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Stanford
University Law School - Securities Class Action Clearinghouse
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UNITED STATES DISTRICT COURT
FOR THE WESTERN DISTRICT OF OKLAHOMA
-------------------------------------x
ROBERT MARK, on Behalf :
of Himself and All Others :
Similarly Situated, :
:
Plaintiff, : CIVIL ACTION NO. CIV-96-0506-M
: Filed Apr 4, 1996
:
v. :
:
FLEMING COMPANIES, INC., :
ROBERT E. STAUTH, HARRY L. :
WINN, DONALD W. EYLER, KEVIN J. : JURY TRIAL DEMANDED
TWOMEY, MERRILL LYNCH & CO. and :
J.P. MORGAN SECURITIES, INC., :
:
Defendants. :
:
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CLASS ACTION COMPLAINT
Plaintiff, by his attorneys, for his Complaint against
defendants, alleges the claims set forth herein. Plaintiff's
claims as to himself and his own actions, as set forth in ¶ 12,
are based upon personal knowledge. All other allegations are
based upon the investigation of counsel, which investigation
included a review of the public filings with the Securities and
Exchange Commission (the "SEC") made by Fleming Companies, Inc.
("Fleming" or the "Company"), press releases issued by the
Company, and various pleadings filed in the David's Supermarkets,
Inc. litigation described below. Based on the foregoing,
plaintiff believes that substantial evidentiary support exists
for those allegations. Each paragraph sets forth with
particularity the basis for the allegations contained therein.
CERTIFICATION
ROBERT MARK, ("Plaintiff") declares that:
1. Plaintiff has reviewed the foregoing complaint and
authorized its filing. Plaintiff did not purchase the security
that is the subject of this action at the direction of counsel or
in order to participate in this action.
2. Plaintiff's transactions in the security that is the
subject of this action are as follows: on February 27, 1996,
plaintiff purchased $11,000 face amount 10 5/8% Senior Notes due
12-15-2001 at a price of $102/100.
3. During the three years prior to the date hereof,
Plaintiff has not sought to serve or served as a representative
party for a class in any action filed under the federal securities
laws. Plaintiff is willing to serve as a representative party on
behalf of the class and, if necessary, will provide testimony at
deposition and/or trial.
4. Plaintiff will not accept any payment for serving as a
representative party on behalf of the class beyond his pro rata
share of any recovery, except such reasonable costs and expenses
(including lost wages) directly relating to the representation of
the class as ordered or approved by the Court.
I declare under penalty of perjury that the foregoing is true
and correct. Executed this 2nd day of April, 1996, at New York,
New York.
/s/
_________________________
ROBERT MARK
NATURE OF THE CASE
1. This is a securities class action on behalf of persons
who purchased Fleming 10 5/8% Senior Notes (the "Fixed Notes"), and
Fleming Floating Rate Senior Notes (the "Floating Notes")
(collectively the "Notes") during the period December 8, 1994
through and including March 15, 1996 (the "Class Period").
2. During the Class Period, defendants, as more
specifically alleged herein, caused to be filed with the SEC a
Registration Statement (the "Registration Statement"), which
incorporated a prospectus ("Prospectus") (hereinafter, the
Registration Statement and the Prospectus are referred to
collectively as the "Registration Statement") in connection with
the Company's December 8, 1994 debt offering (the "Debt
Offering") for $300,000,000 of Fixed Notes and $200,000,000 of
Floating Notes. The Registration Statement was materially false
and misleading respecting Fleming's exposure to contingent
liabilities, because the Registration Statement failed to
disclose the existence of a material loss contingency, that is, a
lawsuit filed in a Texas state court in August, 1993 denominated
David's Supermarkets, Inc. v. Fleming Companies, Inc. (the
"David's Litigation").
3. In addition, during the Class Period, as hereinafter
alleged, defendants Fleming, one of the largest food wholesalers
and distributors in the United States, Robert E. Stauth,
Fleming's Chief Executive Officer and the Chairman of its Board
of Directors, Harry L. Winn, Jr., the Company's Executive Vice
2
President and Chief Financial Officer, Donald W. Eyler, until his
retirement in 1995 a Senior Vice President of Fleming and its
Controller-Chief Accounting Officer, and Kevin J. Twomey, a Vice
President who, in early 1995, succeeded to the position of
Controller-Chief Accounting Officer, repeatedly misrepresented
and failed to disclose the existence of the David's Litigation,
and to accrue an appropriate reserve for the probable loss in
that lawsuit.
4. In the David's Litigation, Fleming was charged with
fraud, breach of contract, conspiracy, and a violation of the
Texas Deceptive Trade Practices Act, a statute that provides for,
among other things, the recovery of treble damages and attorneys'
fees. On March 14 and 15, 1996, the jury found that Fleming
breached its contract with David's Supermarkets, Inc.
("David's"), and that the Company had committed fraud, deceptive
trade practices, and breach of contract in its dealings with
David's, and awarded David's as much as $207.5 million in damages
and legal fees. This verdict was approximately five times
Fleming's previously announced 1995 annual net income and more
than three times its average net income over the past ten years.
The announcement of the jury's verdict was the first time that
the existence of the lawsuit was disclosed to investors.
5. Since no later than the commencement of the Class
Period, it was at least reasonably possible, if not probable,
that the David's Litigation would have a material adverse effect
on the Company's financial condition and its results of
3
operations. Under SEC regulations, therefore, as well as under
generally accepted accounting principles ("GAAP"), the
Registration Statement, as well as the Form 10-K and each
Form 10-Q filed by Fleming during the Class Period, were required
to disclose the David's Litigation. Specifically, among other
things, defendants were required to state in the Registration
Statement and in Fleming's subsequent SEC filings and press
releases, that the plaintiff in the David's Litigation was
seeking in excess of $100 million in damages, which, in the event
of an outcome unfavorable to Fleming, would have a material
adverse impact on the Company. In addition, Fleming was required
under GAAP to accrue in its financial statements filed in its
Form 10-K for the fiscal year ended December 31, 1994 (the "1994
10-K"), and in its Forms 10-Q for the fiscal quarters ended April
22, July 15, and October 7, 1995 (collectively, the "1995
10-Qs"), a loss contingency for this litigation.
6. Fleming's non-disclosure of the existence of, and facts
regarding, the David's Litigation was particularly misleading in
view of the Company's other disclosures concerning the threat,
commencement and existence of other pending litigation against
the Company.
7. The market's reaction to Fleming's belated disclosure
was swift. The price of Company's Fixed Notes plummeted to $820
per $1,000 face amount of the notes; and its Floating Notes
dropped to $793.70 per $1,000 face amount of the notes. As a
result of Fleming's misrepresentations and omissions and its
4
failure to accrue a loss contingency, the market prices of the
Notes were artificially inflated as initially offered and
throughout the Class Period.
JURISDICTION AND VENUE
8. The claims asserted herein arise under and pursuant to
Section 11 of the Securities Act of 1933 (the "Securities Act"),
15 U.S.C. § 77k, and under and pursuant to Sections 10(b) and
20(a) of the Securities Exchange Act of 1934 (the "Exchange
Act"), 15 U.S.C. §§ 78j(b) and 78t(a), and Rule 10b-5, 17 C.F.R.
§ 240.10b-5, promulgated thereunder by the SEC.
9. This Court has jurisdiction of this litigation pursuant
to Section 22 of the Securities Act, 15 U.S.C. § 77v; pursuant to
Section 27 of the Exchange Act, 15 U.S.C. § 78aa; and pursuant to
28 U.S.C. §§ 1331 and 1337.
10. Venue is proper in this District pursuant to Section 22
of the Securities Act and Section 27 of the Exchange Act, and to
28 U.S.C. §1391(b). Many of the acts and transactions giving
rise to the violations of law complained of herein occurred in
this District. In addition, defendant Fleming maintains its
principal United States office in this District at 6301 Waterford
Boulevard, Oklahoma City, Oklahoma 73126.
11. In connection with the acts, conduct and other wrongs
complained of herein, defendants, directly or indirectly, used
the means and instrumentalities of interstate commerce and the
United States mails.
5
THE PARTIES
12. Plaintiff Robert Mark purchased $11,000 principal
amount of Fixed Notes on February 26, 1996, at a price of $1020
per $1,000 face amount of the Fixed Notes, and suffered damages
as a result of the violations of the federal securities laws
alleged herein.
13. Defendant Fleming is an Oklahoma corporation with its
principal place of business in Oklahoma City, Oklahoma. Fleming
is a wholesale food distributor and marketer that services food
stores of various sizes that operate in a wide variety of
formats, including conventional full-service stores,
supercenters, price impact stores, combination stores and
convenience stores. The Company files annual, quarterly and
other reports with the SEC in accordance with the Exchange Act.
14. At all times relevant hereto, defendant Robert E.
Stauth ("Stauth") was Chairman of Fleming's Board of Directors
(the "Board") and its Chief Executive Officer. In 1995, as
reported in the Company's Proxy Statement accompanying the notice
of Fleming's annual meeting of shareholders to be held on May 1,
1996 (the "1995 Proxy Statement"), Stauth's annual salary was
$588,462, and he beneficially owned 72,374 shares of Fleming
common stock. The 1995 Proxy Statement also disclosed that, in
1994, the Company granted Stauth 24,000 shares of Fleming
restricted common stock, then valued at $598,500, as well as
options to purchase 90,000 shares of Fleming common stock, 60,000
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of which were performance-related. Stauth signed the
Registration Statement, as well as the 1994 10-K.
15. Defendant Harry L. Winn, Jr. ("Winn") has been
Fleming's Executive Vice President and Chief Financial Officer
since he joined the Company in May, 1994. In 1995, as reported
in the Proxy Statement, Winn's annual salary was $291,846, and he
beneficially owned 14,050 shares of Fleming common stock. Winn
signed the Registration Statement.
16. Until 1995, defendant Donald W. Eyler ("Eyler") was a
Senior Vice President, Controller and Chief Accounting Officer of
the Company. Eyler, who signed the Registration Statement, is
liable only for the Company's misrepresentations and omissions
made during the period of his employment.
17. Beginning no later than June 5, 1995, defendant
Kevin J. Twomey ("Twomey") was a Vice President-Controller and
Chief Accounting Officer of the Company. Twomey, who signed the
1995 10-Qs, is liable only for the Company's misrepresentations
and omissions made during the period of his employment.
18. Defendants Stauth, Winn, Eyler and Twomey sometimes are
collectively referred to herein as the "Individual Defendants".
19. Defendant Merrill Lynch & Co. ("Merrill Lynch"), is a
national brokerage and investment banking firm that regularly
transacts business in this District. Merrill Lynch was one of
the co-lead underwriters for the Debt Offering and underwrote
$270 million principal amount of the Fixed Notes and $180 million
principal amount of the Floating Notes. As underwriter, Merrill
7
Lynch sold and distributed to the public the Company's Notes on
or after December 8, 1994, pursuant to the Registration Statement
issued in connection with the Debt Offering. As part of its
duties as an underwriter, Merrill Lynch conducted, prior to the
Debt Offering, a due diligence investigation of Fleming. Merrill
Lynch received substantial fees, expenses and discounts in
connection with the Debt Offering, and acted as a market-maker
for the Notes. In these various capacities, Merrill Lynch had
access to material non-public proprietary information about
Fleming's business, finances, and prospects.
20. Defendant J.P. Morgan Securities, Inc. ("J.P. Morgan"),
is a national brokerage and investment banking firm that
regularly transacts business in this District. J.P. Morgan was
one of the co-lead underwriters for the Debt Offering and
underwrote $30 million of principal amount of the Fixed Notes and
$20 million principal amount of the Floating Notes. As
underwriter, J.P. Morgan sold and distributed to the public the
Company's Notes on or after December 8, 1994, pursuant to the
Registration Statement issued in connection with the Debt
Offering. As part of its duties as an underwriter, J.P. Morgan
conducted, prior to the Debt Offering, a due diligence
investigation of Fleming. J.P. Morgan received substantial fees,
expenses and discounts in connection with the Debt Offering, and
acted as a market-maker for the Notes. In these various
capacities, J.P. Morgan had access to material non-public
8
proprietary information about Fleming's business, finances, and
prospects.
21. Defendants Merrill Lynch and J.P. Morgan are
collectively referred to herein as the "Underwriter Defendants".
The Underwriter Defendants participated in the preparation of the
Registration Statement, which was prepared for the purpose, and
with knowledge, that it would be used by the Underwriter
Defendants to solicit purchases of the Notes. The Underwriter
Defendants are liable only for the misrepresentations contained
in, and the omissions from, the Registration Statement.
22. Each of the Individual Defendants and the Underwriter
Defendants, as signatories of the Registration Statement,
directors and/or officers of Fleming, and as underwriters of the
Debt Offering, owed to the purchasers of the Notes, including
plaintiff and the members of the Class, the duty to make a
reasonable and diligent investigation of the statements contained
in the Registration Statement at the time it became effective.
This duty including ensuring that the statements contained
therein were true, and that there were no omissions of material
fact required to be stated in order to make the statements
contained in the Registration Statement not misleading. As
hereinafter alleged, each Individual Defendant and Underwriter
Defendant violated these specific duties and obligations.
9
PLAINTIFF'S CLASS ALLEGATIONS
23. Plaintiff brings this action on his own behalf and as a
class action pursuant to Rule 23(a) and Rule 23(b)(3) of the
Federal Rules of Civil Procedure on behalf of a class (the
"Class") of all persons who purchased the Notes during the Class
Period, that is, during the period from December 8, 1994 -- the
date the Company filed its Registration Statement and
Registration Statement with the SEC -- through March 15, 1996,
the last trading day before it was publicly revealed that a Texas
jury awarded David's as much as $207.5 million in its lawsuit
against Fleming. Excluded from the Class are the named
defendants, members of the immediate families of the Individual
Defendants, any entity in which any defendant has a controlling
interest, and the legal representatives, heirs, successors,
predecessors in interest, or assigns of any of the defendants.
24. The members of the Class, as purchasers of the Notes on
their initial offering and on the open market, are so numerous
that joinder of all members is impracticable. While the precise
number of class members cannot be ascertained without the benefit
of records in the possession or control of Fleming, based upon
the size of the Debt Offering and upon the distribution of the
Notes, plaintiff believes that there are at least hundreds of
members of the Class.
25. Plaintiff's claims are typical of the claims of the
members of the Class. Plaintiff and all members of the Class
purchased the Notes during the Class Period at artificially
10
inflated prices, and sustained damages as a result of the same
wrongful course of conduct.
26. Plaintiff will fairly and adequately protect the
interests of the members of the Class, and has retained counsel
competent and experienced in class and securities litigation, and
intends to prosecute this action vigorously. The claims asserted
on behalf of the Class are typical of the claims of all members
of the Class. Plaintiff is a member of the Class, and does not
have any interests that are antagonistic to, or in conflict with,
the interests of the other members of the Class.
27. A class action is superior to other available methods
for the fair and efficient adjudication of this controversy,
because, among other things, it would be impracticable and
undesirable for all members of the Class to bring separate
actions in various parts of the country. In addition, because
the damages suffered by many individual Class members may be
relatively small, the expense and burden of individual litigation
make it virtually impossible to redress the wrongful conduct
alleged.
28. The prosecution of separate actions by individual Class
members also would create the risk of inconsistent and varying
adjudications concerning the subject of this action, which
adjudications could establish incompatible standards of conduct
for defendants under the laws cited herein. Further, common
questions of law and fact exist as to all members of the Class
and predominate over any questions affecting solely individual
11
members of the Class in that, at least by use of publicly filed
reports, defendants have acted on grounds generally applicable to
the entire Class. Among the questions of law and fact common to
the Class are:
a. whether defendants filed and issued a false
and misleading Registration Statement in connection
with the Debt Offering;
b. whether the federal securities laws were
violated by defendants' acts as alleged herein;
c. whether the documents, releases and public
statements made by defendants omitted to state and
misrepresented material facts concerning the Company's
true financial results and liability exposure in
connection with the David's Litigation;
d. whether defendants acted with the requisite
state of mind in omitting and/or misrepresenting
material facts respecting the David's Litigation;
e. whether the market price of Fleming's Notes
during the Class Period was artificially inflated due
to the non-disclosures and/or misrepresentations
respecting the David's Litigation complained of herein;
and
f. whether the members of the Class have
sustained damages and, if so, the appropriate measure
thereof.
29. 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 names and
addresses of the record owners of the Notes purchased during the
Class Period are available from the Company or its transfer
agent(s). Notice may be provided to such record owners via first
class mail using techniques and a form of notice similar to those
customarily used in class actions.
12
ADDITIONAL SUBSTANTIVE ALLEGATIONS
The History and Business of Fleming
30. As disclosed in, among other places, the Registration
Statement and the 1994 10-K, the Company is a wholesale and
retail food distributor and marketer that services more than
10,000 retail food stores in 43 states, including 3,700
supermarkets, representing approximately 13 percent of all
supermarkets in the United States. The Company serves food
stores of various sizes, according to the Registration Statement
and the 1994 10-K, operating in a wide variety of formats,
including conventional full-service stores, supercenters, price
impact stores, combination stores and convenience stores.
31. On February 22, 1996, in a press release carried by
Bloomberg Business News, the Company announced its results for
its fiscal year ended December 30, 1995 ("fiscal 1995"),
reporting revenues of $17.5 billion, and net income of
$42 million. Fleming's average net income for the past ten
years, as determined from the Company's annual report for fiscal
1995 (the "1995 Annual Report"), was approximately $61,996,000.
32. As described in the 1994 10-K and in the Registration
Statement, although in some geographic areas Fleming charges its
customers based upon a percentage markup over cost, Fleming
generally charges its customers for products based on an agreed
price, which price includes the Company's defined "cost". In
determining such "cost", as disclosed in the 1994 10-K and in the
Registration Statement, the Company did not historically pass
13
through to its customers the benefits it obtained from
promotional fees and allowances from Fleming's vendors. As part
of its so-called re-engineering process, however, the Company
disclosed in the 1994 10-K and in the Registration Statement that
Fleming will begin to charge actual costs of acquiring certain of
its food products, including passing through to its customers all
promotional fees and allowances received from suppliers.
According to the 1994 10-K and the Registration Statement, the
net effect of this pricing change and increases in the costs
charged to customers for handling and transportation, will, among
other things, lower the cost of products to most of the Company's
customers.
The Fleming - David's Relationship
and the David's Litigation
33. David's, according to Plaintiff's Original Petition in
the David's Litigation, which was filed in the district court in
Johnson County, Texas on August 24, 1993 (the "David's
Complaint"), and to the First through Fifth Amended Original
Petitions (collectively, the "Amended David's Complaints";
together with the David's Complaint, the "David's Complaints")
had 22 stores, employed approximately 500 people, and provided
groceries to a variety of communities in Texas. According the [sic]
David's Complaints, David's, through its predecessor, began using
Fleming as its primary supplier on or about January 16, 1989,
pursuant to an agreement the terms of which provided that Fleming
would charge David's for products "at agreed-upon mark-ups over
14
Fleming's cost for each type of product." For example, according
to the Complaints, in the initial form of the agreement between
David's predecessor and Fleming, Fleming agreed to provide
grocery products, dairy products, meat and store supplies at
Fleming's cost plus 3.45%, frozen food and frozen meat at its
cost plus 6.25%, and produce at its cost plus 7.65%.
34. According to the David's Complaints, David's and
Fleming operated under this or similar agreements until November,
1991. For approximately 10 months, between November, 1991 and
September, 1992, David's purchased its grocery products from
suppliers other than Fleming. In September, 1992, David's
returned to Fleming and received from Fleming, as part of an
overall financial restructuring, $7.5 million of financing.
35. On August 24, 1993, the David's Litigation was filed
against Fleming and one of its Executive Vice Presidents, James
E. Stuard ("Stuard"), in the District Court in Johnson County,
Texas. The David's Complaint alleged that Fleming systematically
overcharged David's and ultimately drove David's to the brink of
insolvency. Fleming effectuated its scheme, according to the
David's Complaint, by regularly marking-up its actual costs by
paper transfers between various Fleming offices, and then
calculating the agreed upon "cost plus" price on an inflated
figure, rather than on Fleming's actual cost. Thus, the "cost"
upon which Fleming calculated the agreed mark-up was not
Fleming's true cost, but was instead a phony figure that included
large, secret mark-ups within Fleming's own corporate structure.
15
36. As also alleged in the David's Complaints, the "cost"
of the products Fleming sold to David's prior to November, 1991
was improperly overstated in other ways, including the failure by
Fleming to pass along to David's the benefit of Fleming's so-
called "deal" buying and the "rebates" and promotional discounts
Fleming obtained from its suppliers.
37. The David's Complaint alleged that Fleming's conduct
was intentional, cynical and systematic, and that officers of the
Company, including Executive Vice President Stuard, were knowing
participants in this illicit behavior. Indeed, the David's
Complaint asserted that Stuard negotiated the agreement and its
various revisions with David's, and directed Fleming's operations
in the region with full knowledge and approval of the Company's
wrongful and illicit behavior.
38. The David's Complaints charged Fleming and Stuard with
breach of contract, fraud, conspiracy, and violation of the Texas
Deceptive Trade Practices Act (the "DTPA"), which provides for,
among other things, treble damages and the recovery of attorneys'
fees, as follows:
a. Breach of contract. David's alleged that Fleming
breached its contracts with David's by using improperly
inflated costs as the basis for the prices it charged
David's for products purchased prior to November, 1992.
b. Fraud. David's alleged that Fleming committed
fraud, because Fleming had, at the time the agreements were
entered into, already formed its intent to charge David's
16
based on improperly inflated costs, and even arranged for
the Company's suppliers to raise their invoice prices to
Fleming in exchange for subsequent secret rebates and
kickbacks. The David's Complaints also allege that fraud
was perpetrated by Fleming, because Fleming knew at the time
the agreements were entered into that it was not using its
buying power to maximize the benefit to David's and, even
worse, that Fleming would keep for itself all benefits
produced as a result of Fleming's buying power.
c. Conspiracy. David's claimed that Fleming and
Stuard schemed, planned, and conspired to systematically
overcharge David's for groceries, food and store products.
d. Violation of the DTPA. David's, as a "consumer"
under the DTPA, alleged that Fleming violated the DTPA, by,
among other things, (i) the advantage the Company took over
David's; (ii) engaging in a variety of false, misleading,
and deceptive acts, including representing that its goods or
services were of a particular standard, quality, or grade,
when they were of another; (iii) making false or misleading
statements of fact concerning the reasons for, existence of,
or amount of price reductions; (iv) by representing that an
agreement confers or involves rights, remedies, or
obligations which it did not have or involve, or that were
prohibited by law; and (v) failing to disclose information
concerning goods or services that was known at the time of
the transaction and with the intention to induce David's
17
into a transaction into which David's would not have entered
had the information been disclosed.
39. The David's Complaint alleged that Fleming's wrongful
acts were material, were the direct and proximate cause of
substantial damage to David's, and almost destroyed David's
ability to compete in the marketplace, because it was unable to
price its merchandise competitively. As a result, David's lost
substantial business and revenue, and was forced to close several
of its stores. In the David's Complaint, therefore, David's
requested, in addition to its costs and attorneys' fees, actual
damages of $20 million trebled to $60 million, and exemplary
damages of at least $50 million. When the First Amended David's
Complaint was filed on or about February 23, 1995, David's
request for exemplary damages was raised to $65 million; and by
the time the Fifth Amended David's Complaint was filed on or
about February 12, 1996, David's was requesting, in addition to
attorneys' fees and costs and pre-judgment interest,
$54.632 million in actual damages for its breach of contract and
conspiracy claims trebled to $163.896 million, actual damages of
$38.655 million for its fraud claim, and exemplary damages in the
amount of 22.5% of Fleming's net worth of $1.078 billion (or
approximately 1.5% of Fleming's 1994 net sales of
$15.753 billion).
40. On September 19, 1993, the Company filed an answer to
the David's Complaint rather than seeking its dismissal, thus
ensuring that the Company would be exposed to costly discovery
18
and, in all likelihood, to protracted litigation, and, if David's
was successful, to liability in excess of $110 million.
41. According to the David's Litigation Docket Book Report
obtained from the Johnson County, Texas District Court (the
"Docket Report"), discovery began immediately after the filing of
Fleming's answer. The parties exchanged various discovery
requests, including requests for the production of documents and
interrogatories, as well as notices for the taking of depositions
upon oral examination and upon written questions. Indeed,
discovery was quite extensive. David's, throughout 1994, 1995
and into February, 1996, served at least five requests for the
production of documents, two requests for admissions, and a set
of interrogatories; in addition, David's took the depositions of
at least twenty witnesses, with several lasting over one day,
including the deposition of Stuard, which lasted over five days
-- July 6, 1995, August 8, 1995, October 12, 1995, December 12,
1995 and January 26, 1996 -- producing seven volumes, and of
defendant Eyler, which lasted over two days. Fleming, for its
part, served at least eight requests for the production of
documents, two sets of interrogatories and a request for
admissions; in addition, the Company took the deposition of at
least eleven witnesses, also with several lasting over one day.
42. The Docket Report also discloses that significant
discovery was undertaken prior to December 8, 1994 -- the date of
Fleming's Debt Offering. In particular, David's served at least
three requests for the production of documents, a set of
19
interrogatories and a request for admissions, and took the
depositions of at least five witnesses; Fleming served at least
four requests for production and a set of interrogatories, and
took the deposition of at least one witness. Even more discovery
was undertaken prior to March 27, 1995, the date on which Fleming
filed its 1994 10-K. David's served an additional request for
the production of documents and an additional request for
admissions; Fleming served at least two additional requests for
the production of documents, and took the depositions of at least
four additional witnesses.
43. On November 4, 1994, Fleming moved for partial summary
judgment, conceding that, at best, at least certain of David's
claims presented issues of fact that would be tried. David's
responded on January 9, 1995. On January 24, 1995, before
Fleming filed its 1994 10-K with the SEC, the court denied
Fleming's motion, ensuring that the case would proceed to trial.
Nevertheless, neither the Registration Statement nor the 1994 10-
K even disclosed the existence of the David's Litigation.
Neither did any of Fleming's 1995 10-Qs.
44. The David's Litigation proceeded to trial in February,
1996. On March 14, 1996, as reported in Bloomberg Business News
after the close of the market, the jury returned a partial
verdict against Fleming in the amount of at least $73 million.
According to the jury verdict sheet, the jury also found against
Stuard for $100,000. The jury found the Company and Stuard
liable for breach of contract, fraud, and violation of the DTPA.
20
The next day, also after the market closed, Bloomberg Business
News reported that the jury awarded punitive damages, and
determined that Fleming must pay a total of as much as
$207.5 million for committing unfair and deceptive trade
practices.
Defendants' Failure to Disclose the
David's Litigation in the Registration Statement
45. On December 8, 1994, Fleming announced the Debt
Offering, in which it would issue $500 million of senior notes,
with the transaction expected to close on December 15, 1994. The
Notes, it was disclosed, would mature on December 15, 2001. The
Fixed Notes -- $300 million of the Debt Offering -- would carry a
fixed interest coupon of 10 5/8%, and the Floating Notes -- the
remaining $200 million of the Debt Offering -- were structured to
carry an interest rate based on a floating three month London
interbank offered rate, or LIBOR, plus a margin of 2.25%.
Merrill Lynch and J.P. Morgan were the underwriters for the Debt
Offering.
46. In the Registration Statement, dated December 8, 1994,
the Company provided investors with unaudited "pro forma"
financial information for the year ended December 25, 1993, and
the forty weeks ended October 1, 1994, which pro forma financial
information gave effect to the Debt Offering and to the Company's
acquisition of the Scrivner Group, as if each had occurred on the
first day of the respective periods. For the year ended
December 25, 1993, pro forma net sales were approximately $19.11
21
billion, and pro forma net earnings were approximately $18.7
million. For the period ended October 1, 1994, pro forma net
sales were approximately $14.3 billion, and pro forma net
earnings were approximately $33 million. The Registration
Statement was signed by defendants Stauth, Winn and Eyler.
47. By December 8, 1994, the parties to the David's
Litigation served a total of at least seven requests for the
production of documents, two sets of interrogatories, a request
for admissions, and took the depositions of at least six
witnesses prior to the issuance of the Registration Statement;
indeed, as disclosed in an April 1, 1996 report by Bloomberg
Business News, one memo shown to the jury in the David's
Litigation referred to "artificially inflating costs to build in
margin." In addition Fleming had already undertaken an
investigation sufficient to form the basis of its motion for
partial summary judgment. Nevertheless, the Registration
Statement made no disclosure of the David's Litigation, a lawsuit
in which the Company and one of its senior executives were
charged with systematic and pervasive fraudulent conduct, and
which sought damages -- claimed at that time to be in excess of
$110 million -- that were almost six times the pro forma 1993 net
earnings, and in excess of three times the pro forma 1994 net
earnings, each as presented in the Registration Statement.
48. Instead, defendants disclosed two other legal matters
in the Registration Statement. One such matter was represented
in the Registration Statement as being in its "preliminary
22
stages"; the other matter was represented as not likely to have a
material impact on the Company. Neither legal matter related to
the claims asserted in the David's Litigation.
a. The first legal matter involved two lawsuits that
were filed in federal court in Florida (the "Florida
Litigation") after the filing of the David's Litigation. As
specifically disclosed in the Registration Statement, the
Florida Litigation concerns allegations that former
employees of a Fleming subsidiary, while acting within the
scope of their employment, participated in a fraudulent
scheme by taking money for certain "diverting" transactions
that had not actually occurred; as a result, the
Registration Statement discloses, the plaintiffs in the
Florida Litigation alleged, among other causes of action,
common law fraud, breach of contract, negligence, conversion
and civil theft, and violations of the federal Racketeer
Influenced and Corrupt Organizations Act and comparable
state law. The Registration Statement then states, even
though the Florida Litigation is in its "preliminary
stages," and, therefore, that "the Company is unable to
predict a potential range of monetary exposure to the
Company," that "[b]ased on the recovery sought, an
unfavorable judgment could have a material adverse effect on
the Company."
b. The Registration Statement also specifically
discloses that "[t]he Company has been designated by the
23
U.S. Environmental Protection Agency as a potentially
responsible party under the Comprehensive Environmental
Response, Compensation and Liability Act (the "CERCLA
Matter"). With respect to the CERCLA Matter, the
Registration Statement states that "[w]hile liability under
CERCLA . . . is joint and several, the Company believes
that, to the extent it is ultimately determined to be liable
. . ., such liability will not result in a material adverse
effect on its consolidated financial position or results of
operations."
c. The only other Registration Statement disclosure
respecting litigation is a general catch-all for a variety
of ordinary, run-of-the-mill lawsuits against the Company
arising "in the ordinary course of business." As to these
cases, the Registration Statement discloses that, "[w]hile
the ultimate effect of such actions cannot be predicted with
certainty, the Company expects that the outcome of these
matters will not result in a material adverse effect on its
consolidated financial position or results of operations."
In sum, even though discovery in the David's Litigation was well
underway, the Registration Statement explicitly disclosed only
the Florida Litigation, actions that were filed after the David's
Litigation in which discovery had not yet even begun, and the
CERCLA Matter, for which the Company, named only as a potentially
responsible party, believed it would not have material liability.
As such, defendants led the investing public to believe that the
24
Florida Litigation and the CERCLA Matter were the only
significant legal matters facing the Company.
49. The Registration Statement did contain a disclosure
relating to the subject matter of the David's Litigation without
as much as a reference to that lawsuit. Under "Sales Terms" in
the "Management's Discussion and Analysis" section of the
Registration Statement, Fleming described the manner in which the
Company calculates its charges to customers -- an issue at the
very heart of the David's Litigation -- and stated that it
intends to change its practices by passing through to customers
"all promotional fees and allowances received from vendors."
Specifically, the Registration Statement stated:
The Company currently charges customers for
products based generally on an agreed price
which includes the Company's defined "cost"
(which does not give effect to promotional
fees and allowances from vendors), to which
is added a fee determined by the volume of
the customer's purchase. In some
geographical areas, product charges are upon
a percentage markup over cost. A delivery
charge is usually added based on order size
and mileage from the distribution center to
the customer's store. . . . As part of the
reengineering process, the Company will begin
to charge the actual costs of acquiring its
grocery, frozen food and dairy products while
passing through to its customers all
promotional fees and allowances received from
vendors."
(Emphasis added) This disclosure in the Registration Statement,
without any accompanying reference to the pending David's
Litigation in which the central point of the disclosure -- the
definition of "cost" and the passing along of "rebates" and
promotional fees to Fleming's customers -- was being litigated,
25
and which could have had a material adverse impact on the
Company, also was materially misleading.
50. Under "Liquidity and Capital Resources" in the
"Management's Discussion and Analysis" section of the
Registration Statement, Fleming disclosed that the Company's two
principal sources of liquidity were cash flows from operations
and bank borrowings. In fact, as of October 1, 1994, Fleming's
total indebtedness was 66% of total capital, an increase of 16%
from December 25, 1993. Under "Liquidity and Capital Resources,"
the Company also described, among other things, certain
restrictive covenants contained in its "Credit Agreement," the
Company's only committed line of credit. Those restrictive
covenants included, among other things, the maintenance of
certain financial ratios, as well as restrictions on the
Company's ability to incur additional debt, to create liens and
encumbrances, and to make certain payments, investments, loans
and guarantees. Defendants' disclosed that "[t]he Company is
currently in compliance with all financial covenants under the
Credit Agreement," and that "[t]he Company believes that cash
flows from operating activities and its ability to borrow under
the Credit Agreement will be adequate to meet the Company's
working capital needs, planned capital expenditures and debt
service obligations for the foreseeable future." No mention was
made, however, of the potential effect of the David's Litigation
on the Company's liquidity, on its ability to make capital
expenditures, or on compliance with its debt covenants, even
26
though the plaintiffs in that case were seeking over $110 million
the payment of which could have materially impacted the
maintenance of the debt covenants, the Company's ability to
obtain additional financing, and the Company's ability to make
future capital expenditures.
Fleming's Continued Failure
to Disclose the David's Litigation
51. On or about March 27, 1995, the Company filed with the
SEC its 1994 10-K, signed by defendant Stauth. Fleming reported
net sales of approximately $15.76 billion, net earnings of
approximately $56.2 million, current assets of $1.82 billion and
current liabilities of approximately $1.32 billion.
52. As of March 27, 1995, significant discovery in the
David's Litigation had been completed; for example, the parties
combined served at least ten requests for the production of
documents, two sets of interrogatories, two requests for
admissions, and took the depositions of at least ten witnesses.
In addition, approximately two months earlier, on January 24,
1995, Fleming's motion for partial summary judgment was denied.
Nevertheless, the David's Litigation remained undisclosed, and no
accrual for the probable loss had been made even though Fleming
must already have performed an investigation sufficient to
respond to David's discovery requests and to file its motion for
partial summary judgment.
53. Instead of disclosing the David's Litigation and its
potential material adverse consequences, Fleming and the
27
Individual Defendants chose expressly to describe in the notes to
the consolidated financial statements only the Florida Litigation
and the CERCLA Matter in addition to the Company's catch-all, "in
the ordinary course of business" disclosure. With respect to the
Florida Litigation, the Company expressly stated that
The litigation is complex, discovery has
not commenced and the ultimate outcome cannot
presently be determined. Furthermore,
management is unable to predict a potential
range of monetary exposure, if any, to the
company. Based on the large recovery sought,
an unfavorable judgment could have a material
adverse effect on the company. Management
believes, however, that a material adverse
effect on the company's consolidated
financial position is not likely. The
company intends to vigorously defend the
actions.
(Emphasis added) Thus, even though discovery had not yet
commenced, even though management was not able to predict a
potential impact of the Company, and even though management
believed that a material adverse effect on the Company's
consolidated financial position was unlikely, Fleming and the
Individual Defendants chose to make a full disclosure of the
Florida Litigation. In contrast, the David's Litigation, which
was past the summary judgment stage with significant discovery
completed, remained undisclosed.
54. In addition to the above disclosure, the 1994 10-K
included disclosures respecting liquidity and pricing that were
similar to those included in the Registration Statement, each
without reference to the David's Litigation.
28
55. On or about May 3, 1995, in a press release carried by
PR Newswire, the Company announced its results for its first
fiscal quarter ended April 22, 1995. Sales for the quarter were
approximately $5.5 billion, a 36% increase over the prior-year
period, and net earnings were $19.5 million, a 19.9% decrease
over the prior-year period. In its 1995 first quarter Form 10-Q
filed with the SEC on or about June 5, 1995, the Company reported
total current assets of approximately $1.6 billion and total
current liabilities of approximately $1.2 billion. The 10-Q was
signed by defendant Twomey.
56. The first quarter 10-Q also failed to disclose or
accrue for the David's Litigation. Instead, in note 5 to the
Consolidated Condensed Financial Statements, Fleming specifically
described only the Florida Litigation, and in note 3, stated that
"[t]hese consolidated financial statements should be read in
conjunction with the consolidated financial statements and
related notes" included in the 1994 10-K. Meanwhile, in the
David's Litigation, discovery continued, including the deposition
of defendant Eyler and the noticing of the deposition of
defendant Stauth. Still, no disclosure was made. In addition,
note 1 to the Consolidated Condensed Financial Statements in the
first quarter 10-Q contained management's false representation
that the financial statements included therein reflect "all
adjustments necessary to present fairly the company's financial
position at April 22, 1995."
29
57. On or about August 2, 1995, in a press release carried
by PR Newswire, the Company announced its results for its second
fiscal quarter ended July 15, 1995. Sales for the quarter were
approximately $4.0 billion, an increase of 39% over the prior-
year period, and net earnings were $14.7 million, a decrease of
21% over the prior-year period. In its 1995 second quarter Form
10-Q filed with the SEC on or about August 29, 1995 and signed by
defendant Twomey, the Company reported total current assets of
approximately $1.57 billion and total current liabilities of
approximately $1.22 billion. Even though substantial additional
discovery had been completed by then, including the depositions
of defendant Eyler, of Gerald G. Austin, Fleming's Executive Vice
President of Marketing, and two days of depositions of James E.
Stuard, the Fleming Executive Vice President named as a party
defendant in the David's Litigation, the second quarter 10-Q
failed to disclose or to accrue for the David's Litigation. Once
again, in note 5 to the Consolidated Condensed Financial
Statements, the 10-Q specifically described only the Florida
Litigation, and in note 3, stated that "[t]hese consolidated
financial statements should be read in conjunction with the
consolidated financial statements and related notes" included in
the 1994 10-K. The Consolidated Condensed Financial Statements,
in note 1 thereto, also contained management's false
representation that the financial statements included therein
reflect "all adjustments necessary to present fairly the
company's financial position at July 15, 1995."
30
58. On or about October 25, 1995, in a press release
carried by PR Newswire, the Company announced its results for
third fiscal quarter ended October 7, 1995. Sales for the
quarter were $3.9 billion, a 6% decrease from the prior-year
period, and net earnings were $3.7 million, a 35% increase over
the prior-year period. In its 1995 third quarter Form 10-Q filed
with the SEC on or about November 20, 1995 and signed by
defendant Twomey, the Company reported total current assets of
approximately $1.6 billion and total current liabilities of
approximately $1.3 billion. The third quarter Form 10-Q also
failed to disclose or to accrue for the David's Litigation;
instead, in note 5 to the Consolidated Condensed Financial
Statements, the 10-Q specifically described only the Florida
Litigation, and in note 3, stated that "[t]hese consolidated
financial statements should be read in conjunction with the
consolidated financial statements and related notes" included in
the 1994 10-K. The notes in the Consolidated Condensed Financial
Statements included in the third quarter 10-Q, like those in the
10-Qs for the first two fiscal quarters, also contained
management's representation that the financial statements
included therein reflect "all adjustments necessary to present
fairly the company's financial position at October 7, 1995."
59. On or about February 22, 1996, in a press release
carried by PR Newswire, the Company announced the results for its
fourth quarter ended December 25, 1995. Sales for the quarter
were $4.05 billion, a decrease of 12% compared with the prior-
31
year period, and net earnings were $4.05 million, a 61% decrease
compared with the prior-year period. For the year, sales were
$17.5 billion, an increase of 11% compared with the prior-year
period, and net earnings were $42 million, a decrease of 26% over
the prior-year period. Fleming and the Individual Defendants
continued to conceal the David's Litigation from the investing
public, despite the fact that the trial was then underway in a
Texas courtroom and David's had amended its complaint to seek
over $445 million in actual and exemplary damages.
60. Each of the disclosures and announcements described
above, including those contained in the Registration Statement,
in the 1994 10-K, in the 1995 10-Qs, and in the Company's
February 22, 1996 fourth quarter and 1995 year-end earnings
announcement, were materially false and misleading, because of
their failure to disclose the David's Litigation. Such
disclosure was required so that the statements concerning
litigation against Fleming, the nature of Fleming's contractual
relationships with its customers, and Fleming's liquidity
described above would not be materially false and misleading. In
addition, under GAAP, as set forth below, a lawsuit that charged
senior management with systematic and pervasive fraudulent
conduct in its dealing with a customer, that sought damages that
could eliminate several years of a company's net earnings, and
that could have a material adverse impact on a company's
financial condition is required to be disclosed to investors in
the notes accompanying a company's financial statements. In
32
addition, as described below, SEC regulations require that the
potential exposure of a public company to such litigation be
described in the "Management's Discussion and Analysis" section
of a registrant's SEC filings.
61. Additionally, the Company's 1994 10-K and 1995 10-Qs,
as well as its earnings announcements that were publicly
disseminated during the Class Period, were materially false and
misleading, because the reported net income and reported current
assets were materially overstated, while the Company's reported
current liabilities were materially understated. Under GAAP, the
company was required, as early as the dissemination of the 1994
10-K, to accrue for the contingent liability resulting from the
lawsuit, because such an adverse outcome was probable. The
Company's failure to reflect such an accrual rendered its
reported financial condition and results of operations during the
Class Period materially overstated.
62. Finally, the Company's representations in the notes to
the Consolidated Condensed Financial Statements included in its
1995 10-Qs that the financial statements contained therein
"present fairly the Company's financial position," were false and
misleading, because the Company's net income and current assets
were materially overstated, and its current liabilities were
materially understated, each as a result of the Company failure
to accrue for the probable loss to be realized from the David's
Litigation.
33
63. The safe harbor for forward-looking statements
contained in Section 27A(a) of the Exchange Act is inapplicable
here, because the statements at issue are historical, not
forward-looking: Defendants failed to disclose facts existing at
the time the statements were made respecting litigation pending
against the Company. Even if those statements are deemed to be
"forward-looking", they are exempt from the safe harbor by
paragraph (b)(2)(A), which provides that "this section shall not
apply to a forward looking statement included in a financial
statement prepared in accordance with generally accepted
accounting principles," and by paragraph (b)(2)(D), which exempts
statements made in connection with an initial public offering,
such as the Debt Offering.
The Truth is Finally Revealed
64. With the reports on March 14 and 15, 1996 of the jury's
verdicts, investors learned for the first time that a potentially
devastating litigation had shadowed the Company for the past two
and one-half years. On March 15, the Company filed a Current
Report on Form 8-K in which, pursuant to Item 5 thereto, it
disclosed the jury's verdicts. In addition, Fleming stated in
the Form 8-K that "[t]he company believes that this is an
isolated verdict specifically related to David's Supermarkets.
Fleming will continue to service retailers and deal with them
honestly and professionally as it has always done."
34
65. Investors were left holding notes in a Company that
could be rendered insolvent as a result of a material contingency
that went undisclosed for 2 1/2 years. The market's reaction to
this startling news was swift and severe. By March 18, as a
result of heavy trading, the price of the Company's Floating
Notes dropped to $793.70 per $100 [sic] face amount of notes, and the
Fixed Notes dropped to $820 per $1000 face amount of notes. On
March 18, 1996, Moody's Investors Service placed the Company's
Bal rating for its senior unsecured debt (which includes the
Notes in this action) under review for possible downgrade, citing
the "significant damages" awarded against the Company in the
David's Litigation. Standard & Poor's has placed the Notes on
its CreditWatch for a possible downgrade.
66. The fallout from the David's Litigation has continued.
On March 28, 1996, Bloomberg Business News reported that Fleming
had cut its quarterly dividend 98% from $.30 per share, which it
had paid since the fourth quarter of 1991, to $.02 per share.
The Company was reported to have said that the cut would, among
other things, help it meet its bank's requirements for an appeal
bond in the David's Litigation.
67. On March 29, 1996, not surprisingly, Bloomberg reported
that Fleming was delaying the filing of certain sections of its
Form 10-K for fiscal 1995 until certain matters regarding the
David's Litigation were resolved; in particular, the company said
it would delay filing information respecting its "legal
proceedings, financial data, and management's discussion and
35
analysis of financial condition and results of operations." In
addition, Bloomberg reported that, to post the necessary appeal
bond for the David's Litigation, the Company must seek an
amendment to its Credit Agreement.
68. On April 1, 1996, Bloomberg Business News reported that
other Fleming customers, notwithstanding the statements made by
the Company in its Form 8-K, were investigating their
relationships with the Company in the wake of the David's
Litigation verdict. It was reported that Red Apple Group,
operator of Gristede's and some Sloan's supermarkets in New York,
expressed dissatisfaction and was "looking at it." And the U.S.
Army, Navy and Air Force, all of which use the Company as one of
the top suppliers to their retail outlets, are investigating
Fleming.
COUNT I
Against All Defendants for
Violations of Section 11 of the Securities Act
69. Plaintiff repeats and realleges all preceding
allegations as if fully set forth herein, except any allegations
of fraud, scienter, scheme to defraud and wrongful conduct that
operated as a fraud and deceit upon plaintiff and the members of
the Class. This Count is asserted against all defendants for
violations of Section 11 of the Securities Act, 15 U.S.C. § 77k.
70. The Registration Statement was materially false and
misleading; contained untrue statements of material facts;
omitted to state material facts necessary to make the statements
36
made in the Registration Statement, under the circumstances in
which they were made, not misleading; and failed to disclose
adequately material facts. As detailed herein, the
misrepresentations contained in, or the material facts omitted
from, the Registration Statement included the following:
a. Defendants' failure to disclose in the
Registration Statement the existence of the David's
Litigation, that the Company and one of its former Senior
Executive Officers were named as parties defendant in that
lawsuit, and that an outcome unfavorable to Fleming would
have a material adverse effect on the Company.
b. Defendant's representation in the Registration
Statement that, in addition to certain disclosed litigation,
it was a party to various other litigation that "will not
result in a material adverse effect on its consolidated
financial statements or results of operations," falsely led
investors to believe that Fleming was not a party to any
litigation that could have a material adverse effect on the
Company.
c. The defendants' disclosure in the Registration
Statement respecting Fleming's current pricing policy and
its plans to change that policy -- without any reference to
the David's Litigation in which that policy was being
litigated -- falsely led investors to believe that there was
no material litigation concerning Fleming's pricing
policies.
37
d. The defendants' liquidity and capital expenditures
disclosure in the Registration Statement was materially
misleading, because that disclosure never mentioned the
potential effect that a material adverse judgment would have
on Fleming's ability to maintain compliance with it debt
covenants, its ability to make future capital expenditures,
or its ability to obtain additional borrowing.
71. The Company is the registrant for the Debt Offering and
filed the Registration Statement as the issuer of the Notes sold
in the Debt Offering, as defined in §11(a)(5) of the Securities
Act. The Company, the Individual Defendants, and the Underwriter
Defendants named herein were responsible for the contents of the
Registration Statement and caused its filing with the SEC.
72. Fleming is the issuer of the Notes sold via the Debt
Offering. As issuer of the Notes, Fleming is liable to plaintiff
and the members of the Class for the misstatements in, and the
omissions from, the Registration Statement.
73. The Company and the Individual Defendants signed the
Registration Statement or otherwise caused it to be prepared,
filed with SEC and circulated to the public, including plaintiff
and the other members of the Class.
74. The Underwriter Defendants were underwriters and
sellers with respect to the Notes sold in the Debt Offering
within the meaning of the Securities Act. Those underwriters
owned and sold all of the Notes issued in the Debt Offering under
a firm underwriting agreement.
38
75. None of defendants named herein made a reasonable
investigation or possessed reasonable grounds for the belief that
the statements described above, which were contained in the
Registration Statement, were true, were without omissions of any
material facts, and were not misleading.
76. At the time they purchased the Notes, neither plaintiff
nor any member of the Class knew or by the exercise of reasonable
care could have known of the facts concerning the inaccurate and
misleading statements and omissions alleged herein.
77. Plaintiff and members of the Class each purchased the
Notes prior to the date the Company made generally available to
its securities holders an earnings statement covering a period of
at least twelve months beginning after the effective date of the
Registration Statement.
78. In connection with the Debt Offering and sale of the
Notes, the defendants, directly or indirectly, used the means and
instrumentalities of interstate commerce and/or the U.S. mails.
79. This action was brought within one year after the
discovery of the untrue statements and omissions and within three
years after the Notes were sold to the public in the Debt
Offering.
80. By reason of the foregoing, defendants have violated
Section 11 of the Securities Act and are liable to plaintiff and
the members of the Class, each of whom has been damaged by reason
of such violations, in a total amount in excess of $80 million.
39
COUNT II
Against Fleming and the Individual
Defendants for Violations of
Section 10(b) of the Exchange
Act and Rule 10b-5 Promulgated Thereunder
81. Plaintiff repeats and realleges all preceding
allegations as if fully set forth herein.
82. During the Class Period, defendants, directly and
indirectly, by use of means and instrumentalities of interstate
commerce and/or the mails, engaged in a plan and course of
conduct, pursuant to which each of them knowingly or recklessly
engaged in acts, transactions, practices, and courses of business
that operated as a fraud and deceit upon plaintiff and the other
members of the Class; made various untrue statements of material
facts and omitted to state material facts necessary in order to
make the statements made, in light of the circumstances under
which they were made, not misleading; and employed devices and
artifices to defraud in connection with the purchase and sale of
securities, which were intended to, and, throughout the Class
Period, did: (i) deceive the investing public, including
plaintiff and the other Class members, regarding, among other
things, the existence of, and the consequences of a probable
adverse outcome of, the David's Litigation; (ii) artificially
inflate and maintain the market price of the Notes; and
(iii) cause plaintiff and other members of the Class to purchase
the Notes at artificially inflated prices.
83. Pursuant to the aforesaid plan and course of conduct,
defendants participated, directly and indirectly, in the
40
preparation and/or issuance of the statements and documents
referred to above. Each of the Individual Defendants
participated directly in the wrongs complained of herein. By
reason of his senior position as an executive officer and/or
director, as well as their close personal working relationships,
each of the Individual Defendants was a "controlling person" of
Fleming, within the meaning of Section 20(a) of the Exchange Act,
and had the power and influence, and exercised the same, to cause
Fleming to engage in the unlawful conduct complained of herein.
The Individual Defendants were able to, and did, directly or
indirectly, in whole or material part, control the content of the
Company's public financial reports, filings with the SEC, and
public statements. Each Individual Defendant was provided, for
his approval or otherwise, with copies of Fleming's reports,
filings, releases, and statements herein alleged to have been
materially false and misleading prior to or shortly after their
issuance by the Company, and had the ability and opportunity to
prevent their issuance or to cause them to be corrected.
84. As an officer and/or director of a publicly-held
company the Notes of which were, and are, registered pursuant to
the Exchange Act, each Individual Defendant had a duty to
disseminate timely, accurate, truthful, and complete information,
as set forth below, with respect to the outcome of the David's
Litigation, as well as the probable or reasonably possible
adverse consequences that this litigation would have on the
Company's financial condition and its results of operations so
41
that the market price of the Notes would be based on truthful,
accurate and complete information. As hereinafter alleged, each
Individual Defendant violated these specific duties and
obligations.
85. Said statements and documents were materially false and
misleading in that, among other things, they misrepresented the
nature of litigation pending against the Company, and failed to
disclose the existence and the consequences of a probable adverse
outcome of the David's Litigation. The documents and statements
referred to above were materially false and/or misleading in
that, among other things:
a. The Company's disclosures in the Registration
Statement and in the 1994 10-K (repeated and referenced in
the 1995 10-Qs) respecting the existence and status of the
Florida Litigation, the CERCLA Matter and other litigation
"in the ordinary course of business," falsely led investors
to believe that the only significant litigation against or
contemplated against the Company were the Florida Litigation
and the CERCLA Matter.
b. All of defendant's statements during the Class
Period failed to disclose that Fleming was a party defendant
in the David's Litigation. Given that there was more than a
reasonable possibility that the outcome of the David's
Litigation would be unfavorable, defendants reported
financial results during the Class Period violated GAAP by
42
failing to disclose the nature and amount of the loss
contingency.
c. The Company's disclosures in the Registration
Statement and in the 1994 10-K (repeated and referenced in
the 1995 10-Qs) respecting Fleming's current pricing policy
and its plans to change that policy -- without any reference
to the David's Litigation in which that policy was being
litigated -- falsely led investors to believe that there was
no material litigation concerning Fleming's pricing
policies.
d. Fleming and the Individual Defendants failed to
accrue a loss for the probable material adverse outcome in
the David's Litigation in the 1994 10-K and the 1995 10-Qs.
As detailed above, given Fleming's culpability with respect
to the conduct underlying the allegations in the David's
Complaint, as well as the completion of substantial
discovery and the preparation of a motion for partial
summary judgment, Fleming and the Individual Defendants
knew, or, but for its recklessness, should have known, by
the time the Company issued the 1994 10-K, that it was
probable that the lawsuit would result in an unfavorable
outcome with material adverse consequences for the Company.
e. Fleming and the Individual Defendants falsely
represented in the notes to the Consolidated Condensed
Financial Statements included in its 1995 10-Qs that "[i]n
the opinion of management, all adjustments necessary to
43
present fairly the company's financial position . . . and
the results of operations and cash flows for the periods
presented have been made."
f. In all of its SEC disclosures respecting liquidity
and capital expenditures, the Company never mentioned the
potential effect that a material adverse judgment would have
on Fleming's ability to maintain compliance with its debt
covenants, its ability to make future capital expenditures,
and its ability to obtain additional borrowing.
86. Disclosure of these facts was required so that the
statements detailed above would not be materially misleading. In
addition, it is management's responsibility, under SEC
regulations and under GAAP, to disclose fully all material loss
contingencies, such as lawsuits seeking significant damages
against a registrant. Under Rule 303(a)(1) of Regulation S-K,
which governs "Management's Discussion and Analysis of Financial
Condition and Results of operations," management must
[i]dentify any known trends or any known
demands, commitments, events or uncertainties
that will result in or that are reasonably
likely to result in the registrant's
liquidity increasing or decreasing in any
material way. If a material deficiency is
identified, indicate the course of action
that the registrant has taken or proposes to
take to remedy the deficiency.
The purpose of Rule 303, as set forth therein, is to provide
readers of the financial statements with meaningful information
relevant to the assessment of the registrant's financial
condition and results of operations as determined through the
44
evaluation of the amounts and certainty of cash flows. The Rule
specifies that the disclosures are intended to focus on material
events and uncertainties that would cause reported financial
information not to be necessarily indicative of future operating
results or of future financial condition, including matters that
would have an impact on future operations that have not had an
impact in the past. Disclosures, which are intended to be
forward-looking, are required for information presently known to
the registrant that will impact upon future operating results.
87. Under GAAP, particularly Statement of Financial
Accounting Standards No. 5, Accounting for Contingencies
("SFAS 5"), disclosure is required for all loss contingencies,
expressly including pending or threatened litigation, which are
"reasonably possible" to occur, that is, whenever the chance of
the loss occurring is more than "remote", or slight.
88. In addition, SFAS 5 requires that an accrual be
recorded whenever (i) it is "probable" that the loss contingency
will occur, that is, whenever the loss is likely to occur; and
(ii) the amount of the loss may be reasonably estimated. In the
event that the first element is established but only a range of
loss is reasonably estimable, SFAS 5 requires that, unless a
particular amount within the range is determined to be a better
estimate (in which case such amount should be accrued), the
minimum amount of the range should be accrued. SFAS No. 5 also
provides that:
[i]f no accrual is made for a loss
contingency because one or both of the
45
conditions in paragraph 8 are not met . . .
disclosure of the contingency shall be made
when there is at least a reasonable
possibility that a loss or an additional loss
may have been incurred. The disclosure shall
indicate the nature of the contingency and
shall give an estimate of the possible loss
or range of loss or state that such an
estimate cannot be made.
Thus, even if no amount is reasonably estimable, disclosure is
still required.
89. SFAS 5 provides guidance for the determination of
whether or not a pending lawsuit should be disclosed, whether or
not it should be accrued for, or both:
If the underlying cause of the
litigation . . . is an event occurring before
the date of an enterprise's financial
statements, the probability of an outcome
unfavorable to the enterprise must be
assessed to determine whether [it is probable
and reasonably estimable]. Among the factors
that should be considered are the nature of
the litigation . . .; the progress of the
case (including progress after the date of
the financial statements but before those
statements are issued); the opinions or views
of legal counsel and other advisers; the
experience of the enterprise in similar
cases; the experience of other enterprises;
and any decision of the enterprise's
management as to how the enterprise intends
to respond to the lawsuit . . . (for example,
a decision to contest the case vigorously or
a decision to seek an out-of-court
settlement).
90. At all relevant times, Fleming and the Individual
Defendants had actual knowledge that the statements and documents
complained of herein were materially false and misleading as set
forth herein and intended to deceive plaintiff and the other
members of the Class. In the alternative, these defendants acted
46
in reckless disregard for the truth in that they failed or
refused to ascertain and disclose such facts as would have
revealed the materially false and misleading nature of the
statements and documents complained of herein although such facts
were readily available to defendants from, among other sources,
the record in pending litigation. Said facts and omissions of
defendants were committed willfully or with reckless disregard
for the truth. In addition, Fleming and the Individual
Defendants knew or recklessly disregarded that material facts
were being misrepresented or omitted as alleged herein.
91. Information showing that these defendants acted
knowingly or with reckless disregard for the truth is peculiarly
within defendants' knowledge and control. As senior corporate
officers of Fleming, the Individual Defendants had knowledge of
the details of the Company's financial affairs and results,
including litigation in which Fleming was named as a party
defendant; indeed, defendants Stauth and Eyler were deposed in
the David's Litigation and it was disclosed in an April 11, 1996
Bloomberg Business News report that Stauth's deposition testimony
"hurt the company's stand." Plaintiff, who purchased the Notes
on the open market, does not have knowledge of the details of the
Company's internal corporate affairs. However, the following
facts, among others, indicate a strong inference that Fleming and
the Individual Defendants acted with scienter:
a. Fleming and the Individual Defendants knew that
the fact that a lawsuit seeking more than $110 million in
47
damages was filed against Fleming is the type of information
that, under Rule 303(a)(1) of Regulation S-K, promulgated
under the Exchange Act, must be, and is expected by
investors and securities analysts to be, disclosed.
Specifically, because David's was seeking in excess of $110
million dollars in damages in its lawsuit filed in August
1993 -- an amount that was nearly 10% of Fleming's 1993
current assets, and because the allegations in the David's
Litigation concerned the integrity of Fleming's management,
the Company was required to describe in its filings with the
SEC "any material pending legal proceedings." Given these
defendants' knowledge of Regulation S-K and the fact that it
disclosed other pending litigation in its SEC filings, its
failure to disclose the David's Litigation was necessarily
the result of a conscious and deliberate decision to conceal
these facts from the public.
b. In the 1995 Annual Report, which was filed with
the SEC on March 18, 1996 but apparently was prepared prior
to the verdict in the David's Litigation, Fleming disclosed
the David's Litigation. In the "Litigation and
contingencies" footnote to its fiscal 1995 consolidated
financial statements, the Company described the relevant
facts, and that the case went to trial in February, 1996.
Fleming then made the following disclosure:
Management is unable to predict a
potential range of monetary exposure, if any,
to the company, but believes the claims
asserted are without merit and that a
48
material adverse effect on the company's
consolidated financial position is less than
probable. However, based on the large
recovery sought, an unfavorable result could
have a material adverse effect on the
company. The company is vigorously defending
the litigation.
Obviously, these defendants believed that an adverse outcome
from the David's Litigation was at least reasonably possible
as of February 22, 1996 -- prior to the verdict -- the date
of the accountants' report on the fiscal 1995 consolidated
financial statements. Whatever facts Fleming and the
Individual Defendants were privy to on February 22, 1996,
those facts clearly were available to them throughout the
Class Period. No explanation was provided, however, for the
change in the Company's belated disclosure, over 2 1/2 years
after the David's Litigation was filed.
c. Fleming and the Individual Defendants failed to
disclose the David's Litigation in order to conceal its
fraudulent and deceptive practices from its other customers,
thereby protecting its goodwill and reducing the possibility
that other customers would file lawsuits as a result of
similar conduct. Indeed, as described above, the belated
disclosure of the verdict in the David's Litigation has
caused several of Fleming's customers to perform their own
investigation of the Company's practices.
92. In addition, certain of the Individual Defendants had
personal motives for failing to disclose and accrue for the
David's Litigation and thereby artificially create and inflate
49
the market for the Notes and artificially enhance the value of
Fleming:
a. Defendant Stauth beneficially owned 72,374 shares
of Fleming common stock, was granted 24,000 shares of
Fleming restricted common stock, and was granted options to
purchase 90,000 more shares (60,000 of which were
performance related) of the Company's common stock.
b. Defendant Winn beneficially owned 14,050 shares of
Fleming common stock.
c. The Individual Defendants participated in the
wrongdoing complained of herein in order to inflate and
maintain the price of Fleming's common stock so that they
could protect and enhance their positions as senior officers
of the Company, as well as the substantial compensation,
prestige and other benefits they obtained thereby.
93. As a result of Fleming's and the Individual Defendants'
fraudulent conduct as alleged herein, the prices at which the
Notes were initially sold and purchased on the secondary market
were artificially inflated throughout the Class Period. At the
time that plaintiff and the other members of the Class purchased
the Notes, the true value of such Notes was substantially lower
than the prices paid by plaintiff and the other members of the
Class. The market price of the Notes declined sharply
immediately following the public disclosures on March 14 and
15, 1996 of the material adverse impact of the David's
Litigation. In ignorance of the materially false and misleading
50
nature of the statements and documents complained of herein, as
well as of the adverse, undisclosed information known to
defendants, plaintiff and the other members of the Class relied,
to their damage, on such statements and documents, and/or on the
integrity of the offering and market prices of the Notes in
purchasing such Notes at artificially inflated prices during the
Class Period. Had plaintiff and the other members of the Class
known the truth, they would not have taken such action.
94. At all relevant times, the misrepresentations and
omissions particularized in this Complaint directly or
proximately caused or were a substantial contributing cause of
the damages sustained by plaintiff and the other members of the
Class. The misstatements and omissions complained of herein had
the effect of creating in the market an unrealistically positive
assessment of Fleming, as well as of its litigation exposure,
thereby causing the Notes to be overvalued and artificially
inflated at all relevant times. Defendants' false portrayal,
during the Class Period, of Fleming's exposure to materially
adverse judgments resulted in purchases of the Notes by plaintiff
and by the other members of the Class at artificially inflated
prices measured by the difference between the market prices and
the actual value of such Notes at the time of purchase, thus
causing the damages complained of herein.
95. The Underwriter Defendants, Merrill Lynch and J.P.
Morgan, made a market for the Notes and, as a result, there was a
ready market for the Notes throughout the Class Period. In
51
addition, their price reflected sensitivity to new market
conditions, as evidenced by the sharp and immediate drop in price
upon the disclosure by Fleming of the verdict in the David's
Litigation.
96. In addition, at the time the Notes were issued, Fleming
common stock was listed and actively traded on the New York,
Pacific and Chicago Stock Exchanges, and the Company had twelve
different issues of debt outstanding, including debentures that
were registered pursuant to Section 12(b) of the Exchange Act and
listed and traded on the New York Stock Exchange. Because
Fleming securities, including its debt securities, had been
trading prior to the Debt Offering, the pricing of the Notes on
the offering and thereafter was made in relation to the prices
the market as a whole was willing to pay for Fleming securities.
97. As a result, the market for Fleming securities,
including the Notes, was well-developed, and the price at which
the Notes were initially offered, and at which the Notes traded
thereafter, necessarily reflected the material misrepresentations
and omissions complained of herein.
98. As a direct and proximate result of defendants'
aforesaid wrongful conduct during the Class Period, plaintiff and
the other members of the Class have suffered substantial damages
in connection with their purchases of the Notes.
99. By virtue of the foregoing, each defendant has violated
Section 10(b) of the Exchange Act, and Rule 10b-5 promulgated
thereunder.
52
COUNT III
Against the Individual Defendants
for Violations of
Section 20(a) Of The Exchange Act
100. Plaintiff repeats and realleges each of the foregoing
allegations as if fully set forth herein.
101. Throughout the Class Period, each of the Individual
Defendants, by reason of his position as a senior executive
officer or and/director of Fleming, had the power and influence,
and exercised the same, to cause the Company to engage in the
unlawful acts, conduct, and practices complained of herein. As a
result, at the time of the wrongs alleged herein, the Individual
Defendants were "controlling persons" of the Company within the
meaning of Section 20(a) of the Exchange Act.
102. Pursuant to Section 20(a) of the Exchange Act, by
reason of the foregoing, each of the Individual Defendants is
liable to the same extent as is Fleming for the Company's
aforesaid violations of Section 10(b) of the Exchange Act and
Rule 10b-5 promulgated thereunder. As a direct and proximate
result of said defendants' wrongful conduct during the Class
Period, plaintiff and the other members of the Class have
suffered substantial damages in connection with their purchases
of the Notes.
PRAYER FOR RELIEF
WHEREFORE, plaintiff, on behalf of himself and the
Class, prays for judgment against defendants, as follows:
53
A. Declaring this action to be a class action properly
maintainable pursuant to Rule 23(a) and Rule 23(b)(3) of the
Federal Rules of Civil Procedure on behalf of the Class, and
declaring plaintiff to be a proper Class representative;
B. Awarding plaintiff and the other members of the Class
damages as a result of the wrongs complained of herein in an
amount to be determined at trial;
C. Awarding plaintiff and other members of the Class their
costs and expenses of this litigation, including, without
limitation, reasonable attorneys' and experts' fees, and other
costs and disbursements; and
D. Awarding plaintiff and the other members of the Class
such other and further relief as the Court may deem just and
proper.
54
JURY TRIAL DEMANDED
Plaintiff hereby demands a trial by jury.
Dated: April 3, 1996
JONES, GIVENS, GOTCHER
& BOGAN, P.C.
/s/
By____________________________
Jack L. Brown (OBA # 10742)
15 East Fifth Street
Suite 3800
Tulsa, OK 74103-4309
(918) 581-8200
BERNSTEIN LITOWITZ BERGER &
GROSSMANN LLP
Jeffrey A. Klafter
Jeffrey N. Leibell
1285 Avenue of the Americas
New York, New York 10019
(212) 554-1400
55
3 Aug 1997