

Electronic News, Oct 14, 1996

San Jose--StorMedia filed suit in federal court against Hyundai Electronics Industries of Korea after HEI's wholly owned subsidiary Maxtor Corp. pulled out of a major long-term purchase agreement for rigid disks. The cancelled contract, StorMedia contends, resulted in lost profits of $206 million and caused company stock to collapse.

That very same purchase agreement is at the heart of a shareholder action leveled against StorMedia just a week before it sued HEI. On Sept. 18, shareholders claimed StorMedia and certain officials walked away with more than $4.8 million in proceeds from the sale of illegally traded stocks, prior to the stock taking a nosedive, seemingly as a result of the cancelled Maxtor contract.

StorMedia's attorney, Timothy Scott of Wilson, Sonsini, Goodrich and Rosati, declined to comment on either case, but described the class action as "another in a very, very, very long line of securities class actions filed by (William) Lerach and a few others like him." Mr. Lerach is a securities lawyer and author of the controversial Proposition 211, coming up before California voters next month, that would ostensibly make it easier for shareholders to hold company executives liable for dramatic swings in stock values.

The StorMedia suit, entered in the U.S. District Court for the Northern District of California, claims Hyundai entered the high-volume purchase agreement for thin-film rigid disks at the same time ramping its own rigid disk capacity at Maxtor and other suppliers--including StorMedia's main competitor, HMT Technology--but assured StorMedia as late as May 17 of its ability to meet the purchase commitment.

In June, StorMedia said, Maxtor cancelled its 2Q96 order of 2 million units, and reduced its 3Q purchase forecast on the charge that StorMedia's products were not meeting performance specifications. StorMedia has denied that claim. Subsequently, StorMedia reduced its revenue forecast (EN, July 1) and laid off some 140 employees.

A Maxtor spokesperson said, "We are aware of the litigation, but we are unable to comment." Hyundai representatives were not available for comment.

A case management conference is scheduled for Jan. 24 before District Judge Ronald Whyte.

Meanwhile, the securities class action alleges StorMedia's top executives violated the California Corporations, Civil and Business & Professions Codes by artificially inflating company stocks and then profiting from their sale. The suit was filed by Sara Werczberger in California Superior Court for Santa Clara County on behalf of purchasers of StorMedia common stock between Nov. 27, 1995 and Aug. 9, 1996.

The complaint alleges that at one point during the period, stock reached $30 per share, based on strong projected demand for StorMedia's products and the multi-year thin-film disk supply contract with Maxtor. After the cancellation of the Maxtor contract was made public, stock value fell to $9-3/4. Ms. Werczberger had purchased 150 shares of StorMedia common stock on May 21 at $28- 1/2 per share.