Omnicom’s Wren feels the heat in fraud suit

To most of us Seneca and Chaucer are history: two dusty old writers who happened to share an interest in biting satire.

Not so to John Wren and Randy Weisenburger, respectively ceo and cfo of Omnicom – still the world’s largest marketing services organisation. For them, these names have a vivid contemporary significance, and it’s far from funny. Potentially, what they represent is a form of nemesis.

Seneca and Chaucer are the names of two corporate investment vehicles that are central to a four-year-old securities-fraud lawsuit in which the two most senior Omnicom executives stand accused of manipulating the share price with a falsely optimistic set of financial results. In other words, shareholders have been deliberately short-changed; or so the plaintiffs say.

The origins of this complex and meandering class action, brought by a number of disgruntled Omnicom shareholders, are to be found in the dying days of the internet boom. Certain “impaired” dotcoms were parked off balance sheet, claim the litigants, without the full nature of the disposals being made clear to the auditors, still less the shareholders. For good measure, they also allege that Omnicom lied about the valuation of these assets to the Securities and Exchange Commission, which has primary responsibility for enforcing federal securities law.

For whose good?
What matters here are the write-downs on these failed internet businesses. If the plaintiffs can prove that a) their lost value was much greater than Omnicom has led us to believe and b) that that lost value should have been written off against Omnicom’s financial results instead of being obscured in off-balance sheet ‘parking’, the case for fraud is much stronger. One deposition, filed in 2005, suggests the motivation behind avoiding write-offs was twofold: to artificially prop up the share price, enabling further company acquisitions; and to enrich John Wren personally through his performance-linked compensation package.

Over the years, Omnicom attorneys have deflected these charges in a masterly way, without quite managing to get them suppressed. Nevertheless, the case seemed likely to peter out when up popped one Michael Tierney to add his name to the litigants.

The importance of Tierney is that, as chief executive of Seneca at the critical time, he had intimate knowledge of how the controversial transactions were done. Up to this point, Omnicom has successfully conveyed the impression that it has committed no fraud because, essentially, Seneca was held ‘at arm’s length’ from the corporation?s control and independently managed, through a joint venture with private equity firm Pegasus.

It all turns on Tierney
Tierney is suing Omnicom for $1m of unpaid stock options. The nature of the suit implies, of course, the precise opposite of what Omnicom has been saying all along. Indeed, Tierney alleges that Pegasus’ participation was just a front, that he reported directly to Wren and Weisenburger, that he has proof that he was an Omnicom employee and, most damagingly of all, that Omnicom often made decisions without informing him.

If Tierney can prove Seneca was effectively a wholly owned subsidiary of Omnicom, that’s very bad news for Wren and not much better for Weisenburger. It means, for example, that Wren?s stock options at the time, whose exercise would be based on certain measures of successful financial performance, will come under the spotlight; and the justification for the way they handled the assets vested in Seneca will fall to pieces. In other words, at very least an embarrassing restatement of the Omnicom accounts will have to take place, with all the destruction of shareholder value that can imply. And at the worst? More SEC scrutiny and the distribution of swords to fall on.

If. Tierney may be a tainted witness. In 2001, in a deposition for a separate lawsuit, he maintained the exact opposite of what he is now saying: that is, he was employed only by Seneca, and not by Omnicom. Wren, on the other hand, is a redoubtable and wily leader; for good measure, he?s also a skilful accountant in his own right.

In the words of the original Seneca: “Fire is the test of gold; adversity, of strong men”.

The case continues…