philip henningsen, et al. v. the adt corporation, et al. 14-cv...

Case 9:14-cv-80566-WPD Document 1 Entered on FLSD Docket 04/28/2014 of 30

UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF FLORIDA

Case No.

PHILIP HENNINGSEN, Individually and on ) CLASS ACTION Behalf of All Others Similarly Situated, )

) Plaintiff, )

) vs. )

THE ADT CORPORATION, NAREN GURSAHANEY, KATHRYN A. MIKELLS, MICHAEL S. GELTZEILER, KEITH A. MEISTER and CORVEX MANAGEMENT LP,

Defendants.

COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS


Plaintiff, individually and on behalf of all others similarly situated, by plaintiff’s undersigned

attorneys, for plaintiff’s complaint against defendants, alleges the following based upon personal

knowledge as to plaintiff and plaintiff’s own acts, and upon information and belief as to all other

matters based on the investigation conducted by and through plaintiff’s attorneys, which included,

among other things, a review of United States Securities and Exchange Commission (“SEC”) filings

by The ADT Corporation (“ADT” or the “Company”), as well as media reports about the Company

and conference call transcripts. Plaintiff believes that substantial additional evidentiary support will

exist for the allegations set forth herein after a reasonable opportunity for discovery.

SUMMARY OF THE ACTION

This is a securities fraud class action on behalf of all persons who purchased the

common stock of ADT listed on the New York Stock Exchange (“NYSE”) (under the ticker symbol

“ADT”) between November 27, 2012 and January 29, 2014, inclusive (the “Class Period”). This

action is brought against ADT and certain of the Company’s current and former officers and

directors for violations of the Securities Exchange Act of 1934 (the “1934 Act”) and SEC Rule

10b-5 promulgated hereunder.

INTRODUCTION AND OVERVIEW

2. ADT, originally known as American District Telegraph, was founded in 1874 and

became a public company listed on the NYSE in 1969. In 1987, the Company was taken private and

renamed ADT Security Systems, Inc., and in 1997, the then-private Company was acquired by Tyco

International Ltd. (“Tyco”). On September 28, 2012, ADT was spun off from Tyco as The ADT

Corporation, again becoming an independent public company listed on the NYSE under the symbol

“ADT.”

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3. Through a variety of brands, including ADT, ADT Pulse and Companion Services,

ADT provides electronic security, interactive home and business automation, and related monitoring

services to approximately 6.5 million residential and small business customers in the United States

and Canada.

4. The majority of the Company’s annual revenue (typically 90%) is driven by the

services ADT provides, which are governed by multi-year contracts that generate recurring revenue.

ADT’s service offerings include the installation and monitoring of residential and small business

security and premises automation systems that react to movement, smoke, carbon monoxide,

flooding, temperature and other environmental conditions and hazards, and address personal

emergencies, such as injuries, medical emergencies or incapacitation.

5. During the Class Period, defendants issued materially false and misleading statements

regarding ADT’s current financial condition and future business prospects, including the outlook for

fiscal 2013 and 2014. Specifically, during the Class Period, the Company stated among other things:

• “ We expect recurring revenue to continue to grow at the rate we’ve seen over the past several quarters at approximately 4.9% to 5.2% . . . .”

“Attrition has stabilized . . . [and] competitors continue to have little impact on attrition and in fact, we think the level of concern that has been expressed by some over the past few weeks is overblown . . . . [T]o date nothing has really changed . . . .”

“[W]e are affirming our guidance [that recurring revenue growth for] fiscal year 2013 . . . will be about 5% . . . . [W]e expect cost-to-serve to be flat . . . [and] margins should modestly improve as we continue to grow the revenue base. . . . [We] expect . . . to come in at the high end of our full-year EBITDA margin guidance . . . .”

• “[A]nything we do at this stage is going to be consistent with the $2 billion three- year share repurchase program that we announced back in November . . . . [W]e are at our target leverage . . . [and] are sticking to what we laid out back in November .”

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6. In truth, however, defendants knew or deliberately disregarded the following facts:

(a) Despite defendants’ emphatic representations concerning the Company’s

current financial condition and bullish forecasts of future financial results, ADT was experiencing

reduced non-Pulse demand, accelerating churn rate and attrition, and increased advertising and

service costs, all of which were negatively impacting ADT’s recurring revenue, margins and

earnings;

(b) ADT had been relying on its aggressive share repurchases to artificially inflate

reported earnings per share (“EPS”), thereby disguising an overall growth slowdown and inflating

the value of stock options granted to defendants and other insiders; and

(c) In light of these known facts, the Company did not have a reasonable basis for

its 2013 and 2014 quarterly and full-year financial forecasts.

7. As a result of defendants’ false and misleading statements and omissions, the

Company’s stock traded at artificially inflated prices during the Class Period, reaching a high of

$49.73 per share on March 13, 2013.

8. Then on November 25, 2013, ADT announced in a press release that the Company

would repurchase the vast majority of board member Keith A. Meister (“Meister”) and Corvex

Management LP’s (“Corvex”) ADT common stock position at an above-market price of $44.01 per

share, and that, notwithstanding Meister having joined the Board of Directors (“Board”) less than

one year earlier, he was resigning from ADT’s Board effective immediately. On this November 25,

2013 disclosure, investors began to question the veracity of ADT’s bullish earnings forecasts, and

the price of ADT common stock dropped nearly 10% to $40.85 per share on nearly ten times the

average daily trading volume.

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9. On December 2, 2013, ADT announced that it had completed the repurchase of

Meister and Corvex’s ADT common stock position. On this news, investor confidence, and

consequently the price of ADT shares, continued to slide, dropping to $38.80 per share on December

13, 2013.

10. Then on January 30, 2014, before the market opened, ADT issued a press release

announcing severely disappointing first quarter 2014 results, falling far short of ADT’s previous

bullish EPS guidance and Wall Street’s consensus estimate. Investors reacted swiftly and severely,

driving the price of ADT stock down 17%, from $37.81 per share to $31.40 per share on nearly 20

times the average daily trading volume.

11. As a result of defendants’ false and misleading statements and omissions, ADT

common stock traded at artificially inflated prices during the Class Period. Upon disclosure of the

Company’s true financial condition, ADT’s stock price plummeted, causing tens of millions of

dollars in damages to ADT investors.

JURISDICTION AND VENUE

12. The claims asserted herein arise under §§10(b) and 20(a) of the 1934 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.

Jurisdiction is conferred by §27 of the 1934 Act (15 U.S.C. §78aa).

13. Venue is proper pursuant to §27 of the 1934 Act because ADT is headquartered in

this District.

14. In connection with the acts and conduct alleged herein, defendants, directly and

indirectly, used the means and instrumentalities of interstate commerce, including, but not limited to,

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the United States mails, interstate telephone communications and the facilities of the national

securities exchanges and markets.

PARTIES

15. Plaintiff Philip Henningsen purchased the common stock of ADT during the Class

Period as set forth in the certification attached hereto and was damaged as a result of defendants’

wrongdoing as alleged in this complaint.

16. Defendant ADT is an alarm and securities system company incorporated under the

laws of Delaware and headquartered in Boca Raton, Florida.

17. Defendant Naren Gursahaney (“Gursahaney”) is and at all times relevant was

President and Chief Executive Officer (“CEO”) of ADT. Prior to the Class Period, Gursahaney

served as President of Tyco’s ADT North American Residential business segment.

18. Defendant Kathryn A. Mikells (“Mikells”) was Chief Financial Officer (“CFO”) of

ADT from May 2012 to May 2, 2013.

19. Defendant Michael S. Geltzeiler has been CFO of ADT since November 2013.

20. Defendant Meister is founder, Managing Director and a Partner of Corvex. Meister

was a member of ADT’s Board from December 2012 to November 2013.

21. Defendant Corvex is a hedge fund that, from October 2012 to November 2013, owned

over 5% of ADT’s outstanding common stock.

22. The defendants identified in ¶¶17-20 are referred to herein as the “Individual

Defendants.”

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CONTROL PERSONS

23. The Individual Defendants, because of their positions with the Company, possessed

the power and authority to control the contents of ADT’s quarterly reports, press releases and

presentations to securities analysts, money and portfolio managers and institutional investors, i.e .,

the market. They were provided with copies of the Company’s reports and press releases alleged

herein to be misleading prior to or shortly after their issuance and had the ability and opportunity to

prevent their issuance or cause them to be corrected. Because of their positions within the Company,

and their access to material non-public information available to them but not to the public, the

Individual Defendants knew that the adverse facts specified herein had not been disclosed to and

were being concealed from the public and that the positive representations being made were then

materially false and misleading. The Individual Defendants are liable for the false and misleading

statements pleaded herein.

DEFENDANTS’ FALSE AND MISLEADING STATEMENTS ISSUED DURING THE CLASS PERIOD

24. On November 27, 2012, ADT issued a press release, entitled “ADT Reports Fourth

Quarter and Fiscal 2012 Results,” reporting the Company’s fourth quarter 2012 financial results:

The ADT Corporation today reported diluted earnings per share of $0.40 for the fourth quarter of 2012, and diluted earnings per share before special items of $0.43. . . . Commenting on the company’s results for the fourth quarter, Gursahaney added, “ We delivered solid recurring revenue growth fueled by the continued success of Pulse in the residential and small business security markets. Our focus for 2013 is to deliver meaningful shareholder value by leveraging our competitive strengths to accelerate growth and through the efficient deployment of capital .”

Recurring revenue, which made up over 90% of total revenue in the quarter, was up 5.2%, driven by 4.4% growth in average revenue per customer, which rose to $38.87, and 1.1% net growth in customer accounts. . . . Total revenue of $812 million increased 2.3%, compared to the fourth quarter of 2011. Attrition was up 30 basis points sequentially to 13.8% with the majority of the increase coming from

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voluntary disconnects, in part due to the higher level of price escalations implemented in the second and third quarters. ADT added 284,000 new customers and closed the quarter with 6.4 million customer accounts, 1.1% higher than last year.

25. The Company’s November 27, 2012 press release also provided the Company’s

financial forecast for fiscal 2013:

FISCAL YEAR 2013 GUIDANCE

• Recurring revenue growth of 4.9%-5.2%

• EBITDA margin before special items of 49.5%-50.5%

• Free cash flow before special items of $375-$425 million

• Steady-state free cash flow before special items of $950 million-$1.0 billion

26. On the same day, November 27, 2012, the Company hosted a conference call for

analysts and investors during which defendants Gursahaney and Mikells touted the strength of the

Company’s recurring revenue and signaled that ADT had agreed with Meister and Corvex’s capital

restructuring thesis, initially articulated in an October 25, 2012 Form 13D, and that the Company

expected recurring revenue to continue to grow: 1

[Mikells:] Now I’d like to focus on . . . our guidance for fiscal 2013. We expect recurring revenue to continue to grow at the rate we’ve seen over the past several quarters at approximately 4.9% to 5.2%, with the underlying recurring revenue growth drivers being consistent with recent trends .

* * *

[Gursahaney:] We strongly believe that our capital structure must be appropriate for both our business model and the key strategies we are pursuing. In our case, we

1 On October 25, 2012, ADT filed a Schedule 13D with the SEC, announcing that defendant Meister, through his hedge fund Corvex, had acquired over 5% of the outstanding ADT common stock. Attached to the October 25, 2012 Schedule 13D was a 50-slide presentation to investors by Meister and Corvex arguing for increased leverage and share repurchases which would purportedly push the price of ADT common stock up to $60-$80 per share.

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have a business model that generates strong recurring revenues and attractive financial returns .

27. Between November 27, 2012 and December 31, 2012, the Company’s share price

traded at artificially inflated levels above $46.00 per share.

28. On December 17, 2012, the Company announced that defendant Meister had been

appointed to the Company’s Board:

The ADT Corporation, a leading provider of electronic security, interactive home and business automation and alarm monitoring services, today announced the appointment of Keith Meister, the Founder and Managing Partner of Corvex Management LP, to the Company’s Board of Directors.

29. On January 17, 2013, the Company issued a press release announcing that it had

priced a private offering of senior notes worth in excess of $700 million.

30. On January 30, 2013, the Company issued a press release announcing ADT’s first

quarter fiscal 2013 financial results. In addition to reporting strong earnings and margin results and

continued strong growth in recurring revenue, the Company announced the acceleration of the share

repurchase program as follows:

The ADT Corporation today reported diluted earnings per share of $0.44 for the first quarter of 2013, and diluted earnings per share before special items of $0.44. Using the company’s cash tax rate, EPS before special items was $0.70.

Naren Gursahaney, ADT’s Chief Executive Officer, said, “ We are pleased to start the new fiscal year with a very solid quarter characterized by continued strong growth in recurring revenue and EBITDA margin, along with stabilization in attrition rates . . . .”

Recurring revenue, which made up 92% of total revenue in the quarter, was up 5.1%. Recurring revenue growth was driven by a 4.7% increase in ending average revenue per customer, which rose to $39.27, and 0.5% net growth in ending customer accounts. . . . Attrition was flat sequentially at 13.8% . ADT added 257,000 new customers and closed the quarter with 6.4 million customer accounts.

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*


SHARE REPURCHASE PROGRAM

Under its previously announced $2 billion authorization, during the quarter the company repurchased 567 thousand of its shares for $26 million, and in January the company repurchased an additional 1.6 million of its shares for $74 million.

The company announced today that it has entered into an accelerated share repurchase agreement with Credit Suisse International, under which it will repurchase approximately $600 million of its common stock. The company will acquire the shares under its previously authorized share repurchase program and will fund the repurchase using proceeds from its recently concluded debt offering. Under the terms of the agreement with Credit Suisse International, ADT will pay Credit Suisse International $600 million on February 4, 2013 and on that date will receive initial deliveries of approximately 10 million shares, representing a substantial majority of the shares expected to be retired over the course of the agreement. 2

(Footnote omitted.)

31. The January 30, 2013 press release also reaffirmed the Company’s financial guidance

for fiscal 2013:

AFFIRMING FISCAL YEAR 2013 GUIDANCE

Recurring revenue growth of 4.9%-5.2%

EBITDA margin before special items of 49.5%-50.5%

. Free cash flow before special items of $375-$425 million

Steady-state free cash flow before special items of $950 million - $1.0 billion

32. On the same day, January 30, 2013, the Company hosted a conference call for

analysts and investors during which defendants Gursahaney and Mikells touted the strength of the

Company’s recurring revenue and downplayed the risk of increased competition:

2 On April 12, 2013, the Company issued a press release announcing that it had completed its accelerated stock repurchase program resulting in the repurchase of 12.6 million shares at a cost of $600 million.

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[Mikells:] [F]rom our perspective, the competitive environment really hasn’t changed . . . . We are seeing the same level of overall competition. We continue to look at our results . . . [and] the metrics are holding up very well .

. . . [Gursahaney:] I think Kathy hit the nail on the head. We are not seeing any significant change .

33. On April 1, 2013, the Company filed a Form 424B3 prospectus supplement with the

SEC offering to exchange up to $2.5 billion aggregate principal of its outstanding unregistered debt

securities.

34. On April 18, 2013, the Company filed a Form 424B3 prospectus supplement with the

SEC offering to exchange $700 million worth of the Company’s unregistered notes for new

registered notes. On the same day, the Company issued a press release describing the offer as

follows:

The ADT Corporation Initiates Exchange Offer

. . . The ADT Corporation announced at 5:00 p.m. ET today its offer to exchange certain of its outstanding unregistered notes for new registered notes in accordance with the terms of its registration rights agreement with existing holders of those notes.

Under the exchange offer, ADT is offering to exchange (the “Exchange Offer”) up to $700,000,000 aggregate principal amount of its outstanding $700,000,000 4.125% Notes due 2023 for a like principal amount of its new $700,000,000 4.125% Notes due 2023 (the “Exchange Notes”).

35. Between April 1, 2013 and April 30, 2013 ADT shares traded at artificially inflated

prices of more than $47.00 per share, reaching a high of $48.00 on April 1, 2013.

36. On May 1, 2013 the Company issued a press release announcing ADT’s financial

results for its second quarter of fiscal 2013. In addition to reporting strong earnings and financial

results, the Company noted that it was experiencing solid growth in recurring revenue and had

repurchased another 16.9 million shares of its common stock on the open market for $800 million:

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The ADT Corporation today reported diluted earnings per share of $0.47 for the second quarter of 2013, and diluted earnings per share before special items of $0.41. Using the company’s cash tax rate, EPS before special items was $0.631.

Naren Gursahaney, ADT’s Chief Executive Officer, said, “ Our results this quarter reflect continued solid growth in recurring revenue, which is a key element of our business model, along with further improvement in take rates for ADT Pulse . . . . Capital management continues to be a major focus for us, and thus far we have repurchased $800 million of our shares under the $2 billion authorization we announced last November.” Gursahaney added, “Over the balance of the fiscal year we will focus on continuing to grow our customer base, controlling costs to improve margins and returning excess cash to our shareholders.”

Recurring revenue, which made up 92% of total revenue in the quarter, was up 5.0%. Recurring revenue growth was driven by a 4.4% increase in ending average revenue per customer, which rose to $39.66, and 0.6% net growth in ending customer accounts. . . . Attrition was up 10 basis points sequentially at 13.9% . ADT added 303,000 new customers and closed the quarter with 6.5 million customer accounts.

EBITDA before special items was $409 million, 1.5% higher than the prior year, and EBITDA margin before special items was 49.8%, a 10 basis point decline.

Operating cash flow for the twelve month period ended March 29, 2013 was $1.6 billion. Steady-state free cash flow before special items, calculated on a pre-tax and unlevered basis for the twelve month period ended March 29, 2013 was $953 million.

(Footnote omitted.)

37. The Company’s May 1, 2013 press release again affirmed the Company’s 2013

financial guidance:

AFFIRMING FISCAL YEAR 2013 GUIDANCE

. Recurring revenue growth of 4.9%-5.2%

EBITDA margin before special items of 49.5%-50.5%


Steady-state free cash flow before special items of $950 million - $1.0 billion

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38. On the same day, May 1, 2013, the Company hosted a conference call for analysts

and investors during which defendant Gursahaney touted the strength of the Company’s recurring

revenue and downplayed both the likelihood of increased debt to fund further share repurchases and

the risk of increased competition affecting ADT’s reported financial results:

[Gursahaney:] [W]e will continue to take a balanced approach to capital management. We have a resilient predictable business model, which enable us to invest in growth and consistently return significant capital to shareholders over time through . . . share repurchases. Overall, this was another solid quarter for us with a number of continuing positive trends in our business.

* * *

Recurring revenue grew by 5% to $756 million and accounted for 92% of our total revenue. Total revenue was $821 million, up 1.7% over the second quarter of last year.

* * *

Attrition has stabilized over the last two quarters and was essentially flat at 13.9% versus last quarter. . . .

New entry competitors continue to have little impact on attrition and in fact, we think the level of concern that has been expressed by some over the past few weeks is overblown . . . . [W]e attribute less than 10% of our total customer disconnects to lost competition . . . . We continue to closely monitor the impact . . . , but to date nothing has really changed .

* * *

[WJe are affirming our guidance for fiscal year 2013 . . . .

. . . I expect we will be about 5% for recurring revenue growth in fiscal 2013 .

* * *

As we look towards the back half of the year, we expect cost-to-serve expenses to be flat to be up only modestly with further investment in capability to be largely offset by productivity gains and other cost-reduction programs. As a result, margins should modestly improve as we continue to grow the revenue base. . . . I expect us to come in at the high end of our full-year EBITDA margin guidance .

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* * *

I feel very good about our performance this quarter as our results were in line with our expectations. With our needed customer service investments in place, we will be focused on cost control in the second half of the year and I am optimistic about our prospects for continued growth at attractive returns and for generating excess cash flow that can be deployed efficiently over time.

* * *

[Analyst:] [A]ny thoughts on the pace of share repurchase to expect over the remainder of the fiscal year and if you, at this point, plan for any additional debt issuance to fund your purchases in the near term?

. . . [Gursahaney:] [A]nything we do at this stage is going to be consistent with the $2 billion three-year share repurchase program that we announced back in November . . . .

[Analyst:] Okay, but based on that, it doesn’t sound like you’re anticipating at this point raising incremental debt to fund share purchase. It sounds like you have plenty of excess liquidity at this point to do what you want to do.

[Gursahaney:] Yes, I think we have liquidity at this point and we are at our target leverage . So again I think we are sticking to what we laid out back in November .

39. After the announcement of the Company’s May 1, 2013 financial results, ADT’s

shares continued to trade at prices over $42.00 per share.

40. On July 31, 2013, ADT issued a press release entitled “ADT Reports Third Quarter

2013 Results; Company Provides Update on Capital Allocation Strategy, Announces Acquisition of

Devcon Security.” The Company again reported strong recurring revenue growth and margin

results, and restated its reported attrition rates to reflect metrics that were significantly more

favorable than previously reported:

The ADT Corporation today reported diluted earnings per share of $0.52 for the third quarter of 2013. . . .

Recurring revenue, which made up 92% of total revenue in the quarter, was up 4.2%. Recurring revenue growth was driven primarily by an increase in ending average revenue per customer, which rose to $40.08 . . . .

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The company has determined that its net attrition rates for prior periods have been overstated due to the inaccurate capture of certain resale activity . The revised net attrition rate for the current quarter was 13.8% and revised rates for the preceding quarters were: 13.5%, 13.4%, 13.5%, 13.2%, 12.9%, 12.7%, and 12.7% for the quarters ended March 29, 2013 through September 30, 2011, respectively. ADT closed the quarter with 6.5 million customer accounts.

EBITDA before special items was $433 million, 5.1% higher than the prior year, and EBITDA margin before special items was 52.0%, a 140 basis point improvement. The margin expansion was mainly due to the favorable impact of the mix shift to more ADT-owned systems and cost control initiatives that helped to offset the impact of dis-synergies and public company costs resulting from the separation from Tyco International.

Operating cash flow for the twelve month period ended June 28, 2013 was $1.6 billion. Steady-state free cash flow before special items, calculated on a pre-tax and unlevered basis for the twelve month period ended June 28, 2013 was $918 million.

* * *

Naren Gursahaney, ADT’s Chief Executive Officer, said, “Our results for the quarter reflect solid execution on our growth and cost control initiatives. We continued to make significant progress in expanding sales of ADT Pulse with the trends in take rates demonstrating the broad appeal of the Pulse product set across all of our sales channels.”

* * *

SHARE REPURCHASE PROGRAM

Under its previously announced three-year, $2 billion authorization, the company repurchased 7 million of its shares for $296 million during the quarter. Additionally, during April 2013, the company received 1.2 million additional shares of its common stock in conjunction with the completion of the $600 million accelerated share repurchase program initiated on January 29, 2013. From inception of the $2 billion program to date the company has repurchased 25.3 million shares for $1.15 billion.

41. The Company also announced its financial forecast for 2013, including a reduction in

expected recurring revenue growth and steady-state free cash flow, and an increase in its margins

and free cash flow:

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UPDATING FISCAL YEAR 2013 GUIDANCE

. Recurring revenue growth of 4.5%-4.8%

EBITDA margin before special items approximately 51.0%


Steady-state free cash flow before special items $900-$950 million

42. On July 31, 2013 the Company hosted a conference call for analysts and investors to

discuss the third quarter 2013 results:

[Gursahaney:] Overall this was another solid quarter for us with a number of positive trends in our business.

* * *

Recurring revenue grew by 4.2% to $764 million and accounted for 92% of our total revenue. Total revenue was $833 million, up 2.3% over the third quarter of last year.

43. After the July 31, 2013 report of ADT’s results for its fiscal 2013 third quarter, ADT

common stock traded at artificially inflated prices above $41.00 per share.

44. On September 24, 2013, ADT issued a press release entitled “The ADT Corporation

Prices Private Offering of Senior Notes.” The press release announced the pricing of debt securities

that would raise capital to, in part, pay down debt associated with share buybacks:

The ADT Corporation announced the pricing of its offering of $1,000,000,000 of 6.250 percent senior unsecured notes due 2021. ADT intends to use the net proceeds from the offering primarily to repay $150 million in borrowings under its revolving credit facility, repurchase outstanding shares of its common stock and for other general corporate purposes, including acquisitions.

45. On November 20, 2013, ADT issued a press release, entitled “ADT Reports Fourth

Quarter and Fiscal Year 2013 Results; Q4’13 Recurring Revenue up 5%; Q4’13 GAAP Diluted EPS

up 13%,” announcing ADT’s fourth quarter 2013 financial results:

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The ADT Corporation today reported diluted earnings per share of $0.45 for the fourth quarter of 2013. Excluding special items for the separation from Tyco, and merger and restructuring costs, diluted earnings per share was $0.46. This compares to earnings per share excluding special items of $0.43 in the fourth quarter of last year. . . .

Recurring revenue, which made up 92% of total revenue in the quarter, was up 4.7%. Recurring revenue growth was driven by 388 thousand gross additions . . . . This was partially offset by customer attrition, which rose 10 basis points sequentially to 13.9%. ADT closed the quarter with 6.5 million customer accounts, 1.5% higher than last year. Total revenue of $846 million increased 4.2% compared to the fourth quarter of 2012.

* * *

ADT’s Chief Executive Officer, Naren Gursahaney, commented on the company’s results, ”I am pleased with our progress during our first year as a standalone public company. We continue to build on our industry leading position . . . . In the fourth quarter, we again delivered solid recurring revenue growth driven in large part by the success of Pulse and our acquisition of Devcon Security.”

46. After the November 20, 2013 report of ADT’s results for its fiscal 2013 fourth

quarter, ADT common stock traded at inflated prices above $44.00 per share.

47. Each of the above representations was false and misleading, as defendants knew or

recklessly disregarded, and failed to disclose the following:

(a) Despite defendants’ emphatic representations concerning the Company’s

current financial condition and bullish forecasts of future financial results, ADT was experiencing

reduced non-Pulse demand, accelerating churn rate and attrition, and increased advertising and

service costs, all of which were negatively impacting ADT’s recurring revenue, margins and

earnings;

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(b) ADT had been relying on its aggressive share repurchases to artificially inflate

reported EPS, thereby disguising an overall growth slowdown and inflating the value of stock

options granted to defendants and other insiders; and

(c) In light of these known facts, the Company did not have a reasonable basis for

its 2013 and 2014 quarterly and full-year financial forecasts.

THE COMPANY’S TRUE FINANCIAL CONDITION BEGINS TO BE DISCLOSED

48. On November 25, 2013, ADT issued a press release, entitled “ADT Announces

Repurchase of Shares Held by Corvex,” which announced ADT’s intention and agreement to

repurchase the vast majority of defendants Meister and Corvex’s ADT common stock position in a

private transaction at an above-market price, and also that defendant Meister has resigned from

ADT’s Board:

The ADT Corporation announced today that it has entered into an agreement to repurchase 10.24 million shares of ADT common stock beneficially owned by Corvex Management LP (“Corvex”), at a purchase price of $44.01 per share. The purchase price equals the closing price of ADT common stock on November 22, 2013.

Keith Meister, the Founder and Managing Partner of Corvex, has also submitted his resignation from ADT’s Board of Directors, effective immediately.

49. On the same day, November 25, 2013, Morningstar Research issued a report

discussing the abrupt departure of Meister and the sale of common stock back to the Company,

noting:

The share sale by Corvex sends a negative signal to the market that ADT is no longer the great investment it was originally thought. Corvex likely scored around a 10% gain on its stock purchases . . . but . . . [i]n its 50-slide presentation to investors a year ago, Corvex argued that ADT was worth anywhere from $61 to $83 . . . .

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50. On this November 25, 2013 news, investors reacted severely, driving the price of

ADT common stock down nearly 10% from $44.01 per share to $40.85 per share on nearly ten times

the average daily trading volume.

51. On December 2, 2013, ADT filed a Form 8-K with the SEC confirming that the

Company had repurchased 10.24 million shares of ADT common stock from defendants Meister and

Corvex in a private transaction at an above-market price of $44.01 per share. On this news, that the

Company had indeed repurchased over 10 million shares in a private transaction at an above-market

price of $44.01 per share from the very insider who had just a year prior pushed dramatically to

increase Company debt while trumpeting a $60-$80 target price, ADT shares continued to slide,

closing at $38.80 per share on December 13, 2013.

52. Then, on January 30, 2014, before the market opened, ADT issued a press release,

entitled “ADT Reports First Quarter 2014 Results,” announcing ADT’s first quarter financial results,

which badly missed the Company’s guidance and analysts’ consensus estimates and revealed ADT’s

far-worse-than-forecasted financial condition and its diminished future prospects, including that

ADT was experiencing reduced demand, accelerating churn rate and attrition, and increased

advertising and service costs, all of which were negatively impacting ADT’s recurring revenue,

margins and earnings:

The ADT Corporation today reported its financial results for the first quarter of 2014. The Company reported diluted earnings per share of $0.39 for the first quarter of 2014. Excluding special items for the separation from Tyco, merger and restructuring costs, and 2G radio conversion costs, diluted earnings per share was $0.43. This compares to diluted earnings per share excluding special items of $0.44 in the first quarter of 2013. Using the Company’s cash tax rate, diluted earnings per share before special items was $0.66. Net income for the first quarter of 2014 was $77 million.

(Footnote omitted.)

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53. On January 30, 2014, Barclays issued a report, entitled “ADT Corporation – F1Q14:

Thoughts + Model,” which sharply criticized ADT’s disappointing financial results and suspect

repurchase of insider shares, reflecting growing concern among ADT investors as to the credibility

of ADT’s management (particularly in light of the repurchase of Corvex’s shares) and the worse than

previously disclosed impact of increased competition on ADT’s business and prospects:

A far worse-than-expected quarter out of AflT which raises the question of management’s credibility and the unusually structured deal the company made with a board member announced on 11/25/13 . For context, the company agreed to buy 10.24M shares directly from a board member’s firm at a price set on the day before the company announced this shareholder was selling down the position and leaving the board. We had a number of questions from investors regarding the structure of this deal at the time it was made and given today’s earnings we suspect more questions will arise . Beyond the credibility questions, this quarter’s accelerating churn rate, shortfall in customer adds, and large margin miss only add to concerns over impacts from competition on growth and pricing.

54. The Company’s January 30, 2014 disclosure caused a massive sell-off in the

Company’s shares, which declined from a close of $37.81 per share on January 29, 2014 to a close

of $31.40 per share on January 30, 2014, on more than 36 million shares traded.

55. On January 31, 2014, William Blair issued a report entitled “The Wheels May Have

Come Off Its Operational Execution, but ADT’s Pulse Remains Vibrant.” The report discussed the

huge earnings and margin miss which caused ADT’s stock price to decline more 17% on January 30,

2014:

The ADT Corporation

The Wheels May Have Come Off Its Operational Execution, but ADT’s Pulse Remains Vibrant

ADT Corporation reported a significantly weaker quarter than anticipated, with GAAP EPS totaling $0.39 but adjusted EPS excluding one-time items of $0.43, down 2% from a year ago and well below consensus of $0.49 and our

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$0.52 forecast. Recurring revenue growth of 4.2% versus a year ago was weak and trailed our 4.9% forecast .

Better-than-expected Pulse take-rates and upgrades enabled stronger-than-expected ARPU, but new customer additions were shockingly weak for dealer and direct originated channels , while net SAC surged 40%, driving ADT’s net SAC creation multiple up 22% (or 20% excluding upgrade costs).

The shares declined 17% to new lows on three primary concerns: the apparent misallocation of capital ($1.2 billion to repurchase 25.5 million shares or 12% of fully diluted shares at year end fiscal 2013 ending last September at an average price of $46.43 per share), surging SAC costs, and lower third-party new customer referrals due to heightened advertising by new entrant competitors .

Total revenues rose 3.7%, below our 4.9% projection, while EBITDA margins, targeted to rise 50 basis points this year, declined 70 basis points to 50.8% from a year ago, well below our 51.7% forecast and consensus of 51.3%. Net customer attrition rose 30 basis points sequentially to 14.2% and 80 basis points from 13.4% a year ago .

New customer additions of 231,000 declined 9.4% from 255,000 a year earlier (versus our 268,000 forecast); dealer additions fell 16.0% and direct account additions declined 5.2%. While ADT has encountered weak dealer origination problems over the past year, the emergence of a large decline in new direct customer additions was a material new problem attributed to lower third-party referrals .

56. In the days immediately following this report, investors sold off ADT shares on

nearly 20 times the average daily trading volume, driving the price down nearly 25% from the

stock’s close of $37.81 per share on January 29, 2014 to $28.83 per share by February 3, 2014.

57. As a result of defendants’ false and misleading statements and omissions, ADT stock

traded at artificially inflated prices during the Class Period. However, after revelation of the true but

undisclosed facts seeped into the market, the Company’s stock experienced exorbitant selling

pressure, sending its stock price down nearly 37% from its Class Period high.

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LOSS CAUSATION

58. During the Class Period, as detailed herein, the defendants made false and misleading

statements and engaged in a scheme to deceive the market and a course of conduct that artificially

inflated the price of ADT common stock and operated as a fraud or deceit on Class Period

purchasers of ADT common stock by misrepresenting the Company’s business and prospects. Later,

when the defendants’ prior misrepresentations and omissions and fraudulent conduct became

apparent to the market, the price of ADT common stock fell precipitously, as the prior artificial

inflation came out of the price over time. As a result of their purchases of ADT common stock

during the Class Period, plaintiff and other members of the Class suffered tens of millions of dollars

in economic loss, i.e., damages, under the federal securities laws.

NO SAFE HARBOR

59. ADT’s “Safe Harbor” warnings accompanying its forward-looking statements

(“FLS”) issued during the Class Period were ineffective to shield those statements from liability.

60. The defendants are also liable for any false or misleading FLS pleaded because, at the

time each FLS was made, the speaker knew the FLS was false or misleading and the FLS was

authorized and/or approved by an executive officer of ADT who knew that the FLS was false. None

of the historic or present tense statements made by defendants were assumptions underlying or

relating to any plan, projection or statement of future economic performance, as they were not stated

to be such assumptions underlying or relating to any projection or statement of future economic

performance when made, nor were any of the projections or forecasts made by defendants expressly

related to or stated to be dependent on those historic or present tense statements when made.

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APPLICATION OF PRESUMPTIONS OF RELIANCE

61. At all relevant times, the market for ADT shares was an efficient market for the

following reasons, among others:

(a) ADT stock met the requirements for listing, and was listed and actively traded

on the NYSE, a highly efficient and automated market;

(b) The Company had more than 183 million shares issued and outstanding

during the Class Period. During the Class Period, on average, more than two million ADT shares

were traded on a daily basis, demonstrating a very active and broad market for ADT shares and

permitting a very strong presumption of an efficient market;

(c) As a regulated issuer, ADT filed periodic public reports with the SEC and the

NYSE;

(d) ADT regularly communicated with public investors via established market

communication mechanisms, including through regular disseminations of press releases on the

national circuits of major newswire services and through other wide-ranging public disclosures, such

as communications with the financial press and other similar reporting services; and

(e) ADT was followed by numerous securities analysts employed by major

brokerage firms who wrote reports that were distributed to the sales force and certain customers of

their respective brokerage firms. Each of these reports was publicly available and entered the public

marketplace.

62. As a result of the foregoing, the market for ADT stock promptly digested current

information regarding ADT from all publicly available sources and reflected such information in the

price of ADT common stock. Under these circumstances, all purchasers of ADT common stock

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during the Class Period suffered similar injury through their purchases of ADT common stock at

artificially inflated prices and a presumption of reliance applies.

63. A Class-wide presumption of reliance is also appropriate in this action under the

Supreme Court’s holding in Affiliated Ute Citizens v. United States , 406 U.S. 128 (1972), because

the Class’s claims are grounded on defendants’ material omissions. Because this action involves

defendants’ failure to disclose material adverse information regarding ADT’s business operations

and financial prospects – information that defendants were obligated to disclose – positive proof of

reliance is not a prerequisite to recovery. All that is necessary is that the facts withheld be material

in the sense that a reasonable investor might have considered them important in making investment

decisions. Given the importance of the Class Period material misstatements and omissions set forth

above, that requirement is satisfied here.

CLASS ACTION ALLEGATIONS

64. Plaintiff brings this action as a class action pursuant to Rule 23 of the Federal Rules

of Civil Procedure on behalf of all persons who purchased or otherwise acquired ADT common

stock during the Class Period (the “Class”). Excluded from the Class are defendants and their

families, the officers and directors of the Company, at all relevant times, members of their

immediate families and their legal representatives, heirs, successors or assigns and any entity in

which defendants have or had a controlling interest.

65. The members of the Class are so numerous that joinder of all members is

impracticable. The disposition of their claims in a class action will provide substantial benefits to

the parties and the Court. ADT has approximately 183 million shares outstanding, owned by

hundreds if not thousands of persons.

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66. There is a well-defined community of interest in the questions of law and fact

involved in this case. Questions of law and fact common to the members of the Class that

predominate over questions that may affect individual Class members include:

(a) Whether the 1934 Act was violated by defendants;

(b) Whether defendants omitted and/or misrepresented material facts;

(c) Whether defendants’ statements omitted material facts necessary to make the

statements made, in light of the circumstances under which they were made, not misleading;

(d) Whether defendants knew or recklessly disregarded that their statements were

false and misleading;

(e) Whether the price of ADT common stock was artificially inflated; and

(f) The extent of damage sustained by Class members and the appropriate

measure of damages.

67. Plaintiff’s claims are typical of those of the Class because plaintiff and the Class

sustained damages from defendants’ wrongful conduct.

68. Plaintiff will adequately protect the interests of the Class and has retained counsel

who are experienced in class action securities litigation. Plaintiff has no interests which conflict

with those of the Class.

69. A class action is superior to other available methods for the fair and efficient

adjudication of this controversy.

COUNT I

For Violation of §10(b) of the 1934 Act and Rule 10b-5 Against All Defendants

70. Plaintiff incorporates ¶¶1-69 by reference.

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71. During the Class Period, defendants disseminated or approved the false statements

specified above, which they knew or deliberately disregarded were misleading in that they contained

misrepresentations and failed to disclose material facts necessary in order to make the statements

made, in light of the circumstances under which they were made, not misleading.

72. Defendants violated §10(b) of the 1934 Act and Rule 10b-5 in that they:

(a) employed devices, schemes and artifices to defraud;

(b) made untrue statements of material facts or 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; or

(c) engaged in acts, practices and a course of business that operated as a fraud or

deceit upon plaintiff and others similarly situated in connection with their purchases of ADT

common stock during the Class Period.

73. Plaintiff and the Class have suffered damages in that, in reliance on the integrity of

the market, they paid artificially inflated prices for ADT common stock. Plaintiff and the Class

would not have purchased ADT common stock at the prices they paid, or at all, if they had been

aware that the market price had been artificially and falsely inflated by defendants’ misleading

statements.

COUNT II

For Violation of §20(a) of the 1934 Act Against the Individual Defendants and ADT

74. Plaintiff incorporates ¶¶1-73 by reference.

75. The Individual Defendants acted as controlling persons of ADT within the meaning

of §20(a) of the 1934 Act. By virtue of their positions with the Company, and ownership of ADT

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stock, the Individual Defendants had the power and authority to cause ADT to engage in the

wrongful conduct complained of herein. ADT controlled the Individual Defendants and all of its

employees. By reason of such conduct, defendants are liable pursuant to §20(a) of the 1934 Act.

PRAYER FOR RELIEF

WHEREFORE, plaintiff prays for judgment as follows:

A. Determining that this action is a proper class action, designating plaintiff as Lead

Plaintiff and certifying plaintiff as class representative under Rule 23 of the Federal Rules of Civil

Procedure and plaintiff’s counsel as Lead Counsel;

B. Awarding plaintiff and the members of the Class damages, including interest;

C. Awarding plaintiff’s reasonable costs and attorneys’ fees; and

D. Awarding such equitable/injunctive or other relief as the Court may deem just and

proper.

JURY DEMAND

Plaintiff demands trial by jury.

DATED: April 28, 2014 ROBBINS GELLER RUDMAN & DOWD LLP

PAUL J. GELLER JACK REISE Florida Bar No. 984795 (213113)

s/ JACK REISE

120 East Palmetto Park Road, Suite 500 Boca Raton, FL 33432 Telephone: 561/750-3000 561/750-3364 (fax) [email protected] [email protected]

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ROBBINS GELLER RUDMAN & DOWD LLP

SHAWN A. WILLIAMS Post Montgomery Center One Montgomery Street, Suite 1800 San Francisco, CA 94104 Telephone: 415/288-4545 415/288-4534 (fax)

Attorneys for Plaintiff

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CERTIFICATION OF PL'rivjj'UJSUANT TO TRI? FEDERAL SEC[JRTT1S LAWS

I, Philip Henningsen declare the following as to the claims asserted, or to be asserted, under the federal securities laws:

1. I have reviewed the complaint and authorize its filing.

2. 1 did not acquire the securities that are the subject of this action at the direction of

plair)tirrs counsel or in order to participate in any private action or any other litigation under the

federal securities laws.

3. I am willing to serve as a representative party on behalf of the class, including

testifying at deposition or trial, if necessary.

4.. I made the following transactions during the Class Period in the securities that are

the subject of this action.

Acquisitions: Number of Shares Acquisition Price Per Date Acquired Acquired Share

4/17/13 1500 43.119 4/23113 1000 43.68

5/1/13 500 40.54

5/1 7/13 1000 4400 7131/13 500 40.88 1018113 500 39.619 1019/13 500 39.80

Saks: Number of Shares Selling Price Per Date Sold Sold Share 4/17/13 1500 44.01

/19/13 500 - 42.702 - 10/30/13 1 1000 42.991

Case 9:14-cv-80566-WPD Document 1 Entered on FLSD Docket 04/28/2014 of 30 I...-.

S. 1 will not accept any payment for serving as a representative party beyond my

pro-rats share of any recovery, except reasonable cosis and expenses - such as lost wages and

travel expenses - directly related to the class representation, as ordered or approved by the Court

pursuant to law.

6. 1 have not sought to serve or served as a representative party for a class in an

action under the federal securities laws witbin the past three years, except if detailed below:

I declare under penalty of perjury urldcT die laws of the United States of America that the

foregoing is true and correct

Executed this 10th day of April, 2014.

?434o e% //A,,, Philip Henningsen

philip henningsen, et al. v. the adt corporation, et al. 14-cv...

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