Case: 3:19-cv-00347-jdp Document #: 14 Filed: 07/12/19 Page 1 of 135 IN THE UNITED STATES DISTRICT COURT FOR THE WESTERN DISTRICT OF WISCONSIN ) ) ) IN RE SPECTRUM BRANDS LITIGATION ) No. 19-cv-347-jdp ) ) AMENDED CLASS ACTION COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS RATHJE WOODWARD LLC BERNSTEIN LITOWITZ BERGER Douglas M. Poland & GROSSMANN LLP State Bar No. 1055189 Avi Josefson 10 E. Doty Street, Suite 507 875 North Michigan Avenue, Suite 3100 Madison, Wisconsin 53703 Chicago, Illinois 60611 Telephone: (608) 960-7430 Telephone: (312) 373-3880 Facsimile: (608) 960-7460 Facsimile: (312) 794-7801 [email protected] [email protected] Liaison Counsel for Lead Plaintiffs The -and- Public School Teachers’ Pension and Retirement Fund of Chicago and the Katherine M. Sinderson Cambridge Retirement System Jai Chandrasekhar and the Class Julia K. Tebor Matthew Traylor (admission forthcoming) 1251 Avenue of Americas New York, New York 10020 Telephone: (212) 554-1400 Facsimile: (212) 554-1444 [email protected] [email protected] [email protected] [email protected] Lead Counsel for Lead Plaintiffs The Public School Teachers’ Pension and Retirement Fund of Chicago and the Cambridge Retirement System and the Class Case: 3:19-cv-00347-jdp Document #: 14 Filed: 07/12/19 Page 2 of 135 TABLE OF CONTENTS I. PRELIMINARY STATEMENT ........................................................................................ 2 II. JURISDICTION AND VENUE ......................................................................................... 9 III. THE PARTIES.................................................................................................................... 9 IV. DEFENDANTS’ FRAUDULENT CONDUCT ............................................................... 13 A. Spectrum, Its Businesses, and Relevant Pre-Class Period Events ........................ 13 B. The Technological and Operational Demands of a Modern Distribution Center .................................................................................................................... 16 C. Defendants Misled Investors During the Class Period About the Purported Success of the GAC and HHI Consolidations ...................................................... 17 D. In Reality, the Consolidations Severely Disrupted Spectrum’s Business............. 21 The GAC Consolidation Was Not “Progressing Smoothly” .................... 21 Material Undisclosed Delays in Consolidating GAC’s Manufacturing Lines and Distribution .......................................... 22 The Dayton Center’s Lack of Basic Infrastructure ....................... 25 The Dayton Center’s Massive Undisclosed Quality-Control Problems ....................................................................................... 29 The Dayton Center’s Inventory-Management Problems .............. 33 The Dayton Center’s Inability to Fill Customer Orders Promptly and Completely ............................................................. 37 The HHI Consolidation Was Not “On Track” .......................................... 38 Delays and Cost Overruns in Consolidating Distribution in Edgerton ........................................................................................ 39 Consolidation Delays at Edgerton Caused Excess Inventory Buildup at the North Carolina, California, and Edgerton Centers .......................................................................................... 42 The Edgerton Center’s Failure to Install Basic Infrastructure ................................................................................. 42 The Edgerton Center’s Incomplete Shipments to Customers ....... 45 i Case: 3:19-cv-00347-jdp Document #: 14 Filed: 07/12/19 Page 3 of 135 The Edgerton Center’s Delayed Shipments to Customers ............ 50 The Edgerton Center’s Undisclosed Hiring, Retention, and Training Problems ......................................................................... 54 The Consolidations’ Undisclosed Impact on Spectrum’s Sales to Walmart and Other Major Retailers .......................................................... 56 The Consolidations’ Undisclosed Adverse Impact on Spectrum’s Ability to Pay Both GAC’s and HHI’s Vendors ....................................... 60 E. The Truth Emerges While Defendants Continue to Mislead Investors ................ 65 Spectrum Discloses That Significant Distribution Center “Challenges” Had Occurred In March 2018, Fires Defendant Rouvé, But Assures The Market That These Issues Are “Transitory” .............................................................................................. 65 Spectrum Again Asserts That Consolidation Issues Are “Transitory” When Reporting Third-Quarter 2018 Earnings ................... 71 In the Days Leading up to Its Fourth-Quarter 2018 Earnings Release, Spectrum Announces Surprise Sale of GAC .............................. 74 November 19, 2018: Spectrum Admits that the Distribution-Center Consolidation Challenges Were Not “Transitory” and Had Ongoing Material Negative Effects on the Company’s Financial Results ....................................................................................................... 75 V. DEFENDANTS’ FALSE AND MISLEADING STATEMENTS AND OMISSIONS ..................................................................................................................... 77 A. January-June 2017: Defendants Falsely Claim That The Consolidations Are “On Track” and “Progressing Smoothly” ...................................................... 77 First Quarter 2017 ..................................................................................... 77 Second Quarter 2017................................................................................. 82 B. July 2017-February 2018: Defendants Misleadingly Claim That “Minor” Negative Financial Results Are Partly Attributable to “Temporary” “Transitory” “Normal Startup Inefficiencies” At Dayton and Edgerton .............. 85 Third Quarter 2017 ................................................................................... 85 First Quarter 2018 ..................................................................................... 96 ii Case: 3:19-cv-00347-jdp Document #: 14 Filed: 07/12/19 Page 4 of 135 C. April 2018: Defendants Falsely Claim That Materially Poor Financial Results Are “Transitory in Nature” ..................................................................... 102 D. July 2018: Defendants Falsely Claim That Positive Financial Results Demonstrate That The “Turnaround Is Well Underway” And The Issues Were Transitory” ................................................................................................ 105 VI. ADDITIONAL ALLEGATIONS OF SCIENTER ......................................................... 110 VII. LOSS CAUSATION ....................................................................................................... 119 VIII. CLASS ACTION ALLEGATIONS ............................................................................... 122 IX. INAPPLICABILITY OF STATUTORY SAFE HARBOR ........................................... 124 X. PRESUMPTION OF RELIANCE .................................................................................. 124 XI. CLAIMS BROUGHT UNDER 10(b) AND 20(a) OF THE EXCHANGE ACT ........... 125 COUNT I – For Violations of Section 10(b) of the Exchange Act and Rule 10b-5 Against Spectrum, Spectrum Legacy, and The Executive Defendants .................................................... 125 COUNT II – For Violations of Section 20(a) of the Exchange Act Against The Executive Defendants .................................................................................................................................. 127 COUNT III – For Violations Of Section 20(a) of The Exchange Act Against Defendant HRG Group, Inc. ......................................................................................................................... 128 XII. PRAYER FOR RELIEF ................................................................................................. 129 XIII. JURY DEMAND ............................................................................................................ 130 iii Case: 3:19-cv-00347-jdp Document #: 14 Filed: 07/12/19 Page 5 of 135 Lead Plaintiffs the Public School Teachers’ Pension and Retirement Fund of Chicago and the Cambridge Retirement System, by and through their undersigned counsel, bring this action pursuant to Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the “Exchange Act”) and U.S. Securities and Exchange Commission (“SEC”) Rule 10b-5 promulgated thereunder, on behalf themselves and all other persons or entities who purchased securities of Spectrum Brands Holdings, Inc. or HRG Group, Inc. during the period from January 26, 2017 to November 19, 2018, inclusive (the “Class Period”) and were damaged thereby (the “Class”).1 Lead Plaintiffs allege the following based upon personal knowledge as to themselves and their own acts and upon information and belief as to all other matters. Lead Plaintiffs’ information and belief are based on the ongoing investigation of their counsel, including from the following sources: (i) Spectrum Legacy’s, HRG’s, and Spectrum’s public filings with the SEC; (ii) research reports from securities and financial analysts; (iii) Spectrum Legacy’s, HRG’s, and Spectrum’s press releases and reports; (iv) Company website and marketing materials; (v) news and media reports concerning Spectrum Legacy, HRG, and Spectrum