According to an article dated December 6, 2007, Judge Virginia M. Hernandez Covington of the U.S. District Court for Middle District of Florida granted the defendants' motion to dismiss, for now ending the action brought on behalf of Winn-Dixie shareholders from August 2002 through January 2004. The three defendants were two former CEOs and one former CFO of the retail chain. Winn-Dixie itself was not named as a defendant, having eliminated its liability by entering into and, last November, exiting Chapter 11 bankruptcy, according to the judge.
On May 1, 2007 Judge Virginia M. Hernandez Covington entered an order providing all parties five days to submit a notice in opposition to lifting the stay on the case. None were submitted and plaintiffs filed a Consolidated Amended Class Action Complaint on June 8, 2007. The amended complaint expands the class period and alleges violations of sections 10b and 20 of the Securities Exchange Act of 1934.
According to the Company’s FORM 10-K for the fiscal year ended June 28, 2006, in February 2004, several putative class action lawsuits were filed in the United States District Court for the Middle District of Florida against the Company and certain present and former executive officers alleging claims under the federal securities laws. In March and April 2004, three other putative class action lawsuits were filed in the United States District Court for the Middle District of Florida against the Company and certain of its present and former executive officers and employees, alleging claims under the Employee Retirement Income Security Act of 1974, as amended (“ERISA”) relating to our Profit Sharing/401(k) Plan (the “Plan”). The actions purport to be brought on behalf of a class consisting of the Plan and participants and beneficiaries under the Plan whose individual accounts held shares in the Winn-Dixie Stock Fund during the period from May 6, 2002 through and including January 29, 2004 (the “Class Period”). More specifically, the complaints generally allege that, during the Class Period, the defendants breached their fiduciary duties to the Plan, its participants and its beneficiaries under ERISA by failing to exercise prudent discretion in deciding whether to sell Company stock to the Plan trustee for investment by the Plan, failing to provide timely, accurate and complete information to Plan participants, failing to adequately monitor and review Company stock performance as a prudent investment option, failing to manage Plan assets with reasonable care, skill, prudence and diligence and other matters. By separate court orders, both the securities law claims and the ERISA claims were consolidated and will proceed as separate, single actions. The consolidated complaint has not yet been filed in either action. As a result of the Company’s Chapter 11 filing, the automatic stay prevents the plaintiffs in these class action lawsuits from proceeding against the Company. If any claims alleged in these lawsuits are sustained against the Company, the claims will be treated in the Company’s Chapter 11 case, and to the extent any such claims are subject to the provisions of 11 U.S.C. §510(b), such claims will be subordinated to other claims against the Company and will be treated in the same manner as the Company’s existing shares. As to the individual co-defendants, on May 10, 2005, the court entered an order staying both lawsuits as to all parties and all issues in light of the Company’s Chapter 11 filing. The court also denied the ERISA plaintiffs’ motion to dismiss the Company as a defendant so that the case could continue against the individual defendants.
The original complaint charges defendants with violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and Rule 10b-5 promulgated thereunder. The complaint alleges that throughout the Class Period, the defendants issued a series of material misrepresentations to the market concerning the Winn-Dixie's financial results. More specifically, the defendants' statements during the Class Period were materially false and misleading because they failed to disclose and/or misrepresented the following adverse facts.
Specifically, the complaint alleges that throughout the Class Period, Winn-Dixie was suffering from substantial undisclosed long-term business and financial problems. The Company was unable to market its Winn-Dixie brand competitively, it was unable to reduce excess expenses when needed, it recorded the carrying value of its long-lived assets at inflated levels, and maintained insufficient reserves for self-insurance. In addition, Winn-Dixie had no credible or workable marketing plan in place which would allow it to compete effectively with other large supermarket chains and discounters, such as Publix and Costco. Nevertheless, throughout the Class Period, defendant Allen Rowland ("Rowland") and later defendant Frank Lazaran ("Lazaran"), Rowland's successor as CEO, continued to tell investors that Winn-Dixie was following through on its strategic marketing plan. As evidence of its success and financial health, Winn-Dixie declared cash dividends throughout the Class Period.
The complaint further alleges that approximately mid-way through the Class Period, in June 2003, Rowland stepped down as CEO and received $7.7 million in severance pay, supposedly for improving store operations and enhancing the Company's financial condition. When Lazaran replaced him, unbeknownst to the investing public, Lazaran ordered his senior management to conduct a "comprehensive review" of Winn-Dixie's "entire business model." Even while this plan to restructure the Company's business model was underway, Winn-Dixie and Lazaran continued to tell the public that the Company was successfully executing its sales and marketing plan, with declared dividends to prove it. The Company's stock price rose throughout the Class Period on this encouraging news.
The complaint also alleges that on January 30, 2004, before the opening of trading, Winn-Dixie and Lazaran lowered the boom. In a press release that day, Lazaran stunned the public with disastrous financial results for the Company's second fiscal quarter ended January 7, 2004. The Company's sales were down over a quarter of a billion dollars from the prior year period. The Company had sustained a loss of $79.5 million, or $0.57 per share. Employing understatement, Lazaran told the public: "[W]e recognize that we cannot continue down this path." The Company also announced that it would take a "series of major actions" to change the way the Company does business, including, brand positioning for its Winn-Dixie brand, $100 million in expense reduction by July 1, 2004, in-depth analysis of the Company's core markets, market share, and competitive positioning, an "image makeover program," and an initiative to "reengineer" organizational effectiveness and accountability. In addition, the Company announced that it would recognize a $36.4 million charge to earnings for impairment to its long-lived assets, namely, its store locations, and would add $21.4 million to its reserves for self-insurance expense, which included additional reserves for workers' compensation claims. The Company also cut its dividend indefinitely. The market reacted swiftly to the news. Winn-Dixie's stock plunged from $9.09 to $6.56 per share on volume of 24.6 million shares.