united states district court david young, individually and on behalf ) no. 1: 12-cv...
TRANSCRIPT
Case 1:12-cv-12405-DJC Document 22 Filed 07/22/13 Page 1 of 35
UNITED STATES DISTRICT COURT
DISTRICT OF MASSACHUSETTS
DAVID YOUNG, Individually and on Behalf ) of All Others Similarly Situated, )
)
Plaintiff, ) )
VS. )
COMMONWEALTH REIT, et al.,
Defendants.
No. 1: 12-cv-12405-DJC
AMENDED COMPLAINT
DEMAND FOR JURY TRIAL
Case 1:12-cv-12405-DJC Document 22 Filed 07/22/13 Page 2 of 35
Lead Plaintiff David Young ("Lead Plaintiff' or "Plaintiff'), by his undersigned attorneys, on
behalf of himself and the class he seeks to represent, alleges the following based upon the
investigation of Plaintiff's counsel as detailed below.
NATURE OF THE ACTION
1. This is a federal securities class action on behalf of purchasers of the common shares
of CommonWealth REIT ("CommonWealth" or "Company") between January 10, 2012 and August
8, 2012, inclusive (the "Class Period"), seeking to pursue remedies under the Securities Exchange
Act of 1934 (the "Exchange Act").
JURISDICTION AND VENUE
2. 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 1 Ob-5 promulgated thereunder by the SEC
[17 C.F.R. §240.1Ob-5].
3. This Court has jurisdiction over the subject matter of this action pursuant to 28 U. S.C.
§133 1 and Section 27 of the Exchange Act.
4. Venue is proper in this District pursuant to Section 27 of the Exchange Act and
28 U.S.C. § 1391(b). Many of the acts charged herein, including the preparation and dissemination
of materially false and misleading information, occurred in substantial part in this District.
5. In connection with the acts alleged in this complaint, Defendants, directly or
indirectly, used the means and instrumentalities of interstate commerce, including, but not limited to,
the mails, interstate telephone communications and the facilities of the national securities markets.
PARTIES
6. Lead Plaintiff David Young purchased the common shares of CommonWealth during
the Class Period, as set forth in the certification previously filed in this action and has been damaged
thereby.
Case 1:12-cv-12405-DJC Document 22 Filed 07/22/13 Page 3 of 35
7. Defendant CommonWealth is a real estate investment trust, commonly referred to as
a "REIT", which primarily owns office and industrial properties located throughout the United
States.
8. Defendant Adam D. Portnoy ("Portnoy" or "Defendant Portnoy") is, and was at all
relevant times, President and Managing Trustee of CommonWealth.
9. Defendant John C. Popeo ("Popeo" or "Defendant Popeo") is, and was at all relevant
times, Treasurer and Chief Financial Officer ("CFO") of CommonWealth.
10. Defendants Portnoy and Popeo are referred to herein as the "Individual Defendants"
(the Individual Defendants and CommonWealth are referred to collectively as "Defendants").
11. During the Class Period, the Individual Defendants, as senior executive officers
and/or directors of CommonWealth, were privy to confidential and proprietary information
concerning CommonWealth, its operations, finances, financial condition and present and future
business prospects. The Individual Defendants also had access to material adverse non-public
information concerning CommonWealth, as discussed in detail below. Because of their positions
with CommonWealth, the Individual Defendants had access to non-public information about its
business, finances, 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.
12. The Individual Defendants are liable as direct participants in the wrongs complained
of herein. In addition, the Individual Defendants, by reason of their status as senior executive
-2-
Case 1:12-cv-12405-DJC Document 22 Filed 07/22/13 Page 4 of 35
officers and/or directors, 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 were
able to and did, directly or indirectly, control the conduct of CommonWealth's business.
13. The Individual Defendants, because of their positions with the Company, controlled
and/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 Company's reports and press releases alleged herein to be misleading,
prior to or shortly after their issuance and had the ability and opportunity to prevent their issuance or
cause them to be corrected. Thus, the Individual Defendants had the opportunity to commit the
fraudulent acts alleged herein.
14. As senior executive officers and/or directors and as controlling persons of a publicly
traded company whose common shares were, and are, registered with the SEC pursuant to the
Exchange Act, and were, and are, traded on the New York Stock Exchange ("NYSE") and governed
by the federal securities laws, the Individual Defendants had a duty to promptly disseminate accurate
and truthful information with respect to CommonWealth's financial condition and performance,
growth, operations, financial statements, business, 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 CommonWealth common shares would
be based upon truthful and accurate information. The Individual Defendants' misrepresentations and
omissions during the Class Period violated these specific requirements and obligations.
15. The Individual Defendants are each liable as participants in a fraudulent scheme and
course of conduct that operated as a fraud or deceit on purchasers of CommonWealth common
-3-
Case 1:12-cv-12405-DJC Document 22 Filed 07/22/13 Page 5 of 35
shares by disseminating materially false and misleading statements and/or concealing material
adverse facts. The scheme: (i) deceived the investing public regarding CommonWealth's business,
operations, and management and the intrinsic value of CommonWealth common shares; (ii) enabled
Defendants to raise capital through a spin-off offering of Select Income REIT ("SIR") common
shares whereby the Company generated more than $170 million in net proceeds; (iii) allowed
Defendants to complete a public offering of $175 million of 5.75% unsecured senior notes;
and (iv) caused Plaintiff and members of the Class to purchase CommonWealth common shares at
artificially inflated prices.
CLASS ACTION ALLEGATIONS
16. Plaintiff brings 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 the common
shares of CommonWealth between January 10, 2012 and August 8, 2012, inclusive, and who were
damaged thereby (the "Class"). 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.
17. The members of the Class are so numerous that joinder of all members is
impracticable. Throughout the Class Period, CommonWealth common shares were 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 hundreds or
thousands of members in the proposed Class. Record owners and other members of the Class may
be identified from records maintained by CommonWealth 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.
-4-
Case 1:12-cv-12405-DJC Document 22 Filed 07/22/13 Page 6 of 35
18. Plaintiffs claims are typical of the claims of the members of the Class as all members
of the Class are similarly affected by Defendants' wrongful conduct in violation of federal law
complained of herein.
19. Plaintiff will fairly and adequately protect the interests of the members of the Class
and has retained counsel competent and experienced in class action and securities litigation.
20. Common questions of law and fact exist as to all members of the Class and
predominate 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 as
alleged herein;
(b) whether statements made by Defendants to the investing public during the
Class Period misrepresented material facts about the business and operations of CommonWealth;
(c) whether the price of CommonWealth common shares was artificially inflated
during the Class Period; and
(d) to what extent the members of the Class have sustained damages and the
proper measure of damages.
21. 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 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.
BASIS FOR PLAINTIFF'S ALLEGATIONS
22. Plaintiff's allegations are based upon the investigation of Plaintiff's counsel,
which included among other things, a review and analysis of: (a) filings made by CommonWealth
-5-
Case 1:12-cv-12405-DJC Document 22 Filed 07/22/13 Page 7 of 35
with the Securities and Exchange Commission ("SEC"); (b) press releases, press conferences,
analyst conference calls and other public statements issued by the Company; (c) news articles,
investigations, and other publications disseminated concerning Defendants and related entities;
(d) securities analyst reports concerning CommonWealth and its operations; and (e) legal actions
related to issues and events in question, including court papers filed in the actions captioned:
(i) Corvex Mgmt. LP v. CommonWealth REIT, No. 1:13-cv-10475-DJC (D. Mass. 2013);
(ii)Delaware County Emps. Ret. Fund v. Portnoy, No. 1:13-cv-10405-DJC (D. Mass. 2013); and
(iii) Centr. Laborers' Pension Fund v. Portnoy, No. 24-C-13-1966 (Md. Cir. Ct. 2013). Plaintiff
believes that substantial additional evidentiary support will exist for the allegations set forth herein
after a reasonable opportunity for discovery.
23. The allegations made herein are further supported by the first-hand knowledge of two
confidential informants ("C 1" and "C2")
24. C served as Regional Vice President of the Midwest region of CommonWealth's
management company, REIT Management and Research ("RMR"), from 2007 through April 2012.
25. C2 served as a senior property manager for RMR from January 2000 to April 2012.
SUBSTANTIVE ALLEGATIONS
CommonWealth and RMIR
26. CommonWealth, formed in 1986 under the laws of the State of Maryland and
headquartered in Massachusetts, is a REIT that owns office buildings throughout the United States,
as well as properties in Australia. The Company is focused on the acquisition, management and
leasing of office properties in the secondary Central Business District ("CBD") market and, to a
lesser extent, in the suburban office and industrial market. CommonWealth holds an unconsolidated
interest in Government Properties Income Trust ("GOV"), a REIT that primarily owns and leases to
Case 1:12-cv-12405-DJC Document 22 Filed 07/22/13 Page 8 of 35
government tenants, and a consolidated financial interest in Select Income REIT ("SIR"), a publicly
traded REIT that owns and invests in net lease, single tenant properties.
27. A REIT, a real estate investment trust, is a company that owns and in some cases
operates income producing real estate such as offices, hotels, healthcare facilities, apartments, and
shopping centers. In order to qualify as a REIT, a company must have most of its assets and income
tied to real estate investment and must distribute at least 90% of its taxable income to its
shareholders annually. REITs generally pay little or no corporate taxes because they are able to
deduct the dividends they pay from their taxable earnings.
28. Primary objectives of REITS are to increase earnings and to pay returns to investors
in the long term through dividends. Three commonly accepted measures of a REIT's operating
performance and its ability to pay dividends are Funds From Operations ("FF0"), Normalized FF0,
and Cash Available for Distribution ("CAD").' FF0 is the most commonly accepted and reported
measure of operations. FF0 is equal to net income adjusted for non-cash items such as adding back
depreciation and excluding gains or losses from sales of property. Normalized FF0 represents FF0
adjusted for non-recurring, infrequent and unusual items. An important measure of a REIT's ability
to generate and distribute dividends to its shareholders is the CAD, which is calculated by adjusting
Normalized FF0 for recurring real estate related expenditures (e.g., leasing expenses, tenant
improvements and building improvements) and other non-cash items such as adjustments for straight
lining of rents. The CAD payout ratio, which measures a company's dividend paying ability, is
calculated by dividing distributions to common shareholders by the company's CAD.
29. CommonWealth is dominated and controlled by Defendant Portnoy and his family
members.
1 These measures (FF0, Normalized FF0 and CAD) are discussed in the context of amounts available to common shareholders (i.e., after distributions are made to preferred shareholders).
-7-
Case 1:12-cv-12405-DJC Document 22 Filed 07/22/13 Page 9 of 35
30. CommonWealth is managed by RMR, a large real estate management company
headquartered in Massachusetts that is fully owned by Defendant Portnoy and his father, Barry
Portnoy. RMR's affiliated entities include RMR Advisors Inc. and RMR investment funds.
Significantly, as the chart below illustrates, all members of Common Wealth's management team
are affiliated with RMR.
Common Wealth REIT RMR RMR Entities Barry Portnoy Founder and Managing Founder, Owner, Owner, Director and Vice President
Director Director and Chairman of RIvIIR Advisors, Inc.; Trustee and Portfolio Manager of various RMR investment funds
Defendant Adam President and Managing President, CEO, Co- President, Director and Owner of Portnoy Trustee owner RMR Advisors, Inc.; Trustee and
Portfolio Manager of various RMR investment funds
Defendant Popeo Treasurer and CFO Served in various Vice President of RMR Advisors, positions including the Inc. from 2004 to 2009; Vice role of Treasurer and President of each of the RMR Executive Vice investment Funds since their President since 1997 respective formations beginning in and 2008, respectively; 2002 Vice President from 1999 to 2006; Senior Vice President from 2006 to 2008
David M. Lepore Senior Vice President and Senior Vice President Chief Operating Officer since 2006
Vern Larkin Director of Internal Audit Chief Compliance Officer of RIvIIR investment Fund
Jennifer B. Clark Secretary Secretary and Vice President from 1999 to 2006; Executive Vice President until 2008
31. Defendant Portnoy is also a member of CommonWealth's five person Board of
Trustees. The three remaining trustees, Joseph L. Morea, William A. Lamkin and Fredrick N.
Zeytoonjian, are all longtime friends and/or business partners of the Portnoys or are otherwise
affiliated with RMR related entities.
32. The two operative compensation agreements between CommonWealth and RMR are
the Business Management Agreement and the Property Management Agreement. Under the
Business Management Agreement, RMR is paid a percentage of the historical cost of
Case 1:12-cv-12405-DJC Document 22 Filed 07/22/13 Page 10 of 35
CommonWealth's real estate investments. The Property Management Agreement provides that
RMR earns management fees equal to 3% of gross collected rents and construction supervision fees
equal to 5% of construction costs.
33. RMR's management of CommonWealth creates a significant conflict of interest.
Although CommonWealth's stated goals are "current income for distribution to shareholders and
capital growth from appreciation in the value of our properties," because RMR's compensation is
primarily tied to the size of the Company's portfolio rather than to its profitability, there is a strong
incentive for RMR to cause the Company to engage in a high number of acquisitions at high prices.
34. According to C2, the Company's business decisions with respect to acquisitions were
made based on the incentives of receiving fees as opposed to the best interest of the Company. C2
further stated that the fees that RMR and the Portnoys were earning were not entirely disclosed. C2
explained that when Defendant Portnoy presented quarterly reports, he would quote the Company's
costs "excluding acquisition fees and legal." C2 explained that these costs were "going into the
Portnoys' pocket" but that that fact was "carefully camouflaged. . . so [the costs] didn't show up on
the financials."
35. C2 stated that RMR harmed CommonWealth's interests by failing to properly
conduct its diligence responsibilities and causing CommonWealth to buy buildings in poor
condition. For example, according to C2, CommonWealth purchased a property in upstate New
York where the elevators were "red-tagged" and were unusable.
36. Fees paid to RMR were a major Company expense. From 2009 through 2012,
CommonWealth paid RMR approximately $274 million in management fees. From 2009 through
2012, RMR fees were a significant expenditure for CommonWealth ranging from 7.5% to 7.9% of
revenues, 10.3% to 10.7% of expenses, and 12.9% to 13.6% of net operating income ("NOT"). From
S
Case 1:12-cv-12405-DJC Document 22 Filed 07/22/13 Page 11 of 35
2010 to 2012, RMR fees ranged from 25.5% to 27.4% of FF0 available for common shareholders.
In addition, RMR's fees represented 37.5% of CAD in 2010,47.7% in 2011 and increased to 59.1%
in 2012.
37. While RMR collected exorbitant fees for its services, CommonWealth floundered as
demonstrated in the sharp decline in the price of CommonWealth shares, which dropped by over
60% between January 1, 2007 and August 8, 2012. CommonWealth's underperformance in the
broad market over the past five years is illustrated in the chart below:
38. A comparison between the market value of CommonWealth shares and the value of
its assets indicates that the market was pricing the Company well below the book value of its equity.
By the end of 2012, CommonWealth's high volume of acquisitions resulted in CommonWealth's
ownership of approximately $7.8 billion of commercial real estate. Further, as of December 31,
2012, CommonWealth' s total assets (including commercial real estate) of $8.2 billion, net of
liabilities of $4.7 billion, yielded a net book value of equity (i.e., net worth or shareholders' equity)
-10-
Case 1:12-cv-12405-DJC Document 22 Filed 07/22/13 Page 12 of 35
of $3.5 billion. However, the market value of its common and preferred shares aggregated only $2.0
billion.
39. Another effect of the divergence between CommonWealth's shareholders' interests
and those of the Individual Defendants and RMR is the Company's lack of growth. As illustrated in
the graph below, 2 since 2010, CommonWealth's growth percentage metrics were low while RMR
collected between $62 million and $77 million in management fees per year.
(S in ais) For the Fiscal Year Ending Decenler 31, 2010 2011 202
Total [Return in 3%)(243%)
SF Owned per Share (%gth) (159%) (52%)
NOI per Share (%owth) 19.1%) (42%) 161% - -- Value
E81TDAp&Swe(%1h) (221%) (4.7%) accruing to RMR not
P shareholders FF0 rSham (%grth) (13.8%) (9.4%) 0.0% L---------
CAD per Siwa (%9ro(h) (237%) (26.5%) (169%)
Fees Paid to RMR $62.2 $691 $17.3 -----
-":!. -------
() Totswn if p1 TsIn asine Io
Ja'fy ISI c( &e S Wt1O Jaxiy 2O3.
CommonWealth Repositions Its Portfolio of Properties
40. Beginning at the onset of the financial crisis in 2007, CommonWealth struggled with
widespread vacancies in its properties, especially in the Company's suburban office market. During
this time, the Company attempted to stem the decline in its occupancy rates by offering tenants steep
rent concessions.
41. In a purported effort to improve the Company's performance, beginning in 2009,
CommonWealth undertook a plan to reposition its portfolio from the suburban office market in favor
This graph forms a part of Corvex and Related Management's presentation to CommonWealth shareholders on February 26, 2013, prior to the initiation of the action captioned Corvex Management v. Common Wealth REIT, No. 1:1 3-cv-10475- DJC (D. Mass. 2013).
-11-
Case 1:12-cv-12405-DJC Document 22 Filed 07/22/13 Page 13 of 35
of CBD office properties. The plan to reposition involved selling off its weaker performing
suburban office assets and acquiring a high volume of CBD properties.
42. As part of the plan to reposition, on July 18, 2011, CommonWealth conducted an
offering of 11.5 million common shares. The offering raised net proceeds of $530 million which
was mainly used to finance the Company's CBD acquisitions.
43. The Company assured investors that the plan to reposition was promising. In fact, on
November 2, 2011, during the third quarter 2011 earnings call, Defendant Popeo stated: "[D]espite a
very challenging market environment, we continue to make meaningful progress toward
repositioning our portfolio to more heavily weighted to high value CBD properties. Our strong
balance sheet, solid dividend payout ratio, excess cash, and $750 million of availability on our
revolving credit facility, position us to opportunistically grow cash flow as the economy improves."
CommonWealth Experiences Cash Flow Strain and Management Actively Discusses Cutting the Company's Dividend Payout
44. By the start of the Class Period, CommonWealth was still struggling with a weak
leasing market and low occupancy rates. The general market conditions, along with
CommonWealth's plan to reposition, was putting pressure on the Company's balance sheet and
results of operations and, later, on its FF0, CAD and CAD payout ratio. Further, the plan to
reposition included not only increasing CBD and selling off suburban assets, but also issuing
11.5 million shares of common stock in July 2011, increasing CommonWealth's debt, and the
issuance of additional preferred shares in 2011. As a result of these debt and equity transactions, the
Company increased its interest expense, preferred distributions and common stock distributions, all
of which negatively affected CommonWealth's key financial metrics; it lowered its CAD and
increased its CAD payout ratio. See Summary of Key Data 2010-2012, attached hereto as Exhibit A.
-12-
Case 1:12-cv-12405-DJC Document 22 Filed 07/22/13 Page 14 of 35
45. In particular, the following changes in CommonWealth's financial metrics, taken
together, would have put the Company on notice by the first quarter of 2012 that its CAD was
declining and the dividend would likely need to be cut:
. Preferred shares outstanding increased by 11 million between the first and second quarters of 2011;
Weighted average common shares outstanding-basic increased by 9.4 million between the second and third quarters of 2011;
. Preferred distributions increased by $3.3 million between the second and third quarter of 2011; and
Common distributions paid increased by $5.8 between the third and fourth quarter of 2011.
See Id.
46. Defendants were aware of the strain caused by the plan to reposition and the weak
market conditions as CommonWealth had a meticulous financial performance tracking system in
place. In fact, according to C2, CommonWealth's management was obsessive compulsive in regard
to keeping track of the money and forecasting and management would know pretty well in advance
how much cash it would have available for distribution.
47. According to Cl, CommonWealth measured its financial performance via various
tracking systems:
Lease Proposal Summaries: Lease proposal summaries are daily financial analyses
created by property managers that forecast the amount of cash needed for each lease.
Lease proposal summaries require the approval of the Regional Vice President and,
in some cases, Defendant Portnoy. According to C2, lease proposal summaries for
leases entered into during the spring of 2012 would have come out in October of
2011; these lease proposal summaries allowed management to forecast how much
cash it would need to cover the leases.
- 13 -
Case 1:12-cv-12405-DJC Document 22 Filed 07/22/13 Page 15 of 35
Budget Presentations: Budget Presentations are slide presentations that include
information regarding the state of the markets, projected vacancies and average
anticipated occupancy. The content of the Budget Presentations is compiled by
property managers and submitted to each Regional Vice President. This information
is consolidated and ultimately presented to Defendant Portnoy in November or
December of each year.
. Internal Leasing Database: CommonWealth has an internal tracking database in place
that tracks the status of each Company transaction as well as the transaction's
potential financial impact. C explained that the internal database allows illustrates
the transaction that have occurred, what is projected to occur and the financial impact
relative to tenant improvement costs, lease commissions and any other kinds of
commissions.
"Yardi" (Occupancy Database): Yardi is an internal tracking system that records
CommonWealth's occupancy rates. The data generated can be used to calculate
projected occupancy, NOT or cash.
. Internal audits: Internal Audits between the leasing database and the occupancy
database were conducted monthly or at minimum, quarterly to assess
CommonWealth's performance. Audit results are consolidated and presented to
ownership, typically by the Company President, David Lepore.
48. Most importantly, C stated that all aspects of CommonWealth's performance were
formally discussed on quarterly telephone conferences. During these conferences, each regional
Vice President reported on the Company's financial results for the quarter, reprojection for the
-14-
Case 1:12-cv-12405-DJC Document 22 Filed 07/22/13 Page 16 of 35
ensuing years, occupancy, market information, trends, and other relevant information. According to
Cl, there were nine Regional Vice Presidents on the call as well as Defendant Portnoy, Defendant
Popeo, David Lepore and others.
49. C stated that either on the February or April 2012 quarterly call, CommonWealth's
upper management discussed an upcoming dividend cut. According to Cl, by the second quarter of
2012, management discussed that the fact that the dividends were going to be cut due to the fact
that they were transitioning Common Wealth's portfolio.
Materially False and Misleading Statements Issued During the Class Period
50. The Class Period begins on January 10, 2012. On that date, CommonWealth issued a
press release announcing its quarterly common and preferred dividends. In that regard,
CommonWealth announced a common dividend of $0.50 per common share, a distribution of
$0.4453 per Series C Cumulative Redeemable Preferred Share ("Series C"), a distribution of
$0.4063 per Series D Cumulative Convertible Preferred Share ("Series D"), and a distribution of
$0.4531 per Series E Cumulative Redeemable Preferred Share ("Series E")
51. In reaction to this press release, the price of CommonWealth's common shares rose
$0.45 per share, or 3%, to close at $16.84 per share. CommonWealth's share price continued to rise
steadily from January 10, 2012 to February 22, 2012, reaching $19.24, an increase of $2.85 per
share, or 17%.
52. On February 23, 2012, CommonWealth issued a press release announcing its
financial results for the fourth quarter and year end of 2011, the period ended December 31, 2011.
For the quarter, the Company reported Normalized FF0 of $63.8 million, or $0.76 per basic and
diluted share, and net income of $1.1 million.
- 15 -
Case 1:12-cv-12405-DJC Document 22 Filed 07/22/13 Page 17 of 35
53. Following the earnings press release, CommonWealth held a conference call with
analysts and investors. With regard to the Company's occupancy rate, Defendant Portnoy stated, in
pertinent part, as follows:
As of December 31, our consolidated occupancy rate was 84.6% which is about a 0.5 percentage point higher than our occupancy rate on September 30 which was 84.1%. It is important to note that historical occupancy rates have been adjusted to include 27 properties which were previously included in discontinued operations. Also during the quarter, we saw an uptick in leasing activity, signing leases for over 2.2 million square feet. 43% of our fourth-quarter leasing activity was renewals and 57% were new leases. Leasing activity this quarter resulted in a flat rents and $19.15 per square foot in capital commitments. The average lease term was 6.9 years and the average capital commitment per lease year was $2.78.
***
Finally, I want to point out that, as of today, we have $172 million outstanding on our $750 million revolving credit facility, which is largely the result of redeeming about $156 million of senior notes and a mortgage since year-end that was schedule to mature in 2012. This liquidity provides us with more than adequate financial flexibility to fund the $119 million of cash required to close on pending acquisitions, as well as fund any other capital requirements in the future.
[Emphasis added.]
54. With regard to the Company's dividend, Defendant Portnoy stated, in pertinent part,
as follows:
Michael Bilerman - Citigroup- Analyst
And how do you think about - you mentioned your payout, I think you said was above [100%]. I think on our numbers with a fully-loaded CapEx, it's higher than that. But how do you think about the dividend goingforward, especially with the higher CapEx needs, the weak run rate coming out of the fourth quarter from an NOlperspective, but also a spinoff transaction would certainly affectpayout ratio as well, Given the fact of where things using - effectively deleveraging would reduce cash flow.
Defendant Portnoy
Sure. Want to point out I know you're talking about CAD. From an FF0 perspective we are only 66%, but also Ican tell you that there's been no discussion at the Board level at all to do anything with the dividend in terms of cutting it or reducing it. It is our current intention to maintain the dividend And that is what
-16-
Case 1:12-cv-12405-DJC Document 22 Filed 07/22/13 Page 18 of 35
weforeseefor the foreseeablefuture. And again, there's been no discussion about reducing the dividend at the Board level at all.
[Emphasis added.]
55. The statements referenced above in ¶'JSO, 53-54 were each materially false and
misleading when made because they misrepresented and failed to disclose the following adverse
facts, which were known to Defendants or recklessly disregarded by them:
(i) that the compounded effect of CommonWealth's plan to reposition its
portfolio by acquiring CBD properties at high costs and the weakness in the leasing market was a
significant strain on the Company's capital resources;
(ii) that, as a result of these factors, the Company's upper level
management was actively discussing the fact that a dividend cut would likely be necessary; and
(iii) as a result of the foregoing, Defendants lacked a reasonable basis for
their positive statements about the Company's liquidity, occupancy rate and dividend payout.
56. Further, Defendants' statement referenced in 154, "I can tell you that there's been no
discussion at the Board level at all to do anything with the dividend in terms of cutting it or reducing
it," was materially false and misleading because, according to Cl, management was discussing the
fact that the dividends were going to be cut due to the fact that CommonWealth was transitioning its
portfolio.
57. On March 6, 2012, CommonWealth issued a press release announcing that its
subsidiary, SIR, priced an initial public offering of 8,000,000 common shares of beneficial interest at
$21.50 per share. Prior to the offering, SIR was a 100% subsidiary of CommonWealth. Upon
completion of the offering, CommonWealth continued to own approximately 70% of SIR.
According to the press release, the net proceeds of the offering would be used to repay SIR debt to
CommonWealth.
-17-
Case 1:12-cv-12405-DJC Document 22 Filed 07/22/13 Page 19 of 35
58. The SIR Spin-Off enriched RMR and the Individual Defendants to the detriment of
CommonWealth. In particular, the SIR Spin-Off allowed: (a) RMR to enter into an additional
lucrative management contract; and (b) the Individual Defendants to be placed in leadership
positions in the spun-off company. In fact, Defendant Popeo serves as SIR's Treasurer and Chief
Financial Officer and Defendant Portnoy serves as SIR's Managing Trustee. Although the Spin-Off
was beneficial to Defendants, it had a negative impact on CommonWealth's balance sheet and
results of operation as SIR was one of CommonWealth's most profitable investments, generating
58% of CommonWealth's CAD but only accounting for 12% of CommonWealth's portfolio on a
total revenue basis. Had CommonWealth not spun off SIR, its CAD, and correspondingly, its ability
to maintain the dividend, would have been significantly greater.
59. On April 5, 2012, CommonWealth issued a press release announcing its quarterly
common and preferred dividend. In that regard, the Company announced a common dividend of
$0.50 per common share, a distribution of $0.4453 per Series C, a distribution of $0.4063 per Series
D, and a distribution of $0.4531 per Series E.
60. On May 3, 2012, CommonWealth issued a press release announcing its financial
results for the first quarter of 2012, the period ended March 31, 2012. For the quarter, the Company
reported Normalized FF0 of $76.0 million, or $0.91 per share basic and $0.90 diluted, and net
income of $9.9 million.
61. Following the earnings press release, CommonWealth held a conference call with
analysts and investors. With regard to the Company's occupancy rate, Defendant Portnoy stated, in
pertinent part, as follows:
As of March 31st, our consolidated occupancy rate was 84.8%, which is 20 basis points higher than our 84.6 occupancy rate on December 3 1st. Our occupancy rate for our wholly [owned] properties [excluding] results from SIR was 80.6% as [of] March 31st.
-18-
Case 1:12-cv-12405-DJC Document 22 Filed 07/22/13 Page 20 of 35
62. With regard to the Company's CAD, Defendant Portnoy stated, in pertinent part, as
follows:
In April 2012, we declared a dividend of $0.50 per share, which represents 55% of our first quarter normalized F.F.O. During the quarter, we spent $26.8 million on recurring capital expenditures, which includes tenant improvements, leasing costs and recurring building improvements. We generated approximately $44.9 million of cash availability for distribution, or C.A.D. during the first quarter, resulting in a rolling fourth quarter C.A.D. pay out ratio of about 104%.
63. In response to questions regarding the Company's dividend, Defendants Popeo and
Portnoy stated, in pertinent part, as follows:
John Guinee - Stfel Nicolaus - Analyst
And then the last question, the obvious question, as you are bouncing around $18, $19 a share, high ten's on a dividend, clearly when you're at that level, people are either anticipating a diminution, or decline in share value, and or a dividend adjustment. And it seems to me that - if the stocks price can't get back up into the low to mid 20's, a dividend cut could be the prudent thing to do. In fact, if you cut the dividend down to $1.20 you would still have one of the halation dividends in the office industrial Reese space. What's your thought on process on all that?
Defendant Popeo
I'm glad you ask[] that, John, because it is something a lot of investors have asked us about and it's the security of the dividend. Right now, we acknowledge that it certainly appears that the market is expecting a dividend cut. You know, we disclosed our payout ratios 104%. That is above 100%, it's not much above 100%. But we think we can maintain this dividendfor the foreseeable future. If the pay out ratio were to balloon up, above 104%, well above 100%, and be therefor quite some time, I think we'd have to seriously consider reducing the dividend, but right now, there's no intention from management, or the board, to do anything with the dividend.
Now that might change as circumstances change. But today we have no intention of changing the dividend And lhave to tell you, it is - at times it is perplexing to us, because we look at our numbers and say we can afford the dividend, and it doesn't look like it should be at risk, yet the stock price seems to indicate that everybody else doesn't see that. They think we are going to - that there should be a dividend cut. Maybe they are anticipating something years from now, or a long timefrom now. But l don't —it is - sometimes it's as perplexing to us as to maybe you, John, but that's our thoughts on it.
_19-
Case 1:12-cv-12405-DJC Document 22 Filed 07/22/13 Page 21 of 35
John Guinee - Stfel Nicolaus - Analyst
Believe me, it's not perplexing to me at all. It looks to me over the last 5 quarters that your equity raises or debt raises essentially equity is about 28%, $278 million, preferred is about $275 million or 28%, and debt is about $440 million, so over the last four or 5-quarters, your incremental capital has been over 70%, either preferred shares or debt. And whatyou're doing is you 'rejust levering up the company, well, not really generating any increased F.F.O. And then your ratios I think you mentioned was 104%, you're down at 85% occupancy, 80% occupancy, in the wholly ownedportfolio, so you have to spend much more over the next two or three years to get yours elfback over 90. So essentially what these assets are doing is just declining in value. At the end of the day, you are overpaying the dividend - isn't there a time when this music stops.
[Emphasis added.]
64. Two weeks later, on the May 15, 2012 conference call at the IMP Group Inc.
Research Conference, Defendant Popeo again defended CommonWealth's financial position and
assured investors that the dividend payout would not be reduced. Defendant Popeo stated, in
pertinent part, as follows:
Mitch Germain - JMP Securities - Analyst
The dividend yield, 10.6%, 10.7% today, yes, listen, I get alot of conversations with management, a lot of calls from - sorry, from investors that feel as if the coverage levels are gapping up higher, potential funding deficit. Just your thoughts, management's thoughts, the Board's thoughts on the dividend, maintaining it at current levels, and anything you could - any sort of color you can provide in terms of your ability to bridge that funding gap deficit?
Defendant Popeo
Sure. Let's see, on a rolling four-quarter basis, Commonwealth has paid out in dividend about 104% of its cash generated from operations of CAD. The biggest variable impacting that payout ratio is capital expenditures. And capital expenditures within our portfolio have been fairly lumpy if you look back over the past four quarters. It just all depends on the timing of when we actually spend the money for tenant improvements.
When Hook outforward, though, the 2012 budgetprogress is behind us, but we try to bank in some conservative assumptions. And it looks to us like we'll be able to hold occupancy in the portfolio through the end of 2012 at around 84%. In doing that, and this - and of course, the wild card here is how renewals versus new leases play out. But based on our assumptions just to keep the portfolio occupied at 84%
-20-
Case 1:12-cv-12405-DJC Document 22 Filed 07/22/13 Page 22 of 35
will likely mean that we'll go over 100% with the payout ratio. Our hope is that things firm up in the economy, that it becomes tenants' market and more of a landlords' market over the next let's say 12 to 18 months. If that is the case, we will begin to see an increase in occupancy within our portfolio. But that will also translate into an increased CapEx and a higher payout ratio. But that would actually be a good thing.
As far as the Board - Board's view on the dividend goes, I can't speak for the Board directly. But I think it's pretty safe to assume that if the Board - first of all, the Board has no intention in previous meetings up to this date even considering a dividend cut. But if the payout ratio was deemed 120% or over 100% payout ratio considered recurring for a long period of time, of course, they would have to consider adjusting the dividend. But, again, if the payout ratio looking out two or three years looked as though it was going to be over 100%, but at the same time occupancy was increasing or the prospects for increasing occupancy were there, I think it would be very unlikely that the Board would consider adjusting the dividend.
[Emphasis added.]
65. On June 13, 2012, Defendant Popeo reiterated the same position regarding the
dividend and the state of CommonWealth's business at the National Association of Real Estate
Investment Trust ("NAREIT") Investor Forum. Defendant Popeo stated, in pertinent part, as
follows:
Unidentified Audience Member
With your dividend coverage, (inaudible - microphone inaccessible), where do you want to be on that and what's your (inaudible - microphone inaccessible) going forward?
Defendant Popeo
Looking back over the past couple of years, we've run the dividend coverage just below 100%. We had a spike in the payout ratio in the third quarter of 2011 but that was mainly attributable, just a timing of capital expenditures which is, of course, the biggest driver in that payout ratio.
First quarter came in roughly 100% as you say. Looking out, though, to the remainder of 2012, its very likely we'll run that payout ratio above 100%. Just based on our bottoms-up budget process that we complete in December 2011. Just to maintain occupancy, it's probably going to 115% to 120% payout ratio.
As far as the Board's view on the situation, I can't speak for the Board but it's clear that if the Board saw 120% to 130% payout ratio for a prolonged period of
-21-
Case 1:12-cv-12405-DJC Document 22 Filed 07/22/13 Page 23 of 35
time, say two to three years and it may be a double-dip recession, they may have to consider revisiting the dividend level but, as for today, adjusting the dividend isn't even a topic of discussion.
66. On July 9, 2012, CommonWealth issued a press release announcing its quarterly
common and preferred dividends. In that regard, CommonWealth announced a common dividend of
$0.50 per common share, a distribution of $0.4453 per Series C , a distribution of $0.4063 per Series
D, and a distribution of $0.4531 per Series E.
67. The statements referenced above in 1159, 61-65 were each materially false and
misleading when made because they misrepresented and failed to disclose the following adverse
facts, which were known to Defendants or recklessly disregarded by them:
(i) that the compounded effect of CommonWealth's plan to reposition its
portfolio by acquiring CBD properties at high costs and the weakness in the leasing market was a
significant strain on the Company's capital resources;
(ii) that, as a result of these factors, the Company's upper level
management was engaged in an active discussion regarding the fact that a dividend cut would likely
be necessary;
(iii) that, contrary to its public statements, the Company's upper level
management planned to cut the dividend, even if the payout ratio did not go far above 100% for a
long period of time, because the Company needed cash to finance its repositioning strategy; and
(iv) as a result of the foregoing, Defendants lacked a reasonable basis for
their positive statements about the Company's liquidity, occupancy rate and dividend payout.
68. Further, Defendants' statements that: (i)".. . right now, there's no intention from
management, or the board, to do anything with the dividend"; (ii) ". . . the Board has no intention in
previous meetings up to this date even considering a dividend cut"; and (iii) ". . . as for today,
adjusting the dividend isn't even a topic of discussion" referenced in 1163-65 were materially false
-22-
Case 1:12-cv-12405-DJC Document 22 Filed 07/22/13 Page 24 of 35
and misleading because, according to Cl, at the time these statement was made, management was
discussing the fact that the dividends were going to be cut due to the fact that the Company was
transitioning CommonWealth's portfolio.
69. On July 20, 2012, the Company issued a press release announcing that it priced an
underwritten public offering of $175 million of 5.75% unsecured senior notes due August 1, 2042.
According to the press release, the proceeds of the offering were expected to be used to "redeem
some or all of [the Company's] outstanding 7 1/8% Series C Cumulative Redeemable Preferred
Shares, repay amounts outstanding under its revolving credit facility and for general business
purposes, including funding possible future acquisitions of properties."
CommonWealth Announces Plan to Reduce Dividend by 50%
70. On August 8, 2012, CommonWealth issued a press release announcing its financial
results for the second quarter of 2012, the period ended June 30, 2012. For the quarter, the Company
reported Normalized FF0 of $69.8 million, or $0.83 per share basic and diluted, and net income of
$2.2 million.
71. Following the earnings press release, CommonWealth held a conference call with
analysts and investors. Despite having previously told investors that the dividend would not be cut
unless the payout ratio wasfar above 100% for a long period of time, Defendant Portnoy stated that
the Company would likely reduce its dividend due to a 4% incremental increase in the CAD payout
ratio during the first quarter of 2012. In that regard, Defendant Portnoy stated, in pertinent part, as
follows:
In July 2012, we declared a dividend of $0.50 per share which represents 60% of our second-quarter normalized FF0. During the quarter, we spent $27.5 million on recurring capital expenditures, which included tenant improvements, leasing costs, and recurring building improvements. We generated $37.5 million of cash available for distribution, or CAD, during the second quarter, resulting in a rolling four-quarter CAD payout ratio of about 108%.
-23-
Case 1:12-cv-12405-DJC Document 22 Filed 07/22/13 Page 25 of 35
The remaining one-third of our square feet scheduled to expire in 2012 is located in suburban office buildings, which we think can be renewed or leased to new tenants but the cost to do so may be high based on the current market environment.
For the year-end 2012, we previously guided the market to an expected consolidated occupancy rate of around 85%. Because of the generally weak leasing market conditions, today our best guess is that occupancy will continue to trend slightly downward through the end of the year and we currently estimate the year-end occupancy will be around 84% for the Company.
With the weak leasing market conditions, declining occupancy, and a CAD payout ratio above 100%, many investors may question the security of the Company's dividend rate going forward Obviously, the stock price for the Company has indicated that the market anticipates a possible dividend reduction because the dividend yield has been over 10% for almost a year.
Given all these dynamics and unless market conditions start improving meaningfully, it may become necessary for the Board of Trustees to adjust the dividend rate during the next couple of quarters in order to retain more cash flow, as we increase occupancy at our properties in the future.
[Emphasis added.]
72. During this call, Michael Bilerman, a Citigroup analyst, questioned Defendant
Portnoy regarding CommonWealth's questionable "asset gathering strategy." Defendant Portnoy
responded, in pertinent part, as follows:
Michael Bilerman - Citigroup - Analyst
Good afternoon. It's actually Michael Bilerman. Adam, I'm trying to put everything into perspective. You had no problem buying assets and paying the highest price, both within Common Wealth but you think about - you spun off SIR, which you just have 75% of and quickly that entity has about another $160 million of suburban assets.
I find it a little bit hard to grasp what appears to just to be an asset-gathering strategy for RMR, between all those entities and ultimately, trying to get the shareholder return. I would have thought that looking at the performance of Common Wealth would have given you some pause in ramping leverage further. I can understand that you do have the line of credit and you have capacity. But that's not a permanent solution for capital, that you would have held off a little bit, in terms of the acquisitions, before you can make meaningful dents on the disposition side.
Defendant Portnoy
-24-
Case 1:12-cv-12405-DJC Document 22 Filed 07/22/13 Page 26 of 35
Keep in mind, Michael, that we also have significant ownership interest as you know, in SIR, as you mentioned, as well as GOV. So there are other avenues for the Company to raise money and deliver besides doing capital markets activities. Yes, we have two buildings under agreement now.
Michael Bilerman - Citigroup - Analyst
It's $8 million. You have purchased $710 million in the first half of the year. That math doesn 'tjive.
Defendant Portnoy
As I said, we have two buildings under agreement now to acquire is what I was going to say. As you point out, we do have tremendous liquidity, and the types of buildings that we're trying to buy, again, are trying to reposition and get better results out of the portfolio. If you look at our portfolio, the different segments, clearly the stuff we have been buying and the stuff that we have bought over this year, and the stuff that we have bought over the last few years, have far outperformed some of the legacy assets that we've held.
Michael Bilerman - Citigroup - Analyst
But how do you think about - to buy assets, you need fund it. So you've got to think about your cost and that availability of capital. Leverage has gone up. It's pure math. Your leverage is higher today than it was a few years ago. Your cost of equity obviously is very high, which is why you've done more of the spin-offs to take off pieces, where you could raise capital off pieces of the CommonWealth portfolio. I'm just curious. I can understand your point of, well, I would rather buy a good CBD asset which is well-leased but that comes at a cost from a capital to buy it.
[Emphasis added.]
73. Michael Bilerman also questioned Defendant Portnoy regarding the Company's
radical reversal of position regarding the dividend reduction. Defendant Portnoy stated, in pertinent
part, as follows:
Michael Bilerman - Citigroup - Analyst
In terms of dividend, I think for some time people have looked at it, saying it's too high. It's not covered and I think as of last call, you defended it pretty strongly. What changed in the last three months?
Defendant Portnoy
The last three months, the operating results, and the results from the field, and seeing what happened with leasing, and just the sentiment that you're hearing in the market,
- 25 -
Case 1:12-cv-12405-DJC Document 22 Filed 07/22/13 Page 27 of 35
and also the amount of showings we're having, just the leasing activity. Last quarter, we felt better that things were going in a good direction, especially in the spring.
As we got into the summer, we don't know whether or not this is just a summer slowdown in activity, or whether there's something bigger going on in the marketplace. That's why we started to get a little bit more concerned. Because if the operations don't start to turn around, which is largely being driven by what is going on in the economy, then that has an effect on our cash flow and our occupancy. As I said in my prepared remarks, if occupancy is trending down and CAD is over 100%, that is not a good combination.
That requires us to think long and hard about does the dividend at its current level makes sense, or should we be thinking about trying to retain more cash flow so we can lease up the portfolio, in what looks to be a prolonged difficult period in the office leasing market.
[Emphasis added.]
74. In reaction to these announcements, the price of CommonWealth common shares fell
$1.57 per share, or 9%, to close at $16.48 per share. The price of the Company's shares continued to
decline over the next two trading days to $15.67 per share as the market digested this news.
75. On October 9, 2012, CommonWealth issued a press release announcing its quarterly
common and preferred dividends. CommonWealth announced a common dividend of $0.25 per
common share - a 50% reduction from the Company's previous dividend rate.
76. The market for CommonWealth common shares was open, well-developed and
efficient at all relevant times. As a result of the materially false and misleading statements and
failures to disclose detailed herein, CommonWealth common shares traded at artificially inflated
prices during the Class Period. Plaintiff and other members of the Class purchased or otherwise
acquired CommonWealth common shares relying upon the integrity of the market price of
CommonWealth common shares and market information relating to CommonWealth, and have been
damaged thereby.
77. During the Class Period, Defendants materially misled the investing public, thereby
inflating the price of CommonWealth common shares, by publicly issuing false and misleading
-26-
Case 1:12-cv-12405-DJC Document 22 Filed 07/22/13 Page 28 of 35
statements and omitting to disclose material facts necessary to make Defendants' statements, as set
forth herein, not 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.
78. At all relevant times, the material misrepresentations and omissions particularized in
this 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 CommonWealth's business, prospects and operations. These material
misstatements and omissions had the cause and effect of creating in the market an unrealistically
positive assessment of CommonWealth and its business, prospects and operations, thus causing the
Company's common shares 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 Company's common shares at artificially inflated
prices, thus causing the damages complained of herein.
Additional Scienter Allegations
79. As alleged herein, Defendants acted with scienter in that Defendants knew that the
public documents and statements issued or disseminated in the name of the Company were
materially false and misleading; knew that such statements or documents would be issued or
disseminated to the investing public; and knowingly and substantially participated or acquiesced in
the issuance or dissemination of such statements or documents as primary violations of the federal
securities laws. As set forth elsewhere herein in detail, Defendants, by virtue of their receipt of
information reflecting the true facts regarding CommonWealth, their control over, and/or receipt
and/or modification of CommonWealth' s allegedly materially misleading misstatements and/or their
-27-
Case 1:12-cv-12405-DJC Document 22 Filed 07/22/13 Page 29 of 35
associations with the Company which made them privy to confidential proprietary information
concerning CommonWealth, participated in the fraudulent scheme alleged herein.
80. Defendants were motivated to misrepresent the state of CommonWealth in order to
complete the March 6, 2012 Spin-Off. The Spin-Off enriched Defendants as it allowed: (a) RMRt0
enter into an additional lucrative management agreement; and (b) the Individual Defendants to place
themselves in executive positions at SIR. However, the Spin-Off was detrimental to
CommonWealth as it reduced the Company's interest in SIR, one of its most profitable investments.
81. Defendants were further motivated to make positive statements to investors in order
to enable Defendants to raise capital through a Spin-Off offering of SIR common shares whereby the
Company generated more than $170 million in net proceeds and allowed Defendants to complete a
public offering of $175 million of 5.75% unsecured senior notes.
Loss Causation/Economic Loss
82. During the Class Period, as detailed herein, Defendants engaged in a scheme to
deceive the market and a course of conduct that artificially inflated the prices of CommonWealth
common shares and operated as a fraud or deceit on Class Period purchasers of CommonWealth
common shares 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 CommonWealth common shares fell precipitously as the prior artificial
inflation came out. As a result of their purchases of CommonWealth common shares during the
Class Period, Plaintiff and the other Class members suffered economic loss, i.e., damages, under the
federal securities laws.
83. By failing to disclose to investors the adverse facts detailed herein, Defendants
presented a misleading picture of CommonWealth's business and prospects. Defendants' false and
misleading statements had the intended effect and caused CommonWealth common shares to trade at
-28-
Case 1:12-cv-12405-DJC Document 22 Filed 07/22/13 Page 30 of 35
artificially inflated levels throughout the Class Period, reaching as high as $19.57 per common share
on February 16, 2012.
84. As a direct result of the disclosures on August 8, 2012, the price of CommonWealth
common shares fell precipitously, falling from their Class Period high of $19.57 per common share
to $15.67 per common share, a decline of approximately 20%. This drop removed the inflation from
the price of CommonWealth common shares, causing real economic loss to investors who had
purchased CommonWealth common shares during the Class Period.
85. The 20% decline from the Company's Class Period high was a direct result of the
nature and extent of Defendants' fraud finally being revealed to investors and the market. The
timing and magnitude of the price decline in Common Wealth common shares negates 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 prices of
CommonWealth common shares and the subsequent significant decline in the value of
CommonWealth common shares when Defendants' prior misrepresentations and other fraudulent
conduct were revealed.
Applicability of Presumption of Reliance: Fraud on the Market Doctrine
86. At all relevant times, the market for CommonWealth common shares was an efficient
market for the following reasons, among others:
(a) CommonWealth common shares met the requirements for listing, and were
listed and actively traded on the NYSE, a highly efficient and automated market;
-29-
Case 1:12-cv-12405-DJC Document 22 Filed 07/22/13 Page 31 of 35
(b) as a regulated issuer, CommonWealth filed periodic public reports with the
SEC and the NYSE;
(c) CommonWealth regularly communicated with public investors via established
market communication 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) CommonWealth 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 marketplace.
87. As a result of the foregoing, the market for CommonWealth common shares promptly
digested current information regarding CommonWealth from all publicly available sources and
reflected such information in the prices of the stock. Under these circumstances, all purchasers of
CommonWealth common shares during the Class Period suffered similar injury through their
purchase of CommonWealth common shares at artificially inflated prices and a presumption of
reliance applies.
No Safe Harbor
88. The statutory safe harbor provided for forward-looking statements under certain
circumstances 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
-30-
Case 1:12-cv-12405-DJC Document 22 Filed 07/22/13 Page 32 of 35
liable for those false forward-looking statements because at the time each of those forward-looking
statements were made, the particular speaker knew that the particular forward-looking statement was
false, and/or the forward-looking statement was authorized and/or approved by an executive officer
of CommonWealth who knew that those statements were false when made.
COUNT I
Violation of Section 10(b) of the Exchange Act and Rule lOb-5 Promulgated Thereunder
Against All Defendants
89. Plaintiff repeats and realleges each and every allegation contained above as if fully set
forth herein.
90. During the Class Period, Defendants disseminated or approved the materially false
and 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.
91. 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 common shares during the Class Period.
92. Plaintiff and the Class have suffered damages in that, in reliance on the integrity of
the market, they paid artificially inflated prices for CommonWealth common shares. Plaintiff and
the Class would not have purchased CommonWealth common shares 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.
-31-
Case 1:12-cv-12405-DJC Document 22 Filed 07/22/13 Page 33 of 35
93. As a direct and proximate result of Defendants' wrongful conduct, Plaintiff and the
other members of the Class suffered damages in connection with their purchases of CommonWealth
common shares during the Class Period.
COUNT II
Violation of Section 20(a) of the Exchange Act Against the Individual Defendants
94. Plaintiff repeats and realleges each and every allegation contained above as if fully set
forth herein.
95. The Individual Defendants acted as controlling persons of CommonWealth within the
meaning of Section 20(a) of the Exchange Act as alleged herein. By reason of their positions as
officers and/or directors of CommonWealth, and their ownership of CommonWealth stock, the
Individual Defendants had the power and authority to cause CommonWealth to engage in the
wrongful conduct complained of herein. By reason of such conduct, the Individual Defendants are
liable pursuant to Section 20(a) of the Exchange Act.
WHEREFORE, Plaintiff prays for relief and judgment, as follows:
A. Determining that this action is a proper class action, designating Plaintiff as Lead
Plaintiff and certifying Plaintiff as a Class representative under Rule 23 of the Federal Rules of Civil
Procedure and Plaintiff's counsel as Lead Counsel;
B. Awarding compensatory damages in favor of Plaintiff 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 Plaintiff and the Class their reasonable costs and expenses incurred in this
action, including counsel fees and expert fees; and
D. Such other and further relief as the Court may deem just and proper.
-32-
Case 1:12-cv-12405-DJC Document 22 Filed 07/22/13 Page 34 of 35
JURY TRIAL DEMANDED
Plaintiff hereby demands a trial by jury.
DATED: July 22, 2013 ROBBINS GELLER RUDMAN
& DOWD LLP SAMUEL H. RUDMAN MARIO ALBA JR. AVITAL 0. MALINA
Is! Mario Alba Jr. MARIO ALBA JR.
58 South Service Road, Suite 200 Melville, NY 11747 Telephone: 631/367-7100 631/367-1173 (fax) [email protected] [email protected] [email protected]
Lead Counsel for Plaintiff
BLOCK & LEVITON LLP JEFFREY C. BLOCK (BBO #600747) SCOTT A. MAYS (BBO #663396) LEIGH E. O'NEIL (BBO #681459) 155 Federal Street, Suite 1303 Boston, MA 02110 Telephone: 617/398-5600 617/507-6020 (fax) [email protected] [email protected] [email protected]
Liaison Counsel
-33-
Case 1:12-cv-12405-DJC Document 22 Filed 07/22/13 Page 35 of 35
CERTIFICATE OF SERVICE
I, Mario Alba Jr., hereby certify that on July 22, 2013,1 caused a true and correct copy of the
attached:
AMENDED COMPLAINT
to be served: (i) electronically on all counsel registered for electronic service for this case; and (ii) by
first-class mail to any additional counsel.
Is! Mario Alba Jr. MARIO ALBA JR.
-34-