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PE Firm Advent Wants Out of Party City IPO Class Action

Private equity firm Advent International Corp. sought to dismiss a class action claim brought against it as part of a suit filed by investors unhappy with Party City Holdco Inc.’s initial public offering in New York federal court on Friday, saying Advent had no control over the party supplies giant’s alleged misrepresentations in the lead-up to the IPO.

Advent argued before the U.S. District Court for the Southern District of New York that Party City investors failed to allege facts suggesting that Advent took any action resulting in the allegedly false IPO documents or to establish a specific claim of control, but only stated that Advent held a minority interest in Party City and could appoint up to two of the nine to 12 members of Party City’s board of directors.

“The relevant case law — which includes factually similar decisions from courts in this circuit — makes clear that mere minority stock ownership and board appointment rights do not suffice to adequately plead control,” Advent said.

Also on Friday, Party City, PE firm Thomas H. Lee Partners and the IPO underwriting firms — Goldman, Sachs & Co.; Merrill Lynch, Pierce, Fenner & Smith Inc.; Credit Suisse Securities (USA) LLC; and Morgan Stanley & Co. LLC — filed a motion to dismiss the suit, arguing that the investors didn’t adequately allege that Party City made misleading statements ahead of the IPO.

“Plaintiff’s claim fails at the threshold because it rests on an implausible, out-of-context reading of the alleged misstatement. Specifically, plaintiff’s theory asks this court to construe Party City’s statement as conveying an ‘impression’ that Party City’s ‘impressive sales growth’ would continue after the IPO,” they argued. “That purported ‘impression’ is necessary to plaintiff’s claim because the complaint offers no other basis upon which to infer that Party City’s statement was materially misleading.”

Party City investor Roy Jones first filed suit in November 2015, alleging the company, CEO James M. Harrison and Chief Financial Officer Michael A. Correale had failed to disclose that a decline in “Frozen” merchandise would hurt the company’s financial results and that investors were kept in the dark about the impact of sluggish consumer trends and disruption caused by physical changes at Party City stores.

Party City, backed by private equity firms Advent International and Thomas H. Lee Partners LP, raised $372 million in its April 2015 IPO by selling 21.875 million shares for $17 apiece, at the top of the anticipated price range for the offering.

But Jones said the share price fell by $0.97 a share after Party City held an earnings call in August during which Harrison said the company faced “several challenges” in the early part of the third quarter of 2015.

During the call, according to Jones’ complaint, Harrison said customers in the third quarter of 2014 had “rushed to buy” “Frozen” merchandise, creating demand that could prove tough to match a year later. He also said there would be “temporary disruption” in Party City stores because of a remerchandising initiative scheduled to wrap up before the Halloween sales season, the complaint said.

Representatives for Advent International, Party City and its underwriters did not respond to a request for comment on Tuesday.

Roy Jones is represented by Phillip Kim and Laurence Rosen of The Rosen Law Firm PA and Michael Goldberg of Goldberg Law PC.

Advent International is represented by Matthew Solum and Elliot C. Harvey Schatmeier of Kirkland & Ellis LLP and Stuart M. Glass of Choate Hall & Stewart LLP.

Party City, its officer defendants and Thomas H. Lee Partners are represented by David L. Schwarz, Joshua D. Branson and Mark Charles Hansen of Kellogg Huber Hansen Todd Evans & Figel PLLC.

Goldman, Sachs & Co.; Merrill Lynch, Pierce, Fenner & Smith Inc.; Credit Suisse Securities (USA) LLC; and Morgan Stanley & Co. LLC are represented by James P. Smith III, Robert Y. Sperling and Joseph L. Motto of Winston & Strawn LLP.

The case is Jones et al. v. Party City Holdco Inc. et al., case number 1:15-cv-09080, in the U.S. District Court for the Southern District of New York.