Case 6:13-cv-00736-KNM Document 72 Filed 07/18/14 Page 1 of 40 PageID #: 1488
UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF TEXAS
TYLER DIVISION
ALAN B. MARCUS, Individually and on Civil Action No. 6:13-cv-00736 Behalf of All Others Similarly Situated, (Consolidated)
Plaintiff, CLASS ACTION
vs.
J.C. PENNEY COMPANY, INC., et al.,
Defendants.
CONSOLIDATED COMPLAINT FOR VIOLATION OF THE FEDERAL SECURITIES LAWS
956945_1 956945_1 Case 6:13-cv-00736-KNM Document 72 Filed 07/18/14 Page 2 of 40 PageID #: 1489
Lead Plaintiff National Shopmen Pension Fund (“Lead Plaintiff”) alleges the following based
upon personal knowledge as to itself and its own acts, and upon an investigation conducted by and
through Lead Plaintiff’s attorneys, which included, among other things, a review of Securities and
Exchange Commission (“SEC”) filings by J.C. Penney Company, Inc. (“JCPenney” or the
“Company”), Company releases, conference calls, public statements issued by defendants, media
reports, analyst reports and consultation with persons familiar with JCPenney’s business. Lead
Plaintiff believes substantial additional evidentiary support will likely exist for the allegations set
forth herein after a reasonable opportunity for discovery.
INTRODUCTION
1. This is a securities fraud class action on behalf of all purchasers of JCPenney
common stock between August 20, 2013 and September 26, 2013, inclusive (the “Class Period”)
against JCPenney, its Chief Executive Officer (“CEO”) and its former Chief Financial Officer
(“CFO”) for making materially false and misleading statements in violation of §10(b) and §20(a) of
the Securities Exchange Act of 1934 (the “1934 Act”) and SEC Rule 10b-5 promulgated thereunder.
2. JCPenney is a publicly traded holding company whose principal operating subsidiary
is the well-known department store J.C. Penney Corporation Inc. JCPenney’s business consists of
selling merchandise and services, including apparel and footwear, accessories, jewelry, home
furnishings and beauty products, to consumers through its brick-and-mortar stores and jcp.com .
During the Class Period, the Company operated over 1,000 stores nationwide.
SUMMARY OF THE ACTION
3. During the Class Period, JCPenney and its senior insiders falsely assured investors
that, heading into the crucial back-to-school and holiday seasons, the Company’s inventory was
- 1 - 956945_1 Case 6:13-cv-00736-KNM Document 72 Filed 07/18/14 Page 3 of 40 PageID #: 1490
adequate and its liquidity sufficient to sustain the Company through the end of fiscal year 2013.1 For
example, on August 20, 2013, JCPenney announced that, “[g]iven the Company’s current cash
position, along with the undrawn portion of its credit facility, the Company expects to end the year
with in excess of $1.5 billion in overall liquidity.” Later that same day, during a conference call with
investors, defendant Myron E. Ullman, III (“Ullman”), the Company’s CEO, reiterated that “we
expect to have $1.5 billion of available liquidity at year-end.” The Company’s CFO, Kenneth H.
Hannah (“Hannah”), likewise explained that same day that, “[t]he total liquidity available to the
Company is expected to be in excess of $1.5 billion at year-end given the improvements we are
experiencing in the business,” and that “we are not assuming that we need any additional financing.”
The market responded favorably to defendants’ August 20, 2013 statements, sending JCPenney’s
stock price up 6% over the prior day’s closing price.
4. On September 10, 2013, defendants again reassured investors about JCPenney’s
liquidity, when defendants Ullman and Hannah caused the Company to file its Form 10-Q with the
SEC, which stated that “[f]or the remainder of 2013, we believe that our existing cash and cash
equivalents will be adequate to fund our capital expenditures and working capital needs.”
5. As a result of defendants’ Class Period statements, JCPenney’s stock traded at
artificially inflated prices, reaching a Class Period high of $14.65 per share on September 9, 2013.
As the market would learn just two weeks later, however, defendants’ statements were materially
false and misleading when made. The defendants knew, but concealed from the market, that
JCPenney was facing a liquidity crisis and required a cash infusion of almost $1 billion to enable it
to continue to operate through the crucial back-to-school and holiday seasons. Defendants concealed
the true state of JCPenney’s affairs in order to maintain the false impression that the Company’s
1 JCPenney’s fiscal quarters are abbreviated by quarter and year. Thus, “2Q13,” for example, represents the second quarter of fiscal year 2013. JCPenney’s 2013 fiscal year began on February 3, 2013 and ended on February 1, 2014.
- 2 - 956945_1 Case 6:13-cv-00736-KNM Document 72 Filed 07/18/14 Page 4 of 40 PageID #: 1491
turnaround was proceeding apace and to avoid exacerbating existing concerns by suppliers and their
factors about JCPenney’s liquidity, as the suppliers’ and factors’ confidence was fundamental to the
Company’s ability to continue to operate throughout fiscal 2013 .2
6. The market began to learn the truth about defendants’ deception in late September
2013. After the market closed on September 24, 2013, a Goldman Sachs analyst reported that
JCPenney could face liquidity problems in 3Q13. When the market opened on September 25, 2013,
JCPenney stock responded by declining 15% from $11.62 per share to an intra-day low of $9.93 per
share.
7. Knowing that JCPenney was in the midst of finalizing a massive equity share offering
that would be announced the next day, defendants took immediate steps to reinflate JCPenney’s
flagging stock price. For example, during a Sterne, Agee & Leach Inc. (“Sterne Agee”) conference
on September 25, 2013, defendant Ullman unequivocally told attendees that JCPenney would end
the year with sufficient liquidity and that he “[did] not see conditions for the rest of the year where
[JCPenney] would need to raise liquidity.” Thereafter, JCPenney’s stock price began to recover
from its midday lows, closing at $10.12 per share.
8. The next morning, on September 26, 2013, defendants continued their effort to inflate
JCPenney’s stock price by announcing they were “pleased with [the Company’s] progress thus far in
[its] turnaround efforts” and the Company was “starting to see greater predictability in its
performance across many areas.” Defendants’ efforts paid off, as JCPenney’s stock price rose again,
closing at $10.42 per share, up 3% from the prior day’s close.
2 Factors provide debt financing to suppliers. By selling accounts receivable to a factoring company at a discount, a supplier generates the cash necessary to operate its business. Factoring companies increase their required discount rate – or end their financing arrangement altogether – when they perceive an increased risk that the retailer owing on underlying outstanding accounts payable may not be able to pay timely, or at all, for a supplier’s merchandise.
- 3 - 956945_1 Case 6:13-cv-00736-KNM Document 72 Filed 07/18/14 Page 5 of 40 PageID #: 1492
9. Just a few hours later, after the market closed on September 26, 2013, JCPenney
stunned investors by announcing that, contrary to defendants’ repeated representations as recently as
that very morning, JCPenney would in fact be raising capital via an $800 million offering of its
common stock. As the truth about JCPenney’s operations and liquidity reached the market, the
artificial inflation dissipated and JCPenney’s stock declined 13% on trading volume almost 1,000%
greater than the average daily volume during the Class Period, causing significant harm to Lead
Plaintiff and the putative class.
JCPenney ust 20. 2013 - Seøtember 26. 2013 $15
$14 -
$13 September 26 2013
\ August 20, 2013 September 24, 2013 Offering $12 JCPenney 2Q13 Goldman Report JCP C., Results August 26, 2013 needs larger liquidity Defendants enter into buffer 0 30-Day Lockup September 25, 2013: .c $11 - Stock drops 15k in ;::: September 27 2013: Stock drops ...... 13% $10 -