Shareholder Whacks Kansas City Southern

     KANSAS CITY, Mo. (CN) - Kansas City Southern officers exposed the company to hundreds of millions of dollars of losses by "breaches of fiduciary duties and violations of law," a shareholder claims in a derivative lawsuit.
     Bruce Lerner sued 12 company officers in Federal Court.
     Kansas City Southern is a holding company with domestic and international rail operations in North America. KCS has a concession from the Mexican government that allows it to operate strategic routes between Mexico City and Texas.
     The lawsuit states: "Defendants improperly touted KCS's business prospects and issued aggressive financial guidance to demonstrate to the market and to the corporate debt rating agencies in particular, that the company's business metrics and financial prospects were deserving of an investment grade debt rating. In particular, defendants hyped that the company was then on track to achieve during fiscal 2013: (i) 'mid single-digit volume growth, along with mid single-digit pricing [growth]'; (ii) 'revenue growth ... higher on a percentage growth basis than 2012'; and (iii) improved 'operating ratio.' The company's guidance was overstated because it failed to take into account several negative trends affecting the company's business, including that KCS's utility coal volumes and crude oil shipments declined more drastically than defendants led the market to anticipate, that carloads in the company's chemical & petroleum shipments to Mexico declined due to operational issues with the company's customers in Mexico, that the company's anticipated ramp-up of its Mexican auto shipment business was not advancing at the rate the market was led to believe as the new plants were not coming on line, and that the company's heavily touted efforts to build the Port Arthur crude oil terminal were riddled with operational difficulties pushing the positive financial benefits of the expansion effort off further into the future."
     Lerner claims evidence of the defendants' wrongdoing began to emerge on Jan. 24 this year, when KCS issued a press release announcing disappointing 2013 fourth quarter fiscal results. KCS reported a net income of $113.8 million or $1.03 a share on revenues of $615.6 million. Lerner said that fell below the projected net income of $1.10 a share on $618.1 million.
     For 2013, net income fell to $3.98 a share, below the $4.05 a share the investment community had expected based on the defendants' statements, the complaint states. Also, Lerner claims that KCS's operating ratio had increased, even though the market was led to believe that it was declining.
     Lerner claims KCS officials blamed the poor earnings on a variety of factors during a conference call. He says some of the excuses included a plant shutdown, unplanned plant outages, reduced shipments to another plant, weakness in petroleum shipments and increased operating expenses.
     "Then, on February 18, 2014, the market learned that the lower house of the Mexican legislature had approved a new bill to increase rail competition in Mexico," the complaint states. "This legislation, if passed by Mexico's Senate, would give third-party companies access to KCS's currently exclusive freight and passenger rail networks. The Wall Street Journal, in a February 19, 2014 report entitled, 'Railroads and Mexican Government on Collision Course: Kansas City Southern and Grupo Mexico Fight Bill That Would Strip Exclusive Track Rights,' explained that the Mexican government had long been dissatisfied with KCS's performance under the concession.
     "Upon disclosure of the company's true business health and limited financial outlook, KCS's market capitalization plunged by nearly 22 percent, erasing over $2.8 billion in value. As a direct result of the individual defendants' wrongdoing, the company is now the subject of a securities class action lawsuit filed in the United States District Court for the Western District of Missouri on behalf of investors who purchased KCS shares. The securities class action lawsuit poses the risk of hundreds of millions of dollars in damages to the company."
     Lerner seeks damages, disgorgement of profits and a ruling requiring KCS to improve its internal structure to protect shareholders, including strengthening the company's disclosure controls; strengthening the board's supervision of operations; and allowing shareholders to elect three members to the board.
     He is represented by Tim Dollar of Dollar, Burns & Becker.