In Re CROCS, Inc. Securities Litigation 07-CV-02351-Corrected

Case 1:07-cv-02351-REB-KLM Document 87 Filed 12/31/2008 Page 1 of 180 IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLORADO Civil Action No. 07-cv-02351-REB-KLM (Consolidated with 07-cv-02412; 07-cv-02454; 07-cv-02465; and 07-cv-2469) IN RE CROCS, INC. SECURITIES LITIGATION CORRECTED CONSOLIDATED AMENDED CLASS ACTION COMPLAINT 1. Lead Plaintiffs, Antonio Pedrera Sánchez and Fernando Pedrera Sánchez (the “Sánchez Group”) and plaintiffs, Harvey Babbitt and Daniel J. Lundberg (collectively “Plaintiffs”), bring this action on behalf of themselves and all persons or entities that purchased and/or acquired securities of CROCS, Inc. (“CROCS” or the “Company”) between April 2, 2007 and April 14, 2008, inclusive (the “Class Period”) seeking to pursue remedies under the Securities Exchange Act of 1934, 15 U.S.C. § 78j (the “Exchange Act’”), and Rule 10b-5 promulgated under the Exchange Act by the United States Securities and Exchange Commission (“SEC”), codified at 17 C.F.R. § 240.10b-5. 2. Plaintiffs’ allegations are based upon the investigation conducted by and through their attorneys, including but not limited to: (a) investigators contacting approximately 60 former CROCS employees, consultants, independent contractors, and temporary workers, as well as other individuals knowledgeable about the Company, which resulted in multiple substantive interviews of approximately nine individuals over a period of more than two months’ time; (b) review and analysis of filings made by CROCS with the SEC; and (c) review and analysis of press release, news articles, Case 1:07-cv-02351-REB-KLM Document 87 Filed 12/31/2008 Page 2 of 180 securities analysts’ reports and other publications disseminated by or about CROCS. The individuals interviewed either know the facts described firsthand or learned them by virtue of their position at CROCS and through reporting they received from other CROCS employees in the course of their employment. These sources will be referred to as confidential informants ( i.e ., “CIs No. __”), and the facts learned from each CI will be cited accordingly. 3. Additional facts supporting the allegations in this Consolidated Amended Class Action Complaint (“Complaint”) are known only to the Defendants or are exclusively in their control. Indeed, Plaintiff’s investigation found that CROCS had required multiple employees to enter into non-disclosure agreements (“NDAs”) at the time of their termination. CROCS required these NDAs after the first lawsuits were filed alleging securities fraud, and its action were designed to prevent, and have prevented, further investigation. A number of former employees, after being contacted, refused to speak to Plaintiffs’ private investigators, citing their NDAs. As a result, Plaintiffs believe that substantial additional evidentiary support exists for the allegations set forth in this Complaint that will be revealed after a reasonable opportunity for discovery. NATURE OF THE ACTION 4. This is a federal class action brought on behalf of all persons or entities that purchased or acquired CROCS securities during the Class Period, seeking to pursue remedies under the Exchange Act and Rule 10b-5. 5. The claims are brought against CROCS, five members of the Company’s senior management: Chief Executive Officer (“CEO”) Ronald R. Snyder (“Snyder”); Senior Vice President, Retail Division and former Chief Financial Officer (“CFO”) and 2 Case 1:07-cv-02351-REB-KLM Document 87 Filed 12/31/2008 Page 3 of 180 former Senior Vice-President for Finance Peter S. Case (“Case”); Chief Financial Officer (“CFO”), Russ Hammer (“Hammer”); Chief Operating Officer (“COO”) and Executive Vice-President and former Senior Vice President for Global Operations John P. McCarvel (“McCarvel”); and Senior Vice President for Global Operations (VP-Global Operations) and former Vice President for the Global Supply Chain (VP-Global Supply Chain) Scott Crutchfield (“Crutchfield”) (collectively, the “Individual Defendants” and together with CROCS itself, “the CROCS Defendants.”) for violations of Sections 10(b) and 20(a) of the Exchange Act; certain officers and directors of CROCS for violation of Section 20A of the Exchange Act; and Deloitte & Touche LLP (“Deloitte”), which served as CROCS’ public accounting firm at all relevant times, for violations of Section 10(b) and Rule 10b-5 promulgated thereunder. 6. This is the story of a company and its senior management who lost control over the company’s rapid growth, operations, and financial controls and, as a result, embarked on a scheme to defraud investors to conceal the company’s problems. Faced with a run-away train, to maintain its stock price, their own wealth and market position, the CROCS Defendants deliberately concealed – and then outright lied about – the deep-seated weaknesses in its manufacturing, forecasting and inventory management systems. At the same time, the Company’s accountants – who knew the material facts about the breakdown in their clients’ internal controls, leading to a catastrophic buildup in excess inventory – provided false “clean” audit reports of the Company’s books. Defendants’ deception and manipulations resulted in artificially inflating the price of the Company’s securities, which plummeted – beginning more than 3 Case 1:07-cv-02351-REB-KLM Document 87 Filed 12/31/2008 Page 4 of 180 a year in advance of the current market downturn – upon successive, partial-curative disclosures of the Company’s underlying problems. 7. CROCS is a Colorado-based company whose core business is the manufacture and sale of fashionable plastic footwear. To support its international sales network, CROCS maintains or contracts for manufacturing and warehouse facilities in the United States, Europe, China, and elsewhere. Producing the right shoe, in the right quantities, and getting it to the right place, at the right time for sale, is fundamental to success of a company in CROCS’ line of business: it requires the use of well- recognized, industry-standard practices, systems and computer software. CROCS often lacked all three in critical areas. But this is a case about fraud: instead of providing full disclosure to the market about CROCS’ faltering internal controls and expensive missteps, the CROCS’ Defendants, with the active participation of Deloitte, chose to hide them from the investing public, then to lie about the Company’s problems. 8. A prime example of the CROCS Defendants’ false and misleading statements concerns CROCS’ inventory management systems. The Company’s 2007 SEC Form 10-K, filed February 29, 2008, at page 13 stated that: “[w]e have made significant improvements to our management information systems over the past several years, specifically to upgrade our financial reporting systems and to implement new information technology systems to better track our business, streamline our financial reporting, and improve our internal controls.” These statements were false and misleading because, inter alia , in fact, because the Company lacked accurate data on inventory, CROCS constantly placed “bulk orders” of shoes in all styles, colors and sizes – whether or not those orders were likely to result in sales. This led inevitably to 4 Case 1:07-cv-02351-REB-KLM Document 87 Filed 12/31/2008 Page 5 of 180 geometric progressive buildups of unnecessary and unsalable inventory. The size of CROCS’ inventory was a key indicator to the market. 9. When CROCS made a partial disclosure of its substantial increase in inventory at the end of the third quarter of 2007, CROCS’ stock price plummeted in reaction the following day, from $74.75 to $47.74. A similar plunge occurred on April 15, 2008 (the last day of the Class Period), the day after management belatedly (and still incompletely) revealed that inventory had increased again in the first quarter of 2008, causing the stock to sink from $17.79 to $10.11. 10. On November 12, 2008, the Company disclosed it was taking a write- down of more than $70 million in the nine-months ended September 30, 2008 related to discontinued inventories and defective products and an additional $4.2 million related to expected losses on future purchase commitments. 11. As demonstrated by the information provided by the CIs and under the circumstances, the Company’s senior executives – beginning with defendant Scott Crutchfield, but also including his superiors, defendants Snyder, Case and Hammer, who received regular reports by email and in internal Company conference calls, were not only well aware of this problem, but it consumed much of their time day-to-day at CROCS. 12. One root cause of the Company’s failure to manage inventory was the fact that CROCS used archaic, error-prone Excel spreadsheets to track inventory and forecast sales. This approach ran directly contrary to the modern standard of using appropriate inventory control software which provides a real-time, up-to-the-minute picture of the Company’s vast inventory. The use of outdated technology led CROCS 5 Case 1:07-cv-02351-REB-KLM Document 87 Filed 12/31/2008 Page 6 of 180 continually to both undershoot and overshoot the amount of inventory actually on hand, and to produce absurd quantities of unusable merchandise – such as size 13 shoes in colors such as fuchsia and “Butter,” supposedly aimed at women customers. Meanwhile, the Company ran woefully short of shoes in reliably popular styles and colors. Thus, CROCS simultaneously was unable to meet demand for product its customers sought while building up a huge store of worthless inventory that could not be sold. 13.

Load more