TYLER, Texas (CN) — A federal judge granted class certification in a securities fraud lawsuit accusing J.C. Penney of boosting its stock price through false and misleading statements.
U.S. District Judge Robert Schroeder III on March 8 rejected Penney’s objections to a magistrate judge’s report recommending class certification.
Lead plaintiff Alan B. Marcus sued J.C. Penney, its CEO Myron Ullman III and CFO Kenneth Hannah in October 2013 in the Eastern District of Texas.
Representing a class who bought common stock between Aug. 20, 2013 and Sept. 26, 2013, Marcus claims the defendants made materially false and misleading statements in news releases, conference calls with analysts, and SEC filings.
“Specifically, throughout the class period, defendants violated the federal securities laws by disseminating false and misleading statements to the investing public in connection with the company’s finances, assuring investors that the company had sufficient cash through year-end. As a result of defendants’ false statements, J.C. Penney’s stock traded at artificially inflated prices during the class period, reaching a high of $14.47 per share on September 9, 2013,” the complaint states.
Among his claims were that Penney concealed that it lacked liquidity to get through the year, and that it needed additional investments to make it through the holiday season.
“However, after the above revelations seeped into the market, the company’s shares were hammered by massive sales, sending the stock price down over 37 percent from its class period high,” according to the complaint.
Marcus claims that the “fraudulent scheme” not only caused him and the class to buy J.C. Penney common stock at inflated prices, but also allowed one of its largest shareholders, Pershing Square Capital Management, to sell 39.07 million shares of its Penney stock at inflated prices, for more than $504 million.
Marcus’ original complaint cited an Aug. 20, 2013 news release in which Penney said it expected to end the year with more than $1.5 billion in liquidity.
CEO Ullman reiterated that in a conference call, saying: “‘We obviously shared with [suppliers] the significant financial support we arranged with Goldman Sachs, which we had put in place in order to make sure that we had sufficient liquidity to effectuate the turnaround,’” according to the complaint.
It continues: “‘The financial actions we took in the quarter enable us to stabilize the business financially and provide us with the necessary resources to complete the turnaround. … Significant progress has been made and we are confident we will have inventory at appropriate levels throughout the store and online well in advance of the holiday season.’”
In that same call, CFO Hannah said: “I think we are very comfortable that the $1.5 billion liquidity is in line for year-end,” according to the complaint.
The news caused J.C. Penney stock to rise to its high of $14.47 for the class period on Sept. 9, 2013. However, Marcus adds, on Sept. 25 that year a Goldman Sachs analyst reported that Penney would need to take on additional debt to keep operating, and might face liquidity problems due to a “combination of weak fundamentals, inventory rebuilding, and an underperforming home department.”
Penney stock then dropped $1.78 per share to close at $10.12 on Sept. 25, 2013.
The next day, Sept. 26, Penney announced a secondary offering of 84 million shares of common stock, saying: “The company intends to use the net proceeds from the offering for general corporate purposes.”
On Sept. 27, Penney company priced the new shares at $9.65, but they sank to $9.05 that day.
Penney claimed that the Sept. 24 Goldman Sachs report and the Sept. 26 stock offering announcement were not corrective disclosures. It said the disclosures were not corrective because the information had already been reported, and therefore were not evidence of fraud.
Judge Schroeder disagreed. He found that Penney’s objections failed to rebut the findings that the presumption of reliance was invoked for purchasers of its common stock.
“Here, defendants did not meet their burden to produce sufficient evidence to show that the disclosures on September 24 and September 26 did not affect the market price and cause J.C. Penney’s stock price to drop on September 25 and September 27, respectively,” Schroeder wrote.
He agreed with the magistrate judge’s finding that Penney did not establish that the opinions in the Goldman Sachs report had been previously disclosed to the market.
“Defendants did not meet their burden to show that the causal link between the disclosures and the stock price decrease on September 25 and 27 was severed,” Schroeder said.
He certified the class of stockholders: “Plaintiffs demonstrated that J.C. Penney Company, Inc. securities traded in an efficient market during the class period, and are entitled to the presumption of reliance set forth in Basic Inc. v. Levinson.”
He appointed the National Shopmen Pension Fund as class representative and Robbins Geller Rudman & Dowd as lead counsel.
Penney did not reply to voicemail and email requests for comment.