HD Supply Holdings, CEO, CFO Facing Securities Fraud Allegations

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A 40-page class action filed in Georgia by the City of Hollywood Police Officers’ Retirement System alleges HD Supply Holdings, Inc. and its CEO (who’s also the chairman of the industrial distributor’s board of directors) and CFO violated federal securities laws with a “scheme” to artificially inflate the HD Supply stock prices by “issuing false and misleading guidance and hiding critical information from investors.” The complaint wages the defendants’ conduct allowed the individual CEO defendant to unload more than 1.3 million shares of stock—roughly 80 percent of the man’s ownership stake in the company—for a profit of more than $54 million.

The narrative laid out by the complaint begins in early 2016 when HD Supply’s Facilities Maintenance segment reportedly began experiencing “supply chain difficulties” linked to the company’s supposed failure to properly calculate the demand for its products. This resulted in HD Supply being, ahem, undersupplied in the run up to the spring and summer 2016 sales pushes, the suit claims. Remedial action taken by management to stem this problem led to an “unreasonably large” stock of inventory, the lawsuit continues, which caused HD Supply’s distribution hubs to be stretched beyond capacity. Come November 2016, the defendants spread word that the Facilities Maintenance group was “on track” and positioned perfectly to meet its market commitments and revenue benchmarks.

According to the complaint, the defendants reported in June 2017 that HD Supply had missed its earnings goals and disclosed the divestiture of Waterworks, the country’s largest distributor of sewer, storm and fire protection products, while announcing a bulk-up of its capital investments in HD’s Facilities Maintenance segment. After more less-than-ideal disclosures, the complaint notes HD Supply’s stock prices sank more than 17.5 percent, reportedly “wiping out over $1.4 billion in market capitalization in one day.” 

The class action alleges that before these disclosures came out, HD Supply’s CEO sold more than 1.3 million shares of his company’s stock, while insiders, at the time, were allegedly “fully aware of this negative information” yet did not inform investors that one of the strongest arms of the business would likely be sold.