InvenSense sued by investors over “sweetheart deal” with Apple

InvenSense has been struck with allegations that it misled investors about the toll that deep discounts to Apple would take on the sensor-maker’s financial performance.

After much speculation, InvenSense joined the ranks of Apple suppliers this fall, producing sensors for the iPhone 6 and 6 Plus. But InvenSense executives did not tell investors that they had given Apple a “sweetheart deal” that would dent profitability, plaintiffs allege in a putative class action filed in Bay Area federal court on Monday. As investors bought stock at inflated prices, InvenSense insiders sold off their shares, reaping more than $5.3 million in total, the plaintiffs contend.

“Instead of revealing the true condition of the company and its prospects, defendants hid those facts from investors and chose to issue strong guidance and paint a picture of a bright future with a new mega-customer,” the complaint states.

Plaintiffs lawyer Robert Prongay of Glancy Binkow & Goldberg did not immediately respond to a request for comment after normal business hours. A spokesman for InvenSense did not immediately respond either.

The case follows a similar suit filed by law firm Robbins Geller Rudman & Dowd in the Bay Area last week.

Suppliers compete fiercely to have a hand in Apple’s perennially popular gadgets, but the Cupertino-based tech giant is famous for driving a hard bargain. Materials manufacturer GT Advanced Technologies shocked the business world this fall by filing for bankruptcy shortly after striking a deal to make synthetic sapphire for use in iDevices, highlighting the risks and rewards of doing business with Apple. 

InvenSense’s sensors, which are built into a variety of smartphones, tablets and wearables, allow consumers to manipulate their gadgets by moving them. Apple’s latest iPhones feature gyroscopes and accelerometers made by InvenSense, according to a teardown of the gadgets conducted by iFixit.

Due to Apple’s insistence on secrecy, InvenSense was not allowed to announce that its sensors would be included in the iPhone 6 and 6 Plus before the gadgets’ release. But plaintiffs claim that savvy investors read between the lines when former InvenSense Chief Financial Officer Alan Krock alluded to a new customer who would account for 10 percent of the company’s revenue during a July earnings call.

“Defendants… made it loud and clear to investors that InvenSense sensors would be included in the iPhone 6,” the complaint states.

But despite InvenSense’s rosy projections for the future, investors were left sorely disappointed. When it announced its earnings in October, the company revealed that it had logged gross margins of just 35 percent, down from 47 percent the previous quarter. Shares sunk 25 percent on the news, according to the complaint.

InvenSense’s financial performance was also hurt by manufacturing problems and discounts to Samsung, neither of which were disclosed to investors, the plaintiffs contend.

Above: InvenSense has come under fire for discounts it gave Apple for parts in the iPhone 6 (Getty Images).


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  • How do you join the lawsuit?


    • Dave

      Please. This was a speculative stock. Anybody who got burned (I’m one of them) knew the risk they were taking.

  • Walt French

    Time for a bit of algebra. If the new customer accounted for 10% of sales, but gross margins fell 12 points—from 47% to 35%—then those new sales were at approximately -85% gross margin.

    Apple may drive a hard bargain, but no exec capable of basic arithmetic would’ve sold products that required losing almost as much profit as sales.

    Something else happened. I’m rather surprised that prior to filing the lawsuit, the lawyers didn’t come up with a better explanation; they’re said to be pretty good about the basic math of profits.

    • Miles Putnam

      Apple is more than 10% of revenue. 10% is simply the threshold where public companies start to carve out contributions from individual large customers. To say you have “a new 10% customer” is to say you have a new customer who will contribute between AT LEAST 10% of revenue in the future.

      I’m sure INVN had to give their largest customer Samsung basically the same terms AAPL got, which is another reason the impact on gross margins was so severe.

      • Walt French

        In which case the lawsuit is saying that management perversely strikes stupid deals, not that there was a sweetheart with Apple (for possibly nefarious reasons).

        The normal approach to a company whose management is honest but incompetent is to sell the stock. In my understanding INVN is probably competent but facing a tough market and the suit shows ZERO evidence to the contrary.

        (Not an investor in ANY of the companies.)

  • Bob Conner

    It’d be interesting to be a fly on the wall in Motley Fool’s board room. The Gardners were all over this stock using it as a “tease” to market their newsletter to new subscribers. They can’t be happy campers as their “brand” certainly took a hit. (Hmmmm, let’s just hope they didn’t sell thousands of shares they acquired in the $6 – $8 range when INVN was trading in the $20’s)!