kansas city southern complaint

7/27/2019 Kansas City Southern Complaint

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UNITED STATES DISTRICT COURTWESTERN DISTRICT OF MISSOURI

DON L. GROSS, Individually and on Behalf ofAll Others Similarly Situated,

Plaintiff,

vs.

KANSAS CITY SOUTHERN, DAVID L.STARLING, DAVID R. EBBRECHT,PATRICK J. OTTENSMEYER andMICHAEL W. UPCHURCH,

Defendants.

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No. _______________

COMPLAINT FOR VIOLATIONS

OF THE FEDERAL SECURITIES LAW

Plaintiff Don L. Gross alleges the following based upon the investigation of Plaintiffs

counsel, which included a review of United States Securities and Exchange Commission (SEC)

filings by Kansas City Southern (KCS or the Company), as well as regulatory filings and

reports, securities analysts reports and advisories about the Company, press releases and other

public statements issued by the Company, and media and analyst reports about the Company.

Plaintiff believes that substantial additional evidentiary support will exist for the allegations set forth

herein after a reasonable opportunity for discovery.

NATURE OF THE ACTION

1. This is a securities class action on behalf of purchasers of the common stock of KCSbetween October 18, 2013 and February 18, 2014, inclusive (the Class Period), seeking to pursue

remedies under the Securities Exchange Act of 1934 (the Exchange Act). Defendants include

KCS and certain of its senior executives (Defendants).

Case 4:14-cv-00345-BCW Document 1 Filed 04/15/14 Page 1 of 29


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JURISDICTION AND VENUE

2. The claims asserted herein arise under and pursuant to 10(b) and 20(a) of theExchange 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].

3. This Court has jurisdiction over the subject matter of this action pursuant to 28 U.S.C.1331 and 27 of the Exchange Act.

4. Venue is proper in this District pursuant to 27 of the Exchange Act and 28 U.S.C.1391(b). Many of the acts charged herein, including the dissemination of materially false and

misleading information, occurred in this District.

5. In connection with the acts alleged in this Complaint, Defendants, directly orindirectly, used the means and instrumentalities of interstate commerce, including, but not limited to,

the mails, interstate telephone communications and the facilities of the New York Stock Exchange

(NYSE).

PARTIES

6. Plaintiff Don L. Gross, as set forth in the accompanying certification and incorporatedby reference herein, purchased the common stock of KCS during the Class Period and has been

damaged thereby.

7. Defendant KCS, headquartered in Kansas City, Missouri, operates railroads in theMidwest and Mexico that run north to south, unlike most other U.S. railroads that run east to west.

The Companys stock traded on the NYSE, an efficient market, during the Class Period under the

ticker symbol KSU. As of October 11, 2013, there were more than 110 million shares issued and

outstanding.

8. Defendant David L. Starling (Starling), at all relevant times, served as KCSsPresident and Chief Executive Officer (CEO).



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9. Defendant David R. Ebbrecht (Ebbrecht), at all relevant times, served as KCSsExecutive Vice President and Chief Operating Officer (COO).

10. Defendant Patrick J. Ottensmeyer (Ottensmeyer), at all relevant times, served asKCSs Executive Vice President Sales & Marketing.

11. Defendant Michael W. Upchurch (Upchurch), at all relevant times, served asKCSs Executive Vice President and Chief Financial Officer (CFO).

12. Defendants Starling, Ebbrecht, Ottensmeyer and Upchurch are collectively referred toherein as the Individual Defendants.

13.

During the Class Period, the Individual Defendants, as senior executive officers

and/or directors of KCS, were privy to confidential and proprietary information concerning KCS, its

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

Defendants also had access to material adverse non-public information concerning KCS, as

discussed in detail below. Because of their positions with KCS, the Individual Defendants had

access to non-public information about its business, finances, products, markets and present and

future business prospects via internal corporate documents, conversations and connections with other

corporate officers and employees, attendance at management and/or board of directors meetings and

committees thereof and via reports and other information provided to them in connection therewith.

Because of their possession of such information, the Individual Defendants knew or recklessly

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

concealed from, the investing public.

14. The Individual Defendants are liable as direct participants in the wrongs complainedof herein. In addition, the Individual Defendants, by reason of their status as senior executive

officers and/or directors, were controlling persons within the meaning of 20(a) of the Exchange

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



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complained of herein. Because of their positions of control, the Individual Defendants were able to

and did, directly or indirectly, control the conduct of KCSs business.

15. The Individual Defendants, because of their positions with the Company, controlledand/or possessed the authority to control the contents of its reports, press releases and presentations

to securities analysts and through them, to the investing public. The Individual Defendants were

provided with copies of the Companys reports and press releases alleged herein to be misleading,

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

cause them to be corrected. Thus, the Individual Defendants had the opportunity to commit the

fraudulent acts alleged herein.

16. As senior executive officers and/or directors and as controlling persons of a publiclytraded company whose common stock was, and is, registered with the NYSE and governed by the

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

truthful information with respect to KCSs 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 KCS common stock would be based upon truthful

and accurate information. The Individual Defendants misrepresentations and omissions during the

Class Period violated these specific requirements and obligations.

17. The Individual Defendants are liable as participants in a fraudulent scheme andcourse of conduct that operated as a fraud or deceit on purchasers of KCS common stock by

disseminating materially false and misleading statements and/or concealing material adverse facts.

The scheme: (i) deceived the investing public regarding KCSs business, operations and

management and the intrinsic value of KCS common stock; (ii) allowed the Company to obtain

upgraded corporate debt ratings; (iii) facilitated the Company issuing hundreds of millions of dollars



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of corporate debt and using some of those the proceeds to retire expensive leases on its operating

equipment; and (iv) caused Plaintiff and members of the Class to purchase KCS common stock at

artificially inflated prices.

CLASS ACTION ALLEGATIONS

18. Plaintiff brings this action as a class action pursuant to Federal Rule of CivilProcedure 23(a) and (b)(3) on behalf of a class consisting of all those who purchased the common

stock of KCS between October 18, 2013 and February 18, 2014, inclusive, and who were damaged

thereby (the Class). Excluded from the Class are the Individual 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 the Individual Defendants have

or had a controlling interest.

19. The members of the Class are so numerous that joinder of all members isimpracticable. Throughout the Class Period, KCS common stock was actively traded on the NYSE.

While the exact number of Class members is unknown to Plaintiff at this time and can only be

ascertained through appropriate discovery, Plaintiff believes that there are thousands of members in

the proposed Class. Record owners and other members of the Class may be identified from records

maintained by KCS or its transfer agent and may be notified of the pendency of this action by mail,

using the form of notice similar to that customarily used in securities class actions.

20. Plaintiffs claims are typical of the claims of the members of the Class as all membersof the Class are similarly affected by Defendants wrongful conduct in violation of federal law

complained of herein.

21. Plaintiff will fairly and adequately protect the interests of the members of the Classand has retained counsel competent and experienced in class action and securities litigation.



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22. Common questions of law and fact exist as to all members of the Class andpredominate over any questions solely affecting individual members of the Class. Among the

questions of law and fact common to the Class are:

(a) whether the federal securities laws were violated by Defendants acts asalleged herein;

(b) whether statements made by Defendants to the investing public during theClass Period misrepresented material facts about the business and operations of KCS;

(c) whether the price of KCS common stock was artificially inflated during theClass Period; and

(d) to what extent the members of the Class have sustained damages and theproper measure of damages.

23. A class action is superior to all other available methods for the fair and efficientadjudication of this controversy since joinder of all members is impracticable. Furthermore, as the

damages suffered by individual Class members may be relatively small, the expense and burden of

individual litigation make it impossible for 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.

BACKGROUND TO THE CLASS PERIOD1

24. KCS was founded in 1887 with the goal of connecting the U.S. heartland to the Gulfof Mexico. The Companys wholly-owned operating subsidiary is the Kansas City Southern

Railway (KCSR), a Class I railroad headquartered in Kansas City, Missouri. Unlike other U.S.

railways, KCSRs tracks run primarily south and north, rather than east and west. Due to the

Companys geographic placement, KCSR benefitted from the passage of the North American Free

Trade Agreement (NAFTA) in 1995 and is sometimes known as The NAFTA Railroad because

1 All emphasis in bold and italics is added, unless otherwise indicated.



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its operations carry goods between the midwest and Mexico. In 1993, the Company purchased the

MidSouth Railroad, which provided its first east-west route, connecting Dallas, Texas to Meridian,

Mississippi.

25. KCS operates its Mexican railroad under a 1997 concession from the Mexicangovernment that purportedly extended to 2027 (the Concession). According to the Concession,

KCS had the exclusive right to use, but did not own, all tracks and buildings necessary for its

Mexican operation. KCS was obligated to maintain the right of way, track structure, buildings and

related maintenance facilities to the operational standards specified in the Concession and to return

the assets in that condition at the end of the Concession period. Under the Concession and Mexican

law, the Company was also free to set rates unless the Mexican government determined that there

was no effective competition in Mexicos rail industry. Mexican Railroad Services Law and

regulations and the Concession established several circumstances under which the Concession would

terminate early: revocation by the Mexican government, statutory appropriation, or KCSs voluntary

surrender of its rights or liquidation or bankruptcy. If the Concession was revoked by the Mexican

government, KCS would receive no compensation.

26. According to a February 18, 2014Bloombergreport, KCS obtained approximately46% of its 2013 revenues from Mexican operations. The KCS Concession required the undertaking

of capital projects, including those described in a business plan filed every five years with the

Mexican government. KCS submitted its five-year plan with the Mexican government in the fourth

quarter of 2012.

27. As KCS entered fiscal 2013, the Company sought to get out from under costly leaseson its operating equipment, seeking to raise capital to purchase the equipment outright. The

Company also sought to restructure costly corporate debt at lower interest rates. This would allow

the Company to report lower expenses and higher profits. The Companys corporate debt was then



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rated junk. And, according to the Companys annual financial report filed with the SEC on Form 10-

K for the period ended December 31, 2012, until the Company successfully obtained an investment

grade corporate debt rating, its debt instruments and revolving credit facility would continue to

contain negative covenants, including one in its credit facility restricting the Companys ability to

freely deploy proceeds in excess of pre-defined thresholds from insurance settlements or asset sales,

which would only terminate[] upon conversion of [Kansas City Southern de Mexico, S.A. de C.V.s

(KCSM)] revolving credit facility from secured to unsecured upon KCSMs attainment of

investment grade credit ratings from at least two of the three primary rating agencies .

28.

So the Company set out to demonstrate to the investment community and to the

corporate debt rating agencies in particular, that the Companys business metrics and financial

prospects were deserving of an investment grade debt rating. In particular, the Company sought to

demonstrate that it could significantly decrease its Operating Ratio so that even if carloads and

revenues decreased, KCS could report profits. As explained by www.investopedia.com [last visited

April 10, 2014], an Operating Ratio shows the efficiency of a companys management by

comparing operating expense to net sales[,] such that the smaller the ratio, the greater the

organizations ability to generate profit if revenues decrease.

29. On January 22, 2013, the Company issued a release announcing its fourth quarter and2012 financial results. Later that day, the Individual Defendants conducted an earnings conference

call on behalf of the Company during which, in addition to discussing the Companys fiscal and

fourth quarter 2012 results, they provided fiscal 2013 guidance that if met would convince the

rating agencies to upgrade the Companys corporate debt ratings to investment grade. Specifically,

Defendants stated the Company was then on track to achieve during fiscal 2013:

mid single-digit volume growth along with mid-single digit pricing [growth]; revenue growth to be high single-digit, somewhat higher on a percentage growth

basis than 2012; and



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operating ratio [would] continue to improve given that [KCS was] starting from thebase in the 60%s and would continue to improve during the years ahead.

30. The market reacted positively to the news. As reported byReutersthat evening, theCompany forecast 2013 revenue growth in the high-single digits and on this news, [s]hares of

Kansas City Southern, which have risen about 30 percent since the beginning of 2012, closed up

nearly 5 percent at an all-time high of $91.67 on Tuesday.

31. Thereafter, on February 20, 2013, William H. Galligan (Galligan), then KCSsHead of Investor Relations, presented on behalf of KCS at the Barclays Capital Industrial Select

Conference in New York City. During the presentation, Galligan emphasized that one of [the] key

operation areas for KCS was in [] Port Arthur, Texas, [in] the Gulf region of Texas where six of

the largest 50 refineries in the world are located on [KCSs] line there[,] stating that the Company

expected to see tremendous crude by rail growth there. Galligan also disclosed, for the first time,

that another thing thats going to ramp up probably, were in very serious negotiations with a third

party that has interest to build a crude facility on our property in Port Arthur, Texas[,] stating

that this would be a mixed-use facility, it could take heavy crude from Western Canada, it can take

Bakken or a lighter crude, it can take refined products, it can even take ethanol products. Galligan

further emphasized that the impact on the Companys revenues and earnings would be a game

changer and that the impact could hit as early as 2014, stating, in pertinent part, as follows:

We are we kind of fit perfectly into the plans, because our facility, our land is righton the Gulf of Mexico. Its probably the largest plot of land still undeveloped on thePort of in the middle of all these refineries. There are pipelines already runningthrough it. Theres rail access into it. Its a perfect facility.

If this facility is built, and I would say theres a pretty good likelihood thats going tohappen, and probably sooner rather than later, that would take multiple unit trains aday of product.And that would be kind of a game changer again for Kansas CitySouthern in terms of its whole business profile.And, you know, its theoreticallypossibleyou would start seeing that kind of huge growth in unit trains in 2014. Itall depends on when we can finalize the deal.



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So one way or another, its going to grow substantially. We think theres a goodchance that theres going to be a lot of growth in this facility.

32. As the market analyzed and absorbed this news, the price of KCS stock continued toclimb.

33. On February 28, 2013, the Kansas City Business Journal, in an article entitled, KCSouthern rides high on positive reports from Credit Suisse, Wells Fargo, noted the price rise in KCS

stock and stated, in pertinent part, as follows:

Kansas City Southern stock is surging on a pair of positive reports from Credit SuisseGroup AG and Wells Fargo.

The Kansas City based railroad companys (NYSE: KSU) stock hit a 52-week highon Wednesdays news, rising to as much as $107.3 a share from $99.60 during theday.On Thursday afternoon, the price sagged slightly to $104.01 a share, accordingto Yahoo Finance.

The Credit Suisse report, written by analyst Allison Landry, said the company isconducting very serious negotiations with an energy company about developing acrude oil terminal in Port Arthur, Texas, that would handle as many as five trains fullof crude oil a day.

The new terminal would help KCS play a big role in moving heavy crude fromCanada to the Gulf Coast andcould increase the companys total carloads by as

much as 8 percent, the report said. Moving the oil would generate significantlyhigher revenue for the firm than analysts initially estimated.

We see substantial upside to our estimates should KSU ink a deal to construct thePort Arthur Crude Terminal, Landry said in the report, with upwards of $1 inincremental earnings accretion by 2015.

The Wells Fargo report, written by analyst Anthony Gallo, said that the Port Arthurlocation is favorable because of its proximity to chemical plants and oil refineries onthe Gulf Coast and that the deal would be very beneficial for the railroad company.The report also said Kansas City Southern owns around 500 acres in Port Arthur.

34. Then, on March 8, 2013, the Wall Street Journalreported that corporate debt ratingagency Standard & Poors Ratings Services upgraded its ratings on [KCS] to investment grade,

noting the regional railroad companys improving operating efficiency, disciplined debt reduction

and lower interest expense[,] adding that [t]he outlook is stable, reflecting expectations the



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companys revenues will benefit from modest pricing increases and growth in the Mexican economy

will continue to enhance volumes.

35. In an April 2, 2013 letter to KCS, following the filing of the Companys annualfinancial report for fiscal 2012 on Form 10-K, the SEC directed the Company to enhance its

discussion of known trends impacting its financial results in future filings with the SEC, stating, in

pertinent part, as follows:

We note your disclosures regarding the factors for which fluctuations in incomestatement line items are attributed; however, in addition to discussing the reasons forthe change (or lack thereof), we believe you should also quantify the reasons for thechange, particularly when more than one factor is attributed to the change. For

example, you state that certain increases in revenues were primarily attributed toseveral factors, and partially offset by another factor. For a company with the sizeand breadth of operations as yours, these disclosures should be presented in a mannerso as to allow investors to discern the relative contribution of each of the multiplecomponents cited to the total change. Please revise to separately quantify eachsignificant factor contributing to the change for each of the line items discussedwithin the results of operations section.

36. The Companys April 8, 2013 response promised to improve its disclosure of trendsin future financial filings, stating, in pertinent part, as follows:

In preparing Managements Discussion and Analysis of Financial Condition andResults of Operations (MD&A), the Company carefully considers the requirementsof Item 303(a) of Regulation S-K and the related interpretive guidance in Section III.D of SEC Release 33-6835. The Company believes the disclosures included in theResults of Operations section of MD&A in its 2012 annual report on Form 10-Kprovide relevant quantitative information necessary for an understanding of itsfinancial condition and results of operations, including a discussion of the causes ofmaterial changes from year-to-year in financial statement line items to the extentnecessary to an understanding of the registrants businesses as a whole.

* * *

While the Company believes its disclosures provide relevant quantitativeinformation and comply with existing guidance, we have considered the Staffscomments, and in future filings, commencing with our quarterly report on Form10-Q for the quarter ended March 31, 2013, we will include additionalquantification where reasonable and practical.



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37. Thereafter, on April 17, 2013, Moodys Investor Service (Moodys), which ratedKansas City Southern Railway Companys (KCSR) senior unsecured debt as investment grade,

upgraded KCSMs senior unsecured debt to investment grade.

38. On April 19, 2013, during a conference call reporting the Companys financial andoperating results for the first quarter of 2013, ended March 31, 2013, confirming the Companys

earlier comments about the ongoing negotiations to expand the Port Arthur crude oil terminal, and

expressly referencing the prior analyst jubilation about the Companys earlier announcement,

Defendant Ottensmeyer stated, in pertinent part, as follows:

I wanted to take a moment to bring everyone up-to-date on the status of ournegotiations regarding the possible development of a crude oil terminal in PortArthur, Texas. Weve seen heightened discussion in the analyst community, and wejust wanted to make sure everyone understands what we are up to.

We are currently in negotiations with a potential partner to develop a unit train,unloading and storage terminal on property that KCS owns in Port Arthur. Thatproperty is highlighted in red on this map. We are not in a position to identify ourpartner or discuss details regarding timing, volumes or revenues. So please dont askquestions.

What we will discuss are the reasons we are so optimistic about this potential

opportunity and what gives KCS a seat at the crude oil table. As you can see on thisslide, Port Arthur refineries import about 1.7 million barrels of crude oil each day.Because many of the refineries have also invested in coking capacity, there is anatural draw for heavy crude like that produced in Western Canada.

Even if or when the Keystone pipeline is completed, we believe it will be able tohandle only about half of this demand. The current rail terminal unloading capacitycan handle less than 3% of this demand.

As I said earlier, we are in negotiations with a potential partner, and we hope to beable announce a transaction very soon. However, if for whatever reason we dont

come to terms with this group, we are confident that other options would beavailable for us to capitalize on this market opportunity.

DEFENDANTS MATERIALLY FALSE

AND MISLEADING CLASS PERIOD STATEMENTS

39. The Class Period starts on October 18, 2013. On that day, before the opening oftrading, KCS issued a press release reporting its financial and operating results for the third quarter



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of 2013, ended September 30, 2013, entitled Kansas City Southern Reports Record Revenues and

Carloads, Driven by Strong Cross-Border Revenue Growth. The release emphasized that the

Company had achieved [r]evenues of $622 million,an increase of 8% over third quarter 2012 on a

3% increase in carloads[,] [o]perating income of $200 million,11% higher than operating income

in third quarter 2012[,] [o]perating ratio of 67.8%,a 0.9 point improvementover the operating

ratio in third quarter 2012[,] [d]iluted earnings per share of $1.07 compared with diluted earnings

per share of $0.82 in third quarter 2012[,] and that [a]djusted diluted earnings per share of $1.10

for third quarter 2013 increased 16% over adjusted diluted earnings per share of $0.95 in the third

quarter 2012.

40. As to the Companys Operating Ratio, the release emphasized that while [o]peratingexpenses for the third quarter were $421 million, 6% higher than the corresponding 2012 period

and [o]perating income for the third quarter of 2013 was $200 million, 11% higher than 2012

operating income[,] the Company actually reported a third quarter 2013 operating ratio of 67.8%,

a 0.9 point improvement over the 2012 operating ratio. The release also quoted Defendant

Starling stating, in pertinent part, as follows:

Kansas City Southern achieved record revenues and carloads as a result of solid,sustainable growth opportunities and strong execution by our team. Thisperformance demonstrates KCS ability to absorb the impacts of a challengingeconomic environment whileconsistently delivering strong top-line and bottom-lineresults.

The fact that KCS delivered revenue growth in all of its business units speaks to thestrength and diversity of this franchise. In addition to themany exciting growthopportunities that we see on the horizonfrom Intermodal, Auto and Energy, KCS

core carload franchise continues to deliver solid revenue performance andcontribution to our overall growth in earnings. Particularly exciting is the fact thatour cross-border revenue grew by 16% in the quarter. In addition to continuedstrength in cross-border intermodal, cross-border revenue also benefited fromstrength in steel shipments and an early rebound in export grain.



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41. Addressing the Companys forward financial guidance, and emphasizing thepurported ongoing improvement in its Operating Ratio, the release quoted Defendant Starling

stating, in pertinent part, as follows:

Looking ahead, we expect a strong end to the yearbenefited by growth in exportgrain shipments. We also look forward to long-term improvement in our operatingratio as we move forward with our plan to increase the percentage of equipment weown versus lease.

42. Following the issuance of the Companys 2013 third quarter financial results, onOctober 18, 2013, the Individual Defendants made additional positive statements on a conference

call with investors and analysts discussing the Companys financial condition, its outlook and how it

was still on track to achieve if not beat the financial guidance issued on January 22, 2013, including

stating that despite that fourth quarter for utility coal [would] look a little bit worse than last year

and the full year 2013 [would] be a little worse than all of 2012 for utility coal[,] growth in frac

sand and crude oil [would] still push the Energy business unit overall into positive single-digit

territory. Defendant Ottensmeyer also stated the Company was still expecting double-digit growth

in Automotive for 2013 in spite of a drop in growth rates during the third quarter[,] as it would

begin to see some activity from the new Nissan plant in December and the Honda and Mazda plants

[were] opening in the Salaya area in the first quarter of 2014. Defendant Starling also emphasized

that investors and analysts could be assured that well maintain stringent control of our operating

cost, which will further enhance profitability[,] and that Defendants remain[ed] very bullish on the

opportunities [the Companys] franchise provides for the next several years and beyond.

43. As reported byReuterson October 18, 2013, because the Company gets almost halfof its revenue from Mexico[,] the strength of its cross-border business has placed [KCS] in a better

position than most U.S. railroads, whose heavy dependence on coal shipments has hurt them since

early 2012 as demand for coal has slumped. Reutersalso confirmed that the Company said it

expects a strong end to the year as cross-border business grew. Cross-border shipments were



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expected to ramp-up particularly in Automotive as early as the 2014 first quarter, with several auto

manufacturers scheduled to bring new plants on line in Mexico.

44. Also on October 18, 2013, the Company filed its quarterly financial report on Form10-Q with the SEC for the quarter ended September 30, 2013, which was signed and certified under

the Sarbanes Oxley Act of 2002 by Defendants Starling and Upchurch. Concerning the exclusivity

provided to the Companys use of tracks in Mexico by the Concession, and the pricing power that

purportedly provided the Company through 2027, the Form 10-Q stated, in pertinent part, that

[u]nder KCSMs 50-year railroad concession from the Mexican government, KCSM paid

concession duty expense of 0.5% of gross revenues for the first 15 years of the Concession period

and, on June 24, 2012, KCSM began paying 1.25% of gross revenues, which is effective for the

remaining years of the Concession[,] and that [f]or the three and nine months ended September 30,

2013, the concession duty expense, which is recorded within materials and other in operating

expenses, was $3.7 million and $10.5 million, respectively, compared to $3.5 million and $6.2

million for the same periods in 2012.

45. Following the issuance of the Companys financial results, the price of KCS commonstock rose, increasing more than $4 per share to close at $117.15 on October 18, 2013 on unusually

high trading volume of nearly 1.4 million shares trading, almost twice the average daily trading

volume over the preceding ten trading days.

46. The price of KCS common stock continued rising and reached a Class Period high of$125.96 per share in intraday trading on November 14, 2013.

47. Meanwhile, with the price of KCS common stock artificially inflated, on October 24,2013 the Company announced that its two wholly-owned operating subsidiaries were raising

hundreds of millions of dollars in private debt placements not registered under the Securities Act of

1933. KCSR priced and sold$200 millionaggregate principal amount of its 3.85% Senior Notes



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due 2023, saying it would use the net proceeds to: (i) finance the purchase of certain leased

equipment, pay any early lease termination charges related thereto and finance the purchase of new

equipment to replace certain leased equipment under expiring leases; and (ii) pay fees and expenses

related to the offering. KCSM priced and sold$250 millionaggregate principal amount of its

Floating Rate Senior Notes due 2016, saying it would use the net proceeds to: (i) redeem certain of

its senior notes due in 2018 and 2021; (ii) finance the purchase of certain leased equipment, pay any

early lease termination charges related thereto and finance the purchase of new equipment to replace

certain leased equipment under expiring leases; and (iii) pay fees and expenses related to the

offering.

48. On October 24, 2013, Moodys assigned a rating of Baa3 and Fitch assigned a ratingof BBB- to the new senior notes offered by KCSR and KCSM. In its release issued that day,

Moodys reiterated, as to its Ratings Rationale, that [t]he majority of the proceeds from these

notes will be used to finance the buy-out of equipment leases and to finance the replacement of

equipment with near-term lease expirations. The release further emphasized that Moody's

anticipates that the economic benefits of the lease buy-outs would offset any such increase in

leverage as the company is expected to focus on NPV positive transactions that result in increased

profitsand operating cash flow[,] and that [t]he stable rating outlook for KCS and its subsidiaries

reflects Moodys expectations that the companys operations will be able to maintain solid

operating marginswhile experiencing single-digit revenue growth over the near term. Similarly, in

its release issued that day, Fitch too reiterated that [p]roceeds from the issuance [would] largely be

used to purchase rolling stock that [was] currently under operating lease, or to acquire new

equipment that [would] replace equipment under leases set to expire in the near term[,] adding that:

The BBB- ratings for KSU and its primary operating subsidiaries are supported bythe companys solid operating margins, steadily increasing revenues,moderateleverage, and positive free cash flow (FCF).Fitch expects the company to continueto produce healthy operating results in the near to intermediate term driven by a



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growing cross-border business, an improving automotive market, and expectationsfor a rebound in grain shipments after the weak harvest in 2012.Fitch notes thatthe health of KCSs balance sheet has improved after the company completed amajor refinancing of much of its remaining high yield debt in the first half of 2013.

49. The statements referenced above in 39-42 and 44 were each materially false andmisleading when made because they misrepresented and failed to disclose the following adverse

facts, which were known to Defendants or recklessly disregarded by them:

(a) that KCSs utility coal volumes were declining below forecasted levels (inaddition to the cooler summer and two generating units shutting down earlier than anticipated on

October 1, 2013) as other customers were either experiencing problems or closed plants;

(b) that KCSs crude oil shipments were declining below forecasted levels as theCompany faced increased competition and oil produced in various regions was directed to locations

not serviced by KCS;

(c) that the construction of the Port Arthur crude oil terminal was experiencingoperational difficulties which were delaying its completion and the Companys realization of the

benefits from the plant;

(d) that carloads in the Companys Chemical & Petroleum shipments to Mexicohad declined during the fourth quarter of 2013 due to operational issues with the Companys

customers in Mexico;

(e) that the Companys anticipated ramp-up of its Mexican auto shipmentbusiness was not advancing to the degree Defendants led the market to believe it was as the new

plants were not coming on line and there would be a negligible benefit to the Companys revenues

and profits in 2014;

(f) that Mexican government officials were privately clamoring to control thetariffs and/or curtail the exclusivity provided to KCS in Mexico railway shipping under the

Concession, exclusivity which the Mexican government was claiming resulted in KCS investing less



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into railway capital and charging higher shipping prices in Mexico than the market would otherwise

provide for absent the Concession; and

(g) based on the foregoing, Defendants lacked a reasonable basis for their positivestatements about the Company, its business, operations and earnings.

50. On January 24, 2014, KCS issued a press release announcing its 2013 fourth quarterand fiscal financial results for the period ended December 31, 2013. The Company reported 2013

fourth quarter net income of $113.8 million, or $1.03 per share, on revenues of $615.6 million,

significantly missing the net income of $1.10 per share on revenues of $618.1 million the investment

community had been led to expect based on Defendants bullish Class Period statements. For fiscal

2013, net income fell to $3.98 per share, significantly missing the $4.05 per share the investment

community had been led to expect based on Defendants bullish Class Period statements.

Significantly, where the Companys Operating Ratio had decreased to 67.8% for the 2013 third

quarter, and Defendants had led the market to believe on October 18, 2013 that it was continuing to

decline, the Companys Operating Ratio actually increased in the 2013 fourth quarter to 68.1% a

0.3 point increase.

51. During a call with investors that followed the Companys earnings release, displayinga final scorecard and how [KCS] perform[ed] versus [its] guidance[,] Defendant Starling noted

that [i]n terms of volume, despite that Defendants had forecasted mid single-digit growth[,]

[w]ith [the Companys] reported 2% growth for the year, [it had] obviously [come] in below that

guidance. Defendants also disclosed that KCSs Energy business actually declined 17% in the 2013

fourth quarter, with the Companys utility coal volumes the lowest for any quarter since the

beginning of 2006 due to the earlier than expected seasonal shutdown at one plant [the Company]

serve[s] in Texas, unplanned outages for one month at another plant [it] serve[s] in Louisiana, and

reduced shipments to a third plant that [it] serve[s] due to derating in anticipation of permanently



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shutting down one generating unit there by the end of 2015. Also bringing the Companys 2013

fourth quarter Energy business down, [c]rude oil shipments declined by 8% during the quarter,

the first time in a couple of years that [Defendants had] seen decline in this business[,] with [s]ome

of the factors driving this decline include[ing] shifting supply pattern among refiners, more light

sweet crude coming into [KCSs] service region by pipeline and water, a shift in the destination

for Bakken crude away from the Gulf and more toward the eastern refineries[,] and increased

pipeline capacity and limited storage availability at one of the terminals [the Company] serve[d] in

the Port Arthur area. Carloads in the Companys Chemical & Petroleum business declined by 4%

in the 2013 fourth quarter due to weakness in petroleum shipments in Mexico attributable entirely to

large customers, with one suffering a residual impact of flooding in Southern Mexico earlier in the

quarter in October as well as some terminal congestion on the part of [the] customer, which reduced

the level of shipments[,] and the second, a utility customer, again in Mexico, which shifted its

power generation away from fuel oil to hydroelectric and natural gas[.] As to the previously

promised increases in the Companys Automotive business, Defendants conceded that [t]he ramp-

up in production at the [Companys] new auto plants [in Mexico would] occur over a bit longer

period of time than [anticipated] a year ago[,] causing a ripple effect on other products like steel

and plastics and those other commodities that [the Company] move[s] that are connected to auto

plants during 2014. Defendants also disclosed that operating expenses increased 6% in the 2013

fourth quarter, including year-over-year increases in headcount (compensation and benefit expenses)

and purchased services (such as track repairs and trackage rights), bringing Operating Ratio down.

52. The Company also offered a disappointing earnings growth outlook for fiscal 2014,forecasting per-share earnings for 2014 to rise only in the mid-teens, while the investment

community had been led to expect 26% growth to $5.02 per share in earnings based on Defendants

bullish Class Period statements.



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53. The dour news was Company-specific as both Norfolk Southern Corp. and UnionPacific Corp. had posted stronger-than-expected results days preceding the Companys

announcement.

54. In response to the Companys announcement, on January 23, 2014, the price of KCScommon stock declined $17.79 per share more than 15% from its close of $117.28 per share on

January 23, 2013 to close below $100 per share on unusually high trading volume of more than 14.6

million shares trading, or more than 15 times the average daily trading volume over the preceding

ten trading days. In all, the price of KCS common stock price declinedmore than$26 per share

from its Class Period high of $125.96 per share on November 14, 2013, erasing more than $2.9

billion in market capitalization.

55. Summarizing the markets revised view of KCS in its report downgrading theCompanys stock valuation from $135 a share to $109 a share on January 28, 2014, Raymond James

& Associates confirmed that Kansas City Southerns commentary largely reset earnings

expectations to more achievable levels in addition to lowering valuation.

56. Thereafter, on February 18, 2014, the market learned that the lower house of theMexican legislature had approved a new bill to increase rail competition in Mexico. The legislation,

if it passed Mexicos Senate, would give third-party companies access to KCSs now-exclusive

freight and passenger rail networks. As emphasized by The Wall Street Journalin its February 19,

2014 report entitled Railroads and Mexican Government on Collision Course: Kansas City

Southern and Grupo Mexico Fight Bill That Would Strip Exclusive Track Rights, the Mexican

government had long been dissatisfied with KCSs performance under the Concession and Company

officials had known of that discontent and the threat to the profits on the Companys Mexican

operations:

A bill to open the rails to new passenger and freight operators has passed Mexico'slower house of Congress and could be voted on in the Senate before the end of April.



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The measures sponsors say the rail duopoly has led to low investment and highfreight prices.

The railroads say the legislation would nullify 30-year exclusive licenses theypurchased 17 years ago and create congestion on the tracks. The new law also wouldplace the burden of maintaining rail crossings on the companies, rather than thefederal government, potentially opening the companies to liability claims if accidentsoccur, the railroads say.

The legislation was expected to have been a point of discussion during U.S. PresidentBarack Obamas meeting here Wednesday with Mexican President Enrique PeaNieto.

The effort to open up the rails follows Mr. Pea Nietos drive to increasecompetition in such industries as banking, energy and telecommunications. OnWednesday he proposed a law that would give antitrust authorities greater powersto ensure competition.

Mexicos continued role as a global manufacturing powerhouse depends in part on itsability to move cars and other goods out of the country quickly by rail.

Mr. Pea Nieto also plans to boost the countrys modest passenger railway networkby auctioning off licenses in the coming months to lay track in central andsoutheastern Mexico. The state of Quintano Roo, home to beach destinations such asCancn, has no rail infrastructure, for example.

The Mexican rail system was privatized in the late 1990s by then-president ErnestoZedillo, who served on the Union Pacific board for five years after his presidency.

The bill Mexicos Congress seeks would partially reverse that privatization byforcing Ferromex and Kansas City Southern de Mxico to open their rails to otheroperators at fees regulated by the government.

* * *

Kansas City Southern has called in the big guns in an attempt to stymie the raillegislation.

Patrick Ottensmeyer, Kansas City Southerns executive vice president and chiefmarketing officer, told investors at a conference last week that U.S. CommerceSecretary Penny Pritzker addressed the companys concerns when she met with

senior Mexican officials recently. The Commerce Department confirmed that themeasure was a topic of conversation. The company hopes that intensive lobbyingcan kill, or at least soften, the legislation.

Were using every available channel to make sure our interests are protected, and atthe end of the day, we dont think this will be a threat to our franchise there, Mr.Ottensmeyer says.



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The legislation says insufficient investment has stalled expansion of the railsystem, which has carried a quarter of the countrys freight since 2006, whileprices have more than quadrupled. Rail handles 42% of all cargo transported in theU.S. and 64% of that in Canada. The high concentration of cargo that traversesMexico by truck clogs and damages roads and poses a threat to public safety and the

cargo itself, according to the bills sponsors.

Its intolerable that in recent years they have only built [25 miles] of railway. Thisis why we have to get more competition in a sector dominated by two companies,says Manlio Fabio Beltrones, head of the ruling PRI party in Mexicos lowerhouse of Congress.

57. On this news, the price of KCS stock further plummeted, closing down more than $4per share on February 18, 2014 alone, on unusually high trading volume of more than 6.3 million

shares trading.

58. As reported by The Economiston March 15, 2014:The bills authors had President Enrique Pea Nietos backing. Rail bosses say hewas talked into supporting it by steelmakers, whose trade body, the National SteelChamber, is headed by a friend of the president, Alonso Ancira. The Chamber saysthat the rail costs of shipping steel through Mexico are 57% more than in theUnited States, which it blames on a lack of competition.The lower-house bill setout to fix that with three new impositions on the concession-holders:regulation oftheir tariffs where necessary; a requirement to offer smooth interchanges betweentheir networks; and freedom for new competitors to use their lines, even though they

would not have to invest in their upkeep.

59. The market for KCS common stock was open, well-developed and efficient at allrelevant times. As a result of these materially false and misleading statements and failures to

disclose, KCS common stock traded at artificially inflated prices during the Class Period. Plaintiff

and other members of the Class purchased or otherwise acquired KCS common stock relying upon

the integrity of the market price of KCS common stock and market information relating to KCS, and

have been damaged thereby.

60. During the Class Period, Defendants materially misled the investing public, therebyinflating the price of KCS common stock, by publicly issuing false and misleading statements and

omitting to disclose material facts necessary to make Defendants statements, as set forth herein, not



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false and misleading. Said statements and omissions were materially false and misleading in that

they failed to disclose material adverse information and misrepresented the truth about the Company,

its business and operations, as alleged herein.

61. At all relevant times, the material misrepresentations and omissions particularized inthis Complaint directly or proximately caused, or were a substantial contributing cause of, the

damages sustained by Plaintiff and other members of the Class. As described herein, during the

Class Period, Defendants made or caused to be made a series of materially false or misleading

statements about KCSs business, prospects and operations. These material misstatements and

omissions had the cause and effect of creating in the market an unrealistically positive assessment of

KCS and its business, prospects and operations, thus causing the Companys common stock to be

overvalued and artificially inflated at all relevant times. Defendants materially false and misleading

statements during the Class Period resulted in Plaintiff and other members of the Class purchasing

the Companys common stock at artificially inflated prices, thus causing the damages complained of

herein.

ADDITIONAL SCIENTER ALLEGATIONS

62. As alleged herein, Defendants acted with scienter in that Defendants knew, orrecklessly disregarded, that the public documents and statements they issued and disseminated to the

investing public in the name of the Company or in their own name during the Class Period were

materially false and misleading. Defendants knowingly and substantially participated or acquiesced

in the issuance or dissemination of such statements and documents as primary violations of the

federal securities laws. Defendants, by virtue of their receipt of information reflecting the true facts

regarding KCS, their control over, and/or receipt and/or modification of KCS allegedly materially

misleading misstatements, were active and culpable participants in the fraudulent scheme alleged

herein.



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63. Defendants knew and/or recklessly disregarded the false and misleading nature of theinformation which they caused to be disseminated to the investing public. The fraudulent scheme

described herein could not have been perpetrated during the Class Period without the knowledge and

complicity or, at least, the reckless disregard of personnel at the highest levels of the Company,

including the Individual Defendants.

64. The Individual Defendants, because of their positions with KCS, controlled thecontents of the Companys public statements during the Class Period. Each defendant was provided

with or had access to copies of the documents alleged herein to be false and/or misleading prior to or

shortly after their issuance and had the ability and opportunity to prevent their issuance or cause

them to be corrected. Because of their positions and access to material non-public information, these

Defendants knew or recklessly disregarded that the adverse facts specified herein had not been

disclosed to and were being concealed from the public and that the positive representations that were

being made were false and misleading. As a result, each of these Defendants is responsible for the

accuracy of KCS corporate statements and is therefore responsible and liable for the representations

contained therein.

LOSS CAUSATION/ECONOMIC LOSS

65. During the Class Period, as detailed herein, Defendants engaged in a scheme todeceive the market and a course of conduct that artificially inflated the price of KCS common stock

and operated as a fraud or deceit on Class Period purchasers of KCS common stock by failing to

disclose and misrepresenting the adverse facts detailed herein. When Defendants prior

misrepresentations and fraudulent conduct were disclosed and became apparent to the market, the

price of KCS common stock fell precipitously as the prior artificial inflation came out.

66. As a result of their purchases of KCS common stock during the Class Period, Plaintiffand the other Class members suffered economic loss, i.e., damages, under the federal securities laws.



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Defendants false and misleading statements had the intended effect and caused KCS common stock

to trade at artificially inflated levels throughout the Class Period, trading at nearly $126 per share in

intraday trading on November 14, 2013.

67. By failing to disclose to investors the adverse facts detailed herein, Defendantspresented a misleading picture of KCSs business and prospects. When the truth about the Company

was revealed to the market, the price of KCS common stock fell precipitously. These declines

removed the inflation from the price of KCS common stock, causing real economic loss to investors

who had purchased KCS common stock during the Class Period.

68.

The declines in the price of KCS common stock after the corrective disclosures came

to light were a direct result of the nature and extent of Defendants fraudulent misrepresentations

being revealed to investors and the market. The timing and magnitude of the price declines in KCS

common stock negate any inference that the loss suffered by Plaintiff and the other Class members

was caused by changed market conditions, macroeconomic or industry factors or Company-specific

facts unrelated to Defendants fraudulent conduct. The economic loss, i.e., damages, suffered by

Plaintiff and the other Class members was a direct result of Defendants fraudulent scheme to

artificially inflate the price of KCS common stock and the subsequent significant decline in the value

of KCS common stock when Defendants prior misrepresentations and other fraudulent conduct

were revealed.

APPLICABILITY OF PRESUMPTION OF RELIANCE:

FRAUD ON THE MARKET DOCTRINE

69. At all relevant times, the market for KCS common stock was an efficient market forthe following reasons, among others:

(a) KCS common stock met the requirements for listing, and was listed andactively traded on the NYSE, a highly efficient, electronic stock market;



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(b) as a regulated issuer, KCS filed periodic public reports with the SEC and theNYSE;

(c) KCS regularly communicated with public investors via established marketcommunication mechanisms, including regular disseminations of press releases on the national

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

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

(d) KCS was followed by securities analysts employed by major brokerage firmswho 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 marketplace.

70. As a result of the foregoing, the market for KCS common stock promptly digestedcurrent information regarding KCS from all publicly available sources and reflected such

information in the prices of the stock. Under these circumstances, all purchasers of KCS common

stock during the Class Period suffered similar injury through their purchase of KCS common stock at

artificially inflated prices and a presumption of reliance applies.

NO SAFE HARBOR

71. The statutory safe harbor provided for forward-looking statements under certaincircumstances does not apply to any of the allegedly false 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. Alternatively, to the extent that the

statutory safe harbor does apply to any forward-looking statements pleaded herein, Defendants are

liable for those false forward-looking statements because at the time each of those forward-looking

statements was made, the particular speaker knew that the particular forward-looking statement was



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false, and/or the forward-looking statement was authorized and/or approved by an executive officer

of KCS who knew that those statements were false when made.

COUNT I

Violation of 10(b) of the Exchange Act and Rule 10b-5

Promulgated Thereunder Against Defendants

72. Plaintiff repeats and realleges each and every allegation contained above as if fully setforth herein.

73. During the Class Period, Defendants disseminated or approved the materially falseand misleading statements specified above, which they knew or deliberately disregarded were

misleading in that they contained misrepresentations and failed to disclose material facts necessary

in order to make the statements made, in light of the circumstances under which they were made, not

misleading.

74. Defendants: (a) employed devices, schemes, and artifices to defraud; (b) made untruestatements of material fact and/or omitted to state material facts necessary to make the statements

made 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 Companys common stock during the Class Period.

75. Plaintiff and the Class have suffered damages in that, in reliance on the integrity ofthe market, they paid artificially inflated prices for KCS common stock. Plaintiff and the Class

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

aware that the market prices had been artificially and falsely inflated by Defendants misleading

statements.

76. As a direct and proximate result of Defendants wrongful conduct, Plaintiff and theother members of the Class suffered damages in connection with their purchases of KCS common

stock during the Class Period.



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COUNT II

Violation of 20(a) of the Exchange Act

Against the Individual Defendants

77. Plaintiff repeats and realleges each and every allegation contained above as if fully setforth herein.

78. The Individual Defendants acted as controlling persons of KCS within the meaning of20(a) of the Exchange Act as alleged herein. By reason of their positions as officers and/or

directors of KCS, and their ownership of KCS common stock, the Individual Defendants had the

power and authority to cause KCS to engage in the wrongful conduct complained of herein. By

reason of such conduct, the Individual Defendants are liable pursuant to 20(a) of the Exchange Act.

PRAYER FOR RELIEF

WHEREFORE, Plaintiff prays for relief and judgment, as follows:

A. Determining that this action is a proper class action, designating Plaintiff as LeadPlaintiff and certifying Plaintiff as a Class representative under Rule 23 of the Federal Rules of Civil

Procedure and Plaintiffs counsel as Lead Counsel;

B. Awarding compensatory damages in favor of Plaintiff and the other Class membersagainst 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 Plaintiff and the Class their reasonable costs and expenses incurred in thisaction, including counsel fees and expert fees; and

D. Such other and further relief as the Court may deem just and proper.JURY TRIAL DEMANDED

Plaintiff hereby demands a trial by jury.



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DATED: April 15, 2014 STUEVE SIEGEL HANSON LLP

/s/ Norman E. Siegel

Norman E. SiegelRachel Schwartz

Stephen Six460 Nichols Road, Suite 200Kansas City, MO 64112Telephone: 816-714-7100Facsimile: 816-714-7101Email: [email protected]: [email protected]: [email protected]

ROBBINS GELLER RUDMAN

& DOWD LLPSamuel H. RudmanMary K. Blasy58 South Service Road, Suite 200Melville, NY 11747Telephone: 631/367-7100Facsimile: 631/367-1173

ATTORNEYS FOR PLAINTIFFS

kansas city southern complaint

Documents