Case 2:11-cv-00133-MJP Document 76 Filed 06/17/11 Page 1 of 72 The Honorable Marsha J. Pechman 1 2 3 4 5 6 7 UNITED STATES DISTRICT COURT 8 WESTERN DISTRICT OF WASHINGTON 9 AT SEATTLE 10 ) IN RE COINSTAR INC. ) Case No. C11-133 MJP 11 SECURITIES LITIGATION ) ) LEAD CASE NO. C11-133 MJP 12 ) 13 ) ) CONSOLIDATED AMENDED 14 ) COMPLAINT ) 15 ) ) JURY TRIAL DEMANDED 16 ) 17 18 19 20 21 22 23 24 25 26 27 CONSOLIDATED AMENDED COMPLAINT LABATON SUCHAROW LLP 28 NO. C11-133 MJP 140 BROADWAY NEW YORK, NEW YORK 10005 (212) 907-0700 Case 2:11-cv-00133-MJP Document 76 Filed 06/17/11 Page 2 of 72 1 TABLE OF CONTENTS Page 2 3 NATURE OF THE ACTION 1 JURISDICTION AND VENUE 9 4 PARTIES 9 5 DEFENDANTS SHOULD BE TREATED AS A GROUP FOR PLEADING PURPOSES 11 CLASS ACTION ALLEGATIONS 12 6 CONTROL PERSON ALLEGATIONS 14 7 SUBSTANTIVE ALLEGATIONS 16 8 BACKGROUND 16 Coinstar And Its Redbox Business 16 9 Redbox’s Inability To Obtain New Release DVDs 18 10 The 28-Day Delay Agreements 20 First Quarter Financial Results Following Entry Of The 28-Day Delay Agreements 21 11 The Second Quarter 2010 “Anomaly” 22 The Third Quarter Mixed Results 24 12 CWs Confirm that Defendants Knew the Company Faced Revenue Shortfall in the Fourth Quarter 28 13 Defendants Knew about DVD Revenue Shortfall 28 14 Defendants Knew of Revenue Problems Stemming from the Rent and Return Anywhere Policy 31 15 Defendants Knew of Revenue Problems Resulting from Slow Blu-Ray Disc Rentals: 32 Weak Titles In 4Q10 And The 28-Day Delay 33 16 DEFENDANTS’ MATERIALLY FALSE AND MISLEADING STATEMENTS MADE DURING THE CLASS PERIOD 35 17 October 28, 2010 3Q10 Press Release 35 18 October 28, 2010 3Q10 Earning Conference Call 36 October 28, 2010 3Q10 Form 10-Q 38 19 November 16, 2010 Investor Summit 41 November 17, 2010 Investor Conferences 42 20 THE TRUTH IS REVEALED 46 21 January 13, 2011 Disclosure 46 February 3, 2011 Disclosure 49 22 POST-CLASS PERIOD EVENTS 51 23 MISREPRESENTATIONS CONCERNED COINSTAR’S “CORE OPERATIONS” 52 54 24 LOSS CAUSATION AND ECONOMIC LOSS ADDITIONAL SCIENTER ALLEGATIONS 55 25 APPLICABILITY OF PRESUMPTION OF RELIANCE UNDER THE AFFILIATED UTE 26 DOCTRINE, AND/OR, IN THE ALTERNATIVE, THE FRAUD ON THE MARKET DOCTRINE 58 27 NO STATUTORY SAFE HARBOR 60 28 PRAYER FOR RELIEF 68 CONSOLIDATED AMENDED COMPLAINT i LABATON SUCHAROW LLP NO. C11-133 MJP 140 BROADWAY NEW YORK, NEW YORK 10005 (212) 907-0700 Case 2:11-cv-00133-MJP Document 76 Filed 06/17/11 Page 3 of 72 1 JURY DEMAND 68 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 CONSOLIDATED AMENDED COMPLAINT ii LABATON SUCHAROW LLP NO. C11-133 MJP 140 BROADWAY NEW YORK, NEW YORK 10005 (212) 907-0700 Case 2:11-cv-00133-MJP Document 76 Filed 06/17/11 Page 4 of 72 1. Lead Plaintiff Employees’ Retirement System of the State of Rhode Island 1 (“Rhode Island” or “Plaintiff”), by its undersigned attorneys, hereby brings this Consolidated 2 Amended Complaint (“Complaint”) against Coinstar, Inc. (“Coinstar” or the “Company”), Paul 3 Davis, Gregg A. Kaplan, J. Scott Di Valerio, Donald R. Rench, and Galen Smith 4 (“Defendants”). The allegations herein are based on Plaintiff’s personal knowledge as to its 5 own acts and on information and belief as to all other matters, such information and belief 6 having been informed by the investigation conducted by and under the supervision of its 7 counsel, which included interviews of former employees of Coinstar and other persons with 8 knowledge of the matters alleged herein (some of whom have provided information in 9 confidence; these confidential witnesses (“CWs”) will be identified herein by number (CW1, 10 CW2, etc.) and will be described in the masculine in all cases in order to protect their 11 identities); review and analysis of publicly available information, including United States 12 Securities and Exchange Commission (“SEC”) filings by Coinstar, regulatory filings and 13 reports, securities analysts’ reports and research data, investor conference transcripts, Company 14 advisories, press releases and other public statements issued by the Company, Company 15 pleadings in other litigation, and media reports about the Company. Plaintiff believes that 16 substantial additional evidentiary support will exist for the allegations set forth herein after a 17 reasonable opportunity for discovery. On behalf of itself and the class it seeks to represent, 18 Plaintiff alleges as follows: 19 NATURE OF THE ACTION 20 2. Plaintiff brings this action on behalf of itself and as a class action on behalf of 21 all persons and entities who purchased or otherwise acquired common stock of Coinstar 22 between October 29, 2010 and February 3, 2011 inclusive (the “Class Period”). 23 3. This class action is brought pursuant to Sections 10(b) and 20(a) of the 24 Securities Exchange Act of 1934 (the “Exchange Act”), 15 U.S.C. §§ 78j(b) and 78t(a); and 25 SEC Rule 10b-5, 17 C.F.R. § 240.10b-5. 26 27 CONSOLIDATED AMENDED COMPLAINT LABATON SUCHAROW LLP 28 NO. C11-133 MJP 140 BROADWAY NEW YORK, NEW YORK 10005 (212) 907-0700 Case 2:11-cv-00133-MJP Document 76 Filed 06/17/11 Page 5 of 72 1 4. Coinstar is a provider of automated retail solutions for consumers. The 2 Company’s core automated retail businesses include: (i) Redbox self-service digital video disc 3 (“DVD”) kiosks that dispense DVDs that may be rented or purchased by consumers, and (ii) 4 Coinstar branded self-service coin-counting machines that enable consumers to convert their 5 coins to bills. 6 5. As of early 2011, Redbox operated approximately 30,200 self-service kiosks in 7 26,100 locations, primarily leading mass retailers, drug stores, restaurants and convenience 8 stores, including Walmart, Walgreens, and McDonalds. The kiosks, placed either inside or 9 outside a retail establishment, provide the functionality of a traditional video rental store while 10 occupying an area of less than twelve square feet. To use a kiosk, a consumer selects a title, 11 swipes a valid credit card, and receives a DVD. By the Class Period start, approximately 80% 12 of Coinstar’s revenue was generated through the rental or sale of DVDs at Redbox kiosks. See 13 Coinstar’s 2010 Form 10K dated February 10, 2011, p. 25 (showing 2010 DVD revenue of 14 $1.16 billion and coin revenue of $276.3 million). 15 6. Redbox’s business model is primarily focused on renting standard definition, 16 new release DVDs to consumers for $1 per night. Unlike a traditional video rental store, which 17 stocks a much greater variety and volume of DVDs, a typical Redbox kiosk only has room for 18 630 DVDs, so Redbox cannot provide, and consumers do not expect, a wide variety of titles 19 when they rent a DVD from a Redbox kiosk. Because DVDs rent at a substantially higher rate 20 during the first few weeks following their release, the stocking of kiosks with a sufficient 21 number of new releases to satisfy customer demand is of paramount importance to the 22 Company’s success. 23 7. Historically, Redbox enjoyed a competitive advantage over other new release 24 movie distribution rental channels because movie studios made movies available on physical 25 formats like DVDs for a 30-45 day release window before releasing its movies to other 26 distribution rental channels, such as pay-per-view (PPV), video-on-demand (VOD), or 27 television. Redbox also enjoyed a competitive advantage over stores selling DVDs, because 28 CONSOLIDATED AMENDED COMPLAINT 2 LABATON SUCHAROW LLP NO. C11-133 MJP 140 BROADWAY NEW YORK, NEW YORK 10005 (212) 907-0700 Case 2:11-cv-00133-MJP Document 76 Filed 06/17/11 Page 6 of 72 1 movie studios made new release DVDs available to retailers selling movies and to Redbox 2 renting movies at the same time. Consumers wishing to view a newly released DVD 3 historically had the option of buying a movie for full price, or renting the same movie on the 4 same day for $1.00. 5 8. However, as Redbox grew and became more prominent in the new release, 6 movie distribution marketplace, it became increasingly difficult for Redbox to secure the new 7 release DVDs its customers demanded. Many studios believed that Redbox’s $1.00 per night 8 rentals were adversely impacting upon the sale of DVDs to consumers, who given the option, 9 often preferred to rent most genres of new release DVDs at the low $1.00 per night rate over 10 the significantly higher purchase price. 11 9. Prior to the Class Period, many of the historic advantages Redbox enjoyed over 12 its competitors had been eliminated. Studios began making their movies available on demand 13 for on-line streaming on the same day, or even before they made DVDs available for purchase 14 or rental. Additionally, some major studios began staggering the release of DVDs so that a 15 movie might be less available or unavailable for rental until as much as 28 days after the DVD 16 was made available for purchase at a retail outlet. 17 10. As the studios began to make new release DVDs more difficult for Redbox to 18 obtain, Redbox was forced to engage in the costly practice of sending its workforce to retail 19 outlets to buy, at full price, the new release DVDs its customers demanded, often in 20 unsatisfactory quantities.