NEWARK (CN) – Top directors of A&P supermarkets sold $430 million of shares at inflated prices by lying to investors to disguise the company’s desperate financial straits, and when the truth came out the share price dropped by 70 percent in a single day, a shareholder says in a federal class action.
In a bit of unsettling irony, the 33-page complaint was filed the week after a new book, “The Great A&P and the Struggle for Small Business in America,” received glowing reviews in print and on radio, for its tale of a “stunningly successful company that forever changed how Americans shop and what Americans eat,” according to its description on Amazon.com.
While that may once have so, named plaintiff Ricky Dudley says that from July 2009 to December 2010 the operation of the storied company was nothing to be proud of.
Dudley says that during that time CEO Christian W.E. Haub and five codefendants on the board’s executive committee participated in a scheme “that operated as a fraud or deceit on purchasers of A&P securities by disseminating materially false and misleading statements and/or concealing material adverse facts.”
He claims the scheme enabled A&P to sell more than $430 million in shares at inflated prices.
Dudley cites a series of A&P press releases stating that despite financial difficulties associated with A&P’s $1.3 billion purchase of the Pathmark supermarket chain in March 2007, a “major investment agreement” would “strengthen [the Company’s] balance sheet” and significantly increase the liquidity available to pursue its business strategy. (Brackets in complaint.)
Dudley says the first of these press releases stated that the infusion of $175 million from the German investment firm Tengelmann Warenhandelsgesellschaft KG, and the Yucaipa Companies, a former owner of Pathmark, would “unlock shareholder value” and better position the company to compete in the dynamic food retail industry.
Citing the press release, Dudley says A&P acknowledged that the Pathmark purchase would continue to weigh on earnings, but said the strategic investment in the company will “well-position us to generate long-term growth overtime and once the overall economy improves.”
Dudley says these statements were materially false and misleading for a number of reasons: A&P was facing increased low-cost competition from retailers such as Wal-Mart and Target Corp.; Pathmark’s operations were in far worse condition than investors were told; and A&P was not operating according to internal expectation and could not achieve the guidance sponsored and/or endorsed by the defendants.
The string of positive news from A&P led to strong demand for a public offering of $260 million in shares in 2009, Dudley says.
Then in January 2010, A&P announced a sudden “‘impairment charge’ of almost $413 million,” and said that for the third quarter of 2009, the company would report a loss of $502.4 million, which included charges of $412.6 million for “goodwill, trademark and long-lived asset impairment and $16 million for mark to market adjustments related to financial liabilities.”
By comparison, losses from continuing operations for the previous year had been only $3.8 million, and the supermarket’s financial statements included income of $23 million for mark to market adjustments to financial liabilities.
Despite this worrying news, Dudley says, Haub continued to try to spin corporate statements, telling investors, “The good news is that we have identified several critical issues within our organization that will lead us back to market performance.”
But in December 2010, “A&P shocked and alarmed investors after they revealed, for the first time, that the company was performing so far below expectations and that the purported turnaround program was failing so miserably that the company would likely to be forced to file for bankruptcy protection,” according to the complaint.
Dudley seeks compensatory damages and extraordinary, equitable, and/or injunctive relief on behalf of the class for Exchange Act violations.
Lead counsel is Peter S. Pearlman, with Cohn, Lifland, Pearlman, Herrmann & Knopf of Saddle Brook, N.J.