J.C. Penney has reached an agreement to settle a shareholder class action lawsuit for $97.5 million. The case stems from a period in 2013 when the Plano-based company was struggling to survive from a failed attempt to transform the department store. The lawsuit, Alan B. Marcus, Individually and on Behalf of All Others Similarly Situated, v. J.C. Penney Company, Inc., et.al., is pending in the U.S. District Court for the Eastern District of Texas.
The retailer was accused of lying about its financial health. A Texas federal judge was asked to stay the litigation. It was about two months after U.S. District Judge Robert Schroeder adopted a magistrate judge’s ruling certifying a class of J.C. Penney investors, that the two sides reached a settlement.
The lawsuit alleged that J.C. Penney publicly assured investors that its business was improving and that it saw no need to raise capital. The statements made by former chief executive officer Mike Ullman and chief financial officer Ken Hannah in August and September 2013 misled investors regarding the company’s liquidity prior to the announcement of a public stock offering in September 2013, the lawsuit said. Penney issued 84 million shares of stock and raised $800 million to get it through a cash crunch it found itself in after CEO Ron Johnson’s tenure. Ullman returned to lead Penney in April 2013.
Investors, who first filed suit in October 2013, claim that their decision to purchase stock within the class window was the result of false statements made by J.C. Penney executives in August 2013 about how much cash the company would have on hand at the end of the year. The class, led by the National Shopmen Pension Fund, includes investors who purchased company stock from Aug. 20 to Sept. 26, 2013.
The newly issued stock diluted the 220 million shares outstanding. The company had $5.8 billion in debt and its interest payments have climbed to $400 million a year. Penney says it “denies the allegations in the lawsuit, but is entering into this settlement to eliminate the uncertainties, burden and expense of further protracted litigation.” The $97.5 million settlement will be funded by insurance and will have no financial impact to the company. The settlement remains subject to final documentation and approval of the District Court following notice to class members.
In September 2013, a Goldman Sachs report on the retailer’s liquidity issues, as well as J.C. Penney’s subsequent announcement of plans to issue nearly $1 billion in new shares to deepen its reserve, caused the company’s stock price to drop, according to the suit.
A September 2016 report and recommendation from U.S. Magistrate Judge K. Nicole Mitchell found that the then-proposed class had “sufficiently pled” its claim that J.C. Penney was aware of undisclosed facts that would undermine the assertions made in its financial statement, including the company’s claim that it “did not see conditions for the rest of the year” that would require J.C. Penney to raise its liquidity.
The class is represented by X. Jay Alvarez, James A. Caputo, Rachel A. Cocalis, Jonah H. Goldstein, Robert R. Henssler Jr., Danielle S. Myers and Hillary B Stakem of Robbins Geller Rudman & Dowd LLP, and Claire A. Henry and Jack W. Hill of Ward Smith & Hill PLLC. The case is Marcus v. J.C. Penney Co. Inc. et al. (case number 6:13-cv-00736) in the U.S. District Court for the Eastern District of Texas.
Sources: Law360.com and Dallasnews.com