Case 1:05-cv-02494-WSD Document 18-1 Filed 02/02/2006 Page 1 of UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF GEORGIA (ATLANTA) IN RE SPECTRUM BRANDS, INC. FILE NO.: 1-05-CV-2494-WSD SECURITIES LITIGATION CONSOLIDATED AMENDED CLASS ACTION COMPLAINT FOR VIOLATIONS OF FEDERAL SECURITIES LAWS Case 1:05-cv-02494-WSD Document 18-1 Filed 02/02/2006 Page 2 of Table of Contents Page 1. NATURE OF THE ACTION ................................................................ 1 II. BACKGROUND ................................................................................... 3 III. JURISDICTION AND VENUE ........................................................... 6 IV. THE PARTIES ......................................................................................7 A. Lead Plaintiffs .............................................................................7 B. Defendants ..................................................................................7 V. DEFENDANTS' FRAUDULENT SCHEME ...................................... 8 A. "We Always Find a Way to Make the Quarter ......................... 8 B. Defendants' Clear View of the Retail Channel ........................13 C. Defendants Fail to Reveal a Material Adverse Trend ..............23 D. Acquisitions: Defendants' Light at the End of the Tunnel .......26 VI. FALSE AND MISLEADING STATEMENTS ..................................29 VII. THE TRUTH BEGINS TO EMERGE ............................................... 38 VIII. POST CLASS PERIOD EVENTS ......................................................46 IX. DEFENDANTS' OMISSIONS AND FAILURE TO REVEAL THE TRUTH .......................................................................................47 X. ADDITIONAL SCIENTER ALLEGATIONS ...................................48 A. Defendants Cash Out Before SPC's Huge Earnings Miss Is Revealed ................................................................................48 B. Performance-Based Bonuses: Additional Incentive to Withhold Material Information ................................................. 51 1 Case 1:05-cv-02494-WSD Document 18-1 Filed 02/02/2006 Page 3 of C. A "Truly Transforming Transaction: The United Acquisition ................................................................................ 52 XI. CAUSATION AND ECONOMIC LOSS ...........................................56 XII. CLASS ACTION ALLEGATIONS ................................................... 59 XIII. PRESUMPTION OF RELIANCE: FRAUD ON THE MARKET DOCTRINE ....................................................................... 61 COUNT I AGAINST SPC AND THE INDIVIDUAL DEFENDANTS FOR VIOLATIONS OF SECTION 10(B) OF THE EXCHANGE ACT .............64 COUNT II AGAINST THE INDIVIDUAL DEFENDANTS SECTION 20(A) OF THE EXCHANGE ACT .........................................................................68 XIV. PRAYER FOR RELIEF ...................................................................... 70 XV. JURY TRIAL DEMANDED ..............................................................71 ii Case 1 :05-cv-02494-WSD Document 18-1 Filed 02/02/2006 Page 4 of The Court appointed Lead Plaintiffs, James H. Milner, individually, and as General Partner of Kountry Kitchen Ltd., Jain Sushil Kumar, David Davis, and Brett Harris (the "Milner Group ) , (collectively "Lead Plaintiffs or "Plaintiffs ) individually and on behalf of all other persons similarly situated, make the following allegations against Spectrum Brands, Inc. ("SPC or the "Company ), David A. Jones ("Jones ) and Randall J. Steward ("Steward ) (collectively, "Defendants ). Except as to allegations specifically pertaining to the named Lead Plaintiffs and their counsel, which are based upon personal knowledge, Lead Plaintiffs' allegations are based upon Lead Plaintiffs' counsel's investigation, which included inter alia, a review of the public announcements made by Defendants , Securities and Exchange Commission ("SEC ) filings, press releases, reports by securities industry analysts and media concerning SPC, and interviews with former SPC employees and SPC customers. 1. NATURE OF THE ACTION 1. This is a securities class action that arises out of the Defendants' dissemination of materially false and misleading information and omissions of material information to the investing public concerning the business, operations and financial performance of SPC during the period of November 11, 2004, through November 13, 2005 (the "Class Period ). This lawsuit is brought on behalf of all persons who purchased or otherwise acquired securities of SPC during Case 1:05-cv-02494-WSD Document 18-1 Filed 02/02/2006 Page 5 of the Class Period, except for Defendants, the officers and directors of the Company, members of their immediate families and each of their legal representatives, heirs, successors or assigns and any entity in which any Defendant has or had a controlling interest (the "Class ). 2. Defendants find themselves responding to allegations of securities fraud for the second time in just four years. Not surprisingly, the U.S. Attorney's Office for the Northern District of Georgia and the SEC are also conducting investigations into the Company's public statements and Defendants' suspiciously timed insider trading. Among other things, the U.S. Attorney's Office is investigating Defendant Jones' sale of almost $1 million worth of SPC stock just two days before a negative disclosure from the Company that sent shares trading as much as $8 .53 lower than Defendant Jones' sale price of $38.63. 3. Lead Plaintiffs allege that Defendants instituted a scheme to defraud the market by providing a false and misleading image of the operational strength of the Company's core battery business during the fourth quarter of fiscal year 2004 and first quarter of fiscal 2005. Defendants accomplished this fraud through what one former manager dubbed the Rayovac Philosophy - "channel stuffing. When the Defendants could no longer convince retailers to buy additional product at the rate necessary to keep the scheme secret, sales dropped considerably and so did the value of SPC stock. 2 Case 1:05-cv-02494-WSD Document 18-1 Filed 02/02/2006 Page 6 of II. BACKGROUND 4. Founded in 1906 as the French Battery Company before a name change in the 1930's to Rayovacl, Rayovac existed for over 90 years as a privately owned battery manufacturer until 1996, when it was acquired by Thomas H. Lee Partners, LP ("THL Partners ). Immediately after acquiring Rayovac, THL Partners installed a new management team, led by Defendant Jones as Chairman of the Board and Chief Executive Officer. As revealed in the Company's SEC filings, THL Partners2 and Defendant Jones owned 80.2% of the outstanding shares of Rayovac following a September 12, 1996 recapitalization. 5. On November 22, 1997, THL Partners brought Rayovac public in a $98 million offering of 6.5 million shares at $14 per share. Since that initial offering, the Company has engaged in additional secondary offerings to facilitate THL Partners' sale of its Rayovac stock. One such offering in which THL Partners sold 4 million shares in June 2001 sent shareholders seeking legal redress in federal court. Just three months after the offering, the Company disclosed a "slowdown in battery sales and negatively adjusted earnings guidance from positive 8-9% to flat or slightly negative. The market reacted swiftly and shares dropped to 35% below the then recent offering price of $19.50. 1 The Company was renamed in May 2005 with the name it bears today. 3 Case 1:05-cv-02494-WSD Document 18-1 Filed 02/02/2006 Page 7 of 6. Once again, under the direction of the same management team as in 2001, Defendants have manipulated the flow of information to investors to facilitate their strategy for transforming Rayovac from a battery company into Spectrum Brands, a more diversified global company. From 1999 to 2002, Rayovac's management team waged war against Duracell and Energizer, the two leading consumer battery suppliers in the United States. After four years of a campaign to undersell its competitors , Rayovac managed to lose 1.9% of its market share while at the same time reducing its price per cell from $0.72 in 1999 to $0.55 in 2003. With their failure to grow Rayovac's battery business becoming more evident, Defendants chose to take the Company in an entirely different direction by acquiring or "rolling-up other businesses to offset declining battery operations. Beginning with the acquisition of Remington Products Company, LLC ("Remington ) in 2003 and culminating with the multi-billion dollar acquisitions of United Industries, Inc. ("United ) and Tetra Holding GmbH ("Tetra ) in the spring of 2005, the Company has evolved into the global, diverse consumer 2 Including numerous affiliates or like-named partnerships under the control and direction of THL Partners. 4 Case 1:05-cv-02494-WSD Document 18-1 Filed 02/02/2006 Page 8 of products manufacturing and marketing company known today as Spectrum Brands.3 7. Although the name Spectrum Brands may aptly describe the full spectrum of products it sells today, at the start of the Class Period, the Company only sold Rayovac's batteries and Remington's personal-grooming products. After the Remington acquisition, analysts began to question if the Company was committed to its diversification through acquisition strategy. On November 11, 2004, Deutsche Bank analysts wrote, "We like the Rayovac story when it is in acquisition mode... [but] Without a deal on the horizon and with few upcoming catalysts, we maintain our Hold rating. Defendants