Case 2:18-cv-01758-APG-PAL Document 34 Filed 10/22/18 Page 1 of 78 1 Patrick R. Leverty LEVERTY & ASSOCIATES LAW CHTD 2 832 Willow Street 3 Reno, Nevada 89502 Telephone: (775) 322-6636 4 Facsimile: (213) 322-3953 5 Email: [email protected] 6 Liaison Counsel for Plaintiffs 7 8 [additional counsel listed on signature page] 9 UNITED STATES DISTRICT COURT 10 DISTRICT OF NEVADA 11 DANIEL CHECKMAN, Individually Case No: 18-CV-01758-APG-PAL 12 And On Behalf Of All Others Similarly 13 Situated, AMENDED CLASS ACTION COMPLAINT FOR VIOLATIONS 14 Plaintiffs, OF THE FEDERAL SECURITIES 15 LAWS v. 16 JURY TRIAL DEMANDED 17 ALLEGIANT TRAVEL COMPANY, 18 MAURICE J. GALLAGHER, JR., SCOTT SHELDON, STEVEN E. 19 HARFST, and JUDE I. BRICKER, 20 Defendants. 21 22 23 Lead Plaintiff Charles Brendon and Named Plaintiff Daniel Checkman 24 (collectively, “Plaintiffs”), individually and on behalf of all other persons similarly 25 situated, by Plaintiffs’ undersigned attorneys, for Plaintiffs’ complaint against 26 Defendants (defined below), alleges the following based upon personal knowledge as 27 to Plaintiffs and Plaintiffs’ own acts, and information and belief as to all other 28 matters, based upon, inter alia, the investigation conducted by and through Plaintiffs’ - 1 - Amended Class Action Complaint for Violations of the Federal Securities Laws Case 2:18-cv-01758-APG-PAL Document 34 Filed 10/22/18 Page 2 of 78 1 attorneys, which included, among other things, a review of the Defendants’ public 2 documents, conference calls and announcements made by Defendants, United States 3 Securities and Exchange Commission (“SEC”) filings, wire and press releases 4 published by and regarding Allegiant Travel Company (“Allegiant” or the 5 “Company”), analysts’ reports and advisories about the Company, information 6 readily obtainable on the Internet, and interviews with former employees of 7 Allegiant. Plaintiffs believe that substantial evidentiary support will exist for the 8 allegations set forth herein after a reasonable opportunity for discovery. 9 I. NATURE OF THE ACTION 10 1. This is a federal securities class action on behalf of a class consisting of 11 all persons and entities other than Defendants who purchased or otherwise acquired 12 the publicly traded securities of Allegiant between June 8, 2015 and May 9, 2018, 13 both dates inclusive (the “Class Period”). Plaintiffs seeks to recover compensable 14 damages caused by Defendants’ violations of the federal securities laws and to pursue 15 remedies under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the 16 “Exchange Act”) and Rule 10b-5 promulgated thereunder. 17 2. Allegiant operates an ultra-low-cost passenger airline called Allegiant 18 Air. Its business model was enormously profitable: acquire antiquated, second-hand 19 passenger jets for a few million dollars and operate them as cheaply as possible to 20 transport vacation travelers from under-served, small and mid-size cities, where 21 Allegiant faced less competition, to leisure destinations throughout the United States. 22 3. During the Class Period, Allegiant recorded sixty consecutive quarters of 23 profit, including in 2008, as the country fell into recession and oil skyrocketed above 24 $145 per barrel. The business model was so successful that Allegiant was reportedly 25 the most profitable airline in the world at one point during the Class Period. 26 4. But the U.S. airline industry is intensely competitive. Analysts and 27 investors evaluate whether an airline will be a good investment by studying its ability 28 to control costs and enhance revenue. This is particularly true for an airline such as - 2 - Amended Class Action Complaint for Violations of the Federal Securities Laws Case 2:18-cv-01758-APG-PAL Document 34 Filed 10/22/18 Page 3 of 78 1 Allegiant, which draws its revenue from one-way fares as low as $29 and add-on 2 fees. Because one of the biggest costs of an airline’s operating cost is aircraft 3 maintenance, which is regulated by the Federal Aviation Administration (the “FAA”) 4 with standards that apply to all airlines, airline executives who keep their airline’s 5 operating costs below industry average, and can increase revenue per passenger, are 6 viewed as successful managers.1 7 5. Defendants improperly cut corners to reduce Allegiant’s maintenance 8 and labor related operating costs by: (1) running skeleton maintenance crews that 9 were too few in numbers to adequately perform maintenance, which created an 10 environment where maintenance workers felt pressured and threatened to (i) 11 disregard maintenance items outside of the scope of a work order, which ran contrary 12 to Allegiant’s self-described “normal procedures,” (ii) falsely certify that 13 maintenance tasks had been performed, (iii) skip maintenance inspections but report 14 they had been performed, and (iv) rush maintenance tasks to keep up with the large 15 work load, which could pose a safety hazard; (2) hiring unqualified and 16 inexperienced maintenance personnel as well as failing to provide comprehensive 17 training for maintenance personnel, which created an environment leading to (i) 18 experienced mechanics feeling overwhelmed and pressured to somehow complete 19 repairs on time; (ii) mechanics falsely certifying that certain tasks were being 20 completed; and (iii) substandard repairs being made; and (3) implementing a culture 21 that compromised maintenance, and in turn, safety and reliability, for profits, which 22 lagged industry standards. 23 6. To this end, and unbeknownst to Allegiant investors, Defendants made 24 materially false and misleading statements during the Class Period that Allegiant had 25 sufficient maintenance personnel to “satisfy [Allegiant’s] ongoing maintenance 26 27 1 Allegiant characterizes the FAA as “primarily regulat[ing] flight operations and 28 safety, including matters such as airworthiness and maintenance requirements for aircraft, pilot, mechanic, dispatcher, and flight attendant training and certification[.]” - 3 - Amended Class Action Complaint for Violations of the Federal Securities Laws Case 2:18-cv-01758-APG-PAL Document 34 Filed 10/22/18 Page 4 of 78 1 needs[,]” employed maintenance technicians with “appropriate experience[,]” 2 provided maintenance technicians with “comprehensive training[,]” ran a “safe 3 operation,” believed it had “mechanically reliable” aircraft, embraced a “culture” 4 which focused on “safety and reliability[,]” and complied with its Code of Ethics. 5 7. From June 2015 through March 2016, local news organizations reported 6 numerous incidents of Allegiant planes being cancelled, delayed, forced to make 7 emergency landings, with smoke filling their cabins, and aborting takeoffs, all due to 8 aircraft maintenance and repair issues. These headlines seized the attention of 9 Allegiant’s CEO, CFO, and COOs. At that time, Defendants routinely maintained 10 that the Company was committed to safety. Defendants downplayed reports 11 criticizing Allegiant’s reliability and safety, characterizing them as misleading 12 because they were fueled by a pilot’s union eager to strike its first labor contract with 13 the airline. At the same time, Defendants continued to try to curtail growing 14 maintenance costs for Allegiant’s obsolete aircraft. 15 8. Even as Defendants widely downplayed and refuted these negative news 16 reports, Allegiant’s then-COO suddenly resigned on January 15, 2016, less than 17 thirteen months after taking the job. Then, on March 9, 2016, Gallagher suspiciously 18 sold $47.8 million in Allegiant stock. It was disclosed soon thereafter that Gallagher 19 booked a nearly $3 million bonus for 2015, a figure far above his usual payout, as 20 Allegiant’s profits soared to $220 million—more than 2 ½ times above the nearly $87 21 million it earned in 2014. 22 9. Allegiant stated in the summer of 2016 that it would accelerate the 23 acquisition of Airbus A320 to retire its MD-80 fleet, which it blamed for its 24 maintenance and reliability woes.2 Then, in November 2016, Allegiant reported it 25 would “[a]ggressive[ly] focus on ‘other’ revenue[,]” now that Allegiant was forced to 26 change its business model and transition to more costly A320s. 27 28 2 Used Airbus A320s were also to blame. - 4 - Amended Class Action Complaint for Violations of the Federal Securities Laws Case 2:18-cv-01758-APG-PAL Document 34 Filed 10/22/18 Page 5 of 78 1 10. Faced with the reality that Allegiant’s lucrative business model was 2 being jeopardized, Allegiant executives were under enormous pressure. Allegiant 3 continued to lead shareholders to believe it was committed to hiring sufficient 4 maintenance staff, employing qualified and experienced maintenance personnel, 5 investing in comprehensive training for maintenance workers, focusing on reliable 6 equipment and a safe operation, and promoting a safety culture which did not lag 7 industry standards. This was false. Rather, Defendants continued to skimp on 8 maintenance costs. 9 11. Defendants closely tracked maintenance and related labor expenses as it 10 was core to their operation. Allegiant’s business model relied on antiquated aircraft 11 purchased at bargain basement prices, which put them at a competitive price 12 advantage provided they kept maintenance and repair costs low. Indeed, Allegiant 13 reported maintenance and repair expenses in each quarter during the Class Period. 14 These expenses cost Allegiant tens of millions of dollars per year. Around 11% of the 15 cost per passenger was attributed to maintenance in FY 2016. 16 12. Investors who purchased Allegiant stock as high as $238.13 during the 17 Class Period have suffered millions in damages. By contrast, Allegiant insiders, like 18 Gallagher, were able to offload their Allegiant shares at artificially inflated prices 19 immediately before a 60 Minutes broadcast revealed to investors what Defendants 20 knew was a troubled airline with serious, undisclosed maintenance issues.