case 1:13-cv-04461-ua document 1 filed 06/27/13 page 1 of...
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Case 1:13-cv-04461-UA Document 1 Filed 06/27/13 Page 1 of 27
CHARLES NUTSCI-I, Individually and on Behalf of All Others Similarly Situated.
Plaintiff,
vs.
<04? Civil Action No.
CLASS ACTION CO AINT FOR VIOLATIONS OF T FEDERAL SECURITIES LA
Jury Trial Demanded
CASH STORE FINANCIAL SERVICES, INC., GORDON REYKDAL, CRAIG WARNOCK, and NANCY BLAND
Defendants.
Plaintiff. Charles Nutsch, by his attorneys, alleges the following upon information and
belief, except for those allegations that pertain to Plaintiff and his attorneys, which are based on
personal knowledge. Plaintiff's information and belief are based upon, among other things.
Counsel's investigation, which included, inter a/ia, review and analysis of filings by Cash Store
Financial Services, Inc. ("Cash Store" or the "Company") with the United States Securities and
Exchange Commission ("SEC"), press releases, conference calls, news articles, and analyst
reports. Plaintiff believes that substantial, additional evidentiary support will exist for the
allegations set forth herein after a reasonable opportunity for discovery.
NATURE OF THE ACTION
1. This is a federal securities class action brought pursuant to the Securities Exchange Act
of 1934 (the "Exchange Act") on behalf of all purchasers of Cash Store common stock on the
New York Stock Exchange (NYSE") from November 24, 2010 until and through May 13, 2013,
inclusive (the Class Period") and who were damaged thereby. 1
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2. Defendant Cash Store is a pay-day lender based in Alberta, Canada. The Company
primarily operates in Canada, where it maintains 579 branches under banners "Cash Store
Financial" and "Instaloans." During the Class Period, Cash Store was traded on the NYSE under
the ticker symbol "CSFS."
3. Beginning on November 24, 2010, Cash Store made a series of false and misleading
statements concerning the Company's financial condition that caused the Company's shares to
trade at an artificially high price.
4. Specifically, during the Class Period, the Company made a number of false and
misleading statements in its quarterly and annual financial statements in which it overvalued a
major loan portfolio it had acquired. Additionally, the Company understated its liabilities
associated with a class action settlement.
5. On December 10, 2012, the Company revealed that it needed to restate its financial
statements and that it had inappropriately accounted for the acquisition of a large loan portfolio
in violation of U.S. Generally Accepted Accounting Principles ("GAAP"). Specifically, the
Company determined that a $36.8 million premium should have been recorded as an expense.
The Company further stated that it was going to restate the fair value of the loans acquired to $50
million from which the Company had paid $116.3 million and that its provision for loan losses
for the three month periods ending March 31, 2012 and June 30, 2012 was understated by $3.3
million and $3.7 million, respectively. Significantly, the Company admitted that material
weaknesses existed as to the Company's internal controls and that such weaknesses led to the
restatement.
6. On January 3, 2013, Cash Store filed its restated financial statements for the three and
six months ended March 31, 2012 and the three and nine months ended June 30, 2012. The
restatements revealed that several areas of the income statement and balance sheet required
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Case 1:13-cv-04461-UA Document 1 Filed 06/27/13 Page 3 of 27
restatement as a result of inappropriate application of GAAP regarding accounting for asset
acquisitions, fair value measurement and accounting for loan losses. Overall, the restatement
revealed that Cash Store had overstated net income by over $30 million in the first three months
ended March 31, 2012. The Company also disclosed that immediate family members of Cash
Store's directors and one executive profited from the transaction involving the loan acquisition.
7. On April 9, 2013. the Company announced that it received notice from the NYSE that it
was not in compliance with certain standards for continued listing of its shares and that under
NYSE rules, the Company had 18 months from April 2, 201 3 to submit aplan to demonstrate its
ability to achieve compliance with listing standards.
8. The full truth was finally revealed on May 13, 2013. when the Company announced
that it would again have to restate financial results because the previous annual and interim
financial statements improperly calculated the losses accrued due to a lawsuit settlement.
Although every financial statement filed with the SEC estimated liability relating to the lawsuit
to be approximately $18 million, in reality the losses were $23.3 million -- or approximately
25% higher than previously reported. The Company admitted that its previous financial reports
should not be relied upon and that material weaknesses in internal controls for accounting existed
during all periods dating back to 2010.
9. As a result of the foregoing, Cash Store stock plummeted approximately 71.25%, from
its Class Period high of $17.10 per share to $3.83 at the close of the Class Period, resulting in
millions of dollars of losses to Class Members.
JURISDICTION AND VENUE
10. The claims asserted herein arise under and pursuant to Sections 10(b) and 20(a) of the
Exchange Act [15 U.S.C. §78j(b) and 78t(a)] and Rule I Ob-5 promulgated thereunder by the
SEC [17 C.F.R. §240.1Ob-5].
'l
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11. This Court has jurisdiction over the subject matter of this action pursuant to 28 U.S.C.
§1331 and Section 27 of the Exchange Act.
12. Venue is proper in this District pursuant to Section 27 of the Exchange Act and 28
U. S.C. §1391(b) as the securities of Cash Store are publicly traded on the NYSE, which is
located in this District.
13. Additionally, venue is proper because Cash Store conducts business and maintains a
registered agent at National Corporate Research, Ltd., 10 East 40th St., 10th Floor, New York,
NY 10016 in this District.
PARTIES
14. Plaintiff Charles Nutsch purchased the common stock of Cash Store during the Class
Period as set forth in the attached certification and was damaged thereby.
15. Defendant Cash Store is a pay-day lender and a leading provider of alternative financial
products and services. It boasts 579 branches in Canada alone. The Company facilitates short-
term advances and other financial services through its agent brokers and lenders, arranging for
advances to customers ranging from $100 to $1,500. The Company operates eight frilly owned
subsidiary entities, including two of the most recognizable brands in the alternative financial
services market in Canada - Cash Store Financial and Instaloans - each of which hold dominant
positions in all key Canadian markets. The Company represents that by branch count, the
Company holds over 36% of Canadian market share; it is the only broker of short-term advances
that is publicly traded on the Toronto Stock Exchange. The Company also trades common stock
on the NYSE and has been registered with the SEC since June 1, 2010.
16. Defendant Gordon Reykdal ("Reykdal") was the Chairman of the Board and CEO of
Cash Store during the Class Period.
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17. Defendant Michael Warnock ("Warnock") has served as Cash Store's Chief Financial
Officer since .July 1, 2012.
18. Defendant Nancy Bland ("Bland") was the Company's Chief Financial Officer until her
surprise resignation on May 30, 2012.
19. Defendants Reykdal, Warnock, and Bland are collectively referred to herein as the
"Individual Defendants."
SUBSTANTIVE ALLEGATIONS
I :IArsi rOi (s1uJI IIJ
20. On June 3. 2010, Cash Store announced that its shares had been authorized for listing
on the NYSE. In connection with its application, Cash Store filed a registration statement Form
40-F with the SEC that stated an increase in annual revenue of approximately $20 million for the
fiscal year ended June 30, 2009, recording $150.3 million in revenues compared to $130.6
million for the fiscal year ended June 30, 2008. The following day, the Company changed its
financial year-end from June 30 to September 30 to better synchronize its financial reporting
with its business planning.
MATERIALLY FALSE AND MISLEADING STATEMENTS ISSUED DURING THE CLASS PERIOD
21. On November 24, 2010, the Company issued a news release via a Form 6-K filed with
the SEC announcing the Company's financial results for the fifteen month period ending
September 30, 2010. Defendant Reykdal stated that revenue increased 47.4% in the fifteen
month period ended September 30, 2010. He further stated that the earnings per share were up
19.7% from the same three-month period the previous year.
22. An exhibit attached to the Company's Form 40-F. EX-99.3, titled "Management's
Discussion and Analysis [MD&A] for the Three and Fifteen Months Ended September 30,
2010," filed with the SEC on November 26, 2010, stated. "Net income for the fifteen month
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period ended September 30, 2010, after removing class action settlement costs and related taxes
was $28.5 million, compared to $19.4 million for the year ended June 30, 2009."
23. On this news, shares of Cash Store rose 10% to close at $14.69 by November 29, 2010.
24. Significantly, the November 26, 2010 Form 40-F included separate certifications by
defendants Reykdal and Bland pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of
2002 ("SOX"). Section 302 of SOX, entitled "Corporate responsibility for financial reports"
directs that the SEC shall promulgate regulations requiring that, in relevant part, for each
company filing periodic reports under section 13(a) or 15(d) of the Securities Exchange Act of
1934 . . . the principal executive officer or officers and the principal financial officers or officers,
or person performing similar functions, certify in each annual or quarterly report filed or
submitted under either such section of such Act that:
(1) the signing officer has reviewed the report;
(2) based on the officer's knowledge, the report does not contain any untrue statement of a material fact necessary in order to make the statements made, in light of the circumstances under which such statements were made, not misleading;
(3) based on such officer's knowledge, the financial statements and other financial information included in the report, fairly present in all material respects the financial condition and results of operations of the issuer as of, and for, the periods presented in the report;
(4) the signing officers:
(A) are responsible for establishing and maintaining internal controls;
(B) have designed such internal controls to ensure that material information relating to the issuer and its consolidated subsidiaries is made known to such officers by others within those entities, particularly during the period in which the periodic reports are being prepared;
(C) have evaluated the effectiveness of the issuers internal controls as of a date within 90 days prior to the report; and
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D) have presented in the report their conclusions about the effectiveness of their internal controls based on their evaluation of that date.
(5) the signing officers have disclosed to the issuer's auditors and the audit committee of the board of directors (or persons fulfilling the equivalent function):
(A) all significant deficiencies in the design or operation of internal controls which could adversely affect the issuer's ability to record, process, summarize, and report financial data and have identified for the issuer's auditors any material weaknesses in internal controls; and
(B) any fraud, whether or not material, that in that involves management or other employees who have a significant role in the issuer's internal controls; and
(6) the signing officers have indicated in the report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Emphasis added.'
25. Likewise, §906 of SOX, entitled "Failure of corporate officers to certify financial
reports" requires, in relevant part:
(a) Certification of Periodic Financial Reports. Each periodic report containing financial statements filed by an issuer with the Securities Exchange Commission pursuant to 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m(a) 78o(d)) shall be accompanied by a written statement by the chief executive officer and chief financial officer (or equivalent thereof) of the issuer.
(b) Content. The statement required under subsection (a) shall certify, that the periodic report containing the financial statements fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act [o]f 1934 (15 U.S.C. 78m(a) 78o(d)) and that information contained in
Unless otherwise noted, all emphasis is added.
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the periodic report fairly presents, in all material respects, the financial condition and results of operations of the issuer.
26. The SOX certifications attached as EX-99.3 to Cash Store's November 26. 2010 Form
40-F, represented that "falll figures f. .
are reported in accordance with United States
generally accepted accounting principles." The Company's Form 40-F also stated that:
"fdjuring the period covered by this annual report on Form 40-F, no change occurred in the
Company's internal control over financial reporting that has materially affected, or is
reasonably likely to materially affect, the Company's internal control over financial
reporting."
27. On December 29, 2010, the Company filed a Form 6-K with the SEC. In the
Chairman's Report section of the attached Annual Report 2010, defendant Reykdal stated that
Cash Store "achieved records in most critical categories of our business. These records included
[ ... ] record revenue of $180.2 million, record net income adjusted for class action settlement
costs and related taxes was $22.9 million [ ... ] and record loan volume of $681.4 million."
28. On this news, Cash Store's stock price continued to rise, reaching a high of $17.10 at
the close on January 19, 2011.
29. On January 12, 2012, Cash Store announced that it intended to offer up to $125 million
Canadian dollars aggregate principal amount of Senior Secured Notes (the "Notes") to purchase
a loan portfolio. Specifically, Cash Store stated that it planned to use the proceeds of the Notes
offering to purchase loan receivable assets from the Company's current third party lenders, for
general corporate purposes and to pay fees and expenses to acquire the loan portfolio (the "Loan
Acquisition").
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30. Commenting on the Loan Acquisition, defendant Reykdal stated in a Cash Store news
article dated January 12, 20122:
We believe that this transaction will financially benefit the Company as it will allow us to transition from a broker model to an on balance sheet direct lending model in those jurisdictions that are regulated. This transition is expected to have many benefits, including access to lower-cost capital and committed funding. The financial flexibility offered by the Notes will support future loan growth associated with the maturing of our branches and our expansion plans.
31. On this news, the stock price rose from $637 to $7.90 over the next three trading days.
32. Throughout 2012, defendant Reykdal continued to tout the Loan Acquisition as helping
the Company to be "well-positioned for, sustained long-term growth," Indeed, in announcing the
first quarter results on February 8, 2012, defendant Reykdal concluded: "A key strategic focus
for management has been sourcing cheaper capital and moving to on-balance sheet lending. On
January 31, we concluded a $132.5 million offering of senior secured notes, the majority of
proceeds of which were utilized to purchase loans receivable assets held by third-party lenders."
As a result of these representations, Cash Store's stock prices traded at an artificially inflated
price.
33. On May 14, 2012, the Company filed its Form 6-K with the SEC for the quarter ended
March 31, 2012. The Form 6-K was signed by Defendants Reykdal and Bland, and contained
material misstatements regarding loan loss reserves, the value of the Loan Acquisition, earnings,
the effectiveness of internal controls and the cost of settling a class action lawsuit. In short, the
May 14, 2012 Form 6-K intentionally, or recklessly, contained false statements concerning the
Company's financial statements which constituted violations of U.S. GAAP.
2 Available at http ://www.cashstorefinancial.cafNewsArticle/ 12-01-1 2/Cash_StoreFinancial Announces Proposed Offering of CDN 1 25 —Million—Senior Secured5Year_Notes.aspx
Case 1:13-cv-04461-UA Document 1 Filed 06/27/13 Page 10 of 27
34. On May 30, 2012, two weeks after the filing of Cash Store's March 2012 Financials, its
CFO, Defendant Bland, suddenly resigned. The Company provided no explanation for Brand's
abrupt departure other than to state that she was leaving the Company to join her family's
business, an equipment sales and service company in Edmonton. In the same press release, the
Company announced that defendant Warnock had been appointed the Company's new CFO,
effective July 1, 2012 (the first day of the Company's fiscal fourth quarter).
35. On August 14, 2012, the Company filed its Form 6-K with the SEC for the quarter
ended June 30, 2012. The Company represented that the Loan Acquisition enabled the Company
to shift from brokered lending to direct lending. The August 14, 2012 6-K was signed by
defendants Reykdal and Warnock and represented in the attached EX-99.2 MD&A that
management: "has peiformed an evaluation and has not identified any changes in our internal
controls over financial reporting during the most recent interim period ended June 30, 2012
that have material/v affected, or are reasonably likely to materially affect, our internal
controls over financial reporting." This statement was false and misleading because, among
other reasons, the Form 6-K contained material misstatements regarding loan loss reserves, the
value of the Loan Acquisition, earnings, the effectiveness of internal controls and the cost of
settling a class action lawsuit. In other words, the August 14, 2012 Form 6-K, like the May 14,
2012 Form 6-K, intentionally, or recklessly, contained false representations concerning the
Company's financial statements which constituted violations of U.S. GAAP. Moreover, the
Company falsely reported that its internal controls over its financial reporting were sufficient.
36. Given the positive portrayals of the Loan Acquisition and statements concerning the
strength of the Company's internal controls throughout the fiscal 2012 year, the market was
shocked when on December 10, 2012, the Company announced that it needed to restate its
financial statements for the three and six months ended March 31, 2012 and three and nine
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Case 1:13-cv-04461-UA Document 1 Filed 06/27/13 Page 11 of 27
months ended June 30, 2012 because the Company had determined that the Loan Acquisition
from January was overvalued. Specifically, the Company announced that the calculation of fair
value for the Loan Acquisition, for which the Company paid $116.3 million, was actually worth
$50 million - 50% less than what the Company had paid for the loans, and that its provision for
loan losses was significantly understated:
In accordance with U.S. GAAP, the company has determined that the premium of $36.8 million should have been recognized as an expense as a settlement of pre-existing business relationships with third-party , lenders. The Company will restate the .fair value of the loans receivable acquired to $50.0 million and the fair value of intangible assets acquired to $32.0 million with a corresponding deferred tax liability of $2.5 million. The Company will also adjust the interim financial statements for the periods ended March 3 1, 2012 and June 30, 2012 for any corresponding impact that these restatements have on other financial statement line items.
Of the $50 million of loans receivable acquired on January 3 1, 2012 the Company has collected a net amount of $43.5 million to September 30, 2012, of which $5.0 million (three months ended September 30, 2012 - $1.8 million) represents late interest and default fees from the acquired loans. These amounts collected on the acquired portfolio were entirely applied to reduce the value of the acquired loans receivable on the balance sheet as at September 30, 2012 in accordance with U.S. GAAP.
37. In addition, the Company determined that its provision for loan losses on internally
generated loans was understated. As a result, the Company needed to record an additional
expense of $' ).3 million and $3.7 million for the three month periods ended March 31, 2012 and
June 30, 2012, respectively.
38. Finally, the Board of Directors stated that in connection with the Acquisition,
[T]he Company has re-evaluated its conclusions regarding the effectiveness of its internal control over financial reporting for the affected periods and determined that material weaknesses existed at March 31, 2012 and June 30, 2012. As a result of the material weaknesses, the Company has now concluded that such controls were ineffective. Accordingly, the company will restate its disclosure as of March 31, 2012 and June 30, 2012 to include the identification of material weaknesses related to the restatements.
39. On the announcement of this news, Cash Store's stock price plummeted approximately
20% from the previous day's closing of $4.27 to $3.42 on unusually high trading volume.
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40. On December 28, 2012. the Company announced that a Special Committee of
Independent Directors of Cash Store had retained an independent accounting firm to conduct a
special investigation related to the acquisition of the consumer loan portfolio from third-party
lenders in late January 2012. The Company also revealed the existence of previously
undisclosed related party transactions in connection with the Loan Acquisition.
41. Through an amended Form 6-K filed on January 3, 2013, before the special investigation
had concluded, Cash Store filed its restated financial statements for the three and nine months
ended June 30, 2012. In its Form 6-K for the period ended March 31, 2012, the Company
reported that the restatement corrected the allocation of the total consideration paid for the Loan
Acquisition, provision for loan losses, and other immaterial errors.
42. In the January 3, 2013 Form 6-K, the Company disclosed additional facts concerning
the Loan Acquisition, namely that the immediate family members of one of Cash Store's
directors and one of Cash Store's executives profited from the transaction. Specifically the
Company disclosed that an immediate family member of Michael Shaw, a director of the
Company, advanced funds to a privately held entity that raised capital and provided loans to the
third party lender and acted as a third-party lender prior to the acquisition of the consumer loans
portfolio on January 31, 2012. $23.9 million of the total purchase consideration was paid to this
third-party lender, of which $12.89 million was settled by the issuance of the Notes.
43. Moreover, the father of Senior Vice President of Operations, Cameron Schiffner,
controls a privately held entity that raises capital and provides advances to the third party lender
from which the Company acquired the loan portfolio. Schiffner' s brother was a member of
management of AUC, of which Cash Store owned 18.3% of outstanding shares, and is a member
of management of the third-party lender. As part of the Loan Acquisition on January 31, 2012,
$45.5 million of the total purchase consideration was paid to this third-party lender and the
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acquisition agreement was signed on behalf of the third-party lender by Schiffner's brother. As
of March 31, 2012, $ 3 .9 million in liabilities accrued due to the third-party lender.
44. The Company's investigation further revealed that several additional areas of
accounting required restatement as a result of inappropriate application of U.S. GAAP, including
asset acquisitions, fair value measurement, and accounting for loan losses.
45. On April 9, 2013, the Company announced that it received notice from the NYSE that it
was not in compliance with certain standards for continued listing of its shares. Specifically,
Cash Store was below the NYSE's continued listing criteria because its average total market
capitalization over a thirty consecutive day trading period was less than $50 million at the same
time that reported shareholders' equity was less than $50 million. As a result of these
disclosures, the price of the Company's stock fell from further $2.33 to $2.25.
46. On May 13, 2013, the last day of the Class Period, the Company disclosed that it would
again restate financial results because the previous annual and interim financial statements failed
to adequately account for the losses accrued due to a class action lawsuit settlement. Although
previously filed financial statements with the SEC estimated liability relating to the lawsuit to be
approximately $18 million, in reality the losses were $2 3 .3 million, thus understated by
approximately 25% -- $5.3 million. Additionally, the Company noted that its previous financial
reports should not be relied upon and that material weaknesses in the Company's internal
controls existed during all periods dating back to 2010. As a result, the stock price declined
approximately 9.5% from $ 3 .40 to $3 .25.
47. On May 14, 2013, the Alberta Securities Commission determined that certain of the
Company's annual and interim filings were not prepared in accordance with Alberta securities
laws. As a result, the Commission ordered a halt to any trading or purchasing of Cash Store
stock until the order is revoked or varied.
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48. On May 28, 2013, Cash Store filed a Registration Statement, Form 40-F wherein it
announced through an MD&A attached as Exhibit 99.3 that it filed amended and restated
consolidated financial statements and MD&A for the years ended September 30, 2012,
September 30, 2011 and the fifteen month period ended September 30, 2010, as well as the
unaudited interim consolidated financial statements for the periods ended December 31, 2011,
March 31, 2012, June 30, 2012 and December 31, 2012. The Company stated that it re-
evaluated its conclusions regarding the effectiveness of its internal control over financial
reporting for the affected periods and determined that material weaknesses existed during all
periods:
During the preparation of the Company's September 30, 2012 annual financial statements, Management determined that the Company did not design and implement effective ICFR [internal controls] related to the identification, assessment and disclosure of related parties and related party transactions. Specifically, the Company did not design effective ICFR to regularly assess existing business relationships to identify, assess and disclose related parties and related party transactions in accordance with applicable accounting standards. As a result of these ineffective controls, the Company did not disclose related party transactions with a third party lender in its previously filed financial statements; however, it has now amended its disclosure of related party transactions in Note 23 of the restated September 30, 2011 annual financial statements to correct for this omission in disclosure. The disclosure that could reasonably be affected by this material weakness is the disclosure of related parties and related party transactions.
During the preparation of the Company's March 31 1 2013 interim financial statements, Management determined that the Company did not design and implement effective IGFR related to the review and interpretation of complex legal agreements. Specifically, the Company's ICFR did not correctly interpret how the settlement terms and conditions of the March 5, 2004 British Columbia Class Action claim impacted the measurement of the associated liability as at September 30, 2010. As a result of these ineffective controls, the Company incorrectly measured and recorded the liability in its previously filed financial statements; however, it has now corrected for this error as described Note 3 of the Company's September 30, 2011 restated annual financial statements. The accounts that could reasonably be affected by this material weakness are class action settlement expense, interest expense, income tax expense, other receivables (current and long term), deferred tax asset and accrued liabilities.
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Additionally, in EX-99.2 to the May 28th, 2013 Form 6-K. the MD&A for the three months and
year ended September 3 0th, 2012 (Restated), the Company admitted:
Management did not maintali, effective processes and controls specific to accounting for the January 31, 2012 acquisition of the portfolio of consumer loans. Management did not effectively research, develop, communicate and implement an accounting policy with respect to this non-recurring transaction. In addition, management did not implement sufficient preventative and detective controls governing the determination of the key valuation assumptions associated with the assets acquired and allocation of the purchase price. The Company has now corrected for the error as described in Note 3 of the Company's March 31, 2012 restated interim financial statements. The accounts that could reasonably be affected by this material weakness are consumer loans receivable, net, intangible assets, deferred taxes and premium paid to acquire the loans.
Management did not maintain effective processes and controls specific to the determination of the provision for loan losses. Senior finance personnel did not effectively communicate with operations to obtain a sufficient understanding in making the determination of the provision for loan losses. This material weakness resulted in material errors in the unaudited interim financial statements. Further, there is a reasonable possibility that a material misstatement of the financial statements will not be prevented or detected on a timely basis. The Company has now corrected for the errors as described in Note 3 of the Company's March 31, 2012 restated interim financial statements. The accounts that could reasonably be affected by this material weakness are provision for loan losses and consumer loans receivable, net.
Interest expense
Class action settlements
INCOME (LOSS) BEFORE INCOME TAXES
PROVISION FOR INCOME TAXES - Deferred (recovery)
NET INCOME (LOSS) AND COMPREHENSIVE INCOME (LOSS)
BASIC EARNINGS PER SHARE
DILUTED EARNINGS PER SHARE
Year ended September 30 2011 Year ended September 30 2012
As Reported Adjustments Restated As Reported Adjustments Restated
$ - $ 616 $ 616 $ 11,623 $ 716 $ 12,339
3,206
(2,838) 368 - (69) (69)
14,667
2,222 16,889 (56,230)
(647) (56,877)
(532)
685 153 (9,570) (214)
(9,784)
9,042
1,537 10,579 (43,089)
(433)
(43,522)
$ 0.52 $
0.09 $ 0.61 $ (2.47) $
(0.03) $ (2.50)
0.51
0.09 0.60 (2.47)
(0.03) (2.50)
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49. As a result of the Company's false and misleading statements, Cash Store stock has
fallen 71.25% during the Class Period, resulting in millions of dollars in losses to Class
Members.
E*:ES, fJC (CSF5)
I -
.. .. ..: •...
H
DEFENDANTS KNOWINGLY OR RECKLESSLY VIOLATED U.S. GAAP
50. Effective for financial statements issued after September 15, 2009, the Financial
Accounting Standards Board ("FASB") has codified generally accepted accounting principles, or
"GAAP." FASB ASC Topic 105-10-05-1 establishes the FASB Accounting Standards
Codification ("ASC") "as the source of authoritative generally accepted accounting principles
(GAAP) recognized by the FASB to be applied by nongovernmental entities. Rules and
interpretive releases of the Securities and Exchange Commission (SEC) under authority of the
federal securities laws are also sources of authoritative GAAP for SEC registrants."
51. Defendants Reykal, Bland and/or Warnock knowingly or recklessly certified every
financial statement filed with the SEC beginning on November 24, 2010 until the quarter ended
December 31, 2012, that failed to conform to GAAP.
CLASS ACTION ALLEGATIONS
52. Plaintiff brings this action as a class action pursuant to Federal Rule of Civil Procedure
23(a) and (b)(3) on behalf of a class consisting of all those who purchased or otherwise acquired
the common stock of Cash Store on the NYSE from November 24, 2010 to May 13, 2013, 16
Case 1:13-cv-04461-UA Document 1 Filed 06/27/13 Page 17 of 27
inclusive, and who were damaged thereby (the "Class"). Excluded from the Class are
Defendants, the officers and directors of the Company, at all relevant times, members of their
immediate families and their legal representatives, heirs, successors or assigns and any entity in
which Defendants have or had a controlling interest.
53. The members of the Class are so numerous that joinder of all members is impracticable.
Throughout the Class Period, the Company's common stock was actively traded on the NYSE.
While the exact number of Class members is unknown to Plaintiff at this time and can only be
ascertained through appropriate discovery, Plaintiff believes that there are hundreds or thousands
of members in the proposed Class. Record owners and other members of the Class may be
identified from records maintained by Cash Store or its transfer agent and may be notified of the
pendency of this action by mail, using the form of notice similar to that customarily used in
securities class actions.
54. Plaintiff's claims are typical of the claims of the members of the Class as all members
of the Class are similarly affected by Defendants' wrongful conduct in violation of federal law
complained of herein.
55. Plaintiff will fairly and adequately protect the interests of the members of the Class and
has retained counsel competent and experienced in class action and securities litigation
56. Common questions of law and fact exist as to all members of the Class and
predominate over any questions solely affecting individual members of the Class. Among the
questions of law and fact common to the Class are:
1) whether the federal securities laws were violated by Defendants' acts as alleged herein;
2) whether statements made by Defendants to the investing public during the Class Period misrepresented material facts about the business and operations of Cash Store;
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Case 1:13-cv-04461-UA Document 1 Filed 06/27/13 Page 18 of 27
3) whether the price of Cash Store common stock was artificially inflated during the Class Period; and
4) to what extent the members of the Class have sustained damages and the proper measure of damages.
57. A class action is superior to all other available methods for the fair and efficient
adjudication of this controversy since joinder of all members is impracticable. Furthermore, as
the damages suffered by individual Class members may be relatively small. the expense and
burden of individual litigation make it impossible for members of the Class to individually
redress the wrongs done to them. There will be no difficulty in the management of this action as
a class action.
SCIENTER ALLEGATIONS
58. As alleged herein, Defendants acted with scienter in that Defendants knew, or
recklessly disregarded, that the public documents and statements they issued and disseminated to
the investing public in the name of the Company or in their own name during the Class Period
were materially false and misleading.
59. Pursuant to SOX Sections 302 and 906, Defendants Reykdal, Warnock, and Bland
knowingly certified on the Nov. 26, 2010 Form 40-F: "Based on my knowledge, having
exercised reasonable diligence, the interim filings do not contain any untrue statement of a
material fact or omit to state a material fact required to be stated or that is necessary to make a
statement not misleading in light of the circumstances under which it was made, with respect to
the period covered by the interim filings."
60. Each of the Individual Defendants further certified that, as signing officers, they:
(A) are responsible for establishing and maintaining internal controls;
(B) have designed such internal controls to ensure that material information relating to the issuer and its consolidated subsidiaries is made known to such officers by others
V.
Case 1:13-cv-04461-UA Document 1 Filed 06/27/13 Page 19 of 27
within those entities, particularly during the period in which the periodic reports are being prepared;
(C) have evaluated the effectiveness of the issuers internal controls as of a date within 90 days prior to the report: and
(D) have presented in the report their conclusions about the effectiveness of their internal controls based on their evaluation of that date.
61. Defendants knew and/or recklessly disregarded the falsity and misleading nature of the
information that they caused to be disseminated to the investing public, including, but not limited
to, the false statements contained in the SOX certifications. The Individual Defendants, because
of their positions with Cash Store, controlled the contents of the Company's public statements
during the Class Period. Because of their positions and access to material non-public
information, these Defendants knew or recklessly disregarded that the adverse facts specified
herein had not been disclosed to and were being concealed from the public and that the positive
representations that were being made were false and misleading. As a result, each of these
Defendants is responsible for the accuracy of Cash Store's corporate statements and is therefore
responsible and liable for the representations contained therein.
62. The scienter of the Defendants is underscored by the Sarbanes-Oxley mandated
certifications of Defendants Reykdal, Bland, and Wornack, which acknowledged their
responsibility to investors for establishing and maintaining controls to ensure that material
information about Cash Store was made known to them, that the Company's disclosure related
controls were operating efficiently, and that their financial statements were accurate.
LOSS CAUSATION/ECONOMIC LOSS
63. During the Class Period, as detailed herein, Defendants engaged in a scheme to deceive
the market and a course of conduct that artificially inflated the price of Cash Store common stock
and operated as a fraud or deceit on Class Period purchasers of Cash Store common stock by
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Case 1:13-cv-04461-UA Document 1 Filed 06/27/13 Page 20 of 27
failing to disclose and misrepresenting the adverse facts detailed herein. When Defendants'
misrepresentations and fraudulent conduct were disclosed and became apparent to the market,
the price of Cash Store common stock fell precipitously, as the prior artificial inflation came out.
64. As a result of their purchases of Cash Store common stock during the Class Period,
Plaintiff and the other Class members suffered economic loss, i.e., damages, under the federal
securities laws. Defendants' false and misleading statements had the intended effect and caused
Cash Store common stock to trade at artificially inflated levels throughout the Class Period,
reaching a high of $17.10.
65. As the truth about the Company was revealed to the market, the price of Cash Store
common stock fell. These declines removed the inflation from the price of Cash Store common
stock, causing real economic loss to investors who had purchased Cash Store common stock
during the Class Period.
66. The declines in the price of Cash Store common stock after the corrective disclosures
were a direct result of the nature and extent of Defendants' fraudulent misrepresentations being
revealed to investors and the market. The timing and magnitude of the price declines in Cash
Store common stock negate any inference that the loss suffered by Plaintiff and the other Class
members was caused by changed market conditions, macroeconomic or industry factors or
Company-specific facts unrelated to Defendants' fraudulent conduct. The economic loss
suffered by Plaintiff and the other Class members was a direct result of Defendants' fraudulent
scheme to artificially inflate the price of Cash Store common stock and the subsequent
significant decline in the value of Cash Store common stock when Defendants' prior
misrepresentations and other fraudulent conduct were revealed.
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Case 1:13-cv-04461-UA Document 1 Filed 06/27/13 Page 21 of 27
b%fl I!.i I
67. At all relevant times, the market for Cash Store common stock was an efficient market
for the following reasons, among others:
(a) Cash Store's stock met the requirements for listing and was listed and
actively traded, on the NYSE, a highly efficient and automated market;
(b) As a regulated issuer, Cash Store filed periodic public reports with the
SEC and the NYSE;
(c) Cash Store regularly communicated with public investors via established
market communication mechanisms, including through the regular dissemination of press
releases via SEC filings as well as on the national circuits of major newswire services and
through other wide-ranging public disclosures, such as communications with the financial
press and other similar reporting services.
68. As a result of the foregoing, the market for Cash Store common stock promptly
digested current information regarding Cash Store from all publicly-available sources and
reflected such information in the price of Cash Store common stock. Under these circumstances,
all purchasers of Cash Store common stock during the Class Period suffered similar injury
through their purchase of Cash Store common stock at artificially inflated prices and a
presumption of reliance applies.
NO SAFE HARBOR
69. The statutory safe harbor provided for forward-looking statements under certain
circumstances does not apply to any of the allegedly false statements pleaded in this Complaint.
Many of the specific statements pleaded herein were not identified as "forward-looking
statements" when made. To the extent there were any forward-looking statements, there were no
meaningful cautionary statements identifying important factors that could cause actual results to
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Case 1:13-cv-04461-UA Document 1 Filed 06/27/13 Page 22 of 27
differ materially from those in the purportedly forward-looking statements. Alternatively, to the
extent that the statutory safe harbor does apply to any forward-looking statements pleaded
herein, Defendants are liable for those false forward-looking statements because at the time each
forward-looking statement was made, the particular speaker knew that the particular forward-
looking statement was false, and/or the forward-looking statement was authorized and/or
approved by an executive officer of Cash Store who knew that those statements were false when
made.
ESiUII I
Violation of Section 10(b) of the Exchange Act And Rule lOb-5
Promulgated Thereunder Against All Defendants
70. Plaintiff repeats and realleges each and every allegation contained above as if fully set
forth herein.
71. During the Class Period, Defendants disseminated or approved the materially false and
misleading statements specified above, which they knew or deliberately disregarded were
misleading in that they contained material misrepresentations and/or failed to disclose material
facts necessary in order to make the statements made, in light of the circumstances under which
they were made, not misleading.
72. Defendants: (a) employed devices, schemes, and artifices to defraud; (b) made untrue
statements of material fact and/or omitted to state material facts necessary to make the statements
not misleading; and (c) engaged in acts, practices, and a course of business which operated as a
fraud and deceit upon the purchasers of the Company's common stock during the Class Period.
73. Plaintiff and the Class have suffered damages in that, in reliance on the integrity of the
market, they paid artificially inflated prices for Cash Store common stock. Plaintiff and the
Class would not have purchased Cash Store common stock at the prices they paid, or at all, if
22
Case 1:13-cv-04461-UA Document 1 Filed 06/27/13 Page 23 of 27
they had been aware that the market price had been artificially and falsely inflated by
Defendants' misleading statements.
74. As a direct and proximate result of Defendants' wrongful conduct, Plaintiff and the
other members of the Class suffered damages in connection with their purchases of Cash Store
common stock during the Class Period
Violation of Section 20(a) of the Exchange Act Against the Individual Defendants
75. Plaintiff repeats and realleges each and every allegation contained above as if fully set
forth herein.
76. The Individual Defendants acted as controlling persons of Cash Store within the
meaning of Section 20(a) of the Exchange Act as alleged herein. By virtue of their high-level
positions, and their ownership and contractual rights, participation in, and/or awareness of the
Company's operations and/or intimate knowledge of the financial statements filed by the
Company with the SEC and disseminated to the investing public, the Individual Defendants had
the power to influence and control and did influence and control, directly or indirectly, the
decision-making of the Company, including the content and dissemination of the various
statements that Plaintiff contends are false and misleading. The Individual Defendants were
provided with, or had unlimited access to, copies of the Company's reports, press releases, public
filings, and other statements alleged by Plaintiff to be false or misleading prior to and/or shortly
after these statements were issued and had the ability to prevent the issuance of the statements or
cause the statements to be corrected.
77. In particular, each of these Defendants had direct and supervisory involvement in the
day-to-day operations of the Company and, therefore, is presumed to have had the power to
Case 1:13-cv-04461-UA Document 1 Filed 06/27/13 Page 24 of 27
control or influence the particular transactions giving rise to the securities violations as alleged
herein, and exercised the same.
78. As set forth above, Cash Store and the Individual Defendants each violated Section
10(b) and Rule 1 Ob-5 by their acts, statements, and omissions as alleged in this Complaint. By
virtue of their positions as controlling persons, the Individual Defendants are liable pursuant to
Section 20(a) of the Exchange Act. As a direct and proximate result of Defendants' wrongful
conduct, Plaintiff and other members of the Class suffered damages in connection with their
purchases of Cash Store common stock during the Class Period and revelation of the truth as
alleged herein.
WHEREFORE, Plaintiff prays for relief and judgment, as follows:
(a) Determining that this action is a proper class action under Rule 23 of the
Federal Rules of Civil Procedure with Plaintiff serving as class representative;
(b) Awarding compensatory damages in favor of Plaintiff and the other Class
members against all Defendants for all damages sustained as a result of Defendants' wrongdoing,
in an amount to be proven at trial, including pre and post judgment interest thereon;
(c) Awarding Plaintiff and the Class their reasonable costs and expenses
incurred in this action, including counsel fees and expert fees; and
(d) Such other and further relief as the Court may deem just and proper.
Case 1:13-cv-04461-UA Document 1 Filed 06/27/13 Page 25 of 27
JURY TRIAL DEMANDED
Plaintiff hereby demands a trial by jury.
DATED: June 27, 2013 SCOT +SCOT , A orneys at L , LLP
J SEPH . GUGLIELM OSEPI- D. COHEN
The Chrysler Building 405 Lexington Avenue, 401h Floor New York, NY 10174 Telephone: (212) 223-6444 Facsimile: (212) 223-6334 [email protected] [email protected]
DAVID R. SCOTT SCOTT+SCOTT, Attorneys at Law, LLP 156 S. Main Street P.O. Box 192 Colchester, CT 06415 Telephone: (860) 537-5537 Facsimile: (860) 537-4432 david.scott@scott-scottcorn
ZELDES 1-IAEGGQUIST & ECK, LLP Amber Eck 625 Broadway, Suite 1000 San Diego, CA 92101 Telephone: (619) 342-8000 Facsimile: (619) 342-7878 [email protected]
Counsel for Plaintff
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Case 1:13-cv-04461-UA Document 1 Filed 06/27/13 Page 26 of 27
THE CASH STORE FINANCIAL SERVICES, INC.
CERTIFICATION OF NAMED PLAINTIFF PURSUANT TO FEDERAL SECURITIES LAWS
Charles Nutsch ("Plaintiff") declares:
I. Plaintiff has reviewed a complaint and authorized its filing.
2. Plaintiff did not acquire the security that is the subject of this action at
the direction of plaintiff's counsel or in order to participate in this private action or
any other litigation under the federal securities laws.
3. Plaintiff is willing to serve as a representative party on behalf of the
class, including providing testimony at deposition and trial, if necessary.
4. Plaintiff has made the following transactions during the Class Period
in the securities that are the subject of this action:
See Schedule A
5. Plaintiff has not sought to serve or served as a representative party in
a class action that was filed under the federal securities laws within the three-year
period prior to the date of this Certification except as detailed below:
6. Plaintiff will not accept any payment for serving as a representative
party on behalf of the class beyond Plaintiff's pro rata share of any recovery,
except such reasonable costs and expenses (including lost wages) directly relating
to the representation of the class as ordered or approved by the court.
I declare under penalty of perjury that the foregoing is true and correct.
Executed this /iit-dayofLU/E' ,2013.
~ Ll 01,U CHARLES~WTS H,
Case 1:13-cv-04461-UA Document 1 Filed 06/27/13 Page 27 of 27
SCHEDULE A
Trade Date. Quantity Price Per Share Total Cost
__ -- --
o/og/o 4LL OO
Charles Nutsch - The Cash Store Financial Services, Inc.