PHILADELPHIA (Legal Newsline) - The co-founders of national discount retail chain Five Below fraudulently concealed their intent to resign from the company last year and artificially inflated the company's public stock price while planning to hand over the reigns to a much less experienced CEO, causing the stock to crumble upon their exit, according to allegations in a class action suit filed at the U.S. District Court for the Eastern District of Pennsylvania.
Lead plaintiff Richard Haan accuses former Five Below chairman of the board David Schlessinger, former CEO Thomas Vellios, current CEO Joel Anderson and CFO Kenneth Bull of violating the Securities and Exchange Act of 1934 by conspiring to juice the common stock prices between July and December, with Vellios and Schlessinger cashing out. The news of their departure plus a soft sales in the fourth fiscal quarter caused the prices to drop, costing investors an estimated $564 million.
According to the complaint, Schlessinger and Vellios founded Five Below in 2002 with a small chain of retail stores offering products costing $5 or less. The company grew into a national brand, with more than 300 stores in 19 states and a distribution center in New Castle, Del.
In 2010, Five Below was bought out by Advent International, an investment firm that took the company public in 2012. In four public stock offerings between 2012 and 2013, the co-founders collectively sold approximately three million shares on the public market. The class action takes issue with the pair's intent to sell more shares in 2014, however.
The claim says that press releases issued in June announced that Schlessinger and Vellios hired Anderson as president and COO to round out the executive management team, but failed to disclose their plan to have Anderson take over as CEO at the end of the year. According to the complaint, Schlessinger and Vellios were required by federal law to share the management changes in a disclosure statement prior to any public stock offerings.
The class period for the action begins on June 5, the day after a press release from Five Below that raised its net sales projections for the year by $3 million, to a range of $675 to $681 million, and net income projections by $200,000 to between $46.6 million and $48.2.
An accompanying conference call with investors reinforced the notion that the company would add to the executive team, concealing that the hiring of Anderson meant the replacement of Villios and the resignation of Schlessinger, the complaint says. Haan says that Anderson's previous work as the website manager of Walmart.com did not give the new hire the experience necessary to effectively take over operations of the Five Below chain.
Regardless, the Five Below stock price increased by $5 between June 5 and June 20, and Schlessinger and Villios sold more than $12 million of their stock between June 16 and August 18, according to the complaint.
Five Below's stock rose again in September after the release of the second quarter financial results, which again increased sales projections by $6 million and net income by $600,000. During the quarterly conference call, the defendants were directly asked about the impact of Anderson's hiring, and they allegedly maintained that Anderson was only an addition to the management team and that Villios and Schlessinger would remain in their positions for years to come.
The stock market responded positively to the allegedly fraudulent projections, increasing Five Below's price to $48 in in November. Schlessinger and Villios collected another $17.4 million in stock sales between Sept. 9 and Nov. 25, the complaint says.
According to the claim, reality hit Five Below on Dec. 4, when the company released a statement showing that sales in the third quarter greatly declined from the numbers in the first and second fiscal quarters. The press release also predicted that the typically strong fourth quarter sales growth would reduce to just 24 to 26 percent. The previously optimistic fiscal year projections were also reduced to the range of $47.2 $48.8 million for net income and $681 to $687 million for net sales.
The complaint also says that a second press release officially announced the resignations of Vellios and Schlessinger and the promotion of Anderson. During the conference call with investors, the defendants allegedly conceded that the succession plan had been something they had been working on for a while and that Anderson was considered a good replacement for Vellios during his recruitment.
Stock prices for Five Below dropped by 21 percent upon the news, the complaint says, decreasing from $48 to $37.61 on Dec. 5, representing a loss of $564 million in capitalization.
"Defendants materially misled the investing public, thereby inflating the price of Five Below common stock, by issuing false and misleading statements and omitting to disclose material facts," the complaint says. "These misstatements and omissions had the cause and effect of creating an unrealistically positive assessment of Five Below."
The plaintiff is represented by attorneys from the Law Offices of Bernard Gross, PC, in Philadelphia.
The federal case ID is 2:15-cv-00094-LFR.