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John C. Weld, Jr., Et Al. V. Stage Stores, Inc., Et Al. 99-CV-957-Complaint

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John C. Weld, Jr., Et Al. V. Stage Stores, Inc., Et Al. 99-CV-957-Complaint ' 111° II/ s UNITEERDNS DistRicr OUTH TATES CO OF TEXAS FILED MAR 3 1999 Gs liCb8ItJ. MUbydICkrkolcaud UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF TEXAS JOHN C. WELD, JR., On Behalf of § No. 1:1 -9 - 0 9 5 7 Himself and All Others Similarly Situated, S CLASS ACTION § Plaintiff, § § vs. § STAGE STORES, INC., CARL TOOKER, § COMPLAINT FOR VIOLATION OF TYLER INTERNATIONAL, -TYLER S510(b) AND 20(a) OF THE -MASSACHUSETTS, L.P., TYLER CAPITAL § SECURITIES EXCHANGE ACT OF FUND L.P., BCIP TRUST ASSOCIATES S 1934 AND SEC RULE 10b-5 L.P., BCIP ASSOCIATES, BAIN § CAPITAL, INC., BAIN VENTURE § CAPITAL, ACADIA PARTNERS L. P., ACADIA FW PARTNERS L.P._ ACADIA MOP, INC., OAK HILLART1\--TER—S) INC., S SANDRA BORNSTEIN, ERNEST R. CRUSE, S RIGO HERNANDEZ, JERRY C. IVIE, JOANNE SWARTZ, MARK SHULMAN, MEL WARD, DONALD R. WESTBROOK, JAMES § MARCUM, STEPHEN LOVELL, CHARLES § SLEDGE, ADAM KIRSCH, JOSHUA § BEKENSTEIN, PETER G. MULVIHILL, CREDIT SUISSE FIRST BOSTON and BEAR, STEARNS & CO. INC., § § Defendants. S Plaintiff Demand A S Trial By Jury 9S , INTRODUCTION AND OVERVIEW Summary 1. This is an action on behalf of purchasers of Stage Stores, Inc. ("Stage Stores" or the "Company") stock between 5/7/97 and 8/6/98 (the "Class Period"). Stage Stores operates hundreds of retail casual clothing stores in the mid and southwest. 2. In 1988, Stage Stores had been taken "private" in a leveraged buyout ("LBO") arranged and financed by two venture capital groups -- Bain Capital and Acadia (see ¶1118 and 19, infra). After Stage Stores went private, its business performed much worse than expected and one significant acquisition it made was a failure, making Stage Stores a very poor investment for Bain Capital and Acadia. First in 1992, and again in mid-1996, Bain Capital and Acadia tried to take Stage Stores public to recover on their endangered investment. But both attempts to take Stage Stores public had to be pulled due to lack of sufficient investor interest in the proposed stock sale to permit a large offering to take place. 3. Finally, in 10/96, Stage Stores successfully completed its long-desired IPO at $16-1/2 per share. However, the venture capitalists were able to sell only a very small portion of their shares of Stage Stores stock in the IPO. Thus, Bain Capital and Acadia were planning -- counting on -- a large follow-on secondary offering by Stage Stores during 1997 to allow them to bail out of their troubled investment in Stage Stores at a much higher price. 4. To artificially inflate Stage Stores stock during the Class Period and facilitate the secondary offering at an artifi- cially inflated price, defendants made false and misleading , 97 -1- , , statements about Stage Stores' acquisition of the chain of C.R. Anthony Stores ("C.R. Anthony"), including the successful elimina- tion of millions in costs and the successful integration of C.R. Anthony's operations into Stage Stores' operations, the successful conversion of the C.R. Anthony stores to Stage Stores' format and the better-than-expected performance of those converted stores. They also emphasized the success, and indeed acceleration, of Stage Stores' rapid expansion and growth plan of opening new stores, the exceptional profitability of its small town, small store model, Stage Stores' state-of-the-art merchandise mix and inventory controls, the strength of Stage Stores' competitive position and the expertise and depth of Stage Stores' management team. They represented that these favorable factors made Stage Stores a unique company and an exceptionally attractive investment and would result in Stage Stores achieving strong earnings per share ("EPS") growth in F1998, F1999 and F2000 (to end 1/30/99, 1/31/00 and 1/31/01, respectively) -- specifically, EPS of $1.60-$1.85+, $2.22-$2.30+ and $2.75+ in those fiscal years -- with 15%-25% EPS growth going forward. 5. These representations artificially inflated Stage Stores' stock to a Class Period high of $53-3/4 and allowed Bain Capital and Acadia -- who were Stage Stores' two largest and controlling shareholders -- to sell off 6.22 million shares of their Stage Stores stock -- virtually 100% of the shares they owned -- in a 7.1 million share secondary offering on 9/17/97 (the "Secondary Offering"), pocketing $208 million. This Secondary Offering also allowed Stage Stores to sell 650,000 new shares to the public raising $21.7 million in desperately needed equity capital, while ._ -- . -2- 9 6 the underwriters (Credit Suisse First Boston and Bear, Stearns & Co.) got $10+ million of the stock sale proceeds for helping to pull off that stock sale. The apparent strength of Stage Stores' business and its improving financial condition also allowed Stage Stores to refinance some $300 million of its outstanding LBO debt at lower interest rates during the Class Period. During the Class Period, Stage Stores' top officers also pocketed over $7.4 million in illegal insider-trading proceeds, via open market sales of 224,071 shares of their Stage Stores stock at prices as high as $52-1/4 per share. 6. The positive statements and forecasts made by defendants during the Class Period were false. The true facts were: (a) Stage Stores' acquisition of C.R. Anthony was extremely troubled and it was costing significantly more than anticipated to convert the C.R. Anthony stores and taking much longer than planned to complete the conversion process; (b) The performance of many of the converted C.R. Anthony stores was significantly below internally budgeted levels and many of the stores were accumulating large amounts of slow- moving, over-valued inventory; (c) Due to Stage Stores' overly rapid expansion, its merchandise mix and inventory controls were overwhelmed and not working; many of its stores were accumulating large amounts of slow-moving, over-valued inventory that would have to be liquidated at unprofitable prices; (d) Stage Stores did not write down this over-valued inventory so that it could artificially inflate its reported EPS — -3- 95 and gross margins and make its store model appear significantly more profitable than, in fact, it was; (e) Stage Stores' chief merchandising officers had misordered millions of dollars worth of undesirable, slow-moving merchandise which was not selling and which would have to be marked down to be sold at greatly reduced prices, adversely impacting Stage Stores' margins and EPS; (f) Stage Stores' top management was in disarray, had lost control of the business and was riddled with dissention over the serious mistakes which had been made; (g) Stage Stores was achieving its reported revenue growth and same-store sales growth by boosting sales by sharply discounting its merchandise; however, at the same time, Stage Stores was inflating its reported margins and EPS by failing to write down or reserve for the remaining inventory of similar merchandise to reflect those discounted prices; (h) Because of the serious problems with Stage Stores' merchandise mix, inventory controls and its troubled C.R. Anthony acquisition, Stage Stores would not be able to make any more acquisitions for the foreseeable future and would have to sharply curtail its new store openings in order to conserve cash and try to regain control of Stage Stores' business; and (1) AsAs a result of these negative conditions which were adversely Stage Stores, the quarterly F1998 and F1998, F1999 and F2000 gross margins and EPS being forecast by and for Stage Stores were false, as they were impossible to achieve. 7. After Stage Stores' insiders had completed their insider sales, Stage Stores' stock fell from $53-7/16 on 6/23/98, to — — - -4- 4 F g 4 $41-5/8 on 7/7/98, just nine trading days later, after Stage Stores told analysts its same-store sales growth in 6/98 had slowed due to hot weather, but that this would not prevent Stage Stores from achieving same-store sales growth in 2ndQ F1998 and would not adversely impact Stage Stores' F1998 results, in large part because of the better-than-expected performance of the C.R. Anthony stores. On 7/8/98, Stage Stores again stated that a "temporary weather- related phenomenon" was hurting same-store sales, but again assured investors that "we remain positive on our outlook" -- while forecasting only a slight reduction of 2ndQ F1998 EPS to $.27-$.30, compared to the previously forecasted $.32. Stage Stores' stock fell, but only slightly, closing at $39 on 7/8/98. 8. During the next month, Stage Stores' stock continued to decline as rumors (which Stage Stores denied) circulated regarding Stage Stores' 2ndQ F1998 results. Then, on 8/6/98, Stage Stores revealed a "disastrous" 5% decline in same-store sales during 7/98, admitted its 2ndQ EPS would be only $.02-$.05 and that Stage Stores would suffer very weak 3rdQ EPS as well. Stage Stores' stock utterly collapsed, falling from $23-5/8 on 8/5/98 to $9-7/8 on 8/6/98, a one-day price decline of $13-3/4 or 58%, on volume of 5.3 million shares, the largest one-day absolute or percentage stock- price decline on the largest one-day volume in Stage Stores' history, placing the stock at an all-time low! Due to these negative developments, Standard & Poor's immediately placed Stage Stores on "CreditWatch" with "negative implications." Analysts were immediately skeptical of the claim that these huge EPS shortfalls were due just to hot weather. "The heat may have something to do with it, but they're not only in the Southwest," - 5 - 93 said one analyst. The stock's plunge "is a sign of a sudden drop of confidence in management," said another.
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