Two More Threats to Mister Softee

Two worrisome revelations may prove embarrassing and expensive for Microsoft.
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While we were watching the

Department of Justice-Microsoft

(MSFT) - Get Report

trial, thinking that was Mister Softee's big risk (to say nothing of Y2K,

Linux

and

Bill Gates'

wardrobe), two more worrisome stories sneaked out Friday. Neither has been widely reported, so Microsoft investors may want to listen up:

Former Microsoft chief of internal audits Charles Pancerzewski, a direct report to Microsoft CFO Mike Brown, has charged that the company routinely engaged in "cookie jar" accounting practices (

Herb Greenberg

Alert!), knowingly violating both GAAP and

SEC

rules. Pancerzewski also says he was ordered to destroy a consultant's report on potential Microsoft tax liabilities in Europe.

Shortly after going to Brown, via email, with his charges, he received a rebuke (also by email, so there's a record here), chastising him for potentially exposing such claims to legal discovery in what "could be fertile ground for an astute litigator."

Pancerzewski subsequently received his first bad job evaluation after a long series of good ones, and not long after was taken to lunch by his boss and offered a choice: resign or be fired.

It is important to know here that Pancerzewski has an ax to grind: He subsequently filed a wrongful-discharge civil suit against Microsoft under the Whistleblower's Protection Act. That suit wallowed around in the discovery phase in Seattle courts for a year, ending only last fall after U.S. District Court Judge Carolyn Dimmick -- who threw out the European-taxes claim and also an age-discrimination claim by Pancerzewski -- ruled that there was credible evidence that Microsoft might have violated SEC rules and ordered the case to trial.

Microsoft thereupon settled two months ago with Pancerzewski. The

Seattle Weekly

, an alternative newspaper in the Puget Sound area, reported

here the denouement of Pancerzewski's case Friday, claiming that although the details of the settlement are sealed, Microsoft paid him $4 million.

It's hard to know whether this is a case of a discharged employee with a grievance or a legitimate matter. But Judge Dimmick's ruling gives me pause.

If Pancerzewski's charges lead to an SEC inquiry, though, this "second front" in the Washington vs. Redmond War could be troublesome for Microsoft. We'll see -- worth watching closely.

In a second hit, the

Consumer Federation of America

Friday blasted Microsoft for ripping consumers off to the tune of $10B or more over the past three years, thanks to its monopoly in PC operating systems.

Its report, prepared in cooperation with the

U.S. Public Interest Group

, uses internal Microsoft documents and e-mails exposed during the DOJ-Microsoft trial. One,

Microsoft OEM Value Analysis, documents Microsoft's increase in price for its operating system from 1990's $19.03 to 1996's $49.40 - about 150%.

Perhaps more damning, the second document, an internal email from Microsoft's hard-charging worldwide sales chief Joachim Kempin, argues that Microsoft should maximize its operating-system revenues by squeezing PC makers (and consumers) by jacking up the OEM price of its upcoming Windows 2000 to $100 per machine by 2000.

Neither document is new; both have been widely reported.

Microsoft responds typically -- and to a certain extent, fairly -- by pointing out that today's Windows is vastly more complex and delivers a lot more value than the DOS of 1990, and so should be priced higher.

As with the Pancerzewski claim, the risk here is secondary, but very real. In the former case, look for an SEC response, potentially an embarrassing and very expensive one. In the latter, look for the CFA/PIRG report to be used by smart, hungry lawyers to construct class-action suits against Microsoft on behalf of you, me and every other Windows-PC buyer.

Those suits would eventually be consolidated into one mega-suit and, if the plaintiff's lawyers do a good job of jurisdiction-shopping, could easily find a friendly, conspiracy-minded judge and turn it into a long, messy and hideously expensive tar pit for Mister Softee.

I am a little skeptical of an eventual bad outcome for Microsoft from the Pancerzewski claim and any ensuing SEC action. But these class-action suits against Microsoft for gouging OEMs and thus customers have been lurking in the wings for some time, waiting for the right documentation and the right moment.

Friday may have launched that process.

Microsoft holders shouldn't panic -- this is still a powerful company and a profitable juggernaut of a stock -- but they should keep a close eye on both issues as well as on the DOJ circus.

Jim Seymour is president of Seymour Group, an information-strategies consulting firm working with corporate clients in the U.S., Europe and Asia, and a longtime columnist for PC Magazine. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. At the time of publication, Seymour held no positions in stocks mentioned in this column, though positions can change at any time. While Seymour cannot provide investment advice or recommendations, he invites your

feedback.