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It remains to be seen how much embezzled money that Koss Corp. can recover as criminal charges are pursued against Sujata Sachdeva, the company’s former vice president of finance and secretary.

Likewise, it remains to be seen how much damages shareholders of the company will recover from the $30 million Sachdeva is alleged to have embezzled.

Regardless, the case is certain to create a bountiful windfall for one class of folks: attorneys.
Law firms throughout the country are tripping over each other to become the one company that will represent the lead plaintiff in the class action law suit on behalf of shareholders against Koss Corp.

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The suit filed in U.S. District Court for the Eastern District of Wisconsin alleges violations of federal securities laws.

To be a plaintiff in the case, investors needed to purchase shares of Koss Corp. between July 12, 2005, and Dec. 21, 2009.

The law firms that have filed to be the lead legal dog on behalf of shareholders include: Keller Rohrback L.L.P. of Seattle; Federman & Sherwood of Oklahoma City; the Law Offices of Howard G. Smith of Bensalem, Pa.; Izard Nobel LLP of West Hartford, Conn; The Brualdi Law Firm, P.C., of New York; Pomerantz Haudek Grossman & Gross LLP of New York; Bronstein, Gewirtz & Grossman, LLC of New York; and Carney Williams PLLC of Little Rock, Ark.

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While the court decides which firm will represent the lead plaintiff, the phones of attorneys in Milwaukee have been ringing too.

Members of the Koss family who may have legal vulnerability in the case include John C. Koss, chairman of the board; Michael J. Koss, president and chief executive officer; and John Koss Jr., vice president of sales.

In addition, sources say non-family members of the Koss Corp. board of directors also are “lawyering up.” According to a filing with the U.S. Securities & Exchange Commission, the members of the board include: Lawrence Mattison, retired president of Oster Company; John Stollenwerk, chairman of Allen-Edmonds Shoe Corp.; Thomas Doerr, president of Doerr Corp.; and Theodore Nixon, chairman and CEO of D.D. Williamson

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In the aftermath of the 2001 Enron scandal, it has become customary for publicly traded companies to provide liability insurance for their officers and directors. So, presumably, the Koss officers and board members would be shielded from any direct damages sought by plaintiffs.

Meanwhile, Grant Thornton LLP, which was fired as Koss Corp.’s independent auditor after the alleged embezzlement was discovered, will no doubt have some explaining to do as the investigation proceeds.

Although Grant Thornton certainly has incurred a public relations nightmare, it might have a legal out in the case. Maybe. A careful read of the Koss Corp.’s 2009 annual report includes this disclaimer from Grant Thornton: “We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  The Company is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting.  Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.  Accordingly, we express no such opinion.”

Perhaps an audit of the “internal control over financial reporting” might have accounted for the missing $30 million. You think?


Steve Jagler is executive editor of BizTimes Milwaukee.

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