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

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Frederick Hoeck, Et Al. V. Compusa, Inc., Et Al. 98-CV-00998-Class moms u. S. DiSTR/CT COURT NORTHERN DISTRICT OF TEXAS FILED 3 I 1998 I i UNITED STATES DISTRICT COURT 'N !ERTY • LERK NORTHERN DISTRICT OF TEXAS EY DALLAS DIVISION MP" Deputy FREDERICK HOECK, On Behalf of Himself and All Others Similarly ) N°' 3 - • 8 0 VO 9 9 8 G Situated, ) COMPLAINT - CLASS ACTION ) Plaintiff, ) ) COMPLAINT FOR VIOLATIONS OF vs. ) THE SECURITIES EXCHANGE ACT ) OF 1934 COMPUSA, INC., JAMES F. HALPIN, ) ROBERT S. SEAY, LAWRENCE N. MONDRY, ) LESLIE C. MARSHALL, HAROLD D. ) GREENBERG, RICK L. FOUNTAIN, PAUL ) F. EWERT, ROBYN GATCH-PRIEST and ) JAMES E. SKINNER, ) ) Defendants. ) Plaintiff Demands A ) Trial By Jury - , 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 3/5/98, against CompUSA and certain of its top insiders. CompUSA's stock declined sharply from $38 on 12/1/97 to $25-3/4 on 12/29/97 -- 32% -- due to investor concerns that CompUSA and other computer retailers were encountering slowing sales growth and suffering profit margin pressure due to price cutting and increased sales of lower priced PCs. 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 CompUSA stock and to artificially inflate it back up to higher levels so that they could sell off large amounts of their CompUSA stock, CompUSA's top insiders falsely told the securities markets that CompUSA was encountering very strong sales of its more expensive higher margin PCs, that its profit margins were intact, the industry's trend toward lower priced PCs was "healthy" for CompUSA i s business and CompUSA expected to achieve strong revenue and EPS growth during 98, with 98 earnings per share ("EPS") of at least $1.35. As a result of these assurances, CompUSA i s stock rebounded strongly during early 98, climbing to a high of $35-3/8 by 3/2/98. As CompUSA stock climbed to these artificially inflated levels, 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 -1- , dcquired via option exercise during the Class Period, pocketing $17.6 million in illegal insider-trading proceeds. 3. On 3/4/98, CompUSA traded as high as $33-7/16. On 3/5/98, lust 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 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 a lower than expected 3rdQ F98 BPS. 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 3/31/98 to $20-1/2 on 4/1/98 on 10.1 million shares volume -- the largest one-day stock volume in CompUSA's history as a public company. These events are evidenced by the following stock chart: // // // // // -2- CompLISA, Inc. December 1, 1997 - April 17, 1998 Daily Stock Prices vs S&P Retail Composite Index 40 S&P Retail Composite 35— , . • . CompUSA -c 3O— (13 a) a. co -5 25 — Feb 2-23, 1998 0 Insiders sell 605,322 shares for $19,175,559 20 — 15 I 12/01/97 12/26/97 01/23/98 02/19198 03/17/98 04/13/98 12/12/97 01/09/98 02/05/98 03/04/98 03/30/98 4. Defendants' insider trading was unusual in timing and amount, as shown below: %. of Shares Shares Actually Owned Defendants Sold Proceeds Sold Fwert 20,000 $ 639,397 21%. Fountain 21,123 $ 654,790 33% Catch-Priest 8,484 $ 271,488 55%. Greenberg 16,546 $ 529,472 7996 Halpin 360,000 $11,173,780 5696 Marshall 34,166 $ 1,132,603 919g Mondry 100,000 $ 3,133,200 2096- Seay 4,471 $ 141,418 68% TOTALS: 564 790 $17,676,148 419g 1/ 1/ —3- t, CompUSAI Inc. Quarterly Stock Sales By Defendants - Dollar Volume March 1997 - March 1998 $20 $40 Class Period: I 12131f97 - 315198 $15 - - - - $30 IT) 2-- a E $10 - - $20 3,3 o 0) $5 $10 Pre Class Peliod Sales $0 $0 MAMJJASONDJ F M A 1997 1998 JURISDICTION AND VENUE 5. Jurisdiction is conferred by §27 of the Securities Exchange Act of 1934 ("1934 Act"). The claims asserted herein arise under S§10(b) and 20(a) of the 1934 Act and Rule 10b-5. 6. 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 7. Plaintiff Frederick Hoeck purchased shares of CompUSA common stock as described in the attached certification and was damaged thereby. 8. 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 -4- , Company's executive offices are in Dallas, Texas. CompUSA's common stock trades in an efficient market on the New York Stock Exchange. 9. (a) Defendant James F. Halpin ("Halpin") is President, Chief Executive 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. Halpin's stock sales during the Class Period were unusual in timing and amount, as set forth below: CompUSA, Inc. J. Halpin, Pres. CEO - Quarterly Stock Sales - Dollar Volume March 1997 - March 1998 $12 Class Penod: $40 12/31197 - 3/519: $10 $30 c $8 0 CD $6 - - $20 -43 7- > No Pre Class Period Sales Fe' 75 $4_ 0 I $10 $2 $0 $0 M A M J J A SO ND J F M A 1997 1998 • -5- - — (b) Defendant Lawrence N. Mondry ("Mondry") is Executive Vice President-Merchandising of the Company. During the Class Period and as part of the fraudulent scheme, Mondry sold 100,000 shares of CompUSA stock at prices as high as $31.63 per share based on inside information, pocketing over $3.1 million. These sales constituted 20% of the CompUSA stock Mondry actually owned. Mondry's stock sales during the Class Period were unusual in timing and amount, as set forth below: CompUSA, Inc. L. Mondry, V.P. Merch. - Quarterly Stock Sales - Dollar Volume March 1997 - March 1998 $3500 $40 Class Period 12/31197 - 3/5198 $3000 - - - - - - $30 $2500 - - - 37a. 0 69' $2000 - - - - _ a No Pre Class Period Sales $20 13 > $1500 - - - _ _ _ $1000 $lo $500 f so $0 M A M J J A SO NDJ F M A 1997 1998 —6- f (c) Defendant Paul F. Ewert ("Ewert") is Senior Vice President-Merchandising of the Company. During the Class Period and as part of the fraudulent scheme, Ewert sold 20,000 shares of CompUSA stock at prices as high as $32 per share based on inside information, pocketing $639,397. These sales constituted 21% of the CompUSA stock Ewert actually owned. Ewert's stock sales during the Class Period were unusual in timing and amount, as set forth below: CompUSA, inc. P. Ewert, S.V. P. Merchandising - Quarterly Stock Sales - Dollar Volume March 1997 - March 1998 $700 $10 Class Period 12/31197- 315/98 $600 - - $30 $500 - a $20 SI; > $300 - CD No Pre Class Period Sales a 0 $200 $10 I 5100- L 1 1 $0 M AM J J A SO NDJ F M A 1997 1998 - —7- • (d) Defendant James E. Skinner ("Skinner") was, during the Class Period, Executive Vice President, Chief Financial Officer, Treasurer and Assistant Secretary of the Company. Because of his unique position at CompUSA and his sophisticated financial knowledge, Skinner knew CompUSA's business was deteriorating during • the 2ndQ F98 -- he sold off 15,000 shares of CompUSA stock on 11/21/97 at $35-3/4 per share; (e) Defendant Harold D. Greenberg ("Greenberg") is Senior Vice President-Inventory Management of the Company. During the Class Period and as part of the fraudulent scheme, Greenberg sold 16,546 shares of CompUSA stock at $32 per share based on inside information, pocketing $592,472. These sales constituted 79 9.- of the CompUSA stock Greenberg actually owned. Greenberg's stock sales during the Class Period were unusual in timing and amount, as set forth below: CompUSA, Inc. H. Greenberg, Sr. V.P. Inv. Mgmt - Quarterly Stock Sales - Dollar Volume March 1997 - March 1998 $800 $40 Class Penod I 12/31197 - 3/5/99 $600 • - - $30 000 0 ,E $400 $20 I) No Pre Class Period Sales a $200 - - - - - - - - $10 I I 1 $0 $0 MAM JJ A SO NDJ FM A 1997 -8- _ (f) Defendant Rick L.
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