• by Erik Sass  @eriksass1, October 31, 2008

New York State Attorney General Andrew Cuomo is expanding his investigation of Arbitron to include possible securities fraud, according to The Wall Street Journal. The investigation centers on allegations that Arbitron executives engaged in stock fraud and insider trading.

Specifically, they may have deceived shareholders about the readiness of Arbitron's Portable People Meter radio ratings system for commercialization, then sold their shares shortly before announcing the PPM rollout would be delayed, causing the stock price to fall sharply.

The securities investigation comes on top of the lawsuit brought by Cuomo against Arbitron to force the company to further delay the commercialization of PPM ratings in New York. His grounds: the sampling methodology underrepresents ethnic minorities, principally African-Americans and Hispanics.

Minority broadcasters say this endangers their advertising revenues, and Cuomo's office says it is a violation of New York State's civil-rights law. On Oct. 27, United States District Judge Denise Cote rejected a motion from Arbitron seeking a temporary restraining order and a preliminary injunction against Cuomo, in effect attempting to get Cuomo's lawsuit dismissed.

The allegations of stock fraud and insider trading relate to an earlier delay in the rollout of PPM ratings.

The events in question took place in fall 2007, following several years of controversy over the suitability and readiness of PPM for measurement of radio audiences. Arbitron had originally scheduled commercialization of PPM ratings for top American markets beginning with New York and Long Island in December 2007, followed by Los Angeles and Chicago in March of this year, and San Francisco and San Jose in June 2008.

On July 29, 2007, Arbitron chairman, president and CEO Steve Morris, said: "We are currently on schedule" with PPM, and the company reiterated its previously issued guidance for the remainder of 2007. However, strong criticism from radio broadcasters prompted Arbitron to announce on Nov. 26, 2007 that it would delay commercialization in all these markets until September 2008, giving it time to improve the quality of PPM ratings. Immediately following the announcement, Arbitron's stock price fell 15% to $41.70.

According to the allegations currently under investigation, in the three-month period leading up to the Nov. 26 announcement, Arbitron chairman and CEO Steve Morris sold about $900,000 worth of Arbitron stock, while Pierre Bouvard, president of sales and marketing, sold over $2 million. Owen Charlebois, president of research and development, sold about $1.5 million, and executive vice president Linda Dupree sold about $2 million.

If the Attorney General's office decides that the July statement and subsequent sales constitute securities fraud, the 1921 Martin Act gives the Attorney General the power to seek civil and criminal penalties against the company and its executives.

If this happens, the Attorney General's office would be making essentially the same charge as a separate class-action lawsuit by Arbitron stockholders accusing Arbitron of violating SEC rules. In May, the company was sued by one of its institutional investors for allegedly deceiving shareholders about the likelihood of delays in the PPM rollout. The class-action lawsuit, brought by the Plumbers and Pipefitters Local Union #630 Pension Annuity Trust Fund, seeks damages for Arbitron investors who bought stock during that period.

The lawsuit accuses Arbitron of issuing "materially false and misleading statements," suggesting that PPM ratings would be introduced on schedule, when some executives knew otherwise. The plaintiffs argue that the alleged deception constitutes a violation of the Securities Exchange Act of 1934.