Brian Rines, Et Al. V. Heelys, Inc., Et Al. 07-CV-01468-Plaintiffs
Total Page:16
File Type:pdf, Size:1020Kb
IN THE UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF TEXAS DALLS DIVISION BRIAN RINES, ON BEHALF OF § HIMSELF AND ALL OTHERS § CIVIL ACTION NO. SIMILARLY SITUATED, § 3:07=CV- 1468-K Plaintiff, § V. § HEELYS, INC. et al., § Defendants. § PLAINTIFFS' CONSOLIDATED AMENDED CLASS ACTION COMPLAINT Lead Plaintiffs, David Gamel, Alaska Electrical Pension Fund, Jeff Aivazian, Raymond L. Ortman and Wayne Williamson, individually and on behalf of all other persons similarly situated, by their undersigned attorneys, for their complaint against defendants, allege the following based upon personal knowledge as to themselves and their own acts, and information and belief as to all other matters, based upon, inter alia, the investigation conducted by and through their attorneys, which included, among other things, a review of defendants' public documents, conference calls and announcements made by defendants, United States Securities and Exchange Commission ("SEC") filings, wire and press releases published by and regarding Heelys, Inc. ("Heelys" or the "Company") securities analysts' reports and advisories about the Company, and information readily obtainable on the Internet. Plaintiffs believe that substantial evidentiary support will exist for the allegations set forth herein after a reasonable opportunity for discovery. NATURE OF THE ACTION 1. This Consolidated Amended Class Action Complaint (the "Complaint") alleges violations of Sections 11, 12(a)(2) and 15 of the Securities Act of 1933 (the "Securities Act") in connection with Heelys' and the "selling shareholders"' (defined below) issuance of approximately 7.4 million shares of the Company's common stock to investors on or about December 8, 2006. This Complaint does not allege or intend to allege any claims or assertions of fraud and is rooted exclusively in theories of innocent and/or negligent conduct to which the strict liability provisions of the foregoing statutes apply. 2. On or about December 8, 2006, Heelys and the selling shareholders collectively issued 7.4 million shares of Heelys common stock to the public at $21 per share in an Initial Public Offering (the "IPO"), capturing $155.4 million in proceeds. 3. The IPO was registered with the SEC, and was made pursuant to a Registration Statement on Form S-1 filed on or about September 1, 2006, as later amended on October 4, 2006, October 27, 2006, November 24, 2006, and December 6, 2006 as Amendment Nos. 1-4 to Form S-1; and a prospectus filed with the SEC on December 11, 2006 on Form 424B. The foregoing filings are collectively referred to as the "December Prospectus" or the "Prospectus." 4. The Company was incorporated in May 2000 in Nevada, and thereafter was operated through a wholly-owned limited partnership organized in the State of Texas. On August 25, 2006, Heelys was reincorporated as a Delaware corporation by means of a merger with Heeling, Inc., a Nevada corporation. Heelys became a public company through the IPO. 5. Heelys claims to design, market and distribute innovative, action sports inspired products under the HEELYS brand. Heelys' primary product is wheeled footwear, which came in a number of styles and, according to Heelys, is a patented, dual purpose shoe that incorporates a hidden, removable wheel in the heel. At all relevant times hereto, the Company represented 2 that its patented wheeled footwear allowed the user to seamlessly transition from walking or running to skating by shifting weight to the heel. According to the Company, users can transform Heelys-wheeled footwear into street footwear by removing the wheel. Sold under the marketing slogan "Freedom is a wheel in your sole," the shoe is targeted to children between six and fourteen years of age. 6. Commenting in the December Prospectus on the anticipated long-lasting consumer interest in the Company's wheeled footwear, Heelys compared the demand for its product to the demand for, and longstanding popularity of, skateboarding, inline skating, roller skating and scooter riding in the United States. In addition, Heelys stated in the Prospectus that it had a competitive advantage over other wheeled sports as a result of its patent protections -- "We believe that our HEELYS-wheeled footwear, which has broad patent protection relative to other wheeled sports products, appeals to many of these same consumers. While the market for HEELYS-wheeled footwear has grown significantly since our first product was introduced in 2000, we believe this market has substantial growth potential." 7. In the years leading up to the IPO, Heelys had experienced some historical declines in the demand for its products in Asian markets due to the loss of sales to counterfeit and knockoff products. In fact, Heelys experienced slowing sales in Asia between 2003 and 2004 (a decrease from $12.1 million in 2003 to $5.4 million in 2004) due to the emergence of counterfeit and knockoff products from Japan and South Korea. As a result, before the IPO Heelys shifted its marketing focus to other markets such as the United Kingdom and the United States, where, according to the Company, the enforcement of its intellectual and patent rights would be more effective. 3 8. Despite the purported additional support to Heelys' patent protection in the U.K. and the U.S., prior to and at the time of the IPO and unbeknownst to investors, wheeled shoe knockoffs and counterfeits were materially eroding Heelys' U.K. and U.S. sales. For example, knockoffs were sold at mall kiosks and superstores around the U.S., directly competing with Heelys' retail customers. 9. Furthermore, tens of thousands of counterfeit wheeled shoes were sold at retailers throughout the U.K. prior to and at the time of the IPO, and a flood of wheeled shoe knockoffs entered the U.K. market prior to and during the 2006 holiday season. 10. Also at the time of the IPO, Heelys' retailers were experiencing a decrease in organic demand as a result of escalating safety concerns and injuries related to the use of Heelys' wheeled footwear that were not fully disclosed in the Prospectus. Indeed, at the time of the IPO, bans from schools, malls and other public places were escalating, as Heelys' shoes were considered materially less safe than the Prospectus represented. 11. Additionally, prior to and at the time of the IPO, Heelys' original sales markets in the U.S. had become saturated, as the momentum of the high-priced Heelys' shoe "fad" was dissipating. For example, demand for Heelys in older markets such as the West Coast had dropped, and sales from other domestic, and traditionally weaker markets were insufficient to make up for the decline. 12. Notwithstanding that the foregoing adverse facts and trends were materially affecting Heelys' business and sales at the time of the IPO, defendants innocently and/or negligently omitted and misrepresented such in the Prospectus. Indeed, while the Prospectus mentioned the possibility of certain future risks that may affect the Company going forward and indicated limited existing concerns, it did not disclose that such risks had already materialized, 4 and the full extent of the existing concerns, thereby causing investors to purchase shares of a company descending from its market apex rather than a company on the rise as represented in the Prospectus. 13. Additionally, the Prospectus was materially misleading in.that it represented that were such adverse events affecting the Company at the time of the IPO, defendants would have discovered them. For example, the Prospectus assured investors that defendants were effectively monitoring Heelys' end-user demand and sales. That assurance was materially misleading in violation of the Securities Act as defendants had limited visibility as to the sell through, or new consumer demand for Heelys' products. In fact, Heelys had no ability to measure the total units or dollars sold because it only had access to a general report containing aggregate views of U.S. sporting goods industry sales --- without a specific reference to sales of Heelys' products; and whatever information the Company was able to garner from contact with a limited number of Heelys' retailers, but not the total market. 14. As a result of the innocent and/or negligent misrepresentations and omissions contained in the December Prospectus, see infra., the IPO of common stock was completed at inflated prices such that (1) the Company collected approximately $65.6 million in proceeds, and (2) the selling shareholders collected approximately $89.5 million in proceeds. 15. The inflation built into the IPO stock price evaporated shortly after the IPO, damaging investors. For example and as detailed below, in early June 2007, it was reported that the severity and number of children injured while using wheeled shoes was more extensive than previously represented by Heelys in the Prospectus. The announcement caused Heelys' stock price to fall 14.7% from $33.33 to $28.41 between June 4 and June 11, 2007. 5 16. Additionally, on August 7, 2007, the Company announced, inter alia, that it was significantly lowering its full-year revenue and earnings outlook, citing "challenges at retail related primarily to an over-inventoried position of product at many of the Company's domestic accounts." Specifically, due to the undisclosed adverse conditions existing at the time of the IPO, the decline of the Heelys' "fad," safety and injury concerns, and the loss of sales to counterfeiters - the market learned that Heelys' retailers' possessed more than a year's backlog in Heelys' inventory and the unsold inventory at Heelys' own distribution center had grown 175%. 17. The Company's Chief Financial Officer also reported that retailers were reluctant to place significant fourth-quarter orders, further supporting the need to reduce Heelys' sales forecast. The August 2007 announcements caused Heelys' stock price to fall 48 percent, from $21.99 to $11.42.