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HD Supply Misleads on Outlook as CEO Sells Shares, Says Securities Class Action

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HD Supply Holdings Warehouse

It’s hard to say that a company does not have knowledge of negative information when its CEO and Chairman of the Board quietly unloads $54 million worth of company stock, just before revelations cause the price to fall sharply. The complaint for this class action claims that HD Supply Holdings, Inc. hid adverse information from the public, keeping its stock price artificially inflated.

The class for this action is all persons or entities who acquired HD Supply securities between November 9, 2016 and June 5, 2017.

HD Supply is one of the largest industrial supply companies in North America, offering a range of products and services in maintenance, repair, operations, infrastructure and power, and specialty construction areas.

In early 2016, HD’s Facilities Maintenance (FM) segment miscalculated demand for products, leaving it undersupplied. When management tried to remedy the situation, the complaint says, the result was an excessive inventory buildup and distribution centers that were “stretched beyond capacity” in late 2016.

In November, the company claimed that the FM segment was back on track and that the company was “perfectly positioned to enter 2017 and deliver on [its] commitments of 300 basis points more than market, one-and-a-half times operating leverage and 75% cash generation.”

Similar statements followed during the rest of the class period, including statements that HD’s operating leverage would drastically increase during the second half of 2017 because of lower costs in FM.

However, the complaint alleges that HD had been withholding material information:

  • The company’s 2017 targets for growth and operational leverage were unattainable.
  • The recovery of FM was not going according to plan.
  • The company was considering selling Waterworks, a major business segment that is the country’s largest distributor of water, sewer, storm, and fire protection products.
  • The outlook was bad enough that at least one insider wanted to unload his stock.

In June of 2017, HD’s first-quarter report admitted to a number of negatives: Its earnings did not meet predictions; it was selling Waterworks; and it was making increased capital investments in FM, which meant that it had to reduce its operating leverage targets for 2017. The investments in FM in particular were unexpected, because the company had been claiming that FM was over its problems and that the company had achieved this partly by making substantial investments in it.

According to the complaint, just before the these matters were announced, Joseph DeAngelo, the company’s CEO and Chairman of the Board, sold over 1.3 million shares of stock. By the time the negative announcements were made, and the stock fell by over 20%, he had safely unloaded about 80% of his investment in the company.

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