united states district court southern...

Case 9:14-cv-80566-WPD Document 60 Entered on FLSD Docket 08/11/2014 of 149

UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF FLORIDA

PHILIP HENNINGSEN, Individually and on ) Case No. 14-80566-CIV-DIMITROULEAS Behalf of All Others Similarly Situated, )

Plaintiff,

vs.

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

Defendants.

SARATOGA ADVANTAGE TRUST LARGE ) Case No. 14-80862-CIV-DIMITROULEAS CAPITALIZATION VALUE PORTFOLIO, ) Individually and on 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.

CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS


TABLE OF CONTENTS

Page

I. SUMMARY OF THE ACTION ..........................................................................................1

II. JURISDICTION AND VENUE ..........................................................................................5

III. PARTIES .............................................................................................................................6

A. Plaintiffs...................................................................................................................6

B. Defendants ...............................................................................................................6

IV. SUBSTANTIVE ALLEGATIONS ...................................................................................11

A. Background of the Company .................................................................................11

B. The Five Key Drivers of ADT’s Business .............................................................12

C. Defendants’ Touted Value Drivers Suffered During the Class Period ..................14

1. New Competition Significantly Eroded ADT’s Customer Base and Increased Its Spending During the Class Period ........................................14

2. ADT’s Aggressive Sales Practices and Pervasive Customer Service Problems Hindered Its Ability to Gain “Customers for Life” ...................20

a. ADT’s Sales Tactics Backfired, Causing It to Lose Customers......................................................................................20

b. ADT’s Terrible Customer Service Issues Led to Increased Cancellations..................................................................................24

c. Costs Surged as ADT Struggled to Gain and Retain Customers......................................................................................28

3. Defendants Knew of ADT’s Decline in Customer Adds, Increased Attrition, and Surging Costs During the Class Period, but Failed to Disclose These Problems to the Market .....................................................30

D. Defendants Misrepresented and Failed to Disclose Material Facts Regarding the Costly, Debt-Fueled Stock Repurchase Strategy Demanded by Defendants Corvex and Meister ........................................................................34

E. ADT’s Stock Price Ultimately Tumbled When the Market Learned of the True Extent of the Company’s Problems ...............................................................47

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TABLE OF CONTENTS

Page

V. DEFENDANTS’ FALSE AND MISLEADING CLASS PERIOD STATEMENTS..................................................................................................................50

A. First Fiscal Quarter 2013 .......................................................................................50

B. Second Fiscal Quarter 2013 ...................................................................................62

C. Third Fiscal Quarter 2013 ......................................................................................73

D. Fourth Fiscal Quarter 2013 ....................................................................................82

E. First Fiscal Quarter 2014 .......................................................................................93

VI. THE TRUTH IS MORE FULLY REVEALED ..............................................................112

VII. LOSS CAUSATION ........................................................................................................120

A. July 31, 2013 Disclosure ......................................................................................122

B. November 25, 2013 Disclosure............................................................................124

C. January 30, 2014 Disclosure ................................................................................127

VIII. ADDITIONAL SCIENTER ............................................................................................130

A. Defendants Knew or Should Have Known of the Performance of the Key Value Drivers of Its Core Business ......................................................................131

B. Defendants Were Motivated to Engage in the Above Fraudulent Scheme toSave Their Jobs ................................................................................................132

IX. PRESUMPTION OF RELIANCE ...................................................................................133

X. NO SAFE HARBOR .......................................................................................................135

XI. PLAINTIFFS’ CLASS ACTION ALLEGATIONS ........................................................136

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By and through their undersigned counsel, Lead Plaintiffs IBEW Local 595 Pension and

Money Purchase Pension Plans, Macomb County Employees’ Retirement System, and KBC Asset

Management NV (“Plaintiffs”) allege the following against Defendants The ADT Corporation

(“ADT” or the “Company”), Naren Gursahaney (“Gursahaney”), Kathryn A. Mikells (“Mikells”),

Michael S. Geltzeiler (“Geltzeiler”), Keith A. Meister (“Meister”), and Corvex Management LP

(“Corvex”) (collectively, “Defendants”), upon personal knowledge as to those allegations

concerning Plaintiffs and, as to all other matters, upon the investigation of counsel, which included,

without limitation: (a) review and analysis of public filings made by ADT and other related parties

and non-parties with the U.S. Securities and Exchange Commission (“SEC”); (b) review and

analysis of press releases and other publications disseminated by certain of the Defendants and other

related non-parties; (c) review of news articles and shareholder communications; (d) review of other

publicly available information concerning ADT, the other Defendants, and related non-parties; (e)

consultation with experts; (f) interviews with factual sources, including individuals formerly

employed by ADT and other industry participants; and (g) the Verified Consolidated Shareholder

Derivative Complaint, Dkt. No. 39, In re The ADT Corporation Derivative Litigation , No. 9:14-cv-

80570-WPD (S.D. Fla. Aug. 5, 2014) (the “Derivative Cplt.”). Plaintiffs believe that substantial

additional evidentiary support will exist for the allegations set forth herein after a reasonable

opportunity for discovery.

I. SUMMARY OF THE ACTION

1. This is a federal securities class action against ADT and certain of its officers,

Directors, and/or controlling shareholders for violations of the federal securities laws. Plaintiffs

bring this action under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the

“Exchange Act”), 15 U.S.C.§§78; (b) and 78t(a), on behalf of themselves and all persons or entities

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who purchased or acquired ADT securities (the “Class”) between November 27, 2012 and January

29, 2014, inclusive (the “Class Period”). Plaintiffs allege that, during the Class Period, Defendants

engaged in a fraudulent scheme to artificially inflate the Company’s stock price by misrepresenting

and concealing ADT’s true operational and financial condition and engaging in a massive capital

restructuring plan at the behest of a corporate raider, only to secure their positions with the

Company, to the detriment of Plaintiffs and the Class.

2. ADT characterizes its business as a recurring revenue business, where approximately

90% of its revenue is generated from its multi-year customer contracts. As such, ADT’s stated goal

has been to attain “customers for life” who would generate recurring revenue for the Company.

Since ADT’s spin-off from Tyco International Ltd. (“Tyco”), Defendants have emphasized that there

are five key value drivers for its subscription-based business model: customer additions, costs to add

a new customer (known as subscriber acquisition costs or “SAC”), average revenue per customer,

costs incurred to provide service to customers, and customer tenure.

Throughout the Class Period, ADT was facing significant competitive pressures.

While ADT maintained a 25% market-share, ADT’s competitors were eating its lunch in market-

share and it was clear that in any market where ADT did have competition, it was doing horrible, as

one former employee stated. As a result, the touted value drivers that affected ADT’s core business

were suffering. To address these issues, and with the purpose of adding customers to their base,

Defendants engaged in aggressive sales practices and implicitly sanctioned the unscrupulous sales

practices of its authorized dealers to drum up new customers. These practices ultimately backfired –

hampering ADT’s ability to add credit-worthy customers to its base. Likewise, pervasive customer

service issues caused customers to cancel in droves. These issues severely handicapped ADT’s

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ability to gain and retain customers, driving up attrition and rendering its much lauded goal of

creating “customers for life” illusory.

4. Faced with these significant challenges to the core of its business, ADT increased its

advertising and was forced to offer promotions and generous discounts to try and save customers.

The Company also attempted to improve its customer loyalty through various costly initiatives.

However, Defendants’ half-hearted efforts did little to stem the tide. Instead, they caused subscriber

acquisition costs and costs to serve existing customers to balloon. In sum, the Company’s key value

drivers were failing, negatively impacting the Company’s recurring revenue, margins, and earnings.

Defendants were intimately aware of the Company’s declining customer adds and

increasing attrition levels caused by competitive pressures and customer dissatisfaction, as well as

surging costs. These topics were discussed at meetings of the Company’s Board of Directors

(“Board”) throughout the Class Period and were the subject of communications authored by

Defendant Gursahaney himself. Yet, rather than disclose these facts, they continued to mislead the

market, stated that competition had little to no impact on their business, they were adequately

addressing any customer service problems and related attrition issues, and reassured the market that

ADT’s financial and operating condition was strong.

6. Against this backdrop of severe financial and operational problems, ADT embarked

on a capital restructuring plan, which involved the repurchase of billions of dollars of common stock

from ADT investors. This repurchase required a massive, escalating debt load that would inflate the

Company’s leverage ratio and damage the Company’s credit ratings. The Individual Defendants, as

defined herein, agreed to this plan only to avert a corporate takeover by Defendants Corvex (a hedge

fund) and Meister (the founder and Managing Director of Corvex) and, thus, preserve their positions

with the Company. Defendants failed to disclose this information to unwitting investors, instead

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misleadingly representing to the market that the stock repurchase plan was in the best interests of

shareholders and was justified by ADT’s strong financial position and undervalued shares (which

Defendants Corvex and Meister valued at an above-market price of $61 to $83).

7. The truth regarding ADT’s true operational and financial condition began to emerge

on July 31, 2013, when the Company announced, among other things, an increased target leverage

ratio, higher attrition, and lower recurring revenues. The Company assuaged investors that this was

caused by a strong housing market marked by increased relocations, and continued to deceive the

market by failing to disclose the competitive headwinds the Company was facing among other

significant operational issues. Moreover, while the market began to learn that ADT had taken on far

more debt than originally promised to fund the share repurchases, Defendants continued to

misrepresent to the market that the massive restructuring plan was in the Company’s best interests.

While the market reacted negatively to these partial disclosures, causing the stock price to drop by

4.8%, Defendants’ continued false assurances kept the stock price buoyed.

8. Then, before the market opened on November 25, 2013, Defendants surprised the

market by announcing that Defendant Corvex had agreed to sell substantially all of its shares back to

the Company and that Defendant Meister had resigned from the Board, effective immediately.

Defendant Meister’s departure from the Company and Defendant Corvex’s sale of its shares at

$44.01, which was significantly lower than their original valuation of $61-$83, signaled to the

market that the Company’s financial and operating condition and future prospects were not as strong

as Defendants had led investors to believe. Nevertheless, Defendants still hid the full truth from the

market, including the operational impact of the repurchase and the fact that Defendant Corvex bailed

out at an inflated value after it had an insider’s view of ADT’s competitive position. The market

reacted, causing ADT’s stock price to fall nearly 6% on unusually high trading volume.

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9. By the end of January 2014, Defendants could no longer sweep ADT’s mounting

problems under the rug. On January 30, 2014, before the market opened, ADT issued a press release

announcing the Company’s first quarter 2014 financial results, which badly missed consensus

estimates and revealed that ADT was experiencing an extreme slowdown in new customer additions,

higher attrition among existing customers, and increased costs associated with subscriber acquisition

and service, all of which were eroding ADT’s, margins, earnings, and recurring revenue.

Essentially, the key value drivers of the Company’s core business were not thriving. These

disclosures, which stood in stark contrast to Defendants’ Class Period representations, caused ADT’s

common stock price to sink another 17% on unusually high trading volume. Analysts were

dismayed. As one analyst lamented, “[a] far worse-than-expected quarter out of ADT which raises

the question of management’s credibility and the unusually structured deal the company with a board

member announced on 11/25/13. . . . 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.”

II. JURISDICTION AND VENUE

10. The claims asserted herein arise under and pursuant to Sections 10(b) and 20(a) of the

Exchange Act, 15 U.S.C. §§78j(b) and 78t(a), and Rule 10b-5 promulgated thereunder by the SEC,

17 C.F.R. §240.10b-5. This Court has jurisdiction over the subject matter of this action pursuant to

28 U.S.C. §1331 and Section 27 of the Exchange Act, 15 U.S.C. §78aa.

11. Venue is proper in this District pursuant to Section 27 of the Exchange Act, 15 U.S.C.

§78aa, and 28 U.S.C. §1391(b). Many of the false and misleading statements and omissions were

made in or issued from this District. ADT’s principal executive offices are located at 1501 Yamato

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Road, Boca Raton, Florida 33431, and many of the acts and transactions giving rise to the violations

of law complained of occurred in this District.

12. In connection with the challenged conduct, Defendants, directly or indirectly, used

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

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

markets.

III. PARTIES

A. Plaintiffs

13. Plaintiffs were appointed to serve as Lead Plaintiffs in this action by Order of this

Court dated July 14, 2014 [Dkt. No. 51]. As shown in their certifications filed with the Court on

June 27, 2014 [Dkt. No. 37-5] and incorporated herein, Plaintiffs purchased or otherwise acquired

ADT common stock at artificially inflated prices during the Class Period and suffered an economic

loss when true facts about the Company’s operating and financial condition were disclosed and the

stock price resultantly declined.

B. Defendants

14. Defendant ADT is a Delaware corporation with principal executive offices located in

Boca Raton, Florida. ADT is a leading provider of electronic security, interactive home and

business automation, and related monitoring services in the United States and Canada.

15. Defendant Gursahaney has been Chief Executive Officer (“CEO”), President, and a

Director of ADT since the Company was spun-off from Tyco on September 28, 2012. Prior to the

spin-off, Defendant Gursahaney served as President of Tyco’s ADT North American Residential

business segment.

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16. Defendant Mikells was Chief Financial Officer (“CFO”) of ADT from May 2012 to

May 2013.

17. Defendant Geltzeiler was appointed CFO of ADT on November 14, 2013, succeeding

Defendant Mikells, and continues to serve as CFO of the Company.

18. Defendants Gursahaney, Mikells, and Geltzeiler are collectively referred to herein as

the “Individual Defendants.”

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

over 5% of ADT’s outstanding common stock.

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

Corvex. Defendant Meister was a member of ADT’s Board from December 2012 to November

2013 and a member of ADT’s Audit Committee from January 2013 to November 2013.

21. Defendants Corvex and Meister are collectively referred to herein as the “Corvex

Defendants.”

22. During and prior to the Class Period, the Individual Defendants, as senior executive

officers and/or Directors of ADT, and the Corvex Defendants, as Directors and/or controlling

shareholders of ADT, were privy to confidential and proprietary information concerning ADT, its

operations, finances, financial condition, and present and future business prospects. The Individual

Defendants and the Corvex Defendants also had access to material adverse non-public information

concerning ADT, as discussed in detail below. Because of their positions with ADT, the Individual

Defendants and the Corvex Defendants had access to non-public information about ADT’s business,

finances, products, markets, and present and future business prospects via access to internal

corporate documents, conversations, and connections with other corporate officers and employees,

attendance at management and/or Board meetings and committees thereof, and via reports and other

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information provided to them in connection therewith. Because of their possession of such

information, the Individual Defendants and the Corvex Defendants knew or recklessly disregarded

that the adverse facts specified herein had not been disclosed to, and were being concealed from, the

investing public.

23. The Individual Defendants and the Corvex Defendants are liable as direct participants

in the wrongs complained of herein. In addition, the Individual Defendants and the Corvex

Defendants, by reason of their status as senior executive officers, Directors, and/or controlling

shareholders, were “controlling persons” within the meaning of Section 20(a) of the Exchange Act

and had the power and influence to cause the Company to engage in the unlawful conduct

complained of herein. Because of their positions of control, the Individual Defendants and the

Corvex Defendants were able to, and did, directly or indirectly, control the conduct of ADT’s

business.

24. The Individual Defendants and the Corvex Defendants participated in the drafting,

preparation, and/or approval of the various public and shareholder and investor reports and other

communications complained of herein and were aware of, or recklessly disregarded, the

misstatements contained therein and omissions therefrom, and were aware of their materially false

and misleading nature. Because of their executive, managerial, Board, and/or shareholding positions

with ADT, each of the Individual Defendants and the Corvex Defendants had access to the adverse

undisclosed information about ADT’s business prospects, financial condition, and performance as

particularized herein, and knew, or recklessly disregarded, that these adverse facts rendered the

positive representations made by or about ADT and its business issued or adopted by the Company

materially false and misleading.

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25. The Individual Defendants and the Corvex Defendants, because of their positions of

control and authority as senior executive officers, Directors, and/or controlling shareholders of the

Company, were able to, and did, control the content of the various SEC filings, press releases, and

other public statements pertaining to the Company during the Class Period. Each Individual

Defendant and Corvex Defendant was provided with copies of the documents alleged herein to be

misleading prior to or shortly after their issuance and/or had the ability and/or opportunity to prevent

their issuance or cause them to be corrected. Accordingly, the Individual Defendants and the Corvex

Defendants are responsible for the accuracy of the public reports and releases detailed herein and are

therefore primarily liable for the representations contained therein.

26. Each of the above officers, directors, and/or controlling shareholders of ADT, by

virtue of his, her, or its high-level position with the Company, directly participated in the

management of the Company, was directly involved in the day-to-day operations of the Company at

the highest levels, and was privy to confidential proprietary information concerning the Company

and its business, operations, and financial condition, as alleged herein. These Defendants were

involved in drafting, producing, reviewing, and/or disseminating the false and misleading statements

and information alleged herein, were aware, or recklessly disregarded, that these false and

misleading statements were being issued regarding the Company and omitted material adverse facts

regarding the Company, and approved or ratified these statements and failed to disclose these facts,

in violation of the federal securities laws.

27. As senior executive officers, Directors, and/or as controlling persons of a publicly

traded company whose common stock was, and is, registered with the SEC pursuant to the Exchange

Act, and was, and is, traded on the New York Stock Exchange (“NYSE”) and governed by the

federal securities laws, the Individual Defendants and the Corvex Defendants had a duty to promptly

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disseminate accurate and truthful information with respect to ADT’s financial condition and

performance, growth, operations, financial statements, business, products, markets, management,

earnings, and present and future business prospects, and to correct any previously issued statements

that had become materially misleading or untrue so that the market price of ADT’s securities would

be based upon truthful and accurate information. The Individual Defendants’ and the Corvex

Defendants’ misrepresentations and omissions during the Class Period violated these specific

requirements and obligations.

28. The Individual Defendants and the Corvex Defendants are liable as participants in a

fraudulent scheme and course of conduct that operated as a fraud or deceit on purchasers of ADT’s

publicly traded securities by disseminating materially false and misleading statements and/or

concealing material adverse facts. The scheme deceived the investing public regarding the

Company’s operating and financial condition and the intrinsic value of ADT common stock, causing

Plaintiffs and other members of the Class to purchase ADT common stock at artificially inflated

prices.

29. Defendants are liable for: (a) making false and misleading statements; and/or (b)

failing to disclose adverse facts known to them about ADT. Defendants’ fraudulent scheme and

course of business that operated as a fraud or deceit on purchasers of ADT common stock was a

success, as it: (a) deceived the investing public regarding the Company’s operating and financial

condition; (b) artificially inflated the price of ADT common stock; and (c) caused Plaintiffs and

other members of the Class to purchase ADT common stock at artificially inflated prices.

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IV. SUBSTANTIVE ALLEGATIONS 1

A. Background of the Company

30. ADT traces its roots to the American District Telegraph Company, formed in 1874 as

a consortium of 57 telegraph operators. 2 During the early part of the 20th century, ADT began

offering fire and burglar alarm solutions and by 1987 became one of the leading electronic security

services providers. Id. In 1997, the Company was acquired by Tyco International Ltd. (“Tyco”). In

2010, ADT acquired Broadview Security – its largest competitor. Id.

31. As part of a plan to separate Tyco into three independent companies, Tyco transferred

the equity interests of the entities that held all of the assets and liabilities of its residential and small

business security business in the United States and Canada to ADT. Id. On September 28, 2012,

Tyco completed the spin-off of ADT by distributing all of the shares of ADT to its shareholders on a

pro-rata basis. Id. Through this transaction, ADT became an independent, publicly traded

company, which began trading on the NYSE on October 1, 2012 under the symbol “ADT.”

32. According to the Company, ADT “is a leading provider of electronic security,

interactive home and business automation and related monitoring services in the United States and

Canada.” Id. As reported in November 2013, ADT served approximately 6.5 million residential and

small business customers, which, as the Company boasted, made it “the largest company of [its] kind

in both the United States and Canada.” Id. The Company states that it “maintain[s] the industry’s

largest sales, installation and service field force as well as a robust monitoring network, all backed

by the support of approximately 17,000 employees.” Id.

1 All confidential witnesses are referred to in the masculine to protect their identities.

2 See Form 10-K for the fiscal year ending September 27, 2013, filed on November 20, 2013 (“2013 10-K”).

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33. ADT has three key brands: ADT®, ADT Pulse (“Pulse”), and Companion Service®.

ADT provides “electronic security and home/business automation offerings involv[ing] the

installation and monitoring of residential and small business security and premises automation

systems designed to detect intrusion, control access and react to movement, smoke, carbon

monoxide, flooding, temperature and other environmental conditions and hazards, as well as to

address personal emergencies, such as injuries, medical emergencies or incapacitation.” Id. Upon a

triggering event, the Company’s electronic security systems connect to one of its monitoring centers,

where ADT personnel respond to alarms by relaying appropriate information to local fire or police

departments, notifying the customer or others on the customer’s emergency contact list, and taking

additional action as needed. Id.

34. Pulse, which was introduced in 2010, involves interactive technologies that allow

ADT customers to remotely monitor and manage their homes and small businesses through their

electronic security systems. Through Pulse, customers can remotely arm and disarm their security

system, adjust lighting or thermostat levels, view real-time video from cameras on their premises,

and create customized schedules and program their systems to perform certain functions. Id.

35. Companion Services provides personal emergency response system (“PERS”)

products and services. Id. PERS consists of a console unit and a wireless transmitter usually worn

as a necklace or wristband by the client, which allows the client to summon assistance from ADT’s

emergency response center in an emergency, where PERS monitoring personnel relay information to

the appropriate local emergency responder. Id.

B. The Five Key Drivers of ADT’s Business

36. The vast majority of ADT’s annual revenue (approximately 90%) is recurring revenue

generated from its multi-year customer contracts. Id. As Defendant Gursahaney stated in an ADT

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Investor Day presentation to the market on September 18, 2012, “with almost 6.5 million customers

paying us between $35 and $40 a month, it’s a great recurring revenue business with 90% recurring

revenue that gives us predictable, strong cash flows, and also very strong economic returns.” 3 In

fact, ADT’s strong recurring revenue business led Defendant Meister to state that ADT was

undervalued and its common stock’s true worth was $61 to $83 per share.

37. From just prior to ADT’s spin-off from Tyco, Defendants have repeatedly

emphasized that there are five key business drivers of its financial performance: customer additions,

costs to add a new customer, average revenue per customer, costs incurred to provide services to

customers, and customer tenure. 4 At the 2012 Investor Day presentation to the market, Defendant

Gursahaney stated that these five “value drivers” were critical to strengthening ADT’s core business:

And we’ve identified five key value drivers for our business for the subscriber-based business model.

First, it’s customer additions, how efficient and how effective we are at adding new customers to our installed based [sic].

Second is our subscriber acquisition cost , the cash efficiency of bringing on new customers. In our direct channel, that includes our marketing, as well as sales cost, the cost of the equipment that we put in the home or the small business, and the cost of installing that equipment, offset by what the customer pays us upfront for that system. From our dealer perspective, it’s what we fund the dealers who bring us new accounts.

Third is our average revenue per user . It’s that monthly fee that we can collect from our customers for the monitoring and other services that we provide our customers.

Fourth is the cost to serve . It’s the efficient – how efficiently can we deliver those services to our customers and maintain high recurring margins .

And finally, tenure or how long our customers stay with us . You know, we often talk about the reverse of that , attrition .

3 See ADT Investor Day Transcript dated September 18, 2012 (“Investor Day Transcript”).

4 See 2013 10-K.

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See Investor Day Transcript.

38. These metrics were reiterated by analysts when assessing ADT’s performance. See

¶¶131, 151, 174, 251. Thus, the success of these critical metrics was of paramount importance to the

Company and investors during the Class Period.

39. However, in contrast to Defendants’ misleading statements, the Company’s key value

drivers were suffering during the Class Period. In reality, the Company was hurt dramatically by

increased competition, which was compounded by the Company’s unscrupulous sales practices and

subpar customer service. These factors reduced ADT’s customer additions, drove up its customer

attrition, and exploded its costs. Defendants’ half-hearted efforts to address these issues were

unsuccessful, and added to the Company’s already rising expenses. In sum, as detailed below,

Defendants’ supposed “value drivers” were actually weakening ADT’s core business.

C. Defendants’ Touted Value Drivers Suffered During the Class Period

1. New Competition Significantly Eroded ADT’s Customer Base and Increased Its Spending During the Class Period

40. During the Class Period, the “value drivers” repeatedly touted by the Company were

getting hammered by the encroachment of powerful new competitors into markets historically

dominated by ADT. While ADT remained a market leader, occupying 25% of its market share, its

reign was quickly slipping. Numerous former ADT employees described how increased competition

compressed the Company’s ability to add new customers and keep existing customers. To make

matters worse, the Company’s costs were significantly increasing because it needed to substantially

increase advertising, promotions, and customer discounts in order to keep pace with the well-

financed competitors stealing its market share.

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41. According to the former Director of Product Management, 5 Comcast’s Xfinity and

AT&T’s Digital Life systems were major competitors and a growing concern of ADT, particularly in

2013. According to this former employee, Comcast and AT&T were formidable competitors to

ADT because they had significant resources and could afford to lose money in order to get their foot

in the door. He also stated that these competitors were a concern because they were already in the

house of potential customers and started offering bundles with security services and other services

the customers already had through Comcast and AT&T. Additionally, as this former employee

noted, there was a rise in do-it-yourself security systems offered through home improvement stores

such as Lowes and Home Depot, some of which were almost identical to ADT’s products.

42. Likewise, the former Senior Financial Analyst 6 explained that in mid-2013, the

Company’s management – and specifically Defendant Gursahaney – became obsessed with

competition because ADT’s competitors were eating its lunch in market-share. This former

employee stated that without a doubt, by mid-2013, if not sooner, competition was having a real

impact on ADT and it was clear that, in any market where ADT did have competition, ADT was

doing horrible.

5 The former Director of Product Management was employed at ADT’s headquarters in Boca Raton from December 2005 to April 2014 and reported to Ryan Petty, the VP of Product Solutions, who in turn reported to the Chief Innovation Officer (Arthur Orduna). In this capacity, the former Director of Product Management primarily worked on Pulse and was the team leader for all of the various teams that were involved with developing Pulse.

6 The former Senior Financial Analyst worked at ADT from October 2012 until spring 2014. He had been responsible for sales reporting in terms of units and dollars derived from direct sales, the results of which were apparently used for deriving the commissions to be paid to the sales personnel. He was also involved in expense reporting related to sales.

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43. Competitors offered services that were less expensive, causing the Company to lose

more customers to them. As the former Residential Sales Representative 7 observed, ADT was

initially successful by default since they were such a large company. However, ADT charged the

highest fees in the industry and increasingly lost more customers to their competitors as they began

to market similar services.

44. Indeed, the former Residential Sales Representative recalled that external competition

was definitely a rising concern at ADT during 2013. He stated that ADT went into a state of panic in

early 2013 and started to hold special sales meetings just to discuss competition. At these meetings,

sales representatives were asked by a District Sales Manager what they were hearing in the field

about competition, in order to attempt to develop a better game plan to deal with it. The sales team

was especially concerned with Comcast and AT&T because their price points were much lower than

ADT, and it was becoming increasingly challenging for sales representatives to effectively convince

customers to buy ADT’s services rather than a competitor’s.

45. The negative impact that competitive pressures were having on ADT’s business were

echoed by other former employees. The former Credit Balance Analyst 8 also mentioned that new

7 The former Residential Sales Representative worked for ADT in an office located in West Palm Beach, Florida from 2008 to February 2014. This former employee reported to various managers during his tenure at the Company but reported to Danny Marseille, a Residential Resale Representative, for about four months before his departure. This former employee explained that Marseille oversaw two or three departments, including Existing Customer Accounts. During his last year at the Company, this former employee was “cross-trained” to work in a new department focused on promoting existing clients to ADT Pulse. Toward the end of his tenure at the Company, he held the title of Existing Business Representative.

8 The former Credit Balance Analyst was employed at ADT from December 2010 to August 2013. This former employee worked in the Shared Account Services Department, which was comprised of approximately 120-150 employees, and reported to Ilisha Norris, a Senior Account Manager. In this capacity, the former Credit Balance Analyst reviewed credits on customer accounts and determined whether to refund the balance to the customer or to retain the balance.

- 16 -


competition was definitely a concern at ADT, especially Comcast’s new system that was similar to

ADT Pulse but was less expensive. This former employee explained that when he reviewed an

account to determine whether to refund a credit to the customer, he was able to see the reason that

the customer was canceling their account. He noticed that it was especially common during the last

year of his employment at ADT (departed in August 2013) that customers cancelled their accounts

because they were moving to one of ADT’s competitors. Likewise, the former Cash Application

Specialist9 explained that, in 2013, many customers were switching over to ADT’s competitors,

causing a bump in the number of deactivated accounts. This former employee mentioned that ADT

began increasing their efforts to call customers who had deactivated their accounts in an effort to

save these accounts. Similarly, the former Customer Service Representative 10 regularly received

deactivation requests because competitors were offering a lower price.

46. The Company carefully monitored competition and its impact on ADT’s business.

As Defendant Gursahaney explained in the Company’s 2012 Investor Day conference call, “we are

always monitoring the market place for traditional competitors and new competitors, we got a

9 The former Cash Application Specialist was employed with ADT from 2009 to March 2014. This former employee worked in ADT’s Billing Department located in Aurora, Colorado and also reported to Ilisha Norris. By the time this former employee left ADT, he had been promoted to a Cash Application Specialist. The former Cash Application Specialist worked on 80-150 accounts per day, and his primary duty was to review unapplied funds and determine whether ADT should retain them or refund them to the customer.

10 The former Customer Service Representative was employed with ADT from July 2012 to November 2013 at a call center located in Irving, Texas. This former employee worked in the Customer Service Department, which was comprised of about 300-400 people who were engaged in different elements of customer service, including receipt of incoming calls from ADT clients regarding security issues, technical issues, billing issues, Companion Care, and so forth, which were handled by different teams. The former Customer Service Representative reported to Charles Bell, a Floor Manager. The former Customer Service Representative, who handled an average of 65-70 calls per day, explained that his primary duty was to receive inbound calls from residential and small business customers but, when needed, would also assist with dispatching emergency services.

- 17 -


weekly field based, you know, competitive intelligence call that many of the leadership team

members participate on.” Indeed, the former Director of Product Management explained that his

team carefully monitored competing products. For example, ADT sent representatives to the first

installations of AT&T’s Digital Life and Comcast’s Xfinity systems and sometimes even paid people

to have the systems installed in their homes so ADT could observe the process. ADT representatives

would not explain that they worked for ADT and would take pictures of the new systems and

evaluate how long it took for them to be installed.

47. The Company’s internal documents confirm Defendants’ knowledge that competition

was pressuring ADT’s business during the Class Period. At its meetings on “March 13 and 14,

2013,” “[t]he Board also evaluated ADT’s competitive environment, noting that ‘Consumers

increasingly have more options – not only from competitors that are positioning themselves directly

against ADT, but also from new formidable entrants launching in the space.’” 11 Moreover, “ADT

was also facing “competitive pressures” that inhibited dealer marketing and prospecting

efficiency.” 12 Specifically, the Board, which included Defendants Gursahaney and Meister,

“discussed ‘changes in the market environment, including changing customer behavior toward TV

and mobile Internet viewing, increases in the number of sources viewed by consumers before

making purchase decisions, and increased competitor advertising that [was] reducing ADT’s share of

voice in overall marketing by electronic security companies.’” 13 Likewise, as detailed below, “[t]he

11 See Derivative Cplt. at ¶91 (citing ADT220-0000855).

12 Id. (citing ADT220-0000864).

13 Id. (citing ADT220-0000975).

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competitive market and attrition continued to be a focus of the Board’s discussions” at its meetings

held on “May 9, 2013” and “July 18-19, 2013.” 14

48. Yet, despite their knowledge and concern with respect to the impact of competition

on ADT’s business, Defendants led the market to believe that it was having little to no impact on

their business model:

May 1, 2013: Defendant Gursahany stated that “[n]ew 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 .

July 31, 2013: In response to a question regarding whether competition was a factor in the Company’s attrition increase, Defendant Gursahany stated, “ I would say loss to competition, there hasn’t been a significant change there. ”

November 20, 2013: “Before I discuss our total-year results, I would like to comment on the competitive landscape. We continue to see minimal impact on our business performance, specifically attrition, ARPU and Pulse take rates, resulting from any new competitors attempting to enter our market . We will continue to closely monitor the competitive landscape and we believe the heightened awareness on the industry will continue to benefit ADT and the industry as a whole.

49. To make matters worse, the Company’s heightened competitive pressures were

compounded by its own operational problems throughout the Class Period. Namely, the Company’s

supposed “value drivers” were hurt by its aggressive and unscrupulous sales practices and horrible

customer service issues, which Defendants misrepresented and failed to disclose to the market.

14 See Derivative Cplt. at ¶¶107 (citing ADT220-00001240-1248); see also id. at ¶11 (citing ADT220-0001475, ADT220-0001331-1642 (Board packet for July 18-19, 2013 meeting); ADT220- 0001643-1733 (Presentation materials prepared by Goldman Sachs for July 18-19, 2013 Board meeting); ADT220-0001734-1740 (Board minutes for July 18, 2013 meeting); ADT220-0001741- 1752 (Board minutes for July 19, 2013 meeting)).

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2. ADT’s Aggressive Sales Practices and Pervasive Customer Service Problems Hindered Its Ability to Gain “Customers for Life”

a. ADT’s Sales Tactics Backfired, Causing It to Lose Customers

50. As recurring revenue from ADT’s multi-year customer contracts is 90% of the

Company’s revenue, it is critical to the Company’s business model that it gains and retains

customers. For this reason, the Company’s stated goal since its spin-off as an independent, publicly

traded company, was to attain “[c]ustomers for [l]ife,” as a means to add “[v]alue for [its]

[s]hareholders.” 15

51. ADT employs various means to grow its customer base. First, it engages in direct

advertising via national television, the Internet, yellow pages, direct mail, paid search functions, and

social media. 16 Additionally, ADT works with third-party referral providers (including its affinity

organizations such as USAA and AARP) to generate customer leads and sales referrals for its direct

sales team and authorized dealers. Id. The Company also utilizes an authorized dealer network,

comprised of approximately 350 independent security sales and installation companies, to generate

leads and customer accounts. Id. The authorized dealers generate new customer accounts

exclusively for ADT, who pays them for the services they provide. Id.

52. However, contrary to ADT’s representation that it maintained “a service culture

aimed at creating Customers for Life,” its business model emphasized achieving sales over customer

service. As a result, the Company encouraged aggressive and often unscrupulous sales practices

aimed at signing up significant numbers of customers but with little effort to ensure they remained

15 See ADT Investor Day Presentation, September 18, 2012 at 64.

16 See 2013 Form 10-K.

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customers. Rather than attaining “customers for life,” ADT’s sales practices actually caused

customers to cancel their services in droves.

53. One such practice was ADT’s reliance on its authorized dealers to generate accounts.

ADT’s authorized dealers operated under a different name than ADT, but were authorized to sell and

install ADT’s equipment as a middle man between the customer and ADT. According to the former

Sr. Analyst for Internal Controls & Compliance, 17 even if a dealer did not meet ADT’s requirements,

for example, if a dealer did not require a background check or permitted a lower credit score for

customers, ADT would still partner with it if it had a large enough customer base. However, ADT

anticipated that a larger number of customers with lower credit scores would not pay their bills

because they were below par.

54. As a result, ADT tacitly recognized that its authorized dealers often engaged in

unscrupulous practices to drum up customers and get paid by ADT. Indeed, the former Residential

Sales Representative noted that there were significant problems with the authorized dealers and

described them as ambulance chasers. The unscrupulous sales tactics employed by ADT’s

authorized dealers were also corroborated by the former Customer Service Unit Manager, 18 who

17 The former Sr. Analyst for Internal Controls & Compliance initially worked for Tyco and began working for ADT after the companies separated in October 2012. This former employee left ADT in April 2014 because, among other reasons, he felt that ADT was struggling. This former employee worked in the accounting department in the ADT’s headquarters in Boca Raton and reported to Rebecca Cheung, a Compliance Manager, who reported to Jackie Luu, a Vice President of Internal Audit. In this capacity, the former Sr. Analyst for Internal Controls & Compliance was the team lead for matters related to revenue, cost, and finance for ADT’s transition to a new internal system intended for customer billing and monitoring of ADT’s security units.

18 The former Customer Service Unit Manager was employed with ADT from March 2010 to January 2014 and reported to Dinesh Chand, a Director of Customer Service. This former employee initially worked for Broadview Security and began working for ADT when it was acquired by ADT in 2010. The former Customer Service Unit Manager oversaw the entire operations of a call center in Irving, Texas, comprised of about 400 agents who monitored the alarm systems and received inbound customer service calls.

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explained that ADT’s authorized dealers were a constant issue because they would tell customers

anything. The dealers would make promises that they could not keep and then disappear when

customers or ADT representatives would attempt to contact them.

55. Additionally, as the former Residential Sales Representative explained, the work of

the authorized dealers was often shoddy, which caused ADT to lose many customers because they

were dissatisfied with the service they received from the dealers. The dealers also often sold

equipment that was very old or not even authorized by ADT. ADT was frequently unable to service

this equipment and sometimes the service technicians would have to tell customers that they were

going to have to rip out the old system sold by the authorized dealers and start all over.

56. According to the former Residential Sales Representative, customers would call ADT

with complaints about the dealers on a regular basis and ADT employees had to attempt to clean up

their messes. However, it was often difficult to resolve the problems they created. According to this

former employee, sales representatives (of ADT’s in-house salesforce) would raise problems about

the dealers at sales meetings 19 and ask management why they were competing against themselves.

In response, the sales representatives were told by management that the dealers were not going away

and the in-house sales representatives would just have to do a better job than the dealers. The sales

representatives were also told by management that shareholders like the revenue. Indeed, the former

Residential Sales Representative stated that, according to a newsletter posted on the Company’s

intranet, in mid-2013, Defendant Gursahaney took the top sales representatives from every major

19 According to the former Residential Sales Representative, the meetings were initially held once a month but they were increased to weekly meetings during the last few months of his employment at ADT (he left in February 2014). A District Sales Manager would attend these meetings, and about 60%-80% of the time the Vice President of Sales for Florida would also attend .

- 22 -


authorized dealer on a week-long tropical excursion and said that the dealers were the backbone of

ADT.

57. Such unscrupulous sales practices were not limited to ADT’s authorized dealers but

also were rampant among its direct sales force. Indeed, the former Customer Service Representative

described that he often received customer complaints related to problems with sales people,

including both internal ADT sales representatives and authorized distributors. Based on what many

customers represented to the former Customer Service Representative, the sales representatives –

both ADT and distributor sales personnel – were not honest and bamboozled customers into

contracts. This former employee received a high volume of calls from new customers who felt that

the promises made by the sales representatives had not been fulfilled. The actual services were

rarely what the sales representatives had promised. For example, new customers often were

surprised by the actual cost of the services because they were higher than the amount stated by their

sales representatives. In addition, sales representatives would also sometimes promise free

equipment or other features to a customer but when the technician arrived to install the equipment,

he or she would inform the customer that the promised free equipment was not on the customer’s

order form. When the former Customer Service Representative or his colleagues would attempt to

reach the sales representatives to resolve these types of customer complaints, they were usually

transferred to the sales representative’s voicemail and rarely received a call back.

58. While the aggressive sales practices of ADT’s authorized dealers and direct sales

force initially allowed ADT to hook new customers, these sales did not materialize into “customers

for life.” Rather, they actually jeopardized the Company’s ability to add credit-worthy customers to

its base and turn their accounts into recurring revenue. Defendants eventually took belated efforts to

clean up these sorts of practices. For example, as set forth in “Defendant Gursahaney[’s] . . . email

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to certain” officers and directors “on July 12, 2013,” the Company planned to “implement[] an

enhanced customer credit screening process to help reduce non-pay disconnects.” 20 However,

Defendants knew that this plan would come at a huge cost to gross customer additions (an 8%

impact) in fiscal year 2014, 21 but failed to fully and timely disclose the significant known impact on

gross customer additions or on other key metrics.

b. ADT’s Terrible Customer Service Issues Led to Increased Cancellations

59. Even where customers did initially sign up with ADT, its subpar customer service

hindered its ability to retain “customers for life.” Numerous former employees detailed a host of

customer service problems that drove its customers away during the Class Period. Primary among

these problems was billing issues. The former Customer Service Representative explained that

among the calls he handled were calls regarding billing inquiries and complaints. For example,

according to the former Customer Service Representative, sometimes customers would become

upset because they had been charged twice or because their rates were increased.

60. More fundamentally, former employees explained that customers complained and

often cancelled their ADT accounts because they discovered they were paying for monitoring

services that they were not actually receiving. The former Residential Sales Representative

explained that one of the major issues customers had with the Company was that, after paying for

several months of services, customers would discover that their homes were not actually being

monitored because of faulty equipment. This was corroborated by the former Credit Balance

Analyst, who explained that a common reason customers cancelled their accounts was because they

20 See ¶79 below (citing Derivative Cplt. at ¶110 (citing ADT220-0001329-1330)).

21 Derivative Cplt. at ¶110 (citing ADT220-0001329-1330).

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had been paying for ADT’s services for months only to learn that their residence was not actually

being monitored because of mistakes made by ADT.

61. Similarly, customers complained when they discovered that they were unable to get

the necessary emergency response because they did not have the appropriate permits for their ADT

alarm systems. As the former Customer Service Representative explained, certain cities required

residents to have a permit for their alarm systems and it was common that customers would fail to

obtain or renew such permits. The former Customer Service Representative explained that the

salespeople who sold the alarms generally did not tell the customers that this type of permit was

necessary. The permits became an issue when the alarm was set off because of a break-in and the

ADT dispatchers would call the police but the police would refuse to come because the customer did

not have the necessary permit. This situation made some customers very angry because they were

paying money for ADT’s services, and they were under the impression that their property was secure

but when a break-in occurred, they were not actually protected.

62. While Defendants touted their implementation of successful programs addressing

customer loyalty issues (see ¶¶65, 128, 221, 236), their half-hearted efforts to fix such pervasive

customer service problems were ineffective. The former Residential Sales Representative explained

that near the end of 2013, ADT created a new department known as the Customer Loyalty Desk,

which was solely dedicated to resolving issues with existing customers or to assist customers who

had been done wrong by the Company. This department would work with customers that were upset

and had major issues with ADT and were considering cancelling their services from ADT. This

department would attempt to obtain better prices for customers, which to some extent was the only

concession the department could offer them. While customers were supposed to be able to go to the

- 25 -


new Customer Loyalty department and resolve their issues, the department was generally not very

effective at resolving customer complaints and was a joke.

63. The former Residential Sales Representative observed that the level of customer care

and support consistently decreased year after year and customer loyalty concurrently decreased. The

former Residential Sales Representative said that these problems became worse after ADT and Tyco

separated. Everything went to hell in a handbag after the division and did not improve at any time in

2013 or as of the time of his departure in February 2014. According to the former Residential Sales

Representative, the time period between the end of 2012 to when he left in early 2014 was the apex

of the worst problems at ADT.

64. Similarly, the Cash Application Specialist explained that during the Class Period,

ADT was constantly receiving requests from customers to cancel their accounts and the former Cash

Application Specialist saw deactivated accounts all the time in the year leading up to her departure

(in March 2014). This former employee explained that ADT was losing customers like crazy,

especially in 2013. Moreover, the former Cash Application Specialist explained that, in 2013, many

employees in the Field Support Center (“FSC”) were being sent home early or laid off because the

FSC worked on setting up and installing new accounts and there were not enough new accounts to

keep them busy.

65. In sum, ADT’s subpar customer service directly harmed customer additions and

caused an increase in attrition during the Class Period. Defendants knew of these pervasive issues

with the Company’s customer service during the Class Period. Indeed, Defendants actively touted

their attention to these issues but minimized their impact and led the market to believe that they were

being successfully addressed. For example, on November 27, 2012, Defendant Mikells suggested

that ADT was implementing successful programs to help customer retention, including improved

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customer service, that would “ help to mitigate otherwise pressure against attrition .” Likewise,

Defendant Gursahaney stated, “we have got a very robust set of programs that we’re implementing

and continuing to drive to try and mitigate that [attrition] across all areas. . . . As part of our

leadership meeting a couple of weeks ago, we really focused 80% of our leadership meeting on

how we can become a more customer obsessed organization and some investments that we think

we can make there. So again, I think there are some natural headwinds but we’re working hard to

make sure we minimize that and get to the extent possible, try and offset it.”

66. In stark contrast to Defendants’ statements to the market, their efforts to improve

customer service were failing to quell attrition and were making matters worse by causing a

significant surge in subscriber acquisition costs and costs to serve (as further detailed below),

negatively impacting the Company’s revenue margins.

67. As confirmed by numerous former employees above, customer dissatisfaction with

ADT’s unscrupulous business practices and customer service, exacerbated by increased competition,

led to a decline in new customer additions and a rise in customer attrition during the Class Period.

According to the former Director of Product Management, the attrition rate was one of the biggest

issues emphasized by ADT’s executive leadership. In particular, he explained that customer attrition

was especially discussed during the last 12 months he worked for ADT (April 2013 – April 2014)

because the numbers had been growing, in spite of awareness of the issue and various efforts to

address the problem. The former Director of Product Management explained that when new

marketing projects were presented for consideration, one of the key considerations in determining

whether to go forward with the initiative was how many customers the project would save.

Likewise, the former Customer Service Unit Manager explained that overall the attrition rate was

always rising. He recalled participating in town hall meetings via teleconference once a quarter, led

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by Defendant Gursahaney or Vice President Georgia Eddleman, in which rising attrition rates was

one of the topics discussed. The former Director of Product Management, who sometimes attended

the Company’s town hall meetings, also recalled that Defendant Gursahaney would always attend

such meetings and that attrition, as well as competition, were topics discussed.

68. As further detailed below, Defendants were intimately aware of the Company’s rising

attrition rates and the drivers of them during the Class Period. See ¶¶73-81. While they disclosed

attrition levels to market, they misled investors as to the true reasons behind this disturbing trend,

blaming it on the housing market, rather than the negative effects of competition, and also failed to

fully disclose costs associated with the Company’s operational issues and need to keep pace with

competitors through increased advertising and promotions. See, e.g. , ¶221 (Defendant Gursahaney

explained with respect to attrition that “more than 100% of our year-over-year increase is being

driven by [housing] relocations.”).

c. Costs Surged as ADT Struggled to Gain and Retain Customers

69. There is a significant upfront investment required to grow ADT’s customer base.

According to the Company, this investment consists primarily of direct materials and labor to install

ADT’s security and home/business automation systems, direct sales costs, indirect sales costs,

marketing costs, and administrative costs related to installation activities. 22 As a result, ADT must

retain customers for long periods of time in order to recoup its initial investment in new customers.

The Company has stated that it takes approximately three years for the Company to achieve cash

22 See 2013 Form 10-K.

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flow break-even for these investments. 23 Accordingly, the Company would spend a fortune to get

new customers.

70. On top of these significant upfront investments, during the Class Period, as a result of

customer service issues and competition, the Company was forced to spend even more money to

keep its disgruntled customers. For example, the former Credit Balance Analyst explained that when

customers would call ADT to cancel their account, they were offered a credit as an incentive to stay

with ADT rather than cancel their account. These were known as retention credits. This former

employee further explained that these credits were pretty generous, sometimes as high as $150,

which could amount to several months of service. The former Credit Balance Analyst also explained

that these credits rarely resulted in customers choosing to keep their account with ADT and most

customers would just cancel their account after the credit expired.

71. As further detailed below, Company documents establish that “promotions and

discounting” aimed at gaining and retaining customers were causing SAC to surge and “‘pressur[ing

the Company’s] . . . revenue margin.’” 24 Defendants carefully tracked these SAC, which were

mounting during the Class Period. For example, Board meeting minutes from March 13, 2013

revealed that there was “an increase in [SAC]” due to the Company’s Pulse “take rates,”

“promotions and discounting ” and noted that “‘pressure on the recurring revenue margin is the

biggest issue for the quarter . . . [and] the Company continues to see overall pressure on attrition.’” 25

72. Likewise, the Company’s costs to serve skyrocketed as Defendants engaged in costly,

but ultimately ineffective, initiatives to boost customer loyalty ( i.e. , customer loyalty desk) and stem

23 Id.


25 Id. (emphasis added).

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the tide of departing customers. As Defendants knew and would later reveal, these costs were

compressing the Company’s revenue margins.

3. Defendants Knew of ADT’s Decline in Customer Adds, Increased Attrition, and Surging Costs During the Class Period, but Failed to Disclose These Problems to the Market

73. Throughout the Class Period, as further detailed above, Defendants Gursahaney,

Mikells, and then Geltzeiler were intimately aware of the Company’s declining customer adds,

increasing attrition, and surging costs as they dealt with the encroachment of aggressive, new, well-

funded competitors, while struggling to gain and retain customers. Yet Defendants failed to disclose

these issues, and instead continued to paint a misleading picture as to the impact they were having on

ADT’s key value drivers, finances, and overall operating condition.

74. For example, on March 13 and 14, 2013, the Board held meetings at which all

directors were present. 26 During these meetings, the Board received a second quarter 2013

“Business Update,” which in addition to the competitive pressures detailed above in ¶47, revealed:

“(1) an increase in attrition, with Q2’13 T12M at 13.9%, 20 bps higher than plan, driven by

relocations and nonpayment; (2) Pulse take rates and competitive environment driving subscriber

acquisition costs up; (3) continued pressure on lead generation (Direct) and Dealer softness

impacting gross adds and recurring revenue ; and (4) recurring revenue shortfall putting pressure on

margin rates.”27 The Board also evaluated ADT’s competitive environment in more detail as

discussed in ¶47 above.

26 Derivative Cplt. at ¶91. Defendant Gursahaney was a member of ADT’s Board and, thus, was in attendance. See ADT’s Definitive Proxy Statement filed on Form DEF 14A for the period ended March 14, 2013.

27 Derivative Cplt. at ¶91 (citing ADT220-758-782) (emphasis added).

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75. Likewise, “March 13, 2013 Board meeting minutes” revealed that there was an

“increase in [subscriber acquisition costs]” due to the Company’s Pulse “take rates,” “promotions

and discounting” and noted that “‘pressure on the recurring revenue margin is the biggest issue for

the quarter . . . [and] the Company continues to see overall pressure on attrition.’” 28 “At the March

13, 2013 Board meeting, the Board was also presented with the details for the P&L year-over-year

and relative to plan which revealed that ‘non-recurring recurring revenue [was] declining due to the

shift of ADT ownership of more installed systems and that the higher costs of Company owned

equipment result[ed] in higher amortization in the depreciation and amortization line.’” 29

76. On May 2, 2013, in the face of the Company’s inaccurate reporting of its declining

operational and financial results, Defendant Mikells effectively resigned from ADT.

77. The Company’s problems continued. Internal Company documents also reveal that

these issues continued to be a focus of the Board at their meeting on May 9, 2013, which was

attended by all directors, including Defendant Gursahaney. 30 At this meeting, “[t]he ‘competitive

market and attrition continued to be a focus of the Board’s discussions.’” 31

78. On June 15, 2013, “Defendant Gursahaney sent an email to certain of [ADT’s officers

and directors] . . . . In the email he noted that the Company had closed the books on May, but

‘thought it might be useful to provide [] a quarter to date update on [ADT’s] financial performance.’

Defendant Gursahaney stated that ‘[t]hrough two months, we are slightly ($1M) behind our revenue


29 Derivative Cplt. at ¶93 (citing ADT220-0000973).

30 See Derivative Cplt. at ¶107 (stating that “the Board held another meeting, at which it discussed the Company’s Q2’13 results and the Q3 and FY’13 outlook” (citing ADT220-00001320-1326; ADT220-00001188-1249).

31 See id. (citing ADT220-00001240-1248).

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forecast as unit production is below forecast and attrition is continuing to run high . . . . As we look

to the rest of the quarter and year, we are anticipating continued pressure on gross adds and

attrition .’”32

79. Then, on July 12, 2013, in advance of the release of the Company’s third quarter 2013

results, “Defendant Gursahaney sent another email to certain of [ADT’s officers and directors.]” 33

This email “warn[ed] that there were ‘three primary gaps’ in ADT’s financials, of which he wanted

to ‘make you aware of in advance of your review of the materials.’” 34 “The ‘gaps’ including the

following:

In FY14, we will be implementing an enhanced customer credit screening process to help reduce non-pay disconnects. Based on our pilots, we expect this to impact our gross adds in our direct sales channel by 8%. Needless to say, we understand we need to offset more of this than is currently reflected in the model and are working to do so. We also need to make sure our attrition rate reflects the benefit of this screening, however much of the benefit will be realized after FY14. We are confident this is the right thing for the business to do and we understand we need to find offsets to the gross adds shortfall this creates,

Also in FY14, our SSFCF [steady-state free cash flow] is about $20M below where I believe we should be, even after considering our increase in interest payments. . . .

Finally, in the out years (FY17&FY18) the investments required to support the growth programs are yet to be defined in enough detail to provide meaningful estimates at the project level. For our modeling purposes, we have assumed a level of capax that is consistent with this year.” 35

This email, which stood in stark contrast to Defendants’ representations to the market, establishes

that Defendants’ statements regarding the Company’s gross adds and attrition rates were knowingly

32 Derivative Cplt. at ¶109 (citing ADT220-0001327-1328) (emphasis added).

33 Derivative Cplt. at ¶110.

34 Id. (citing ADT220-0001329-1330).

35 Id. (citing ADT220-0001329-1330).

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false when made. Moreover, while Defendants knew that their customer credit screening process

would have a significant negative impact on the Company’s gross adds, they failed to fully and

timely disclose this to the market.

80. Likewise, “[o]n July 18 and 19, 2013, the Board held meetings [attended by

Defendants Gursahaney and Meister, among others], during which it discussed ADT’s capital

structure, strategic plan, share repurchase plan, and business risks facing the Company, including

increased competition in the marketplace, and an ‘attrition trend [that] continues to grow ,

offsetting benefits from planned initiatives.’” 36

81. Thereafter, “[o]n October 20, 2013, Defendant Gursahaney sent an email to certain

[officers and directors] regarding the preliminary [fourth quarter 2013 and fiscal year 2013] results,

noting that ADT had come in about $15 million below its FCF [free cash flow] forecast and about

$25 million below its SSFCF [steady-state free cash flow] estimate.” 37 “The primary drivers of the

shortfall were attrition , higher Pulse take rates and Pulse upgrades that increased subscriber

acquisition costs and higher capital expenses as the Company accelerated some IT spending

associated with its new Pulse product platform.” 38

36 See Derivative Cplt. at ¶111 (emphasis added) (citing ADT220-0001475; ADT220-0001331- 1642 (Board packet for July 18-19, 2013 meeting); ADT220-0001643-1733 (Presentation materials prepared by Goldman Sachs for July 18-19, 2013 Board meeting); ADT220-0001734-1740 (Board minutes for July 18, 2013 meeting); ADT220-0001741-1752 (Board minutes for July 19, 2013 meeting)).

37 Derivative Cplt. at ¶124.

38 Id. (emphasis added).

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D. Defendants Misrepresented and Failed to Disclose Material Facts Regarding the Costly, Debt-Fueled Stock Repurchase Strategy Demanded by Defendants Corvex and Meister

82. Meanwhile, despite ADT’s severe financial and operating problems, the Company

embarked on capital restructuring plan involving the repurchase of billions of dollars of common

stock from ADT investors. The repurchase required a massive, escalating debt load that would

inflate Company’s leverage ratio much more than Defendants initially revealed to investors, and

ultimately damage the Company’s credit ratings. Internal documents revealed that the Individual

Defendants agreed to this plan only to stave off a corporate takeover by Defendants Corvex and

Meister (Corvex’s founder, Managing Director, and Partner), and thus preserve the Individual

Defendants’ Board and executive positions with the Company. Defendants, however, failed to

disclose this information to investors, and instead misleadingly represented that the plan was in the

best interests of shareholders and justified by ADT’s supposedly strong financial position and

undervalued shares, which the Corvex Defendants claimed were worth an above-market price

somewhere between $61 and $83 per share. However, after gaining an inside view of the Company

from Meister’s positions on the ADT Board and Audit Committee, the Corvex Defendants realized

the severe problems facing the Company. As a result, Defendants Corvex and Meister dumped most

of their ADT stock, selling it back to ADT at an artificially inflated price of $44.01 per share before

the true extent of the Company’s problems was revealed the market. As investors learned of this

abrupt sellout by one of ADT’s largest shareholders and proponents, they began to realize that the

Company’s aggressive share repurchase plan was not in the best interests of shareholders, the

Company’s shares were overvalued (not undervalued), and the Company’s financial and operating

conditions were not as strong as Defendants had portrayed to the market.

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83. Defendants Corvex’s and Meister’s involvement with ADT began less than a month

after ADT was spun off from Tyco. On October 25, 2012, Defendant Corvex filed a Schedule 13D

with the SEC, announcing that it had acquired over 5% of ADT’s outstanding common stock.

Attached to the Schedule 13D was a 50-slide presentation on ADT that Defendant Meister (speaking

on behalf of Corvex) had made to investors a day earlier at the “Excellence in Investing” conference

in San Francisco, California. In the presentation, Defendant Meister argued that ADT was

undervalued and should use increased leverage to repurchase 30% of the Company’s shares, which

would purportedly push the price of ADT common stock up to its true worth of $61 to $83 per share.

In the presentation, Defendant Meister criticized ADT’s conservative approach to debt and referred

to ADT’s capital structure as “indefensible.”

84. On the same day, ADT issued a short press release, filed with the SEC on Form 8-K,

acknowledging Defendant Corvex’s Schedule 13D filing. Defendants revealed little about the

situation, vaguely telling the market that ADT “engages in an ongoing dialogue with its shareholders

and has had constructive discussions with Defendant Corvex and others to understand their views.

ADT is committed to delivering long-term value to all its shareholders.”

85. Defendants Corvex and Meister had an immediate and substantial influence on the

Company and its capital and financial strategies. For example, “minutes of [an ADT] Board meeting

which took place on November 26, 2012, reveal” a meeting between Defendant Corvex and certain

members of ADT’s Board and management. 39 At the meeting, “Meister stated that he was interested

in joining the ADT Board and conveyed Defendant Corvex’s view that ‘ADT could enhance

shareholder value through the incurrence of incremental leverage.’” 40

39 See Derivative Cplt. at ¶72.

40 See Derivative Cplt. at ¶72 (citing ADT220-0000236-245).

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86. Only a day later, on November 27, 2012, the Company announced that it had begun

to implement a new share repurchase plan, but failed to attribute this to the Corvex Defendants’

sudden control over the Company’s strategic direction. The announcement simply stated that the

“Board of Directors has approved a share repurchase program, authorizing the Company to

purchase $2.0 billion of its common stock. The program expires on November 27, 2015 and may

be terminated at any time.”

87. On the same day, the Company hosted a conference call for analysts and investors

during which Defendants Gursahaney and Mikells misleadingly touted the strength of the

Company’s financial and operating results and prospects, and signaled that a capital restructuring

plan was “appropriate” for the Company based on its key strategies, business model, and attractive

financial returns, including strong recurring revenue: “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 have a business model that generates strong recurring revenues and attractive financial returns.”

Further, Defendant Gursahaney stated that “[b]ased on our discussions with the rating agencies and

our commitment to maintain an investment grade rating, we’ve targeted an unadjusted debt to

EBITDA ratio of about 2 times.” As in the press release, Defendants failed to disclose Defendants

Corvex’s and Meister’s influence on this new strategic direction.

88. In reality, the capital restructuring plan was motivated by Defendants Corvex’s and

Meister’s tremendous influence and demands on the Company, which were accepted as a result of the

Individual Defendants’ own self interests in maintaining their Board and management positions. This is

evident from ADT Board meetings held on December 13 and 14, 2012. At those meetings, the

Board discussed at length the fact that Defendants Corvex and Meister were placing significant

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pressure on ADT to execute on its capital structure proposal. 41 Specifically, Board minutes from

the meeting on December 13, 2012 referenced discussion regarding the “‘pros and cons of Keith

Meister’s request to join the ADT Board of Directors’” and noting that “‘if Mr. Meister is not

asked to join the Board then Corvex Management will likely make a shareholder proposal to

elect Mr. Meister and possibly others as directors of ADT at ADT’s 2013 annual meeting of

stockholders.’”42 Moreover, Board minutes from the December 14, 2012 meeting state that “‘Mr.

Gordon request that Mr. Bleisch attempt to negotiate mutually satisfactory standstill and

confidentiality agreements with Mr. Meister, Corvex Management and the other Corvex-related

parties.’”43

89. In a Credit Suisse presentation to the Board during the December 13 and 14, 2012

meetings, it is readily apparent that the Board’s (including Defendant Gursahaney’s) real concern

was not the best interests of Plaintiffs and the Class, but in securing their positions with the

Company in the face of Defendants Corvex’s and Meister’s demands. 44 “The presentation makes

specific reference to the fact that its “‘[a]nnually elected Board makes directors vulnerable and

accountable for their actions’ and Corvex would likely seek to ‘[a]dd new outside directors or

replace existing directors’ and make an ‘attack on CEO or [demand] other changes in management’

if the Company did not agree to Meister’s capital structure changes and offer him a Board seat.” 45

“Indeed, the Individual Defendants recognized that to avoid risking their executive and directorial

41 See Derivative Cplt. at ¶84 (citing ADT220-0000475-476; ADT220-0000477-484).

42 Id. (citing ADT220-0000475-476).

43 Id. (citing ADT220-0000477-484).

44 Id. at ¶85 (citing ADT220-0000246-293).

45 Id. (citing ADT220-0000273).

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positions at ADT, they would need to give Defendants Corvex and Meister exactly what they

wanted.”46 Board materials “recit[e] benefits of negotiating with Defendant Corvex [to ensure] that

‘[a]ll current directors stay on Board.’” 47 “A Lazard presentation dated December 3, 2012 reveals

that the Board knew it would need to ‘[f]ully (or partially) implement Corvex’s capital structure and

capital allocation proposals’ by increasing leverage to 3x [debt-to-EBITDA, and] that ‘[a]t least

some additional capitulation [might] be required to substantiate a Corvex claim of “victory” and

encourage exit.’” 48

90. On December 17, 2012, the Company announced that Defendant Meister had been

appointed to the Company’s Board, without disclosing its reason for such appointment (Defendants’

self-interest in preserving their positions), Defendants’ dealings and negotiations with Corvex and

Meister that resulted in such appointment, or Defendants Corvex’s and Meister’s demands on the

Company.

91. After installing Defendant Meister on the Board, Defendants quickly proceeded to

implement the capital restructuring plan forced by Defendants Corvex and Meister. “[O]n January 7,

2013, ADT issued a press release announcing that it had placed a private offering of senior notes

worth in excess of $700 million . . . [and] intended to use the net proceeds from the offering

primarily for the repurchase of outstanding shares of ADT common stock.” 49

92. At its January 10, 2013 meeting, “the [ADT] Board adopted the recommendation of

[its] Nominating & Governance Committee” to keep Meister on the Board by nominating him as a

46 Id. (citing ADT220-0000274).

47 Id.

48 Id. (citing ADT220-0000304-474).

49 Id. at ¶79.

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Director in advance of ADT’s 2013 Annual Meeting, and to appoint Meister as a member of the

Board’s Audit Committee. 50 Accordingly, on January 28, 2013, ADT filed a Proxy Statement

pursuant to Section 14(a) of the Exchange Act, asking shareholders to vote on, among other things,

Meister’s election as a Director of the Company. However, the Proxy Statement was false and

misleading because Defendants once again failed to disclose the true facts regarding their dealings

with Defendants Corvex and Meister, including the manner in which they demanded and influenced

the Company’s Board selection and capital repurchase strategy, and the Individual Defendants’ self-

preservation interests compelling their acquiescence to the demands and influence of Defendants

Corvex and Meister.

93. Such facts were also omitted from the Company’s January 30, 2013 press release

announcing ADT’s first quarter fiscal 2013 financial results. In the press release, the Company gave

a misleadingly strong portrayal of its financial and operating conditions, while announcing that it had

repurchased over 2 million shares through January 2013 for a total of $100 million, and had entered

into an “accelerated share repurchase agreement” with Credit Suisse International to repurchase an

additional $600 million of ADT shares, funded by the Company’s recent debt offering.

94. On April 12, 2013, the Company announced the completion of the accelerated

repurchase program with Credit Suisse International, but again failed to disclose the role of

Defendants Corvex and Meister in driving the repurchase strategy, or the Individual Defendants’

self-preservation motive for accepting and promoting such strategy as beneficial to the Company.

95. Such facts were also absent from the Company’s May 1, 2013 press release

announcing ADT’s financial results for its second quarter of fiscal 2013. The Company

50 Id. at ¶80 (citing ADT220-0000496-497; ADT220-0000521-525).

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misleadingly touted strong earnings and solid growth in recurring revenue, and stated that it had

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

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

and investors during which Defendant Gursahaney once again trumpeted the strength of the

Company’s financial position, including its supposedly strong recurring revenue. Further, Defendant

Gursahaney downplayed the need for increased debt to fund the share repurchases demanded by

Defendants Corvex and Meister, despite knowing since December 2012 that ADT would need to

increase its targeted leverage ratio of 2.0 times debt-to-EBITA (announced in November 2012) to a

much higher ratio of 3.0 times debt-to-EBITA:

[Defendant Gursahaney]: [W]e will continue to take a balanced approach to capital management. We have a resilient predictable business model, which enables 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.

* * *

[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?

[Defendant 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.

[Defendant 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.

97. On July 18 and 19, 2013, ADT held Board meetings, attended by Defendants

Gursahaney and Meister, to “discuss[] ADT’s capital structure” and “share repurchase plan[s],” and

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various financial and operating problems facing the Company. 51 Included in the Board materials was

a “Goldman Sachs presentation” (including a slide titled, “Potential Messaging to Investors”)

“observ[ing] the importance of outwardly maintaining ‘[c]onfidence in the Company’s ability to

support increased leverage while continuing to execute on its strategic plan.’” 52 These concepts

supported the importance of “maintaining the appearance of a strong business model, strong cash

flow generation, and a strong liquidity position” in order to “execute Meister’s demands.” 53 More

specifically, Defendants’ “plan was to ‘[f]ocus [the] July earnings call on financial and operational

performance and signal shift in rating target and capital allocation strategy that [would] be fully

articulated in September.’” 54 Further, the Board materials stated that the “call should emphasize

‘strong operating results for the quarter’ and strategically ‘signal [a] shift in rating conviction while

avoiding piece-meal disclosure of strategy/capital allocation plan.’” 55 “In targeting increased

leverage of 3.0 [times debt-to-EBITDA], the Individual Defendants were well aware that the result

would ‘likely [be] loss of management credibility in the eyes of rating agencies and debt holders as

we had reaffirmed our commitment to investment grade in Nov-12.’” 56

98. In accordance with this strategy, on July 31, 2013, ADT issued a press release touting

strong, stable financial results for the third quarter of 2013. In addition to the positive news,

51 See Derivative Cplt. at ¶111 (citing ADT220-0001475; ADT220- 0001331-1642; ADT220- 0001643-1733; ADT220-0001734-1740; ADT220-0001741-1752).

52 Id. at 112 (citing ADT220- 0001649).

53 Id.

54 Id. (citing ADT220-0001671).

55 Id. (citing ADT220-0001680).

56 Id. (citing ADT220-0001701).

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however, Defendants partially revealed certain of the problems facing the Company, including

higher attrition and lower recurring revenues, which were blamed primarily on the housing market

and “softness in dealer channel production.” Defendants also provided an update on their capital

restructuring, announcing that the Company had in total repurchased 25.3 million shares for $1.15

billion. Moreover, Defendants announced for the first time that the Company would need to increase

its previously announced leverage (debt-to-EBITDA) ratio from 2.0x to 3.0x in order to fund the

repurchase plan, despite their knowledge of such increase since December 2012. Specifically,

Defendant Gursahaney stated: “We believe optimizing our capital structure will help us achieve our

strategic goals, and expect to target a leverage ratio of 3.0 times debt to EBITDA over time.” This

statement directly contradicted Defendant Gursahaney’s knowingly false assurances to the market,

less than five months earlier, that ADT had sufficient liquidity to fund share repurchases, without the

need more debt beyond the 2.0x leverage ratio announced in November 2012.

99. In response, credit rating agencies slashed the Company’s credit ratings, or placed

them under review for a potential downgrade, citing the Company’s increased leverage target from

two times (2x) debt-to-EBITDA to three times (3x) debt-to-EBITDA. Specifically, on July 31,

2013, S&P massively downgraded ADT’s credit rating by three notches, from “BBB-” to “BB-”

(below investment grade). On the same day, Moody’s and Morningstar both placed ADT’s credit

ratings under review for a downgrade. On August 1, 2013, Fitch also reduced the Company’s credit

rating, from “BBB” to “BBB-.”

100. Investors reacted negatively to the news regarding the Company’s plan to

substantially increase leverage, as well as its partial revelation of the financial problems facing the

Company, causing ADT’s share price to immediately drop 4.8% from $42.09 to $40.08 per share on

unusually high trading volume.

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101. Recognizing their power to control the Company’s strategic direction, given the

continued threat of a corporate takeover that would cost the Individual Defendants their jobs,

Defendants Corvex’s and Meister’s demands continued to increase. In September 2013, the

Individual Defendants received from “Goldman Sachs and Centerview Partners prepared discussion

materials” “providing, among other things, a ‘Situation Update’ on [new] demands made by

Corvex.” The materials stated that, “[i]n late August,” “‘Corvex proposed an accelerated timeframe

for increasing net leverage to 3.0x by the end of FY2014 (and 2.7x by the end of Q1 2014) and

using the majority of debt proceeds to repurchase shares,’” instead of ADT management’s July plans

to “steadily increase leverage to 3.0x by Q1 2015” and to allocate capital “more heavily” to

mergers and acquisitions. 57

102. Notably, the discussion materials also revealed that “‘[a]doption of [the] Corvex

capital allocation timetable was presented as a condition to Keith Meister’s exit from the Board.’” 58

“ Corvex also indicated ‘that it would participate in any large share repurchase plan although level

of participation would be dependent on stock price.’” 59 Appealing to the interest of the ADT

Board (including Defendant Gursahaney) in maintaining their entrenched leadership positions,

“‘Corvex [] indicated that if its leverage timeframe [was] not adopted, it would present an

alternative capital allocation framework (a “Public LBO”) and run a competing slate of directors

to be voted on at ADT’s 2014 AGM.’”60

57 See Derivative Cplt. at ¶122 (citing ADT220-0001843).

58 Id.

59 Id.

60 Id.

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103. The [ADT] Board met, without Meister, on September 7, 19, and 20, 2013, to

discuss Corvex’s demands. 61

104. Consistent with Corvex’s demands, ADT issued a press release dated September 24,

2013, entitled “The ADT Corporation Prices Private Offering of Senior Notes.” The press release

announced the pricing of $1 billion in debt securities that would raise capital to repurchase even

more shares and pay down existing debt associated with previous share repurchases, among other

things. Defendants once again failed to reveal Defendants Corvex’s and Meister’s roles in

compelling such debt-fueled repurchases, and the Individual Defendants’ self-preservation motive

for accepting them.

105. On November 18, 2013, the ADT Board met again, “adopt[ing] management’s

recommendation” to massively “increase[] the current share repurchase authorization from $2.0

billion to $3.0 billion” in order to satisfy Defendants Corvex’s and Meister’s demands. 62

106. On November 20, 2013, the Company issued a press release announcing misleadingly

favorable fourth quarter and fiscal year 2013 results, including recurring revenue growth and ADT’s

growing industry leadership, while failing to disclose the many problems hurting the Company’s

finances and operations, driven largely by increased competition and harmful, unscrupulous

customer sales practices. The Company announced that, since inception of its share repurchase plan,

it had repurchased 35.5 million shares for $1.6 billion, that an additional $400 million worth of

shares would be repurchased from JPMorgan Chase Bank on an accelerated basis, and that the Board

had authorized yet another $1.0 billion in share repurchases. Defendants again failed to disclose

material facts regarding its dealings with Defendants Corvex and Meister, including Defendants’

61 Id. at ¶123 (citing ADT220-0001853-1855; ADT220-2201-2202).

62 Id. at ¶126 (citing ADT220-0002670-2693).

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acceptance of the debt repurchase strategy to keep their leadership positions at ADT, and

Defendants’ imminent plan to cash out Defendants Corvex and Meister by way of yet another share

repurchase at an artificially inflated price agreeable to Defendants Corvex and Meister.

107. Ultimately, Defendants Meister and Corvex, through their intimate knowledge of the

Company’s true financial and operating condition and future business prospects, determined that it

was time to dump their ADT stock at a price far below what they had once touted to the market.

“On November 24, 2013, having capitulated to [Defendants Corvex’s] and Meister’s demands, the

[ADT] Board met ‘to review and approve a repurchase of ADT Common Stock from Corvex

Management LP, which is ultimately controlled by Keith Meister, a director of the Company.’” 63

Specifically, the Board contemplated ADT’s repurchase of “10,240,000 shares from Corvex, with a

per share price of $44.01, based on the trading price of ADT’s stock at the close of market on the

prior trading day, November 22, 2013, for a total purchase price of $450,662,400.” 64 “In exchange,

Meister would resign from the Board and Corvex would [extend] its obligations under the current

standstill agreement for five years and [agree to] a mutually acceptable press release announcing the

transaction.” 65 To lend an appearance of propriety, the Board engaged Goldman Sachs and

Centerview Partners to opine that a repurchase of shares from Corvex at the current market price was

“reasonable” under the circumstances. 66

108. On November 25, 2013, ADT stunned the market by issuing a press release, entitled

“ADT Announces Repurchase of Shares Held by Corvex,” which revealed ADT’s intention and

63 Id. at ¶130 (citing ADT220-0002700-2704).

64 Id. (citing ADT220-0002700).

65 Id.

66 Id. at ¶131 (citing ADT220-0002701).

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agreement to repurchase the vast majority of Defendant Corvex’s ADT common stock position at the

current market price, and also that Defendant Meister had resigned from the 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. 67

109. 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 that the share sale by Corvex sent a negative signal to the market that ADT is no longer

the great investment it was originally thought. The report noted that Corvex sold at $44.01 per

share, in sharp contrast to “its 50-slide presentation to investors a year ago, [in which] Corvex

argued that ADT was worth anywhere from $61 to $83.”

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

ADT common stock down nearly 6% from $44.01 per share to $41.46 per share on abnormally high

trading volume. The sudden departure of Defendants Corvex and Meister, only one year after

aggressively promoting the Company’s value and advocating a long-term share repurchase strategy,

was a clear signal to the market that, contrary to Defendants’ public statements throughout the Class

Period, such strategy was not in the best interests of ADT shareholders, the Company’s financial and

operating conditions were materially worse than Defendants portrayed, and the Company’s shares

were significantly overvalued, rather than undervalued.

67 On December 2, 2013, ADT filed a Form 8-K with the SEC confirming its repurchase of shares from Corvex pursuant to the terms announced on November 25, 2013.

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E. ADT’s Stock Price Ultimately Tumbled When the Market Learned of the True Extent of the Company’s Problems

111. Ultimately, on January 30, 2014, the market learned the full truth regarding ADT’s

business, operations, and finances and the reasons why Defendants Meister and Corvex had dumped

ADT stock at a price well below their original valuation of $61-$83. On this date, the Company

issued a press release reporting its first quarter 2014 results, which revealed that ADT had badly

missed analysts’ consensus estimates, and revealed that ADT was experiencing an extreme

slowdown in new customer additions, increased advertising and service costs, and higher attrition

among existing customers, all of which had eroded ADT’s margins, and negatively impacted its

earnings and recurring revenue. Investors were stunned by this news, which stood in stark contrast

to Defendants’ Class Period statements, causing ADT’s stock price to plummet by 17% falling from

a close of $37.81 per share on January 29, 2014 to a close of $31.40 on January 30, 2014, on

abnormally high trading volume. Analysts were dismayed, stating that it was a “far worse-than-

expected quarter,” noting that there was a “weakness in critical metrics,” and questioning

“management’s credibility and the unusually structured deal the company made with a board

member announced on 11/25/13.” As these disclosures made their way into the market, ADT’s

stock price continued to fall another 8%, closing at $28.83 on February 3, 2014. While Defendants

Meister and Corvex dumped their shares at inflated prices, benefitting from their inside knowledge

of the Company’s concealed problems, the rest of ADT’s shareholders suffered millions in losses

when the truth regarding the Company’s financial and operational condition finally came to light.

112. The media also was stunned by Defendants’ revelations, and linked ADT’s myriad

operational and financial problems with the detrimental effect of the Corvex Defendants’ short and

detrimental stint with the Company, profiting handsomely at the expense of investors. For example:

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(a) On January 30, 2014, Herb Greenberg, a financial journalist, released an

article in The Street entitled “ Why ADT is Appalling ” which stated, in pertinent part:

Earnings disappointments come a dime-a-dozen, but ADT ’s (ADT) is a standout.

The company said its customer growth in its fiscal first quarter, ended Dec. 27, didn’t meet its expectations and that it has “implemented actions, including improvements in our dealer channel and lead generation process, to regain subscriber traction in the future.”

Here’s the problem: Over the past year, rather than investing more cash in its business than it otherwise might have, ADT has spent billions buying back shares at prices well above where the stock now trades – with the distortion even greater in the wake of today’s earnings miss.

That highlights a problem with buybacks, in general: They’re often designed to give a short-term pop in the stock to assuage antsy investors. They’re also often the tool of first resort when activists land on a company’s doorstep, which was the case with ADT.

And, as is the case with ADT, the result can often be short-term gain for long-term pain.

A little history here: In early October 2012 ADT was spun off from Tyco (TYC). Later that month Keith Meister of the hedge fund, Corvex Management, filed that his fund held a 5% stake in ADT. At the same time he gave a presentation saying he thought the stock was valued at $61 and he urged the company to raise debt and buy back its shares.

Within weeks (you’ll never guess!) ADT’s board authorized a three-year, $2 billion buyback.

A month later Meister was appointed to ADT’s board.

ADT’s stock, meanwhile, zoomed higher, peaking at nearly $50 in March 2013 on the hoopla and the start of buybacks.

* * *

Adding insult to injury, many of [ADT’s stock repurchases] were, indeed, financed through debt offerings.

Fast-forward to Nov. 20, 2013, which is more than halfway through the company’s fiscal first quarter: ADT announced that with its three-year buyback program completed in about a year, its board added another $1 billion to the buyback pot. On

- 48 -


its earnings call today, the company says it spent $1.2 million on buybacks, including “the Corvex buyback.”

Five days later, the company announced it was buying 10.24 million shares, or the bulk of Corvex’s 11.1 million stake, for $44.01 per share. That’s a far cry from his original $61 target. ADT also said that Meister was immediately exiting the board.

Enter today. With ADT’s 16% decline after the punk earnings you can’t help but wonder about two things: What investors who weren’t bought out with Corvex must be thinking; and, given Meister’s role on the board – and the timing of Corvex’s sudden exit – did something he learned as a board member cause him to get out while the getting was good?

Corvex didn’t return my call.

Reality Check : The headline to this piece says it all but ADT may very well go down as a classic example of activists gone wild. They buy a big stake. They go on the board. They get bought out. As I wrote a few months ago, it smacks of new-age greenmail.

More recently I questioned whether the SEC should clamp down on special deals for activists. The bottom-line is really simple: Should insiders, in this case activists who go on the board, get special treatment? I think we all know what the answer should be.

(b) A 24/7 Wall St. article dated January 30, 2014, entitled “ADT Brings the

Death of Growth” it stated that “[i]f you just looked at the stock price and know that ADT is a

security company, you might just think that ADT’s corporate headquarters had been broken

into. "

(c) On February 3, 2014, a Wall St. Cheat Sheet article entitled “Is Your Money

Safe in ADT?” observed:

Such an aggressive buyback is highly suspicious . On the surface, it appears as if ADT’s board, with Meister as its ring leader, executed a classic “pump and dump.” This means that the company mislead investors and analysts who were led to believe that the numbers would be better than they thought they would be.

* * *

Whether it is true or not is immaterial from an investment standpoint. If it is true, then the board and management cannot be trusted, and investors need to stay away . If it isn’t, then we still have to question the ability of management and analysts

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to predict the results of ADT’s business. This is highly problematic, as ADT’s appeal as an investment is in part its predictability.

V. DEFENDANTS’ FALSE AND MISLEADING CLASS PERIOD STATEMENTS

A. First Fiscal Quarter 2013

113. The Class Period begins on November 27, 2012, shortly after the start of the

Company’s first quarter of fiscal year 2013. On that date, the Company issued a press release

announcing its fourth quarter and total fiscal year 2012 financial results, which was also filed with

the SEC on Form 8-K the same day. In the press release, Defendant Gursahaney boasted of solid

recurring revenue growth and the Company’s strong competitive position. The release also touted

growth in customer additions and EBITDA margins, and provided bullish fiscal year 2013 guidance,

including recurring revenue growth of 4.9%-5.2% and EBITDA margin before special items of

49.5%-50.5%. The release was false and misleading because it failed to reveal the myriad financial

and operational problems facing the Company, as alleged herein, including heightened competition,

poor customer service, aggressive sales tactics, and the material impacts of such problems on the

Company’s supposedly “strong competitive position,” recurring revenue, costs, customer additions,

and margins, among other metrics.

114. The press release also stated that the Company planned to efficiently deploy capital

and that the Company’s Board had approved a share repurchase program, authorizing the Company

to purchase $2.0 billion of its common stock through November 27, 2015, but terminable at any

time. However, Defendants’ press release failed to disclose the circumstances surrounding this

repurchase program, including the demands and influence of Defendants Corvex and Meister that

forced the implementation of such program, and Defendants’ personal financial and self-preservation

interests in accepting and promoting such program.

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115. On the same day, November 27 2012, ADT filed with the SEC a Form 10-K for its

fiscal year 2012. The Company highlighted its purported attributes and strengths, including its

“proven track record of successfully balancing” its key business drivers (specifically customer

additions, costs to add a new customer, average revenue per customer, costs incurred to provide

services to customers, and customer tenure) and its ability to use its recurring revenue “to more

effectively deliver exceptional service to our customers, to expand our dealer and partner network

and to make continued enhancements to operations efficiency.”

116. The Form 10-K further highlighted the Company’s strategy to “extend our leadership

position” in the core residential business through, among other things, continuing to optimize its

“key business drivers” and continuing to provide “high quality” customer service leading to reduced

attrition and increased profitability:

We will continue to manage our business by optimizing the key business drivers [including customer additions, costs to add a new customer, average revenue per customer, costs incurred to provide services to customers, and customer tenure] to maximize the value from our core business. We intend to grow our customer base through the expansion of our current channels and the development of new ones, by continuing to improve sales force effectiveness and by strengthening our strategic marketing and promotional tactics. We will continue to manage the costs associated with adding new customers by optimizing lead generation and conversion, working collaboratively with our solution partners to reduce hardware costs and deliver differentiated solutions and leveraging mobility tools to automate technician scheduling and deployment. We also intend to continue to increase ADT Pulse adoption rates and thereby increase our average monthly recurring revenue per customer and customer tenure. We regularly evaluate our pricing strategies to optimize pricing for our installed base and for new customers. We continue to standardize our product platform to enhance our ability to resolve customer issues remotely, which we believe will reduce ongoing service costs and increase the ease of supporting our customer base.

We also continue to implement enhancements to every customer touch point . We continue to train and incent our employees to provide high-quality service through prompt handling of calls and quick and effective resolution of customer issues. We intend to continue making ongoing improvements to enhance the customer experience, offer more options for customer self-service, including via the Internet, and create opportunities for field employees to meet our customers and hear directly

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how we impact customers’ lives. We believe our emphasis on customer value drives customer satisfaction and tenure, decreasing customer attrition and improving our profitability.

117. The Company added that “[w]e manage our existing customer base to maximize

customer lifetime value, which includes continually evaluating our pricing and service strategies,

managing our costs to provide service to customers and achieving long customer tenure.” Regarding

customer care and service, the Company elaborated on its purported “service culture aimed at

‘Creating Customers for Life’”:

We maintain a service culture aimed at “Creating Customers for Life”‚ because developing customer loyalty and continually increasing customer tenure is an important value driver for our business. To maintain our high standard of customer service, we provide ongoing high quality training to call center and field employees and to dealer personnel. We also continually measure and monitor key operating and financial metrics, including customer satisfaction oriented metrics across each customer touch point.

Customer care specialists answer non-emergency inquiries regarding service, billing and alarm testing and support. Our monitoring centers provide customers with telephone and Internet coverage 24 hours a day on a year-round basis. To ensure that technical service requests are handled promptly and professionally, all requests are routed through our customer contact centers. Customer care specialists help customers resolve minor service and operating issues related to security and home/business automation systems and in many cases are able to remotely resolve customer concerns. We continue to implement new customer self-service tools via interactive voice response systems and the Internet, which will provide customers additional choices in managing their services.

118. The Company went on to boast of its customer quality resulting from “[a] structured

customer acquisition process that is designed to produce customers with attractive characteristics,

including strong credit scores and high usage of automated payment methods, which we believe

results in long average customer tenure.”

119. The Company represented that its principal competitors within the residential and

small business security systems market were traditional security companies called “Protection One,

Inc., Monitronics International, Inc. and Vivint, Inc.,” while downplaying the aggressive

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encroachment of cable and telecom companies and stressing its ability to outperform and

differentiate from its competitors based, not only on price, but a variety of factors including delivery

of an “outstanding customer experience” and a “robust field sales force”:

Competition is often based primarily on price in relation to value of the solutions and service. Rather than compete purely on price, we emphasize the quality of our electronic security and home/business automation services, the reputation of our industry leading brands and our knowledge of customer needs, which together allow us to deliver an outstanding customer experience. In addition, we are increasingly offering added features and functionality, such as those in our ADT Pulse interactive services offering, which provide new services and capabilities that serve to further differentiate our offering and support a pricing premium.

As we move into the interactive services and home automation space, we face new competition from competitors such as cable and telecommunications companies. However, we believe our robust field sales force, including our nationwide team of in-home sales consultants, our solid reputation for and expertise in providing reliable security and monitoring services through our in-house network of fully redundant monitoring centers, our reliable product solutions and our highly skilled installation and service organization position us well to compete with these new competitors.

120. In its 2012 Form 10-K, the Company also highlighted the quality, training,

effectiveness, and monitoring of its sales force in both the direct and dealer sales channels:

Our field sales consultants undergo an in-depth screening process prior to hire. Each sales consultant completes comprehensive centralized training prior to conducting customer sales presentations and participates in ongoing training in support of new offerings and the use of our structured model sales call. We utilize a highly structured sales approach, which includes, in addition to the structured model sales call, weekly monitoring of sales activity and effectiveness metrics and regular coaching by our sales management team.

We train and monitor each dealer to help ensure the dealer’s financial stability, use of sound and ethical business practices and delivery of reliable and consistent high-quality sales and installation methods. Authorized dealers are required to adhere to the same high quality standards for sales and installation as company-owned field offices. We provide dealers with a full range of services designed to assist them in all aspects of their business.

121. The Company echoed these themes in describing its “Business Overview,” stating

that its recurring revenue allows “investments in technologies . . . to continue development and

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training to enable our direct sales, installation, customer service and field service personnel to more


and to make continued enhancements to operations efficiency.” Similarly, in describing “Factors

Affecting Operating Results,” the Company added:

We also focus on “Creating Customers for Life” by maintaining consistently high levels of customer satisfaction, which increases customer tenure and improves profitability . . . . We closely monitor and manage our costs associated with on-boarding new customers. We utilize a structured customer acquisition process that is designed to produce customers with attractive characteristics, including strong credit scores and high usage of automated payment methods, which we believe results in long average customer tenure. . . . We focus on keeping customer service and monitoring costs as low as possible without detracting from the high-quality service levels for which we are known and that our customers have come to expect. We believe that our ability to retain customers for longer periods of time is driven in part by our disciplined customer selection practices and our delivery of a superior customer experience.

122. The Company’s 2012 Form 10-K provided the following one-sentence description of

the share repurchase plan: “On November 26, 2012, our board of directors approved $2 billion of

share repurchases over the next three years.” The Company added one additional sentence regarding

the debt needed to execute such program, vaguely stating that “[f]or fiscal year 2013, we expect

interest expense to increase to $120 million - $125 million as a result of additional debt that we

expect to issue in conjunction with the share repurchase program approved by our board of directors

on November 26, 2012.”

123. The 2012 Form 10-K also provided ADT fiscal year-end financial results through

September 28, 2012, touting positive results including increased recurring revenue and increased

gross customer additions over the prior fiscal year. The Company also announced increased

attrition, attributing this mostly to cancelled service due to “price escalations” during the second and

third quarters of 2012 (without any further explanation of the cause of such escalations) and

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representing that “[w]e continue to focus on high quality service and our disciplined customer

selection process in order to limit customer attrition.”

124. Further, Defendants Gursahaney and Mikells each signed a certification pursuant to

the Sarbanes-Oxley Act of 2002 (“SOX”) that the Form 10-K “fully complies with the requirements

of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, as amended” and

that “the information contained in the [Form 10-K] fairly presents, in all material respects, the

financial condition and results of operations of the Company.”

125. On the same day, November 27, 2012, Defendants hosted a conference call with

analysts to discuss the Company’s fourth quarter and total fiscal year 2012 financial results.

Defendant Gursahaney opened by discussing increases in recurring revenue, EBITDA and earnings

per share (“EPS”), and progress across several of ADT’s “key value drivers” including gross

customer additions and subscriber acquisition cost per customer. He mentioned “some new

competitors to our traditional markets” with strong capabilities, considerable scale and capitalization,

but reassured the market that “we feel very good about our positioning capabilities compared to

these new competitors . . . in these markets” and failed to disclose how the competition was already

eroding the Company’s financial results, and that such erosion was expected to continue going

forward.

126. In his opening remarks, Defendant Gursahaney also discussed ADT’s new three-year,

$2 billion share repurchase program and quarterly dividend, which he attributed to “ a thoughtful

capital policy that is based on our overall business strategy and the opportunities and risks we see

for our business. ” He made no mention whatsoever of Corvex’s role in driving the Company’s

capital strategy, or that Defendants had agreed to it to prevent a leveraged buy-out, and instead

provided the following misleadingly vague statement: “As I’m sure you can appreciate, this is an

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important topic for us and management and our new Board have spent considerable time on it even

before we became an independent public Company. We’ve also received input from several of our

shareholders, both during the equity investor road show and over the course of the last two months.”

Defendant Gursahaney confirmed the Company’s “commitment to maintain an investment grade

rating” notwithstanding a newly targeted debt to EBITDA ratio of “about 2 times.” Later, in

response to an analyst question about the Company’s increased debt and the possibility of incurring

even more debt, he added that, “I don’t see a major departure from what was contemplated [prior

to the spin-off] and what was discussed there versus where we are going. I think we’re

acknowledging the fact that we’ve got a business model that does generate good strong cash flows.

We felt we did have some additional capacity out there, but I don’t think this is a vast departure from

where we were three or four months ago.”

127. In her opening remarks, Defendant Mikells echoed the positive financial commentary

of Defendant Gursahaney, including improvements related to, among other things, EBITDA,

EBITDA margins, gross customer adds, and recurring revenue. Later in the call, she provided a

similar assurance regarding the Company’s newly announced plan to incur massive additional debt

(two times the EBITDA ratio) as part of its capital strategy: “We also took [ADT’s credit rating and

the metrics used by rating agencies] into consideration in determining what we thought the right

leverage target was. And in taking that into consideration, we certainly did so in believing that we’ll

be able to maintain investment grade ratings and that’s important to us.” In response to a separate

question, she added that “I would just reiterate that in looking at our leverage target, we are

certainly confident that that is going to enable us to maintain investment and investment grade

rating. And ultimately that something were going to continue to manage to . ”

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128. In the question-and-answer session that followed, Defendants were asked about a

potential increase in churn (attrition) as the housing market recovers. In response, Defendant

Gursahaney downplayed any risk that this factor would materially hurt the Company given the

supposed opportunities a housing market recovery would have as to gross margin: “So it definitely

should create opportunities for us on the gross add side. So net-net I think a positive housing market

is a benefit for us.” Defendant Mikells chimed in to further downplay the potentially deleterious

effect of attrition, stating that net attrition resulted from price escalations done in prior quarters (due

to the fact that ADT’s attrition metric was a “12-month trailing number”) and suggested that ADT

was implementing successful programs to help customer retention, including improved customer

service, that would “help to mitigate otherwise pressure against attrition.” Defendant Gursahaney

added, “[t]hat said, we have got a very robust set of programs that we’re implementing and

continuing to drive to try and mitigate that [attrition] across all areas. . . . As part of our leadership

meeting a couple weeks ago, we really focused 80% of our leadership meeting on how we become a

more customer obsessed organization and some investments that we think we can make there. So,

again, I think there are some natural headwinds but we’re working hard to make sure we minimize

that and get to the extent possible, try and offset it.” When asked for more specific 2013 guidance

on attrition, Defendants refused to provide it (Defendant Mikells: “We’re not giving specific

attrition guidance for next year.”).

129. Defendants were also asked specifically about the competitive landscape and whether

they had seen “your cable and telecom peers make great inroads in home monitoring.” Defendant

Gursahaney acknowledged that the Company was monitoring traditional and new competitors very

closely, but downplayed their threat to the Company’s business, stating that the Company’s

performance was very consistent and there was no “significant difference” across markets, regardless

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of the incursion of cable and telecom competitors, and that “if they are making inroads, it may not be

at our expense”:

Well, again, as we’ve talked in the past and we continue to monitor not just the new competitors, but the traditional competitors very closely, what I can say is our performance in the markets where the cable and telco players are in aggregate seems to be very consistent with the other markets where they are not. Our returns are good. Some metrics up, some metrics down. For example, our Pulse take rates in those markets tends to be better and we believe part of that is just greater awareness of the interactive service capabilities because of the advertising they’re doing.

So, again, I don’t see a significant difference in our performance in those markets versus other markets. That’s not to say that they’re not making inroads. Like I said, we believe that if they are making inroads, it may not be at our expense. It may be at expense of some of the other traditional players, but the awareness is out there. They are advertising pretty substantially. And we want to make sure that we’re maintaining not just our relevance in the market, but continuing to advertise and continuing to stress our market leader position and the competitive advantages that we believe we have in that marketplace with both our products, but as well as our service and our coverage.

130. When asked about a growth in subscriber acquisition costs, Defendant Gursahaney

stated that such growth was “heavily” and “primarily” driven by Pulse (without mentioning other

factors such as increased competition) but that “we’ll be getting that higher recurring revenue to

offset that, so we think that that is a good investment and a good trade off.”

131. Analysts reacted positively to Defendants’ press release and conference call on

November 27, 2012, including the success of its Pulse product and “better customer management”:

(a) That same day, Morgan Stanley issued a report after the earnings release and

ahead of the conference call highlighting positives after the Company reported EPS and revenue “in

line” with “consensus.”

(b) The following day, Imperial Capital reported that it “anticipate[s] continued

recurring revenue growth from subscriber expansion and higher pricing, with potential acceleration

from the rollout of the ‘Pulse’ interactive service in the dealer channel” and also announced that it is

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“encouraged by the company’s more optimal capital structure.” With regard to the Company’s

success with its Pulse program, the analysts “note ADT launched Pulse for small business only one

year ago and we believe penetration could overtake the residential market, given the higher overall

penetration of monitored security and tangible operational benefits. Dealer channel penetration was

nominal at 1.5%, as ADT has been conducting pilots with select dealers. We see potential upside as

ADT rolls out Pulse into its dealer channel beginning in the current quarter. ARPU (average revenue

per user) for new ‘Pulse’ customers remained at approximately $50. Overall, Pulse customers

constituted nearly 3% of ADT’s 6.4mn accounts.”

(c) Barclays issued its report on November 28, 2012, announcing increases to its

2013 EPS estimate for ADT (to $1.80 from $1.75) and its price target for ADT stock (to $43 from

$38).

(d) On November 29, 2012, Credit Suisse issued its report where it noted overall,

“[w]e think ADT’s guidance is conservative and are modeling at the top end of the FY13 guidance

range for RMR growth, SSFCF [steady state free cash flow], and EBITDA.” Credit Suisse reiterated

its “Outperform” rating and called ADT’s stock “an attractive opportunity for investors both in the

context of the EE/MI group and the broader market.”

132. Between November 27, 2012 and January 29, 2013, the Company’s share price

continued to trade at artificially inflated prices.

133. 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.

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However, the Company failed to disclose the circumstances surrounding such appointment,

including Defendants Corvex’s and Meister’s demands and influence over the Company and

Defendants’ self-interests (avoidance of a corporate takeover and resultant loss of leadership

positions) that resulted in such appointment.

134. On December 31, 2012, the Company filed with the SEC a Form S-4 regarding an

exchange offer of up to $2.5 billion aggregate principal of its outstanding unregistered debt securities

for new registered debt securities, including $750 million 2.250% Notes due 2017, $1 billion 3.500%

Notes due 2022, and New $750 million 4.875% Notes due 2042. The Form S-4 contained false and

misleading statements and omissions materially similar to those contained in the Company’s 2012

Form 10-K, as described herein.

135. For the reasons stated above in the Substantive Allegations section, and as further

detailed herein, the foregoing statements made in or during the Company’s earnings release and

conference call from November 27, 2012, the Company’s 2012 Form 10-K filed on November 27,

2012, the Company’s press release dated December 17, 2012 regarding Meister’s appointment to the

Board, and the Company’s Form S-4 dated December 31, 2012 regarding an exchange of debt

securities, which touted, among other things, the Company’s “strong competitive position,”

“exceptional service to our customers,” service culture aimed at “Creating Customers for Life,”

“structured customer acquisition process,” “consistently high levels of customer satisfaction,”

“thoughtful capital policy” driven by the Company’s overall business strategy, “commitment to

maintain an investment grade rating,” targeted leverage (debt-to-EBITDA) ratio of “about 2 times,”

and failure to experience any “significant difference” in competition from new telecom and cable

companies, were materially false and misleading when made or omitted material facts to make such

statements not false and misleading, because:

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(a) Defendants knew or recklessly disregarded and omitted to disclose that the

Company was indeed facing a “significant difference” in competition that was eroding its

supposedly “strong competitive position,” particularly from well-funded cable and telecom

companies entering the Company’s markets for home security, automation, and monitoring services.

For instance, former employees at the Company confirmed that new competitors were impacting and

causing concern for Company. (see, e.g. , ¶¶40-49);

(b) The Company’s increased competition reduced its growth in customer

additions, increased its subscriber acquisition costs due to the need for increased advertising and

promotions, and accelerated its customer attrition (aka churn rate), all of which negatively impacted

the Company’s recurring revenue, margins, and earnings ( see, e.g. , ¶¶40-49);

(c) The Company was adversely affected by its poor customer service and its

attempts to improve customer service, which increased the Company’s customer attrition and costs

and negatively impacted the Company’s recurring revenue, margins, and earnings. Indeed, one

former employee stated that the Company’s level of customer care and support consistently

decreased and went to hell in a handbag after ADT’s separation from Tyco (which occurred on

September 28, 2012) (see, e.g. , ¶¶59-65);

(d) The Company was adversely affected by its aggressive and unscrupulous sales

practices, which increased the Company’s customer attrition and costs, and negatively impacted the

Company’s recurring revenue, margins, and earnings ( see, e.g. , ¶¶50-58);

(e) The Company’s share repurchase program was not a “thoughtful capital

policy” driven by the Company’s strategy; rather, it was coerced by Defendants Corvex and Meister

and motivated by Defendants’ interests in personal financial gain and/or self-preservation. It also

required far greater leverage ratio than Defendants’ stated objective of “two times” debt-to-EBITDA,

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was not justified by the Company’s share price (which was overvalued, not undervalued) or its

troubled financial condition and was not in the best interests of the Company or its shareholders.

This is supported by documents from a November 26, 2012 meeting of the ADT Board (which

included Defendant Gersahaney as a director), where Meister conveyed Corvex’s view that, “ADT

could enhance shareholder value through the incurrence of incremental leverage,” as well as

documents from ADT Board meetings on December 13 and 14, 2012, where the Board discussed at

length the fact that Defendants Corvex and Meister were placing significant pressure on ADT to

execute its capital structure proposal, increase leverage to 3x debt-to-EBITDA in order to implement

Corvex’s structural changes, and offer Meister a seat on the Board (including the threat of Corvex

seeking to “‘[a]dd new outside directors or replace existing directors’ and make an ‘attack on CEO

or [demand] other changes in management’”) ( see, e.g. , ¶¶82-110);

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

its financial forecasts regarding the metrics described in this paragraph; and

(g) The Company’s Form 10-K for fiscal year 2012 was materially false and

misleading because it failed to disclose to the market (in violation of Item 303 of Regulation S-K)

the materially adverse conditions described in this paragraph.

B. Second Fiscal Quarter 2013

136. The second quarter of the Company’s fiscal year 2013 began on January 1, 2013.

137. On January 14, 2013, the Company issued a press release announcing that it had

priced a private offering of 4.125% Senior Notes due 2023 worth $700 million in aggregate

principal. The press release misleadingly omitted any disclosure of the circumstances surrounding

such offering, including the motives behind the stock repurchase plan demanded by Defendants

Corvex and Meister, and Defendants’ self-interests in promoting and implementing such plan.

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138. On January 28, 2013, ADT filed a Proxy Statement pursuant to Section 14(a) of the

Exchange Act, asking shareholders to vote on, among other things, Meister’s election as a Director

of the Company. However, the Proxy Statement was false and misleading because Defendants once

again failed to disclose the true facts regarding their dealings with Defendants Corvex and Meister,

including the manner in which they demanded and influenced Meister’s Board nomination, the

Company’s capital repurchase strategy, and the self-preservation interests underlying their acquiesce

to the demands and influence of Defendants Corvex and Meister.

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

quarter fiscal 2013 financial results. Defendants reported allegedly strong earnings and margin

results, continued strong growth in recurring revenue (driven by a 4.7% increase in average revenue

per customer), stable attrition (“flat sequentially at 13.8%”), and the addition of 257,000 new

customers. Defendant Gursahaney 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.”

140. The January 30, 2013 press release also reaffirmed the Company’s bullish financial

guidance for fiscal 2013, originally announced in November 2012:

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

141. In the press release, Defendants also provided an update on their share repurchase

program, announcing the repurchase of $27.6 million in common stock since the announcement of

the program, an accelerated repurchase agreement with Credit Suisse International:

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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.

The press release misleadingly omitted any disclosure of the circumstances surrounding the share

repurchase plan or accelerated repurchase agreement with Credit Suisse International, including the

demands of Defendants Corvex and Meister that forced the implementation of such plan, and

Defendants’ self-interests in promoting and accepting such plan. Further, in a conference call later

that day, Defendant Gursahaney suggested that the repurchase was pursued as “a very effective way

of using our additional leverage to enhance shareholder returns” as opposed to a self-interested

strategy driven by Defendants.

142. On the same day, January 30, 2013, ADT filed with the SEC a Form 10-Q for the first

quarter of fiscal year 2013. The Company provided a “Business Overview,” stating that “[w]e focus

on investing wisely in each of our customer acquisition channels to grow our account base in a cost

effective manner and generate positive future cash flows and attractive margins. We also focus on

‘Creating Customers for Life’ by maintaining consistently high levels of customer satisfaction,

which increases customer tenure and improves profitability.”

143. The Company’s Form 10-Q provided information regarding certain of the shares

repurchased and debt issued in connection with the $2 billion share repurchase plan announced on

November 26, 2012, but failed to disclose material information regarding the circumstances

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surrounding such plan, including the demands and influence of the Corvex Defendants or the

implications of such plan on the total debt and leverage ratio of the Company.

144. The Company’s Form 10-Q also provided ADT’s first quarter 2013 financial results,

touting positive results including increased recurring revenue and higher average revenue per

customer. The Company also announced flat attrition and lower gross customer additions, blaming

Hurricane Sandy and lower dealer channel production. The Company added, “We continue to focus

on high quality service and our disciplined customer selection process in order to limit customer

attrition.”

145. The Company’s first quarter 2013 Form 10-Q also contained SOX certifications by

Defendants Gursahaney and Mikells that were materially similar to those identified above in ¶¶124.

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

analysts and investors that emphasized the Company’s apparently strong financial and operational

results, despite costs and sales issues caused by Hurricane Sandy. In his opening remarks,

Defendant Gursahaney reinforced many of the positive metrics announced in the Company’s

earnings release and said, “We performed well in a number of key areas, including growth in

recurring revenue and ARPU and margin expansion. We were also pleased to see some stabilization

in our attrition rate despite some headwinds. In addition, we are continuing to drive higher take rates

for Pulse in all of our distribution channels.”

147. Regarding attrition, Defendant Gursahaney stated as follows, highlighting a “flat”

performance affected primarily by the impact of Hurricane Sandy and housing relocations, while

misleadingly adding that “loss to competition” accounts for just a small percentage of total customer

disconnects, while failing to reveal the full details of the detrimental competitive landscape affecting

the Company:

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Attrition was flat on a quarter sequential basis at 13.8% despite some pressure on disconnects from Hurricane Sandy. There was no significant change in the mix of disconnects by driver or reason code. Relocations continue to be the leading driver of disconnects accounting for 35% to 40% of our total disconnects. The recovery we are seeing in the housing market will likely continue to put pressure on our attrition rate while creating opportunities for new sales as customers move into their new homes. A sustained improvement in the housing market would clearly be a long-term positive for our business as it would reflect positive trends in the US economy and would likely grow the addressable market for residential security. In addition to the impact of relocations, voluntary and non-pay attrition each account for between 20% and 30% of our disconnects while loss to competition accounts for the remaining 10% of the total.

148. Similarly, Defendant Gursahaney also noted somewhat negative trends in gross

customer additions, lead generation, and subscriber acquisition costs, but attempted to explain those

away as follows, failing to address the impact of competition or the myriad operational problems

ADT was experiencing:

Gross adds declined by 12.9% during the quarter as a result of some softness in our dealer channel and the impact of Hurricane Sandy. We saw a significant drop-off in production from one of our larger dealers as they faced some financial issues resulting from their rapid growth over the past few years. Fortunately, they have begun to address these challenges and their production levels are starting to improve. We expect them to ramp up during Q2 and Q3.

In addition, during the first quarter, we saw a decline in leads provided to our dealers by third-party lead generators versus last year. To address this, we are working closely with our dealers to identify alternative lead generation partners to supplement their current partners. We expect these changes to be completed over the next two quarters, allowing production levels to recover yielding year-over-year growth towards the end of the fiscal year.

During the first quarter, our subscriber acquisition costs per customer in our direct sales channel was up 7.9% on a trailing 12-month basis versus last year driven by higher Pulse take rates. While our Pulse systems carry higher installation costs and sales commissions, the returns continue to be attractive as a result of the higher ARPU they bring. We also ran some Pulse holiday promotions, which resulted in lower upfront fees from customers, but helped accelerate our take rates. Our trailing 12-month dealer SAC per customer was up 2.8% versus last year primarily due to higher ARPU in that channel.

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149. Defendant Mikells provided her own opening remarks on the conference call, echoing

many of the statements made by Defendant Gersahaney, described above. The rosy information she

conveyed was similarly misleading and failed to disclose the material operating and financial

problems facing the Company, such as:

We made great progress in a number of areas this quarter, highlighted by solid recurring revenue growth driven by strong ARPU gains, good expense management helping to drive modest recurring margin expansion and more recently, accelerating our business development activities, which yielded a good-sized bulk acquisition earlier this month. The business continues to produce strong cash flows and execution of our share repurchase program is well underway.

150. Later in the call, an analyst asked Defendants about the effect of competition,

specifically in the context of the Company’s massive share repurchase strategy. In response,

Defendants Gursahaney and Mikells both flatly denied any change in competition and confirmed that

the share repurchase plan would remain “very consistent” with Defendants’ disclosures in November

2012:

Analyst: Very good quarter. The question would be on -- I know you talked about the buyback, this $2 billion buyback and I think previously you had said, look, we are waiting to see what happens with competition. I think that was one of the factors you had cited for not buying back as much shares as you probably should -- one of the factors. What are you seeing now as far as competition? How long are you going to give this before you make a further decision on what you’re going to do and how long is it going to take you to sort of assess the competitive landscape?

Defendant Mikells: So from my perspective, we are executing exactly what we intended and said we were going to execute and I think we are fairly far along in the program for the year and that is very consistent with the overall capital structure and capital allocation that we talked about at the end of November. I would say if we then kind of turn the comment toward the competitive environment, from our perspective, the competitive environment really hasn’t changed quarter-to-quarter. We are seeing the same level of overall competition. We continue to look at our results both in areas where we have new entrant competitors where we don’t and while some of those metrics kind of ebb and flow overall, the metrics are holding up very well .

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Defendant Gursahaney: I agree. I think Kathy hit the nail on the head. We are not seeing any significant change , but clearly it is a dynamic environment. We have got new competitors coming in and we are going to continue to monitor it very closely .

In reality, as detailed above, both Defendants Gursahaney and Mikells knew that the Company was

in fact facing increased competition, which was materially affecting the Company’s business and

finances, and knew that the Company would need to expand the share repurchase program and

resulting debt load in order to satisfy the demands of Defendants Corvex and Meister.

151. Analysts reacted positively to the announcement of the Company’s first quarter fiscal

2013 results, highlighting the Company’s strong earnings and margin result as well as its recurring

revenue growth. For example:

(a) On January 30, 2013, Oppenheimer reported that the Company’s increase in

recurring revenues was “driven by an impressive 4.7% ARPU increase and a 0.5% increase in

subscribers.” It was equally as optimistic regarding ADT’s Pulse program. In fact, it noted, “[t]he

pulse rollout has substantial momentum, with an overall Pulse take rate of 18.6% versus 12.9% last

quarter. Dealer take rate was 4.5% versus 1.5% last quarter, indicating impressive receptivity for this

newly rolled-out product.” It encouraged investors to “continue to expect this going forward” while

announcing it would “Maintain Outperform and $55 PT.”

(b) On January 30, 2013, Morgan Stanley announced it was “encouraged by the

fact that attrition rate remained stable Q/Q at 13.8%, particularly in light of the on-going housing

recovery.” The “6% Q/Q uptick in Pulse take rate to 18.6%, driven by both the dealer and internal

channels, should also be viewed positively,” it reported.

(c) That same day, Credit Suisse also reported the “[p]ositive news” that Pulse

was experiencing “positive momentum” and “solid ‘take-rates” which were “better than our . . .

estimate[s],” and noting that attrition, also “better than our estimate” was “moving in the right

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direction” and “marks the lowest quarterly unit attrition (annualized) since FY Q3 2011 (June

2011).” Credit Suisse added, “We believe ADT is well on track to hit their guidance for FY13 and

believe the guidance could be conservative.”

(d) The next day, January 31, 2014, Imperial Capital issued a report commenting

on the Company’s “[s]trong F1Q13 Results.” In addition to maintaining its “[o]utperform” and

raising their price target to $54 from $53, the report notes that they “anticipate” “continued growth

of recurring service revenue” and that “ADT’s overall portfolio will mirror the composition of new

subscribers, implying significantly higher recurring revenue.”

(e) William Blair issued a report on January 31, 2013 titled, “You Can Trust ADT

to Execute, Even With a Hurricane: Improved Operating Metrics, Pulse Sales, and Key Investment

Metrics Enable Better-Than-Expected Performance.” They reported that “[o]ver time, we believe

ADT’s more optimized business model, coupled with its leading market position and advanced Pulse

digital platform for remote home and small business management, should enable higher long-term

recurring revenue growth, enhanced EBITDA and FCF [free cash flow] generation, and increased

resources to return capital to investors.” The report continued:

Today, there is a whole new use for ADT’s incremental cash generation – funding never-before-seen growth opportunities – as well as returning excess capital to shareholders. The incremental benefit from today’s new growth opportunities is that they can help source new customers at lower than historical cost levels. As a result , we strongly reiterate our Outperform rating on ADT and have raised our 12-month price target to $60 (up from $57 previously) to reflect our revised slightly higher fiscal 2013 unleveraged FCF forecast (all other assumptions in our prior DCF valuation model remain unchanged). We are highly confident that ADT’s nominal fundamental operating downside (resulting from about 90% of its sales being derived from recurring revenues), the company’s unique point in the evolution of its customer value proposition (larger and now available to create value for a whole new set of distribution partners in addition to offering more services for existing residential and small business customers), and game-changing business model shift to reduce churn should collectively allow lots of runway for incremental

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understanding of ADT’s secularly altered growth, cash generation, and enhanced return on capital potential.

152. Between January 30, 2013 and April 30, 2013, ADT shares continued to trade at

artificially inflated prices.

153. On March 21, 2013, the Company filed with the SEC an Amendment No. 1 to its

Form S-4 regarding an exchange offer of up to $2.5 billion aggregate principal of its outstanding

unregistered debt securities for new registered debt securities, including $750 million 2.250% Notes

due 2017, $1 billion 3.500% Notes due 2022, and New $750 million 4.875% Notes due 2042. The

amendment contained false and misleading statements and omissions similar to those contained in

the Company’s 2012 Form 10-K and its Form 10-Qs for the first quarter of fiscal year 2013, as

described herein.


detailed herein, the foregoing statements made in or during the Company’s press release regarding

the private debt offering dated January 14, 2013, the Company’s proxy statement dated January 28,

2013, the Company’s earnings release and conference call from January 30, 2013, the Company’s

Form 10-Q filed on January 30, 2013 and the Amendment No. 1 to the Company’s S-4 dated March

21, 2013 regarding an exchange of debt securities, which touted, among other things, the Company’s

focus on “Creating Customers for Life” by maintaining “consistently high levels of customer

satisfaction, which increases customer tenure and improves profitability,” view that the “competitive

environment really hasn’t changed quarter to quarter,” execution of “exactly what we intended and

said we were going to execute” with respect to capital restructuring plan announced in November

2012 and “focus on high quality service and our disciplined customer selection process in order to

limit customer attrition,” were materially false and misleading when made or omitted material facts

to make such statements not false and misleading, because:

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competitive environment was indeed changing, and the Company was concerned and adversely

affected by such competition, particularly from cable and telecom companies entering the

Company’s markets for home security, automation and monitoring services. For example, a former

employee stated that ADT went into a state of panic in early 2013 and started to hold special sales

meetings just to discuss competition, where sales representatives were asked by a District Sales

Manager what they were hearing in the field about competition, in order to attempt to develop a

better game plan to deal with it ( see, e.g. , ¶¶40-49);



promotions and accelerated its customer attrition (aka churn rate), all of which negatively impacted

the Company’s recurring revenue, margins and earnings ( see, e.g. , ¶¶40-49);



and negatively impacted the Company’s recurring revenue, margins and earnings ( see, e.g. , ¶¶59-

65);



Company’s recurring revenue, margins and earnings ( see, e.g. , ¶¶50-58);

(e) The Company’s share repurchase program was coerced by Defendants Corvex

and Meister, was motivated by Defendants’ interests in personal financial gain and/or self-

preservation, required a far greater leverage ratio than Defendants represented (and thus Defendants

knew they could not execute “exactly what we intended and said we were going to execute” in

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November 2012), was not justified by the Company’s share price (which was overvalued, not

undervalued) or its troubled financial condition, and was not in the best interests of the Company or

its shareholders. The Company’s share repurchase program was not a “thoughtful capital policy”

driven by the Company’s strategy, rather, it was coerced by Defendants Corvex and Meister and

motivated by Defendants’ interests in personal financial gain and/or self-preservation. It also

required far greater leverage ratio than Defendants’ stated objective of “two times” debt-to-EBITDA,

was not justified by the Company’s share price (which was overvalued, not undervalued) or its

troubled financial condition and was not in the best interests of the Company or its shareholders.

This is supported by documents from a November 26, 2012 meeting of the ADT Board (which

included Defendant Gersahaney as a director), where Meister conveyed Corvex’s view that, “ADT

could enhance shareholder value through the incurrence of incremental leverage,” as well as

documents from ADT Board meetings on December 13 and 14, 2012, where the Board discussed at

length the fact that Defendants Corvex and Meister were placing significant pressure on ADT to

execute its capital structure proposal, increase leverage to 3x debt-to-EBITDA in order to implement

Corvex’s structural changes, and offer Meister a seat on the Board (including the threat of Corvex

seeking to “‘[a]dd new outside directors or replace existing directors’ and make an ‘attack on CEO

or [demand] other changes in management’”) ( see, e.g. , ¶¶82-110);



(g) The Company’s Form 10-Q for the first quarter of its fiscal year 2013 was

materially false and misleading because it failed to disclose to the market (in violation of Item 303 of

Regulation S-K) the materially adverse conditions described in this paragraph.

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C. Third Fiscal Quarter 2013

155. The third fiscal quarter for the Company’s fiscal year 2013 began on March 30, 2013.

156. 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 for new registered debt securities. The prospectus supplement contained false and

misleading statements and omissions substantially similar to those contained in the Company’s 2012

Form 10-K, and its Form 10-Q for the first quarter of fiscal year 2013, as described herein.

157. 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. The press release was misleading because it omitted any disclosure of the

circumstances surrounding such accelerated repurchase, including the motives behind the stock

repurchase plan demanded by Defendants Corvex and Meister, and Defendants’ self-interests in

promoting and implementing such plan.

158. On the same day, April 12 2013, the Company filed with the SEC a Form S-4

regarding an exchange offer of $700 million worth of unregistered 4.125% Senior Notes due 2023

for new registered notes. The amendment contained false and misleading statements and omissions

similar to those contained in the Company’s 2012 Form 10-K, and its Form 10-Q for the first quarter

of fiscal year 2013, as described herein.

159. 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 4.125% Senior Notes

due 2023 for new registered notes. The prospectus supplement contained false and misleading

statements and omissions substantially similar to those contained in the Company’s 2012 Form 10-

K, and its Form 10-Q for the first quarter of fiscal year 2013, as described herein.

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

results for its second quarter of fiscal year 2013. Rather than revealing the true financial and

operational problems facing the Company, as alleged herein, Defendant Gursahaney highlighted the

Company’s ostensibly positive results, touting “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

[and] great success, with very strong growth in each of [the residential direct, small business and

dealer] channels. . . . 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.”

Further, the press release highlighted growth in recurring revenue (up 5.0% and driven by a 4.4%

increase in ending ARPU which rose to $39.66) and EBITDA before special items (1.5% higher than

the prior year).

161. On the other hand, Defendants disclosed EBITDA margin before special items of

49.8% (a 10 basis point decline year-over-year), but in a subsequent earnings call (discussed further

below) blamed this decline on “dissynergies, corporate costs and the investments in the business,”

rather than the true impact of the Company’s heightened competitive environment or its myriad

operational issues. The press release also disclosed attrition at 13.9%, a 10 basis point increase

sequentially, but in their subsequent call, Defendants reassured the market that attrition had

“stabilized” and was “essentially flat” since the prior quarter.

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

2013 financial guidance initially given in November 2012:

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

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

163. In addition to reporting strong financial results, Defendants provided an update

regarding their capital repurchase plan, with Defendant Gursahaney stating that “[c]apital

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.”

164. On the same day, May 1, 2013, ADT filed with the SEC a Form 10-Q for the second








November 26, 2012, but failed material information regarding the circumstances surrounding such

plan, including the demands and influence of the Corvex Defendants or the implications of such plan

as to the total debt and leverage ratio of the Company.

166. The Company’s Form 10-Q also provided ADT’s second quarter 2013 financial

results, touting positive results including increased recurring revenue, average revenue per customer,

and gross customer additions. The Company also announced “relatively flat” attrition, blaming

relocations. The Company added, “We continue to focus on delivering high quality services and our

disciplined customer selection process in order to limit customer attrition.”

167. The Company’s second quarter 2013 Form 10-Q also contained certifications by

Defendants Gursahaney and Mikells that were materially similar to those identified above in ¶124.

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

and investors. During the call, Defendant Gursahaney touted, among other things, 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 that would affect ADT’s reported financial

results and financial prospects. As to revenue, the Company touted growth “by 5% to $756 million

[accounting] for 92% of our total revenue. Total revenue was $821 million, up 1.7% over the second

quarter of last year.” Defendants reassured the market that “[ajttrition has stabilized over the last

two quarters and was essentially flat at 13.9% versus last quarter. ”

169. Despite the ongoing and escalating problems facing the Company, Defendants told

investors that “we are affirming our guidance for fiscal year 2013. . . . I expect we will be about 5%

for recurring revenue growth in fiscal 2013.” Regarding costs and margins: “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. . . . [m]argins 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 .”

170. Defendant Gursahaney also alleged that the Company’s customer service investments

were already “in place” and therefore the Company will be focused on “cost control” during the

remainder of 2013:

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.

171. Moreover, with respect to the Company’s competitive landscape, Defendant

Gursahaney emphatically rejected any notion that competition was having a negative effect on the

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Company’s finances and operations, claiming that “ [nJew 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. . . . [WJe 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. ” This was false because, as alleged herein, the Company’s financial

and operational results and prospects (including its recurring revenue, gross customer additions,

costs to acquire subscribers and serve existing subscribers and margin growth) were being materially

and increasingly harmed by competitors, particularly the encroachment of “new entry” cable and

telecom competitors, which Defendant Gursahaney and the other Defendants knew, but fraudulently

failed to disclose to investors.

172. Regarding the Company’s capital allocation strategy, Defendant Gursahaney said that

“we will continue to take a balanced approach to capital management. We have a resilient

predictable business model, which enables 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.” Later in the call,

Defendants were asked whether there were “any 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?” Defendant Gursahaney flatly denied this possibility,

reiterating the strategy announced in November 2012, which included a leverage ratio of two (2x)

times debt-to-EBITDA: “ anything 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. ”

173. In response, the same analyst pressed Defendant Gursahaney further on this point:

“Okay, but based on that, it doesn’t sound like you’re anticipating at this point raising incremental

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debt to fund share purchase. It sounds like you have plenty of excess liquidity at this point to do

what you want to do.” Defendant Gursahaney responded, “ 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 .” These statements by Defendant Gursahaney (and the additional statements set forth

in the preceding paragraph herein) were clearly false and misleading because, as evidenced by the

Company’s own internal Board documents, Defendants had known since at least December 2012

that the Company would need to substantially increase its target leverage ratio from two times (2x)

EBITDA-to-margin to three times (3x) EBITDA-to-margin. Moreover, Defendants failed to

disclose, once again, the circumstances and motivations surrounding the share repurchase program

and resulting leverage increase driven by Defendants Corvex and Meister.

174. Following the conference call, analysts issued their reports which reacted positively

to the announcements made by the Company. Specifically:

(a) On May 1, 2013, Credit Suisse reported “the core business results are positive

for our long-term thesis” finding that “[s]ubscriber growth, unit attrition, ARPU, and Pulse adoption

were all better than we expected – this implies the ADT sales force is executing and that fears

surrounding new entrants threatening ADT’s market position are overblown (at least for the short-

term).” Further, the analyst reported “[w]e are encouraged that gross customers additions have

rebounded from Q1, particularly ‘core’ additions.”

(b) Credit Suisse followed up the next day and reported, on May 2, 2013, “[w]e

continue to see ADT as a defensive, 5-6% organic top-line growth business with mid-teens EPS

growth potential over the medium term ($2bn dedicated to share count reduction).” With regard to

new entrants in the market, Credit Suisse reported that they “remain insignificant” touting that the

Company “estimates 1% of their attrition is lost to new entrants.” In fact “[w]eak gross customer

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adds are not related to rising competition and should rebound in 2H13; if they were, ADT would

see weakness in both subscriber acquisition channels, not just Dealer.”

(c) On May 2, 2013, William Blair issued a detailed report announcing “ADT’s

business model and value creation capability remain solidly intact” and “reiterat[ing]” the

“[o]utperform rating.” In fact, the analyst dispelled any hesitation regarding “areas of recent concern

– sharply higher attrition and slowing recurring revenue growth” saying they “proved to be

unfounded.” It focused on the fact that “the company was very clear” that “its surveys do not reveal

a rise in the loss of its customers to competitors, which currently account in total for less than 10%

of its net attrition rate of 13.9%. Perhaps even more reassuring is that less than 1% of its net attrition

is attributable to customers switching to new market entrants.”

175. After the May 1, 2013 announcement of the Company’s financial results, and

subsequent analyst conference call and commentary regarding the same, ADT’s shares continued to

trade at artificially inflated prices.


detailed herein, the foregoing statements made in or during the Company’s Form 424B3 prospectus

supplement dated April 1, 2013 regarding a debt exchange, the Company’s press release dated April

12, 2013 regarding an accelerated stock repurchase program, the Company’s S-4 dated April 12,

2013 regarding a debt exchange offer, the Company’s Form 424B3 prospectus supplement dated

April 18, 2013 regarding a debt exchange, the Company’s earnings release and conference call from

May 1, 2013, and the Company’s Form 10-Q filed on May 1, 2013, which touted, among other

things, the Company’s “consistently high levels of customer satisfaction, which increases customer

tenure and improves profitability,” “stabilized” and “essentially flat” attrition, ability to focus on cost

control given that “needed customer service investments” were already “in place,” “[n]ew entry

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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,” “resilient predictable business

model,” adequate liquidity and target leverage and “sticking to what we laid out back in November”

as to raising debt to fund share repurchases were materially false and misleading when made or

omitted material facts to make such statements not false and misleading, because:


Company was adversely affected by increased competition, particularly from cable and telecom


For example, a second quarter 2013 business update presented to the Board at meetings held on

March 13 and 14, 2013 stated that “Consumers increasingly have options – not only from

competitors that are positioning themselves directly against ADT, but also from new formidable

entrants launching in the space.” Moreover, the ADT Board (which included Defendants Gursahaney

and Meister) discussed “changes in the market environment, including . . . increased competitor

advertising that [was] reducing ADT’s share of voice in overall marketing by electronic security

companies.” (see, e.g. , ¶¶40-49);




the Company’s recurring revenue, margins, and earnings. Indeed, ADT Board minutes from March

13, 2013 reveal an increase in SAC due in part to promotions and discounting and noted that

“pressure on the recurring revenue margin is the biggest issue for the quarter . . . [and] the Company

continues to see overall pressure on attrition.” A second quarter 2013 business update received by

the Board for meetings held on March 13 and 14, 2013 also stated, “Pulse take rates and competitive

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environment driving subscriber acquisition costs up.” Moreover, “competitive market and attrition

continued to be a focus of the Board’s discussions” at their meeting held on May 9 2013 ( see, e.g. ,

¶¶40-49, 74, 77);



and negatively impacted the Company’s recurring revenue, margins, and earnings. Indeed, one

former ADT employee stated that the Company was losing customers “like crazy,” especially in

2013 (see, e.g. , ¶¶59-65);




(e) The Company’s share repurchase program was coerced by Defendants Corvex


preservation, required a far greater leverage ratio than Defendants represented (and thus Defendants

knew they could not “stick[j to what they laid out back in November”), was not justified by the

Company’s share price (which was overvalued, not undervalued) or its troubled financial condition,

and was not in the best interests of the Company or its shareholders. This is supported by documents

from a November 26, 2012 meeting of the ADT Board (which included Defendant Gersahaney as a

director), where Meister conveyed Corvex’s view that, “ADT could enhance shareholder value

through the incurrence of incremental leverage,” as well as documents from ADT Board meetings on

December 13 and 14, 2012, where the Board discussed at length the fact that Defendants Corvex and

Meister were placing significant pressure on ADT to execute its capital structure proposal, increase

leverage to 3x debt-to-EBITDA in order to implement Corvex’ structural changes, and offer Meister

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a seat on the Board (including the threat of Corvex seeking to “’[a]dd new outside directors or

replace existing directors’ and make an ‘attack on CEO or [demand] other changes in

management’”) (see, e.g. , ¶¶82-110);



(g) The Company’s Form 10-Q for the second quarter of its fiscal year 2013 was



D. Fourth Fiscal Quarter 2013

177. The fourth quarter of the Company’s fiscal year 2013 began on June 29, 2013.

178. On July 31, 2013, ADT issued a press release announcing financial results for the

third quarter of its fiscal year 2013. Defendants again portrayed the Company’s financial results as

misleadingly strong, while failing to disclose the true financial and operational difficulties facing the

Company, stating that “[r]ecurring revenue, which made up 92% of total revenue in the quarter, was

up 4.2% . . . driven primarily by an increase in ending average revenue per customer, which rose to

$40.08. . . . 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.” Defendants also

announced increased fiscal year 2013 guidance for EBITDA margin (from a range of 49.5% -50.5%

to approximately 51%) and free cash flow (from a range of $375-$425 million to a range of $450-

$500 million), and restated its reported attrition rates for the past seven prior quarters to capture

additional resale activity. Defendant Gursahaney also touted “solid execution on our growth and

cost control initiatives [and] 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.”

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179. In addition to emphasizing such positive news, the July 31, 2013 press release

partially revealed certain of the symptoms of the Company’s severe financial and operational

problems. Specifically, Defendants announced a decline in the attrition rate from the previous

quarter (from 13.5% to 13.8%), while reducing full-year guidance regarding recurring revenue

growth (from a range of 4.9%-5.2% to a range of 4.5%-4.8%) and steady-state free cash flow (from a

range of $950 million to $1.0 billion to a range of $900-$950 million).

180. In the press release, the Company also provided an update on its share repurchase

program, announcing the buyback of a total of 9.3 million shares in the prior quarter and stating that,

since the inception of the program, the Company had repurchased 25.3 million shares for $1.15

billion. Once again, the Company provided no information regarding the circumstances surrounding

the share repurchase plan, namely that it was driven by the Corvex Defendants’ control over ADT’s

capital strategy and threat of a corporate takeover resulting a change in leadership ( i.e. , the

Individual Defendants losing their executive and Board positions).

181. On the same day, July 31, 2013, ADT filed with the SEC a Form 10-Q for the third








November 26, 2012, but failed material information regarding the circumstances surrounding such

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plan, including the demands and influence of the Corvex Defendants or the implications of such plan

as to the total debt and leverage ratio of the Company.

183. The Company’s Form 10-Q also provided ADT’s third quarter 2013 financial results,

touting positive results including increased recurring revenue and average revenue per customer.

The Company also stated that it had “determined that our customer attrition rates in prior periods

have been overstated due to inaccurate capture of certain re-sale activity. As a result, historical

customer attrition rates have been adjusted.” The Company disclosed however, a decrease in gross

customer additions, blamed on “lower levels of dealer generated customer accounts and bulk account

purchases,” and higher attrition “primarily as a result of relocations.” The Company added, “We

continue to focus on delivering high quality services and our disciplined customer selection process

in order to limit customer attrition.”

184. The Company’s third quarter 2013 Form 10-Q also contained certifications by

Defendant Gursahaney and Michele Kirse, ADT’s Senior Vice President, Controller and Chief

Accounting Officer, that were materially similar to those identified above in ¶124.

185. On the same day, July 31, 2013, the Company hosted a conference call for analysts

and investors to discuss the third quarter 2013 results. In his opening remarks, Defendant

Gursahaney reiterated the mixed financial results outlined in the Company’s earnings release.

Buried at the end of his opening remarks (and excluded from the Company’s earnings release),

Defendant Gursahaney revealed, for the first time, that the Company was increasing its target

leverage ratio to 3 times debt to EBITDA (significantly higher than the “2 times debt to EBITDA”

ratio disclosed previously), to fund the Company’s capital allocation restructuring including share

repurchases:

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We believe that optimizing our capital structure will help us achieve our strategic goals and expect to target a leverage ratio over time of 3 times debt to EBITDA . We expect to use proceeds from incremental leverage to pursue a flexible, balanced capital allocation plan on an ongoing basis, including investing in organic growth, completing acquisitions, and returning capital to shareholders in the form of dividends and share buybacks.

This statement directly contradicted Defendant Gursahaney’s knowingly false assurances to the

market, less than five months earlier, that ADT had sufficient liquidity to fund share repurchases,

without the need more debt beyond the 2.0x leverage ratio announced in November 2012.

186. An analyst from Morningstar asked Defendant Gursahaney for the rationale behind

the debt increase, noting that “[p]reviously you had rates at the 2 times and now 3 times, what really

brought you to increase it further?” In response, Defendant Gursahaney was exceptionally vague,

failing to discuss the stock repurchase plan or any dealings with Defendants Corvex and Meister, and

instead vaguely asserted that the extra debt would be “optimal” for the Company’s business growth

and acquisition strategy, while deferring any additional discussion of capital strategy to the

Company’s Investor Day scheduled to take place in the fall of 2013.

187. Separately, an analyst asked Defendant Gursahaney whether “the increased attrition

that you saw this quarter, is that continuation from last quarter was it really driven by housing? Or

is competition a factor in that as well?” Defendant Gursahaney responded as follows, falsely

representing that there was no “significant change” as to competition and blaming attrition mostly on

relocations and seasonal “door-knocking” sales programs that happen every summer:

Again, when I look at the four buckets of attrition that we talk about, the largest and the most the significant growth is still coming from relocations. We expected to see a little bit of a pick up because summer time is when a lot of the relocations happen, so not a big surprise from that perspective. I would say loss to competition, there hasn’t been a significant change there. The only change in that would be kind of who is showing up at the top of the list, and again that wasn’t a surprise. Some of the competitors that have aggressive summer sales programs, door-knocking programs specifically, picked up more during this time period. But again that’s something we see on a seasonal basis every year.

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188. Defendant Gursahaney also downplayed the effects of competition on ADT Pulse

take rates and subscriber acquisition costs. In response to analyst questions on those topics, he stated

that the Company was “still seeing better Pulse take rates in those markets” where ADT was seeing

new competitors from cable and telecom competitors (even though such competitors have “expanded

across their entire footprint” nationally). He also assured that ARPU has remained steady on Pulse

“[s]o I think we are able to continue to get prices although we are going to continue to watch that

closely.”

189. Similarly, Defendant Gursahaney misleadingly rejected the notion of “any pressure in

that [internal rate of return (IRR)] creation multiple with the emergence of new competitors.”

Specifically, Defendant Gursahaney responded that, “I would say SAC has gone up but most of our

SAC increase is the result of the Pulse take rates as well [as] the Pulse upgrades [rather than

competition]. . . . Again, I think there is some offset by attrition as well as we expect better attrition

performance with Pulse customers as we move forward. But again, overall the returns, the IRRs are

toward the higher end of our range.”

190. Regarding the year-over-year slowdown in recurring revenue margin on existing

customers, Defendant Gursahaney blamed “[e]ssentially all of this” on costs related to ADT’s split

from Tyco and related dis-synergies (rather than the Company’s heightened competition or the

deleterious effects of its unscrupulous business practices), while highlighting a sequential increase

over the prior quarter. Similarly, he later added that an increase in costs to serve was attributed to

“incremental corporate costs associated with the spin, dis-synergies from the split from Tyco, and

account growth.”

191. The net attrition increase was blamed primarily on “the higher relocation disconnects

as a result of the continued recovery in the housing market,” while noting the success of programs

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focusing on reducing voluntary attrition and “enhanced screening of prospects aimed at reducing

non-pay attrition. These efforts in addition to ongoing investments in our loyalty desk and the

proactive upgrading of customers to Pulse should continue to benefit the controllable elements of

attrition.”

192. A decline in year-over-year gross additions was blamed on “softness in the dealer

channel” but Defendant Gursahaney also noted a sequential increase (excluding a large bulk

purchase in the prior quarter) and a year-over-year increase in gross adds attributed to the direct sales

channel. Later in the call, Defendant Gursahaney minimized the reported softness in the dealer

channel, attributing this to “one of our dealers facing some financial troubles” and the need to

abandon some former lead generation partners due to “the tightening and requirements around

marketing and the regulations around marketing.” He stated that he was encouraged by

improvements in this area, added that “our credit scores and our requirements of our dealers are

consistent regardless of the size,” and denied that there was a “low end of your dealer base who have

higher attrition.”

193. Defendant Gursahaney also downplayed the steady-state free cash flow metric, which

was guided downward for the fiscal year, stating that “this metric does not fully reflect the benefit of

moving to a larger proportion of our customer base to Pulse systems, which constrains steady-state

free cash flow in the near term but creates long-term value.”

194. Further, Defendant Gursahaney addressed subscriber acquisition costs, which he

claimed had increased in the direct sales channel and were expected “to continue to grow as Pulse

take rates improve further and as we continue to convert existing customers to Pulse.” However,

Defendant Gursahaney attempted to spin this as a positive, stating that “Pulse customers come with a

significantly higher ARPU than our traditional security customers.”

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195. Immediately after Company announced its third quarter results, credit rating agencies

slashed the Company’s credit ratings, or placed them under review for a potential downgrade, citing

the Company’s increased leverage target from two times (2x) debt-to-EBITDA to three times (3x)

debt-to-EBITDA. Specifically, on July 31, 2013, S&P massively downgraded ADT’s credit rating

by three notches, from “BBB-” to “BB-” (below investment grade). On the same day, Moody’s and

Morningstar both placed ADT’s credit ratings under review for a downgrade. On August 1, 2013,

Fitch also reduced the Company’s credit rating, from “BBB” to “BBB-.”

196. In addition, securities analysts noted the Company’s mixed news, with some

reflecting disappointment as to the negative partial revelations, but maintaining a generally positive

outlook as to the basis of Defendants’ misleading reassurances described herein. For example:

(a) On July 31, 2013, William Blair stated that results were “below expectations”

and “disappointing,” but “strongly recommend purchase of ADT shares” and reiterated its

“[o]utperform rating” on the stock, citing the Company’s statements downplaying the effects of

competition, among other things. The report reflected the market’s surprise as to Defendants’ early

decision to increased leverage ratio (prior to showing continued improvement in key financial

metrics), triggering adverse credit rating actions:

Perhaps one of the more surprising announcements that initially was greeted positively was the company’s decision to increase its long-term gross debt/EBITDA leverage ratio to 3.0 times from 2.0 times. This announcement was originally expected to occur following the completion of a couple of successive quarters of improvement from the company’s new business model in reducing attrition while simultaneously increasing its recurring revenue growth rate. We had expected this might be announced following the reporting of fiscal fourth-quarter earnings in November this year. By doing so, ADT was expected to be able to retain its investment grade debt rating and incrementally increase its gross debt/EBITDA ratio target. . . . Subsequent to its announced intention to increase its gross debt/EBITDA target ratio to 3.0 times, the company’s debt rating was reduced three notches with a stable outlook by S&P, while Moody’s has placed the company’s ratings under review for a downgrade.

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(b) On August 1, 2013, Imperial Capital noted an “increase in the attrition rate

and a reduced guidance on steady state net operating cash flow (SSNOCF) as a result of lower gross

additions in the dealer channel, despite many other positive metrics, in our opinion.” However,

based on Defendants’ false and misleading statements, Imperial Capital maintained its “[o]utperform

rating” and “one-year price target of $53, about 32.2% above the recent share price,” adding that

“[w]e believe the stock should gradually rise over time as increasing penetration for the industry

leaders and growing ARPU (average revenue per user) drive higher recurring monthly revenue

(RMR) and cash flows.”

197. The Company’s partial revelations regarding some aspects of its financial difficulties

(albeit downplayed and mixed with other ostensibly positive results and reassurances regarding the

competitive environment and other factors) and its plan to increase debt caused the Company’s stock

price to drop. Upon this news, ADT’s stock fell nearly 5%, from a close of $42.09 on July 30, 2013,

to a close of $40.08 on July 31, 2013, on abnormally high trading volume (nearly five times the

average daily trading volume over the preceding ten days). The stock price decline would have been

far worse had Defendants fully revealed the financial and operating problems facing the Company,

and the true nature and circumstances of its dealings with the Corvex Defendants and the stock

repurchase plan.

198. 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

($1 billion of 6.250% senior unsecured notes due 2021) that would raise capital, in part, to pay down

debt associated with prior share repurchase and also fund additional share repurchases, while failing

to disclose the true impetus for such debt, the Company’s fraudulently misrepresented buyback

strategy coerced by the Corvex Defendants.

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conference call from July 31, 2013, the Company’s Form 10-Q filed on July 31, 2013, the

Company’s press release dated September 24, 2013 regarding a new private debt offering, which

touted, among other things, “solid execution on our growth and cost control initiatives,” ability to

“Creat[e] Customers for Life,” ability to continue to maintain price levels on despite competition,

representation that “I would say loss to competition, there hasn’t been a significant change there,”

statements regarding success of programs focusing on reducing voluntary attrition and “enhanced

screening of prospects aimed at reducing non-pay attrition. These efforts in addition to ongoing

investments in our loyalty desk and the proactive upgrading of customers to Pulse should continue to

benefit the controllable elements of attrition” and observation that “most of our SAC increase is the

result of the Pulse take rates as well [as] the Pulse upgrades” rather than competition, were

materially false and misleading when made or omitted material facts to make such statements not

false and misleading, because:




For instance, a former ADT employee explained that, in the mid-2013 timeframe, the Company’s

management – and specifically Defendant Gursahaney – became obsessed with competition because

ADT’s competitors were eating our lunch in market-share. ( see, e.g. , ¶¶40-49);




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the Company’s recurring revenue, margins, and earnings. For instance, a former employee of ADT

stated that the attrition rate was one of the biggest issues emphasized by ADT’s executive leadership,

especially during his last 12 months working at ADT (April 2013 – April 2014) because numbers

had been growing, in spite of awareness of the issue and various efforts to address the problem.

Accordingly, an e-mail sent by Defendant Gursahaney to certain of ADT’s officers and directors on

June 15, 2013 stated that “’we are slightly ($1M) behind our revenue forecast as unit production is

below forecast and attrition is continuing to run high. . . As we look to the rest of the quarter and

year, we are anticipating continued pressure on gross adds and attrition.’” Moreover, on July 18 and

19, 2013, ADT’s Board held meetings (attended by Defendants Gursahaney and Meister, among

others), during which it discussed ADT’s capital structure, strategic plan, its share repurchase plan,

and business risks facing the Company, including increased competition in the marketplace, and an

“‘attrition trend [that] continues to grow, offsetting benefits from planned initiatives.’” ( see, e.g. ,

¶¶40-49, 67, 78, 80, 97);



and negatively impacted the Company’s recurring revenue, margins, and earnings. One former

employee explained that ADT was forced to offer retention credits as an incentive for customers to

stay with ADT rather than cancel their account, but that these credits rarely resulted in customers

choosing to keep their account with ADT, as most would just cancel after the credit expired ( see,

e.g. , ¶¶59-65, 70);

(d) The Company was adversely affected by its attempts to improve customer

screening in order to reduce customer attrition, which increased the Company’s costs, reduced the

Company’s gross customer additions and negatively impacted the Company’s recurring revenue,

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margins, and earnings. Accordingly, an e-mail from Defendant Gursahaney to certain of ADT’s

officers and directors on July 12, 2013 warned of “three primary gaps” in ADT’s financials

including: “In FY14, we will be implementing an enhanced customer credit screening process to

help reduce non-pay disconnects. Based on our pilots, we expect this to impact our gross adds in our

direct sales channel by 8%. Needless to say, we understand we need to offset more of this than is

currently reflected in the model and are working to do so. . . Also in FY14, our [steady state free

cash flow] is about $20M below where I believe we should be, even after considering our increase in

interest payments.” ( see, e.g. , ¶¶79, 241, 249);

(e) The Company was adversely affected by its aggressive and unscrupulous sales



(f) The Company’s share repurchase program was coerced by Defendants Corvex


preservation, required a far greater leverage ratio than Defendants represented, was not justified by

the Company’s share price (which was overvalued, not undervalued) or its troubled financial

condition, and was not in the best interests of the Company or its shareholders. This is supported by

documents from a November 26, 2012 meeting of the ADT Board (which included Defendant

Gersahaney as a director), where Meister conveyed Corvex’s view that, “ADT could enhance

shareholder value through the incurrence of incremental leverage,” as well as documents from ADT

Board meetings on December 13 and 14, 2012, where the Board discussed at length the fact that

Defendants Corvex and Meister were placing significant pressure on ADT to execute its capital

structure proposal, increase leverage to 3x debt-to-EBITDA in order to implement Corvex’s

structural changes, and offer Meister a seat on the Board (including the threat of Corvex seeking to

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“‘[a]dd new outside directors or replace existing directors’ and make an ‘attack on CEO or [demand]

other changes in management’”). On July 18 and 19, 2013 additional ADT Board meetings were

held to discuss ADT’s capital structure and share repurchase plans, with Board materials noting that

increased leverage and a “shift in rating conviction” would be announced and that the Board should

prepare for a likely “loss of management credibility in the eyes of rating agencies and debt holders as

we had reaffirmed our commitment to investment grade in Nov-12.” ( see, e.g. , ¶¶82-110);

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


(h) The Company’s Form 10-Q for the third quarter of its fiscal year 2013 was



E. First Fiscal Quarter 2014

200. The Company’s first quarter for fiscal year 2014 began on September 28, 2013.

201. On November 20, 2013, ADT issued a press release announcing ADT’s fourth quarter

2013 financial results. In the press release, Defendants continued their misleadingly positive

messaging, highlighting positive financial metrics including an increase in diluted earnings per share

($0.46 vs. $0.43), a 4.7% increase in recurring revenue (driven by 388,000 gross customer

additions), and a 4.2% increase in total revenue. Despite the myriad problems facing the Company,

Defendant Gursahaney claimed, “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.” The press release disclosed a sequential increase in customer

attrition (13.9% vs. 13.8% the prior quarter), which Defendants later blamed on housing relocations

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(rather than the Company’s heightened competition or problematic operational practices described

herein).

202. Defendants’ press release provided the following bullish guidance for fiscal year

2014:

Recurring revenue and total revenue growth of 4% to 5%

EBITDA margin before special items to improve at least 50 basis points in fiscal year 2014 (and 150 basis points over a three-year period)

Steady-state free cash flow before special items to grow 5% to 10%

203. Echoing this positive tone, Defendant Geltzeiler boasted of the Company’s “strong

customer value proposition” and “significant potential to grow the company’s core businesses,” and

suggested that increasing the Company’s leverage ratio from 2.0x to 3.0x was a strategic financial

policy designed to “enhance shareholder returns.”

204. Defendants also used the press release to provide an update on its share repurchase

plan, announcing that, since inception of the plan, it had repurchased 35.5 million shares for $1.6

billion, that an additional $400 million worth of shares would be repurchased from JPMorgan Chase

Bank on an accelerated basis, and that the Board had authorized yet another $1.0 billion in share

repurchases. Defendants again failed to disclose material facts regarding its dealings with

Defendants Corvex and Meister, including Defendants’ acceptance of the debt repurchase strategy to

keep their leadership positions at ADT.

205. On the same day, November 20, 2013, ADT filed with the SEC a Form 10-K for its

fiscal year 2013. The Company highlighted its purported attributes and strengths, including its

“proven track record of successfully balancing” its key business drivers (specifically customer

additions, costs to add a new customer, average revenue per customer, costs incurred to provide

services to customers and customer tenure) and its ability to use its recurring revenue “to more

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and to make continued enhancements to operations efficiency.”

206. The Form 10-K further highlighted the Company’s strategy to “extend our leadership

position” in the core residential business through, among other things, continuing to optimize its

“key business drivers” and continuing to provide “high quality” customer service leading to reduced

attrition and increased profitability:

We will continue to manage our business by optimizing the key business drivers [including customer additions, costs to add a new customer, average revenue per customer, costs incurred to provide services to customers, and customer tenure] to maximize the value from our core business. . . . We manage our existing customer base to maximize customer lifetime value, which includes continually evaluating our pricing and service strategies, managing our costs to provide service to customers and achieving long customer tenure.

207. Regarding customer care and service, the Company elaborated on its purported

“service culture aimed at ‘Creating Customers for Life’”:

We maintain a service culture aimed at “Creating Customers for Life” because developing customer loyalty and continually increasing customer tenure is an important value driver for our business. To maintain our high standard of customer service, we provide ongoing high quality training to call center and field employees and to dealer personnel. We also continually measure and monitor key operating and financial metrics, including customer satisfaction oriented metrics across each customer touch point.

Customer care specialists answer non-emergency inquiries regarding service, billing and alarm testing and support. Our monitoring centers provide customers with telephone and Internet coverage 24 hours a day on a year-round basis. To ensure that technical service requests are handled promptly and professionally, all requests are routed through our customer contact centers. Customer care specialists help customers resolve minor service and operating issues related to security and home/business automation systems and in many cases are able to remotely resolve customer concerns. We continue to implement new customer self-service tools via interactive voice response systems and the Internet, which will provide customers additional choices in managing their services.

208. The Company went on to boast of its customer quality resulting from “[a] structured

customer acquisition process that is designed to produce customers with attractive characteristics,

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including strong credit scores and high usage of automated payment methods, which we believe

results in long average customer tenure,” and its closely monitored cost management in “on-

boarding new customers.” The Company added: “ We focus on keeping customer service and

monitoring costs as low as possible without detracting from the high-quality service levels for

which we are known and that our customers have come to expect. We believe that our ability to

retain customers for longer periods of time is driven in part by our disciplined customer selection

practices and our delivery of a superior customer experience. ”

209. The Company represented that its principal competitors within the residential and

small business security systems market were traditional security companies called “Protection One,

Inc., Monitronics International, Inc. and Vivint, Inc.,” while downplaying the aggressive

encroachment of cable and telecom companies and stressing its ability to outperform and

differentiate from its competitors based, not only on price, but a variety of factors including delivery

of an “outstanding customer experience” and a “robust field sales force”:

Competition is often based primarily on price in relation to value of the solutions and service. Rather than compete purely on price, we emphasize the quality of our electronic security and home/business automation services, the reputation of our industry leading brands and our knowledge of customer needs, which together allow us to deliver an outstanding customer experience. In addition, we are increasingly offering added features and functionality, such as those in our ADT Pulse interactive services offering, which provide new services and capabilities that serve to further differentiate our offering and support a pricing premium.

As we move into the interactive services and home automation space, we face new competition from competitors such as cable and telecommunications companies. However, we believe our robust field sales force, including our nationwide team of in-home sales consultants, our solid reputation for and expertise in providing reliable security and monitoring services through our in-house network of fully redundant monitoring centers, our reliable product solutions and our highly skilled installation and service organization position us well to compete with these new competitors.

210. In its 2013 Form 10-K, the Company also highlighted the quality, training,

effectiveness and monitoring of its sales force in both the direct and dealer sales channels:

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Our field sales consultants undergo an in-depth screening process prior to hire. Each sales consultant completes comprehensive centralized training prior to conducting customer sales presentations and participates in ongoing training in support of new offerings and the use of our structured model sales call. We utilize a highly structured sales approach, which includes, in addition to the structured model sales call, weekly monitoring of sales activity and effectiveness metrics and regular coaching by our sales management team.

We train and monitor each dealer to help ensure the dealer’s financial stability, use of sound and ethical business practices and delivery of reliable and consistent high-quality sales and installation methods. Authorized dealers are required to adhere to the same high quality standards for sales and installation as company-owned field offices. We provide dealers with a full range of services designed to assist them in all aspects of their business.

211. The Company echoed these themes in describing its “Business Overview,” stating

that its recurring revenue allows “investments in technologies . . . to continue development and

training to enable our direct sales, installation, customer service and field service personnel to more


and to make continued enhancements to operations efficiency.” Similarly, in describing “Factors

Affecting Operating Results,” the Company added:

We also focus on “Creating Customers for Life” by maintaining consistently high levels of customer satisfaction, which increases customer tenure and improves profitability . . . . We closely monitor and manage our costs associated with on-boarding new customers. We utilize a structured customer acquisition process that is designed to produce customers with attractive characteristics, including strong credit scores and high usage of automated payment methods, which we believe results in long average customer tenure. . . . We focus on keeping customer service and monitoring costs as low as possible without detracting from the high-quality service levels for which we are known and that our customers have come to expect. We believe that our ability to retain customers for longer periods of time is driven in part by our disciplined customer selection practices and our delivery of a superior customer experience. ”

212. The Company’s 2013 Form 10-K provided a description of the share repurchase plan:

“On November 26, 2012, our board of directors approved $2 billion of share repurchases over a

period of three years. . . . On November 18, 2013 our board of directors authorized a $1 billion

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increase to the $2 billion, three-year share repurchase program that was previously approved on

November 26, 2012.” The Form 10-K also provided information regarding certain of the shares

repurchased and debt issued in connection with the share repurchase plan announced on November

26, 2012, but failed material information regarding the circumstances surrounding such plan,

including the demands and influence of the Corvex Defendants or the implications of such plan as to

the total debt and leverage ratio of the Company.

213. The 2013 Form 10-K also provided ADT fiscal year-end financial results through

September 27, 2013, touting positive results including increased recurring revenue, higher average

revenue per customer and increased gross customer additions over the prior fiscal year (aided in part

by the acquisition of Devcon Security offsetting “lower dealer channel production”). The Company

also announced increased attrition, attributing this “primarily to relocation disconnects as a result of

the continued recovery of the housing market” and representing that “[w]e continue to focus on high

quality service and our disciplined customer selection process in order to limit customer attrition.”

214. The Company’s 2013 Form 10-K also contained certifications by Defendants

Gursahaney and Geltzeiler that were materially similar to those identified above in ¶124.

215. On the same day, November 20, 2013, the Company hosted a conference call for

analysts and investors to discuss the fourth quarter and fiscal year 2013 financial results. In his

opening remarks, Defendant Gursahaney touted the Company’s strong results including recurring

and total revenue growth (up 4.7% and 4.2%, respectively), EBITDA and EBITDA margin (up 7.5%

and 50.9%, respectively), recurring revenue margin (up 150 basis points versus prior year), and gross

customer additions in direct and dealer channels (up 8% and 21%, respectively). He also boasted of

“solid progress across several of our key value drivers,” numerous positive metrics related to ADT

Pulse (including “very encouraging improvements in our Pulse take rates for new system sales”) and

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“progress on several important fronts, as we were able to grow our business, enhance our margins,

continue to invest in our business to support future growth and return a significant amount of capital

to our shareholders.”

216. Later in the call, in response to an analyst question as to margin improvements,

Defendant Gersahaney added that “the efficiency programs that [Defendant Geltzeiler] is going to

play a key role in helping lead across the business, that will help us continue to improve margins as

well. . . . [W]e had a nice improvement in our EBITDA margins and our recurring revenue margins

year over year, and we believe that we are going to get at least 150 basis points of incremental

margin enhancement over the next three years with over 50 basis points built into our plan for

FY14.”

217. Moreover Defendant Gursahaney misleadingly represented to investors and analysts

that competition continued to have “minimal impact” on the Company’s business performance and

stressed that any competition would actually benefit ADT:

Before I discuss our total-year results, I would like to comment on the competitive landscape. We continue to see minimal impact on our business performance, specifically attrition, ARPU and Pulse take rates, resulting from any new competitors attempting to enter our market. We will continue to closely monitor the competitive landscape and we believe the heightened awareness on the industry will continue to benefit ADT and the industry as a whole.

218. Defendant Gursahaney also asserted that, during fiscal year 2013, Defendants

returned a significant amount of capital to its shareholders and that the Company would “continue to

pursue a flexible, balanced capital allocation plan, including investing in organic growth, making

acquisitions, and returning capital to shareholders in the form of dividends and share buybacks.”

The statement was misleading because the capital allocation plan was not flexible or balanced at all.

Rather it was controlled by the self-interested direction of the Corvex Defendants, who had the

power to direct the Company’s capital strategy by wielding the threat of corporate takeover that

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would cost the Individual Defendants their jobs. Defendant Gursahaney also misleadingly stated

that the share repurchase plan and increased target leverage to 3 times debt to EBITDA demonstrated

“the strength of ADT’s recurring revenue model” and “steady, predictable cash flows” as opposed to

the coercive power of the Corvex Defendants. Later in the call, in response to a question on M&A

strategy, he added that the debt-intensive share repurchase program would not limit the Company in

any way (“I don’t see any constraints at all based on the capital structure we are putting in place.”)

219. While Defendant Gursahaney acknowledged “some challenges during the year,” he

assured investors that Defendants were “laser focused on improving our performance in these areas”

and failed to attribute any of the “challenges” to the Company’s competition or unscrupulous sales

and operational practices:

We also had some challenges during the year and we are laser focused on improving our performance in these areas. Customer attrition, one of our most important value drivers, grew during fiscal year 2013. While all of the increase in attrition is attributable to relocation disconnects, we are committed to mitigating the impact in other areas where we have greater control . As I said earlier, we have implemented several new programs to focus on the areas we can impact, including non-pays and voluntary disconnect, and these initiatives are already yielding positive results. In addition, we have revamped our relocation process on an end-to-end basis to help retain our existing customers as they move into their new homes and capture the new homeowner who is moving into the house with an existing ADT system.

We also saw a significant decline in our dealer production year over year. However, this was primarily due to one of our larger dealers encountering financial difficulties and several dealers facing lead-generation challenges as a result of a discontinuance of a third-party lead generator. We are continuing to work closely with our dealers to help them strengthen their capabilities and better leverage ADT’s marketing assets to grow their businesses.

Defendant Gursahaney added that the Company’s two-channel (direct and dealer) approach

“provides us significant competitive advantage and has allowed us to add more than 1 million new

customers every year for the past four years.”

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220. Defendant Gursahaney also acknowledged that per-subscriber acquisition costs in the

Company’s direct sales channel were up 15.9% on a trailing 12 month basis versus last year, but

blamed it on increased costs in connection with Pulse upgrades and increased Pulse take rates,

instead of the deleterious effects caused by competition (such as the need for dramatically increased

advertising and promotions to keep pace). Moreover, he downplayed this by stating that “Pulse

customers come with a significantly higher ARPU, and early indications are that they have better

retention characteristics than our traditional security customers. As a result, we expect greater

economic returns from our Pulse customers.”

221. Defendant Gursahaney admitted that net attrition “increased by 10 basis points

sequentially and 40 basis points year-over-year to 13.9%.” However, he attributed this to higher

relocations due to continued recovery in the housing market, rather than the negative effects of

competition or the Company’s costly operational issues, stating that “ more than 100% of our year-

over-year increase is being driven by [housing] relocations .” Moreover, he attempted to reassure

the market that;

“We have launched several new programs to address the more actionable aspects of attrition, including non-pays and voluntary disconnects. These projects yielded about a 20 basis point improvement in our attrition performance year-over-year, partially offsetting the impact of relocation disconnects. We are continuing to launch new programs to address attrition and we look forward to discussing these in more detail at our upcoming Investor Day.”

222. Analysts reacted positively to the Company’s fiscal fourth quarter results announcing

an increase in ADT’s recurring revenue, lower attrition results, and less concern surrounding

competition. For example:

(a) On November 20, 2013, William Blair pointed out that “[c]oncerns about

competitive displacement of ADT’s customer base by new entrants to the North American

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residential security market appear unfounded , as ADT’s attrition due to customer defections to

competitors remained unchanged at 10% of total attrition.” As a result, William Blair continued to

strongly recommend the purchase of ADT shares and believe ADT’s recurring revenue growth is likely to accelerate while net customer attrition should soon begin to steadily decline. We anticipate consensus forecasts for fiscal 2014 and 2015 are likely to rise and expect ADT’s December 6 investor meeting is likely to be a further positive near-term catalyst for the stock.

With regard to competition, William Blair explained:

the emerging story at the company isn’t that the ‘new residential security market entrants’ such as media and telecomm companies have failed to adversely affect ADT’s customer additions or market share, but rather that the company is beginning to notably benefit from a mix shift that includes more Pulse customers (particularly that are added directly by ADT than acquired from dealers) despite their estimated 20%-30% higher SAC costs versus new traditional analog security customer additions.

Finally, with regard to attrition:

We sense that the impact from the company’s attrition-reduction programs is likely to show significantly greater impact as the fiscal year progresses. . . . We anticipate the cumulative benefit of the company’s most recent actions will reduce the controllable portion of attrition and, when coupled with a slowing in the rate of existing-home sales, should result in an accelerating positive impact on total net attrition.

(b) On November 20, 2013, Oppenheimer reported that it would maintain its

“outperform” rating based on ADT’s “solid 4Q13 results” and noted that the Company’s “[a]ttrition

of 13.9% was better than our 14.2% est. and net adds increased 69K, a reversal of the previous

quarter’s 19K decline.” Further “[g]uidance for 2014 was impressive: 4-5% recurring and total

revenue growth and 50bps annual EBITDA margin expansion over the next three years.”

223. After the November 20, 2013 announcement of ADT’s results for its fiscal 2013

fourth quarter, ADT common stock continued to trade at artificially inflated prices.

224. On November 20, 2013, the Company filed a Form S-3 regarding the registration of

certain “Debt Securities, Common Stock, Preferred Stock, Depositary Shares, Purchase Contracts,

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Warrants, and Units.” The Form S-3 contained false and misleading statements and omissions

similar to those contained in the Company’s 2013 Form 10-K, as described herein.

225. On November 25, 2013, ADT stunned the market by issuing a press release, entitled

“ADT Announces Repurchase of Shares Held by Corvex,” which revealed ADT’s intention and

agreement to repurchase the vast majority of Defendant Corvex’s ADT common stock position at the

current market price, and also that Defendant Meister had resigned from the 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.

The sudden departure of Defendants Corvex and Meister, only one year after aggressively promoting

the Company’s value and advocating a long-term share repurchase strategy, was a clear signal to the

market that, contrary to Defendants’ public statements throughout the Class Period, such strategy

was not in the best interests of ADT shareholders, the Company’s financial and operating conditions

were materially worse than Defendants portrayed, and the Company’s shares were significantly

overvalued, rather than undervalued.

226. In response to this announcement, analyst Morningstar Research released a report on

November 25, 2013, which observed:

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 (also bought calls and sold puts), but it originally envisioned far greater share appreciation. In its 50-slide presentation to investors a year ago, Corvex argued that ADT was worth anywhere from $61 to $83 based on discounted cash flow valuation and peer comp analysis, assuming 3.0 times target net debt/EBITDA. . . . We believe Corvex may be coming to terms with the fact that that ADT’s underlying growth is minimal in the context of new cable and telecom competition, and that a rise in interest rates could cause a rerating of ADT’s stock price to the downside.

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227. Defendants’ revelation of the Corvex sale and Meister resignation caused an

immediate negative impact to the Company’s stock price. In just one trading day, the stock fell by

nearly 6%, falling from a close of $44.01 on Friday, November 22, 2013, to a close of $41.46 on

Monday, November 25, 2013, on abnormally high trading volume (nearly seven times the average

daily trading volume over the preceding ten days). However, the decline would have been much

worse had the Company fully disclosed the myriad financial and operational problems facing the

Company that contributed to the Corvex Defendants’ abrupt departure. In lieu of such disclosures,

and Defendants’ continued issuance of false and misleading statements to the market, the

Company’s stock continued to trade at artificially inflated prices.

228. On December 2, 2013, ADT filed a Form 8-K with the SEC confirming its repurchase

of shares from Corvex pursuant to the terms announced on November 25, 2013. As in the

Company’s November 25, 2013 press release, the Form 8-K failed to fully disclose the myriad

financial and operational problems facing the Company that caused the Corvex Defendants’ sell-out,

any other material circumstances surrounding the Corvex Defendants’ control over the Company, or

the Company’s self-interested stock repurchase strategy.

229. On December 6, 2013, ADT held an Investor Day conference attended by Defendants

Gursahaney and Geltzeiler, other senior executives from the Company, and a number of securities

analysts. During the call, Defendant Gursahaney misleadingly stressed the Company’s dominant

industry leadership and huge competitive advantages, while severely downplaying the impact of

ADT’s competition, for example:

“The share story really hasn’t changed much. Despite some M&A activity and some entrants, ADT is the clear market share leader in this space with six times the scale of our next largest competitor . And as you can see, once you get past the top five or six players, this market gets fragmented very

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quickly with 60% of the market being held by literally thousands of small local and regional players.”

“A lot of discussion about the cable and the telco players over the past year. In aggregate, the cable market – cable players only have less than 1% of the market today. So it’s not a huge impact on the business, and again ADT has some tremendous advantages. ”

“I mean you look at it, we’re over 40% [market share]. The next closest player is about 6%. And then a really interesting fact when you look at ADT customers, those who chose to buy ADT, 50% of them never even considered another provider. So, again, it just reinforces the power of that brand, the trust that customers have in that brand, and the huge competitive advantage that gives us in the marketplace.”

• “Great business, great market, ADT has a tremendous leadership position, high market share, 6.5 million customers and very attractive incremental returns in all of our business lines.”

• “We think we’ve got industry-leading cost position today because of our scale.”

• “We’re the leading player in residential and small business security and automation systems. We’ve got a large customer base and very attractive returns.”

• “And ADT has some very significant competitive advantages around our brand, around our scale, our product and services that we offer in the marketplace and then this multichannel sales and account generation model.”

• “ADT Pulse, it really has helped transform ADT from a traditional security company three years ago to a true leader in security and automation.”

• “I think many of the new entrants in the marketplace don’t have that field sales infrastructure. . . . [S]o this is a competitive advantage, too, that ADT has. . . . Some of the cable and telcos do have a field infrastructure [but] [t]hey don’t have the monitoring infrastructure.”

• “I think as we look forward to 2014, no changes in the marketplace .”

230. Continuing this theme, Defendant Gursahaney sought to further extinguish any notion

that competitors – particularly cable and telecom competitors - were affecting ADT’s business:

Now, there has been a lot of discussion. With this attractive market, there have been new players coming into the market. As a result, there’s been a lot of discussions

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and I’ve got questions from all of you about what’s the impact of the cable and the telco players. And it’s been a little tough to tell that story at time because the realty is most of these new entrants don’t report their numbers. You see their ads but we don’t know how many new accounts they’ve gotten everything.

Fortunately, Morgan Stanley did some market research over the past few months and published this report that reinforced what we’ve seen in our own data. And when you look at it on the left-hand side there, over the past three years, new subscriber additions, ADT has more than held its own in there. Now, that’s not saying these new players aren’t making any traction, but at least based on this data and confirming data we have internally, it looks like it’s at the expense of the smaller players in the industry, not at the expense of ADT.

As we’ve talked in the past, we watch our attrition numbers very closely to understand that there’s an impact there. And as we’ve discussed with you, about 10% of our disconnects – attrition or disconnects are related to lost the competition. So, 13.9% attrition, about 1.4% of that attrition is related to lost to competition. Of that, about 10% to 15% is cable and telco players. So when you run the math there, it’s a very, very small portion, 1.5% roughly of our disconnects or 0.2% of our customer base. So again, I feel confident saying the impact on our business and business results has not been significant. And we’re going to continue to improve our performance to make sure that, that continues to be the case.

231. During the Investor Day call, when confronted by an analyst about a report showing

that a substantial portion of new subscribers (38%) subscribe to cable and telecom competitors,

Defendant Gursahaney attempted to discredit the information: “[w]e can look at that and clearly

question some of the data. . . . The only cable player I know who has reported, I believe, is Time

Warner Cable. They announced in their last earnings call they’ve got, I think, about 30,000 units.

That’s not a significant increase over what they had several years ago. They’ve been in the security

business in upstate New York for a long time so . . . .”

232. In addition, Defendants Gursahaney and Geltzeiler spent much of the call defending

the Company’s capital strategy, including its share repurchases and increased leverage ratio leading

to reduced credit ratings, and suggesting this was a sound strategy implemented in the best interests

of the Company and its shareholders, for instance:

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Defendant Geltzeiler claimed that management still believed that a debt-to-EBITDA ratio of 3.0 was “appropriate” and that “investment-grade ratings are not necessary for this business. We believe that a three times leverage frees up sizable amounts of capital for growth at attractive returns, while at the same time, balances risk and access to global debt markets, that has afforded a BB rated company.”

Regarding the buyback of Defendant Meister, Defendant Gursahaney stated: “So we reported our fourth quarter earnings, two days later when the window opened, we received a call from Keith expressing his interest in selling a chunk of his shares at the market price at the day of close, which was roughly at $44. Myself and our treasurer sat back and reviewed our situation. . . . We decided to make that – to execute on that transaction. It allowed us to remove a significant block of shares from the market in one transaction with no – virtually no transaction cost. And I think, it was a good business decision for us being a buyer in the market. When you look at it from a price perspective and review some of the data that Mike shared, I think at $44, ADT is still a very attractive buying. We’ve continued buying at that price.”

Defendant Gersahaney: “We ran through a variety of scenarios, both upside scenarios and downside scenarios and, honestly, in our business, upside and downside scenarios can stress cash and we modeled different leverage ratios. And we felt based on the weighted average cost of capital and the risk of – yeah, to the business we had, 3 [times debt to EBITDA] is the optimal structure. I mean, clearly, as the economic environment changes, we’ll continue to look at that, but right now I feel very comfortable that 3 is the optimal model for our business and that’s where we’re moving towards.”

Defendant Geltzeiler: “We think being a BB-rated company, we’ve done some strategic evaluation. It’s the right level for this company. And we start moving into greater leverage then you start to become a company who doesn’t pay dividends, et cetera. So, we not only reinforced our divided, we increased it. We think a BB-rated company is the appropriate level of leverage for this company.”

Defendant Gursahaney: “We saw an opportunity to raise some debt and we used much of that for share buybacks because we saw what we felt was an undervalued stock, so we took an interim step until we went to our strategic planning process. But we view that as a no-regrets move because we knew we had capacity above where we were.”

Defendant Geltzeiler: “So I mentioned in my comments, $3 billion – originally a $2 billion authorization went to $3 billion, and we brought $2.4 billion back so there’s $600 million left and that’s over 2014 and 2015 time period. I mean, I think we also commented that, Naren mentioned, we had a plan and we believe that’s the right answer at these stock prices because they

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both are attractive to us, buying our own stock and also M&A. And we, this year at least, allocated some capital for both. We’ve accelerated the buyback.”

233. However, despite their strained efforts to defend their aggressive, debt-fueled stock

repurchases driven by Defendants Corvex and Meister, Defendant Geltzeiler signaled a shift in

strategy: “near term, we will be prioritizing acquisition opportunities ahead of capital.” Defendant

Gursahaney added that “I think our preference – and Mike said it very well. I think our preference

for the rest of this year is to really focus on the acquisitions [rather than stock repurchases]. . . .

[W]e think that’s a better way for us to create long-term value.”

234. Defendant Gursahaney also acknowledged that “[t]here’s been a lot of noise around

attrition and retention” and blamed it partly on other companies counting attrition, and introduced a

new “apples-to-apples” comparison that brought supposedly brought the Company’s attrition rate

down from 13.9% to 12.2%, which he claimed was “an industry leading attrition rate when you

compare us against our peers in the market and significantly better than other industries that we’re

being compared to.” As he had repeatedly in the past, he emphasized that “[t]he rebound of the

housing market really drove that disconnect and that clearly put pressure on our net adds and,

ultimately, our recurring revenues, so the attrition.”

235. Defendant Gursahaney again blamed an increase in subscriber acquisition cost on the

success of Pulse, which he said was more costly to install and equip, without acknowledging the

increase in subscriber acquisition costs caused by competitive pressures.

236. He also touted “customer addition opportunities,” “cost reduction opportunities,” and

programs to help attrition by “eliminating those adds for customers that don’t create value,

customers that are likely to disconnect within a relatively short period of time,” among other positive

news regarding the Company’s finances and operations. Defendant Gersahaney also described

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“enhanced credit screening that we’re doing on the direct side” that will “put pressure on our gross

adds” but over time (by the end of 2014) will “benefit our attrition numbers.” Defendant

Gersahaney estimated that this screening program would reduce gross adds by 6% (despite

anticipating an 8% reduction in an internal e-mail send months earlier, on July 12, 2013, see ¶¶58,

79, prior to the Corvex Defendants’ sale of substantially all of its ADT position). Later in the call,

Defendant Geltzeiler stated that the Company had also “internally launched an efficiency program

across our cost to serve and subscriber acquisition cost categories.”

237. Consistent with Defendant Gursahaney’s commentary and prior earnings calls,

Defendant Geltzeiler put a positive spin on numerous financial metrics and reiterated 2014 financial

guidance with respect to recurring revenue, EBITDA margins, and steady-state free cash flow.



conference call dated November 20, 2013, the Company’s 2013 Form 10-K filed on November 20,

2013, the Company’s Form S-3 filed on November 20, 2013 regarding the registration of certain

securities, the Company’s press release dated November 25, 2013 regarding the repurchase of shares

from Defendant Corvex and Defendant Meister’s departure from the ADT Board, the Company’s

Form 8-K dated December 2, 2013 confirming the repurchase of shares from Defendant Corvex and

Defendant Meister’s departure from the ADT Board, and the Company’s Investor Day conference on

December 6, 2013, which touted, among other things, the Company’s increased leverage was a

strategic financial policy designed to enhance shareholder returns, “proven track record of

successfully balancing” its key business drivers (specifically customer additions, costs to add a new

customer, average revenue per customer, costs incurred to provide services to customers and

customer tenure), “disciplined customer selection practices and our delivery of a superior customer

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experience,” training, effectiveness and monitoring of its dealers under standards of “high quality,”

“ability to retain customers for longer periods of time,” efficiency programs improving margins,

“continu[ing] to see minimal impact on our business performance, specifically attrition, ARPU and

Pulse take rates, resulting from any new competitors attempting to enter our market,” two channel

(dealer and direct) approach providing a “significant competitive advantage” to ADT, representation

that the effects of cable and telecom competitors were “not a huge impact on the business, and again

ADT has some tremendous advantages,” view that the “[market] share story hasn’t changed much,”

and statements that the share repurchases (and related leverage increase) were “appropriate” and a

“good business decision” made by the Company were materially false and misleading when made or

omitted material facts to make such statements not false and misleading, because:



companies entering the Company’s markets for home security, automation and monitoring services.

One former employee, for example, stated that Comcast’s Xfinity and AT&T’s Digital Life systems

were major competitors and a growing concern of ADT, particularly in 2013 ( see, e.g. , ¶¶40-49);




the Company’s recurring revenue, margins and earnings. For instance, one former employee, who

sometimes attended the Company’s town hall meetings, recalled that Defendant Gursahaney would

always attend such meetings and that attrition, as well as competition, were topics discussed. In

addition, adverse attrition, subscriber acquisition costs and other Company financial metrics were

discussed in an e-mail sent by Defendant Gursahaney on October 20, 2013 to certain officers and

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directors: “The primary drivers of the shortfall [in cash flow metrics] were attrition, higher Pulse

take rates and Pulse upgrades that increased subscriber acquisition costs and higher capital expenses

as the Company accelerated some IT spending associated with its new Pulse product platform.” ( see,

e.g. , ¶¶40-49, 67, 81);



and negatively impacted the Company’s recurring revenue, margins and earnings. For example, one

former employee stated that, while customers were supposed to be able to go to ADT’s Customer

Loyalty department to resolve their issues, the department was generally not very effective at

resolving customer complaints and was a joke. ( see, e.g. , ¶¶59-65);

(d) The Company was adversely affected by its attempts to improve customer

screening in order to reduce customer attrition, which increased the Company’s costs, reduced the

Company’s gross customer additions, and negatively impacted the Company’s recurring revenue,

margins, and earnings (see, e.g. , ¶¶79, 241, 249);

(e) The Company was adversely affected by its aggressive and unscrupulous sales



(f) The Company’s share repurchase program was coerced by Defendants Corvex

and Meister and motivated by Defendants’ interests in personal financial gain and/or self-

preservation (not a “strategic financial decision” made by the Company in the interests of

shareholders), was not justified by the Company’s “attractive” share value (which was overvalued,

not undervalued) or its troubled financial condition, and was not in the best interests of the Company

or its shareholders This is supported by documents from a November 26, 2012 meeting of the ADT

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Board (which included Defendant Gersahaney as a director), where Meister conveyed Corvex’s view

that, “ADT could enhance shareholder value through the incurrence of incremental leverage,” as

well as documents from ADT Board meetings on December 13 and 14, 2012, where the Board

discussed at length the fact that Defendants Corvex and Meister were placing significant pressure on

ADT to execute its capital structure proposal, increase leverage to 3x debt-to-EBITDA in order to

implement Corvex’s structural changes, and offer Meister a seat on the Board (including the threat of

Corvex seeking to “’[a]dd new outside directors or replace existing directors’ and make an ‘attack on

CEO or [demand] other changes in management’”). In addition, Board materials from September

2013 show that the Corvex Defendants continued to manipulate the Company’s capital and leverage

strategy, including an accelerated share repurchase and timetable as a “condition to Keith Meister’s

exit from the Board. The materials also stated that Corvex would participate in any large repurchase

plan “dependent on the stock price” and that Corvex again threated changes to the existing

leadership structure if the new plans were not accepted (specifically, “an alternative capital

allocation framework (a ‘Public LBO’) and run a competing slate of directors to be voted on at

ADT’s 2014 [annual general meeting]”) ( see, e.g. , ¶¶82-110);

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


(h) The Company’s Form 10-K for fiscal year 2013 was materially false and

misleading because it failed to disclose to the market (in violation of Item 303 of Regulation S-K)

the materially adverse conditions described in this paragraph.

VI. THE TRUTH IS MORE FULLY REVEALED

239. On January 30, 2014, investors were stunned by Defendants’ revelation of additional

material information regarding the financial and operational problems facing the Company. On that

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date, before the market opened, ADT issued a press release announcing ADT’s first quarter financial

results, which badly missed analysts’ consensus estimates, and revealed that the Company was in far

worse financial and operational shape than the Company had misleadingly disclosed throughout the

Class Period. The press release announced that ADT was experiencing an extreme slowdown in new

customer additions, increased advertising and service costs, and higher attrition among existing

customers, all of which were negatively impacting ADT’s margins, earnings and recurring revenue.

240. In particular, Defendant Gursahaney admitted in the press release that “[c]ustomer

growth did not meet our expectations this quarter,” citing the need to improve ADT’s dealer channel

and lead generation process. He also acknowledged that “[s]ubscriber acquisition costs were

particularly higher in the quarter” due in part to ADT’s need for higher promotional activity and

increased advertising, along with weaker customer growth. The press release also revealed:

. Diluted earnings per share of $0.43 for the first quarter of 2014 (excluding special items), badly missing analysts’ consensus earnings estimate of $0.49 per share.

. A year-over-year decline in EBITDA margin (excluding special items) of 70 basis points, attributed primarily to “the increased costs associated with being a standalone public company and costs related to productivity investments.”

. An increase in customer attrition of 30 basis points, sequentially.

. An 8% increase in costs to serve subscribers (versus 1Q 2013), driven in part by costs related to improving ADT’s billing and customer care activities and service.

Year-over-year recurring revenue growth of only 4.2%, which was lower than some analysts expected.

241. On the same day, January 30, 2014, earnings conference call with analysts,

Defendants provided further details regarding the stunning news revealed in the Company’s press

release. In his opening remarks, Defendant Gursahaney reiterated that “our gross customer adds

were below our expectations for the quarter,” citing declines in the direct channel (“due to the lead

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generation challenges and the rollout of our enhanced customer credit screening process”) and the

dealer channel (“primarily driven by the lower number of dealers as we have discontinued activities

with about 100 dealers who were not able to effectively make the shift to our higher-end automation

solutions towards the end of 2013 and the same lead-generation challenges we faced in our direct

channel”).

242. Contrary to previous Class Period statements, Defendant Gursahaney finally began to

admit that increased competition was seriously affecting ADT’s business results, particularly

through lower customer growth and increased advertising and promotions, leading to higher

subscriber acquisition costs:

I would like to provide a few brief comments on the evolving landscape in our industry and recent activities that impacted our business results. . . . This opportunity has attracted several large companies to this space and their presence is likely to significantly increase awareness for both new entrants and incumbents. . . . Of course, along with more opportunity comes more competition . More competitors across the spectrum have entered the market over the past few years to pursue this growing opportunity. . . . Over the past few months, we have seen a significant increase in advertising by some of our new competitors as they spend to build brand awareness in this market. This put pressure on our lead-generation activities, impacting both our direct and dealer channel gross customer adds. In response, we have increased our advertising levels to maintain an appropriate share of voice, strengthened our offers to enhance our self-generated lead activities, and redeployed some sales and installation resources to focus on upgrades, particularly those customers looking to upgrade to Pulse. These actions, while increasing our subscriber acquisition costs in the quarter, allowed us to partially mitigate the impact of lower lead flow in our direct channel.

243. Echoing these comments, Defendant Geltzeiler admitted at the outset of his opening

remarks that “it was a challenging quarter financially,” primarily due to “lower customer additions.”

As a result of such weakness in customer additions, he announced that annual revenue growth was

expected to be on the “lower end” of the guidance announced by the Company just two months

earlier: “we now believe that the recurring revenue and total revenue growth [for fiscal year 2014]

will be closer to the lower end of the [4% to 5%] range.”

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244. In addition, Defendant Geltzeiler reiterated that “SAC [subscriber acquisition cost]

was higher than normal” based partly on “promotional activity, and a relatively high level of

overhead absorption attributed to the lower level of gross additions in the seasonably slow first

quarter.” He added that higher capital expenditures in the dealer channel, caused by the Company’s

weak customer additions, were responsible in part for a year-over-year reduction in the Company’s

cash flow.

245. In the question-and-answer session that followed, surprised analysts repeatedly

questioned Defendants about the higher costs, lower gross customer additions, and increased attrition

revealed by Defendants in connection with ADT’s competitive environment. The first two questions

dealt with advertising outlays expected as a result of the “evolving” competitive landscape. In

response, Defendant Gursahaney admitted that “I do expect we will continue to grow our advertising

spend . . . . Again, that is based on the competitive environment we see right now depending what

happens and what changes we see. We don’t feel like we’ve got to go toe-to-toe with the new

advertisers . . . . However, we do need to maintain a reasonable share of voice so we don’t get lost in

the mix there.”

246. Another analyst, from Stifel Nicolaus, noted the shift in Defendants’ message

regarding the harmful effects of ADT’s competition on gross customer additions and churn metrics

(aka attrition of existing customers):

Naren, it just seems that the challenges on the – from the competitive channel are a lot more than what we had been talking about beforehand, both in terms of the lower gross adds and the churn metrics really are , just on a unit basis, pretty high for what – I’m just talking on an individual quarter basis, pretty high right now both on a sequential and year over year. It really seems like there’s more to it on the competitive front than we are talking about.

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In response, Defendant Gursahaney admitted that Defendants had been expecting a “ramp up” in

competitors’ advertising spend that was “clearly understandable,” but claimed the magnitude of such

ramp-up took Defendants by surprise:

As I mentioned in my prepared comments, the big difference that we saw this quarter was a significant ramp up in advertising spend by a couple of the new competitors in the space. And I would say, while we expected a ramp up, we didn’t expect a ramp up to that magnitude. It’s clearly understandable. They are working to build or establish their brand in this space and, in many cases, these are companies that have pretty sophisticated marketing or advertising muscle and they can spread their advertising over a pretty large customer base. So from that perspective, I think it was a little more than we expected and that did have an impact on our top of the funnel.

247. The same analyst also questioned whether, in addition to such increased advertising

expenditures, the Company’s drastically increased subscriber acquisition costs were driven by

ADT’s need for “heavy discounting.” Defendant Gurshaney admitted this was another factor: “And

then to drive the self-gen[erated] side we did give our sales reps some more attractive offers that they

could use with customers on the appointments that they generate on their own . . . .”

248. Another analyst, from Credit Suisse, stated that he had “trouble reconciling”

Defendants’ claims that increased advertising should be positive for lead generation, but that ADT’s

lead generation “has actually been weak.” Defendant Gursahaney admitted that this was a long term

problem, stating that home automation awareness “broadly is not there yet,” that many people don’t

know about ADT Pulse and that “we’ve got a lot of work to do as an industry and as a company to

continue to grow that awareness of the capabilities and of ADT’s capabilities in that space.”

249. Defendant Gursahaney also described “trade-offs” necessitated by ADT’s push to

increase promotions and advertising, and implement enhanced credit screening of potential

customers: “With our enhanced credit screening we are putting pressure on gross adds, with betting

on the come that attrition will be better because we will have a better quality customer. With some

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of the increased advertising and the better promotions that we are offering, we are taking a little bit

of a hit on our SAC in order to drive up the gross adds, so we are always making those trade-offs.”

250. Further, Defendant Gursahaney acknowledged that ADT’s slowdown in customer

additions may be driven by potential customers opting for cheaper monthly rates of competitors,

although he misleadingly couched this as a “possibility” rather than an actual trend being

experienced by the Company.

251. Despite Defendants’ attempts to downplay their surprising news regarding their first

quarter 2014 results, the market and analysts recognized the true meaning and importance of these

revelations. In the wake of this news, analysts issued reports citing, among other things, ADT’s

increased advertising and service costs, higher attrition among existing customers, and extreme

slowdown in new customer additions, all of which were negatively impacting ADT’s recurring

revenue, margins and earning. For example:

(a) On January 30, 2014, Morningstar Research reported that it was “Placing

ADT’s Credit Rating Under Review for Downgrade Because of Deteriorating Fundamentals”

explaining that the “BB+ credit rating is under review with negative implications as a result of weak

first-quarter results, as increasing competition is threatening the firm’s competitive position ” and

“growth.” With regard to ADT’s competitors, Morningstar noted that “ large cable and telecom

companies’ aggressive entry into the security monitoring industry threatens ADT’s position at the

top. ” They explain,

These companies have millions of captive customers to market new services to and can competitively price their services by bundling with existing telephone, cable, and Internet offerings. ADT could be forced to cut prices to stay competitive, and margins could suffer. Further, if customer attrition were to rise due to competitive concerns or because of increased household movements from a better housing market, then returns would suffer.

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(b) Barclays issued its report on January 30, 2014, commenting that it was “[a] far

worse-than-expected quarter out of ADT 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.”

“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.”

“We continue to recommend staying on the sidelines, even at this lower price point.” “Our price

target goes to $37 from $45 based on 17.5x our 2015E EPS of $2.10. Our previous price target was

based on 20x our previous 2015E of $2.25.”

(c) Oppenheimer released a January 30, 2014, report lowering its stock rating on

ADT to Perform from Outperform “[o]wing to troubling fundamental trends – including higher

churn and SAC” seeing a “limited upside in the shares” and reporting that “[o]verall, it was a

disappointing quarter with weakness in critical metrics.” In a different report issued that same day,

following the Company’s earnings call, Oppenheimer “revise[d its] estimates” to “$1.96, from

$2.06.”

(d) William Blair released a report on January 31, 2014, stating that ADT’s

numbers were “significantly weaker” than anticipated and “well below consensus.” With regard to

recurring revenue, it called the Company’s reported growth was “weak” and noted that it trailed the

analysts’ forecast from the previous year. Further, “new customer additions were shockingly weak

for dealer and direct originated channels.”

(e) In a report dated January 31, 2014, Morgan Stanley answered the “recurring

question” of “whether there was anything redeeming in the release. The answer, in our view, is a

definitive, no – even Other Income was down Y/Y! With gross adds weak (-10% Y/Y to 231K),

attrition rising (up 30bps Q/Q to 14.2%), higher SAC (direct SAC up 20% Q/Q to $1,599) and

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SSFCF [steady state free cash flow] sharply down (-24% to $787m), the clear implication is that

competitive pressures have stepped up. ” In fact, the report continues that “[w]e believe that is a fair

assessment, and note that management is now acknowledging that it is seeing pressure on leads from

rising marketing expense, primarily AT&T.” Morgan Stanley stated that “the pendulum has now

decisively swung to the bear side of the debate that rising competitive pressures will lead to

continuous, relentless downward pressure on cash flow and that at 14.4x 2014 EBIT and 17x FCF

[free cash flow] (GAAP), this is still not a cheap stock, in spite of the sharp sell off. There are

cogent countervailing arguments to this view, but 2Q will likely closely resemble 1Q.”

(f) On January 31, 2014, Stifel Nicolaus downgraded ADT’s common stock from

“buy” to “hold.”

252. As described in ¶112 above, the media also assailed the Company’s surprisingly poor

results, particularly in the wake of the Corvex Defendants’ quick departure from the Company, after

implementing their expensive capital repurchase strategy and profiting at the expense of

shareholders.

253. In the wake of Defendants’ January 30, 2014 disclosures, and the resulting analyst

commentary, ADT investors continued to unload the stock. In just one trading day, the stock price

fell over 17%, falling from a close of $37.81 on January 29, 2014, to a close of $31.40 on January

30, 2014, on abnormally high trading volume (over ten times the average daily trading volume over

the preceding ten days). As the market absorbed the news, the ADT stock price continued to drop an

additional 8% over the next two trading days, closing at $28.83 on Monday, February 3, 2014, on

unusually high trading volume.

254. As a result of Defendants’ false and misleading statements and omissions, ADT

common stock traded at artificially inflated prices during the Class Period. As the above revelations

- 119 -


seeped into the market, however, the Company’s shares were hammered by massive sales, sending

them down approximately 40% from their Class Period high, and causing millions in shareholder

losses.

VII. LOSS CAUSATION

255. As detailed throughout and further herein, Defendants’ fraudulent scheme artificially

inflated ADT’s stock price by misrepresenting and concealing the true nature of the Company’s

financial and operational results and prospects, including the facts that: (a) the Company was

adversely affected by increased competition, particularly from cable and telecom companies entering

the Company’s markets for home security, automation, and monitoring services; (b) the Company’s

increased competition reduced its growth in customer additions, increased its subscriber acquisition

costs due to the need for increased advertising and promotions, and accelerated its customer attrition

(aka churn rate), all of which negatively impacted the Company’s recurring revenue, margins and

earnings; (c) the Company was adversely affected by its poor customer service and its attempts to

improve customer service, which increased the Company’s customer attrition and costs and

negatively impacted the Company’s recurring revenue, margins, and earnings; (d) the Company was

adversely affected by its attempts to improve customer screening in order to reduce customer

attrition, which increased the Company’s costs, reduced the Company’s gross customer additions,

and negatively impacted the Company’s recurring revenue, margins, and earnings; (e) the Company

was adversely affected by its aggressive and unscrupulous sales practices, which increased the

Company’s customer attrition and costs, and negatively impacted the Company’s recurring revenue,

margins, and earnings; (f) the Company’s share repurchase program was coerced by Defendants

Corvex and Meister, was motivated by Defendants’ interests in personal financial gain and/or self-

preservation, required a far greater leverage ratio than Defendants represented, was not justified by

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the Company’s share price (which was overvalued, not undervalued) or its troubled financial

condition, and was not in the best interests of the Company’s shareholders; and (g) in light of these

known facts, the Company did not have a reasonable basis for its financial forecasts during the Class

Period.

256. Defendants’ false and misleading statements and omissions, individually and

collectively, concealed the true business prospects of ADT, resulting in ADT’s stock being

artificially inflated until, as indicated herein, the relevant truth about the Company’s financial and

operational condition and future business prospects was revealed. While each of these

misrepresentations and omissions was independently fraudulent, they were all motivated by

Defendants’ desire to artificially inflate ADT’s stock price and give the market the false notion that

the Company’s business was not being impacted by competition and the core metrics of its recurring

revenue business were strong. These false and misleading statements and omissions, among others,

had the intended effect of preventing the market from learning the full truth and keeping the

Company’s stock price artificially inflated throughout the Class Period. Indeed, Defendants’ false

and misleading statements and omissions had the intended effect and caused, or were a substantial

contributing cause of, ADT’s stock trading at artificially inflated levels, reaching as high as $49.73

during the Class Period.

257. As stated in ¶¶178-98, 225-27, 239-54, the truer picture of the Company’s financial

and operating conditions was not revealed to the market all at once but rather the truth began to

emerge, and the risk caused by Defendants’ fraud materialized, through a series of partial revelations

that cast doubt on the veracity of the Company’s Class Period statements: (a) on July 31, 2013, when

the Company issued a press release announcing financial results for the third quarter of its fiscal year

2013 revealing that the Company was experiencing higher attrition and lower recurring revenues and

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provided an update on their capital restructuring and an increased debt-to-EBITDA ratio; (b) on

November 25, 2013, ADT announced that it had agreed to repurchase substantially all Corvex’s

ADT shares at a price of $44.01, significantly below its original valuation of the shares at $61-$83,

and that Defendant Meister had resigned from the ADT Board; and (c) on January 30, 2014, the

Company issued a press release announcing that ADT had badly missed analysts’ consensus

estimates and revealed that ADT was experiencing a decline in customer additions, increased

advertising and service costs and higher attrition amongst existing customers, all of which had

eroded ADT’s margins and negatively impacted its earnings and recurring revenue. When

Defendants provided the market with these revelations on July 31, 2013, November 25, 2013, and

January 30, 2014, it was an indication to the market that Defendants’ prior Class Period statements

were false and misleading.

A. July 31, 2013 Disclosure

258. The truth began to emerge on July 31, 2013, when, as detailed in ¶¶178-98 above, the

Company issued a press release announcing financial results for the third quarter of its fiscal year

2013. On this date, Defendants revealed that the Company was experiencing higher attrition and

lower recurring revenues and provided an update on their capital restructuring, announcing that the

Company had in total repurchased 25.3 million shares for $1.15 billion, resulting in an increase in

ADT’s previously announced leverage (debt-to-EBITDA) ratio from 2.0x to 3.0x. In response to

ADT’s increased leverage ratio, S&P massively downgraded ADT’s credit rating by three notches,

from “BBB-” to “BB-” (below investment grade) on July 31, 2013. On the same day, Moody’s and

Morningstar both placed ADT’s credit ratings under review for a downgrade. As a result of the

information revealed to the market on July 31, 2013, ADT’s stock dropped approximately 4.8%,

falling from a close of $42.09 per share on July 30, 2013, to $40.08 per share on July 31, 2013, on

- 122 -

0713012013 0713112013 08101/2013

10

9

8

7 Cl,

6 0

5

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3

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unusually high trading volume. The market’s negative reaction to ADT’s July 31, 2013 revelations

is demonstrated in the following stock chart:

$41.50

$41.00

$40.50

a.

a) U

$40.00

$39.50

$39.00

$38.50

259. The decline in ADT’s stock price by approximately 4.8% on July 31, 2013, was the

direct result of the nature and extent of the revelations made to investors and the market regarding

the Company’s increased attrition rates, lower recurring revenue rates and increased leverage ratio

that had been concealed or misrepresented by Defendants’ scheme and misstatements. The drop

would have been more dramatic had Defendants not falsely portrayed the Company’s financial

results as strong, while failing to disclose the true financial and operational difficulties facing the

Company, as well as the motivation behind the restructuring and its real impact on shareholders. For

example, Defendant Gursahaney attempted to offset this news by touting “solid execution on our

growth and cost control initiatives [and] 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

- 123 -

103

102

101

100

99

98

I- 97

9€

95

94

93 0113012013 011112013 0810112013


channels.” He also misleadingly represented that attrition growth was due to relocations and not

from a loss of competition.

260. The timing and magnitude of ADT’s stock price decline on July 31, 2013 negates any

inference that the losses suffered by Plaintiffs were caused by changed market conditions,

macroeconomic or industry factors, or Company-specific facts unrelated to Defendants’ fraudulent

conduct. This point is evidenced by the chart below, which demonstrates the clear divergence of

ADT’s stock price from its peer index 68 as the revelation of the truth became known to the market:

B. November 25, 2013 Disclosure

261. The truth continued to emerge on November 25, 2013 when, as detailed in ¶¶225-27

above, Defendants announced that one of its largest shareholders, Corvex, had agreed to sell

substantially all of its ADT shares back to the Company at a purchase price of $44.01 per share,

68 ADT has identified the S&P 500 Index and S&P 500 Industrial Index as benchmarks for its common stock performance. See, e.g. , ADT’s Annual Report on SEC Form 10-K for the Fiscal Year Ended September 27, 2013, at 26-27.

- 124 -

25

20

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I 10

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0 1112212D13 11I25I2013 11J2€2013


which was significantly lower than its original valuation of the shares at $61-$83, and that Defendant

Meister had resigned from the ADT Board, effective immediately. This announcement caused the

market to ask further questions, casting further doubt on the veracity of the Company’s Class Period

statements. As a result of the information revealed to the market on November 25, 2013, ADT’s

stock dropped approximately 5.8%, falling from a close of $44.01 per share on Friday, November

22, 2013, to $41.46 per share on Monday, November 25, 2013, on nearly seven times the average

trading volume over the preceding ten days. The market’s negative reaction to ADT’s November 25,

2013 revelation is demonstrated in the following stock chart:

$43.50

$43.00

$4250

$42.00 U a.

$41.50

$41.00

$40.50

$40.00

$39.50

262. The decline in ADT’s stock price by approximately 5.8% from November 22, 2013,

through November 25, 2013, was the direct result of the nature and extent of the revelations made to

investors and the market regarding the Company’s repurchase of Corvex’s ADT shares at a price far

lower than originally valued by Defendants Corvex and Meister, as well as Meister’s resignation

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from the Board, which signaled to the market, among other things, that the Company’s touted stock

repurchase strategy was not in the best interests of the shareholders and the Company’s financial and

operating condition was materially worse than Defendants had portrayed. The drop would have been

more dramatic had Defendants not continued to conceal the impact of competitive forces on ADT’s

business and mislead the market as to ADT’s true financial and operational condition.

263. The timing and magnitude of ADT’s November 25, 2013 stock price declines negate

any inference that the losses suffered by Plaintiffs were caused by changed market conditions,



ADT’s stock price from its peer index as the revelation of the truth became known to the market:

101

100

99

98

— 97

96

95

94

93

92

ADT S&P 50

.. 0

OO Industrials

1112212013 1112512013 1112612013

- 126 -


C. January 30, 2014 Disclosure

264. As detailed in ¶¶239-54 above, on January 30, 2014, Defendants revealed the

Company’s true financial and operational condition when it announced ADT’s first quarter financial

results, which badly missed analysts’ consensus estimates and revealed that the Company’s financial

and operating condition and future prospects were far worse than the Company had misleadingly

disclosed throughout the Class Period. The press release disclosed, among other things, that ADT

was experiencing an extreme slowdown in new customer additions, increased advertising and service

costs, and higher attrition among existing customers, all of which were negatively impacting ADT’s

margins, earnings and recurring revenue. The market was stunned. As a result of January 30, 2014

announcements, the stock price fell over 17% in one trading day, falling 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 abnormally high

trading volume. Analysts were dismayed, finding the Company’s financial results to be “far worse

than expected” and questioning management’s credibility. See ¶¶111, 251. The market’s negative

reaction to ADT’s January 30, 2014 revelations is demonstrated in the following stock chart:

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$38

$37

$36

$35

$34

CL 2 $33

$32

$31

$30

$29

$28

40

10

0

30

0

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20

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265. The decline in ADT’s stock price by a whopping 17% in one day, from January 29,

2014 to January 30, 2014 was the direct result of the nature and extent of the revelations made to

investors and the market regarding the true scope of the Company’s financial and operational

condition and the challenges to ADT’s core business that had been concealed or misrepresented by

Defendants’ scheme and misstatements.

266. The timing and magnitude of ADT’s stock price decline on January 30, 2014 negates

any inference that the losses suffered by Plaintiffs were caused by changed market conditions,



ADT’s stock price from its peer index as the revelation of the truth became known to the market:

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105

100

95

90 II

0)

85

80

75

70

if

idusirlals

0112912014 0113012014 Iii 131(2014 02/41312014

267. In sum, the rapid declines in ADT’s stock price on July 31, 2013, November 25, 2013

and January 30, 2014, were a direct and foreseeable consequence of the revelation of the falsity of

Defendants’ Class Period misrepresentations and omissions to the market. Thus, the revelations of

truth at the close of the Class Period, as well as the resulting clear market reactions, support a

reasonable inference that the market understood that ADT’s prior statements were false and

misleading. In short, as the truth about Defendants’ prior misrepresentations and concealments was

revealed, the Company’s stock price quickly sank, the artificial inflation came out of the stock, and

Plaintiffs were damaged, suffering true economic losses.

268. Accordingly, the economic losses, i.e. , damages, suffered by Plaintiffs on July 31,

2013, November 25, 2013, and January 30, 2014 were a direct and proximate result of Defendants’

scheme and misrepresentations and omissions that artificially inflated ADT’s stock price and the

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subsequent significant declines in the value of ADT’s stock when the truth concerning Defendants’

prior misrepresentations and fraudulent conduct entered the marketplace.

VIII. ADDITIONAL SCIENTER

269. The Individual Defendants acted with scienter in that they knew or recklessly

disregarded that the public documents and statements issued or disseminated in the name of the

Company were materially false and misleading, and knowingly or recklessly substantially

participated or acquiesced in the issuance or dissemination of such statements or documents as

primary violators of the federal securities laws.

270. The Individual Defendants, by virtue of their receipt of information reflecting the true

facts regarding ADT, its operations, and its business practices, their control over and/or receipt of

ADT’s materially misleading misstatements and/or their associations with the Company that made

them privy to confidential proprietary information concerning ADT, were active and culpable

participants in the fraudulent scheme alleged herein. The Individual Defendants knew and/or

recklessly disregarded the falsity and misleading nature of the information, which they caused to be

disseminated to the investing public. The ongoing fraud as described herein could not have been

perpetrated without the knowledge and/or recklessness and complicity of personnel at the highest

level of the Company, including the Individual Defendants.

271. The Individual Defendants also undertook the affirmative obligation to obtain

knowledge in order to ensure the Company’s disclosures to the market were truthful by executing

SOX certifications (see ¶¶124, 145, 167, 184, 271).

272. These facts, in conjunction with the additional indicia of scienter detailed herein,

collectively support a strong inference of each Individual Defendant’s scienter.

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A. Defendants Knew or Should Have Known of the Performance of the Key Value Drivers of Its Core Business

273. As further detailed above, 90% of the Company’s recurring revenue is generated from

its multi-year customer contracts. Additionally, Defendants have repeatedly emphasized that there

are five key drivers of ADT’s core recurring revenue business: customer additions, subscriber

acquisition costs, average revenue per user, cost to serve, and customer attrition. Further, the

Company’s motto was “Creating Customers for Life” by focusing on the quality of its customers and

customer service. Therefore, these metrics and objectives were of critical importance to the

Company’s financial performance and future business prospects.

274. During the Class Period, the Individual Defendants were high-ranking officers ( i.e. ,

CEO or CFO)and/or directors who were heavily involved with, and had day-to-day responsibilities

concerning these key financial metrics affecting ADT’s core business. Accordingly, through the

receipt of internal reports and involvement with daily operations, the Individual Defendants were

intimately aware of the Company’s aggressive sales practices, customer service issues, attrition

levels, customer additions, rising costs, and revenue margin. Indeed, Defendants repeatedly

addressed these topics on earnings calls with analysts and touted initiatives that they had in place to

strengthen ADT’s customer base and customer additions. See, e.g. , ¶219 (Defendant Gursahaney

stated that “we have implemented several new programs to focus on the areas we can impact,

including non-pays and voluntary disconnect, . . .”); ¶65 (Defendant Mikells suggested that ADT

was implementing successful programs to help customer retention, including improved customer

service, in an effort to “help to mitigate otherwise pressure against attrition.”); ¶128 (Defendant

Gursahaney stated “we’ve got a very robust set of programs that we’re implementing and continuing

to try and mitigate [attrition] across all areas . . . As part of our leadership meeting a couple of weeks

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ago, we really focused 80% of our leadership meeting on how we can become a more customer

obsessed organization and some investments we think we can make there .”).

275. Moreover, Defendants acknowledged that they continuously discussed and evaluated

competition and its impact on these core metrics. See , e.g. , ¶46 (“[W]e are always monitoring the

market place for traditional competitors and new competitors, we got a weekly field based, you

know, competitive intelligence call that many of the leadership team members participate on.”);

¶150 (Defendant Gursahaney stated on January 30, 2013 with respect to competition that “we are

going to continue to monitor it very closely.”). As a result, as ADT’s most senior executives and/or

directors, the Individual Defendants knew, or, at a minimum were severely reckless in not knowing,

that competitive pressures exacerbated by existing customer dissatisfaction with ADT, were

negatively impacting these metrics and, in turn, ADT’s revenue, margins, and earnings. By choosing

to speak about ADT’s value drivers, the Individual Defendants led investors to believe that they had

knowledge, and/or had acquired knowledge, of the performance of these metrics and were speaking

truthfully.

Moreover, as detailed above, Defendants’ knowledge is also evidenced by their regular

participation in Board of directors, audit committee, and town hall meetings, in which the

Company’s attrition levels, competition, capital planning, and other operational and financial matters

were discussed. See ¶¶67, 71, 75, 82, 85, 88, 92, 97, 275. Additionally, Defendants also

corresponded on the Company’s value drivers and the challenges they were facing. See ¶¶273-274.

B. Defendants Were Motivated to Engage in the Above Fraudulent Scheme to Save Their Jobs

Defendants were also motivated to engage in the scheme described in ¶¶82-110, in which

they misled the market as to the true operational and financial condition of the Company, as well as

the true benefits of the massive, debt-fueled capital restructuring conducted at the behest of

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Defendants Meister and Corvex, in order to save their executive and directorial positions. As further

detailed above, presentations made to the Board indicate that Defendants recognized that they had to

capitulate to Defendants’ Meister and Corvex’s capital structure and allocation plan or risk losing

their positions with the Company. See ¶¶88-89, 97. In addition to pursuing this course of action,

which they knew would harm shareholders, Defendants continued to issue false and misleading

statements to the market regarding the Company’s financial and operational condition in furtherance

of their scheme. See ¶¶113-254.

IX. PRESUMPTION OF RELIANCE

276. A Class-wide presumption of reliance is appropriate in this action under the United

States 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 Defendants’ material Class Period omissions

set forth above, that requirement is satisfied here.

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

fraud-on-the-market doctrine. As a result of Defendants’ materially false and misleading statements,

ADT’s publicly traded securities traded at artificially inflated prices during the Class Period on a

market that was open, well-developed, and efficient at all times. Plaintiffs and other members of the

Class purchased or otherwise acquired ADT’s publicly traded securities relying upon the integrity of

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the market price of those securities and the market information relating to ADT, and have been

damaged thereby.

278. At all relevant times, the market for ADT’s securities was an efficient market for the

following reasons, among others:

(a) ADT’s stock met the requirements for listing and was listed and actively

traded on the NYSE, a highly efficient and automated market;

(b) As a regulated issuer, ADT regularly made public filings with the SEC,

including its Forms 10-K, Forms 10-Q, and related press releases;

(c) 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

(d) ADT was followed by several securities analysts employed by major

brokerage firms, such as Citigroup, Stifel Nicolaus, Imperial Capital, Oppenheimer & Co., Credit

Suisse, and Morningstar Research, among others, who wrote research reports that were distributed to

the brokerage firms’ sales force and the public at large. Each of these reports was publicly available

and entered the public marketplace.

279. As a result of the foregoing, the market for ADT’s securities promptly digested

current information regarding ADT from all publicly available sources and reflected such

information in the prices of ADT’s securities.

280. Under these circumstances, all purchasers of ADT’s securities during the Class Period

suffered similar injury through their purchase of ADT’s securities at artificially inflated prices.

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281. At the times they purchased or otherwise acquired ADT’s securities, Plaintiffs and

other members of the Class were without knowledge of the facts concerning the wrongful conduct

alleged herein and could not reasonably have discovered those facts.

282. As a result of the above circumstances, the presumption of reliance applies.

283. In sum, Plaintiffs will rely, in part, upon the presumption of reliance established by

the fraud-on-the-market doctrine in that:

(a) Defendants made public misrepresentations during the Class Period;

(b) The misrepresentations were material;

(c) The Company’s securities traded in an efficient market;

(d) The misrepresentations alleged would tend to induce a reasonable investor to

misjudge the value of the Company’s securities; and

(e) Plaintiffs and the other members of the Class purchased or otherwise acquired

the Company’s securities between the time Defendants misrepresented material facts and the time

the true facts were disclosed, without knowledge that the facts were misrepresented.

X. NO SAFE HARBOR

284. The federal statutory safe harbor providing for forward-looking statements under

certain circumstances does not apply to any of the allegedly false and misleading statements pleaded

in this complaint. Many of the specific statements pleaded herein were not identified as “forward-

looking statements” when made. To the extent there were any forward-looking statements, there

were no meaningful cautionary statements identifying important factors that could cause actual

results to differ materially from those in the purportedly forward-looking statements. Indeed, the

risk warnings that may have been provided by Defendants in their Class Period statements were not

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meaningful, were themselves false and misleading, and did not shield Defendants from liability on

the basis that such statements were “forward-looking.”

285. Alternatively, to the extent that the statutory safe harbor does apply to any forward-

looking statements pleaded herein, Defendants are liable for those false and misleading forward-

looking statements because, at the time each of those forward-looking statements were made, as

detailed above in the Substantive Allegations section, the particular speaker knew that the particular

forward-looking statement was false or misleading and/or the forward-looking statement was

authorized and/or approved by an executive officer of ADT who knew that those statements were

false or misleading when made. Moreover, to the extent that Defendants issued any disclosures

designed to “warn” or “caution” investors of certain “risks,” those disclosures were also false and

misleading since they did not disclose that Defendants were actually engaging in the very actions

about which they purportedly warned and/or had actual knowledge of material adverse facts

undermining such disclosures.

XI. PLAINTIFFS’ CLASS ACTION ALLEGATIONS

286. Plaintiffs bring this action as a class action pursuant to Federal Rule of Civil

Procedure 23(a) and (b)(3) on behalf of a Class consisting of all those who purchased or otherwise

acquired the publicly traded common stock of ADT between November 27, 2012 and January 29,

2014, inclusive, and who were damaged thereby. Excluded from the Class are Defendants, 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.

287. Because ADT has millions of shares of stock outstanding and because the Company’s

shares were actively traded on the NYSE, members of the Class are so numerous that joinder of all

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members is impracticable. According to ADT’s SEC filings, as of shortly before the close of the

Class Period, ADT had approximately 183 million shares outstanding. While the exact number of

Class members can only be determined by appropriate discovery, Plaintiffs believe that Class

members number at least in the thousands and that they are geographically dispersed.

288. Plaintiffs’ claims are typical of the claims of the members of the Class because

Plaintiffs and all of the Class members sustained damages arising out of Defendants’ wrongful

conduct complained of herein.

289. Plaintiffs will fairly and adequately protect the interests of the Class members and

have retained counsel experienced and competent in class actions and securities litigation. Plaintiffs

have no interests that are contrary to, or in conflict with, the members of the Class they seek to

represent.

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

adjudication of this controversy since joinder of all members is impracticable. Furthermore, as the

damages suffered by individual members of the Class may be relatively small, the expense and

burden of individual litigation make it impossible for the members of the Class to individually

redress the wrongs done to them. There will be no difficulty in the management of this action as a

class action.

291. Questions of law and fact common to the members of the Class predominate over any

questions that may affect only individual members in that 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 violated the federal securities laws as alleged herein;

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(b) whether Defendants’ publicly disseminated press releases and statements

during the Class Period omitted and/or misrepresented material facts;

(c) whether Defendants failed to convey material facts or to correct material facts

previously disseminated;

(d) whether Defendants participated in and pursued the fraudulent scheme or

course of business complained of herein;

(e) whether Defendants acted willfully, with knowledge or severe recklessness, in

omitting and/or misrepresenting material facts;

(f) whether the market prices of ADT’s securities during the Class Period were

artificially inflated due to the material nondisclosures and/or misrepresentations complained of

herein; and

(g) whether the members of the Class have sustained damages as a result of the

decline in value of ADT’s stock when the truth was revealed and the artificial inflation came out,

and, if so, what is the appropriate measure of damages.

COUNT I

FOR VIOLATIONS OF SECTION 10(B) OF THE EXCHANGE ACT AND RULE 10B-5 PROMULGATED

THEREUNDER AGAINST ALL DEFENDANTS

292. Plaintiffs repeat and reallege the allegations set forth above as though fully set forth

herein. This claim is asserted against all Defendants.

293. During the Class Period, ADT, the Individual Defendants, the Corvex Defendants,

and each of them, carried out a plan, scheme and course of conduct which was intended to and,

throughout the Class Period, did: (a) deceive the investing public, Plaintiffs, and the other Class

members, as alleged herein; (b) artificially inflate and maintain the market price of ADT’s publicly

- 138 -


traded securities; and (c) cause Plaintiffs and the other members of the Class to purchase ADT’s

publicly traded securities at artificially inflated prices. In furtherance of this unlawful scheme, plan,

and course of conduct, ADT, the Individual Defendants and the Corvex Defendants, and each of

them, took the actions set forth herein.

294. These Defendants: (a) employed devices, schemes, and artifices to defraud; (b) made

untrue statements of material fact and/or omitted to state material facts necessary to make the

statements not misleading; and (c) engaged in acts, practices, and a course of business which

operated as a fraud and deceit upon the purchasers of the Company’s securities in an effort to

maintain artificially high market prices for Company’s securities in violation of Section 10(b) of the

Exchange Act and Rule 10b-5. These Defendants are sued as primary participants in the wrongful

and illegal conduct charged herein. The Individual Defendants and the Corvex Defendants are also

sued as controlling persons of ADT, as alleged below.

295. In addition to the duties of full disclosure imposed on Defendants as a result of their

making affirmative statements and reports, or participating in the making of affirmative statements

and reports to the investing public, they each had a duty to promptly disseminate truthful information

that would be material to investors in compliance with the integrated disclosure provisions of the

SEC as embodied in SEC Regulation S-X (17 C.F.R. §210.01, et seq .) and S-K (17 C.F.R. §229.10,

et seq .) and other SEC regulations, including accurate and truthful information with respect to the

Company’s operations, sales, financial condition, and operational performance, so that the market

prices of the Company’s publicly traded securities would be based on truthful, complete, and

accurate information.

296. ADT, the Individual Defendants and the Corvex Defendants, individually and in

concert, directly and indirectly, by the use, means, or instrumentalities of interstate commerce and/or

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of the mails, engaged and participated in a continuous course of conduct to conceal adverse material

information about the Company’s financial and operational results and prospects as specified herein.

297. These Defendants each employed devices, schemes, and artifices to defraud, while in

possession of material adverse non-public information and engaged in acts, practices, and a course of

conduct as alleged herein in an effort to assure investors of ADT’s value, performance and continued

substantial sales and financial growth, which included the making of, or the participation in the

making of, untrue statements of material facts about the Company’s financial and operational results

and prospects and omitting to state material facts necessary in order to make the statements made

about the Company’s financial and operational results and prospects not misleading in light of the

circumstances under which they were made, as set forth more particularly herein, and engaged in

transactions, practices, and a course of business which operated as a fraud and deceit upon the

purchasers of ADT’s securities during the Class Period.

298. The Individual Defendants’ and the Corvex Defendants’ primary liability and

controlling person liability arise from the following facts, among others: (a) the Individual

Defendants and the Corvex Defendants were high-level executives, Directors and/or controlling

shareholders at the Company during the Class Period; (b) the Individual Defendants and the Corvex

Defendants, by virtue of their responsibilities and activities as senior executive officers, Directors

and/or controlling shareholders were privy to, and participated in, the creation, development, and

reporting of the Company’s internal sales, marketing, projections, and/or reports; (c) the Individual

Defendants and the Corvex Defendants enjoyed significant personal contact and familiarity with,

were advised of, and had access to other members of the Company’s management team, internal

reports, and other data and information about the Company’s financial and operational results and

prospects at all relevant times; and (d) the Individual Defendants and the Corvex Defendants were

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aware of the Company’s dissemination of information to the investing public which they knew or

recklessly disregarded was materially false and misleading.

299. Each of the Defendants had actual knowledge of the misrepresentations and

omissions of material facts set forth herein, or acted with severely reckless disregard for the truth, in

that each failed to ascertain and disclose such facts, even though such facts were available to each of

them. Such Defendants’ material misrepresentations and/or omissions were done knowingly or with

deliberate recklessness and for the purpose and effect of concealing information regarding the

Company’s true financial and operational results and prospects from the investing public and

supporting the artificially inflated price of its securities. As demonstrated by the Individual

Defendants’ and the Corvex Defendants’ misstatements and omissions throughout the Class Period

regarding the Company’s true financial and operational results and prospects, the Individual

Defendants and the Corvex Defendants, if they did not have actual knowledge of the

misrepresentations and omissions alleged, were reckless in failing to obtain such knowledge by

deliberately refraining from taking those steps necessary to discover whether those statements were

false or misleading.

300. As a result of the dissemination of the materially false and misleading information

and failure to disclose material facts, as set forth above, the market prices of ADT’s securities were

artificially inflated during the Class Period. In ignorance of the fact that market prices of ADT’s

publicly traded securities were artificially inflated, and relying directly or indirectly on the false and

misleading statements made by Defendants, or upon the integrity of the market in which the

securities trade, and/or on the absence of material adverse information that was known to, or

disregarded with deliberate recklessness by, Defendants but not disclosed in public statements by

Defendants during the Class Period, Plaintiffs and the other members of the Class acquired ADT’s

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securities during the Class Period at artificially high prices and were damaged thereby, as evidenced

by, among others, the stock price declines above.

301. At the time of said misrepresentations and omissions, Plaintiffs and the other

members of the Class were ignorant of their falsity and believed them to be true. Had Plaintiffs and

the other members of the Class and the marketplace known of ADT’s fraudulent practices, the true

nature and prospects of ADT’s financial and operating results and prospects, or ADT’s true intrinsic

value, which were not disclosed by Defendants, Plaintiffs and the other members of the Class would

not have purchased or otherwise acquired their ADT publicly traded securities during the Class

Period; or, if they had acquired such securities during the Class Period, they would not have done so

at the artificially inflated prices which they paid.

302. By virtue of the foregoing, ADT, the Individual Defendants and the Corvex

Defendants have each violated Section 10(b) of the Exchange Act and Rule 10b-5 promulgated

thereunder.

303. As a direct and proximate result of Defendants’ wrongful conduct, Plaintiffs and the

other members of the Class suffered damages in connection with their respective purchases and sales

of the Company’s securities during the Class Period, as evidenced by, among others, the stock price

declines discussed above, when the artificial inflation was removed from ADT’s stock.

COUNT II

FOR VIOLATIONS OF SECTION 20(A) OF THE EXCHANGE ACT AGAINST THE INDIVIDUAL DEFENDANTS

AND THE CORVEX DEFENDANTS

304. Plaintiffs repeat and reallege the allegations set forth above as though fully set forth

herein. This claim is asserted against the Individual Defendants and the Corvex Defendants.

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305. The Individual Defendants and the Corvex Defendants acted as controlling persons of

ADT within the meaning of Section 20(a) of the Exchange Act as alleged herein. By virtue of their

high-level positions with the Company, participation in, and/or awareness of, the Company’s

operations, and/or intimate knowledge of the Company’s fraudulent practices and the Company’s

actual results and future prospects, the Individual Defendants and the Corvex Defendants had the

power to influence and control, and did influence and control, directly or indirectly, the decision

making of the Company, including the content and dissemination of the various statements which

Plaintiffs contend are false and misleading. The Individual Defendants and the Corvex Defendants

were provided with, or had unlimited access to, copies of the Company’s reports, press releases,

public filings, and other statements alleged by Plaintiffs to be misleading prior to and/or shortly after

these statements were issued and had the ability to prevent the issuance of the statements or cause

the statements to be corrected.

306. In addition, the Individual Defendants and the Corvex Defendants had direct

involvement in the day-to-day operations of the Company and, therefore, are presumed to have had

the power to control or influence the particular transactions giving rise to the securities violations as

alleged herein and exercised the same.

307. As set forth above, ADT and the Individual Defendants and the Corvex Defendants

each violated Section 10(b) and Rule 10b-5 by their acts and omissions as alleged in this Complaint.

By virtue of their controlling positions, the Individual Defendants and the Corvex Defendants are

liable pursuant to Section 20(a) of the Exchange Act. As a direct and proximate result of the

Individual Defendants’ and the Corvex Defendants’ wrongful conduct, Plaintiffs and other members

of the Class suffered damages in connection with their purchases of the Company’s securities during

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the Class Period, as evidenced by, among others, the stock price declines discussed above, when the

artificial inflation was released from ADT’s stock.

PRAYER FOR RELIEF

WHEREFORE, Plaintiffs, on their own behalf and on behalf of the Class, pray for relief and

judgment, as follows:

A. Declaring that this action is a proper class action and certifying Plaintiffs as

class representatives pursuant to Rule 23 of the Federal Rules of Civil Procedure and Plaintiffs’

counsel as Class Counsel for the proposed Class;

B. Awarding compensatory damages in favor of Plaintiffs and the other Class

members against all Defendants, jointly and severally, for all damages sustained as a result of

Defendants’ wrongdoing, in an amount to be proven at trial, including interest thereon;

C. Awarding Plaintiffs and the Class their reasonable costs and expenses incurred

in this action, including attorneys’ fees and expert fees; and

D. Such other and further relief as the Court deems appropriate.

JURY TRIAL DEMANDED

Plaintiffs hereby demand a trial by jury.

DATED: August 11, 2014 ROBBINS GELLER RUDMAN & DOWD LLP

s/ Jack Reise JACK REISE

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JACK REISE (FL Bar No. 058149) STEPHEN R. ASTLEY (FL Bar No. 0139254) ELIZABETH A. SHONSON (FL Bar No. 22282) ANDREW T. REES (FL Bar No. 0062247) 120 East Palmetto Park Road, Suite 500 Boca Raton, FL 33432 Telephone: 561/750-3000 561/750-3364 (fax) [email protected] [email protected] [email protected] [email protected]

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) [email protected]

MOTLEY RICE LLC JAMES M. HUGHES (pro hac vice) WILLIAM H. NARWOLD (pro hac vice) DAVID P. ABEL 28 Bridgeside Blvd. Mount Pleasant, SC 29464 Telephone: 843/216-9000 843/216-9450 (fax) [email protected] [email protected] [email protected]

Lead Counsel for Plaintiffs

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CERTIFICATE OF SERVICE

I HEREBY CERTIFY that on August 11, 2014, I authorized the electronic filing of the

foregoing with the Clerk of the Court using the CM/ECF system, which will send a Notice of

Electronic Filing to all counsel of record.

s/ Jack Reise JACK REISE

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