Groupon caught in a firestorm

Worried investors are launching a string of lawsuits against the internet company just days after it was forced to restate its accounts

Well what did you expect, Groupon's chairman seemed to be saying: "It's like giving a seven-year-old a Ferrari. You're going to get a certain amount of chaos."

If Groupon's $13bn (£8bn) flotation last year was one of the most controversial in recent history, then that was as nothing to the firestorm engulfing the company now.

Just days after the internet sensation was forced to restate its first set of accounts as a public company, when its auditors warned its finance department suffered "material weaknesses", and as investors began lining up lawsuits, its chairman Eric Lefkofsky stepped on to a Chicago stage to address a chamber of commerce audience.

As well as likening the fast-growing company to a Ferrari – and perhaps his baby-faced chief executive, Andrew Mason, 31, to a seven-year-old – Mr Lefkofsky insisted the company was trying to learn from its mistakes.

"Our main focus is trying to figure out how this model evolves and not consistently falling on our face in public," he said. "I can only learn by doing something and failing. You can't tell me to avoid a pothole; I have to drive it."

Mr Lefkofsky is the serial entrepreneur and money man, while Mr Mason is the web designer who dropped out of college to build a company.

It isn't even four years since the pair turned their initial venture, an anti-corporate activism project, into a "daily deals" business and called it Groupon.

Now, the company emails around 150 million people every day with the chance to buy a money-off coupon for a local business, and it has set its sights on changing the world.

Mr Mason says it could "reshape local commerce"; sceptics say it is a fad that could disappear after local merchants and consumers have tried it a few times.

The company is labour intensive, employing 11,500 people around the world. That's a lot of people relying on this being a sustainable business.

The investors who bought into the flotation last November, or who acquired stock on the open market since then, knowingly signed up to a certain amount of risk. But did they sign up to "a certain amount of chaos"?

No, said Howard Smith, a Pennsylvania attorney who launched a class action lawsuit against Groupon this week, claiming the flotation prospectus last year was a misleading document, negligently prepared, amounting to securities fraud. The suit is designed to uncover what happened, he says, and to get compensation for investors who have been burned.

Nor is his lawsuit the first. Since the 30 March restatement bombshell, more than half-a-dozen suits have emerged, vying to become the main class action against Groupon, its executives and advisers. Messrs Lefkofsky and Mason are named personally, along with the chief financial officer, Jason Child, who was hired from Amazon, Ernst & Young, Groupon's auditor, the investment banks who organised the float, led by Morgan Stanley, plus the rest of Groupon's board.

Last night, Groupon's shares languished at $13.60, far below the $20 float price. They fell 17 per cent in a single day after the restatement. The company suffered an operating loss in the final quarter of 2011, not the profit analysts had expected and been led to believe.

The restatement was alarming for two reasons. First, an apparently technical adjustment relating to customer refunds set alarm bells ringing. Groupon had underestimated the number of unsatisfied customers who would return their money-off coupons. Mr Child declared that this was because Groupon has moved into new kinds of deals, such as for expensive holidays, which will be more prone to customer dispute. But investors now have to worry that those people who thought Groupon is a fad might be right.

Second, the company confessed that its internal systems were so weak that finance staff were going through paperwork by hand and reconciling accounts manually for weeks after the end of the period. It is hiring more staff and has brought in KPMG to try to build the robust accounting controls mandated by the Sarbanes-Oxley law. If they can't get it right by the end of the year, Groupon could be delisted.

The debate among analysts has now moved to whether Groupon is properly accounting for cashflows, or whether its results are flattered because there is a lag between getting cash from customers who buy coupons and paying the local merchants for the service. It may also have to write down the value of acquisitions in Europe.

The Securities and Exchange Commission (SEC) is looking into the debacle. The regulator has tussled with Groupon over its controversial accounting policies almost since day one. The first iteration of the flotation prospectus last summer contained a range of unusual accounting metrics, in which Groupon downplayed marketing expenses as if they were one-time investments rather than a perennial cost. The SEC got Groupon to keep to more normal accounting in the end.

The chairman also got himself into trouble with the SEC for predicting that Groupon would be "wildly profitable".

The prospectus revealed how Mr Lefkofsky and his family had cashed out $382m from Groupon, even before it turned a single penny in profit.

He has used the money to raise his profile in the Chicago business community. This included helping to organise and pay for the inauguration celebrations of the city's new mayor, former White House chief of staff Rahm Emanuel, and last year became a part-owner of one of its most famous skyscrapers, the Wrigley Building.

Recent investors who got caught up in his excitement are staring at losses, but – whatever happens next, and despite "a certain amount of chaos" – Groupon has already been wildly profitable for Mr Lefkofsky.

Start your day with The Independent, sign up for daily news emails
ebooksAn introduction to the ground rules of British democracy
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Sales Executive / Foreign Exchange Dealer - OTE £40,000+

£16000 - £40000 per annum: Recruitment Genius: A Foreign Exchange Dealer is re...

SThree: Experienced Recruitment Consultant

£20000 - £40000 per annum + OTE + Incentives + Benefits: SThree: Established f...

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + OTE 40/45k + INCENTIVES + BENEFITS: SThree: The su...

Recruitment Genius: Collections Agent

£14000 - £16000 per annum: Recruitment Genius: This company was established in...

Day In a Page

Refugee crisis: David Cameron lowered the flag for the dead king of Saudi Arabia - will he do the same honour for little Aylan Kurdi?

Cameron lowered the flag for the dead king of Saudi Arabia...

But will he do the same honour for little Aylan Kurdi, asks Robert Fisk
Our leaders lack courage in this refugee crisis. We are shamed by our European neighbours

Our leaders lack courage in this refugee crisis. We are shamed by our European neighbours

Humanity must be at the heart of politics, says Jeremy Corbyn
Joe Biden's 'tease tour': Could the US Vice-President be testing the water for a presidential run?

Joe Biden's 'tease tour'

Could the US Vice-President be testing the water for a presidential run?
Britain's 24-hour culture: With the 'leisured society' a distant dream we're working longer and less regular hours than ever

Britain's 24-hour culture

With the 'leisured society' a distant dream we're working longer and less regular hours than ever
Diplomacy board game: Treachery is the way to win - which makes it just like the real thing

The addictive nature of Diplomacy

Bullying, betrayal, aggression – it may be just a board game, but the family that plays Diplomacy may never look at each other in the same way again
Lady Chatterley's Lover: Racy underwear for fans of DH Lawrence's equally racy tome

Fashion: Ooh, Lady Chatterley!

Take inspiration from DH Lawrence's racy tome with equally racy underwear
8 best children's clocks

Tick-tock: 8 best children's clocks

Whether you’re teaching them to tell the time or putting the finishing touches to a nursery, there’s a ticker for that
Charlie Austin: Queens Park Rangers striker says ‘If the move is not right, I’m not going’

Charlie Austin: ‘If the move is not right, I’m not going’

After hitting 18 goals in the Premier League last season, the QPR striker was the great non-deal of transfer deadline day. But he says he'd preferred another shot at promotion
Isis profits from destruction of antiquities by selling relics to dealers - and then blowing up the buildings they come from to conceal the evidence of looting

How Isis profits from destruction of antiquities

Robert Fisk on the terrorist group's manipulation of the market to increase the price of artefacts
Labour leadership: Andy Burnham urges Jeremy Corbyn voters to think again in last-minute plea

'If we lose touch we’ll end up with two decades of the Tories'

In an exclusive interview, Andy Burnham urges Jeremy Corbyn voters to think again in last-minute plea
Tunisia fears its Arab Spring could be reversed as the new regime becomes as intolerant of dissent as its predecessor

The Arab Spring reversed

Tunisian protesters fear that a new law will whitewash corrupt businessmen and officials, but they are finding that the new regime is becoming as intolerant of dissent as its predecessor
King Arthur: Legendary figure was real and lived most of his life in Strathclyde, academic claims

Academic claims King Arthur was real - and reveals where he lived

Dr Andrew Breeze says the legendary figure did exist – but was a general, not a king
Who is Oliver Bonas and how has he captured middle-class hearts?

Who is Oliver Bonas?

It's the first high-street store to pay its staff the living wage, and it saw out the recession in style
Earth has 'lost more than half its trees' since humans first started cutting them down

Axe-wielding Man fells half the world’s trees – leaving us just 422 each

However, the number of trees may be eight times higher than previously thought
60 years of Scalextric: Model cars are now stuffed with as much tech as real ones

60 years of Scalextric

Model cars are now stuffed with as much tech as real ones