Two stock fraud lawsuits recently filed against Royal Caribbean Cruises have placed the cruise line’s corporate ethics under the microscope.
In the case of Todd Roth v. Royal Caribbean Cruises, Ltd, Richard D. Fain, Brian J. Rice, and Henry L. Pujol, United States District Court, Southern District of Florida, Case No. 22783 – MSC, a stockholder alleges that the cruise lines withheld disclosing certain accounting errors dating back to 2009, misrepresented the company’s financial status, and misled investors about the cruise line’s financial future. The case was filed by the New York and Louisiana law firm of Kahn, Swick & Foti and the Florida firm of Vianale & Vianale.
The lawsuit alleges that on January 27, 2011, Royal Caribbean issued a press release where it made false and misleading statements that its fourth quarter results for 2010 were better than expected and it anticipated certain positive developments regarding its operations, expenses, costs, ratios and net income for 2010.
On April 28, 2011, after the first quarter, Royal Caribbean again made misleading statements regarding its financial status. The lawsuit alleges that CEO Richard Fain (photo left) falsely stated that "the year started off with a roar – strong bookings, low costs and solid profits – and in the first quarter every one of our brands exceeded its forecast . . . "
However, on July 28, 2011, Royal Caribbean suddenly and dramatically departed from its rosy projections regarding the company’s financial operations. The cruise line published a release revealing for the first time that it was performing well below expectations and that certain accounting errors (regarding treatment of interest income relating to amortization of certain financing fees) resulted in a drastic downward revision of the company’s financial statements.
This news "shocked and alarmed" investors. Royal Caribbean’s stock price then fell precipitously in two days, from $35.75 to $30.50. This development had a disastrous effect on the investments of individual shareholders. The stockholder who filed suit, Todd Roth, had purchased 5,000 shares on July 26, 2011 at a price of $36.65 a share. Three days later, with the stock trading at $30.50, he lost over $30,000.
Included as defendants in the lawsuit are the CEO (Richard Fain), the Chief Financial Officer (Brian Rice) and the Corporate Financial Controller (Henry Pujol). On January 28, 2011, the day after touting the financial strength of the cruise line, CEO Fain sold 200,000 shares at a price of $46.63 for a what the lawsuit alleges are total illicit proceeds of $9,326,000. CFO Rice (photo right, below) quickly followed suit, selling 88,872 shares in the $46 to $47 range from February 1 – 14, 2011 for over $4,100,000 in illicit proceeds.
Although not named personally in the lawsuit, Royal Caribbean President Adam Goldstein sold over 40,000 shares between February 1 – 16, 2011 – for a total of over $1,900,000. Six other executives sold stock between January 28 and February 16, 2011, which combined with the stock sold by the named defendants totaled over $20,000,000.
The lawsuit alleges that these individual defendants knew that the negative financial information had not been disclosed to the public and was being concealed, and they were participants in a "fraudulent scheme and course of business that operated as a fraud or deceit on purchasers of Royal Caribbean securities . . . "
Earlier this year, in an article entitled Royal Caribbean Executives Get Richer While Crew Members Get Poorer, I reported that Royal Caribbean increased its 2010 compensation paid to CEO Richard Fain almost 60% to $8,600,000. Royal Caribbean increased the compensation paid to the company’s four other named executives from 18.5% to almost 50%. The largest compensation increase of the four executives went to President Adam Goldstein whose total compensation increased to over $4,000,000.
These increases were primarily incentive based, meaning that the executives claimed that they met or exceeded certain financial goals for the corporation. With this recent revelation that the company’s financial performance was overstated and that the executives allegedly committed fraud or recklessly misrepresented the cruise line’s financial data, the question arises whether the incentive based millions of dollars in compensation should be returned voluntarily to the corporation or disgorged in the pending lawsuits.
The Roth lawsuit seeks class action status for what is referred to as either hundreds or thousands of other shareholders who were defrauded by the cruise line between January 27, 2011 and July 28, 2011.
A second lawsuit seeking class action status was reportedly filed yesterday by the Pomerantz law firm with offices in New York, Chicago and Washington D.C. It is on behalf of stockholder Stanley Wolfe and was filed in the United States District Court, Southern District of Florida, Case No. 22855. This lawsuit seeks class certification for stockholders who purchased securities between April 23, 2009 and July 27, 2011.
It will be interesting to see how these lawsuits turn out. What did the cruise line executives know about the accounting errors? When did they learn of the irregularities? What did they do once they learned that the cruise line was performing substantially under expectations? Did they dump their stock realizing that the price was artificially high? Or did they act prudently and responsibly once the accounting mistakes were brought to their attention?
Photo credits: www.azamaraclubcruises.com
Chart credit: Rick + Rick law firm