WILMINGTON, Del. (CN) – Directors of RH Donnelley filed false and misleading statements as its stock price crashed from $66 to 6 cents, shareholders claim in Federal Court. The crash came as Donnelley went on a buying binge of “yellow page” directories and online search services, whose profit margins were nowhere near the print margins of print directories.
Shareholders sued CEO and Chairman of the Board David Swanson, COO George Bednarz, and CFO Steven Blondy.
“In 2003, RH Donnelley acquired the Embarq Directory Business (‘Embarq’) from Sprint Nextel Corporation,” according to the complaint. “The following year, the Company acquired the AT&T Directory Business (‘AT&T Directory’). In January 2006, RH Donnelley acquired Dex Media from Qwest Communications International, Inc. The Company’s growth through acquisition history caused it to take on a substantial amount of debt. From 2002 through 2007, RH Donnelley’s long-term debt grew from $2.1 billion at year-end 2002 to $10 billion by year-end 2007.
“For years, investors viewed yellow page companies as stable, high-margin companies with strong cash flows capable of carrying high debt. Nonetheless, in recent years, investors’ perceptions have changed due to declines in advertising budgets and perceived shifts in trends away from traditional yellow page searches to online searches.
“In an attempt to diversify, RH Donnelley has been expanding its online offerings and offering its customers a Triple Play bundle. The Triple Play bundle includes print yellow pages, Internet yellow pages and search engine marketing/search engine optimizing tools. Despite the increase in online offerings, the majority of the Company’s revenue was from its high margin print advertising.
“During the Class Period, defendants issued materially false and misleading statements regarding the Company’s business and financial results. Defendants caused the Company to fail to properly account for its bad debt expense and timely write down its impaired goodwill. As a result of defendants’ false and misleading statements, RH Donnelley’s stock traded at artificially inflated prices during the Class Period, trading as high as $66.67 in July 2007. …
“Then, on May 29, 2009, RH Donnelley filed for bankruptcy. The stock now trades at around 6 cents per share.”
Shareholders are represented by Rosenthal, Monhait & Goddess.