Case 4:11-cv-03250 Document 40 Filed in TXSD on 03/22/12 Page 1 of 81 UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF TEXAS HOUSTON DIVISION In re IMPERIAL SUGAR COMPANY § Civil Action No. 4:11-cv-03250-LHR SECURITIES LITIGATION § § JURY TRIAL DEMANDED JUDGE LEE H. ROSENTHAL CONSOLIDATED CLASS ACTION COMPLAINT Case 4:11-cv-03250 Document 40 Filed in TXSD on 03/22/12 Page 2 of 81 By and through its undersigned counsel, Lead Plaintiff Carpenters Pension Fund of Illinois (“Lead Plaintiff” or “Plaintiff”) alleges the following against Defendants Imperial Sugar Company (“Imperial” or the “Company”), John C. Sheptor (“Sheptor”), and Harold P. Mechler (“Mechler”) (collectively, “Defendants”), upon personal knowledge as to those allegations concerning Plaintiff and, as to all other matters, upon the investigation of counsel, which included, without limitation: (a) review and analysis of public filings made by Imperial and other related parties and non-parties with the Securities and Exchange Commission (“SEC”); (b) review and analysis of press releases and other publications disseminated by certain of the Defendants and other related non-parties; (c) review of news articles and shareholder communications; (d) review of other publicly available information concerning Imperial, the other Defendants, and related non-parties; (e) consultation with experts; and (f) interviews with factual sources, including individuals formerly employed by Imperial. I. SUMMARY OF THE ACTION 1. This is a federal securities class action against Imperial and certain of its officers and/or directors for violations of the federal securities laws. Plaintiff brings this action on behalf of itself and the Class under the Securities Exchange Act of 1934 (the “Exchange Act”). Plaintiff alleges that between December 29, 2010 and August 4, 2011, inclusive (the “Class Period”), Defendants engaged in a fraudulent scheme to artificially inflate the Company’s stock price by concealing from the market that Imperial was forced to rely on direct competitors to meet customer demand as a result of Imperial’s significant loss of refinery capacity and continued problems at its Port Wentworth refinery. Plaintiff further alleges that Defendants knew, but failed to disclose, that Imperial was purchasing refined sugar from its competitors and having them “co-pack” the Company’s own sugar to fulfill contractual obligations, and that these practices increased the - 1 - Case 4:11-cv-03250 Document 40 Filed in TXSD on 03/22/12 Page 3 of 81 Company’s operating costs and compressed the Company’s margins. As a result of this fraud, as more fully described below, shareholders suffered millions of dollars in losses. 2. Imperial was incorporated in 1924 and holds itself out as one of the largest processors and marketers of refined sugar in the NAFTA region. The Company’s products include granulated, powdered, liquid, and brown sugars marketed in a variety of packaging options, which are sold under private labels and various brand names ( i.e. , Dixie Crystals). Imperial refines, packages, and distributes sugar through two refineries located in Port Wentworth, Georgia and Gramercy, Louisiana. 3. Prior to the start of the Class Period, the Company lost much of its refinery capacity due to an industrial accident at its Port Wentworth refinery, which caused death and injury to many of the Company’s workers. As a result of this accident, production at the Company’s Port Wentworth refinery – which amounted to 60% of the Company’s refinery capacity – was suspended for more than a year. While the Company restarted limited production at Port Wentworth in the middle of 2009, it continued to experience operational difficulties with this refinery and was struggling to attain pre-accident production levels. Accordingly, Imperial became increasingly reliant on its Gramercy refinery. 4. Despite the Company’s significant reliance on Gramercy for capacity, in November 2009, the Company was forced into a joint venture with Cargill, Inc. (“Cargill”) and Louisiana Sugar Growers and Refiners Inc. (“SUGAR”) known as the Louisiana Sugar Refinery, LLC (“LSR”), which required it to give up its Gramercy refining activities at the beginning of 2011. If the Company did not participate in LSR, it would lose its raw sugar supply in Louisiana and be “left high and dry.” As the Company faced continued problems at its Port Wentworth refinery, it was unable to absorb the loss of Gramercy. - 2 - Case 4:11-cv-03250 Document 40 Filed in TXSD on 03/22/12 Page 4 of 81 5. Due to the loss of Imperial’s refinery capacity at Gramercy and the continued production issues at the Company’s Port Wentworth refinery, Defendants were required to take drastic steps in order to meet customer demand and to retain customers. According to former Company employees, during the Class Period, Defendants were forced to rely on competitors to help them meet their obligations to customers. In particular, the Company hired competitors to pack approximately 50% of the Imperial retail segment – a process known as co-packing. Additionally, the Company was forced to purchase refined sugar from competitors to meet customer needs. 6. The Company’s reliance on competitors to purchase and co-pack refined sugar significantly increased Imperial’s operating expenses. Moreover, by paying premiums to competitors for these services, Imperial was helping its competitors’ bottom line to Imperial’s own detriment. These added expenses, which were further exacerbated by the Company’s operational deficiencies at Port Wentworth and other inefficiencies, caused the Company’s gross margins to erode. 7. In addition to the myriad problems the Company was facing and associated mounting expenses, the Company’s business model was at the mercy of competitive pressures. Unlike many of its competitors, Imperial was a non-integrated producer forced to buy raw sugar in the market and was subject to the market’s price volatility. Accordingly, it was crucial for Imperial to be able to offset rising raw sugar costs by raising prices, which it was no longer able to do because of customer relationships that were strained due to Imperial’s production issues and increased pressure from integrated sugar producers, particularly from Mexico. 8. Defendants were intimately aware of the continued operational deficiencies at Port Wentworth, the Company’s reliance on competitors for co-packing and refined sugar, and the impact competitive pressures were having on the Company’s ability to raise prices through their receipt of daily emails, participation in monthly conference calls, and through Defendant Sheptor’s frequent - 3 - Case 4:11-cv-03250 Document 40 Filed in TXSD on 03/22/12 Page 5 of 81 presence at the Port Wentworth refinery and involvement in purchasing decisions. Despite this, throughout the Class Period, they misled the market by repeatedly touting the improvements of the Company’s Port Wentworth facility and the Company’s ability to raise prices to maintain acceptable price spreads between raw and refined sugar. 9. Eventually, Defendants’ house of cards came falling down. On August 5, 2011, just one quarter after the Company issued glowing financial results and represented to the market that Imperial had turned a corner, Defendants revealed that, among other things, the Company had suffered a significant loss, its gross margins had been crushed, and the Company’s Port Wentworth refinery was still suffering from severe operational difficulties. In sum, the Company admitted that it had been unable to turn around its business and that its financial position was tenuous at best. 10. Analysts were “shell-shocked” by this rapid turn of events and expressed disbelief that raw sugar prices were solely to blame. As a result of Defendants’ announcements, and the resulting analyst commentary, Imperial’s stock price plummeted approximately 66% , falling a staggering $15.40 a share, from a close of $23.19 on August 4, 2011 to close at $7.79 on August 8, 2011, causing millions in investor losses. II. JURISDICTION AND VENUE 11. The claims asserted herein arise under and pursuant to Sections 10(b) and 20(a) of the Exchange Act, 15 U.S.C. §§78j(b) and 78t(a), and Rule 10b-5 promulgated thereunder by the SEC, 17 C.F.R. §240.10b-5. This Court has jurisdiction over the subject matter of this action pursuant to 28 U.S.C. §1331 and Section 27 of the Exchange Act, 15 U.S.C. §78aa. 12. Venue is proper in this District pursuant to Section 27 of the Exchange Act (15 U.S.C. §78aa), and 28 U.S.C. §1391(b). Imperial maintains its principal executive offices in this District. Many of the false and misleading statements were made in or issued from this District, and - 4 - Case 4:11-cv-03250 Document 40 Filed in TXSD on 03/22/12 Page 6 of 81 many of the acts and transactions giving rise to the violations of law complained of occurred in this District. 13. In connection with the challenged conduct, Defendants, directly or indirectly, used the means and instrumentalities of interstate commerce, including, but not limited to, the United States mails, interstate telephone communications, and the facilities of the national securities markets. III. PARTIES A. Plaintiff 14. Plaintiff Carpenters Pension Fund of Illinois was appointed to serve as Lead Plaintiff in this action by Order of this Court dated February 1, 2012 [Dkt. No. 35]. Plaintiff purchased Imperial securities at artificially inflated prices during the Class Period and suffered an economic loss when the true facts about the Company’s business and financial condition were disclosed and the stock price resultantly declined. B. Defendants 15. Defendant Imperial was incorporated in Texas in 1924 and is headquartered in Sugar Land, Texas. As further detailed below, the Company refines, packages and/or distributes cane sugar at refineries located in the states of Georgia and Louisiana.