Case 3:13-cv-00463-CRS Document 72 Filed 08/05/13 Page 1 of 104 PageID #: 628 UNITED STATES DISTRICT COURT WESTERN DISTRICT OF KENTUCKY LOUISVILLE DIVISION : CLASS ACTION IN RE YUM! BRANDS, INC. SECURITIES LITIGATION : NO. 3:13CV-463-CRS : DEMAND FOR JURY TRIAL CONSOLIDATED CLASS ACTION COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS LABATON SUCHAROW LLP RANSDELL & ROACH PLLC Jonathan M. Plasse John C. Roach Eric J. Belfi W. Keith Ransdell Stephen W. Tountas S. Chad Meredith Wilson Meeks 176 Pasadena Drive, Building One 140 Broadway Lexington, Kentucky 40503 New York, New York 10005 Tel: (859) 276-6262 Tel: (212) 907-0700 Fax: (859) 276-4500 Fax: (212) 818-0477 [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] Liaison Counsel for Lead Plaintiff and the Proposed Class Lead Counsel for Lead Plaintiff and the Proposed Class Case 3:13-cv-00463-CRS Document 72 Filed 08/05/13 Page 2 of 104 PageID #: 629 TABLE OF CONTENTS I. NATURE OF THE ACTION ................................................................................................ 1 II. JURISDICTION AND VENUE............................................................................................5 III. THE PARTIES....................................................................................................................... 6 A. Lead Plaintiff ................................................................................................................ 6 B. Defendants ....................................................................................................................6 1. The Company.......................................................................................................... 6 2. The Individual Defendants...................................................................................... 7 IV. SUBSTANTIVE ALLEGATIONS .....................................................................................10 A. Background................................................................................................................. 10 1. The Success Of Yum! China Was Critically Important To The Company’s Global Profitability And Corporate Success .....................................10 2. Maintaining Food Safety Is Critical To Yum!’s Success .....................................11 3. Yum! China Presents Unique Risks To Global Profitability................................13 4. Defendants Continually Assured Investors That Yum! China Adhered To Yum!’s Global Food Safety And Quality Standards........................14 5. Novak Assured Investors That KFC China Did Not Purchase Tainted Chicken From Local Suppliers................................................................17 B. Defendants Fraudulently Concealed That KFC Chicken Repeatedly Failed Third-Party Safety Tests Between 2010 And 2011 ........................................18 1. Documentary Evidence Confirms That Yum! Continued To Purchase Tainted Chicken From The Same Supplier Even Though It Failed Eight Separate Safety Tests For Numerous Banned Chemicals.............................................................................................................. 18 2. While Concealing the Materially Adverse SIFDC Findings, Defendants Misled Investors About Yum!’s Food Safety....................................22 3. Defendants’ Purported Excuse for Not Publicly Disclosing the SIFDC’s Materially Adverse Findings Is Simply Not Plausible..........................25 - i - Case 3:13-cv-00463-CRS Document 72 Filed 08/05/13 Page 3 of 104 PageID #: 630 C. Defendants Also Knew Or Recklessly Disregarded That Yum!’s Food Safety And Testing Procedures Were Drastically Inadequate....................................27 1. Yum! China’s Testing System Was Terribly Broken...........................................27 2. Yum!’s System For Evaluating Suppliers Allowed For Unlimited Failed Tests For Prohibited Chemicals................................................................. 29 3. Yum!’s Safety And Testing Procedures Failed To Reasonably Address The Known Risks Presented By Small Farmers and Local Suppliers...............................................................................................................31 D. Investors Learn The Truth About Yum!’s Failure To Adhere To Its Global Safety Standards And Its Resulting Impact On Global Profitability................................................................................................................. 32 1. Yum! Investors Learn That One Of KFC’s Chicken Suppliers Used Hormone Stimulants to Accelerate the Growth Cycle..........................................32 2. The Foreseeable Risk Of Yum!’s Failure to Adhere To Global Safety Standards Begins to Materialize, as Yum! Drastically Lowers Its Projections For Same Store Sales.......................................................33 3. Investors Begin To Question The Validity Of Yum!’s Purported Explanation For Reducing Its Guidance............................................................... 34 4. Investors Learn That Yum!’s Safety Issues Are Not Limited To Shanxi, And Begin To Learn About The Liuhe Violations.................................. 36 5. Investors Learn That Yum! Knew About Liuhe’s Repeated Use Of Prohibited Chemicals Between 2010 and 2011 ....................................................39 6. The Foreseeable Risk Of Yum!’s Failure To Adhere To Its Global Safety Standards Continues to Materialize, As Yum! Again Reduces Its Prior Guidance On KFC’s Same Store Sales ....................................42 7. Defendant Su Apologizes For Yum!’s “Many Shortcomings”............................. 43 E. On January 25, 2013 The Shanghai Authorities Reprimanded Yum! For Its Actions And Confirmed That Amadantine Was Found In Yum! Chicken.......................................................................................................................44 F. The Foreseeable Risk Of Yum!’s Failure To Adhere To Its Global Safety Standards Fully Materializes, As Defendants Reveal That Concerns Over Yum!’s Food Safety Will Negatively Affect Yum!’s 2013 Earnings .............................................................................................................45 - ii - Case 3:13-cv-00463-CRS Document 72 Filed 08/05/13 Page 4 of 104 PageID #: 631 V. POST-CLASS PERIOD EVENTS FURTHER REVEAL THE FINANCIAL EFFECTS OF CONSUMER CONCERNS OVER FOOD SAFETY AT YUM!................................................................................................................................... 46 VI. ADDITIONAL ALLEGATIONS ESTABLISHING DEFENDANTS’ SCIENTER..........................................................................................................................47 A. Corporate Scienter Is Established By Yum!’s And Su’s Admissions ........................47 B. Yum! China is the Company’s Core Business Segment And KFC China Is the Core Brand in that Segment.................................................................... 48 C. The Individual Defendants Closely Monitored the Supply Chain And Related Food Safety Issues at KFC China.................................................................. 50 D. Defendants Were Motivated To Conceal KFC’s Food Safety And Quality Problems Because Disclosure Threatened Yum!’s Business Model..........................................................................................................................52 1. KFC China’s Business Model Depends On Charging Premium Prices for Cheaply Sourced Local Poultry............................................................ 53 2. Defendants Knew That The SIFDC’s Adverse Findings Threatened To Reveal That Yum!’s Supply Chain Had Been Compromised......................... 56 E. The Individual Defendants Were Motivated To Achieve Yum!’s Global Sales And EPS Targets To Receive Lucrative Performance- BasedCompensation................................................................................................... 57 1. The Defendants’ Cash-Based Incentive Compensation Over 2011 and2012................................................................................................................ 59 2. Incentive Based Stock Option Compensation....................................................... 60 3. Long Term Incentive Based Compensation.......................................................... 63 VII. DEFENDANTS’ MATERIAL MISSTATEMENTS AND OMISSIONS..........................69 VIII. LOSS CAUSATION............................................................................................................ 89 IX. CLASS ACTION ALLEGATIONS ....................................................................................90 X. PRESUMPTION OF RELIANCE UNDER THE AFFILIATED UTE DOCTRINE AND/OR, IN THE ALTERNATIVE, THE FRAUD ON THE MARKET DOCTRINE .......................................................................................................92 XI. CAUSES OF ACTION........................................................................................................ 93 XII. PRAYER FOR RELIEF ......................................................................................................98 - iii - Case 3:13-cv-00463-CRS Document 72 Filed 08/05/13 Page 5 of 104 PageID #: 632 Lead Plaintiff Frankfurt-Trust Investment GmbH (“Lead Plaintiff”), individually and on behalf of all other persons and entities who purchased or acquired Yum! Brands Inc.’s (“Yum!” or the “Company”)