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Red Hat Investors File Lawsuit Following Stock Drop

Posted July 15, 2004

— An accounting change at a Triangle software company has investors seeing red.

Raleigh-based Red Hat moved to a daily bookeeping model and sparked the steepest stock drop in company history. Shares fell more than 20 percent Tuesday. Wednesday, investors filed a class-action lawsuit claiming security fraud.

Despite a wild stock market ride over the past five years, Red Hat proved to be a software survivor when other tech companies crashed.

"Red hat is arguably the most successful public company in the Triangle in the past five years," said Sougata Mukhergee of

The Triangle Business Journal

.

Mukhergee believes the company's change in accounting practices combined with lowered earnings projections, an SEC inquiry and the resignation of its chief financial officer all make Wall Street nervous.

"To an investor who's playing the market, all this news in a short time -- they don't like that. They'd rather stay away from this volatility," he said.

"I don't think there's an issue in terms of ethics," said Don Pagach, an accounting professor at North Carolina State University.

Pagach says the change in the books is unusual in the software industry, but, ultimately, the numbers will be more up to date.

"Every month and every quarter in which they report they're going to have a more accurate revenue number," he said.

In a statement, Red Hat executives downplayed the accounting change saying, it will not make a major difference in earnings reports or the business outlook.

Still, many Red Hat investors are nervous, waiting to see if the accounting issues are over or just beginning.

Red Hat stock fell another 4 percent in heavy trading Wednesday, closing at just over $15. Investors are awaiting Red Hat's next financial report due Monday.

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