XM Satellite's Orbit Decaying Fast

A big recent stock sale by XM (XMSR) chief Hugh Panero isn't exactly soothing investors.

It has been a tough year for satellite radio stocks in general. But XM has been particularly hammered. Its shares are down 35% for the year, putting the company's market cap about $2 billion below that of its smaller rival, Sirius (SIRI).

The latest twist in XM's tale of woe comes from a lawsuit filed in federal court Wednesday. The suit accuses the company of misleading investors with a promise to cut subscriber acquisition costs and deliver on a target of 6 million subscribers.

The lawsuit also says that executives including CEO Panero took advantage of "the artificially inflated stock price" by selling shares before February's release of a fourth-quarter financial report that showed steeper-than-expected losses.

An XM representative says the lawsuit has no merit. The rep says that the company warned analysts and investors on its third-quarter conference call Oct. 27 that -- fitting a seasonal holiday pattern -- its costs to sign up more subscribers would "increase significantly" in the fourth quarter.

And as for Panero's sale of 413,334 shares at about $28.50 on Dec. 6 for $11.8 million, the XM rep says it was normal "investment diversification" and that Panero still has options on 1.8 million shares.

But clearly, the odd timing of Panero's stock sale adds fuel to the intensifying controversy surrounding the company and the satellite-radio sector. Investors have grown weary waiting for the pay-radio strategy to shift from burning cash to earning it.

The bold move by Sirius to spend $500 million for Howard Stern only raised the stakes, forcing XM to spend even more aggressively to counter the subscriber gains that Stern's debut garnered for Sirius.

The cost of the race has proved to be steep. In February, XM released its fourth-quarter report showing a much bigger loss than expected, with costs per gross additional user ballooning to $141 from $104 a year earlier. The cash fire grew too hot for XM board member Jack Roberts. He quit on earnings day, warning that there was "a significant chance of a crisis on the horizon."