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Investors Didn't Show Party City Lied Before IPO, Judge Says

02 February 2017

A New York federal judge on Wednesday told investors suing Party City Holdco Inc. to let it go, saying they had failed to prove their claim that sales of “Frozen” merchandise were more important to the company than they had been told.

The class-action suit alleged that the company failed to disclose prior to its April 2015 initial public offering how central massive sales of merchandise from the hit Disney movie had been to its 2014 sales figures. But District Court Judge Lewis A. Kaplan said the investors had failed to show the sales were central to the business as a whole.

“To be sure, they allege that 'Frozen' merchandise was very popular and a big seller. But just because the company described 'Frozen’s' performance as ‘extraordinary,’ ‘anomalous’ or ‘phenomen[al]’ does not mean that it had a material impact on the company’s aggregate business,” Judge Kaplan said.

Party City investor Roy Jones first filed suit in November 2015, alleging that the company, CEO James M. Harrison and Chief Financial Officer Michael A. Correale had failed to disclose that an anticipated decline in sales of “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, including a decline in “brand comp sales” — the quarter-to-quarter and year-to-year comparison of retail sales — due to the unusually high sales of “Frozen” merchandise in 2014.

Jones claimed that prior to the IPO, Party City had falsely claimed that none of its third-party licenses was individually integral to its business

The company — along with Advent and underwriters Goldman, Sachs & Co.; Merrill Lynch, Pierce, Fenner & Smith Inc.; Credit Suisse Securities (USA) LLC; and Morgan Stanley & Co. LLC — filed motions to dismiss the suit, arguing that the investors had failed to provide evidence the statement was false.

Judge Kaplan agreed, saying the defendants had not provided any numbers for “Frozen” merchandise sales in 2014 or what percentage of the company’s total business they represented.

“Instead, plaintiffs rely on a handful of buzz words and a single financial metric, brand comp sales. Yet they fail to allege any connection between that metric and the company’s aggregate business,” he said.

Roy Jones is represented by Naumon A. Amjed, Ryan T. Degnan, Andrew L. Zivitz, Johnston de F. Whitman Jr. and Meredith L. Lambert of Kessler Topaz Meltzer & Check LLP, Phillip Kim and Laurence Rosen of The Rosen Law Firm PA and Michael Goldberg of Goldberg Law PC.

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.

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.

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.

Matthew Solum, P.C.

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