On April 12, 2011, Wolf Haldenstein Adler Freeman & Herz LLP filed a derivative lawsuit in the Superior Court of Washington in and for King County on behalf of Nominal Defendant Coinstar, Inc. (“Coinstar” or the “Company”) against certain of the Company’s officers and members of the Company’s Board of Directors (the “Board”) to recover for the losses suffered by the Company as a result of Defendants’ breaches of fiduciary duty in connection with the Company’s commission of illegal acts, failure to implement sufficient controls and failure of oversight, which has exposed Coinstar to millions of dollars in damages, criminal and civil penalties, as well as loss of goodwill and other economic and pecuniary damages.
The case name is styled Willis, et al. v. Coinstar, Inc., et al. A copy of the complaint filed in this action is available from the Court, or can be viewed by clicking on the link to the right.
The complaint alleges that the Board has failed to reasonably oversee and mandate the contemporaneous dissemination of material information concerning the Company’s financial prospects. In addition, certain members of the Board exploited the market’s false confidence in the Company by engaging in illegal stock transactions based on material, nonpublic information concerning the Company’s prospects. As a result of its failure to institute and/or enforce sufficient controls to prevent these illegal acts by Board members, the Board breached its fiduciary duties to Coinstar and exposed the Company to civil and criminal liability.
As recently as October of 2010, prospects looked very bright for Coinstar. The Company was reporting increased sales, revenues and profit from continuing operations. For example, on October 28, 2010, Coinstar filed its quarterly report for the third quarter of the 2010 fiscal year, reporting that sales had climbed by a striking 42% over the same quarter the previous year, meeting analysts’ estimates. In addition, revenues for Coinstar’s DVD rental business, Redbox Automated Retail, LLC (“Redbox”), increased over 54% as compared with the third quarter of 2009.
Coinstar’s positive news and projections were very well-taken by the market, leading to a dramatic rise in the Company’s per share price. Indeed, announcement of Coinstar’s fourth quarter 2010 earnings forecast caused the Company’s common stock to rise 24% in the space of one day, October 28th. Things improved further just a few weeks later, when rumors hit the market suggesting that Amazon.com, Inc. (“Amazon”) was considering a merger or buyout of the Company.
It was during this short-lived appreciation in Coinstar common stock that Defendants sold thousands of shares of Coinstar common stock. Indeed, six of the seven members of the Board, Defendants Arik A. Ahitov, Paul D. Davis, David M. Eskenazy, Robert D. Sznewajs, Daniel W. O’Connor and Ronald B. Woodard, sold over $1.35 million in Coinstar common stock shares between November 2, 2010 and November 23, 2010. As would become evident just a few weeks later, the trades made by the Coinstar directors and officer were based on non-public information concerning decreased earnings in the Company’s Redbox subsidiary due to inventory and vendor problems.
On January 12, 2011, the extraordinary amount of insider stock sales were explained, at least in part, when Coinstar announced that circumstances had changed and the Company would not meet its prior revenue and earnings estimates for the fourth fiscal quarter of 2010. The reasons given by Coinstar for the expected downturn in earnings raised considerable question about the Company’s prior guidance. For instance, Coinstar stated that the Company had “underestimated the impact that the” 28-day delay imposed by various movie distributors on rental DVDs would have on its earnings. Also, Coinstar related inventory problems that led to a decrease in revenue, due to weak demand for Blu-Ray DVDs. This confused and dismayed most analysts who, taking the Company’s previous statements at face value, believed the 28-day delay to be of little consequence and Redbox’s inventory management to be beyond reproach.
The market reacted vigorously to Coinstar’s misstatements and omissions in the Company’s earlier projections and market guidance. In the space of just two trading days Coinstar’s stock lost over 27% of its market value, or more than $500 million in market capitalization. Unsurprisingly, the announcement of the revised guidance also sparked a number of investigations and civil lawsuits claiming violations of Sections 10(b) and 20(a) of the Securities and Exchange Act of 1934, 15 U.S.C. §§ 78j(b), 78t(a).
Aside from the loss of millions of dollars in market capitalization, Coinstar faced a number of serious and costly penalties related to illegal insider stock transactions and false and misleading statements. False and misleading statements made in relation to the Company’s financial prospects and projections are punishable under the Exchange Act and expose the Company to various civil and criminal penalties for fraud. Similarly, stock transactions made on the basis of material, non-public information are punishable both civilly and criminally. In addition, the Company faced loss of goodwill and market and investor confidence due to the serious breaches of fiduciary duty.
Additional cases were filed on behalf of the Company and its shareholders in the Washington court and in the United States District Court for the Western District of Washington. On April 27, 2012, the parties in the related state court and federal actions entered into a Stipulation of Settlement providing for, among other things, implementation by the Company of certain corporate governance reform that address Plaintiffs’ allegations and are designed to enhance the overall responsiveness of the Board, including measures relating to audit committee responsibilities, insider trading controls and enhanced internal auditing. A copy of the Stipulation of Settlement is available from the court or can be viewed by clicking on the link to the right. On August 6, 2012, the District Court preliminarily approved the settlement and set a hearing for the court to consider final approval of the settlement for November 9, 2012 at 9:00 a.m.
Wolf Haldenstein has extensive experience in the prosecution of securities class actions and derivative litigation in state and federal trial and appellate courts across the country. The firm has approximately 70 attorneys in various practice areas; and offices in Chicago, New York City, and San Diego. The reputation and expertise of this firm in shareholder and other class litigation has been repeatedly recognized by the courts, which have appointed it to major positions in complex securities multi-district and consolidated litigation.
If you wish to discuss this action or have any questions, please contact Wolf Haldenstein Adler Freeman & Herz LLP at 270 Madison Avenue, New York, New York 10016, by telephone at (800) 575-0735 (Gregory M. Nespole, Esq., or Derek Behnke), or via e-mail at email@example.com. All e-mail correspondence should make reference to Coinstar.