AMC Entertainment Facing Class Action Alleging Host of Alleged Securities Law Violations [UPDATE]

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According to a proposed class action lawsuit, AMC Entertainment Holdings, Inc., its top executives, and several big-name underwriters were not entirely truthful to AMC’s common stockholders regarding issues affecting Carmike Cinemas’ operating results before the world’s largest movie theater company acquired Carmike—at almost the same time it scooped up European theater operators Odeon, UCI Cinemas Holdings Limited and Nordic Cinema Group Holding AB—in late 2016 and early 2017.

As with most class actions alleging violations of securities law, the plaintiff, the Hawaii Structural Ironworkers Pension Trust Fund, charges AMC Entertainment and its officers, despite stating in a December 2016 conference call that “plenty of time” existed in which to look at supposed issues with Carmike’s operations, submitted a Form S-3 registration statement to the U.S. Securities and Exchange Commission that failed to disclose the following, which were, among other issues, adversely effecting Carmike’s business:

• That “only a small number of Carmike’s loyalty program members were willing to join AMC’s loyalty program” after the sale;
• Customers had been “lost to competitors that had upgraded and/or renovated their facilities”; and
• Two of Carmike’s “biggest, most successful” theaters had closed.

 In addition to the above alleged omissions, the 48-page lawsuit notes AMC’s registration statement concerning its new acquisition target also reportedly “failed to disclose that Carmike had been experiencing a significant loss in market share during the first nine months of 2016” that was expected to have a continuingly negative affect on its operating performance.

 The complaint then goes into another item allegedly omitted by AMC and the executive defendants in their SEC registration statement (emphasis ours):

“In particular, the Registration Statement negligently failed to disclose that the gross margins on AMC’s second highest source of revenue, food and beverage sales, associated with its newly acquired international business were, and are, materially lower that what the company has historically reported for its domestic operations. In fact, food and beverage costs as a percentage of food and beverage revenue associated with [AMC’s] international operations are approximately 50% greater than those associated with its domestic operations.”

 The above, however, is only the tip of the alleged securities law-violating iceberg described in the complaint. Topping off the above allegations is the plaintiff’s claim that AMC’s registration documentation also included falsehoods “with respect to the seasonality” of the company’s foreign affairs. The lawsuit claims that AMC’s boast in the statement that its business is “highly seasonal, with higher attendance and revenues generally occurring during the summer months and holiday seasons” is materially inaccurate. The statement itself, the lawsuit says, “otherwise failed to identify and disclose known trends, events, demands, commitments and uncertainties associated with AMC’s Carmike and international operations” that were having and would likely continue to have an adverse effect on AMC’s bottom line, i.e. that the companies just acquired by AMC generally experience lower attendance and revenue during summer months.

The lawsuit alleges the underwriter defendants—Citigroup Global Markets Inc.; Merrill Lynch; Pierce, Fenner & Smith Incorporated; Barclays Capital Inc.; and Credit Suisse Securities (USA) LLC—all failed to perform adequate diligence in ensuring AMC’s registration statement was properly and accurately prepared, with their alleged conduct serving as a “substantial factor” leading to the supposed financial harm detailed in the complaint.