Case 4:14-cv Document 1 Filed in TXSD on 12/22/14 Page 1 of 27. UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF TEXAS Houston Division

Transcription

1 Case 4:14-cv Document 1 Filed in TXSD on 12/22/14 Page 1 of 27 UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF TEXAS Houston Division MARTIN K. INDIK, Individually and on Behalf of All Others Similarly Situated, Case No. 4:14-cv-3660 v. Plaintiff, FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS CONN S, INC., THEODORE M. WRIGHT, BRIAN E. TAYLOR, and MICHAEL J. POPPE, JURY TRIAL DEMANDED Defendants. Martin K. Indik ( Plaintiff ), by and through his attorneys, alleges the following upon information and belief, except as to those allegations concerning Plaintiff, which are alleged upon personal knowledge. Plaintiff s information and belief is based upon, among other things, his counsel s investigation, which includes without limitation: (a) review and analysis of regulatory filings made by CONN S, INC. ( Conn s or the Company ), with the United States Securities and Exchange Commission ( SEC ); (b) review and analysis of press releases and media reports issued by and disseminated by Conn s; and (c) review of other publicly available information concerning Conn s. NATURE OF THE ACTION AND OVERVIEW 1. This is a class action on behalf of those who purchased or otherwise acquired Conn s securities between September 2, 2014 and December 9, 2014, inclusive (the Class 1

2 Case 4:14-cv Document 1 Filed in TXSD on 12/22/14 Page 2 of 27 Period ), seeking to pursue remedies under the Securities Exchange Act of 1934 (the Exchange Act ). 2. Conn s is a specialty retailer that currently operates 91 retail locations in Arizona, Colorado, Louisiana, Mississippi, Nevada, New Mexico, North Carolina, Oklahoma, South Carolina, Tennessee and Texas. The Company s primary product categories include home appliance, furniture and mattress, consumer electronics, and home office. The Company also provides flexible in-house credit options for its customers in addition to third-party financing programs and third-party rent-to-own payment plans. 3. On December 9, 2014, the Company reported a surprising net loss for the quarter, driven primarily by significantly higher than expected losses in its credit segment division. According to the Company, delinquency rates have increased and provisions for bad debt for the three months ended October 31, 2014 was $72.0 million, an increase of $49.4 million from the same prior-year period. The Company announced that its Board of Directors established a Credit Risk and Compliance Committee and that the Company s Chief Financial Officer was leaving the Company. Additionally, the Company retracted its full-year earnings guidance, pending its ongoing review of strategic alternatives and the oversight initiatives. 4. On this news, shares of Conn s declined $14.26 per share, over 40%, to close at $20.83 per share on December 9, 2014, on unusually heavy volume. 5. Throughout the Class Period, Defendants made false and/or misleading statements, as well as failed to disclose material adverse facts about the Company s business, operations, and prospects. Specifically, Defendants made false and/or misleading statements and/or failed to disclose: (1) that the Company was increasing its business and financial results by using underwriting and collections practices that, despite Defendants statements to the 2

3 Case 4:14-cv Document 1 Filed in TXSD on 12/22/14 Page 3 of 27 contrary, weakened the Company s portfolio quality and left it vulnerable to substantial increases in bad debt; (2) that despite increasing underwriting standards, the Company was experiencing rising delinquencies at a substantially different rate that it was representing; (3) that the Company s credit segment practices substantially threatened the Company s financial performance; and (4) that, as a result of the above, the Company s statements were materially false and misleading at all relevant times and/or lacked a reasonable basis. 6. As a result of Defendants wrongful acts and omissions, and the precipitous decline in the market value of the Company s securities, Plaintiff and other Class members have suffered significant losses and damages. JURISDICTION AND VENUE 7. The claims asserted herein arise under Sections 10(b) and 20(a) of the Exchange Act (15 U.S.C. 78j(b) and 78t(a)) and Rule 10b-5 promulgated thereunder by the SEC (17 C.F.R b-5). 8. This Court has jurisdiction over the subject matter of this action pursuant to 28 U.S.C and Section 27 of the Exchange Act (15 U.S.C. 78aa). 9. Venue is proper in this Judicial District pursuant to 28 U.S.C. 1391(b) and Section 27 of the Exchange Act (15 U.S.C. 78aa(c)). Substantial acts in furtherance of the alleged fraud or the effects of the fraud have occurred in this Judicial District. Many of the acts charged herein, including the preparation and dissemination of materially false and/or misleading information, occurred in substantial part in this Judicial District. Additionally, Conn s principal executive offices are located within this Judicial District. 10. In connection with the acts, transactions, and conduct alleged herein, Defendants directly and indirectly used the means and instrumentalities of interstate commerce, including the United States mail, interstate telephone communications, and the facilities of a national securities exchange. 3

4 Case 4:14-cv Document 1 Filed in TXSD on 12/22/14 Page 4 of 27 PARTIES 11. Plaintiff, as set forth in the accompanying certification, incorporated by reference herein, purchased or otherwise acquired Conn s securities during the Class Period, and suffered damages as a result of the federal securities law violations and false and/or misleading statements and/or material omissions alleged herein. 12. Defendant Conn s is a Delaware corporation with its principal executive offices located at 4055 Technology Forest Blvd, Suite 210, The Woodlands, Texas Defendant Theodore M. Wright ( Wright ) was, at all relevant times, Chief Executive Officer ( CEO ) and a director of Conn s. 14. Defendant Brian E. Taylor ( Taylor ) was, at all relevant times, Chief Financial Officer ( CFO ) of Conn s. 15. Defendant Michael J. Poppe ( Poppe ) was, at all relevant times, Executive Vice President on June 1, 2010 and Chief Operating Officer of Conn s. Poppe was also the CFO of Conn s from February 1, 2008 through April 23, Defendants Wright, Taylor, and Poppe are collectively referred to hereinafter as the Individual Defendants. The Individual Defendants, because of their positions with the Company, possessed the power and authority to control the contents of Conn s reports to the SEC, press releases and presentations to securities analysts, money and portfolio managers and institutional investors, i.e., the market. Each defendant was provided with copies of the Company s reports and press releases alleged herein to be misleading prior to, or shortly after, their issuance and had the ability and opportunity to prevent their issuance or cause them to be corrected. Because of their positions and access to material non-public information available to them, each of these defendants knew that the adverse facts specified herein had not been disclosed to, and were being concealed from, the public, and that the positive representations which were being made were then materially false and/or misleading. The Individual Defendants are liable for the false statements pleaded herein, as those statements were each group-published information, the result of the collective actions of the Individual Defendants. 4

5 Case 4:14-cv Document 1 Filed in TXSD on 12/22/14 Page 5 of 27 SUBSTANTIVE ALLEGATIONS Background 17. Conn s is a specialty retailer that currently operates 91 retail locations in Arizona, Colorado, Louisiana, Mississippi, Nevada, New Mexico, North Carolina, Oklahoma, South Carolina, Tennessee and Texas. The Company s primary product categories include home appliance, furniture and mattress, consumer electronics, and home office. The Company also provides flexible in-house credit options for its customers in addition to third-party financing programs and third-party rent-to-own payment plans. Materially False and Misleading Statements Issued During the Class Period 18. The Class Period begins on September 2, On this day, the Company issued a press release entitled, Conn s, Inc. Reports Second-Quarter Fiscal 2015 Financial Results. Therein, the Company, in relevant part, stated: Theodore M. Wright, Conn s chairman and chief executive officer commented, The retail segment had another outstanding quarter with higher gross margins, expanded operating margins, and the 12th consecutive quarter of increasing same store sales. Strategies to grow sales of our most profitable product lines are proving enduringly successful. Over the last five months we have successfully opened an additional 14 stores, in 11 markets. We are reaching customers that were underserved before, giving lowincome consumers the opportunity to purchase quality, durable, branded products for their homes at affordable monthly payments. Overall results were not satisfactory. Our credit operations ran into unexpected headwinds, resulting in portfolio performance deterioration. Despite tighter underwriting, lower early-stage delinquency and improved collections staffing and execution, delinquency unexpectedly deteriorated across all credit quality levels, customer groups, product categories, geographic regions and years of origination. Tighter underwriting and better collections execution did not offset deterioration in our customer s ability to resolve delinquency. 5

6 Case 4:14-cv Document 1 Filed in TXSD on 12/22/14 Page 6 of 27 Delinquency rates improved through May and increased modestly in June, consistent with typical seasonal trends. However, over sixty-day delinquency rates unexpectedly deteriorated a combined 90 basis points in July and August. We now expect future 60-plus day delinquency to increase to levels above our historical highs in the third and fourth quarter of fiscal Early stage delinquency remains lower than historical averages through August. We have made additional minor changes to tighten underwriting in August. Over time, more of the total portfolio will have been originated under the tighter underwriting policies implemented in late fiscal 2014 and early fiscal Declining sales of electronics as a percentage of total sales, slower expected originations growth and an expected reduction in the percentage of originations to new customers should also benefit future portfolio performance. Longer term, we believe the changes necessary to optimize portfolio performance are in place, although we may not return to credit loss rates of prior years. In response to higher delinquency, we are reducing the level of no-interest programs and raising the interest rates in some markets to increase portfolio yield. As it has been for half a century, our combined retail and credit business model proved its strength and resiliency. Retail profitability cushioned the impact of credit performance volatility inherent in subprime consumer credit. Had we not pushed ahead to expand our retail sales, we would not have mitigated negative credit trends by strongly growing retail profits. We remain confident in the business model. The mid-point of our revised guidance for the full year assumes EPS growth of 12% and a 17% return on equity. This performance is expected to be achieved while absorbing high customer acquisition costs from credit losses on new customers, elevated advertising expenses in new markets and inefficiently utilized distribution infrastructure. As our expansions mature and growth pace declines to more stable and predictable rates, we anticipate our performance will be more stable as well. * * * Credit Segment First-Quarter Results (on a year-over-year basis unless otherwise noted) Credit revenues increased 37.8%, to $64.3 million. The credit revenue growth was attributable to the increase in the average receivable portfolio balance outstanding. The customer portfolio balance equaled $1.18 billion at July 31, 2014, rising 39.9%, or $336.2 million from the prior year. The portfolio interest and fee income yield was 18.2% for the second quarter, up 30 basis points from the prior year. 6

7 Case 4:14-cv Document 1 Filed in TXSD on 12/22/14 Page 7 of 27 Provision for bad debts increased $18.3 million to $39.6 million for the second quarter, for a 13.9% annualized provision rate, up 330 basis points from the prior year. The increase was driven primarily by a 41.1% increase in the average portfolio balance, on a 24.9% increase in loan originations over the same period in the prior year, and higher than expected delinquency and future charge-offs. An increase in the balance of accounts which are accounted for as troubled debt restructurings to $62.1 million, or 5.3% of the total portfolio balance, was responsible for $3.4 million of the increase in the provision for bad debts. The percentage of the customer portfolio balance greater than 60-days delinquent was 8.7% as of July 31, 2014, which compares to 8.0% as of April 30, 2014 and 8.2% as of July 31, As of August 31, 2014, the percentage of the customer portfolio balance greater than 60-days delinquent was 9.2%. Additional information on the credit portfolio and its performance may be found in the table included within this press release and in our Quarterly Report on Form 10-Q for the quarter ended July 31, 2014, to be filed with the Securities and Exchange Commission. Outlook and Guidance * * * Conn s updated its fiscal year 2015 earnings guidance to a range of $2.80 to $3.00 per diluted share on an adjusted basis. The company expects to generate diluted earnings per share of between $2.75 and $2.95 for the 12 months ended January 31, 2015, which includes charges of approximately $0.05 per diluted share associated with facility closures and lease terminations during the first six months of fiscal The following assumptions were considered in developing the full-year guidance: General economic conditions impacting our customers or potential customers; Same stores sales up 5% to 10%; New store openings of 18; Ten store closures; Discontinued sales of lawn equipment; Retail gross margin between 40.0% and 41.0%; An increase in the credit portfolio balance; Credit portfolio interest and fee yield of between 17.5% to 18.0%; Credit segment provision for bad debts of between 11.0% and 12.0% of the average portfolio balance outstanding based on the same store sales expectations presented above and influenced by the level of customer receivables accounted for as troubled debt restructurings; 7

8 Case 4:14-cv Document 1 Filed in TXSD on 12/22/14 Page 8 of 27 Selling, general and administrative expense of between 28.5% and 29.0% of total revenues; Issuance of $250.0 million of 7.25% senior unsecured notes on July 1, 2014; and Diluted shares outstanding of approximately 37.0 million. 19. On September 2, 2014, Conn s filed its Quarterly Report with the SEC on Form 10-Q for the fiscal 2015 second quarter. The Company s Form 10-Q was signed by Defendant Taylor, and reaffirmed the Company s financial results previously announced that day. The Company s Form 10-Q also contained required Sarbanes-Oxley certifications, signed by Defendants Wright and Taylor, who certified: 1. I have reviewed this quarterly report on Form 10-Q of Conn s, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: (a) (b) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial 8

9 Case 4:14-cv Document 1 Filed in TXSD on 12/22/14 Page 9 of 27 statements for external purposes in accordance with generally accepted accounting principles; (c) (d) Evaluated the effectiveness of the registrant s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and Disclosed in this report any change in the registrant s internal control over financial reporting that occurred during the registrant s most recent fiscal quarter (the registrant s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant s internal control over financial reporting; and 5. The registrant s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant s auditors and the audit committee of the registrant s board of directors (or persons performing the equivalent functions): (a) (b) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant s ability to record, process, summarize and report financial information; and Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant s internal control over financial reporting. 20. On September 2, 2014, the Company hosted a conference call to discuss its second quarter fiscal 2015 results. During the call, Defendant Wright discussed the Company s credit segment and stated, in part: Turning to our credit segment, we completed the first quarter in May with high confidence in the portfolio performance, improvement trend because of the actions taken over the last several quarters to improve performance. Those trends were not sustained. The company s credit segment performance unexpectedly deteriorated. Delinquency over 60 days increased 70 basis points in the quarter and was up another 50 basis points in August. Our failure to return to the expected trend required adjustments to our expectations for future portfolio performance. Provision for loan losses and guidance then adjusted to reflect this expectation. 9

10 Case 4:14-cv Document 1 Filed in TXSD on 12/22/14 Page 10 of 27 The increase in delinquency occurred despite actions over the last several quarters to improve delinquency performance. Tighter underwriting policies for 2014 has led to increases in average credit score underwritten, average credit score in the portfolio, and down payment percentage. The percentage of originations with FICO scores below 525 is virtually zero. And originations to customers with no scores down 40% from Q3 a year ago. First payment to fall since the percentage of the portfolio is down 25% from the end of fiscal First payment to fall as a percentage of total delinquency is down 27% as well. Entry ended delinquency and early stage delinquency in total was in line with past experience and the expectations built into our underwriting model. Early stage delinquency remained low at the end of August. Operational execution improved measurably. Staffing has been at or above the current need for two consecutive quarters ageing tenures improving. Staff over 12 months with the company is up 50% year-over-year and staff over 6 months with the company is up 74%. Individual collections ageing performance is more consistent. The gap between top and bottom performers is narrowing. We added experienced talents for the collections management team from both outside hires and promotion from within. System enhancements have been implemented. Our systems have been stable and improving. We have opportunities to improve certainly but execution is better not worse than in the recent past. Late stage delinquency increased for all FICO scores, markets, product categories, years of origination, and customer groups. The increase in new customers as a percentage of the portfolio compared to a year ago is impacting delinquency as we have commented on many times over the last year. However, the percentage of new customers was not significantly different in the second quarter than at the end of the first quarter. Once customers become delinquent more than 60 days, our customers are not resolving the delinquency at the same rate as in the past or as expected. Customers are under pressure from the number of directions. Inflation of rents is one example, increased sub-prime issuance for vehicle purchases, and also the pressure in customer s ability to pay Conn s. Car loans and rent will generally rank ahead of Conn s in customers priority to pay. Although we cannot specifically identify the causes for pressure on our customer s ability to resolve delinquency, we haven t identified any internal factor causing the increase in delinquency. We believe there are several factors that should help future performance of our added segment. Portfolio growth should be slower in fiscal 2015 than in fiscal 2014, and slow further in fiscal 2016 due to slower same store sales growth, store closings, slower store opening pace as a percentage of existing stores, and more 10

11 Case 4:14-cv Document 1 Filed in TXSD on 12/22/14 Page 11 of 27 occurred: restrictive underwriting. The anticipated slower same store sales growth should result in increasing originations to repeat customers. As a percentage of the portfolio balance, we expect lower collections caused as the hiring pace and turnover subside. Portfolio growth although slower will provide operating leverage on expenses for this persistence for several of these and other fixed overhead. Delinquency rates about product category on slide 11. Declining electronic sales as a percentage of the total should benefit delinquency as well. 21. During the call, Defendant Poppe stated, in relevant part: Our expectation is that the delinquency rate will rise to just over 9% at the end of October. The net charge off rate increased 220 basis points sequentially to 10%, partially impacted by the fact that we did not complete a sale of charge off accounts during the quarter. This sequential increase is consistent with the expectations we have communicated on the last earnings call though it was higher than originally anticipated. We expect the charge off rate to decline in the third quarter due in part to the anticipated completion of additional charge offs account sales. 22. During the call, Defendant Taylor stated, in relevant part: For the first six months of fiscal 2015 provision for bad debt was 11% of the average portfolio balance. Based on our current expectations of future charge off levels, delinquency trends and sales levels in the third and fourth quarters of the fiscal year, we estimate provision for bad debt to range between 11% to 12% on a full year basis. Reflecting the impact of higher provision for bad debt, the credit segment reported an operating loss of $200,000 this quarter. 23. During the question and answer portion of the call, the following exchange Peter Keith, Piper Jaffray & Company: Okay and then just one last question as a follow-on to that, so if I heard Mike correctly, you re thinking that the delinquency rate will max out at around 9% in October? So you ran at 9.2% in August, I guess that sounds to me like you are sort of on for stabilization from the current level, while you have seen it kind of rise up in the last two months, so what gives you the confidence that you will max out only at 9% a few months from now? Defendant Taylor: 11

12 Case 4:14-cv Document 1 Filed in TXSD on 12/22/14 Page 12 of 27 What gives us confidence at least in the foreseeable term is what we see in early stage delinquency today with 1 to 60 day delinquency actually declining in August. So what we see in the earlier stage performance business confidence that at least in the short-term that there shouldn t be significant additional upward pressure on 60-plus delinquency. The -- it is driven largely just by the -- as we accelerate growth and you continue to see more receivables roll into the portfolio and move into -- and season in the portfolio is driving this acceleration in the provision rate. And if performance continues to improve, that should moderate over time, and we would expect the guidance implies that the provision rate should improve over the remainder of the year. 24. The statements contained in were materially false and/or misleading when made because defendants failed to disclose or indicate the following: (1) that the Company was increasing its business and financial results by using underwriting and collections practices that, despite Defendants statements to the contrary, weakened the Company s portfolio quality and left it vulnerable to substantial increases in bad debt; (2) that despite increasing underwriting standards, the Company was experiencing rising delinquencies at a substantially different rate that it was representing; (3) that the Company s credit segment practices substantially threatened the Company s financial performance; and (4) that, as a result of the above, the Company s statements were materially false and misleading at all relevant times and/or lacked a reasonable basis. Disclosures at the End of the Class Period 25. On December 9, 2014, the Company issued a press release entitled, Conn s, Inc. Reports Third-Quarter Fiscal 2015 Financial Results. Therein, the Company, in relevant part, stated: Conn s, Inc. (NASDAQ:CONN), a specialty retailer of furniture, mattresses, home appliances, consumer electronics and provider of consumer credit, today announced its financial results for the third quarter ended October 31, The Company also announced a transition of its Chief Financial Officer, changes to its management structure and new initiatives by the Board of Directors to enhance 12

13 Case 4:14-cv Document 1 Filed in TXSD on 12/22/14 Page 13 of 27 oversight of the business as Conn s continues to actively pursue its previously announced review of strategic alternatives. Financial Results Third-quarter fiscal 2015 significant items included (on a year-over-year basis unless noted): Consolidated revenues increased 19.0% to $370.1 million; Same store sales declined 1.0%, influenced by tighter credit underwriting standards and the lapping of marketing strategy changes that drove a 35.1% increase a year ago; Furniture and mattress sales increased 37.4% and appliance sales rose 24.6%; Entered three new markets with the opening of six Conn s HomePlus stores; Retail gross margin increased 50 basis points to 40.6%; Adjusted retail segment operating income increased 11.9% to $38.1 million; Credit segment operating income decreased $43.6 million to an operating loss of $33.2 million, driven by increased provision for bad debts; The percentage of the customer portfolio balance 60+ days delinquent was 10.0% as of October 31, 2014, an increase of 130 basis points from July 31, 2014; and Diluted loss was $0.08 per share, compared to diluted earnings of $0.66 per share in the prior year. Theodore M. Wright, Conn s chairman and chief executive officer commented, In the third quarter, we drove significant growth and expanded gross margins in the retail segment, but these gains were more than offset by additional provisions for credit losses. Customer credit scores continue to deteriorate. Despite underwriting changes reducing the percentage of originations to customers with scores below 550, the proportion of customers in late stage delinquency with a score below 550 increased this year, though it has remained relatively constant since the end of the second quarter. As a result, delinquency rates have increased and losses are being realized at a faster pace than originally anticipated. We recorded additional provisions for credit losses this quarter, based on the assumption that we will not realize any improvement in these trends over the next 12 months, despite the underwriting changes and improved collections execution. Although the realization of losses associated with the credit segment is occurring at a faster pace than originally anticipated, at this time, we do not believe we will experience static loss rates that are significantly different from our previous estimates. November credit performance has provided evidence of stabilizing credit trends, with the over-sixty-day delinquency rate holding steady at 10%. The percentage of balances 31 to 60 days past due declined for the 13

14 Case 4:14-cv Document 1 Filed in TXSD on 12/22/14 Page 14 of 27 quarter and again in November 2014 to 3.3% as compared to 3.6% a year ago. We are disappointed in this quarter s reported results, and we are committed to improving performance in the credit segment through better execution and oversight. * * * Credit Segment Results (on a year-over-year basis unless otherwise noted) Credit revenues increased 21.6% to $64.9 million. The credit revenue growth was attributable to the increase in the average receivable portfolio balance outstanding. The customer portfolio balance equaled $1.25 billion at October 31, 2014, rising 32.7%, or $308.7 million from the prior year. The portfolio interest and fee income yield on an annualized basis was 16.9% for the third quarter, down 90 basis points from the same period last year reflecting a higher provision for uncollectable interest. Provision for bad debts for the three months ended October 31, 2014 was $72.0 million, an increase of $49.4 million from the same prior-year period. The yearover-year increase was impacted by the following: A 36.4% increase in the average receivable portfolio balance resulting from new store openings and same store growth over the past 12 months; A 12.3% increase in the balances originated during the quarter compared to the prior year; An increase of 150 basis points in the percentage of customer accounts receivable balances greater than 60 days delinquent to 10.0% at October 31, Delinquency increased year-over-year across credit quality levels, customer groups, product categories, geographic regions and years of origination. Despite tighter underwriting and better collections execution, deterioration in the customer s ability to resolve delinquency continued throughout the quarter and the expectations for charge-offs over the next 12 months were adjusted to fully reflect this trend; Higher expected charge-offs over the next twelve-month period as losses are occurring at a faster pace than previously anticipated, due to the continued deterioration in the customer s ability to resolve delinquency; The decision to pursue collection of past and future charged-off accounts internally rather than selling charged off accounts to a third party. This change resulted in $7.6 million in additional provision as recoveries are expected to occur over an extended time period, which results in a reduction in expected cash recoveries over the next twelve months; and The balance of customer receivables accounted for as troubled debt restructurings increased to $73.4 million, or 5.9% of the total portfolio balance, driving $4.1 million of the increase in provision for bad debts. 14

15 Case 4:14-cv Document 1 Filed in TXSD on 12/22/14 Page 15 of 27 Additional information on the credit portfolio and its performance may be found in the table included within this press release and in the Company s Quarterly Report on Form 10-Q for the quarter ended October 31, 2014, to be filed with the Securities and Exchange Commission. Net Income Results For the quarter ended October 31, 2014, Conn s reported a net loss of $0.08 per diluted share, which included net pretax charges and credits of $0.4 million associated with facility closures and legal and professional fees related to the Company s exploration of strategic alternatives and a class action lawsuit. This compares to $0.66 per diluted share for the prior-year quarter, which included a pretax charge of $2.8 million, or $0.08 per diluted share, associated with facility closures. Management Change * * * Conn s today announced the departure of Brian Taylor, the Company s Chief Financial Officer. Effective immediately, the Company has appointed Mark Haley as Interim Chief Financial Officer. Prior to joining Conn s as Vice President and Chief Accounting Officer in October 2014, Mr. Haley was Vice President and Chief Accounting Officer at Coldwater Creek, Inc. for four years. He previously served as Senior Director, Financial Reporting at Supervalu, Inc. for three years and spent 16 years with Deloitte in Assurance Services. The Company has engaged an executive search firm to identify qualified candidates for the permanent Chief Financial Officer position. The search process will include both internal and external candidates. * * * Additional Oversight Conn s also announced several new initiatives by its Board of Directors that are intended to enhance oversight of the business at a time when the senior management team is contending with a combination of rapid portfolio growth and a more difficult credit collection environment. Although the Company s retail operations have performed well, with successful new store openings and product margin expansion, the performance of the Company s credit operations has been disappointing several times over the last twelve months. Additionally, the Company recognizes that its credit operations forecasting has not been acceptably accurate. 15

16 Case 4:14-cv Document 1 Filed in TXSD on 12/22/14 Page 16 of 27 To help address these challenges, the Board of Directors has established a Credit Risk and Compliance Committee. The Board of Directors members on this committee will be responsible for reviewing credit risks, underwriting strategy and credit compliance activities. The committee will direct and supervise an independent evaluation of underwriting standards to validate underwriting processes and results. A Board of Directors-directed evaluation of collections operations by two independent third-party advisors has already been completed. These reviews identified no significant deficiencies in operations effectiveness but did identify opportunities for improvement, particularly in collections cost efficiency. Additionally, the Board of Directors has approved two new positions to augment its management team. The Board of Directors has initiated a search for a President, who will report directly to the Company s Chairman and Chief Executive Officer. The Company is seeking candidates for this position with demonstrated senior leadership capabilities in large, complex retail and/or consumer credit organizations. The Board of Directors has also initiated a search for a Chief Risk Officer, who will report to the Company s Chief Operating Officer and provide periodic reporting to the Credit Risk and Compliance Committee of the Board of Directors. The Board of Directors is taking these actions in response to the growing scale and complexity of the Company s credit business, along with increasing industry-wide regulatory scrutiny. 26. On this news, shares of Conn s declined $14.26 per share, over 40%, to close at $20.83 per share on December 9, 2014, on unusually heavy volume. CLASS ACTION ALLEGATIONS 27. Plaintiff brings this action as a class action pursuant to Federal Rule of Civil Procedure 23(a) and (b)(3) on behalf of a class, consisting of all those who purchased or otherwise acquired Conn s securities between September 2, 2014 and December 9, 2014, inclusive (the Class Period ) and who were damaged thereby (the Class ). Excluded from the Class are Defendants, the officers and directors of the Company, at all relevant times, members of their immediate families and their legal representatives, heirs, successors or assigns and any entity in which Defendants have or had a controlling interest. 28. The members of the Class are so numerous that joinder of all members is impracticable. Throughout the Class Period, Conn s securities were actively traded on the 16

17 Case 4:14-cv Document 1 Filed in TXSD on 12/22/14 Page 17 of 27 NASDAQ Stock Market ( NASDAQ ). While the exact number of Class members is unknown to Plaintiff at this time and can only be ascertained through appropriate discovery, Plaintiff believes that there are hundreds or thousands of members in the proposed Class. Millions of Conn s shares were traded publicly during the Class Period on the NASDAQ. As of December 4, 2014, Conn s had 36,297,211 shares of common stock outstanding. Record owners and other members of the Class may be identified from records maintained by Conn s or its transfer agent and may be notified of the pendency of this action by mail, using the form of notice similar to that customarily used in securities class actions. 29. Plaintiff s claims are typical of the claims of the members of the Class as all members of the Class are similarly affected by Defendants wrongful conduct in violation of federal law that is complained of herein. 30. Plaintiff will fairly and adequately protect the interests of the members of the Class and has retained counsel competent and experienced in class and securities litigation. 31. Common questions of law and fact exist as to all members of the Class and predominate over any questions solely affecting individual members of the Class. Among the questions of law and fact common to the Class are: (a) Whether the federal securities laws were violated by Defendants acts as alleged herein; (b) Whether statements made by Defendants to the investing public during the Class Period omitted and/or misrepresented material facts about the business, operations, and prospects of Conn s; and (c) To what extent the members of the Class have sustained damages and the proper measure of damages. 17

18 Case 4:14-cv Document 1 Filed in TXSD on 12/22/14 Page 18 of A class action is superior to all other available methods for the fair and efficient adjudication of this controversy since joinder of all members is impracticable. Furthermore, as the damages suffered by individual Class members may be relatively small, the expense and burden of individual litigation makes it impossible for members of the Class to individually redress the wrongs done to them. There will be no difficulty in the management of this action as a class action. UNDISCLOSED ADVERSE FACTS 33. The market for Conn s securities was open, well-developed and efficient at all relevant times. As a result of these materially false and/or misleading statements, and/or failures to disclose, Conn s securities traded at artificially inflated prices during the Class Period. Plaintiff and other members of the Class purchased or otherwise acquired Conn s securities relying upon the integrity of the market price of the Company s securities and market information relating to Conn s, and have been damaged thereby. 34. During the Class Period, Defendants materially misled the investing public, thereby inflating the price of Conn s securities, by publicly issuing false and/or misleading statements and/or omitting to disclose material facts necessary to make Defendants statements, as set forth herein, not false and/or misleading. Said statements and omissions were materially false and/or misleading in that they failed to disclose material adverse information and/or misrepresented the truth about Conn s business, operations, and prospects as alleged herein. 35. At all relevant times, the material misrepresentations and omissions particularized in this Complaint directly or proximately caused or were a substantial contributing cause of the damages sustained by Plaintiff and other members of the Class. As described herein, during the Class Period, Defendants made or caused to be made a series of materially false and/or 18

19 Case 4:14-cv Document 1 Filed in TXSD on 12/22/14 Page 19 of 27 misleading statements about Conn s financial well-being and prospects. These material misstatements and/or omissions had the cause and effect of creating in the market an unrealistically positive assessment of the Company and its financial well-being and prospects, thus causing the Company s securities to be overvalued and artificially inflated at all relevant times. Defendants materially false and/or misleading statements during the Class Period resulted in Plaintiff and other members of the Class purchasing the Company s securities at artificially inflated prices, thus causing the damages complained of herein. LOSS CAUSATION 36. Defendants wrongful conduct, as alleged herein, directly and proximately caused the economic loss suffered by Plaintiff and the Class. 37. During the Class Period, Plaintiff and the Class purchased Conn s securities at artificially inflated prices and were damaged thereby. The price of the Company s securities significantly declined when the misrepresentations made to the market, and/or the information alleged herein to have been concealed from the market, and/or the effects thereof, were revealed, causing investors losses. SCIENTER ALLEGATIONS 38. As alleged herein, Defendants acted with scienter in that Defendants knew that the public documents and statements issued or disseminated in the name of the Company were materially false and/or misleading; knew that such statements or documents would be issued or disseminated to the investing public; and knowingly and substantially participated or acquiesced in the issuance or dissemination of such statements or documents as primary violations of the federal securities laws. As set forth elsewhere herein in detail, Defendants, by virtue of their receipt of information reflecting the true facts regarding Conn s, his/her control over, and/or 19

20 Case 4:14-cv Document 1 Filed in TXSD on 12/22/14 Page 20 of 27 receipt and/or modification of Conn s allegedly materially misleading misstatements and/or their associations with the Company which made them privy to confidential proprietary information concerning Conn s, participated in the fraudulent scheme alleged herein. APPLICABILITY OF PRESUMPTION OF RELIANCE (FRAUD-ON-THE-MARKET DOCTRINE) 39. The market for Conn s securities was open, well-developed and efficient at all relevant times. As a result of the materially false and/or misleading statements and/or failures to disclose, Conn s securities traded at artificially inflated prices during the Class Period. On November 24, 2014, the Company s stock closed at a Class Period high of $35.62 per share. Plaintiff and other members of the Class purchased or otherwise acquired the Company s securities relying upon the integrity of the market price of Conn s securities and market information relating to Conn s, and have been damaged thereby. 40. During the Class Period, the artificial inflation of Conn s stock was caused by the material misrepresentations and/or omissions particularized in this Complaint causing the damages sustained by Plaintiff and other members of the Class. As described herein, during the Class Period, Defendants made or caused to be made a series of materially false and/or misleading statements about Conn s business, prospects, and operations. These material misstatements and/or omissions created an unrealistically positive assessment of Conn s and its business, operations, and prospects, thus causing the price of the Company s securities to be artificially inflated at all relevant times, and when disclosed, negatively affected the value of the Company stock. Defendants materially false and/or misleading statements during the Class Period resulted in Plaintiff and other members of the Class purchasing the Company s securities at such artificially inflated prices, and each of them has been damaged as a result. 20

21 Case 4:14-cv Document 1 Filed in TXSD on 12/22/14 Page 21 of At all relevant times, the market for Conn s securities was an efficient market for the following reasons, among others: (a) Conn s stock met the requirements for listing, and was listed and actively traded on the NASDAQ, a highly efficient and automated market; (b) As a regulated issuer, Conn s filed periodic public reports with the SEC and/or the NASDAQ; (c) Conn s regularly communicated with public investors via established market communication mechanisms, including through regular dissemination of press releases on the national circuits of major newswire services and through other wide-ranging public disclosures, such as communications with the financial press and other similar reporting services; and/or (d) Conn s was followed by securities analysts employed by brokerage firms who wrote reports about the Company, and these reports were distributed to the sales force and certain customers of their respective brokerage firms. Each of these reports was publicly available and entered the public marketplace. 42. As a result of the foregoing, the market for Conn s securities promptly digested current information regarding Conn s from all publicly available sources and reflected such information in Conn s stock price. Under these circumstances, all purchasers of Conn s securities during the Class Period suffered similar injury through their purchase of Conn s securities at artificially inflated prices and a presumption of reliance applies. NO SAFE HARBOR 43. The statutory safe harbor provided for forward-looking statements under certain circumstances does not apply to any of the allegedly false statements pleaded in this Complaint. 21

22 Case 4:14-cv Document 1 Filed in TXSD on 12/22/14 Page 22 of 27 The statements alleged to be false and misleading herein all relate to then-existing facts and conditions. In addition, to the extent certain of the statements alleged to be false may be characterized as forward looking, they were not identified as forward-looking statements when made and there were no meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those in the purportedly forward-looking statements. In the alternative, to the extent that the statutory safe harbor is determined to apply to any forward-looking statements pleaded herein, Defendants are liable for those false forwardlooking statements because at the time each of those forward-looking statements was made, the speaker had actual knowledge that the forward-looking statement was materially false or misleading, and/or the forward-looking statement was authorized or approved by an executive officer of Conn s who knew that the statement was false when made. FIRST CLAIM Violation of Section 10(b) of The Exchange Act and Rule 10b-5 Promulgated Thereunder Against All Defendants 44. Plaintiff repeats and realleges each and every allegation contained above as if fully set forth herein. 45. During the Class Period, Defendants carried out a plan, scheme and course of conduct which was intended to and, throughout the Class Period, did: (i) deceive the investing public, including Plaintiff and other Class members, as alleged herein; and (ii) cause Plaintiff and other members of the Class to purchase Conn s securities at artificially inflated prices. In furtherance of this unlawful scheme, plan and course of conduct, defendants, and each of them, took the actions set forth herein. 46. Defendants (i) employed devices, schemes, and artifices to defraud; (ii) made untrue statements of material fact and/or omitted to state material facts necessary to make the 22

23 Case 4:14-cv Document 1 Filed in TXSD on 12/22/14 Page 23 of 27 statements not misleading; and (iii) engaged in acts, practices, and a course of business which operated as a fraud and deceit upon the purchasers of the Company s securities in an effort to maintain artificially high market prices for Conn s securities in violation of Section 10(b) of the Exchange Act and Rule 10b-5. All Defendants are sued either as primary participants in the wrongful and illegal conduct charged herein or as controlling persons as alleged below. 47. Defendants, individually and in concert, directly and indirectly, by the use, means or instrumentalities of interstate commerce and/or of the mails, engaged and participated in a continuous course of conduct to conceal adverse material information about Conn s financial well-being and prospects, as specified herein. 48. These defendants employed devices, schemes and artifices to defraud, while in possession of material adverse non-public information and engaged in acts, practices, and a course of conduct as alleged herein in an effort to assure investors of Conn s value and performance and continued substantial growth, which included the making of, or the participation in the making of, untrue statements of material facts and/or omitting to state material facts necessary in order to make the statements made about Conn s and its business operations and future prospects in light of the circumstances under which they were made, not misleading, as set forth more particularly herein, and engaged in transactions, practices and a course of business which operated as a fraud and deceit upon the purchasers of the Company s securities during the Class Period. 49. Each of the Individual Defendants primary liability, and controlling person liability, arises from the following facts: (i) the Individual Defendants were high-level executives and/or directors at the Company during the Class Period and members of the Company s management team or had control thereof; (ii) each of these defendants, by virtue of their 23