Class Action for Hansen Unnatural?

Last Thursday, law firm Coughlin Stoia Geller Rudman & Robbins LLP [CSGRR] launched a class action against Hansen Natural (HANS), Rodney Sacks (Chairman and CEO), and Hilton Schlosberg (Vice Chairman, CFO, COO).  In August another law firm (Holzer, Holzer & Fistel) started investigating possible violation of federal securities law. In both instances the period of alleged wrong-doing is between May 23, 2007, and November 8, 2007.

The class action (read full complaint here) is initiated by Marcelo Cunha (named as plaintiff). 

According to the complaint, during the Class Period, defendants issued materially false and misleading statements that misrepresented and failed to disclose: 

• that Hansen Natural’s second quarter sales results were materially impacted by inventory loading as customers were induced to purchase more product before the Company raised its prices in its Monster Energy drink line and its Java Monster drink line;
• that the Company was experiencing declining sales in its non-core drink lines;
• that the Company was experiencing production shortfalls with its Java Monster drink line; and
• that, as a result of the foregoing, defendants lacked a reasonable basis for their positive statements about the Company and its prospects.

All of this, the complaint reads:

• deceived the investing public regarding Hansen Natural’s business, operations, management and the intrinsic value of Hansen Natural’s common stock;
• allowed the Individual Defendants and other Company insiders to sell more than 2.3 million shares of their personally-held Hansen Natural common stock for gross proceeds in excess of $104 million;  
• and caused plaintiff and members of the Class … to purchase Hansen Natural’s common stock at artificially inflated prices.

The class period starts on May 23rd, 2007: 

on that date, JP Morgan issued an analyst report reiterating its “overweight” rating on Hansen Natural stock based on its “recent positive management meeting” with defendants Sacks and Schlosberg.” From the analyst report, CSGRR emphasized the words: “Overall the tone of the meeting was bullish...

Defendant’s false and misleading statements had the intended effect and caused Hansen Natural’s common stock to trade at artificially inflated levels throughout the Class Period, reaching as high as $68.11 per share on October 18, 2007…

As a direct result of defendant’s disclosure on November 8, 2007, the price of Hansen Natural common stock fell precipitously, falling $13.17 per share, or 23%. This drop removed the inflation from the price of Hansen Natural common stock, causing real economic loss to investors who had purchased Hansen Natural common stock during the Class Period.

During the class period, the price of Hansen Natural’s common stock ranged from a low of $37.55 to a high of $68.40. CSGRR (and also Holzer &  Co.) indicate that “throughout the class period” prices traded at artificially high prices. But even after November 8th when according to CSGRR the price was “right”, (“this drop removed the inflation from the price”), the stock traded at least for two months in a price range (marked by the red square in the chart below)  that was first referred to as “inflated”.  

 

Only after mid-September 2007 does the stock price “breaks out” of the red square range, so one might argue that that would be more likely to referred to as “artificially inflated”. But this happens well after the earnings release for Q2 2007 and the accompanying conference call (on August 8th, 2007) , which play an important role in the allegations (see complaint page 7, going forward). And as on page 19 of the complaint under sub 43 is argued that “…At all relevant times, the markets for Hansen Natural common stock was an efficient market” it seems odd that only after over a month after the alleged misleading (too positive) statements (from conference call on August 8th, 2008), the market starts to incorporate this public information in the stock price.

Then, after the Q3 earnings release on November 8th, 2007, “the truth” comes out and the stock tanks: “this drop removed the inflation from the price”. CSGRR emphasizes that, amongst others, securities analysts are material in promoting market efficiency: “Hansen Natural was followed by several securities analysts employed by major brokerage firms who wrote reports which were distributed to the sales force and certain customers of their respective brokerage firms. Each of these reports was publicly available and entered the public market place.”  On December 7th, 2007, UBS initiates coverage of Hansen Natural and sets a price target of $58; on December 13th, 2008, Stifel Nicolaus reiterates:  Buy – target $58. Even after digesting the Q3 earnings release and conference call, painting perhaps a more accurate picture of the company, these analysts obviously didn’t consider a price in the high-fifties as being inflated.

Disclosure: Long HANS.