VMware Agrees to Pay More than $100 Million In Shareholder Lawsuit

VMware has agreed to pay a proposed settlement of $102.5 million to end a shareholder lawsuit alleging the company made statements that artificially inflated its stock price.

The proposed settlement has been submitted to the U.S. District Court for the Northern District of California. Preliminary and final approval are pending.

Broadcom closed its $61 billion acquisition of VMware last November.

The initial complaint was filed in March 2020. The class consists of thousands of investors who in aggregate bought nearly 55 million VMware shares between Aug. 24, 2018, and Feb. 27, 2020. Of the $102.5 million, about $75.6 million would be distributed to the class after fees are deducted.

VMware denies the allegations in the shareholder lawsuit. We couldn’t reach VMware for comment on the proposed settlement. 

Shareholder Lawsuit Allegations

The lead plaintiff, Eastern Atlantic States Carpenters Pension Fund, alleges VMware made materially false or misleading statements in violation of the Securities Exchange Act of 1934 and the U.S. Securities and Exchange Commission (SEC) Rule 10b-5, which caused the price of VMware stock to trade at artificially inflated prices.

In the shareholder lawsuit, the lead plaintiff alleged VMware “deceptively recorded 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.” The third amended complaint alleged VMware inflated backlog with sales that were not required to meet current period guidance throughout fiscal year 2019, which “misled” investors as to the likelihood that fiscal year 2020 guidance would be met.

The complaint further alleged VMware treated the inflated backlog, nearly $500 million, at the end of fiscal year 2019 as a slush fund, drawing on it throughout fiscal year 2020 rather than recognizing the revenue in fiscal year 2019. It also alleged that by deferring revenue to fiscal year 2020, VMware was able to continue to deliver double-digit earnings growth in fiscal year 2020, despite operational challenges that year.  

The lead plaintiff alleged that the truth about VMware’s conduct came to light through a series of partial disclosures in fiscal year 2020, culminating on Feb. 27, 2020, when the company allegedly revealed that:

SEC Action

Also on Feb. 27, 2020, VMware allegedly announced that in December 2019 the SEC launched an investigation into the company’s backlog, and associated accounting and disclosures, on the heels of the sudden resignation of the company’s chief accounting officer. In September 2022, the SEC charged VMware with misleading investors by obscuring financial performance.

The lead plaintiff alleged that persons who purchased VMware stock during the class period suffered economic losses when the price of VMware stock declined as a result of the disclosures that revealed the backlog issues to investors.