Case 1:15-cv-04860-PGG Document 114 Filed 11/14/17 Page 1 of 175 UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK x In re ICONIX BRAND GROUP, INC., et al. : Civil Action No. 1:15-cv-04860-PGG : : CLASS ACTION This Document Relates To: : : ALL ACTIONS. : x SECOND CONSOLIDATED AMENDED CLASS ACTION COMPLAINT Case 1:15-cv-04860-PGG Document 114 Filed 11/14/17 Page 2 of 175 TABLE OF CONTENTS NATURE OF THE ACTION ..........................................................................................................1 JURISDICTION AND VENUE ....................................................................................................11 PARTIES .......................................................................................................................................12 CLASS ACTION ALLEGATIONS ..............................................................................................15 SUBSTANTIVE ALLEGATIONS ...............................................................................................17 The Company and Its Business ..........................................................................................17 Iconix Struggles to Maintain Its Growth ...........................................................................19 Defendants Devise a Fraudulent Scheme to Mask Iconix’s Declining Revenues By Forming Sham Joint Ventures With Overseas Partners ...................................21 Iconix’s Admissions that the Financial Statements It Issued During the Class Period Were Materially False and Misleading .......................................................32 Iconix Restates Its Financial Statements Twice.................................................................37 Iconix’s Financial Misstatements Were the Result of Intentional Conduct ......................44 Iconix Lacked Effective Internal Controls During the Class Period .................................45 MATERIALLY FALSE AND MISLEADING STATEMENTS ..................................................47 POST-CLASS PERIOD EVENTS ..............................................................................................105 ICONIX’S FALSE FINANCIAL STATEMENTS .....................................................................108 ADDITIONAL ALLEGATIONS OF SCIENTER ......................................................................124 BDO VIOLATED GENERALLY ACCEPTED AUDITING STANDARDS AND THE FEDERAL SECURITIES LAWS....................................................................................141 LOSS CAUSATION ....................................................................................................................165 COUNTS AGAINST THE DEFENDANTS ...............................................................................169 JURY DEMAND .........................................................................................................................171 ii Case 1:15-cv-04860-PGG Document 114 Filed 11/14/17 Page 3 of 175 By and through their undersigned counsel, Lead Plaintiffs City of Atlanta Firefighters’ Pension Fund and City of Atlanta Police Officers’ Pension Fund (“Lead Plaintiffs” or “Plaintiffs”) allege the following against Defendants Iconix Brand Group, Inc. (“Iconix” or the “Company”), Neil Cole (“Cole”), Warren Clamen (“Clamen”), Jeff Lupinacci (“Lupinacci”), David Blumberg (“Blumberg”), Seth Horowitz (“Horowitz”), David K. Jones (“Jones”), F. Peter Cuneo (“Cuneo”) (collectively, “Defendants”), and BDO USA, LLP (“BDO”)1, upon personal knowledge as to those allegations concerning Plaintiffs and, as to all other matters, upon the investigation of counsel, which included, without limitation: (a) review and analysis of public filings made by Iconix and other publications disseminated by certain of the Defendants and other related non-parties; (b) review of news articles and shareholder communications; and (c) review of other publicly available information concerning Iconix, the other Defendants, and related non-parties. Plaintiffs believe that substantial additional evidentiary support will exist for the allegations set forth herein after a reasonable opportunity for discovery. NATURE OF THE ACTION 1. This is a federal securities class action brought on behalf of all persons or entities who purchased Iconix securities (the “Class”) between February 22, 2012 and November 5, 2015, inclusive (the “Class Period”), seeking to pursue claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the “Exchange Act”), 15 U.S.C. §§78j(b) and 78t(a), and United States Securities and Exchange Commission (“SEC”) Rule 10b-5 promulgated thereunder, 17 C.F.R. §240.10b-5. 2. Defendant Iconix is a brand management company that owns a portfolio of 35 global brands in the women and men’s apparel, entertainment, and home industry segments. This case 1 “Defendants” as used herein refers to all Defendants except Defendant BDO. Defendant BDO is referred to herein as “BDO.” - 1 - Case 1:15-cv-04860-PGG Document 114 Filed 11/14/17 Page 4 of 175 concerns an accounting fraud in which Defendants committed a multiplicity of accounting manipulations over a nearly four-year period, ultimately forcing Iconix to announce two separate restatements. Specifically, Iconix has admitted that its financial statements covering fiscal years 2011, 2012, 2013, 2014, and the first two quarters of 2015 were materially false. As discussed in greater detail herein, Defendants’ manipulations were specifically effectuated to artificially inflate the Company’s financial results, and allowed certain of the Company’s insiders, including Defendants Cole, Blumberg and Clamen, to capitalize on their fraud through massive, suspiciously timed insider stock sales. 3. Iconix monetizes its brands by licensing its intellectual property rights (“IP”) to retailers and wholesalers. These licensees are responsible for manufacturing and distributing the brands’ products, while Iconix is responsible for the brands’ advertising, public relations and management. In turn, licensees pay royalties to Iconix based upon net sales with a guaranteed minimum if sales targets are not reached. 4. Borrowing heavily, Iconix was able to acquire and monetize dozens of brands. However, there were significant risks inherent to the Company’s new business, which materialized prior to the start of the Class Period. As times and tastes changed, the popularity of the Company’s brands inevitably waned, generating declining amounts of royalty revenue and profit. In order to offset slowing revenue streams from older brands, the Company’s business model relied on regular acquisitions of new desirable brands, which became difficult as economic times worsened in 2008 when there were fewer acquisition targets up for sale and more competitors seeking to acquire them. In particular, the Company’s young men’s apparel brands, Ecko, Rocawear, Ed Hardy, and Zoo York, which Iconix had acquired for the hefty price tag of $508 million, were nearly defunct, and the Company had no realistic prospects to replace them. - 2 - Case 1:15-cv-04860-PGG Document 114 Filed 11/14/17 Page 5 of 175 5. However, during the Class Period, Defendants led the market to believe the opposite. Defendants announced that Iconix was embarking on a new business strategy: exporting its brands overseas by selling its IP rights to international joint ventures. Iconix would maintain a 50% stake in these joint ventures, and purportedly sell the remaining 50% stake to a local joint venture partner. While the Company claimed these joint ventures were an effective means for Iconix to gain a global presence quickly and efficiently, in truth, they were sham transactions designed to generate instant “paper” revenues so that the Company could conceal its worsening financial state. Indeed, Defendants were well aware that Iconix’s brands were failing, and that the Company’s revenues were rapidly declining. Rather than come clean, Defendants masked the decline by falsely claiming Iconix “sold” its IP rights for tens of millions of dollars to a number of overseas joint ventures, while fraudulently recognizing these “sales” as revenue gains for Iconix—all in violation of Generally Accepted Accounting Principles (“GAAP”). 6. To entice prospective joint venture partners to purchase a 50% stake in the joint ventures, Defendants made significant economic concessions that were designed to limit the joint venture partners’ risk. Among other things, Defendants allowed its joint venture partners to pay only a fraction of the multi-million dollar purchase price at closing – with the bulk due in annual installment payments over a number of years – and granted them multi-million dollar revenue guarantees in addition to “put” options, which permitted the joint venture partners to force Iconix to absorb any losses by taking on more equity. In turn, Iconix would maintain control of the joint venture and book the entire multi-million dollar “sale” of the purported 50% stake to the joint venture partner as a “paper” revenue gain for Iconix as of the time of formation, regardless of the fact that the joint venture partner had only paid a fraction of that price at closing. - 3 - Case 1:15-cv-04860-PGG Document 114 Filed 11/14/17 Page 6 of 175 7. Thus, significantly, the joint ventures were not true joint ventures, where partners equally share the risk and responsibilities of the enterprise. To the contrary, they lacked economic substance, and Iconix’s joint venture partners did not share the risk. As was ultimately revealed after the