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Frederick Hoeck, Et Al. V. Compusa, Inc., Et Al. 98-CV-00998

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Frederick Hoeck, Et Al. V. Compusa, Inc., Et Al. 98-CV-00998 rn1cT COURT Non r,,- sTR3CT OF TEXAS . I4 I _ -, ORIGINAL i FILED SEP a 0 1999 ... NANCY. D04 LE' UNITED STATES DISTRICT COUR L ay,1m NORTHERN DISTRICT OF TEXAS DALLAS DIVISION FREDERICK HOECK, et al., On Behalf of ) Civil Action No. 3:98-CV-0998-G Themselves and All Others Similarly Situated, ) ) (Consolidated With No. 3:98-CV-1457-G) Plaintiffs, ) ) CLASS ACTION VS. ) ) SECOND AMENDED CONSOLIDATED COMPUSA, INC., JAMES F. HALPIN, ) COMPLAINT FOR VIOLATIONS OF THE ROBERT S. SEAY, LAWRENCE N. ) SECURITIES EXCHANGE ACT OF 1934 MONDRY, LESLIE C. MARSHALL, ) HAROLD D. GREENBERG, RICK L. ) FOUNTAIN, PAUL F. EWERT, ROBYN ) GATCH-PRIEST and JAMES F. SKINNER, ) ) Defendants. ) ) DEMAND FOR JURY TRIAL \, ) 0 SUMMARY AND OVERVIEW 1. This is a class action on behalf of all purchasers of the common stock and publicly traded options of CompUSA, Inc. ("CompUSA" or the "Company") between 12/31/97 and 4/29/98 against CompUSA and certain of its top insiders. In 12/97, CompUSA's stock declined by 32% (from $38 on 12/1/97 to $25-3/4 on 12/29/97) due to investor concerns that CompUSA and other computer retailers were encountering slow sales growth and increasing pressure on profit margins due to increased price competition. This sharp price decline eliminated millions of dollars in value of the CompUSA stock owned and options to purchase CompUSA stock held by its insiders. 2. In order to halt this decline in CorripU SA stock and to artificially inflate it back up to higher levels so that they could sell off large amounts of their CompUSA stock, top CompUSA insiders falsely reported to the market in early 1/98, inter alia, that CompUSA was achieving strong sales in both its inexpensive PCs (below $1,000) and its higher margin computers despite the experiences of other similar computer retailers. They further represented that CompUSA's financial results were not being harmed by expanding sales of inexpensive computers, since the Company was continuing to sell a substantial number of its higher profit margin PCs to sophisticated computer users and upscale customers. These insiders went so far as to state that the trend toward low-end PCs was "healthy" for CompUSA's business. Along with these misrepresentations and others, CompUSA projected fiscal third quarter earnings to exceed the prior quarter with 1998 earnings per share ("EPS") of at least $1.35. Based upon these false statements, CompUSA's stock price recovered with a 36% increase to $35-3/8 on 3/2/98. 3. As the stock price rebounded based upon CompUSA's misrepresentations, the CompUSA executives named as defendants unloaded 564,790 shares of their CompUSA stock at prices as high as $33.15, selling off 41% of the CompUSA stock they actually owned and 100% of the stock they acquired via option exercise during the Class Period, pocketing $17.6 million in illegal insider-trading proceeds. 4. On 3/4/98, CompUSA traded as high as $33-7/16. On 3/5/98, just eight trading days after CompUSA's insiders had completed their insider-selling spree, CompUSA stock was twice halted from trading and ultimately plunged to $26 on volume of over 9 million shares (the -.1- largest one-day volume in CompUSA's history as a public company up to that point) as it leaked into the market that CompUSA was about to make a negative announcement about its 3rdQ F98 results. After the close, CompUSA revealed that it expected much lower 3rdQ F98 sales than earlier forecast. Then on 4/1/98, CompUSA revealed that its 3rdQ F98 sales fell from the prior quarter, due in large part to a decline in sales per superstore, which would result in lower than expected 3rdQ F98 EPS. CompUSA revealed that gross margins would be approximately 14.1%, lower than in any quarter in the past year. CompUSA also indicated that these adverse conditions would continue during 4thQ F98, resulting in lower margins and EPS at least one-third lower than earlier forecast for the 3rdQ and 4thQ of F98. CompUSA stock plunged from $26-7/16 on 3131198 to $20-1/2 on 411/98 on volume of 10.1 million shares — the largest one-day volume in CompUSA's history as a public company. 5. On 4/1/98, contrary to defendants representations, the Company reported that its third quarter sales fell from the prior quarter and that its fourth quarter estimates would have to be adjusted downward by at least a third. Further, defendants admitted that CompUSA's gross margins had fallen to their lowest level of the past year, despite their representations in January that the margins were protected due to its sales of high-end PCs. Immediately following these disclosures, the Company's stock plummeted an additional 22% to $20-1/2 — a price at least $10 per share less than any price obtained by defendants only five weeks earlier. On 4/29/98, the Company officially announced its third quarter results, confirming its prior announcement on 4/1/98 and indicating that net income fell 22% from the same period of fiscal 1997. Despite defendants' representations during the Class Period that the industry's trend toward lower priced PCs was "healthy" for CompUSA's business, they now revealed that because more of the computers CompUSA sold were models costing less than $1,000, profits sank to $25.4 million (or $0.27 per share) from $32.7 million (or $0.35 per share). CompUSA's stock fell to $17-3/16. These events are evidenced by the following stock chart: -2- , i .. • CornpUSA., Inc. December 1, 1997 -April 29, 1998 Daily Stock Prices vs. S&P Retail Composite index 40 Feb. 2-23, 1998 Insiders self 605,322 shares for $19,175,559 S&P Retail Composite 35 1— \ilk \ r.., ai cr, s.a qr- Al CompLISA 2 ,a 30 — 0) f a. 0 2.' TO 1, Aill041111P.r \ -9-3 Izi 25 — —6 0 0 g 13 C 20 — I 1 1 1 I 1 i 15 I _L_ 1 12/01197 12/30197 01/29/98 02127/98 03/27198 04127198 12/15/97 01/14/98 02/12198 03/13/98 04/13198 6. Defendants insider trading was unusual in timing and amount, as shown below: % of Shares Shares Actually Owned Defendants Sold Proceeds Sold Ewert 20,000 $ 639,397 21% Fountain 21,123 $ 654,790 33% Gatch-Priest 8,484 $ 271,488 55% Greenberg 16,546 $ 529,472 79% Ha/pin 360,000 $11,173,780 56% Marshall 34,166 $ 1,132,603 91% Mondry 100,000 $ 3,133,200 20% Seay 4,47 $ 141,418 68% TOTALS: 564,790 $17676,148 41% • - 3 - , r CompUSA, Inc. Quarterly Stock Sales By Defendants - Dollar Volume March 1997 - Aeril 1998 $20 $40 Class Period: 12/31/97 - 4/29/98 $15 $30 Tfc 5— E $1 () -0 3 $5 4' $10 Pre Class Period Sales $0 $0 M A M JJ A SO NDJ F M A 1997 1990 JURISDICTION AND VENUE 7. Jurisdiction is conferred by §27 ofthe Securities Exchange Act of 1934 ("1934 Act"). The claims asserted herein arise under §§10(b) and 20(a) of the 1934 Act and Rule 10b-5. 8. Venue is proper in this District pursuant to §27 of the 1934 Act. CompUSA is headquartered in this District. The false and misleading statements were made or issued from this District. THE PARTIES 9. (a) PlaintiffFrederick Hoeck, who was appointed as a lead plaintiff in this action by Order dated June 23, 1998, purchased shares of CompUSA common stock during the Class Period, as described in the certification filed with plaintiffs initial complaint, and was damaged thereby. (b) The following individuals, who were appointed as lead plaintiffs in this action by Order dated June 23, 1998, purchased shares of CompUSA common stock and/or publicly traded options on the open market during the Class Period, as described in the certifications attached as Exhibit 1 to the Declaration of Katherine L. Blanck filed in support of the Hoeck Group's motion to -4 r be appointed lead plaintiffs, and were damaged thereby: Jeff Ackerman, Reza Ansari, Robert E. Appleby, Jr., Boris Blanter, William Blust, Benedict J. Bucalo Trust, Josephine F. Bucalo Trust, Michael Bucalo, Mary Suk Fun Cheung, John and Honey Jean Christofiles, Ronny and Lourdes Cohen, Bruce Devlin, Frankie Dinsmore, Michael Dougherty, Joseph Drazdowski, Peter Dugery, Fran and Paul Gonnelli, Jr., Charles Katsohis, John Kemendo, Ken Klein, Alan Koch, Marc Lupczynski, John Macuski, Wayman D. Merrill, John T. and Ruth Q. Neary, Philip Ramirez, Larry Rebich, Jack Rushing, George Schneider, John Special, Wieslawa Tabor, Patricia Waldschmidt, Irving M. Weiner, Stephen Winarick, and Jedidiah Yueh. (c) Plaintiff Herbert Silverberg purchased shares of CompUSA common stock during the Class Period, as described in the certification filed with plaintiffs initial complaint, and was damaged thereby. 10. Defendant CompUSA, Inc. ("CompUSA") is a large retailer of personal computers and related products and services. CompUSA operates 150+ Computer Superstores in the United States. The Company's executive offices are in Dallas, Texas. CompUSA's common stock trades in an efficient market on the New York Stock Exchange. 11. (a) Defendant James F. Halpin ("Halpin") is President, ChiefExecutive Officer and a director of the Company. During the Class Period and as part of the fraudulent scheme, Halpin sold 360,000 shares of CompUSA stock at prices as high as $31.31 per share based on inside information, pocketing over $11.1 million. These sales constituted 56% of the CompUSA stock Halpin actually owned.
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