(CN) - A shareholder derivative lawsuit claims industrial-distribution titan HD Supply's top executive improperly sold off more than $53 million worth of HD Supply stock shortly before the company's share price tumbled amid revelations that its financial projections were unattainable.
The federal lawsuit in the Northern District of Georgia says HD Supply Chairman and CEO Joseph DeAngelo sold off most of his stock in the company at artificially inflated prices after allegedly misleading investors about the company's ability to recover from inventory mismanagement.
DeAngelo and HD Supply, one of the largest suppliers of building maintenance products in the country, have been issuing "false and misleading statements" about the company's business operations and financial prospects since Nov. 2016, according to the complaint.
Last year, HD Supply struggled with inventory issues in its facilities-management division. The company has conceded that it lacked inventory to deal with the 2016 spring-summer selling season, and that after attempting to take corrective action, it ended up overwhelming its distribution centers with "atypical" inventory loads.
In a series of earnings calls and public filings beginning in late 2016, HD Supply led investors to believe it was overcoming the financial hurdles spawned by the inventory problems, according to the complaint.
During a Dec. 2016 conference call, for instance, DeAngelo stated: "The operational recovery of our Facilities Maintenance supply chain continues to make exciting daily progress, and the teams are executing at or ahead of expectations."
He reiterated the sentiment in a March 2017 earnings call, noting that the company's recovery was "progressing as we expected."
According to the complaint, analysts bought into the positive statements, with Deutsche Bank in late March setting HD Supply's price target at $48.
DeAngelo, the lawsuit claims, "took advantage of the artificially inflated prices to sell [his] HD Supply shares for substantial proceeds." He sold roughly 80 percent of his holdings near a multi-year high in the company's stock price, according to the complaint.
The lawsuit claims "the truth" emerged when the company released its first quarter results last June in conjunction with an announcement that it was selling its waterworks division to a private equity group for $2.5 billion.
HD Supply's Q1 results were largely in line with earnings expectations, missing analyst consensus by 3 cents per share. But the company announced lower-than-expected sales in its facilities management division, a plan for "accelerated expense investment," and a revision of its gross margin outlook.
"The market responded negatively to these revelations, resulting in a substantial sell-off of HD Supply stock," the lawsuit says.
By the end of the trading day, the company's stock price had tumbled to $34.03 a share, down more than 17 percent from the previous day's closing price.
The share price continued to erode, briefly dropping under $30 a share in mid-July, before rebounding slightly to $31.01 a share as of Aug. 15.
Plaintiff shareholder Sean Zhou seeks damages for insider trading, securities law violations, breach of fiduciary duty, unjust enrichment and corporate waste.
Zhou is represented by Michael Fistel Jr., William W. Stone and David Weisz of Johnson & Weaver LLP in Marietta, Ga. The firm is representing a second derivative action plaintiff in Georgia federal court, James Calderaro, whose pleading is substantially identical to Zhou's.
DeAngelo, Chief Financial Officer Evan Levitt and several HD Supply board members are named as defendants in the derivative actions. The insider trading counts are listed against only DeAngelo and boardmember Betsy Atkins, who sold roughly $125,000 worth of company stock a few months before the share price tumbled.
A putative class action over HD Supply's supposed misrepresentations to shareholders in the time leading up to the stock price collapse was filed last month in the same Georgia district.