Case 1:16-cv LTS Document 24 Filed 06/13/16 Page 1 of 34

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1 Case 1:16-cv LTS Document 24 Filed 06/13/16 Page 1 of 34 UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK IN RE CNOVA N.V. SECURITIES LITIGATION This Document Relates To: All Actions MASTER FILE 16 CV 444-LTS JURY TRIAL DEMANDED AMENDED CLASS ACTION COMPLAINT Lead Plaintiffs Michael Schwabe and Jaideep Khanna (collectively, Plaintiffs ) make the following allegations, except as to allegations specifically pertaining to Plaintiffs and Plaintiffs counsel, based upon the investigation undertaken by Plaintiffs counsel, which investigation included analysis of publicly available news articles and reports, public filings, securities analysts reports and advisories about Cnova N.V. ( Cnova or Company ), press releases and other public statements issued by the Company, and media reports about the Company, and believe that substantial additional evidentiary support will exist for the allegations set forth herein after a reasonable opportunity for discovery. NATURE OF THE ACTION 1. This is a federal securities class action on behalf all persons other than Defendants (defined herein) who purchased the ordinary shares of Cnova pursuant and/or traceable to the Company s Registration Statement ( Registration Statement ), which incorporated the Prospectus ( Prospectus ), which was filed pursuant to Rule 424(b)(4) on November 21, 2014, issued in connection with the Company s initial public offering on or about November 19, 2014 ( IPO or Offering ) seeking to pursue remedies under the Securities Act of 1933 ( Securities Act ).

2 Case 1:16-cv LTS Document 24 Filed 06/13/16 Page 2 of Cnova was formed on May 30, 2014 as a combination of Cdiscount S.A. and its subsidiaries ( Cdiscount ), which have operations in France, Columbia, Thailand, Vietnam, Ecuador, Ivory Coast, Belgium and Senegal, and Nova Pontocom Comércio Eletrônico S.A. and its subsidiaries ( Cnova Brazil ), which operate Extra.com, Casasbahia.com and Pontofrio.com in Brazil. To effect the combination of Cdiscount and Cnova Brazil, Cnova implemented reorganization ( Reorganization ) of the ecommerce businesses of its parent companies (i.e., Cnova and Big C Supercenter, Casino, CBD, Éxito and Via Varejo). As of the IPO, Cnova generated approximately half of its sales from each of Cdiscount and Cnova Brazil. 3. On November 20, 2014, Cnova priced its IPO of 26,800,000 shares at $7.00 per share, exclusive of the underwriters over-allotment option to purchase 4,020,000 additional shares. Inexplicably, the IPO price reflected a discount of between 44% and 50% compared to the range of $12.50 to $14.00 that the Company had indicated just two days earlier on November 18, The IPO offered approximately 6.1% of Cnova s equity to the public. 4. The Registration Statement included consolidated financial statements for the years ended December 31, 2011, 2012 and 2013, and for the nine months ended September 30, 2013 and 2014, prepared on a pro forma basis reflecting the effects of the Reorganization. The Registration Statement likewise included the quarterly financial information for the quarterly periods ending September 30, 2012 through September 30, Beginning a little over a year after Cnova s IPO, the Company issued a series of disclosures wherein it revealed that the financial information incorporated into the 2

3 Case 1:16-cv LTS Document 24 Filed 06/13/16 Page 3 of 34 Registration Statement for 2013 and 2014, and all of the financial results Cnova reported since becoming a public company, require corrective restatements that will cumulatively reduce its operating EBIT (earnings before interest and taxes) by at least 50.8 million. (Cnova s previously reported operating EBIT for full year 2013 and 2014 was 23 million and 33 million, respectively). Specifically, the Company admitted that it: (i) overstated net sales and earnings; (ii) improperly valued damaged and returned items and failed to take an appropriate write-off; (iii) misstated accounts receivable related to the damaged/returned items; (iv) identified discrepancies related (a) to accounts payable due to suppliers, and (b) to accounts receivable and products in-transit with delivery companies; (v) improperly accounted for intangible assets; and (vi) may have improperly deferred operating expenses. Thus, the Company materially misreported its historical financial reports, which violated the Company s own stated accounting policies. 6. Based on these shocking disclosures, it now is evident that Defendants Registration Statement was materially false and misleading in violation of the Securities Act. From the IPO through the commencement of this Action, Cnova shares declined more than 67%, from $7 to $2.28, or $4.62 per share, damaging investors in excess of approximately $120 million. JURISDICTION AND VENUE 7. The claims asserted herein arise under and pursuant to Sections 11 and 15 of the Securities Act [15 U.S.C. 77k, and 77o]. 8. This Court has jurisdiction of this action pursuant to Section 22 of the Securities Act [15 U.S.C. 77v] and 28 U.S.C and

4 Case 1:16-cv LTS Document 24 Filed 06/13/16 Page 4 of Venue is properly laid in this District pursuant to Section 22 of the Securities Act and 28 U.S.C. 1391(b) and (c). The acts and conduct complained of herein occurred in substantial part in this District. 10. In connection with the acts and conduct alleged in this Complaint, defendants, directly and indirectly, used the means and instrumentalities of interstate commerce, including the United States mail, interstate telephonic communications, and the facilities of the NASDAQ Global Select Market, a national securities exchange. 11. This Action has been brought within three years of the ordinary shares being bona fide offered to the public and within one year after the discovery of the untrue statement or the omission, or after such discovery should have been made by the exercise of reasonable diligence. PARTIES Plaintiffs 12. Plaintiff Michael Schwabe purchased ordinary shares of Cnova, as set forth in the certification previously filed with the Court and incorporated herein by reference, pursuant and/or traceable to the Registration Statement issued in connection with the Company s IPO, and was damaged thereby. 13. Plaintiff Jaideep Khanna purchased ordinary shares of Cnova, as set forth in the certification previously filed with the Court and incorporated herein by reference, pursuant and/or traceable to the Registration Statement issued in connection with the Company s IPO, and was damaged thereby. 4

5 Case 1:16-cv LTS Document 24 Filed 06/13/16 Page 5 of 34 Defendant Cnova 14. Defendant Cnova is a public limited liability company organized under the laws of The Netherlands. Its principal executive offices are at WTC Schiphol Airport, Tower D, 7th Floor, Schiphol Boulevard 273, 1118 BH Schiphol, The Netherlands. Cnova ordinary shares traded on the NASDAQ Global Select Market at all relevant times hereto. Individual Defendants 15. Defendant Vitor Faga de Almeida ( Almeida ) was, at all relevant times, Chief Financial Officer ( CFO ) of Cnova. Almeida signed or authorized the signing of the Registration Statement. 16. Defendant German Quiroga ( Quiroga ) was, at all relevant times, Co-Chief Executive Officer and a director of Cnova. Quiroga signed or authorized the signing of the Registration Statement and was the founder of Nova Pontocom, whose ecommerce business is the main component of Cnova Brazil, and Pontofrio.com. 17. Defendant Emmanuel Grenier ( Grenier ) was, at all relevant times, Co- CEO of Cnova. Grenier signed or authorized the signing of the Registration Statement. 18. Defendant Jean-Charles Naouri ( Naouri ) was, at all relevant times, a director and Chairman of Cnova. Naouri signed or authorized the signing of the Registration Statement. According to the Registration Statement, prior to completion of the IPO, Naouri was the beneficial owner of 100% of the Company s ordinary shares and 100% of the special voting depository receipts for special voting shares, which together accounted for 100% of the total voting power. Also according to the Registration Statement, upon completion of the IPO, Naouri would be the beneficial owner of 93.9% of the Company s ordinary shares and 100% of the special voting depository receipts for 5

6 Case 1:16-cv LTS Document 24 Filed 06/13/16 Page 6 of 34 special voting shares, which together would account for 96.9% of the total voting power. 19. Defendant Libano Miranda Barroso ( Barroso ) was, at all relevant times, a director of Cnova. Barroso signed or authorized the signing of the Registration Statement. 20. Defendant Eleazar de Carvalho Filho ( Filho ) was, at all relevant times, a director of Cnova. Filho signed or authorized the signing of the Registration Statement. 21. Defendant Didier Leveque ( Leveque ) was, at all relevant times, a director of Cnova. Leveque signed or authorized the signing of the Registration Statement. 22. Defendant Ronaldo Iabrudi dos Santos Pereira ( Pereira ) was, at all relevant times, a director of Cnova. Pereira signed or authorized the signing of the Registration Statement. 23. Defendant Arnaud Strasser ( Strasser ) was, at all relevant times, a director of Cnova. Strasser signed or authorized the signing of the Registration Statement. 24. Defendant Fernando Tracanella ( Tracanella ) was, at all relevant times, CFO and Human Resources Director of the Company s Brazilian operating segment. Tracanella signed or authorized the signing of the Registration Statement. 25. Defendant Nicolas Woussen ( Woussen ) was, at all relevant times, Deputy CEO in charge of Finance, Legal and Human Resources of Cdiscount, the Company s French operating segment. Woussen signed or authorized the signing of the Registration Statement. 26. Defendant Yves Desjacques ( Desjacques ) was, at all relevant times, a director of Cnova. 27. Defendant Bernard Oppetit ( Oppetit ) was, at all relevant times, a director of Cnova. 6

7 Case 1:16-cv LTS Document 24 Filed 06/13/16 Page 7 of Defendants Almeida, Quiroga, Grenier, Naouri, Barroso, Filho, Leveque, Pereira, Strasser, Tracanella Woussen, Desjacques and Oppetit are collectively referred to as the Individual Defendants. 29. Because of their positions with the Company, the Individual Defendants had the power and authority to control the contents of Cnova s filings with the U.S. Securities and Exchange Commission ( SEC ), press releases, presentations to securities analysts and investors, and other public statements, including the Registration Statement and Prospectus. Each Defendant was provided with copies of the Company s filings and statements alleged herein to be materially false and misleading, including the Registration Statement and Prospectus, prior to, or shortly after, their issuance and had the ability and the opportunity to prevent their issuance or to cause them to be corrected. Underwriter Defendants 30. Defendant Morgan Stanley & Co. LLC ( Morgan Stanley ) was lead underwriter of the Company s IPO. In the IPO, Morgan Stanley agreed to purchase 10,050,000 shares of Cnova, exclusive of its over-allotment option. 31. Defendant J.P. Morgan Securities LLC ( J.P. Morgan ) was an underwriter of the Company s IPO. In the IPO, J.P. Morgan agreed to purchase 6,030,000 shares of Cnova, exclusive of its over-allotment option. 32. Defendant Merrill Lynch, Pierce, Fenner & Smith Incorporated ( Merrill Lynch ) was an underwriter of the Company s IPO. In the IPO, Merrill Lynch agreed to purchase 2,680,000 shares of Cnova, exclusive of its over-allotment option. 33. Defendant Credit Suisse Securities (USA) LLC ( Credit Suisse ) was an underwriter of the Company s IPO. In the IPO, Credit Suisse agreed to purchase 2,680,000 7

8 Case 1:16-cv LTS Document 24 Filed 06/13/16 Page 8 of 34 shares of Cnova, exclusive of its over-allotment option. 34. Defendant Deutsche Bank Securities Inc. ( Deutsche Bank ) was an underwriter of the Company s IPO. In the IPO, Deutsche Bank agreed to purchase 2,680,000 shares of Cnova, exclusive of its over-allotment option. 35. Defendant BNP Paribas Securities Corp. ( BNP Paribas ) was an underwriter of the Company s IPO. In the IPO, BNP Paribas agreed to purchase 670,000 shares of Cnova, exclusive of its over-allotment option. 36. Defendant HSBC Securities (USA) Inc. ( HSBC ) was an underwriter of the Company s IPO. In the IPO, HSBC agreed to purchase 670,000 shares of Cnova, exclusive of its over-allotment option. 37. Defendant Natixis Securities Americas LLC ( Natixis ) was an underwriter of the Company s IPO. In the IPO, Natixis agreed to purchase 670,000 shares of Cnova, exclusive of its over-allotment option. 38. Defendant SG Americas Securities, LLC ( SG Americas ) was an underwriter of the Company s IPO. In the IPO, SG Americas agreed to purchase 670,000 shares of Cnova, exclusive of its over-allotment option. 39. Defendants Morgan Stanley, J.P. Morgan, Merrill Lynch, Credit Suisse, Deutsche Bank, BNP Paribas, HSBC, Natixis and SG Americas are collectively referred to as the Underwriter Defendants. PLAINTIFFS CLASS ACTION ALLEGATIONS 40. Plaintiffs bring this action as a class action pursuant to Federal Rules of Civil Procedure 23(a) and 23(b)(3) on behalf of themselves and all persons ( Class ) who purchased the ordinary shares of Cnova pursuant and/or traceable to the Registration 8

9 Case 1:16-cv LTS Document 24 Filed 06/13/16 Page 9 of 34 Statement issued in connection with the Company s IPO during the period between November 19, 2014 (the date of the IPO) and December 18, 2015 ( Class Period ). Excluded from the Class are Defendants; the officers and directors of Defendants; members of the immediate family of any excluded person; the legal representatives, agents, heirs, successors, or assigns of any excluded person; and any entity in which any excluded person has a controlling interest or which is related to or affiliated with any excluded person. 41. The members of the Class are so numerous that joinder of all members is impracticable. Cnova sold 26.8 million shares in the IPO. During the Class Period, Cnova s ordinary shares were actively traded on the NASDAQ Global Select Market. While the exact number of Class members is unknown to Plaintiffs at this time and can only be ascertained through appropriate discovery, Plaintiffs believe there are hundreds, if not thousands, of members of the proposed Class. Record owners and other members of the Class may be identified from records maintained by Cnova or its transfer agent or the underwriters of the IPO and may be notified of the pendency of this action, by mail and publication, using techniques and forms of notice similar to those customarily used in class actions arising under the federal securities laws. 42. Plaintiffs will fairly and adequately represent and protect the interests of the members of the Class. Plaintiffs have retained competent counsel experienced in class and securities litigation to further ensure the Class s interests are protected and intend to prosecute this action vigorously. 43. Plaintiffs claims are typical of the claims of all members of the Class because Plaintiffs and all the Class members damages arise from and were caused by the same violations of the federal securities laws that are complained of herein. Plaintiffs do 9

10 Case 1:16-cv LTS Document 24 Filed 06/13/16 Page 10 of 34 not have any interest antagonistic to, or in conflict with, the Class. 44. Common questions of law and fact exist as to all members of the Class and predominate over any questions affecting only 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 and omissions as alleged herein; (b) Whether the Registration Statement that Defendants issued to the investing public in connection with the IPO misstated and/or omitted material facts about Cnova and its financial results; and (c) Whether the members of the Class have sustained damages and, if so, what is the proper measure of damages. 45. A class action is superior to other available methods for the fair and efficient adjudication of this controversy since joinder of all Class members is impracticable. Furthermore, as the damages suffered by individual Class members may be relatively small, the expense and burden of individual litigation make it virtually impossible for Class members, individually, to seek to redress the wrongs done to them. Plaintiffs know of no difficulty that will be encountered in the management of this litigation that would preclude its maintenance as a class action. THE OFFERING AND DEFENDANTS MISSTATEMENTS 46. Cnova describes itself as one of the largest global ecommerce companies, with operations in Europe, Latin America, Asia and Africa. Its most significant product categories are home appliances, consumer electronics, computers, and home furnishings. The Company s brands include Cdiscount, Extra, Casas Bahia, and Ponto Frio. In its 10

11 Case 1:16-cv LTS Document 24 Filed 06/13/16 Page 11 of 34 primary markets of France and Brazil, Cnova was the largest and second largest ecommerce company, respectively. 47. According to the Company s Form 20-F filing for the fiscal year ended December 31, 2014, Cdiscount accounted for approximately 46.2% of the Company s total reported net sales in 2014 and Cnova Brazil accounted for approximately 53.8% of total net sales that year. 48. On November 18, 2014, Cnova filed Amendment No. 8 to its Form F-1 indicating that it expect[s] that the initial public offering price will be between $12.50 and $14.00 per ordinary share. 49. On November 20, 2014, Cnova priced its IPO at $7.00 per share 44% to 50% lower than the range of $12.50 to $14.00 that the Company had indicated just two days earlier. Pursuant to the IPO, the Company offered 26,800,000 ordinary shares, exclusive of the underwriters over-allotment option to purchase 4,020,000 additional shares. According to the Company, after a partial exercise of the underwriters over-allotment option (for an additional 2,357,327 shares), the Offering raised million (or approximately $146.6 million) for the Company net of underwriter discounts and expenses. The IPO offered approximately 6.1% of Cnova s equity to the public. 50. The Registration Statement included consolidated financial statements for the years ended December 31, 2011, 2012 and 2013, and for the nine months ended September 30, 2013 and 2014, prepared on a pro forma basis reflecting the effects of the Reorganization. The Registration Statement likewise included the quarterly financial information for the quarterly periods ending September 30, 2012 through September 30, In addition, the Registration Statement represented the respective percentage changes 11

12 Case 1:16-cv LTS Document 24 Filed 06/13/16 Page 12 of 34 of various financial metrics, including, inter alia, net sales, cost of sales, operating expenses, net financial expenses and income tax expenses, cash flow and earnings during the various covered periods. Cnova Misstated its Net Sales, Cost of Sales and Gross Margin 51. The Registration Statement included, inter alia, the following representations regarding Cnova s Net Sales: 1 for the year ended December 31, 2013, net sales were 2,898,912,000 for the nine months ended September 30, 2013, net sales were 1,981,232,000 for the nine months ended September 30, 2014, net sales were 2,375,225,000 See, e.g., Prospectus at Defendants also represented that: Net sales consist primarily of revenue generated from product sales and related services from our business to consumer direct sales and our business to business transactions, across our variety of product categories.... We exclude revenue from items that are returned and orders that are cancelled. Prospectus at 71. [Emphasis added]. However, in direct contravention to Cnova s own stated policy, Cnova did not exclude revenue from damaged/returned items in its financial reports. Instead, in its reported net sales for the year ended December 31, 2013, for the nine months ended September 30, 2013, and for the ninth months ended September 30, 2014, the Company improperly included sales of merchandise that was returned for replacement and the merchandise sent as replacement as two sales, rather than cancelling out the original sales once the merchandise was returned. This double booking of replacement sales resulted in a 1 Although, based on currently available information, the inaccurately reported financial information related to Cnova s operations in Brazil, Cnova reported its income statement and balance sheet on a consolidated basis without specifying the specific inputs by country and thus distorted all of the financial information for the entire Company. 12

13 Case 1:16-cv LTS Document 24 Filed 06/13/16 Page 13 of 34 material overstatement of Net Sales. 53. In addition, as defined in the Prospectus, Cost of Sales consist of costs related to [Cnova s] direct sales business, including purchase price of consumer products sold to customers from our direct sales... and costs for lost, stolen or damaged goods we receive. Prospectus at 72. [Emphasis added]. However, contrary to that representation, Cnova did not properly account for its costs related to damages goods in its Costs of Sales. Moreover, Cnova s records included discrepancies related to accounts payable due to suppliers and also related to accounts receivable/products in-transit with delivery companies. The Registration Statement thus materially misstated Cnova s Cost of Sales. 54. Cnova represented that it calculated its Gross Margin as net sales minus cost of sales. See, e.g., Prospectus at Thus, the Registration Statement also materially misstated Cnova s Gross Margin as follows: for the year ended December 31, 2013, 426,768,000 for the nine months ended September 30, 2013, 285,886,000 for the nine months ended September 30, 2014, 317,146,000 Id. The Company similarly materially misstated its Gross Margin for each of the financial quarters within 2013 and the first three quarters of 2014 contained in the Registration Statement. Likewise, the Company materially misstated its Gross Margin post-marketing expenses for each of the relevant periods contained in the Registration Statement. 55. According to the Company, see Prospectus at 58, gross margin was included in the Registration Statement as a supplemental disclosure because it is a performance measure used by [Cnova s] management and board of directors to determine the commercial performance of our business. In addition, we provide gross margin post-marketing expenses 13

14 Case 1:16-cv LTS Document 24 Filed 06/13/16 Page 14 of 34 because it indicates that our growth in sales has been achieved with only limited marketing expenses. Thus, these misstatements were admittedly material. 56. As set forth in detail below, on January 12, 2016, the Company publicly announced that it failed to properly account for certain product returns and thereby overstated its Net Sales. The Company subsequently admitted that the requisite accounting adjustments to Net Sales, and the related approximately 50 million reduction in operating EBIT, needed to be partially apportioned to the Company s 2013 and 2014 financial statements, which were included in the Registration Statement. The Company further admitted that its records also included incorrect entries concerning accounts payable. Cnova Misstated its Income Statement 57. The Registration Statement represented Cnova s Income Statement, and, critically, its earnings for its year ended December 31, 2013, and for the nine months ended September 30, 2013 and 2014 as follows: Nine Months Ended Year Ended December 31, September 30, ( ( thousands) thousands) ( thousands) Consolidated Income Statement: Net Sales 2,898,912 1,981,232 2,375,225 Cost of sales (2,472,144) (1,695,346) (2,058,079) Operating expenses: Fulfillment (202,840) (140,429) 167,795 Marketing (79,136) (58,820) (48,959) Technology and content (76,733) (54,696) (60,615) General and administrative (44,554) (34,657) (38,784) Operating profit before restructuring, initial public offering expenses, litigation, gain/(loss) from disposal of non-current assets and impairment of assets 23,505 (2,717) 993 Restructuring (2,790) (78) (9,359) Litigation (3,145) (1,837) (410) Initial Public Offering expenses (5,097) Gain/(loss) from disposal of non-current assets Impairment of assets (1,139) Operating profit (loss) 17,266 (3,772) (13,860) 14

15 Case 1:16-cv LTS Document 24 Filed 06/13/16 Page 15 of 34 Financial income 5,297 3,532 4,369 Financial expense (60,946) (42,188) (53,901) Profit (loss) before tax (38,382) (42,428) (63,392) Income tax gain (expense) 15,732 6,380 10,518 Share of profits of associates (356) (356) (2,339) Net profit (loss) (23,006) (36,404) (55,213) Attributable to the owners (22,490) (35,772) (53,685) Attributable to non-controlling interests (516) (632) (1,528) Earnings (loss) per share (in and $, respectively) (0.05) (0.09) (0.13) Diluted earnings per share in and $, respectively (0.05) (0.09) (0.13) Prospectus at Additionally, as set forth in detail below, on April 26, 2016, Cnova admitted that its financials statements for 2013 and 2014 underestimated freight costs and products in transit, and contained other accounting inaccuracies related to intangible assets and possible improperly deferred operating expenses. Cnova further admitted that certain intangible assets had been improperly accounted for and that it also was looking into whether some operational costs were improperly deferred. 59. As a result of the foregoing, the Registration Statement materially misstated Cnova s quarterly income for each of the quarters in the relevant period. See Prospectus at 83. Moreover, in addition to misstating the actual inputs to the income statement, the Registration Statement falsely stated that the income statement was prepared on a basis consistent with [its] audited annual consolidated financial statements and included all normal recurring adjustments necessary for a fair statement of the financial information contained in those statements. Id. Cnova Misstated its Balance Sheet 60. The Registration Statement also included Cnova s balance sheet as of September 30, 2014 and December 31, 2013, as follows: 15

16 Case 1:16-cv LTS Document 24 Filed 06/13/16 Page 16 of 34 Prospectus at 56. As of December 31,As of September 30, ( thousands) ( thousands) Consolidated Balance Sheet: Cash and cash equivalents 263,550 46,777 Trade receivables, net 110, ,291 Inventories, net 366, ,270 Total assets 1,691,379 1,437,835 Trade payables 905, ,484 Financial debt (current and non-current portion) 163, ,934 Total equity 473, , However, Cnova improperly valued damaged and returned items, failed to take appropriate write-offs, misstated its accounts receivable, and improperly accounted for intangible assets. Discrepancies were also identified in Cnova s accounts payable and products in-transit. Accordingly, the Registration Statement misstated Cnova s Trade Receivables, Inventories, Total Assets, Trade Payables and Total Equity. 62. Further, because of the foregoing, and Cnova s failure to properly account for certain returns, the Registration Statement falsely stated how Cnova calculated the net realizable value of its inventories by representing that the reported figures are based on currently available information[] about the likely method of disposition, such as... returns to product vendors. Prospectus at F-16, F-97. Cnova Misstated its Gross Merchandise Volume 63. The Registration Statement also materially misstated Cnova s gross merchandise volume ( GMV ) for each of the relevant periods as follows: for the year ended December 31, 2013, 3,563,600 for the nine months ended September 30, 2013, 2,422,700 for the nine months ended September 30, 2014, 3,044,100 See, e.g., Prospectus at

17 Case 1:16-cv LTS Document 24 Filed 06/13/16 Page 17 of As defined in the Prospectus, GMV is derived from our product sales, marketplaces business volumes and other revenues, after returns, including taxes. [Emphasis added]. 65. Thus, by virtue of the Company overstating its sales and failing to properly account for retuned merchandise, the Registration Statement also misstated Cnova s GMV. 66. According to the Company, [a] key component of our business model is increasing GMV transacted on our marketplaces, which we believe to be an important driver of future profitable growth. Prospectus at 66. Thus, these misstatements are admittedly material. [Emphasis added]. Other Misstatements 67. As a result of, inter alia, misstating Net Sales, GMV and EBIT, the Company s representations concerning the growth of those metrics over the relevant periods were also false and misleading. See, e.g., Prospectus at 65, Similarly, as a result of the misstated Net Sales, the Company also misstated its fulfillment, marketing, technology and content, general and administrative, and financing expenses, i.e., its operating expenses as a percentage of Net Sales, and also misstated the percentage changes of each of those metrics over the relevant periods. See, e.g., Prospectus at In addition, because of the foregoing, the Registration Statement misstated Cnova s interim condensed consolidated statement of cash flows for the nine months ended September 30, 2013 and See Prospectus at F As a result of the numerous material misstatements in the Registration Statement, members of the Class suffered damages in excess of approximately $120 million 17

18 Case 1:16-cv LTS Document 24 Filed 06/13/16 Page 18 of 34 as Cnova shares declined from $7 to $2.28, or $4.62 per share during the Class Period. Cnova s Performance During the Class Period 71. On January 28, 2015, Cnova issued a press release entitled, Cnova s Q4 and FY 2014 Earnings, which announced its first financial results as a public company, including the following highlights: GMV for 4Q14 increased by 28.6% to 1,472 million compared to 1,144 million in 4Q13. GMV for the full year 2014 increased by 26.6% to 4,516 million, compared to 3,567 million in the full year Placed Orders for 4Q14 increased by 38.0% to 10.8 million, compared to 7.9 million in 4Q13. Placed Orders for the full year 2014 increased by 34.3% to 31.7 million, compared to 23.6 million in Net sales for 4Q14 increased by 19.7% to 1,099 million compared to 918 million in 4Q13. Net sales for the full year 2014 increased by 19.8% to 3,474 million, compared to 2,899 million in the full year Operating Profit Before Other Expenses Excluding Expansion to New Countries, or Adjusted Operating Profit, increased by 34.5% to 35.3 million for 4Q14 and by 58.1% to 37.2 million for the full year As of December 31, 2014, the Net Cash position was 534 million, compared to 164 million at the end of 2013, representing a cash amount of 1.21 per share. Moreover, Cnova advised that for 1Q15 net sales were expected to grow 17%, within a plus or minus 200bps deviation, compared with 1Q On April 29, 2015, Cnova announced its financial results for the first quarter ended March 31, Highlights included: Strong commercial dynamics: Net Sales growth of +17.8% and GMV growth of +28.2% Improvement in Gross Margin excluding Expansion to New Countries by +18 bps as a percentage of net sales 18

19 Case 1:16-cv LTS Document 24 Filed 06/13/16 Page 19 of 34 Improvement in Net Financial Expense Good Free Cash Flow generation of M on a last twelve months basis vs M at end of 1Q14, leading to a positive Net Cash position of +71 M at end 1Q15. On a constant exchange rate basis, over the last twelve months, Free Cash Flow generation improved by 92 M (+25.4 M in 2015 vs M in 2014) 73. On July 22, 2015, Cnova announced its financial results for the second quarter ended June 30, Highlights included: Strong growth of GMV and net sales: GMV +25.8% ( 1,154 million) Net sales +17.5% ( 837 million) Significant sequential improvement in France & Brazil in 2nd quarter 2015 in view of important investments in 1Q15 to fuel future growth: Gross margin +56 basis points EBITDA margin +93 basis points EBIT margin +78 basis points 74. On October 9, 2015, Cnova announced GMV, net sales and other activity data for the quarter ended September 30, Highlights included: GMV: 1,121 million (+17.6% constant currency) Marketplace share: 22.7% (+1,032 bps) Sales: 781 million (+9.1% constant currency) 75. On October 28, 2015, Cnova announced its financial results for the third quarter ended September 30, Highlights included: 19

20 Case 1:16-cv LTS Document 24 Filed 06/13/16 Page 20 of 34 Gross merchandise volume (GMV): 1,121 million (+17.6% constant currency) Net sales: 781 million (+9.1% constant currency) Gross profit: 97 million (Gross margin: 12.5%) Resilient gross margin in a tough macro environment Operating EBIT Cnova Brazil declines; action plan at Cnova Brazil to adapt to market conditions Free cash flow (LTM): 23 million Operating working capital management helps compensate for net loss and increased capital expenditure Cnova s Financial Statements Require Restatement and Were Materially Inaccurate 76. A little over a year after Cnova s IPO, the Company disclosed that all of the financial reports Cnova issued since becoming a public company, as well as much of the financial information incorporated into the Registration Statement, could not be relied upon and require corrective negative restatements. 77. First, on December 18, 2015, after the market closed, Cnova issued a press release entitled Cnova N.V. Initiates a Review of Inventory in Brazil. Therein, in relevant part, the Company disclosed that its Board of Directors engaged legal advisors and external forensic accountants to perform a review of issues related to inventory management. According to the Company, the issues involved the handling of product returns and damaged product inventory at distribution centers of Cnova s Brazilian subsidiary, Cnova Comércio Eletrônico S.A. (Cnova Brazil). The investigation will also assess any accounting and financial statement impact of the conduct under review. 78. Shares of Cnova subsequently declined $0.53, or nearly 18%, to close at $2.42 on December 21, 2015, on unusually heavy volume. The shares continued to decline in value 20

21 Case 1:16-cv LTS Document 24 Filed 06/13/16 Page 21 of 34 the following day, dropping another $0.14 per share, or nearly 6%, to close at $2.28 per share. 79. On January 12, 2016, the Company issued a press release entitled Cnova Full Year 2015 Activity announcing its gross merchandise value (GMV), net sales and other operating activity data for the quarter and full year ended December 31, The Company noted that [f]or Cnova Brazil, GMV and GMV marketplace share as well as net sales for the quarter and full year ended December 31, 2014 and 2015, presented here are subject to revision following completion of the legal and forensic accounting review and [a]s the investigation is ongoing, as of the date of this press release, Cnova has not yet determined whether it may be required to adjust its previously issued financial statements for any prior period(s) for any portion of this sales adjustment, or for any other items. [Emphasis added]. 80. Also on January 12, 2016, the Company issued a press release entitled Cnova Update on Investigation into Brazil Inventory Management and Other Topics. The Company disclosed that, although the investigation was ongoing: [a]s of the date of the press release: Investigations performed so far in connection with inventory management have uncovered a potential overstatement of Cnova net sales by approximately R$110 million (approximately 30 million) on a cumulative basis as of December 31, 2015 (adjusted in 4Q15 numbers on a preliminary basis). A comprehensive physical count as of December 31, 2015, of all seven of its distribution centers in Brazil has been completed with the support of external consultants. The results currently indicate that no significant adjustment is necessary based on the inventory count. They indicate, however, that a write-off linked to the valuation of damaged/returned items, which represents approximately 10% of total inventory, will be necessary. In addition, a material discrepancy in 21

22 Case 1:16-cv LTS Document 24 Filed 06/13/16 Page 22 of 34 accounts receivable related to the damaged/returned items was also identified. The combined impact, based on preliminary estimates, would result in non-cash provisions of between R$ million (approximately million) that would reduce Cnova s EBIT. * * * Accounts Payable at Cnova Brazil The company has identified additional supplier or vendor accounts payable balances in the amount of approximately R$70 million (approximately 20 million). A related provision is also planned to be booked that will reduce Cnova s EBIT. * * * Benchmark on Inventory Valuation As a result of benchmarking of inventory valuation of e-commerce companies, warehouse reception and storage costs will no longer be incorporated into a retail-sector inventory valuation but directly expensed through income as is widely practiced in the e-commerce sector. The cumulative impact is a negative one-off of 10 million. * * * The company stresses that the assessment of the impact of the above on 2015 and potentially prior periods (annual consolidated financial statements and quarterly financial communication) is currently underway. * * * Fourth Quarter and Full Year 2015 Financial Results Release Date Subject to progress of the ongoing inventory management investigation in Brazil, Cnova currently plans to release Fourth Quarter and Full Year 2015 Financial Results on February 24, 2016, at 07:45 CET. 81. In the midst of these revelations, on January 21, 2016, defendant Quiroga, formerly co-ceo of the Company and CEO of Cnova Brazil, abruptly resigned. The 22

23 Case 1:16-cv LTS Document 24 Filed 06/13/16 Page 23 of 34 following day, January 22, 2016, the Company issued a press release announcing the designation of Emmanuel Grenier, previously one of the two co-ceos of the Company, as Chief Executive Officer and replacement of defendant Quiroga as executive director of the Company. The Company also announced that Flavio Dias would become CEO of Cnova Brazil. Tellingly, the Company offered no explanation for defendant Quiroga s sudden resignation and made no attempt to disclaim its connection with Cnova Brazil s false financial information incorporated into the Company s financial statements and reports, including the Registration Statement and Prospectus. 82. On February 24, 2016, the Company issued a press release entitled Cnova N.V. 4th Quarter and Full Year 2015 Financial Results wherein it announced its unaudited financial results for the fourth quarter and full year ended December 31, Therein, Cnova disclosed, inter alia, that: As of the date of this press release, Cnova has determined that some of the fraud-related accounting adjustments recorded in the 4th quarter of 2015 (- 48 million impact on operating EBIT) will need to be apportioned to 2013 and 2014, but has not yet determined the specific amounts attributable to these prior periods. Accordingly, the financial statements included in our previously filed 2014 annual report on Form 20-F should not be relied upon. Restated financial statements and the related auditor s report will be issued in due course as the internal review progresses. [Emphasis added]. The Company further noted that: During the review, the Company also identified discrepancies related to accounts payable due to suppliers and accounts receivable/products in-transit with delivery companies. 83. Also on February 24, 2016, the Company issued a press release entitled Cnova N.V. Update on Brazil Internal Review, which reiterated that Cnova had 23

24 Case 1:16-cv LTS Document 24 Filed 06/13/16 Page 24 of 34 determined that the accounting adjustments will need to be apportioned to 2013 and 2014, but it had not yet determined the specific amounts attributable to these prior periods. Accordingly, the Company stated that its previously issued financial statements for those periods [i.e., the 2013 and 2014 financial statements incorporated into the Company s Registration Statement] should not be relied upon. The Company further provided the following update on its investigation: Net Sales & Accounts Receivable: Management have identified an overstatement of Cnova net sales and accounts receivable. Under the Cnova Brazil s customer service practice in Brazil, a customer is sent a replacement order when a report is lodged that ordered merchandise is either not received or is received in damaged/unsuitable condition. In many cases, the replacement shipment is sent before the missing or damaged/unsuitable merchandise is returned to Cnova Brazil, and a second sale is recorded in the company s books. That second sale is cancelled when Cnova Brazil receives the return of the originally shipped merchandise. Management have determined that a significant portion of second sales were not reversed even though the originally ordered merchandise never showed as having arrived back at Cnova Brazil. While there was a procedure in place to periodically evaluate aged outstanding returns to estimate provisions, this failed to reverse second sales from revenue. Consequently, management decided to: Revise and enhance the tracking of replacement orders and the associated second sales in Brazil - these are now supervised by a specialized team; Reduce 4th quarter 2015 net sales by R$ million ( 29.7 million). This has resulted in a decrease of accounts receivable at December 31, 2015, and 4th quarter 2015 operating profit/(loss) from ordinary activities (operating EBIT) both in the amount of R$ 74.9 million ( 20.2 million). Inventory: Management requested forensic accounting consultants, in conjunction with Cnova Brazil personnel and under the observation of Cnova s external auditors, to conduct a comprehensive physical inventory count as of December 31, 2015, of all seven of Cnova Brazil s DCs. The results of that count indicated no significant discrepancy in the expected 24

25 Case 1:16-cv LTS Document 24 Filed 06/13/16 Page 25 of 34 number of new inventory items. Inconsistencies were found, however, linked to the amount and valuation of damaged/returned items, which represent less than 10% of total inventory at the end of Consequently, management have: Increased the year-end write-off of total inventory to R$ 46.8 million ( 12.7 million). This has resulted in a decrease of 4th quarter 2015 operating EBIT in the same amount. Accounts Payable and Other Accounts: Management has uncovered that incorrect entries concerning primarily accounts payable and written reports were intentionally prepared by Cnova Brazil accounting staff at the direction of former Cnova Brazil employees. Consequently, management: Decided to expand the scope of the external legal and forensic review to include this matter; Increased year-end accounts payable by R$ 55.3 million ( 14.9 million). This has resulted in a decrease of 4th quarter 2015 operating EBIT in the same amount. Estimated Impact of Financial Adjustments The combined estimated impact of the above management actions on 4th quarter 2015 operating EBIT is a reduction of R$ million ( 47.8 million). This compares to the R$ million ( million) preliminary range provided on January 12, During Cnova s February 24, 2016 earnings conference call with investors, Ms. Brunel provided the following explanation and update on the review: [L]ast year our CFO at Cnova Brazil, who joined the Company in April 2015, had some suspicions regarding accounting entry requests coming from a DC. He started an internal inquiry and came to the conclusion that there could be problems with inventory management at the DCs and that misconduct might be involved. As a result, Cnova s Board decided to hire external consultants to look into this matter, and as of today, this is where we stand. First, due to Cnova Brazil s customer service policy, replacement deliveries were often counted as temporary second sales that were to be backed out once the product from the original delivery was returned. According to the 25

26 Case 1:16-cv LTS Document 24 Filed 06/13/16 Page 26 of 34 internal review, many of these second sales were never reversed. This resulted in an overstatement of net sales. Second, there was a complete inventory count at the end of 2015 and the first week of The results of that showed two things. First, there was no material anomaly with respect to more than 90% of total inventory. For the remainder, however, there were differences in the returned goods inventory between the actual value and what was listed in the Company s books. Third, during the review, it appears that former Cnova Brazil employees intentionally made incorrect bookkeeping entries that led to inaccurate accounting reports. This had two consequences; first, certain accounts in the books, mostly related to accounts payable, were understated. Second, incorrect accounting reports were used to prepare prior period related financial statements, and even though the amount of these misstatements may not seem very significant, the fact that they were done on purpose will require financial restatement. [Emphasis added]. 85. On April 12, 2016, the Company issued a press release, which announced its gross merchandise value (GMV), net sales and other operating activity data for the quarter ended March 31, Therein, Cnova disclosed that: Due to the Company s ongoing internal review of Cnova Brazil, Cnova will not be able to file its Annual Report on Form 20-F for the fiscal year ended December 31, 2015, or its 2015 Dutch Annual Report within the prescribed time period for each filing. Cnova intends to file its 2015 Form 20-F and its 2015 Dutch Annual Report as soon as reasonably practicable upon completion of: (i) the internal review; (ii) the restatement of its previously issued financial statements; and (iii) the audit of its 2015 financial statements by the Company s independent registered public accounting firm, Ernst & Young Audit. 86. On April 26, 2016, Cnova issued a press release, which announced its unaudited financial results for the first quarter 2016 and disclosed that the review of Cnova Brazil had identified additional accounting issues. Cnova cautioned investors that the 1st quarter 2015 figures presented herein are preliminary estimates, prepared solely by management and these figures are presented for comparison purposes only, and are subject to 26

27 Case 1:16-cv LTS Document 24 Filed 06/13/16 Page 27 of 34 change depending on the developments of the ongoing review. The press release further stated that: The ongoing review in Cnova Brazil has recently identified other issues (related to intangible assets and possible improperly deferred operating expenses) that are currently the subject of further review. It is not possible at this time to: i) evaluate the impact that these issues may have on 2015 and prior periods, ii) determine how such an impact would be apportioned to the various quarters of those accounting periods, and iii) know whether those apportionments could ultimately also impact the first quarter 2016 financial results. [Emphasis added]. 87. Also on April 26, 2016, the Company issued a press release entitled Cnova N.V. Update on Internal Review at Cnova Brazil, wherein it increased its estimate of the impact of the accounting adjustments and provided the following updates on its investigation into the financial improprieties: The combined impact on operating EBIT of the above listed adjustments has been revised up to R$ 219 million 2 primarily due to unintentional reporting errors related to returned items in-transit as well as their shipping costs. The ongoing review in Cnova Brazil has recently identified other issues (related to intangible assets and possible improperly deferred operating expenses) that are currently the subject of further review. It is not possible at this time to: i) evaluate the impact that these issues may have on 2015 and prior periods, ii) determine how such an impact would be apportioned to the various quarters of those accounting periods, and iii) know whether those apportionments could ultimately also impact the first quarter 2016 financial results. 2 In its press release of February 24, 2016, the Company converted the R$ 177 million into euros using an average R$/ exchange rate of Using the more relevant 2015 yearend R$/ exchange rate of , the R$ 177 million is equivalent to approximately 41.1 million and the updated amount of R$ 219 million is equivalent to approximately 50.8 million. 27

28 Case 1:16-cv LTS Document 24 Filed 06/13/16 Page 28 of 34 In view of the above, the Company now expects to file its 2015 annual report on Form 20-F, including restated financial statements, by no sooner than June As such, the Company will file a Form 12b-25 with the US Securities and Exchange Commission before April 30, [Emphasis added]. 88. During Cnova s April 26, 2016 earnings conference call with investors, Ms. Brunel provided the following summary and update on the review: First, we revised upwards the estimated adjustments that we booked in the fourth quarter of last year. You may remember that we had provisioned 177 million Reals. We have now increased that to 219 million due to two accounting errors related to under-estimated freight costs and products in transit. This will be apportioned to 2015 and prior years. We have made an estimate of what the impact could be in the first quarter of 2015 and that s reflected in the numbers we are reporting today. I would remind you that this is a preliminary estimate and could change as the internal review in Brazil progresses. Second, the review team has come across evidence that suggests that intangible assets have been improperly accounted for. They are also looking into whether some operational cost was deferred when they should not have been. At this stage, it is too early to know if these will lead to further provisions and if so what the estimated range of those could be. We will update the market when we have more information. Finally, given that the review is lasting longer than expected, we currently do not anticipate being able to provide restated 2015 financial statements and the 20-F sooner than June of On April 28, 2016, Cnova issued a press release, which confirmed that it was reviewing the possibility of a transaction to divest itself of Cnova Brazil. 3 It should be noted that Cnova announced that it would not file a reliable annual report for 2015, which would necessarily disclose the scope and amount of the reported accounting inaccuracies, before June 2016, and now, before the deadline for filing this Amended Complaint. This announcement, which also identified other potential accounting issues, was made after the Court issued the pertinent scheduling order and with Defendants knowledge that such critical information would now be made unavailable to Plaintiffs in advance of this filing. 28