Stock Drop Class Action Claims ServiceMaster Downplayed Damage from ‘Costly’ Terminix Termite Litigation

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A proposed class action lawsuit alleges ServiceMaster Global Holdings and its CEO and senior vice president/CFO misled stockholders by repeatedly assuring that the company’s Terminix segment was trending positively for the second half of 2019 amid a key management shakeup.

In truth, the 37-page lawsuit claims, the defendants unlawfully failed to disclose or omitted that years of “costly termite litigation” centered on apparent infestation troubles in Mobile, Alabama would ultimately harm ServiceMaster’s current and future financial position and damage investors.

According to the lawsuit, ServiceMaster, a leading provider of residential and commercial termite, pest control, cleaning and restoration services, underwent in 2017 a “turnover of key management” after a period of slowing growth in its important termite and pest remediation Terminix segment. The individual ServiceMaster defendants were allegedly responsible for “revitalizing growth” within Terminix, focusing in particular on customer service and operations. Relatedly, the case centers on a reported uptick in invasive Formosan termite infestations—not to mention widespread property damage—in Mobile, Alabama, which the suit describes as a locale considered to be “the most at-risk” for termite infestation.

The complaint alleges that while the defendants repeatedly assured investors that ServiceMaster was successfully executing the top-level turnover within Terminix, purporting that the segment would hit a positive “inflection point” and serve as the driver of expected positive trends for the latter half of 2019, the termite remediation company had “experienced an adverse trend of costly termite litigation” related to infestation problems in Mobile. The defendants allegedly possessed knowledge of Terminix’s legal concerns yet failed to disclose such to investors. 

ServiceMaster, the lawsuit claims, failed to inform stockholders of certain “adverse facts,” including that the company neglected to properly inspect and treat for Formosan termite activity and that this failure would cause the company to “experience a material adverse trend of costly litigation from injured customers.” Further, ServiceMaster, in what the suit calls an unsuccessful attempt to mitigate Terminix’s downward trend, utilized remedial measures—including “drastically” boosting prices for termite treatments in Mobile to hopefully deter contract renewals—since at least 2018.   

Per the case, ServiceMaster broke the news of “disappointing” preliminary financial results for 2019’s third quarter after missing revenue and earnings estimates, with the company reporting a net income of $25 million against $71 million during the third quarter the year prior. The lawsuit says that ServiceMaster, in a press release, attributed its financial woes to “termite damage claims arising primarily from Formosan termite activity” in Mobile, a situation the defendants allegedly added had been a “known issue” since early 2018. Lastly, ServiceMaster allegedly claimed that its organic revenue growth would offset a reduction in termite renewals linked to price increases in Mobile, which the suit claims contradicted previous statements that the price increases were optional.

“On this news the price of ServiceMaster common stock fell $11.44 or 20 percent, closing at $44.70 on October 22, 2019, down from its $56.14 closing price on October 21, 2019,” the lawsuit says.

The hits continued for ServiceMaster into the following months, according to the lawsuit, as the company discussed in a November 5 press release a “challenging quarter” for Q3 2019 linked to the impacts of “legacy risks,” including termite damage claims. Ultimately, the case says, news that termite damage claims had reduced the company’s revenue by seven to eight percent, as well as the disclosure that such claims would likely continue to roll in through 2020, caused the defendants’ stock to fall another 3.5 percent and nine percent on November 5 and 6, respectively. 

The lawsuit, which alleges violations of the federal Securities Exchange Act of 1934, looks to represent those who bought or otherwise acquired ServiceMaster common stock between February 26 and November 4, 2019.