WILMINGTON, Del. (CN) – Revlon tricked common shareholders into selling 9.3 million shares of common stock before announcing “stellar” quarterly results that more than tripled share prices, according to a class action in Chancery Court.
Lead plaintiff Edward Gutman says Revlon’s controlling shareholder, MacAndrews & Forbes, used a stock exchange offer, “an extraordinary event in corporate life,” to increase its holdings of Revlon common stock.
In exchange for common stock, which had bottomed out at $5.75 a share, investors received an equal number of shares from a newly issued series called Revlon Preferred Stock, according to the complaint.
Preferred stock had a higher liquidation preference compared to common stock, and Revlon promised a 12.75 percent annual dividends to lure investors into the exchange, the class claims.
MacAndrews used the exchange to increase its share of common stock from 58.3 percent to 77.5 percent, according to the complaint. Investors now own 22.5 percent of common stock and 100 percent of the preferred stock.
The class claims that Revlon learned one week before the exchange offer closed that it would be publishing “unexpected profit” for the third quarter – but Revlon withheld the information from investors.
Gutman says he was entitled to know Revlon’s results before deciding whether to exchange his 26,000 shares of common stock.
Revlon posted higher net sales for the third quarter. The class claims that Revlon doubled its operating income from the previous quarter and increased net income from continuing operations by 100 percent.
Nothing in the second quarter results or the company’s statements “prepared the investing public for the strength of the 2009 third quarter results,” according to the complaint.
In light of the results, investors say that Revlon’s disclosures were “inadequate and misleading.”
Shares of Revlon common stock traded at $18.87 a share on Dec. 17, up from $5.75 before publication of the results, according to the complaint.
Defendants include CEO Ronald Perelman and other executives and directors Barry Schwartz, David Kennedy, Alan Ennis, Alan Bernikow, Paul Bohan, Meyer Feldberg, Ann Jordan, Debra Lee, Tamara Mellon, Kathi Seifert, and Kenneth Wolfe.
The class seeks damages for breach of fiduciary duty. Its lead counsel is David Jenkins with Smith Katzenstein & Furlow.