Sherleigh Associates v. Windmere-Durable Holdings

• Decision Date: 08 June 2000
• Docket Number: No. 98-2273-CIV.,98-2273-CIV.
• Citation: 178 F.Supp.2d 1255
• Parties: SHERLEIGH ASSOCIATES, LLC and Sherleigh Associates, Inc. Profit Sharing Plan, on behalf of themselves and all others similarly situated, Plaintiffs, v. WINDMERE-DURABLE HOLDINGS, INC.; David M. Friedson, Harry D. Schulman; and Nationsbanc Montgomery Securities, LLC, Defendants.
• Court: U.S. District Court — Southern District of Florida

178 F.Supp.2d 1255

SHERLEIGH ASSOCIATES, LLC and Sherleigh Associates, Inc. Profit Sharing Plan, on behalf of themselves and all others similarly situated, Plaintiffs, v. WINDMERE-DURABLE HOLDINGS, INC.; David M. Friedson, Harry D. Schulman; and Nationsbanc Montgomery Securities, LLC, Defendants.

No. 98-2273-CIV.

United States District Court, S.D. Florida.

June 8, 2000.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

Vincent Capucci, Entwistle & Cappucci, New York City, David J. Bershad, Salvatore J. Graziano, Milberg Weiss Bershad Hynes & Lerach, New York City, Michael Elliot Criden, Hanzman Criden Chaykin & Rolnick, Coral Gables, FL, Mark C. Gardy, Abbey Gardy, New York City, Jeffrey a. Klafter, Bernstein Litowitz Berger & Grossmann, New York City, Peter Harold Rachman, Emily Cornelia Komlossy, Goodkind Labaton Rudoff & Sucharow, Fort Lauderdale, FL, Steven J. Toll, Cohen Milstein Hausfeld & Toll, Seattle, WA, Jeffrey C. Block, Berman DeValerio Pease Tabacco Burt & Pucillo, Boston, MA, Robert Cecil Gilbert, Coral Gables, FL, Abraham Rappaport, Maya Susan Saxena, Kenneth J. Vianale, Milberg Weiss Bershad Hynes & Lerach, Boca Raton, FL, Curtis V. Trinko, New York City, for plaintiffs.

Richard G. Garrett, Clement Ryan Reetz, Michael James Rogal, Greenberg Traurig, Miami, FL, Alan Mansfield, Greenberg Traurig Hoffman Lipoff Rosen & Quentel, New York City, Parker D. Thomson, Thomson Muraro Razook & Hart, Miami, FL, Gregory A. Markel, Brobeck Phleger & Harrison, New York City, Dennis Michael Campbell, Clarke, Silverglate Campbell Williams & Montgomery, Miami, FL, Francis S. Chlapowski, Nicole M. Hunn, Brobeck Phleger & Harrison, New York City, for defendants.

MEMORANDUM OPINION AND ORDER ON MOTIONS TO DISMISS

LENARD, District Judge.

Defendants Windmere Durable Holdings, Inc., David M. Friedson and Harry D. Schulman (the "Windmere Defendants"), and separately Defendant Nationsbanc Montgomery Securities LLC ("Montgomery"), move to dismiss the Consolidated Amended Class Action Complaint. For the reasons discussed below, the Court denies the Motion of the Windmere Defendants in its entirety, and grants Montgomery's Motion to the extent that Count IV of the Consolidated Amended Class Action Complaint is dismissed as to Montgomery and denied Montgomery's Motion in all other respects.

I. Factual Background

This is a securities class action on behalf of all persons who purchased the publicly traded securities of Defendant Windmere-Durable Holdings, Inc. ("Windmere") between May 12, 1998 and September 22, 1998, including those who acquired Windmere common stock and 10% Senior Subordinated Notes in Windmere's July 22, 1998 public offering. This action alleges violations of the Securities Act of 1933 (the "'33 Act") and the Securities Exchange Act of 1934 (the "'34 Act").

As alleged in the Consolidated Amended Class Action Complaint (hereinafter "Amended Complaint"), Windmere is a diversified international manufacturer and distributor of small electrical kitchen appliances and other household items. On May 11, 1998, Windmere issued a press release, filed with the Securities and Exchange Commission ("SEC") in a Form 8-K and signed by Defendant Harry D. Schulman ("Schulman"), the Chief Operating and Financial Officer, announcing Windmere's acquisition of the Home Products Group ("HPG") of the Black & Decker Corporation ("Black & Decker"). According to the press release, the HPG purchase would give Windmere a license to use the valuable Black & Decker brand name in North and Latin American markets, and would increase Windmere's manufacturing and distribution capacity.

Windmere acquired HPG on June 26, 1998 for $ 315 million in cash. Windmere financed its purchase of HPG with a "bridge loan" from NationsBank. To repay the NationsBank bridge loan, Windmere, along with the lead underwriter, Defendant Montgomery, offered its debt and equity securities to investors in a public offering on July 22, 1998 (the "July Offering"). The July Offering commenced pursuant to a registration statement, which included the Prospectus and two Prospectus supplements (collectively, the "Registration Statement"), that the SEC declared effective on June 4, 1998. In the July Offering, Windmere offered $ 103 million of common stock, approximately three million shares at $ 34 per share, and $ 130 million of 10% Senior Subordinated Notes.

The Registration Statement stated that the proceeds of the offering would be used to pay, in part, the NationsBank bridge loan. The Registration Statement further explained that Windmere "intended to utilize the marketing and distribution channels acquired through HPG to expand global market penetration of its products, particularly in Latin America." The acquisition, the Registration Statement explained, offered "immediate growth opportunities" and "uniquely positioned [Windmere] to capitalize on growth opportunities" in the household appliance and personal care markets. The Registration Statement went on to describe Windmere's 50% ownership of NewTech Electronics Industries ("NewTech"), and that Windmere would recognize 50% of the net earnings and losses of NewTech.

As alleged in the Amended Complaint, Windmere, Montgomery, Schulman and Defendant David M. Friedson ("Friedson"), Windmere's Chairman and Chief Executive Officer, promoted and sold the Windmere securities by issuing positive statements in pre-offering road show presentations to investors between July 6, 1998 and July 21, 1998. During these road show presentations, Plaintiffs allege, Defendants represented that Windmere was enjoying substantial benefits from the "complimentary strengths" between Windmere's existing operations and those of the recently acquired HPG. Windmere further represented that it "continued to enjoy strong revenue growth with a decreasing cost structure."

During this period, several adverse material facts were allegedly concealed or not disclosed by Defendants. Described more fully below, the Plaintiffs allege five categories of material omissions and misstatements. First, Windmere did not have the requisite licenses required to operate HPG and to sell HPG products in various Latin American countries and thus could not sell HPG products in these Latin American countries or even call on HPG's then-existing customer base, until such time as the licenses were obtained. Windmere allegedly knew as early as March, 1998 that, after the acquisition but prior to the July Offering, it was obligated by local law in each Latin American country to create a new company for HPG, and to register those entities with the authorities in each country. Windmere had not yet begun this complicated and time-consuming process, however. At the time of the July Offering and during the Class Period, Plaintiffs allege Windmere's failure to obtain such licenses was causing Windmere to experience declining international sales and undermining the business objectives that the HPG acquisition was intended to serve.

Second, Plaintiffs allege, prior to the sale of HPG to Windmere, Black & Decker caused HPG to aggressively stuff its distribution channels through extensive discounting and relaxation of payment terms, which allowed Black & Decker to sell HPG at an unrealistically high price. According to Plaintiffs, Latin American retailers of HPG products were overstocked before Windmere's June 26, 1998 acquisition of HPG. Plaintiffs allege the oversupply and constrained distribution stream were known to HPG and Windmere but was not disclosed in the Registration Statement.

Third, Plaintiffs allege that the Registration Statement failed to disclose the risks and difficulties of merging Windmere and HPG's "manufacturing infrastructure" and that Windmere overstated the cost savings and efficiency gains that could be realized from the merger. HPG's manufacturing facilities in North Carolina, Mexico and Asia apparently produced for all divisions of Black & Decker, and severing HPG from Black & Decker's manufacturing operations would be significantly more confusing, costly, and time-consuming than disclosed in the Registration Statement.

Fourth, Plaintiffs allege NewTech, of which Windmere owned 50%, was then experiencing substantial problems meeting the orders of some of its largest department store customers, such as Wal-Mart, Ames Department Stores, Bradlees, and Walgreens, and as a result, was suffering a substantial decline in sales. Plaintiffs allege this information was in Defendants' possession but was not disclosed in the Registration Statement.

Fifth, Plaintiffs allege Defendants Friedson and Schulman protected themselves from the possible negative consequences of the merger, and thus the undisclosed material risks enumerated above, through surreptitiously hedging their own Windmere stock holdings against a share price decline. Prior to the stock price drop, but during the period just before the Registration Statement was declared effective, Plaintiffs allege Friedson and Schulman employed a sophisticated trading strategy of using puts and calls on their own Windmere common stock that guaranteed that the value of their shares would be fixed in a range between $ 21 per share and $ 33 per share. These two Defendants allegedly traded these positions through a common broker at CIBC Oppenheimer in Boston.

On September 23, 1998, eight weeks after the July Offering, Windmere issued a press release stating that it was experiencing weak international sales, particularly in Latin America, and that NewTech was experiencing lower than expected earnings. That day, Windmere's stock price dropped to $ 7.1875 per share, down $ 27 per share from the $ 34 July Offering price. Between September 23, 1998 and February 23, 1999, the price further declined from $ 7 per share to below $ 4 per share. Although Windmere had previously expected 1998 earnings per share to be $ 1.50, Windmere in actuality realized...