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.
18. On the day plaintiffs commenced this case, September 14, 2007, Heelys closed at
$7.95 -- 62% lower than its IPO price of $21 per share and 80% lower than its post-IPO of
$38.96 per share on February 5, 2007.
19. Plaintiffs assert negligence and strict liability based claims under the Securities
Act against Heelys, certain officers, directors and a controlling shareholder of Heelys, including the selling shareholders, and the four lead underwriters for the IPO.
JURISDICTION AND VENUE
20. The claims alleged herein arise under the strict liability provisions §§ 11, 12(a)(2) and 15 of the Securities Act, 15 U.S.C. §§ 77k, 771(a)(2) and 77o.
21. This Court has jurisdiction over the subject matter of this action pursuant to § 22 of the Securities Act, 15 U.S.C. § 77v.
6 22. Venue is proper in this District pursuant to § 22 of the Securities Act, 15 U.S.C. §
77v. Many of the acts and transactions giving rise to the violations of law complained of herein,
including the preparation and dissemination to the investing public of materially false and
misleading statements, including the materially untrue and misleading December Prospectus,
occurred in this District. In addition, Heelys maintains its principal executive offices in this
District at 3200 Belmeade Drive, Suite 100, Carrollton, Texas 75006, where the day-to-day
operations of the Company are directed and managed.
23. Defendants directly or indirectly employed the means and instrumentalities of interstate commerce in connection with the acts alleged in this Complaint, including, without limitation, the mails, interstate telephone conversations and the facilities of the national securities markets.
THE PARTIES
24. This action is brought on behalf of all purchasers of Heelys common stock or notes pursuant to, or traceable to, the December Prospectus by Lead Plaintiffs David Gamel, Jeff
Aivazian, Raymond L. Ortman, Wayne Williamson, and Alaska Electrical Pension Fund ("Lead
Plaintiffs").
25. Lead Plaintiffs purchased Heelys common stock pursuant to and traceable to the
December Prospectus as set forth in various filings with the Court and incorporated herein by reference, and suffered damages as a result. The Court appointed Lead Plaintiffs on December
21, 2007.
26. Defendant Heelys is a Delaware corporation with its principal executive offices located in Carrollton, Texas, 75006. The Company's stock is traded on the NASDAQ stock exchange under the symbol HLYS.
7 27. As described more fully herein, defendant Heelys is a Delaware corporation with
its principal executive offices located at 3200 Belmeade Drive, Suite 100, Carrollton, Texas,
75006.
28. Defendant Michael G. Staffaroni ("Staffaroni") was, at all relevant times, Heelys'
President and Chief Executive Officer ("CEO") since January 2001; and President of the
Company since May 2006; and member of the Company's Board of Directors since August
2006. Staffaroni sold 189,287 shares of Heelys common stock pursuant to the IPO for proceeds
of approximately $39.7 million. Staffaroni signed the false and misleading December
Prospectus.
29. Defendant Michael W. Hessong ("Hessong") was, at all relevant times, Heelys'
Chief Financial Officer ("CFO") since December 2000, and the Company's Vice President
Finance, Treasurer and Secretary since May 2006. Hessong sold 94,644 shares of Heelys
common stock pursuant to the IPO for proceeds of approximately $19.8 million. Hessong signed the false and misleading December Prospectus.
30. Defendant Patrick F. Hamner ("Hamner") was, at all relevant times, the Chairman
of Heelys' Board of Directors. Defendant Hamner was also a senior vice president of finance at
Capital Southwest Corporation until May 2006. Hamner sold 362,150 shares of Heelys common
stock pursuant to the IPO for proceeds of approximately $7.6 million. Hamner signed the false
and misleading December Prospectus.
31. Defendant Roger R. Adams ("Adams") invented Heelys' wheeled shoes and was,
at all relevant times, a director of the Company. From the Company's inception until May 2006,
Adams served as Heelys' President and Secretary, at which time he became Director of Research
and Development. Adams sold 928,637 shares of Heelys common stock pursuant to the IPO for
8 proceeds of approximately $26 million. Adams signed the false and misleading December
Prospectus.
32. Defendant Richard E. Middlekauff ("Middlekauff') was, at all relevant times, a
director of the Company. Middlekauff sold 494,725 shares of Heelys common stock pursuant to
the IPO for proceeds of approximately $12 million. Middlekauff signed the false and misleading
December Prospectus.
33. Defendant Samuel B. Ligon ("Ligon") was, at all relevant times, a director of the
Company. Ligon was also a director of Capital Southwest at the time of the IPO. Ligon sold
66,321 shares of Heelys common stock pursuant to the IPO for proceeds of approximately $1.66
million. Ligon signed the false and misleading December Prospectus.
34. Defendant William R. Thomas ("Thomas") was, at all relevant times, a director of
the Company. Thomas also served as president, chairman and director of Capital Southwest at
the time of the IPO. On behalf of Capital Southwest, Thomas sold 1,591,790 shares of Heelys
common stock pursuant to the IPO for proceeds in excess of $33 million. Thomas signed the
false and misleading December Prospectus.
35. Heelys, Staffaroni, Hessong, Hamner, Adams, Middlekauff, Ligon, Thomas, and
Capital Southwest (defined below) shall be referred to herein collectively as the "selling
shareholders."
36. Defendant James T. Kindley ("Kindley") was, at all relevant times, a director of the Company. Kindley signed the false and misleading December Prospectus.
37. Each of the defendants named in ¶¶ 28-36 above (collectively, the "Individual
Defendants"), because of their management positions, membership on Heelys' Board of
Directors and/or their extensive ownership of Heelys common stock, had the power and authority
9 to control the contents of the December Prospectus and to cause Heelys to engage in the conduct
complained of herein.
38. Defendant Capital Southwest Corporation, and its wholly owned subsidiary
Capital Southwest Venture Corporation (collectively referred to as "Capital Southwest") is a
private investment firm, which exercised control over Heelys prior to, at the time of and after the
IPO as evidenced by, inter alia, the following:
(a) Prior to the Company's IPO on December 8, 2006, Capital Southwest owned 20,909,100 shares, or 45.6% of Heelys common stock;
(b) Capital Southwest had a contractual right to designate up to two nominees to management's directors at the time of the IPO;
(c) In May 2000, Heelys borrowed $1.8 million from Capital Southwest, which was repaid in August 2003, and sold to Capital Southwest 1,745,455 shares of Series A
Preferred Stock for a purchase price of $480,000 and 436,364 shares of Series B Preferred Stock for a purchase price of $120,000. On May 2005, Heelys redeemed all of its Series A Preferred
Stock for a purchase price of $480,000. In June 2006, in anticipation of the IPO, each share of
Series B Preferred Stock held by Capital Southwest was converted into one share of Heelys common stock, prior to giving effect to a 25-for-1 stock split effected in October 2006; and
(d) Capital Southwest sold 1,591,790 shares of Heelys common stock pursuant to the IPO for proceeds in excess of $33 million.
39. The Prospectus confirms that Capital Southwest, because of, inter alia, its extensive ownership of Heelys common stock and its representation on Heelys' board of directors, had the power and authority to control Heelys and the contents of the December
Prospectus, and to cause Heelys to engage in the conduct complained of herein:
10 Capital Southwest Venture Corporation, or CSVC, which will own approximately 34.5% of our common stock upon completion of this offering, has the contractual right to designate (i) two nominees for director to be included in management's slate of director nominees, so long as it owns at lest 15% of the outstanding shares of our common stock, and (ii) one such nominee so long as it owns at least 10%, but less than 15%, of the outstanding shares of our common stock. As a result, through its designees, CVSC may significantly influence our corporate governance.
40. Defendants Bear, Stearns & Co. Inc. ("Bear Stearns"), Wachovia Capital Markets,
LLC ("Wachovia"), J.P. Morgan Securities Inc. ("JP Morgan"), and CIBC World Markets Corp.
("CIBC") (collectively the "Underwriter Defendants") were underwriters of the Company's IPO, were involved in the preparation of the Company's IPO materials, and as such are liable parties under the Securities Act. The Underwriter Defendants received more than $9 million in fees related to the TPO.
41. In return for their share of the IPO proceeds, the Underwriter Defendants arranged a multi-city road show prior to the IPO. As part of the road show, the Underwriter Defendants together with Individual Defendants Staffaroni, Hessong, Adams, Middlekauff, Ligon and
Thomas met with potential investors and presented highly favorable information about the
Company in an effort to sell and solicit the sale of Heelys' stock in the IPO.
42. Each of the defendants owed to the purchasers of Heelys stock in the IPO, including plaintiffs and the other Class members, the duty to make a reasonable and diligent investigation of the statements contained in the December Prospectus at the time it became effective. This duty included performing an appropriate investigation to ensure that the statements contained therein were true, and that there were no omissions of material fact required to be stated in order to make the statements contained in the December Prospectus not misleading. As herein alleged, each of the defendants innocently and/or negligently violated
II these specific duties and obligations. As a result of these violations, the offering prices of Heelys common stock in the IPO were artificially inflated, causing injury to plaintiffs and the Class.
CLASS ACTION ALLEGATIONS
43. Plaintiffs bring this action as a class action pursuant to Federal Rules of Civil
Procedure 23(a) and 23(b)(3) on behalf of the following class (the "Class"): all persons and entities who purchased shares of Heelys common stock pursuant to, or traceable to, the
Company's IPO and who were damaged thereby. Excluded from the Class are: Defendants herein; members of the families of each of the Individual Defendants; any parent, subsidiary, affiliate, partner, officer, executive or director of any defendant; any entity in which any such excluded person has a controlling interest; and the legal representatives, heirs, successors and assigns of any such excluded person or entity.
44. The members of the Class are so numerous that joinder of all members is impracticable. Approximately 7,388,750 million shares of Heelys common stock were issued pursuant to the IPO.
45. Common questions of law and fact exist as to all members of the Class and predominate over any questions solely affecting individual members of the Class. Among the questions of law and fact common to the Class are whether:
(a) the provisions of the Securities Act were violated by defendants' innocent and/or negligent conduct as alleged herein;
(b) the December Prospectus filed with the SEC in connection with the IPO contained misstatements of material fact or omitted to state material facts necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading;
12 (c) each of the defendants had a duty to make a reasonable and diligent investigation of the statements contained in the December Prospectus filed with the SEC in connection with the IPO at the time it became effective, but failed to do so;
(d) the price of Heelys common stock was artificially inflated due to the non- disclosures and misstatements complained of herein; and
(e) plaintiffs and the other members of the Class have sustained damages and, if so, the appropriate measure thereof.
46. Plaintiffs will fairly and adequately represent and protect the interests of the members of the Class. Plaintiffs have retained competent counsel experienced in class action and securities litigation and intend to prosecute this action vigorously. Plaintiffs are members of the Class and do not have interests antagonistic to, or in conflict with, the other members of the
Class.
47. Plaintiffs' claims are typical of the claims of the members of the Class. Plaintiffs and all members of the Class have sustained damages arising out of the conduct alleged herein that violate the Securities Act.
48. A class action is superior to other available methods for the fair and efficient adjudication of this controversy. Since the damages suffered by individual class members may be relatively small, the expense and burden of individual litigation make it virtually impossible for the class members individually to seek redress for the conduct alleged herein that violated the
Securities Act. Plaintiffs know of no difficulty that will be encountered in the management of this litigation that would preclude its maintenance as a class action.
13 FACTUAL ALLEGATIONS
A. The Nature of Heelys' Business
49. Heelys designs, markets and distributes action sports-inspired products under the
HEELYS brand. The Company' s principle product line consists of numerous styles and types of
wheeled footwear. Heelys also designs, markets and distributes branded accessories such as
replacement wheels, helmets and other protective gear.
50. Heelys does not own or operate any manufacturing facilities, and purchases all of
its products as finished goods from independent manufacturers. Indeed, Heelys purchased all of its finished goods from one manufacturing facility in South Korea up until May 2006, at which time Heelys began to purchase finished goods from five additional manufacturing facilities.
Furthermore, the Company does not have any long-term contracts with manufacturers.
Typically, Heelys' products are inspected , bar-coded and packaged by the manufacturers and transported by container ship to destinations determined by Heelys.
51. For products sold in the U.S., Heelys uses an independent freight forwarder and customs broker to ship the products via rail to (1) retail customers, or (2) the Company's distribution center in Carrollton, Texas. In 2005, approximately 67.4% of the Company's products sold in the United States were shipped directly to retail customers, with 32.6% shipped to the Company's Carrollton distribution center for packaging and shipment to retailers. At all times relevant hereto, Heelys claimed to have in excess of 800 retail customers with approximately 5000 selling storefronts or "doors" in the United States.
52. In 2004, two years before the IPO, Heelys experienced a 4.1% drop in net sales, which were $22.2 million in 2003. According to the Prospectus, this decrease was "primarily the result of lower unit sales of our HEELYS-wheeled footwear, which decreased by 49,000 pairs, or
14 6.6%, to 697,000 pairs in 2004 from 746,000 in 2003." The Company attributed the drop to
decreased sales in South Korea, which the Company believed was primarily due to competition
from counterfeit and knockoff products, partially offset by increased sales in other countries.
53. In 2005, Heelys commenced a marketing push that ran up to the December 2006
IPO, particularly in the United States. Indeed, Heelys' marketing and sales efforts had
previously been limited to regions the Company viewed as more likely to accept Heelys (e.g., the
West Coast), and had distributed its products through only one large national specialty retailer.
Employing what CEO Staffaroni described as "guerilla" marketing tactics, Heelys attempted to
generate consumer excitement about Heelys. These guerilla tactics included, but were not
limited to, creating "Team Heelys" -- a network of skaters from around the country who were paid to participate in Heelys' footwear demonstrations in skate-parks, malls, and other public places, as well as to chat with customers on the Company's Internet website. Heelys also teamed up with Subway restaurants in the U.S. and Canada to provide free Heelys toys with Subway's
"kids' meals."
54. Heelys also commenced its first national cable television advertising campaign in the fourth quarter of 2005. Advertisements were aired in select regions of the United States during the Company's primary selling seasons, on cable channels such as ABC's Family
Channel, Nickelodeon and The Cartoon Network. Heelys wheeled shoes and products also were featured on numerous television programs and print media, including programs on CNN and
CNBC ; television shows such as So You Think You Can Dance, Good Morning America, Radical
Sabbatical, Livin' Large, CSJ: Miami and Invent This; magazines and newspapers such as Time,
People, The Wall Street Journal, In Style, Newsweek and Sports Illustrated; and the World Book
Encyclopedia and McGraw Hill text books. Heelys wheeled footwear also were used in the
15 Miramax film Spy Kids 2 and were featured in pop artist Usher's music videos and television
specials.
55. These "guerilla tactics" purportedly were effective as the Company claimed that
sales increased in 2005 and the first nine months of 2006. However, Heelys' marketing blitz did
not come without a cost. In fact, as reported in the December Prospectus, sales and marketing
expense reportedly increased by 173% to $9.0 million for the nine months ended September 30,
2006, from $3.3 million for the nine months ended September 30, 2005.
B. Undisclosed Counterfeiting and Patent Infringement
56. In the months leading up to the IPO, the Company was not prepared to meet the
demand for product that the marketing hype created, creating a backlog of orders. Indeed, utilizing only one independent manufacturer until May 2006 when additional independent manufacturers were added, Heelys' demand exceeded manufacturing capacity, and orders were not timely filled (e.g., as of September 30, 2006, the Company's backlog was $69 million, compared to $13 million at September 30, 2005).
57. The combined effect of the 2005-2006 marketing blitz and the inability to satisfy customer demand for Heelys in the first two quarters of 2006, due to Heelys' relationship with only one manufacturing facility, created a void in supply that creators and marketers of counterfeit and knockoff wheeled shoes rushed to fill, thereby eroding Heelys' sales. As noted above, in the time leading up to and after the IPO tens of thousands of pairs of counterfeit wheeled shoes flooded foreign and domestic markets, adversely affecting Heelys' sales.
58. Heelys filed numerous lawsuits against counterfeiters for patent infringement and the sale of knockoff products that took place prior to and at the time of the IPO. For example, after the filing of the Registration Statement Forms S-1 and S-IIAs on September 1, 2006,
16 October 4, 2006, October 27, 2006, Heelys filed a patent infringement lawsuit on December 7,
2006, one day before the IPO, against a Miami, Florida based marketing company, Levy
Marketing, for selling knockoffs of Heelys to "kiosk retail outlets in various malls throughout the
United States." The complaint further alleges that the defendants recently "sold over 1,000 sets of infringing knockoffs of the HEELYS skates to a Pennsylvania customer." Levy's violation of the Heelys' patents also was alleged to have caused Heelys to suffer "substantial harm" and would continue to "cause irreparable harm" to Heelys in the future. Following the IPO and the filing of the Levy Marketing matter, in or about December 2006, a Heelys ' lawyer prosecuting the Levy Marketing matter reported to the market that Heelys likely would be filing additional suits against counterfeiters.
59. Additional suits did follow as Heelys filed complaints across the U.S. against, inter alia, owners and operators of mall kiosks that sold knock off wheeled shoes. For example, between September 2006 and April 2007 , Heelys filed at least eight complaints against twenty- six defendants alleging, inter alia, that the defendants violated Heelys' wheeled shoe patents by selling knockoff products; that such patent infringement was causing Heelys to "suffer[] substantial harm;" and that such conduct, if not stopped, would continue to "cause irreparable harm" to Heelys.
60. At or about the time of the IPO, the mega-superstore Wal-Mart made plans to and/or began selling knockoffs of Heelys' wheeled shoes called "Spinners." On October 5,
2007, Heelys filed a patent infringement suit against Wal-Mart for selling " Spinners", claiming that Heelys "has suffered substantial harm" and "Wal-Mart's infringing acts are causing irreparable harm" to Heelys.
17 61. Defendants innocently and/or negligently omitted from the Prospectus the full
extent and adverse effect that counterfeiting was having on Heelys' business at the time of the
IPO, including but not limited to the foregoing information.
C. Undisclosed Safety Concerns and Injuries
62. Also innocently and/or negligently omitted from the Prospectus were ( 1) material
safety concerns regarding the use of Heelys footwear, and (2) the increase in injuries to users of
Heelys. Both adverse conditions existed at or about the time of the IPO and further decreased
demand for and sales of Heelys footwear.
63. As noted above, at or about the time of the IPO, Heelys shoes were being banned
from an increasing number of schools, malls, playgrounds and other venues frequented by
children as a result of safety concerns and injury reports, leading consumer groups to condemn
Heelys and parents not to buy Heelys' products. The full extent of, and adverse effects on demand and sales from, the foregoing was not fully disclosed in the Prospectus.
64. For example, the Prospectus did not disclose that the Consumer Product Safety
Commission ("CPSC") estimated that 1,600 injuries, including one confirmed fatality, occurred in 2006 related to use of wheeled shoes.
65. Moreover, the Prospectus innocently and/or negligently omitted that the injuries from the use of Heelys rose dramatically in the months leading up to the IPO as increasing numbers of Heelys and knockoffs entered the market due to the Company's two-year marketing blitz. Indeed, children had suffered hundreds of injuries related to the use of Heelys in the months leading up to the IPO, including broken wrists, arms and ankles, dislocated elbows, and cracked skulls. For example, over a 10-week period during the summer of 2006, 67 children were treated for injuries related to wheeled footwear, including Heelys, at Temple Street
18 Children's University Hospital in Dublin, Ireland. Likewise, doctors in Singapore reported that
37 children had been treated for similar injuries at a single hospital during a seven-month period
in 2004.
66. As a result of these material safety concerns and rash of injuries, the American
Academy of Orthopaedic Surgeons (the "AAOS") in June 2007 issued new safety advice that recommended the use of helmets, wrist protectors and knee and elbow pads for children using wheeled shoes.
67. While the Prospectus identified safety concerns as an issue that may impact sales revenues in the future, the Prospectus did not disclose (1) the extent or severity of the safety concerns and problems then affecting the Company, including the evidence listed above, and (2) the adverse effect that such was having and would continue to have on sales of and demand for
Heelys. Indeed, the safety concerns and rash of injuries that were escalating prior to and at the time of the Prospectus (1) caused parents to refrain from buying Heelys for their younger children, and (2) caused older children to avoid Heelys due to the stigma associated with wearing the protective gear required by their parents.
68. Additionally, the materiality of the safety and injury-related omissions from the
Prospectus become more apparent when the Prospectus is viewed as a whole and alongside
Heelys' promotional materials. For example, demonstrational videos on Heelys' website featured Heelys users in action "crashing and burning," tripping, falling, jumping off railings, flying into pools, wearing no protective padding and no helmets. Furthermore, the Heelys' website stated that "protective gear is not required" when using Heelys. Additionally, the cover of the Prospectus features several children using Heelys with no protective gear and the text of the Prospectus emphasizes that Heelys' footwear are "stylish," reflect "individualism,"
19 "independence," and "freedom," and allow the user to "seamlessly" transition from walking, running and skating without missing a beat, much less stopping to don wrist guards, knee pads,
elbow pads and helmets. The combination of the foregoing representations and the innocent and/or negligent omissions of safety and injury-related information further rendered the
Prospectus materially false and misleading.
D. The False and Misleading Statements in the December Prospectus
69. As noted above and in violation of the Securities Act of 1933, defendants innocently and/or negligently failed to adequately notify investors of at least the following in the
Prospectus:
+ Safety concerns and injuries associated with the use of Heelys and their affect on Heelys' sales and demand at the time of the IPO was more severe and materially beyond what was represented in the Prospectus;
• Heelys had insufficient visibility of its sales channel to adequately assess sell through or organic consumer demand for its products; and
• Competition from knockoffs was eroding Heelys' sales.
70. Furthermore, while Heelys' revenues appeared to be increasing in the months leading up to the IPO, the increase was not indicative of Heelys' customer sell through, marketplace demand, or sales revenue as it was due in large part to (1) short-term, increased marketing by the Company, {2) the filling of backorders due to Heelys' limited manufacturing capability, and (3) the increased distribution to hundreds of new storefronts or "doors" that cannibalized sales from existing "doors." Indeed, following the IPO it was discovered that new sales of Heelys had declined and retailers did not need new inventory at the time of the IPO.
71. In light of the above circumstances and conditions which existed at and about the time of the IPO, the Prospectus filed with the SEC in connection with the IPO contained misstatements of material fact or omitted to state material facts necessary in order to make the
20 statements made not misleading, thereby artificially inflating the price of Heelys' stock. In sum,
the Prospectus led investors to believe they were purchasing the stock of a company on the rise
with "substantial growth potential," rather than a company that had commenced its decline from
the height of its sales and operations.
72. On December 7, 2006, Heelys ' registration statement was deemed effective, and
covered (1) the sale of 3.125 million shares of Heelys common stock by the Company, (2) the
sale of 3.3 million shares of Heelys common stock by the selling shareholders, and (3) an option
for the lead underwriters to purchase an additional 963,750 shares of common stock from the
selling stockholders to cover over-allotments. Heelys' Registration Statement on Form S-1
(Registration No. 333-137046) was first filed on September 1, 2006 and declared effective on
December 7, 2006 after amendments on October 4, 2006, October 27, 2006, November 24, 2006, and December 6, 2006. Also, Heelys filed the Prospectus on Form 424B on December 11, 2006.
The Individual Defendants each signed the Prospectus.
73. On December 8, 2006, the IPO was launched leading to the sale of 7,388,750 million shares of its common stock at $21 per share for proceeds of approximately $155 million.
Defendants Bear, Steams, Wachovia, JP Morgan, and CIBC, served as the lead underwriters in the IPO.
74. As detailed herein, the Prospectus contained false and misleading statements of material fact or statements which omitted material facts necessary to make the statements made, in light of the circumstances in which they were made, not misleading.
75. The December Prospectus made, inter alia, the following materially false and misleading representations concerning the fulfillment of orders for Heelys' products:
21 We typically receive most of our orders three to four months prior to the date the products are shipped to customers. Generally, these orders are not subject to cancellation prior to the date of shipment. .. .
Prospectus at 37 (emphasis added).
76. The December Prospectus also contained the following materially misleading and
incomplete statements:
Order Fulfillment and Inventory Management
To allow us to better plan our production volume with our manufacturers, we offer our retail customers discount incentives to place advance orders. We typically receive most of our orders, which are not subject to cancellation, three to four months in advance of the scheduled delivery dates. To manage our inventory risk, we regularly monitor available sell through data and seek input on anticipated consumer demand from our retail customers.
Prospectus at 50 (emphasis added).
77. The foregoing statements were materially misleading and incomplete as they
materially misrepresented the extent of Heelys' visibility, or the material lack thereof, for
organic consumer demand for its products. For example, the "data" referenced above consisted
of only ( 1) a general report containing aggregate views of U. S. sporting goods industry sales - without a specific reference to sales of Heelys' products, and (2) contact with a limited number
of Heelys' retailers - not comprehensive sell through sales figures or forecasts from Heelys' 800 retail customers or 5000 "door" operators. Accordingly, Heelys' visibility into its sales-channel was materially limited and insufficient to "manage [Heelys'] inventory risk." Furthermore, the
foregoing statements were materially misleading and incomplete as Heelys' customers were
indeed able to cancel orders, which occurred prior to, at the time of and after the IPO; thereby
adversely affecting the Company's financial results.
78. With respect to Heelys' claim that its wheeled footwear was uniquely patented, which the Company touted as a competitive and demand stabilizing advantage over other
22 popular wheeled sports such as roller blading and skate-boarding, the December Prospectus made the following representations:
Intellectual Property - Patents and Trademarks
We have both domestic and international patent coverage for the technology incorporated in our HEELYS-wheeled footwear and own more than 65 patents issued or pending in more than 25 countries. Our first patent was a method patent that was issued in June 2002 and includes coverage for wheeled footwear, including HEELYS-wheeled footwear, with a wheel in the heel that allows the user to transition from walking or running to skating by shifting weight to at least one wheel in the heel. We also own a variety of trademarks, with more than 75 registered and pending trademarks in more than 3 0 countries.
We have vigorously enforced and expect to continue to vigorously enforce our intellectual property rights against infringers around the world. Despite the challenges inherent in combating infringers in international jurisdictions that may not protect intellectual property rights to the same extent as the United States, we have cooperated with the appropriate authorities and they have conducted successful raids, customs seizures and product confiscations of products that infringe our intellectual property rights in various countries. We have obtained agreements from importers and retailers to cease and desist all infringing activists and, in some cases have been paid monetary compensation. We have also successfully asserted our patent rights against manufacturers of infringing products.
Prospectus at 50-51 (emphasis added).
Competition
We compete with companies that focus on the young consumer across a number of markets, including footwear, sporting goods and recreational products. Many of these companies have substantially greater financial, distribution and marketing resources than we have. Product design, performance, styling, comfort, quality, brand awareness, timeliness of product delivery and pricing are all important elements of competition in the markets for our products. We believe that the strength of our HEELYS brand, the intellectual property related to the design of HEELYS-wheeled footwear, the quality of our products and our relationships with retailers and distributors allows us to compete effectively in the markets we serve. In certain international markets where enforcing our intellectual property rights is more difficult than in the United States, we compete against counterfeit, knockoff and infringing products, which typically are offered at lower prices.
23 Prospectus at 52 (emphasis added).
***
Legal Matters
... We are also engaged from time to time in various claims and legal proceedings relating to intellectual property matters and because of the recent increasing number of infringing and knockoff products being sold domestically, we have an increased number of claims and legal proceedings relating to intellectual property matters. We believe that none of our pending legal matters will have a material adverse effect upon our liquidity, financial condition or results of operations.
Prospectus at 52 (emphasis added).
79. The foregoing statements were materially false and misleading, as they omitted and innocently and/or negligently failed to disclose that (1) counterfeit and knockoff products were adversely and materially affecting demand for and sales of Heelys' products prior to and at the time of the IPO in domestic and overseas markets; and (2) the benefit of Heelys' patent protection was materially overstated as the purported patent protection did not guard against, and the statements concerning such "patent protection" did not convey, the expense, burden and decline in demand and sales caused by counterfeiters. Indeed, at the time of the IPO, counterfeiters had flooded the U.S. market with wheeled shoe knockoffs, prompting Heelys to file numerous patent infringement complaints throughout the country, alleging that the patent infringement was causing "substantial" and "irreparable harm" to Heelys.
80. The Prospectus contained a section entitled "risk factors" that consisted of purported warnings to investors looking to invest in the IPO. The risk factors were not sufficient to render non-actionable any of the alleged false and misleading statements or omissions because, inter alia, they warned of contingencies that had already materialized. Indeed, the above-alleged omissions from the Prospectus rendered much of the "risk" language materially false and misleading in and of itself. For example, the Prospectus at page 7 stated, "[i]f we are
24 unsuccessful in enforcing our intellectual property rights, sales of counterfeit, knockoff or
infringing products by others could harm our HEELYS brand and adversely affect our business,
financial condition and results of operations." The foregoing statement is materially misleading
as Plaintiffs allege that sales of counterfeit products were already adversely affecting Heelys'
business, financial condition and results of operations at the time of the IPO, prompting Heelys
to file lawsuits claiming "substantial" and "irreparable harm."
81. With respect to Heelys' ability to forecast consumer demand for its products, the
December Prospectus contained, in part, the following purported risk factors:
Because we are a consumer products company, if we fail to accurately forecast consumer demand and trends in consumer preferences, our HEELYS brand, net sales, customer relationships and results of operations may be adversely affected.
Demand for our products, and for consumer products in general, is subject to rapidly changing consumer demand and trends in consumer preferences. Therefore, our success depends upon our ability to:
• identify, anticipate, understand and respond to these trends in a timely manner; • expand the number of styles of HEELYS-wheeled footwear we offer to broaden the appeal of our products to a wider range of consumers; and • introduce appealing new products and performance features on a timely basis.
Prospectus at 7 (emphasis added).
82. The foregoing statements are materially misleading and incomplete when viewed alongside the above-referenced representations, i.e., "we have developed systems and procedures that enable us to actively monitor product quality, control product costs and facilitate timely product delivery," and "we regularly monitor available sell through data and seek input on anticipated consumer demand from our retail customers," because prior to and at the time of the
IPO, Heelys did not have sufficient visibility of the sales channel for its products and thus, could not meaningfully identify or assess customer demand or product sell through.
25 83. The December Prospectus provided the following concerning safety and personal injury issues:
Legal Matters
Due to the nature of our products, from time to time we have to defend against personal injury and product liability claims arising out of personal injuries that allegedly are suffered using our products. To date, none of these claims has had a material adverse effect on us.
Additional bans on the use of our HEELYS-wheeled footwear due to public safety and liability concerns could adversely affect our net sales and results of operations.
Various places of business and other institutions, such as shopping malls and schools, have imposed bans on the use of our HEELYS-wheeled footwear due to public safety and liability concerns. If the number of businesses and other institutions instituting such bans increases in the future, consumers could find our HEELYS-wheeled footwear less appealing, which could adversely affect our net sales and results of operations.
Prospectus at 52 (emphasis added).
84. Furthermore, the Prospectus at page 43 stated the Company's belief that "we benefit from greater repeat purchases by our consumers relative to other wheeled sports products, driven by the natural replacement cycle of children's footwear and the new styles that we offer each season."
85. The foregoing statements were materially false and misleading because, inter alia,
(1) the safety concerns with Heelys' products and injuries incurred by users of Heelys' products prior to and at, the time of the IPO were more widespread and material than disclosed in the
Prospectus; (2) additional bans by schools, malls and other venues frequented by children already were occurring; and (3) the material safety concerns and bans not disclosed in the
Prospectus were causing parents not to buy Heelys' products for their children, thereby materially and adversely affecting demand for and sales of Heelys' products.
26 86. Additionally, the Prospectus did not disclose the severity and number of injuries and related complaints, concerning broken wrists, arms and ankles, dislocated elbows, cracked skulls, etc., suffered by wheeled shoe users including the 1,600 accidents estimated by the CPSP in 2006.
87. Furthermore, the Prospectus as a whole did not adequately warn consumers of the material safety issues and history of injuries associated with the use of Heelys' products. For example, the Prospectus represented that (1) Heelys were marketed to "six to fourteen year old boys and girls" as "stylish" shoes that reflected "individualism," "independence" and "freedom" and permitted the user to "seamlessly" switch back and forth between walking, running and skating, without missing a beat -- much less stopping to don wrist guards, knee pads, elbow pads and helmets; and (2) the Company would "benefit from greater repeat purchasers by [its] consumers relative to other wheeled sports products, driven by the natural replacement cycle of children's footwear and the new styles that [Heelys would] offer each season" -- without mentioning that these purported "everyday" shoes were burdened by material safety concerns that caused parents to stop purchasing them.
88. Each of the representations referred to above were materially false and misleading, or omitted to contain facts necessary to make the statements made, in light of the circumstances in which they were made, not misleading for the reasons stated above.
89. Furthermore, applicable SEC rules and regulations, including but not limited to
Regulation S-K Item 303, governing the preparation of Registration Statements and Prospectuses required the Heelys Registration Statement and Prospectus to disclose all material adverse trends then-affecting the Company including: (i) the marked increase in consumer complaints and injury reports regarding the safety of Heelys' products, including complaints made to the U.S.
27 Consumer Product Safety Commission; (ii) the decline in organic demand for Heelys' products
as a result of safety concerns, injury reports, the decline in the wheeled-shoe "fad," and
counterfeit sales; (iii) the cancellation of orders by retail customers; (iv) Heelys' lack of visibility
of consumer demand for its wheeled footwear; and (v) the actual or impending impact of all of
the foregoing problems on Heelys' results of operations and overall financial condition. The
Prospectus' failure to include the foregoing material adverse trends constitutes a violation of
applicable SEC rules and regulations, further rendering the Prospectus materially false and
misleading under the Securities Act.
90. Further, pursuant to Item 3 of Forms S-1, the Registration Statement was required
to furnish the information required by Item 503 of Regulation 503. Under Item 503(c) of
Regulation S-K, an issuer is required, among other things, to provide a "discussion of the most
significant factors that make the offering risky or speculative." The rise in safety concerns,
increased presence of counterfeits, and the lack of visibility into future sales, which impacted the
organic demand for Heelys' products at the time of the IPO, were "significant factors" that made the IPO "risky or speculative" and were required to be disclosed in the Registration Statement.
The omission of these "significant factors" rendered the Prospectus materially false and misleading in violation of the Securities Act.
E. Post IPO Events
91. In June 2007, it was disclosed that the safety risks associated with use of Heelys' products at the time of the IPO were materially more severe than disclosed in the Prospectus.
For example, a number of articles and reports highlighting safety risks and concerns about the
Company's products were published. The June 2007 edition of Pediatrics contained a study entitled "Heelys and Street Gliders Injuries : A New Type of Pediatric Injury" reported on the
28 risks and cause of orthopaedic injuries suffered by children using Heelys' wheeled shoes, and that such risks and safety concerns existed prior to and at the time of the IPO
92. On June 4, 2007, the Associated Press published an article entitled "Docs Say
Kids Need Healing From `Heeling' on Rolling Sneakers." The article reported on the study published in the June issue of Pediatrics, as well as an anticipated recommendation by the
American Academy of Orthopaedic Surgeons, cautioning Heelys users to wear helmets, wrist protectors and elbow pads.
93. On June 6, 2007, the Associated Press published an article entitled "Government
Reports 1,600 Roller-Shoe Injuries, Mostly In Children." The article, in relevant part stated:
Accidents from trendy roller shoes are far more numerous than previously thought, contributing to roughly 1,600 emergency room visits last year, the U.S. Consumer Product Safety Commission said Wednesday.
Those injuries were mostly in children, the target market for the wheeled shoes that send kids cruising down sidewalks, across playgrounds and through shopping mall crowds.
Scott Wolfson, a spokesman for the Consumer Product Safety Commission, said last week that the agency knew of at least 64 roller shoe-related injuries and one death between September 2005 through December 2006.
The new higher estimate is based on a more recent and thorough examination by staff statisticians of data reported to the agency, Wolfson told the AP Wednesday.
The update follows new safety advice posted online Tuesday by the American Academy of Orthopaedic Surgeons, which recommends helmets, wrist protectors and knee and elbow pads for kids who ear wheeled shoes.
On Monday, a report in June's Pediatrics said 67 children were treated for roller-shoe injuries at a Dublin, Ireland hospital during a 10-week period last summer.
(Emphasis added.)
29 94. The foregoing information, which existed prior to and at the time of the IPO, also
was disclosed in reports carried on Bloomberg on June 4 and 6, 2007. The June 4, 2007
Bloomberg report also stated, in part, "Heelys Inc.'s wheeled sneakers have lead to an
increase in limb fractures in children ...". (Emphasis added).
95. The June 2007 safety-related reports resulted in a 12.4% drop in Heelys' share price June 4, through June 11, 2007.
96. On August 8, 2007, the Dow Jones Newswire and Marketwatch issued stories entitled "Heelys Shares Fall as Downgrades Greet Dismal Forecast" and "Heelys Shares Plunge
As Downgrades Greet Forecast," respectively. The Marketwatch story stated, in relevant part:
"Shares of Heelys, Inc. tumbled nearly 50% in Wednesday trading after giving a dismal forecast for the year and as four analysts cut their ratings on the wheeled-shoe company. The downgrades, which came in the wake of quarterly results released late Tuesday, cited weak forecasts for the year, bloated inventories, weak retail trends and an uncertain back-to-school season for the new ratings." In fact, by August 2007, sales had decreased by 37% on a year- over-year comparison basis. An analyst from Brean Murray Carret & Co. downgraded the stock, noting "a potentially deadly combination of signs of slowing consumer demand and what appears to be a growing inventory problem at retail."
97. As detailed above, the causes of the "bloated inventory" and "weak retail trends" had commenced and existed at the time of the IPO, rendering the Prospectus materially misleading and incomplete.
98. Furthermore, while the Prospectus represented, inter alia, (1) "We have developed systems and procedures that enable us to actively monitor product quality, control product costs and facilitate timely product delivery; and (2) "To manage our inventory risk, we
30 regularly monitor available sell through data and seek input on anticipated consumer demand from our retail customers," it was revealed on the Company's August 7, 2007 conference call with analysts and investors that defendants had limited monitoring capabilities and visibility of
Heelys' sales channel.
99. For example, defendant Staffaroni explained the Company's lack of sell through visibility in response to an analyst's request for retail sales figures year over year as follows:
Staffaroni:
"Well, of course, it is hard for us to measure. I know that one data point that everyone looks at in the investment community is SportScan. We have talked in the past about the fact that SportScan can provide some useful information but again it is only data point and not to be solely relied upon. ... And so we monitor sell-through on a customer-by-customer basis."
Jennifer Childe - Bear Stearns:
"You don't have any further visibility beyond SportScan?"
Staffaroni:
"Well, right. We have just the weekly sell-through that we get from our key customers."
Jennifer Childe - Bear Stearns:
"And can you --"
Staffaroni:
"It is just a sample of the market. It is not the total market."
100. Following the August 7, 2007 announcements, Heelys' stock price fell $10.57 per share, or 48 percent, thereby damaging investors.
101. Things only got worse for Heelys. First, on February 2, 2008 it was announced that Staffaroni, Kindley and the Vice-President of Global Sales had resigned. Second, on the same day, the IPO Monitor named Heelys among the worst performing IPO stocks between
31 December 2006 and December 28, 2007, during which time Heelys stock fell 67 percent. Third, the full effect of pre-IPO conditions materialized in the fourth quarter of 2007 as sales dropped
86 percent (from $71. 1 million in 4Q 2006, to $9.8 million in 4Q 2007).
COUNTI
Against Heelys, Capital Southwest, The Individual and Underwriter Defendants For Violation of Section 11 of the Securities Act in Connection With The IPO
102. Plaintiffs incorporate each and every allegation of ¶11-101 by reference as if set forth fully herein.
103. This Count is brought pursuant to § 11 of the Securities Act, 15 U.S.C. § 77k, on behalf of all persons or entities who acquired Heelys common stock pursuant to, or traceable to, the December Prospectus. Plaintiffs bring this claim against Staffaroni, Hessong, Hamner,
Adams, Middlekauff, Ligon, Thomas, Kindley, Capital Southwest, Bear Steams, Wachovia, JP
Morgan, and CIBC.
104. As alleged above, the December Prospectus was materially false and misleading; contained untrue statements of material facts; omitted to state material facts necessary to make the statements contained therein not misleading; and failed to disclose material facts.
105. All defendants named in this Count owed to the acquirers of the stock, including the plaintiffs and the other members of the Class who acquired Heelys common stock pursuant to or traceable to the December Prospectus, the duty to make a reasonable and diligent investigation of the statements contained in the December Prospectus at the time they became effective, to assure that those statements were true and that there was no omission to state material facts required to be stated in order to make the statements contained therein not misleading.
106. All of the defendants named in this Count: (i) signed the December Prospectus;
(ii) were directors of Heelys at the time the December Prospectus was filed with the SEC; and/or
32 (iii) served as underwriters for the offering. Further, none of the defendants named in this Count
made a reasonable investigation or possessed reasonable grounds for believing that the
statements contained in the December Prospectus were true and devoid of any misstatements or
omissions of material fact. Therefore, each of the defendants named in this Count is liable to plaintiffs, and the other members of the Class who acquired Heelys common stock pursuant to the December Prospectus for the various misstatements and omissions contained. therein under §
11 of the Securities Act.
107. Plaintiffs and other members of the Class purchased Heelys common stock pursuant to or traceable to the December Prospectus. At the time they purchased Heelys common stock, plaintiffs and the other members of the Class were without knowledge of the facts concerning the inaccurate and misleading statements and omissions alleged herein.
108. By reason of the conduct alleged herein, each defendant named in this Count violated § 11 of the Securities Act. As a direct and proximate result of defendants ' conduct, plaintiffs and the other members of the Class have sustained substantial damage in connection with the purchase of the common stock issued pursuant to or traceable to the December
Prospectus.
COUNT II
Against Defendants Heelys, Capital Southwest, Staffaroni, Hessong, Hamner, Adams, Middlekauff, Ligon , Thomas and Underwriter Defendants For Violation Of Section 12(a)(2) Of The Securities Act In Connection With The IPO
109. Plaintiffs incorporate each and every allegation of ¶' l-108 by reference as if set forth fully herein.
110. This Count is brought pursuant to § 12(a)(2) of the Securities Act on behalf of all purchasers of Heelys common stock pursuant to, or traceable to, the December Prospectus
33 against defendants Heelys, Staffaroni, Hessong, Hamner, Adams, Middlekauff, Ligon, Thomas,
Capital Southwest, Bear Stearns, Wachovia, JP Morgan, and CIBC.
111. Each of the defendants named in this Count was an offeror or seller of a security,
specifically Heelys common stock sold in the Company's IPO.
112. By means of the December Prospectus, defendants named in this Count offered
and sold shares of the Company's common stock to plaintiffs and/or other members of the Class
in return for proceeds in excess of $155 million.
113. The actions of solicitations taken by defendants included participation in the preparation and dissemination of the false and misleading December Prospectus. Additionally, one or more of the defendants named herein participated in the acts detailed as follows:
(a) they made the decision to conduct the Company's IPO,° to do it at the selected offering price and to make the sale in the United States. They actively and jointly drafted, revised, and approved the December Prospectus and other written selling materials by which the Company's IPO was made to the investing public. These written materials were
"selling documents" and calculated by these defendants to create interest in the securities offered and were widely distributed by defendants for that purpose;
(b) they finalized the December Prospectus and/or caused it to become effective. But for the defendants having signed and/or drafted the December Prospectus, the IPO could not have been made; and
{c) they conceived and planned the Company's IPO and together, jointly orchestrated all activities necessary to effect the sale of these securities to the investing public by issuing the securities, promoting the securities, and supervising their distribution and ultimate sale to the investing public.
34 114. The Heelys common stock offered and sold in the IPO by defendants named in
this Count were offered and sold through the use of interstate communication, the use of
interstate commerce, and the use of the mails.
115. Heelys common stock was offered and sold through the use of the December
Prospectus, which contained untrue statements of material fact or omitted to state material facts
necessary in order to make the statements made not misleading.
116. Defendants named herein were obligated to make a reasonable and diligent
investigation of the written statements made in the December Prospectus to ensure that such
statements were true and that there was no omission to state a material fact required to be stated
in order to make the statements contained therein not misleading.
117. Plaintiffs and other members of the Class purchased Heelys securities pursuant to
or traceable to the defective December Prospectus. Plaintiffs did not know, or in the exercise of reasonable diligence could not have known, of the untruths and omissions contained in the
December Prospectus.
118. Those plaintiffs who continued to own Heelys securities offer to tender to Heelys their holdings in return for the consideration paid for the securities together with interest thereon.
119. By reason of the conduct alleged herein, each defendant violated § 12(a)(2) of the
Securities Act. As a direct and proximate result of defendants' conduct, plaintiffs and the other members of the Class suffered substantial damage in connection with the purchase of the securities pursuant to, or traceable to the December Prospectus.
35 COUNT III
Against the Individual Defendants and Capital Southwest For Violations Of Section 15 Of The Securities Act In Connection With The IPO
120. Plaintiffs incorporate each and every allegation of ¶¶1-119 by reference as if set forth fully herein. This Count is brought pursuant to § 15 of the Securities Act on behalf of all persons who acquired Heelys securities pursuant to, or traceable to, the December Prospectus.
121. The defendants named in this Count were each control persons of Heelys by virtue of their executive and/or directorial positions and/or their ownership of a significant percentage of the Company's outstanding stock. The defendants named in this Count had the power, and exercised the same, to cause Heelys to engage in the violations of law complained of herein and were able to and did control the contents of the December Prospectus.
122. None of the defendants named in this Count made a reasonable investigation or possessed reasonable grounds for the belief that the statements contained in the December
Prospectus were true and devoid of any omissions of material fact. By reason of their top executive positions at Heelys, ownership of a significant percentage of the Company's stock and their actual control over the Company's day-to-day operations, financial statements, public filings and their intimate involvement and control over the December Prospectus, each of the defendants named in this Count is jointly and severally liable to plaintiffs and the other members of the Class as a result of the wrongful conduct alleged herein.
PRAYER FOR RELIEF
WHEREFORE, plaintiffs, on behalf of themselves and the members of the Class, pray for judgment as follows:
1. Declaring this action to be a proper class action maintainable pursuant to Rule 23 of the Federal Rules of Civil Procedure;
36 2. Awarding plaintiffs and the other members of the Class compensatory damages as
a result of the wrongs alleged herein, including interest thereon;
3. Awarding plaintiffs and other members of the Class recessionary damages with
respect to their claims under Section 12(a)(2) of the Securities Act;
4. Awarding plaintiffs and the other members of the Class their costs and expenses
in this litigation, including reasonable attorneys' fees and experts' fees and other costs and
disbursements; and
5. Granting plaintiffs and the other members of the Class such other and further relief as the Court may deem just and proper.
JURY TRIAL DEMANDED
Plaintiffs demand a trial by jury of all issues so triable.
Dated March 11, 2008 Respectfully submitted,
PROVOS7& UMPffREY LAW FIRM, LLP
Joe Kendall--' State Bar No. 11260700 Willie Briscoe State Bar No. 24001788 Hamilton Lindley State Bar No. 24044838 3232 McKinney Avenue Suite 700 Dallas, TX 75204 Tel: 214-744-3000 Fax: 214-744-3015
Liaison Counsel for Lead Plaintiffs
37 Andrew L. Zivitz Karen E. Reilly Mark Danek SCHIFFRIN BARROWAY TOPAZ & KESSLER LLP 280 King of Prussia Road Radnor, PA 19087 Tel: 610-667-7706 Fax: 610-667-7056
Dennis Herman Shirley Huang COUGHLIN STOIA GELLER RUDMAN & ROBBINS LLP 655 West Broadway, Suite 1900 San Diego, CA 92101-3301 Tel: 619-231-1058 Fax: 619-231-7423
Co- Counsel for Lead Plaintiffs
38 CERTIFICATE OF SERVICE
I hereby certify that on March 11, 2008, the foregoing document was filed with the clerk of the court for the U.S. District Court, using the electronic case filing system of the court. The electronic case filing system sent a "Notice of Electronic Filing" to all attorneys of record who have consented in writing to accept this Notice as service of documents by electronic means . I hereby certify that I have served the foregoing document all individuals who have not consented to electronic notification by mail.