• by Erik Sass  @eriksass1, October 3, 2008

New York Attorney General Andrew Cuomo is suing Arbitron to delay the rollout of ratings from its Portable People Meter, a passive electronic measurement device, in the New York metro market. Arbitron is scheduled to introduce PPM ratings, replacing the existing paper diary system, on Wed. Oct. 8. 

However, Cuomo is seeking to delay PPM ratings because of "fraudulent and illegal business practices"--in essence, accusing Arbitron of deceiving the radio industry about PPM's readiness and rushing the system to market despite methodological flaws.

These flaws include a failure to accurately represent minority audiences, which Cuomo says violates New York State's civil-rights laws.

Cuomo further alleges that Arbitron executives have engaged in "unlawful and deceptive practices" to hurry the rollout schedule because the company's performance-based compensation rules make money, not technical accuracy, their primary concern.

His allegation that Arbitron "failed to disclose material adverse information about the PPM methodology" echoes a charge made in a separate class-action lawsuit by Arbitron stockholders accusing Arbitron of violating SEC rules. Cuomo's legal action comes three weeks after he launched an investigation of Arbitron and PPM on Sept. 12.

The legal action appears to be motivated by the fear of some minority broadcasters that PPM measurement will undercut their ratings, leading to big drops in ad revenue--a phenomenon they blame on flawed sampling methodology associated with PPM. Specifically, broadcasters with urban formats targeting African-Americans and Hispanics say these groups are under-represented in Arbitron's samples--especially important segments like men ages 18-34.

Radio stations targeting African-American and Hispanic listeners in Houston, Philadelphia and New York say they have seen dramatic drops in ratings after the transition from paper diaries to PPM measurement. (PPM ratings have already been commercialized in Houston and Philadelphia.)

Over the last year, this has prompted statements of protest and complaints to Congress, the Federal Communications Commission and the New York City Council by industry groups like the National Association of Black-Owned Broadcasters, the Spanish Radio Association and the Association of Hispanic Advertising Agencies, which has also formed a special PPM council to address these concerns.

Earlier this year, disgruntled radio groups ran several ads in radio trade publications criticizing PPM's sampling methodology and calling on Arbitron to delay rollout of the system in New York and elsewhere until it had obtained MRC accreditation for the system in one more city besides Houston.

Arbitron has said it will continue with the scheduled rollout in New York, followed by other top markets, without waiting for further MRC accreditation. However, the company is committed to getting accreditation in all markets where PPM is eventually used.

The FCC has also said it is considering launching its own inquiry into the PPM ratings system, although Arbitron claims the agency has no legal authority to regulate PPM. In this connection, the MRC also lacks regulatory power, as ratings firms are not legally required to gain accreditation before commercializing a new methodology.

For example, Nielsen's commercial ratings (C3) are being used as currency for television ad sales despite several failures to gain MRC accreditation. The MRC is a quasi-official body established at the behest of Congress in 1963 but funded by the media industry.

Still, Arbitron has plenty of work to keep its lawyers busy.

In May, it 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.

According to the lawsuit, on July 19, 2007, Arbitron filed a form 8-K with the Securities and Exchange Commission that contained the press release summarizing its second-quarter results. In the press release, Stephen Morris, the chairman, president and CEO of Arbitron, asserted: "We are currently on schedule" with PPM, and the company reiterated its previously issued guidance for the remainder of 2007.

Then, on Nov. 26, 2007, Arbitron announced publicly that it would delay the commercialization of PPM ratings in New York, Nassau-Suffolk and Middlesex-Somerset-Union by nine months; Los Angeles, Riverside and Chicago by six months; and San Francisco, San Jose and Dallas by three months. This caused its stock to fall almost 15% to $41.70, according to the lawsuit.

The plaintiffs argue that the alleged deception constitutes a violation of the Securities Exchange Act of 1934.