UNITED STATES DISTRICT COURT DISTRICT OF NEW JERSEY ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) )

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1 UNITED STATES DISTRICT COURT DISTRICT OF NEW JERSEY TIM SCHULER, Individually and On Behalf of All Others Similarly Situated, vs. Plaintiff, CENTRAL EUROPEAN DISTRIBUTION CORPORATION, WILLIAM V. CAREY and CHRISTOPHER BIEDERMANN, Defendants. CIVIL ACTION NO. CLASS ACTION COMPLAINT JURY TRIAL DEMANDED Plaintiff, Tim Schuler ( Plaintiff, alleges the following based upon the investigation of Plaintiff s counsel, which included, among other things, a review of defendants public documents, conference calls and announcements, United States Securities and Exchange Commission ( SEC filings, wire and press releases published by and regarding Central European Distribution Corporation ( CEDC or the Company and securities analysts reports and advisories about the Company. Plaintiff believes that substantial additional evidentiary support will exist for the allegations set forth herein after a reasonable opportunity for discovery. NATURE OF THE ACTION AND OVERVIEW 1. This is a federal class action on behalf of purchasers of the securities of CEDC, who purchased or otherwise acquired CEDC securities between August 5, 2010 and February 28, 2011, inclusive (the Class Period, seeking to pursue remedies under the Securities Exchange Act of 1934 (the Exchange Act. 2. CEDC is one of the largest producers of vodka in the world, and is Central and 1

2 Eastern Europe s largest integrated spirit beverage business. The Company exports its products to markets including the United States, England, France and Japan. CEDC also is an importer of alcoholic beverages in Poland, Russia and Hungary, and an importer of premium spirits and wine in Russia. 3. The brands produced at the Company s Polish distilleries include Absolwent, Zubrowka, Bols, Palace and Solplica. Zubrowka Biala, which was launched in November 2010, has become one of the fastest growing brands in the Polish market. CEDC s Green Mark product is the top-selling mainstream vodka in Russia, and is the second-largest vodka brand by volume worldwide. CEDC s Zhuravli and Parliament are top-selling sub-premium vodkas in Russia. 4. On March 1, 2011, CEDC shocked investors when it announced dismal financial results for fiscal year 2010 and issued disappointing guidance for the 2011 fiscal year. For fiscal 2010, the Company reported a net loss from continuing operations of $92.9 million, or ($1.32 per diluted share, compared to a net profit of $72.7 million, or $1.35 per diluted share, for fiscal Additionally, the defendants disclosed for the first time that the Company had faced a production issue in Russia that had halted a significant portion of our production needs for approximately two weeks during our peak selling period. The defendants further revealed that the production issue alone necessitated a $30 million to $35 million charge. Moreover, the defendants revealed that the Company would take an impairment charge for fiscal 2010 totaling $152 million, primarily [related to] the Absolwent and Bols brands in Poland. Further, the defendants disclosed that the Company had experienced double-digit declines in its vodka portfolio, and that the launch of its Biala product, and the promotional plans that went along with it, had cannibalized 30% to 35% of the Company s existing portfolio. 2

3 5. Upon the release of this news, shares of the Company s stock fell $8.52 per share, or over 37 percent, to close on March 1, 2011 at $14.33 per share, on unusually heavy trading volume. 6. The Complaint alleges that, throughout the Class Period, defendants failed to disclose material adverse facts about the Company s financial well-being, business operations, and prospects. Specifically, defendants failed to disclose or indicate the following: (1 that the Company was experiencing significant declines in its vodka portfolio; (2 that the Company was losing market share in Poland as discounters were taking market share from the Company; (3 that the Company s Zubrowka Biala product launch was having a materially adverse effect on CEDC s gross margins and had impacted the channel mix in the market; (4 that as a result, CEDC was required to take an impairment charge primarily related to two of its Polish brands, and that this impairment charge was not recorded on a timely basis; (5 that the Company s financial statements were not prepared in accordance with Generally Accepted Accounting Principles ( GAAP ; (6 that the Company lacked adequate internal and financial controls; (7 that, as a result of the foregoing, the Company s financial statements were materially false and misleading at all relevant times; and (8 that the defendants financial guidance and positive statements about the Company s future prospects were lacking in any reasonable basis when made. 7. 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 suffered damages. JURISDICTION AND VENUE 8. The claims asserted herein arise under and pursuant to Sections 10(b and 20(a of 3

4 the Exchange Act, (15 U.S.C. 78j(b and 78t(a, and Rule 10b-5 promulgated thereunder (17 C.F.R b This Court has jurisdiction over the subject matter of this action pursuant to Section 27 of the Exchange Act (15 U.S.C. 78aa and 28 U.S.C Venue is proper in this District pursuant to Section 27 of the Exchange Act, 15 U.S.C. 78aa and 28 U.S.C. 1391(b. Many of the acts and transactions alleged herein, including the preparation and dissemination of materially false and misleading information, occurred in substantial part in this District. Additionally, CEDC s principal executive offices are located within this District. 11. In connection with the acts, conduct and other wrongs alleged in this Complaint, defendants, directly or indirectly, used the means and instrumentalities of interstate commerce. PARTIES 12. Plaintiff Tim Schuler, who resides at E. 126th Street, Fishers, IN 46038, as set forth in the accompanying certification, incorporated by reference herein, purchased CEDC securities at artificially inflated prices during the Class Period and has been damaged thereby. 13. Defendant CEDC is a Delaware corporation with its principal executive offices located at 300 Atrium Way, Suite 265, Mt. Laurel, New Jersey. 14. Defendant William V. Carey ( Carey was, at all relevant times, the Company s President, Chief Executive Officer ( CEO and Chairman of the Board of Directors. 15. Defendant Christopher Biedermann ( Biedermann was, at all relevant times, the Company s Vice President and Chief Financial Officer ( CFO. 16. Defendants Carey and Biedermann are collectively referred to hereinafter as the Individual Defendants. The Individual Defendants, because of their positions with the 4

5 Company, possessed the power and authority to control the contents of CEDC 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 misleading. The Individual Defendants are liable for the false statements pleaded herein, as those statements were each grouppublished information, the result of the collective actions of the Individual Defendants. SUBSTANTIVE ALLEGATIONS Background 17. CEDC is one of the largest producers of vodka in the world, and is Central and Eastern Europe s largest integrated spirit beverage business. The Company exports its products to markets including the United States, England, France and Japan. CEDC also is an importer of alcoholic beverages in Poland, Russia and Hungary, and an importer of premium spirits and wine in Russia. 18. The brands produced at the Company s Polish distilleries include Absolwent, Zubrowka, Bols, Palace and Solplica. Zubrowka Biala, which was launched in November 2010, has become one of the fastest growing brands in the Polish market. CEDC s Green Mark product is the top-selling mainstream vodka in Russia, and is the second-largest vodka brand by volume worldwide. CEDC s Zhuravli and Parliament are top-selling sub-premium vodkas in 5

6 Russia. Materially False and Misleading Statements Issued During the Class Period 19. The Class Period begins on August 5, On this day, the Company issued a press release entitled CEDC Announces Second Quarter 2010 Results. The press release stated, in relevant part: CEDC today announced its results for the second quarter of Net sales for the three months ended June 30, 2010 were $175.6 million as compared to $175.9 million reported for the same period in Operating profit on a comparable basis for the second quarter 2010 was $44.7 million as compared to $36.3 million for On a comparable basis, CEDC announced net income, excluding discontinued operations of $17.6 million, or $0.25 per fully diluted share, for the second quarter of 2010, as compared to $16.2 million, or $0.34 per fully diluted share, for the same period in CEDC also announced net loss on a U.S. GAAP basis (as hereinafter defined, excluding discontinued operations, for the quarter was $70.1 million or $1.00 per fully diluted share, as compared to net profit of $211.4 million or $4.28 per fully diluted share, for the same period in * * * William Carey, President and CEO commented, We have started to see more robust demand from the consumer in our largest market, Russia (which represents approximately 75% of our net income, our volumes were up 7.5% from vodka and imports from the Whitehall Group were up 14% in volume terms during the second quarter of The bulk of the growth in demand for our vodka portfolio is still coming from a lower price point as compared to the second quarter 2009, but pricing seems to have stabilized and gross margins remain above 50%. We have also seen strong Parliament Vodka distribution gains, post integration, in the second quarter with Parliament vodka up 14% in volume. There has been continued strong interest from the vodka consumer in Russia for our new mainstream/economy brands that we launched last fall, and we are still realizing strong distribution gains for these brands over the last nine months. Our core economy brand, Yamskaya, is ranked as one of the fastest growing brands in Russia today and is expected to achieve over three million nine liter cases in 2010 (a 25% increase over Although the product mix has had a slight negative impact on our gross margin percentages this has been more than offset by a declining SG&A base resulting in our core operating profit as a percent of sales in Russia expanding by over 400 basis points over 2009 second quarter results. 6

7 * * * William Carey, President and CEO continued, The Polish consumer was hit with a number of external events that we believe had a significant impact on the Polish vodka market generally and our results.... Management is extremely focused on improving the volume numbers in Poland and with a major launch of a new mainstream/subpremium vodka brand planned for the fourth quarter of this year and improved execution; we believe we are on track to deliver increased top line growth and a continued improvement in our operating profit margins. * * * Chris Biedermann, Vice-President and CFO, continued, As announced earlier this week, we completed the final disposal of our Polish Wholesale business to Eurocash.... The result of this final sales split provides for an increased shift of the wholesale revenue of approximately $136 million (grossing up excise for the wholesale business and revised reduction of $711 million (previous $575 million from our initial full year 2010 net sales guidance. The operating profit impact of this change will be less than $1 million annually. As a result of this change we are updating our full year net sales guidance from $900 - $1,050 million to $764 million to $914 million and keeping full year fully diluted earnings per share guidance unchanged at $2.10 -$2.20. We are also maintaining our full year guidance for operating profit excluding depreciation of $262 million. [Emphasis added.] 20. On August 9, 2010, the Company filed its Quarterly Report with the SEC on Form 10-Q. The Company s Form 10-Q was signed by the Individual Defendants, and reaffirmed the Company s financial results previously announced on August 5, Additionally, the Form 10-Q stated: Disclosure Controls and Procedures. Disclosure controls and procedures (as defined in Rules 13a-15(e and 15(d-15(e of the Securities Exchange Act of 1934 refer to the controls and other procedures of a company that are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934, is recorded, processed, summarized and reported within the time periods specified in the SEC s rules and forms. A company s internal control over financial reporting includes those policies and procedures that (i pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii provide 7

8 reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company s assets that could have a material effect on the financial statements. Based upon the evaluation of the Company s disclosure controls and procedures as of the end of the period covered by this report, the Chief Executive Officer and Chief Financial Officer have concluded that the Company s disclosure controls and procedures were effective at the reasonable assurance level. 21. The Company s Form 10-Q also contained Sarbanes-Oxley required certifications, signed by the Individual Defendants, which stated: I, [William V. Carey, President and Chief Executive Officer of Central European Distribution Corporation/Chris Biedermann, Vice President and Chief Financial Officer of Central European Distribution Corporation], certify that: 1. I have reviewed this quarterly report on Form 10-Q of Central European Distribution Corporation; 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 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; b 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 statements for 8

9 external purposes in accordance with generally accepted accounting principles; c 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 d 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 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 b 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. * * * The undersigned, [the Chief Executive Officer of Central European Distribution Corporation (the Company /the Chief Financial Officer of Central European Distribution Corporation (the Company ], hereby certifies that, to his knowledge on the date hereof: (a the Form 10-Q of the Company for the quarterly period ended June 30, 2010, filed on the date hereof with the Securities and Exchange Commission (the Report fully complies with the requirements of Section 13(a or 15(d of the Securities Exchange Act of 1934; and (b information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. 22. The statements contained in were materially false and misleading when made because defendants failed to disclose or indicate the following: (1 that the Company was 9

10 experiencing significant declines in its vodka portfolio; (2 that the Company was losing market share in Poland as discounters were taking market share from the Company; (3 that as a result, CEDC was required to take an impairment charge primarily related to two of its Polish brands, and that this impairment charge was not recorded on a timely basis; (4 that the Company s financial statements were not prepared in accordance with GAAP; (5 that the Company lacked adequate internal and financial controls; (6 that, as a result of the foregoing, the Company s financial statements were materially false and misleading at all relevant times; and (7 that the defendants financial guidance and positive statements about the Company s future prospects were lacking in any reasonable basis when made. 23. On November 5, 2010, the Company issued a press release entitled CEDC Announces Third Quarter 2010 Results; Updates Full Year 2010 Guidance. Therein, the Company stated, in relevant part: Central European Distribution Corporation (Nasdaq: CEDC today announced its results for the third quarter of Net sales for the three months ended September 30, 2010 were $157.8 million as compared to $187.5 million reported for the same period in Operating profit on a comparable basis for the third quarter 2010 was $32.5 million as compared to $43.5 million for On a comparable basis, CEDC announced net income, excluding discontinued operations of $8.5 million, or $0.12 per fully diluted share, for the third quarter of 2010, as compared to $27.2 million, or $0.49 per fully diluted share, for the same period in CEDC also announced net profit on a U.S. GAAP basis (as hereinafter defined, excluding discontinued operations, for the quarter was $68.9 million or $0.98 per fully diluted share, as compared to net profit of $45.4 million or $0.83 per fully diluted share, for the same period in * * * William Carey, President and CEO commented, We were disappointed by the results in the 3rd quarter of 2010 which were a result of a combination of factors including external events, currency movements, commodity prices and negative sales mix that occurred in our core markets.... We were able to see strong volume and market trends in September; however, these trends were not sufficient to cover the shortfall for the first two months of the quarter. 10

11 William Carey, President and CEO continued We have spent a lot of management time on restructuring, integration and cost reductions over the past fifteen months which have all contributed to the lowering of our operating overheads. The key objective for management on all levels is top line growth from our existing core portfolio, as well as new product development and new import agency business. This will be our primary focus over the next 24 months; kicking off next week with our biggest ever new product launch in Poland. In Russia, we have a pipeline of new products that will begin to enter the market early next year, not to mention our successful brandy launch last month. Our strategic aim is to grow profitable market share in Poland, Russia and Hungary through all segments. * * * William Carey, President and CEO continued As we are now in our biggest quarter of the year in terms of revenue and profitability we are forecasting high single digit volume growth and double digit value growth (taking into account recent price increases for this quarter from our overall portfolio. We have seen a stabilization of commodity prices since September, and we believe we will continue to benefit from a much lower cost base this quarter and beyond. Although the 3rd quarter was a huge disappointment for us, our management team is extremely focused on delivering on these 4th quarter objectives, and we believe the worst is behind us. The Company also announced it has updated its full year 2010 net sales guidance from $764 - $914 million to $730 -$780 million and its full year comparable fully-diluted earnings per share guidance from $2.10 -$2.20 to $1.50 -$1.70. This revised guidance includes exchange rates assumptions based upon recent market rates. [Emphasis added.] 24. That same day, CEDC held an earnings conference call with investors and analysts. During the call, Defendant Carey stated the following: To start off with, just like to reiterate, as from the press release, that we are extremely disappointed on the results in Q3 and to be honest a bit disappointed with the results for the three quarters. And hopefully today, that we can put some color on Q3 and also get into Q4 where we believe in -- moving to next year, we believe that certainly the opportunity in front of us is much more bright than what we ve seen in the past three quarters. * * * Now moving to Q4, we re anticipating certainly no more one-off events, we re anticipating a flat market, vodka market, for Q4. We re still anticipating a strong growth of our imports and exports, and also with the new product launch next week, is our biggest product launch ever we ve made as a Company, in terms of 11

12 our Zubrowka Clear. We re very, very positive on this development, which we ll get to a little bit later. Also, we ve doubled the size of the sales force in Q3 in terms of our development team. So we should see obviously positive results coming out of this development sales force, and overall we re seeing the consumer fairly stable. So what does that translate? It translates into positive Q4 top-line growth, which is quite a bit different than a 16% drop in Q3. [Emphasis added.] 25. On November 9, 2010, CEDC filed its Quarterly Report with the SEC on Form 10-Q. The Company s Form 10-Q was signed by the Individual Defendants, and reaffirmed the Company s financial results previously announced on November 5, The Company s Form 10-Q also contained Sarbanes-Oxley required certifications, substantially similar to the certifications contained in 21, supra. Additionally, the Form 10-Q stated, in relevant part: Disclosure Controls and Procedures. Disclosure controls and procedures (as defined in Rules 13a-15(e and 15(d-15(e of the Securities Exchange Act of 1934 refer to the controls and other procedures of a company that are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934, is recorded, processed, summarized and reported within the time periods specified in the SEC s rules and forms. A company s internal control over financial reporting includes those policies and procedures that (i pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company s assets that could have a material effect on the financial statements. Based upon the evaluation of the Company s disclosure controls and procedures as of the end of the period covered by this report, the Chief Executive Officer and Chief Financial Officer have concluded that the Company s disclosure controls and procedures were effective at the reasonable assurance level. 26. Shortly after the filing of this Form 10-Q, the Company experienced a major production issue in Russia that halted a significant portion of CEDC s production needs for two weeks. This production issue was of such a magnitude that the Company would be forced 12

13 to take a $30 million to $35 million impairment charge (the production issue is detailed in 29-30, infra. Between the middle of November 2010 and March 1, 2011, the defendants remained completely silent about this production issue and waited over three months to disclose the details of this event to investors. 27. The following month, between December 9, 2010 and December 13, 2010, Defendant Carey sold 67,300 shares of his personally held or controlled CEDC stock at artificially inflated prices of between $25.25 per share and $28.59 per share, reaping gross proceeds of $1,763, The statements contained in were materially false and misleading when made because defendants failed to disclose or indicate the following: (1 that the Company was experiencing significant declines in its vodka portfolio; (2 that the Company was losing market share in Poland as discounters were taking market share from the Company; (3 that the Company s Zubrowka Biala product launch was having a materially adverse effect on CEDC s gross margins and had impacted the channel mix in the market; (4 that as a result, CEDC was required to take an impairment charge primarily related to two of its Polish brands, and that this impairment charge was not recorded on a timely basis; (5 that the Company s financial statements were not prepared in accordance with GAAP; (6 that the Company lacked adequate internal and financial controls; (7 that, as a result of the foregoing, the Company s financial statements were materially false and misleading at all relevant times; and (8 that the defendants financial guidance and positive statements about the Company s future prospects were lacking in any reasonable basis when made. The Truth Begins to Emerge 29. On March 1, 2011, CEDC shocked investors when it issued a press release 13

14 entitled Central European Distribution Corporation Announces Full Year and Fourth Quarter 2010 Results and 2011 Full Year Guidance. Therein, the Company revealed: Central European Distribution Corporation (Nasdaq: CEDC today announced its results for the fiscal year Net Sales for the twelve months ended December 31, 2010 were $711.5 million as compared to $689.4 million reported for the same period in 2009 and net sales for the fourth quarter of 2010 was $228.4 million as compared to $255.2 million for the same period in CEDC announced a net loss from continuing operations on a U.S. GAAP basis (as hereinafter defined for the year of $92.9 million or $1.32 per fully diluted share, as compared to net profit of $72.7 million or $1.35 per fully diluted share, for the same period in On a comparable basis, CEDC announced net income from continuing operations of $38.7 million, or $0.55 per fully diluted share, for the full year 2010, as compared to $118.9 million, or $2.20 per fully diluted share, for the same period in The number of fully diluted shares used in computing the full year earnings per share was 70.3 million for 2010 and 54.0 million for The net loss from continuing operations on a U.S. GAAP basis for the 4th quarter of 2010 was $103.2 million or $1.46 per fully diluted share, as compared to net loss of $95.3 million or $1.51 per fully diluted share, for the same period in On a comparable basis, CEDC announced net income of $12.2 million, or $0.17 per fully diluted share, for the 4th quarter 2010, as compared to $70.6 million, or $1.12 per fully diluted share, for the same period in The Company also announced its full year 2011 net sales guidance of $880- $1,080 million and its full year comparable fully-diluted earnings per share guidance of $1.05-$1.25. This guidance includes the impact from the consolidation of the Whitehall Group from the acquisition of the remaining stake on February 7th, * * * William Carey, President and CEO, commented, We faced a number of key challenges and strategic decisions in our core markets during the fourth quarter. In Poland we had our biggest new product launch ever with Zubrowka Biala, which was tremendous success and continues to be, however at the expense of bottom line profitability during the fourth quarter. We also took the decision to invest more behind our core vodka brands later in the quarter to start to reverse a two year slide of market share. We have been very encouraged by seeing our market share gain from 20.2% in November 2010 to 25.2% in January In Russia, we faced a production issue in November that halted a significant portion of our production needs for approximately two weeks during our peak selling period. We were very encouraged that we were able to make up a large 14

15 part of this lost revenue in December, but which came at the expense of gross margin and added logistics and over-time costs, that substantially reduced the profitability of the quarter. William Carey, President and CEO, continued, Although we are coming off of a disappointing 2010, which included a number of unplanned events that have had a substantial effect on our overall profitability for 2010, we are encouraged to see that our market shares in our core markets are increasing, especially in Poland.... Mr. Carey continued, We have taken a hard look in late November 2010 at our current market position in our core markets, and we believe that strong top line growth will require increased investments behind our core brands which have been factored into our 2011 guidance. We realize that this added investment has an effect on our overall profit margin percentage in the short term, but believe that long term brand equity and top line growth is paramount to our overall business model. Our business model is built on strong production and sales assets that have ample capacity to generate more volume through a fixed cost infrastructure, thereby adding substantial operating leverage. [Emphasis added.] 30. Also on March 1, 2011, the Company held an earnings conference call with analysts and investors. During the call, the Individual Defendants further revealed: [Carey]: If we turn attention to Q4 in Poland, and look at the highlights. Like I said in the Press Release, we continue to lose market share slide. We got to low point of 20.2% in November and that was starting the quarter at around a 20.1% or 20.2%. And we finished the year at 22.2%. So, overall, from the beginning of the quarter to the end of the quarter, we remained flat in market share, which is pretty evident in our vodka numbers as well. We were down about 7% for the quarter, which is about what the market was down, also, around 7% for the quarter. So that translates into a flat market share. The Biala launch was extremely successful. But, certainly a negative implication on our bottom line, as the brand grew 2.5 times more than we estimated, and as we put out the promotional plan in place, we couldn t just turn off the spigot or reduce the plan as the brand was doing extremely well, not just filling up the market, but really rotating in the marketplace. But because of the investment program behind it, it was running a negative comp. Certainly, also, it does cannibalize -- the growth in this brand, it does cannibalize about 30% to 35% of our other portfolio. As I mentioned, this will be our biggest brand in our portfolio this year, and it does work on a higher price point than our Absolwent brand. So, on a comparability base and mainstream, it does offer a higher profitability than our Absolwent brand is giving. * * * 15

16 Certainly, these added investments in the quarter stopped our market share slide and reduced our -- we had double-digit declines as you saw in the last few quarters of our vodka portfolio. Certain that s been reduced, and this year we re certainly looking at much more positive numbers. Once we get into 2011 I will take you through Poland in terms of the projections. Also in Poland that we ve been working off the negative client mix for probably the last five years. That s mainly from the discounters and key accounts taking share. This also had a negative effect in the fourth quarter. But this certainly has been stabilizing in the last few months. What we re seeing in 2011 also is already stabilizing. Where also then we have doubled the size of our sales force in the traditional trade, so what we re seeing also is our overall client mix is improving as we move into * * * The one key issue that stood out for us in Q4 in Russia -- one was the top line was a bit softer than we anticipated, the main reason being also coming for the fact that we had an excise tax issue in production, where we had a dispute with authorities on an old excise stamp count where you must rectify, or you must agree with the authorities every so often on getting the old excise account (inaudible, and there was a dispute which we are proven correct at the end of the day but it did certainly cost us in our overall production runs. We lost two weeks of limited production runs, with one week having nothing produced in the middle of November, which is our key selling period. We were scrambling after that period to make up this loss, and we were hoping we could make up this lost, but unfortunately that it did hit our bottom line quite dramatically as we had to give extra discounts in the marketplace and a bit extra credit days to make up for some of those lost period of time that we were affected. Also, our operating costs were affected because we were scrambling to meet the logistics needs and Russia s very difficult in December. On a normal base, on logistics, and because we re making up for some of the loss in November on the production, also it affected some of the staff over runs and certainly our logistics overheads. We are not also able to make the product mix because of this -- maximize the product mix that we were expecting because we were constantly running behind from this issue. In terms of the -- in terms of the EBIT, we had about a $30 million to $35 million charge for this production issue, if you include the full impact of this issue, as well as a 4% currency in negativity year-on-year. And, again, the product mix did not come what we had modeled in our model, and a bit of a negative spirit price. 16

17 * * * [Biedermann]: The next major item on the balance sheet, looking our tangible assets, we did take a $152 million non-cash impairment charge. This is primarily the Absolwent and Bols brands in Poland. The decision to impair these assets was driven by the market share decline, as Bill discussed earlier. And, although we ve recovered share in Poland, this growth is driven primarily by Biala, the new brand, which is also estimated to have cannibalizing a bit of our brands, and all of this has been factored into this overall parent model. [Emphasis added.] 31. On this news, shares of the Company s stock fell $8.52 per share, or over 37 percent, to close on March 1, 2011 at $14.33 per share, on unusually heavy trading volume. CEDC S VIOLATION OF GAAP RULES IN ITS FINANCIAL STATEMENTS FILED WITH THE SEC 32. These financial statements and the statements about the Company s financial results were false and misleading, as such financial information was not prepared in conformity with GAAP, nor was the financial information a fair presentation of the Company s operations due to the Company s improper accounting for, and disclosure about its revenues, in violation of GAAP rules. 33. GAAP are those principles recognized by the accounting profession as the conventions, rules and procedures necessary to define accepted accounting practice at a particular time. Regulation S-X (17 C.F.R (a (1 states that financial statements filed with the SEC which are not prepared in compliance with GAAP are presumed to be misleading and inaccurate. Regulation S-X requires that interim financial statements must also comply with GAAP, with the exception that interim financial statements need not include disclosure which would be duplicative of disclosures accompanying annual financial statements. 17 C.F.R (a. 34. Given these accounting irregularities, the Company announced financial results 17

18 that were in violation of GAAP and the following principles: (a The principle that interim financial reporting should be based upon the same accounting principles and practices used to prepare annual financial statements was violated (APB No. 28, 10; (b The principle that financial reporting should provide information that is useful to present to potential investors and creditors and other users in making rational investment, credit, and similar decisions was violated (FASB Statement of Concepts No. 1, 34; (c The principle that financial reporting should provide information about the economic resources of an enterprise, the claims to those resources, and effects of transactions, events, and circumstances that change resources and claims to those resources was violated (FASB Statement of Concepts No. 1, 40; (d The principle that financial reporting should provide information about an enterprise s financial performance during a period was violated (FASB Statement of Concepts No. 1, 42; (e The principle that financial reporting should provide information about how management of an enterprise has discharged its stewardship responsibility to owners (stockholders for the use of enterprise resources entrusted to it was violated (FASB Statement of Concepts No. 1, 50; (f The principle that financial reporting should be reliable in that it represents what it purports to represent was violated (FASB Statement of Concepts No. 2, 58-59; 18

19 (g The principle that completeness, meaning that nothing is left out of the information that may be necessary to insure that it validly represents underlying events and conditions was violated (FASB Statement of Concepts No. 2, 79; and (h The principle that conservatism be used as a prudent reaction to uncertainty to try to ensure that uncertainties and risks inherent in business situations are adequately considered was violated (FASB Statement of Concepts No. 2, The adverse information concealed by Defendants during the Class Period and detailed above was in violation of Item 303 of Regulation S-K under the federal securities law (17 C.F.R PLAINTIFF S CLASS ACTION ALLEGATIONS 36. Plaintiff brings this action as a class action pursuant to Rule 23 of the Federal Rules of Civil Procedure on behalf of all persons who purchased CEDC securities during the Class Period (the Class. Excluded from the Class are defendants, directors and officers of CEDC and their families and affiliates. 37. The members of the Class are so numerous that joinder of all members is impracticable. The disposition of their claims in a class action will provide substantial benefits to the parties and the Court. According to the Company s Form 10-Q filed with the SEC on August 9, 2011, CEDC had over 72 million shares of stock outstanding, owned by thousands of persons. 19

20 38. There is a well-defined community of interest in the questions of law and fact involved in this case. Questions of law and fact common to the members of the Class which predominate over questions which may affect individual Class members include: (a (b (c Whether the Securities Exchange Act was violated by defendants; Whether defendants omitted and/or misrepresented material facts; Whether defendants statements omitted material facts necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading; (d Whether defendants knew or recklessly disregarded that their statements were false and misleading; (e (f Whether the prices of CEDC securities were artificially inflated; and The extent of damage sustained by Class members and the appropriate measure of damages. 39. Plaintiff s claims are typical of those of the Class because plaintiff and the Class sustained damages from defendants wrongful conduct. 40. Plaintiff will adequately protect the interests of the Class and has retained counsel who are experienced in class action securities litigation. Plaintiff has no interests which conflict with those of the Class. 41. A class action is superior to other available methods for the fair and efficient adjudication of this controversy. LOSS CAUSATION/ECONOMIC LOSS 42. Defendants wrongful conduct, as alleged herein, directly and proximately caused the economic loss suffered by Plaintiff and the Class. The price of CEDC s securities significantly declined when the misrepresentations made to the market, and/or the information 20

21 alleged herein to have been concealed from the market, and/or the effects thereof, were revealed, causing investors losses. As a result of their purchases of CEDC securities during the Class Period, plaintiff and other members of the Class suffered economic loss, i.e., damages, under the federal securities laws. SCIENTER ALLEGATIONS 43. During the Class Period, the defendants had both the motive and opportunity to commit fraud. They also had actual knowledge of the misleading nature of the statements they made or acted in reckless disregard of the true information known to them at the time. In so doing, the defendants participated in a scheme to defraud and committed acts, practices and participated in a course of business that operated as a fraud or deceit on purchasers of CEDC s securities during the Class Period. 44. Additionally, as set forth in 26, supra, during the Class Period, and with the Company s securities trading at artificially inflated prices, Defendant Carey sold 67,300 shares of his personally held or controlled CEDC stock for gross proceeds of $1,763,000. This trading by Defendant Carey is evidenced by the following chart: Date of Trade Inside Trader Number of Shares Price per Share Gross Proceeds December 13, 2010 Carey, William V. 20,000 $ $518,000 $26.13 December 10, 2010 Carey, William V. 22,500 $ $573,000 $25.65 December 9, 2010 Carey, William V. 24,800 $ $672,000 $28.59 TOTALS: 67,300 $1,763,000 Applicability of Presumption of Reliance: Fraud on the Market Doctrine 21

22 45. Plaintiff will rely upon the presumption of reliance established by the fraud-onthe-market doctrine in that, among other things: (a Defendants made public misrepresentations or failed to disclose material facts during the Class Period; (b (c (d The omissions and misrepresentations were material; The Company s securities traded in an efficient market; The misrepresentations alleged would tend to induce a reasonable investor to misjudge the value of the Company s securities; and (e Plaintiff and other members of the Class purchased CEDC securities between the time defendants misrepresented or failed to disclose material facts and the time the true facts were disclosed, without knowledge of the misrepresented or omitted facts. 46. At all relevant times, the market for CEDC securities was efficient for the following reasons, among others: (a as a regulated issuer, CEDC filed periodic public reports with the SEC; and (b CEDC regularly communicated with public investors via established market communication mechanisms, including through regular disseminations of press releases on the major news wire services and through other wide-ranging public disclosures, such as communications with the financial press, securities analysts and other similar reporting services. NO SAFE HARBOR 47. Defendants verbal Safe Harbor warnings accompanying its oral forwardlooking statements ( FLS issued during the Class Period were ineffective to shield those statements from liability. 22

23 48. The defendants are also liable for any false or misleading FLS pleaded because, at the time each FLS was made, the speaker knew the FLS was false or misleading and the FLS was authorized and/or approved by an executive officer of CEDC who knew that the FLS was false. None of the historic or present tense statements made by defendants were assumptions underlying or relating to any plan, projection or statement of future economic performance, as they were not stated to be such assumptions underlying or relating to any projection or statement of future economic performance when made, nor were any of the projections or forecasts made by defendants expressly related to or stated to be dependent on those historic or present tense statements when made. FIRST CLAIM Violation of Section 10(b of The Exchange Act and Rule 10b-5 Promulgated Thereunder Against All Defendants 49. Plaintiff repeats and realleges each and every allegation contained above as if fully set forth herein. 50. During the Class Period, CEDC and the Individual 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 CEDC securities at artificially inflated prices. In furtherance of this unlawful scheme, plan and course of conduct, these defendants, and each of them, took the actions set forth herein. 51. CEDC and the Individual 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 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 23

24 securities in an effort to maintain artificially high market prices for CEDC securities in violation of Section 10(b of the Exchange Act and Rule 10b-5. These defendants are sued either as primary participants in the wrongful and illegal conduct charged herein or as controlling persons. SECOND CLAIM Violation of Section 20(a of The Exchange Act Against the Individual Defendants 52. Plaintiff repeats and realleges each and every allegation contained above as if fully set forth herein. 53. The Individual Defendants acted as controlling persons of CEDC within the meaning of Section 20(a of the Exchange Act as alleged herein. By virtue of their high-level positions, and their ownership and contractual rights, participation in and/or awareness of the Company s operations and/or intimate knowledge of the false financial statements filed by the Company with the SEC and disseminated to the investing public, the Individual Defendants had the power to influence and control and did influence and control, directly or indirectly, the decision-making of the Company, including the content and dissemination of the various statements which Plaintiff contends are false and misleading. The Individual Defendants were provided with or had unlimited access to copies of the Company s reports, press releases, public filings and other statements alleged by Plaintiff to be misleading prior to and/or shortly after these statements were issued and had the ability to prevent the issuance of the statements or cause the statements to be corrected. 54. In particular, each of the Individual Defendants had direct and supervisory involvement in the day-to-day operations of the Company and, therefore are presumed to have had the power to control or influence the particular transactions giving rise to the securities violations as alleged herein, and exercised the same. 24