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
News
i100 In this video, the late actor Leonard Nimoy explains how he decided to use the gesture for his character
Arts and Entertainment
Secrets of JK Rowling's Harry Potter workings have been revealed in a new bibliography
arts + ents
News
Down-to-earth: Winstone isn't one for considering his 'legacy'
people
News
news
ebooks
ebooksA special investigation by Andy McSmith
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

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

iJobs Job Widget
iJobs Money & Business

SThree: HR Benefits Manager

£40000 - £50000 per annum + pro rata: SThree: SThree Group have been well esta...

Recruitment Genius: Office Manager / Financial Services

£30000 - £37000 per annum: Recruitment Genius: Established in 1999, a highly r...

Jemma Gent: Year End Accountant

£250-£300 Day Rate: Jemma Gent: Are you a qualified accountant with strong exp...

Jemma Gent: Management Accountant

£230 - £260 Day Rate: Jemma Gent: Do you want to stamp your footprint in histo...

Day In a Page

HIV pill: Scientists hail discovery of 'game-changer' that cuts the risk of infection among gay men by 86%

Scientists hail daily pill that protects against HIV infection

Breakthrough in battle against global scourge – but will the NHS pay for it?
How we must adjust our lifestyles to nature: Welcome to the 'Anthropocene', the human epoch

Time to play God

Welcome to the 'Anthropocene', the human epoch where we may need to redefine nature itself
MacGyver returns, but with a difference: Handyman hero of classic 1980s TV series to be recast as a woman

MacGyver returns, but with a difference

Handyman hero of classic 1980s TV series to be recast as a woman
Tunnel renaissance: Why cities are hiding roads down in the ground

Tunnel renaissance

Why cities are hiding roads underground
'Backstreet Boys - Show 'Em What You're Made Of': An affectionate look at five middle-aged men

Boys to men

The Backstreet Boys might be middle-aged, married and have dodgy knees, but a heartfelt documentary reveals they’re not going gently into pop’s good night
Crufts 2015: Should foreign dogs be allowed to compete?

Crufts 2015

Should foreign dogs be allowed to compete?
10 best projectors

How to make your home cinema more cinematic: 10 best projectors

Want to recreate the big-screen experience in your sitting room? IndyBest sizes up gadgets to form your film-watching
Manchester City 1 Barcelona 2 player ratings: Luis Suarez? Lionel Messi? Joe Hart? Who was the star man?

Manchester City vs Barcelona player ratings

Luis Suarez? Lionel Messi? Joe Hart? Who was the star man at the Etihad?
Arsenal vs Monaco: Monaco - the making of Gunners' manager Arsene Wenger

Monaco: the making of Wenger

Jack Pitt-Brooke speaks to former players and learns the Frenchman’s man-management has always been one of his best skills
Cricket World Cup 2015: Chris Gayle - the West Indies' enigma lives up to his reputation

Chris Gayle: The West Indies' enigma

Some said the game's eternal rebel was washed up. As ever, he proved he writes the scripts by producing a blistering World Cup innings
In Ukraine a dark world of hybrid warfare and murky loyalties prevails

In Ukraine a dark world of hybrid warfare

This war in the shadows has been going on since the fall of Mr Yanukovych
'Birdman' and 'Bullets Over Broadway': Homage or plagiarism?

Homage or plagiarism?

'Birdman' shares much DNA with Woody Allen's 'Bullets Over Broadway'
Broadchurch ends as damp squib not even David Tennant can revive

A damp squib not even David Tennant can revive

Broadchurch, Series 2 finale, review
A Koi carp breeding pond, wall-mounted iPads and a bathroom with a 'wellness' shower: inside the mansion of Germany's 'Bishop of Bling'

Inside the mansion of Germany's 'Bishop of Bling'

A Koi carp breeding pond, wall-mounted iPads and a bathroom with a 'wellness' shower