CHICAGO (CN) - An investors' class action against Ulta Salon, Cosmetics and Fragrance may proceed, a federal judge ruled. Shareholders said the company concealed that its expenses and inventory had increased so dramatically that when the truth was revealed Ulta's stock price plummeted.
Ulta's third quarter ended just nine days after its Oct. 25, 2007 initial public offering. Investors say the beauty supplier timed the IPO to avoid exposure of its dismal financial news.
Ulta's IPO included 7.7 million shares of common stock at $18 per share, and certain selling shareholders also sold 1.3 million shares to close out Ulta's stock at $29.82 at the end of the first day.
The retailer's Prospectus, Registration Statements and SEC forms included financial information only through the end of the second quarter, omitting "information necessary to make the information that was provided not misleading," U.S. District Judge Robert Gettleman found.
Actual expense and inventory levels at the time of the IPO were contrary to the trends reported in the Prospectus, which described positive financial movement in expenses as a percentage of net sales and merchandise inventory levels.
According to investors, Ulta knew that its new warehouse management software system, touted in the prospectus, had operating problems, causing a build-up in unwanted inventories, but represented that its positive financial trends were expected to continue into the third quarter.
"The complaint has detailed allegations about the warehouse management software problem and the resulting build-up of inventory, including allegations that weekly internal memoranda were produced," Gettleman wrote. "There can be no question that defendants had access to this information, as well as the information regarding increased advertising and ... expenses."
Ulta argued that it was not subject to liability because it was not a "seller" within the meaning of the Securities Act, having sold shares to underwriters and not directly to investors.
But Gettleman noted that company executives did signed the prospectus, which is a document that solicits the public to acquire securities.
The court also rejected Ulta's arguments that the plaintiffs failed to identify misleading misrepresentations or omissions, that the complaint was based on hindsight, "must have known" contentions without evidence of motivation, and that Ulta had no duty to disclose pending financial data.
Because of the ample factual allegations of Ulta's impending third-quarter results, the court determined that the defendants signed the prospectus and went forward with the IPO deliberately withholding the negative financial news.
"There are allegations sufficient to support a strong inference that [Ulta] either knew or intentionally avoided knowing that the Prospectus was misleading," the judge wrote, rejecting the retailer's final arguments for dismissal.
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