folgers coffee lawsuit

Case 2:03-cv-05020-EL Document 58 Filed 06/18/2004 Page 1 of 63 UNITED STATES DISTRICT COURT EASTERN DISTRICT OF PENNSYLVANIA ) ) ) This Document Relates To: ) ) ALL ACTIONS. ) ) ______________________________________ ) IN RE CONSTAR INT’L INC. SECURITIES LITIGATION Master File No. 03cv05020 CLASS ACTION CONSOLIDATED AMENDED CLASS ACTION COMPLAINT Case 2:03-cv-05020-EL Document 58 Filed 06/18/2004 Page 2 of 63 SUMMARY OF CLAIMS 1. This securities class action is brought on behalf of the purchasers of Constar International, Inc. (“Constar” or the “Company”) common stock, who purchased their shares pursuant or traceable to Constar’s November 14, 2002 initial public offering (“IPO” or the “Offering”). Plaintiffs bring this action against Constar, certain of its officers and directors, the colead underwriters of the IPO, and Constar’s former parent company, Crown Holdings, Inc., formerly known as Crown Cork & Seal Company, Inc. (“Crown”), for violations of Sections 11 and 15 of the Securities Act of 1933 (the “Securities Act”), 15 U.S.C. §§ 77k and 77o. Plaintiffs seek to recover damages resulting from their purchases of Constar common stock, which was marketed and sold to the investing public at an inflated price by means of a materially false and misleading registration statement and prospectus (the “Registration Statement”). Constar Issues a Materially False and Misleading Registration Statement 2. In November 2002, Constar, which was then a wholly-owned subsidiary of Crown, issued 10.5 million shares of common stock pursuant to the Registration Statement. The IPO, which was solely comprised of shares sold by Crown, was priced at $12 per share for total proceeds of $117 million after underwriting discounts and commissions. Co-Lead Plaintiffs Pilot Advisors, L.P. and Ameesh Bhandari and Randolph Redstone (“Plaintiffs”) purchased Constar common stock pursuant, or traceable, to the Registration Statement, which was declared effective on November 14, 2002. 3. However, the Registration Statement contained materially false and misleading statements of fact or failed to disclose material facts necessary to make the statements not misleading. These statements include, among others, the following: (a) Constar had “patented technology and full-service design capabilities.” As a result of these state-of-the-art technologies and capabilities, Constar was able to successfully compete in the polyethylene terephthalate (“PET”) container industry by attracting new customers to the what was represented to be the fast growing and highly profitable specialty PET market. To this end, Defendants represented that Constar was “investing in capacity expansion in all categories of PET products, services, product development and reliability” and that the Company would remain 1 Case 2:03-cv-05020-EL Document 58 Filed 06/18/2004 Page 3 of 63 “a high-quality, low cost operator implementing best-practices manufacturing disciplines in every manufacturing activity we undertake.” (b) Constar was “strongly positioned within the PET industry” because of its “Technology and Product Development Expertise” and “Creative and Innovative Product Design Capability.” Defendants represented that because Constar’s “machinery has been continuously maintained and upgraded, and because the speed and capacity of [its] equipment [was] generally comparable to the equipment of [its] competitors,” Constar’s “manufacturing platform [was] cost competitive.” Defendants further represented that they sought “to maintain and improve [Constar’s] competitive cost position by acquiring the highest speed state of the art equipment on each occasion that [it] increase[d] capacity.” (c) Constar’s customers, which included “many of the world’s leading branded consumer products companies,” such as PepsiCo, The Anheuser-Busch Companies (“AnheuserBusch”), and Buffalo Rock Company (“Buffalo Rock”), represented “a large share of future opportunities for PET conversion and market growth.” Defendants represented that Constar had strong relationships with its customers and would “continue to focus on the development and commercialization of bottle design, bottle forming and technologies that [would] allow [Constar] to further leverage [its] existing manufacturing and distribution infrastructure, and [its] strong customer relations.” (d) Constar’s reported $331 million in goodwill on its balance sheet - nearly 50% of the Company’s total asset value - but at least $183 million of this goodwill no longer existed and had become impaired. The $331 million in goodwill was simply a carry over from when Crown had purchased Constar in 1992. In subsequent years, Constar’s goodwill became impaired as (1) key Constar management and operations personnel left the Company, (2) Constar’s manufacturing equipment became obsolete, (3) Constar’s customers ceased purchasing PET containers from the Company, and (4) Constar was no longer a leader in specialty PET manufacturing because it lost its competitive edge. Had Defendants timely and properly written off the $183 million of impaired 2 Case 2:03-cv-05020-EL Document 58 Filed 06/18/2004 Page 4 of 63 goodwill prior to the IPO, 55% of Constar’s recorded goodwill - or 24% of the Company’s total asset value - would have evaporated. 4. Contrary to the positive statements in the Registration Statement, Constar was not the company that Defendants had represented. For example, Constar did not have state-of-the-art PET manufacturing and design capabilities. Nor had Constar’s equipment been continuously maintained and upgraded. It lacked the speed and capacity to be cost competitive. In fact, the Company was laboring under old and obsolete equipment that produced inferior and frequently defective PET products that could not meet customer needs or satisfy customer demands and requirements. 5. Moreover, because Constar had antiquated manufacturing equipment and facilities, and had refused to invest in new equipment that was needed to meet customer requirements, Constar had seen its market share greatly diminish in the years preceding the IPO. In fact, Constar’s contracting market share was accelerating at the time of the IPO, such that at least five key customers - Anheuser Busch, Buffalo Rock, Powerade, Exxon, and Folgers - were in the process of terminating their relationship with Constar or had completed this process in the months immediately preceding the IPO. Yet, Defendants failed to disclose this negative trend in the Registration Statement. Instead, the Registration Statement falsely indicated that Constar expected to see growing customer demand for its products. Events Leading Up to the IPO A. 6. Constar and the PET Container Market Constar produces PET plastic containers for food and beverages. The Company, which was acquired by Crown in 1992, manufactures containers for conventional PET applications in soft drinks and water and for custom PET applications for food, juices, teas, new age beverages, beer and flavored alcoholic beverages, which require advanced technologies, processing know-how, and the ability to satisfy customer specifications. 7. Conventional PET products are primarily used in the packaging for soft drinks and water. As explained in the Registration Statement, to succeed in the conventional PET market, Constar needed to, among other things, create economies of scale in manufacturing and purchasing 3 Case 2:03-cv-05020-EL Document 58 Filed 06/18/2004 Page 5 of 63 through high volume production. The manufacturing process is highly automated and, therefore, much of the cost of operating a bottle-making plant is incurred in overhead expenses, such as the cost of leasing and maintaining the plant and acquiring raw materials, such as resin. Among the advantages cited by Constar of high production volume is purchasing power for resin and equipment. Conventional PET products represented approximately 83% of Constar’s sales in 2001. 8. Custom PET products are used in packaging applications such as hot-fill beverages, food, beer and flavored alcoholic beverages, most of which require containers with special performance characteristics. As a result of these special requirements, custom PET products typically command higher prices and result in higher margins than conventional PET products. As explained in the Registration Statement, to succeed in the custom PET market, the Company needed to have the technology, design capabilities, and expertise with specialized equipment and processes. Custom PET containers represented approximately 13% of Constar’s sales in 2001. 9. Prior to and shortly after Crown’s acquisition of Constar, the Company was considered a major player in the growing PET food and beverage container market: it was a participant in the growth of the two liter PET bottle for soft drinks in the early 1980s, the introduction of single serve soft drink bottles for convenience sales in the 1990s, and the development of the market for bottled water. By the time of the IPO, however, Constar had lost its lead in the conventional PET and custom PET container markets. 10. Because of Constar’s past success, Crown sought to diversify its business by acquiring the Company as a hedge against the growing dominance of plastic containers in the food and beverage industry. Crown acquired Constar in 1992 for $519 million. When Crown acquired Constar, several companies, including Ball Corp. (“Ball”) and American National Can Co., had also considered acquiring Constar but chose not to because the price was too high, indicating that Constar’s goodwill was overvalued from the date Crown initially purchased the Company. 11. Indeed, at the time Crown purchased Constar, many industry observers considered the price, $519 million, to be very high. Because the value of Constar’s hard assets were much less 4 Case 2:03-cv-05020-EL Document 58 Filed 06/18/2004 Page 6 of 63 than the purchase price, Crown booked more than 93% of the purchase price (or approximately $486 million) as goodwill. B. 12. Crown and Its Heavy Debt Burden Crown’s primary business is the manufacture of metal beverage cans and cork-filled bottle caps for the beverage and food storage markets. In 1989, Crown began a series of acquisitions that helped to increase its sales to more than $8 billion from $1.9 billion by 1997. These acquisitions, which continued throughout the 1990s, enabled Crown to enter into new markets and new product areas, such as plastic containers and even metal bird cages. To pay for Crown’s aggressive diversification, however, Crown incurred a substantial amount of debt. As Crown’s earnings before interest, taxes, depreciation, and amortization (“EBITDA”) had been declining since 1997, Crown’s debt burden adversely impacted Constar, its goodwill, and its ability to compete in the conventional and custom PET market place. 13. At the time of the acquisition, Constar was relatively debt-free and profitable. Conversely, as noted, Crown was already a heavily leveraged company. Crown’s debt position worsened after the 1997 $5.2 billion acquisition of Paris-based Carnaud-Metalbox. By the start of 2002, Crown had to service net debt of $4.9 billion, a task rendered especially difficult given the deterioration of industry pricing trends, excessive industry capacity, and Crown’s eroded EBITDA. Crown’s financial results reflected these problems. Crown ended 2001 with $7.2 billion in sales, but a net loss of almost $1 billion. 14. To reduce its heavy debt burden, Crown determined to sell non-core assets, close manufacturing facilities, and layoff workers. Raising cash through an equity offering would have been very costly. Moody’s Investors Service rated Crown’s unsecured bonds Ca and its $2.5 billion credit facility Caa1. 15. Consequently, Crown approached its competitors, such as Ball, about purchasing Constar. Plaintiffs’ confidential sources advised that the asking price was in the low $200 million range - a price Ball was unwilling to pay. (The net asset base was in the $100-$150 million range, which indicated that goodwill was only worth approximately $50-$150 million.) 5 Case 2:03-cv-05020-EL Document 58 Filed 06/18/2004 Page 7 of 63 16. Historically, Constar’s operations were reported through Crown’s Americas and Europe reporting segments. Following the Company’s adoption of SFAS 142, Constar conducted a transitional impairment review, in which recorded goodwill was determined to be impaired in the Company’s European reporting unit - Constar recognized an impairment charge of $50,059 in goodwill for the period December 31, 2001 through March 31, 2002. No impairment was recognized in the Americas unit. 17. Although Constar took the $50 million charge to write down goodwill in 2002 (months before the IPO), the charge was grossly inadequate. As alleged below, goodwill was impaired because, among other reasons: (a) the Americas unit had not been performing well; (b) the fair market value of the entire Company was only approximately $200 million; (c) the Company had been experiencing declining demand for its products and customer defections caused by the equipment obsolescence; (d) by the end of October 2002/early November 2002, many key customers had terminated their relationship with Constar, or were in the process of doing so; and (e) the industry was experiencing downward pricing pressure combined with increasing resin prices. C. 18. Equipment Obsolescence and Constar’s Inability to Compete Following the Constar acquisition, especially in the late -1990s, Crown’s financial condition worsened as Crown struggled with servicing its mounting debt. With prices deteriorating and EBITDA eroding, Crown was unable to make the necessary and required capital investment in Constar. As Constar explained in the Registration Statement, success in the PET container industry is dependent upon, inter alia, capital investment. Consequently, Constar could neither maintain technological parity with its competitors, nor surpass them with technological superiority. The financial constraints, which adversely affected Constar’s manufacturing operations and competitiveness, were glaringly omitted from the Registration Statement. 19. By the time of the IPO, Constar was still using much of the same manufacturing equipment it had used since 1996 and before, which was at least two generations old. In contrast, Constar’s competitors were using high speed equipment that could produce more units per hour and enabled them to provide a greater range of custom products than Constar could provide. As a natural 6 Case 2:03-cv-05020-EL Document 58 Filed 06/18/2004 Page 8 of 63 consequence, Constar began to lose major customers, including Buffalo Rock, Folgers, Powerade, and Anheuser-Busch. 20. Constar repeatedly lost business opportunities due to its unwillingness, or inability, to make necessary capital expenditures. For example, during 2000-2001, Constar managers attempted to develop several custom and conventional PET container contracts with major potential and existing customers. Constar was unable to secure these contracts, however, because it would not, or could not, upgrade its outdated manufacturing equipment. D. 21. The Decision to Conduct the IPO By the start of 2002, Crown was in desperate need of cash. As noted, it had attempted to sell Constar to competitors in the PET container industry, but could not find any buyer interested in acquiring Constar at the price Crown was seeking. Unable to sell Constar outright, Crown decided to spin-off the Company to the investing public in a public offering. Initially, Crown priced the IPO at $18 per share, but reduced it to $15 per share due to market disinterest. Ultimately, Crown reduced the price even further, to $12 per share. Had Defendants disclosed the true state of affairs at Crown and Constar in the Registration Statement, Defendants would not have been able to market and sell the IPO even at $12 per share. 22. As part of the IPO, Crown caused Constar’s asset base to become further impaired by effectively transferring a portion of its debt to Constar. Because Constar was a wholly-owned subsidiary of Crown prior to the IPO, Crown was able to cause the Company to issue a $350 million note to Crown as a “dividend,” despite the fact that Constar had insufficient retained earnings to declare a dividend of this magnitude. Constar was to make payment on the note, in part, from the proceeds of $175 million of senior subordinated notes to be issued by Constar concurrent with the IPO. The remainder of the $350 million note was to be paid from a loan that Constar agreed to secure following the IPO. In this manner, Defendants were able to transfer a substantial amount of Crown’s debt to Constar as part of the IPO. The nature of this transaction and its impact on Constar’s goodwill was not properly disclosed in the Registration Statement. 7 Case 2:03-cv-05020-EL Document 58 Filed 06/18/2004 Page 9 of 63 23. As a result of the foregoing, by the time it became a publicly held company, Constar’s financing was already exhausted, leaving the Company with no working capital with which to upgrade its manufacturing equipment. This, in turn, adversely impacted Constar’s competitive position, ensuring additional customer loss and reduced cash flows, and further impairing Constar’s goodwill. E. 24. The IPO and Its Aftermath In November 2002, Constar completed the IPO, issuing 10.5 million shares of common stock pursuant to the Registration Statement. The IPO, which was solely comprised of shares sold by Crown, was priced at $12 per share for total proceeds of $117 million after underwriting discounts and commissions. 25. On July 30, 2003, the price of Constar stock dropped almost 30% when the Company announced a 2003 second quarter loss of $4 million. The Company attributed the loss to, among other things, “slower than expected ramp-up of new customers and product conversions in the United States and Europe.” As explained, “without the expected growth, we were unable to offset the previously announced business losses and the price concessions given in exchange for added volume and contract extensions.” In a conference call with analysts, Defendants further explained that the reported loss was due to the loss of customers, including Folgers, Powerade and Buffalo Rock, and margin erosion caused by the absence of special technology needed to produce custom PET products. In addition, in August 2003, Constar announced that it would write off $183 million to reflect the impairment of goodwill. 26. As this adverse information was disclosed in July and August of 2003, the Company’s shares declined to $5 per share, thereby causing substantial damages to the public investors who purchased Constar stock pursuant or traceable to the Registration Statement. JURISDICTION AND VENUE 27. The claims asserted herein arise under Sections 11 and 15 of the Securities Act, 15 U.S.C. §§ 77k and 77o. 8 Case 2:03-cv-05020-EL Document 58 Filed 06/18/2004 Page 10 of 63 28. This Court has jurisdiction over the subject matter of this action pursuant to Section 22 of the Securities Act, 15 U.S.C. § 77v, and 28 U.S.C. § 1391(b). 29. Venue is proper in this District pursuant to Section 22 of the Securities Act, 15 U.S.C. § 77v. Many of the acts and transactions giving rise to the violations of the federal securities laws complained of herein, including the preparation and dissemination to the investing public of materially false and misleading statements, occurred in substantial part in this District. In addition, the Company maintains its executive offices in this District and the Individual Defendants and/or witnesses transact business and/or reside in this District. 30. In connection with the conduct complained of herein, Defendants, directly or indirectly, used the means and instrumentalities of interstate commerce, including the mails and interstate telephone communications, and the facilities of a national securities exchange. PARTIES 31. Co-Lead Plaintiff Pilot Advisors, L.P. purchased shares of Constar common stock pursuant to the Registration Statement filed in connection with the IPO, and was damaged thereby. Co-Lead Plaintiff’s purchases of Constar stock are reflected in the signed certification, executed pursuant to the federal securities laws, previously filed with the Court. 32. Co-Lead Plaintiffs Ameesh Bhandari and Randolph Redstone purchased shares of Constar common stock pursuant to the Registration Statement filed in connection with the IPO, and were damaged thereby. Co-Lead Plaintiffs’ purchases of Constar stock are reflected in the signed certifications, executed pursuant to the federal securities laws, previously filed with the Court. 33. Defendant Constar maintains its corporate headquarters in Philadelphia, Pennsylvania. Constar operates manufacturing, administrative, research and warehouse facilities in the United States and in Europe. Constar’s stock actively trades on the NASDAQ market system under the symbol “CNST.” Constar’s customers include major brand marketers in the beverage and food industries. Among Constar’s top conventional PET customers in 2001 were Buffalo Rock and PepsiCo, and among Constar’s top custom PET customers in 2001 were Anheuser-Busch, the Minute Maid Company (an operating group of the Coca-Cola Company), and the Proctor & Gamble 9 Case 2:03-cv-05020-EL Document 58 Filed 06/18/2004 Page 11 of 63 Company (the maker of Folgers and Jiff). In 2001, Constar’s top five customers accounted for an aggregate of $378 million, or 51%, of its sales, while its top ten customers accounted for $470 million, or 63%, of its sales. During the same period, purchases by PepsiCo accounted for an aggregate of $259 million, or 35%, of Constar’s sales. 34. Defendant Charles F. Casey (“Casey”) is, and at all relevant times was, a director of the Company and signed the Registration Statement. At the time of the IPO, Casey was the Chairman of the Board of Constar’s board of directors. 35. Defendant William G. Little (“Little”) is, and at all relevant times was, a director of the Company and signed the Registration Statement. 36. Defendant Michael J. Hoffman (“Hoffman”) is, and at all relevant times was, a director of the Company and signed the Registration Statement. At the time of the IPO, Hoffman was Constar’s President and Chief Executive Officer. 37. Defendant James C. Cook (“Cook”) is, and at all relevant times was, a director of the Company and signed the Registration Statement. At the time of the IPO, Cook was, among other positions, Constar’s Chief Financial Officer. 38. Defendant Alan W. Rutherford (“Rutherford”) is, and at all relevant times was, a director of the Company and signed the Registration Statement. 39. Defendant John W. Conway (“Conway”) is, and at all relevant times was, a director of the Company and signed the Registration Statement. 40. Defendant Angus F. Smith (“Smith”) is, and at all relevant times was, a director of the Company and signed the Registration Statement. 41. Defendant Frank J. Mechura (“Mechura”) is, and at all relevant times was, a director of the Company and signed the Registration Statement. 42. For purposes of this Amended Complaint, the defendants named in ¶¶ 34-41 are referred to herein as the “Individual Defendants.” 10 Case 2:03-cv-05020-EL Document 58 Filed 06/18/2004 Page 12 of 63 43. Defendant Crown was the parent company of Constar and owned 100% of Constar’s stock immediately prior to the IPO. Crown sold approximately 85% of its holdings to the investing public in the IPO. 44. Defendants Salomon Smith Barney Inc. (“Salomon”), Deutsche Bank Securities Inc. (“Deutsche Bank”), JP Morgan Securities Inc. (“JP Morgan”) and Lazard Fréres & Co. LLC (“Lazard”) served as the co-lead underwriters and the “qualified independent underwriter” of the IPO in which $126 million in Constar stock was sold to the public, for which Crown received over $117 million after underwriting discounts and commissions. Each of these firms helped orchestrate the IPO, including drafting the Registration Statement, selling the shares to the public, and/or conducting the necessary due diligence for the offering. 45. Defendant Salomon, now d/b/a Citigroup Global Markets Inc., is a subsidiary of defendant Citigroup, a financial services institution that, through its subsidiaries and divisions, provides commercial and investment banking services and commercial loans to corporate entities. Salomon acted as co-lead underwriter and joint bookrunning manager in the IPO and received substantial underwriting fees and commissions exceeding $3.175 million. Defendant Salomon also provided analyst coverage of Constar at or near the time when it was underwriting the Offering. Salomon was responsible for conducting a reasonable due diligence review of Constar prior to the IPO. Salomon is liable for its own acts under Section 11 of the Securities Act. 46. Defendant Citigroup, an international financial services company was formed in 1998 by the merger of Citicorp and Travelers. Citigroup, which serves more than 200 million customer accounts in more than 100 countries, is the corporate parent and 100% owner of Defendant Salomon and reports Salomon’s financial results in its consolidated financial statements. As the 100% owner of Defendant Salomon, Citigroup was able to control, and did control, Salomon. 47. Defendant Deutsche Bank acted as a co-lead underwriter and joint bookrunning manager in the IPO and received substantial underwriting fees and commissions exceeding $3.175 million. Deutsche Bank was responsible for conducting a reasonable due diligence review of 11 Case 2:03-cv-05020-EL Document 58 Filed 06/18/2004 Page 13 of 63 Constar prior to the IPO. Deutsche Bank is liable for its own acts under Section 11 of the Securities Act. 48. Defendant JP Morgan acted as a co-lead underwriter in the IPO and received substantial underwriting fees and commissions exceeding $1.58 million. JP Morgan was responsible for conducting a reasonable due diligence review of Constar prior to the IPO. JP Morgan further served in numerous other capacities with respect to, among other things, Crown’s debt restructuring. JP Morgan is liable for its own acts under Section 11 of the Securities Act. 49. Defendant Lazard acted as the “qualified independent underwriter,” pursuant to Rule 2720 of the National Association of Securities Dealers, in the IPO. Lazard received substantial underwriting fees and commissions exceeding $330,000. Lazard was responsible for conducting a reasonable due diligence review of Constar prior to the IPO. Lazard is liable for its own acts under Section 11 of the Securities Act. 50. For the purposes of this Complaint, defendants Salomon, Citigroup, Deutsche Bank, JP Morgan, and Lazard will be referred to as the “Underwriter Defendants.” 51. The Underwriter Defendants assisted Crown and Constar in planning the IPO, purportedly conducting an investigation into the business, operations, products and future business prospects of Constar, known as a “due diligence” investigation, which was required of them in order to participate in the Offering. During the course of their “due diligence,” the Underwriter Defendants had continual access to confidential corporate information concerning Constar’s business, financial condition, products and future business plans and prospects. In addition to availing themselves of virtually unbridled access to internal corporate documents, the Underwriter Defendants also communicated with Crown and Constar management. As a result of those constant contacts and communications between the Underwriter Defendants’ representatives and Crown and Constar, the Underwriter Defendants should have known of Constar’s existing financial and manufacturing problems. 52. As a consequence of their investigation and communications with Crown and Constar, the Underwriter Defendants (or their agents or counsel) met with representatives of Constar 12 Case 2:03-cv-05020-EL Document 58 Filed 06/18/2004 Page 14 of 63 and Crown and counsel during the several weeks prior to the issuance of the Registration Statement for the IPO. During such meetings, including those known as “drafting sessions,” representatives of the participants met to discuss the timing in terms of the Offering and the contents of the Registration Statement, and devised, agreed upon and refined the actions necessary for the consummation of the IPO. These parties discussed and reached understandings as to the timing and strategy to best accomplish the IPO, the terms of the IPO, the language to be used in the Prospectus, what disclosures about Constar would be made in the Registration Statement, and what responses would be made to the SEC in connection with its review of the Registration Statement. The Underwriter Defendants thereafter caused the Registration Statement to be delivered to potential and actual purchasers of Constar common stock in connection with the Offering. 53. As a result of constant contacts and communications between the Underwriter Defendants’ representatives and Constar and Crown and their access to the negative and adverse internal documents and reports of the Company’s actual business performance, the Underwriter Defendants should have known that those public statements were misleading when made and had the effect of inflating the price of Constar’s common stock. CLASS ACTION ALLEGATIONS 54. Plaintiffs bring this action as a class action, pursuant to Fed. R. Civ. P. 23(a) and (b)(3), on behalf of a class consisting of all persons who purchased Constar common stock in or traceable to the IPO (the “Class”). Excluded from the Class are Defendants, members of the immediate family of each of the Individual Defendants, officers and/or directors of the corporate Defendants, any person, firm, trust, corporation, officer, director or other individual or entity in which any Defendant has a controlling interest or which is related to or affiliated with any of the Defendants, and the legal representatives, agents, affiliates, heirs, successors-in-interest or assigns of any such excluded party. 55. The Class is so numerous that joinder of all members is impracticable. Approximately 10.5 million shares of Constar common stock were issued pursuant to the IPO. It is believed that hundreds, if not thousands, of investors purchased Constar common stock pursuant 13 Case 2:03-cv-05020-EL Document 58 Filed 06/18/2004 Page 15 of 63 or traceable to the Registration Statement, rendering joinder of all such purchasers impracticable. 56. The names and addresses of the record owners of Constar common stock purchased pursuant to the IPO are available from the Company’s transfer agent(s). Notice can be provided to such record owners via first class mail using techniques and a form of notice similar to those customarily used in class actions. 57. Plaintiffs’ claims are typical of the claims of the members of the Class. Plaintiffs and all members of the Class sustained damages as a result of the wrongful conduct complained of herein. 58. Plaintiffs will fairly and adequately protect the interests of the members of the Class and have retained counsel competent and experienced in class and securities litigation. Plaintiffs have no interests that are contrary to or in conflict with those of the members of the Class that Plaintiffs seek to represent. 59. A class action is superior to other available methods for the fair and efficient adjudication of this controversy. Because the damages suffered by individual Class members may be relatively small, the expense and burden of individual litigation make it virtually impossible for Class members individually to seek redress for the wrongful conduct alleged. 60. Common questions of law and fact exist as to all members of the Class and predominate over any questions solely effecting individual members of the Class. Among the questions of law and fact common to the Class include whether: (a) herein; (b) the Registration Statement contained misstatements of material fact or omitted Defendants violated Sections 11 and 15 of the Securities Act, as alleged to state material facts necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading; (c) the price of Constar common stock in the IPO was artificially inflated due to the non-disclosures and misstatements complained of herein; and 14 Case 2:03-cv-05020-EL Document 58 Filed 06/18/2004 Page 16 of 63 (d) measure thereof. 61. the members of the Class have sustained damages and, if so, the appropriate Lead Plaintiffs know of no difficulty that will be encountered in the management of this litigation that would preclude its maintenance as a class action. FACTUAL BACKGROUND I. CONSTAR’S VALUE AND GOODWILL BECAME SUBSTANTIALLY IMPAIRED FOLLOWING CROWN’S ACQUISITION OF THE COMPANY A. 62. Crown’s Acquisition of Constar Crown purchased Constar in 1992 for what was then recognized by many industry observers to be the very high price of $519 million. Because the value of Constar’s hard assets were much less than the $519 million purchase price, Crown booked more than 93% of the purchase price (or approximately $486 million) as goodwill. Under then-existing accounting rules, Crown was to amortize Constar’s goodwill over 40 years. However, effective January 1, 2002, Constar adopted Statement of Financial Accounting Standards (“SFAS”) 142, which, as discussed below, requires a company to cease amortizing goodwill. SFAS 142 requires a company to review goodwill and other intangible assets for impairment at least annually or if an event(s) occurs or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying value. By the start of 2002, Constar’s recorded goodwill exceeded $381 million. However, as described below, Constar’s goodwill was substantially impaired and should have been written-off. B. 63. Crown’s Failure to Make Necessary Capital Expenditures By 2002, Constar’s goodwill had become substantially impaired because Crown had failed to make critical capital investments in Constar, causing the Company’s plant, property and equipment to become obsolete. In addition, after the acquisition by Crown, Constar lost many key employees, whose expertise in the plastic container industry made Constar a success prior to the acquisition. Likewise, Constar had lost, and was continuing to lose, major customers because it lacked the resources to meet customer needs. Furthermore, while Crown had shifted the emphasis of Constar’s business away from the higher-margin custom PET market, the Company’s antiquated manufacturing equipment, which increased the Company’s manufacturing costs vis-à-vis its 15 Case 2:03-cv-05020-EL Document 58 Filed 06/18/2004 Page 17 of 63 competitors, made it increasingly difficult for Constar to effectively compete in the lower-margin conventional PET market. 64. Beginning in 1989 and continuing throughout the 1990’s, Crown embarked on an acquisition campaign that was funded primarily through the use of debt financing. As a result, by 1995, Crown was highly leveraged, committing an increasing portion of its cash flow to servicing that heavy debt. Consequently, Crown could not, and did not, make critical capital expenditures to upgrade Constar’s property, plants and equipment. This failure was of paramount importance since the manufacture of PET containers is, according to the Registration Statement, “capital intensive.” Crown’s failure to make the necessary and required capital investments in Constar resulted in the eventual obsolescence of the Company’s manufacturing equipment. Thus, by the time of the IPO, Constar was using manufacturing equipment that was at least two generations older than that of its competitors. Because Constar lacked state-of-the-art manufacturing equipment, it could not maintain its competitive position. By the time of the IPO, Constar had lost, and was still losing, major customer accounts. 1. 65. The Loss of Key Constar Personnel Crown had paid a premium for Constar in 1992, in part, because Constar’s top management was skilled and knowledgeable of the PET container industry with a successful track record directing Constar’s operations within that industry. However, as a consequence of Crown’s failure to support Constar following the acquisition, Constar lost highly experienced senior and middle management. This exodus greatly diminished the value of Company, as it lost the management and expertise that had previously made Constar successful. 2. 66. Crown’s Shift to Lower Margin Business In addition, Crown also refocused Constar’s business away from the higher margin custom PET products, instead, emphasizing the higher volume, but much lower margin, conventional PET products. This shift in business strategy further reduced Constar’s going concern value. Constar could not successfully compete on the basis of price, because its equipment was old and inefficient. In the PET manufacturing industry, fixed costs constitute a large percent of overall operating costs, 16 Case 2:03-cv-05020-EL Document 58 Filed 06/18/2004 Page 18 of 63 and large production volume is needed to spread these costs over the total production run. Constar’s production volume was lower than that of its competitors because its equipment was older and slower than that of those competitors. As a result, Constar incurred operating losses in 2000 and 2001. These systemic problems could be corrected only by means of huge capital expenditures to upgrade the Company’s manufacturing capabilities. 3. Crown’s Failure to Write-Off the Diminished Value of Constar’s Goodwill 67. Despite the significant impairment described above, Crown continued to amortize the goodwill associated with Constar on a 40 year straight line basis, with no adjustment to reflect its true value. By the start of 2002, Constar’s goodwill was still valued at over $381 million. To properly account for the impairment of this goodwill, Crown should have written off at least $233 million of Constar’s goodwill prior to the IPO. Although Crown caused Constar to take a $50 million write down of goodwill at Constar’s European unit, this was grossly inadequate in light of the actual impairment. Crown failed to take an appropriate charge prior to the IPO, however, because had it written off the full $233 million of impaired goodwill, it would have reduced total assets by at least 24% and goodwill by 55%. This would have prevented Crown from successfully completing the IPO at the inflated price of $12 per share. C. 68. Crown’s Mounting Debt Having overextended itself to acquire assets in the 1990’s, by the start of 2002, Crown was in a precarious financial position, needing substantial sums of money to pay off its heavy debt burden. 69. Crown’s financial condition was so adversely impacted by its crushing debt that, as reported by the news media, it was teetering on the edge of bankruptcy. By the start of 2002, Crown’s debt load included a $400 million term loan owed to Defendant JP Morgan that was due in February 2002, a $300 million payment due bondholders in September 2002, and $2.5 billion in bank debt that was due in 2003. As noted in the Daily Deal on January 10, 2002, Crown lacked the EBITDA to meet these impending obligations. (Crown’s EBITDA had eroded from $1.4 billion in 1997 to $1 billion in 2000 and $866 million in 2001.) Consequently, to raise the needed $1.2 billion 17 Case 2:03-cv-05020-EL Document 58 Filed 06/18/2004 Page 19 of 63 to $1.5 billion, Crown began selling assets in 2001 and 2002. As part of the process, Crown explored the possibility of selling Constar. Crown contacted several of its competitors – including Amcor, Continental Can and Ball – to generate much-needed capital through an outright sale of Constar. However, none of these competitors were interested in acquiring Constar since its going concern value was seriously diminished as a result of conditions described above in ¶¶ 60-66. D. 70. Crown’s Failure to Privately Sell Constar Numerous former Constar managers and employees and/or its competitors have confirmed that Crown sought to sell Constar to generate much needed capital in the period leading up to the IPO. These witnesses spoke to Lead Plaintiffs’ counsel on a confidential basis and are referred to herein as “CW__.” 71. CW1 is a former senior executive of American National Can, a competitor of Crown. CW1 reported that a former Constar employee, who went to work for Ball, advised him that in 2002, prior to the IPO, Crown approached Ball about purchasing Constar. CW1 said he was told that the asking price was in the low $200 million range and the asset base was estimated to be in the range between $100 million and $150 million. At that price, “goodwill” would be valued at approximately $50 to $150 million. 72. According to CW2, a senior corporate officer at Amcor, an Australian container manufacturer, Amcor also looked into acquiring Constar sometime during the first 8 months of 2002, prior to the IPO. CW2 stated that there were synergies that would result from a combination of Amcor and Constar, including economic benefits from consolidation of operations, plant closures, and personnel cuts. CW2 reported that despite these synergies, Amcor decided not to conduct a “formal determination” (due diligence) because Crown’s asking price “was so far out of line.” CW2 reported that Constar had initially attempted to price the Company at $18 and, later, $15 per share, but “there were no takers.” He stated that even at $12 per share, Amcor thought the price was still “far too high.” 73. A July 8, 2002, article in the Australian Financial Review confirmed CW2’s assertions, reporting that Amcor “nearly bought” Constar from Crown, but “could never come to 18 Case 2:03-cv-05020-EL Document 58 Filed 06/18/2004 Page 20 of 63 grips with the residual asbestos risk in [Crown] or the high price expectations of the vendor.” As noted in the January 10, 2002 Daily Deal article, the asbestos risk, which dates to 1963, pertains a small insulation company that Crown acquired when it purchased Mundet Cork Corp., a maker of bottle caps. As of January 2002, Crown had paid $350 million to settle asbestos claims - including $100 million in 2000 and $88 million for 2001 through September of that year. 74. Indeed, Constar’s book of business was in decline, and the Company’s competitors and industry insiders understood that Constar would continue to lose customers as its production capacity could no longer meet customer needs or compete on the basis of price. As noted, Constar’s manufacturing equipment was obsolete. Potential purchasers naturally opted to purchase new equipment directly from PET equipment manufactures rather than buy Constar’s obsolete production capacity. Moreover, Constar was not an attractive acquisition because the unit was being run by managers who possessed no special PET business acumen. E. 75. Crown Saddles Constar with Debt Prior to the IPO Constar’s going-concern value was significantly less than the price Crown sought to obtain through a sale. Because they were unable to sell Constar outright, Defendants decided to spin off Constar to the investing public in the IPO, where Crown and the Underwriter Defendants received a greatly inflated price for the Company. 76. As part of the IPO, Crown caused Constar’s asset base to become further impaired by effectively transferring a potion of its debt to Constar. Because Crown had total control over Constar prior to the IPO, it was able to cause the Company to issue a $350 million note to Crown as a “dividend,” despite the fact that Constar had insufficient retained earnings to declare a dividend of this magnitude. Payment on the $350 million note was to be made, in part, from the proceeds of $175 million of senior subordinated notes to be issued by Constar. The remainder of the $350 million note was to be paid from a loan that Constar agreed to secure following the IPO. In this manner, Defendants were able to transfer a substantial amount of Crown’s debt to Constar as part of the IPO. 19 Case 2:03-cv-05020-EL Document 58 Filed 06/18/2004 Page 21 of 63 77. As a result of the foregoing, by the time it became a publicly held company, Constar's financing was already exhausted, leaving the Company with no working capital with which to upgrade its manufacturing equipment. This, in turn, adversely impacted Constar’s competitive position, causing customer loss and reduced cash flows, thereby further impairing Constar’s goodwill. F. 78. The Underwriter Defendants’ Financial Incentive to Conduct the Offering Underwriter Defendants JP Morgan and Deutsche Bank were financially motivated to assist Crown in spinning off Constar at artificially inflated prices by using a materially false and misleading registration statement for the IPO because these underwriters were also Crown’s creditors, who fully appreciated Crown’s precarious financial position and Crown’s need to service its heavy debt burden. Accordingly, the Underwriter Defendants participated in the Offering so that Crown could use the proceeds of the Offering to repay debt owed to them. 79. Indeed, Crown needed to monetize assets to make its debt payments to, among others, JP Morgan and Deutsche Bank that were coming due in 2002 and 2003. At the time Defendants were planning the Offering, Crown’s debt load included a $400 million term loan owed to Defendant JP Morgan that was due in February 2002, a $300 million payment due bondholders in September 2002, and $2.5 billion in bank debt that was due in 2003. Because Crown could not make its $400 debt payment in February 2002 without undermining its financial viability, Defendant JP Morgan agreed to extend the repayment terms on this debt, while requiring Crown to repay immediately $175 million of the $400 million loan with the proceeds from other asset sales that Crown had completed during this time period. Thus, Defendant JP Morgan had a direct financial interest in marketing the Offering, ensuring that Crown could repay its debt. 80. Similarly, Defendant Deutsche Bank had extended a $125 million credit facility to Crown in 1997, which was amended in 2001, and again in 2002. Deutsche Bank participated in the Offering to ensure that the proceeds from the IPO would be used to repay Crown’s credit facility with the investment bank. In this regard, the Registration Statement noted that “[c]oncurrently with the completion of this offering, Crown will use its proceeds from this offering and from our 20 Case 2:03-cv-05020-EL Document 58 Filed 06/18/2004 Page 22 of 63 repayment of intercompany debt to pay a portion of its indebtedness, including under its credit facility ....” Thus, Defendant Deutsche Bank also had a direct financial interest in marketing the Offering to ensure that Crown could repay its debt. G. 81. Constar’s Inability to Compete Beginning in or about 1993 and continuing with increasing severity in the years leading up to the IPO, Crown’s financial condition, namely its heavy debt burden, materially impaired Constar’s ability to compete in the PET container market. As reported by former Constar managers and employees, Crown lacked the financial wherewithal to maintain its equipment and acquire new, state-of the-art machinery demanded by the PET marketplace. The failure to upgrade its manufacturing equipment caused a continuous erosion of the Company’s margins, prevented the Company from obtaining new business, caused the loss of existing accounts because of Constar’s inability to meet changing customer product demands, caused the loss of business due to product defects, and resulted in the Company’s inability to offer competitive pricing. 1. 82. Constar’s Antiquated Machinery CW3 is a former senior Constar officer, who worked for the Company from 1977 through 1996, and presently serves as a consultant in the plastics industry. According to CW3, following the acquisition by Crown, Constar began to focus on “big machine, high volume” production of plastic bottles for the carbonated soft drink and water business. CW3 characterized this as low margin business in contrast to the high margin custom plastic bottle business. CW3 said that the carbonated soft drink and water plastic bottle business could be profitable, “but only if you run your production on state-of-the-art machines, and operate them at full volume capacity.” CW3 stated that Constar did not use state-of-the-art equipment and had not since it was acquired by Crown in 1992. 83. In fact, CW3 stated that “Constar was at least two generations behind” in equipment technology, such that “Constar could not be competitive in the marketplace.” For example, CW3 explained that in 1996, the workhorse of the industry to manufacture preforms was the Sidel No. 2, i.e. SB02. (As explained in the Registration Statement, “[p]reforms are test tube-shaped intermediate 21 Case 2:03-cv-05020-EL Document 58 Filed 06/18/2004 Page 23 of 63 products in the manufacturing process for bottles and are purchased by customers or other PET container manufacturers that operate equipment to convert preforms into bottles.”) At that time, Constar was running the older, out-of-date model, SB01. Based on his work as an industry consultant, CW3 stated that he was aware that, although the rest of the industry was running the newer, improved model, the SB02+, Constar continued to use, and after the IPO still used, the SB01. CW3 explained that the newer machines produce more bottles per hour than the older machines. Since the Company’s other costs - raw materials, labor, warehousing expenses, etc. - are the same as its competitors, Constar cannot effectively compete, and makes less profit per dollar than its competitors. CW1 corroborates CW3’s assertions, confirming that at the time of the IPO, Constar was running the Sidel SB01, while the industry standard was SB02+, meaning that Constar was using equipment that was two generations old. 84. Constar’s lack of competitiveness due to its failure to upgrade its manufacturing equipment was corroborated by a former senior Constar officer and former Company director, CW4. CW4 left Constar in 1993, approximately one year after the Crown acquisition. Noting that the equipment used by the Company became obsolete quickly, CW4 stated that the Company’s failure to add new technology caused Constar to lose a significant portion of its business, “its customer base withered and disappeared.” 85. CW5 is a former production supervisor who oversaw quality control at Constar’s Houston facility. CW5 was employed by Constar from 1985 through November 2003. According to CW5, even after the IPO, Constar’s cash situation made needed equipment upgrades impossible. CW5 stated that at the time of the IPO, Constar was trying to install a new statistical processing control program (“SPC”) to monitor the quality and performance of the bottles through automatic data collection stations at each production line. CW5 said that because it lacked the funds to do so, Constar never implemented this system. 86. CW6 is a former Constar employee who worked at the Company’s Havre de Grace, Maryland plant from 1998 until 2002. CW6 held a managerial position at Constar with oversight responsibility of the plant’s seven high-production lines and employees, as well as warehouse 22 Case 2:03-cv-05020-EL Document 58 Filed 06/18/2004 Page 24 of 63 operations. CW6 reported that there were constant cash shortages that prevented the Company from buying new equipment or repairing existing equipment at that facility. As a consequence, the Havre de Grace plant experienced difficulty meeting production schedules and addressing quality complaints from customers. CW6 stated that often, by the second week of the month, Constar’s regional operations manager (Mike Prior, from 1998 until 2001, and then, Tom Brewer) would state, in effect, “You’re not getting any money to spend. Make things happen, but you’re not getting any money to spend.” According to CW6, “[a] lot of times, by the second week of the month, you were just cut off. Your checkbook was closed, and you’ve still got two more weeks in the month, and you don’t know what’s going to break down.” 87. According to CW6, in 1998, the Havre de Grace facility lacked a production manager, a quality control manager and a couple of shift supervisors, due to budgetary constraints. CW6 stated that, as a result, there was “basically no one to run the place.” CW6 stated that in calendaryear 2001, the budget at the Havre de Grace plant, which had seven Sidel machines with a total bottle-making capacity of 5 million units daily, and generated 25 percent of Constar’s total revenues, was cut “significantly.” CW6 explained that this resulted in a $25,000 reduction in maintenance allocation per Sidel machine, despite the fact that equipment breakdowns were chronic at the facility. Equipment breakdowns caused severe production delays at the Havre de Grace facility. 88. CW6 cited the example of one particular Sidel machine (serial no. SB01624) that was moved to Havre de Grace from a Constar plant in Massachusetts, when that facility lost its PepsiCo business to a competitor in late 1999 or early 2000. According to CW6, the Havre de Grace plant’s budget was consumed by attempting to get the machine to operate properly. CW6 stated that the problems with this Sidel machine caused the plant to consistently fall 10-15% percent short of its output quotas. CW6 explained, “[w]e needed that machine desperately to meet production requirements.” CW6 further stated that “[t]he machine was junk; it would not run and there was no money to spend on it.” 89. According to CW6, the Havre de Grace plant also experienced problems with its central water system that plagued operations for “months and months and months.” CW6 stated that 23 Case 2:03-cv-05020-EL Document 58 Filed 06/18/2004 Page 25 of 63 Constar’s regional operations management “wouldn’t let us shut down and fix it or do anything about it.” According to CW6, the central water system had a problem with clogged and dirty water that wasn’t properly cooled and caused product defects. CW6 stated that in early 2002, 30 truckloads of PepsiCo 2-liter bottles, or approximately 2.3 million bottles, had to be scrapped due to quality problems stemming from the central water system’s deficiencies. 90. CW6 stated that Constar’s corporate officers were consistently informed of the product quality problems plaguing the Havre de Grace plant. CW6 stated that, at the end of each month, Constar’s senior executives received an operations report, which included a detailed itemization of quality complaints; the exact nature of quality claims, such as expanding/bursting bottles, bottles with holes, labels that fell off, etc.; associated costs; and corrective actions. CW6 stated that the month-end operations report was distributed to Defendant Hoffman and Constar’s Vice President of Operations Mike Andrysiak, among others. CW6 also stated that Constar’s corporate office prepared monthly national and regional reports that included the same quality data and analyses - consisting of the local plant’s data. According to CW6, those reports encompassed “everybody combined; they would break it down by plant, region, customers, bottles types. They would look at the report every way possible.” 2. 91. Customer Losses Prior to the IPO Because of the failure to upgrade its manufacturing equipment and the loss of seasoned management, Constar lost a number of customers, both large and small, prior to, and after, the IPO. While Constar failed to upgrade its manufacturing equipment, its competitors replaced aging manufacturing equipment with state-of-the-art machinery. As the Company’s competitors replaced their primary manufacturing equipment, the Sidel No. 1 (which is still being used by Constar) with newer Sidel equipment, Constar lost an increasing number of customer accounts to its better equipped competitors, who could offer more competitive pricing and meet the demand for the manufacture of custom PET products. 24 Case 2:03-cv-05020-EL Document 58 Filed 06/18/2004 Page 26 of 63 a. 92. Loss of the CPF Business CW7 is a former account executive at Constar who worked at the Company’s Ayer, MA facility. CW7 was employed by Constar until early 2000. According to CW7, Constar had contracted with eight or nine Pepsi franchises that had set up a cooperative production facility called the Consolidated Pepsi Facility (the “CPF”) to manufacture bottles for distribution in the New England market. According to CW7, Constar had manufacturing operations at the same site and would run bottles through a partition in a wall directly to the customer’s beverage-filling stations. CW7 stated that Constar produced 20-30 million 2 liter bottles a year at the CPF site, and also provided a large volume of smaller bottles to the CPF from the Company’s Havre de Grace, MD plant. 93. In late 1999 or early 2000, however, a Constar competitor, Plastipak Packaging, Inc. (“Plastipak”), opened a production facility in East Longmeadow, MA. According to CW7, shortly thereafter, Constar lost the CPF contract to Plastipak because the Company was unable to match Plastipak’s pricing. CW7 stated that the loss of the CPF business was “very significant” to Constar. b. 94. Loss of the Exxon Business CW8 is a former Operations Manager at Constar’s Reserve, LA plant, who was employed by the Company from approximately 1989 until January 2004. According to CW8, after approximately 13 years, in 2000, Constar lost the contract to produce motor oil quart containers for Exxon. 95. According to CW8, when Exxon merged with Mobil, the new company solicited open bids for its motor oil quart containers. Constar lost the bidding competition to “Graham,” the Company that previously provided motor oil quart packaging to Mobil. c. 96. Loss of the Clorox Business CW9 is a former National Account Sales Manager in the Company’s Midwest region, who was employed by Constar from March 1999 through April 2002. According to CW9, the Company lost an account with Clorox for the manufacture of two different size containers for Soft Scrub bleach disinfectant in Spring 2001. These bottles, manufactured from high-density 25 Case 2:03-cv-05020-EL Document 58 Filed 06/18/2004 Page 27 of 63 polyethylene (HDPE), a rigid plastic, were made in Constar’s Memphis plant. The Soft Scrub bottles were custom PET products and, therefore, had higher margins - 12% to 15% - than conventional PET products, which typically had margins of 5% to 7%. 97. According to CW9, in the Spring of 2001, Clorox put virtually all of its container business up for bid. This included several hundred laundry, household cleaning, and auto care products, as well as dressing and sauce containers. All items up for bid were listed on a Clorox website, which bidders were instructed to use to submit their proposals. According to CW9, Clorox informed Constar that it would need to bid on a major portion of Clorox’s business in order to get any part of it. 98. CW9 stated that there were detailed discussions of each of the Clorox products up for bid during meetings with Constar regional sales manager John Pfeiffer. Constar decided against bidding on a significant number of Clorox products because the manufacture of these products would require a substantial capital investment by Constar to upgrade its technical manufacturing capabilities. Constar, lacking the capital to make the necessary upgrades, was unable to bid on most of the products and, thereafter, lost its existing business with Clorox to Consolidated Container Corp. 99. According to CW9, Constar also could not compete with other manufacturers that offered greater economies of scale in the manufacture of HDPE containers because of the Company’s technological limitations. This precluded Constar from securing contracts from other companies that also required HPDE containers. For example, according to CW9, Dean Foods was interested in the nationwide distribution of a milk drink named “Chuggs” that was packaged in a container shaped like a milk bottle. Constar was unable to submit competitive bids because of its limitations in HPDE technology. As a result, the Company did not secure the Chuggs account. d. 100. Loss of the Buffalo Rock CW10 is a former Maintenance Manager at Constar’s Birmingham, Alabama plant, who was employed from October 1993 through September 2003. CW10’s job responsibilities included monitoring production quality. CW10 participated in weekly conference calls with Constar’s corporate headquarters regarding plant efficiencies and corrective-action plans. According 26 Case 2:03-cv-05020-EL Document 58 Filed 06/18/2004 Page 28 of 63 to CW10, by December 2001, major technical and production problems jeopardized Constar’s relationship with Buffalo Rock, a major independent Pepsi bottler. 101. CW10 stated that Constar’s Birmingham plant manufactured approximately 350 million units of 20-ounce and 2 liter bottles of Pepsi products per year for Buffalo Rock. However, due to faulty and antiquated machinery, many of the 600,000 20-ounce bottles Constar manufactured each day for Buffalo Rock were defective. According to CW10, these bottles expanded in size after they were shipped, causing the glue-affixed labels on the bottles to pop off. These problems became most pronounced in or about December 2001, when the entire production at the Birmingham facility was halted. According to CW10, other Constar plants around the country tried to make up for the shortfall, shipping bottles to Buffalo Rock while the Birmingham production was down. In addition to the expanding 20-ounce bottles, CW10 stated that Constar often shipped bottles with labels that were not properly affixed in order to make its shipping deadlines. 102. CW10 stated that the defective 20-ounce bottles were repeatedly discussed during conference calls, including calls in which defendant Hoffman participated. According to this former employee, all the production problems at the various plants were discussed during these calls. 103. CW10 stated that Constar was able to eventually correct the problem with the 20- ounce bottles, but by that time, the Company had already lost credibility with Buffalo Rock. In October 2002, Plastipak purchased a building in Birmingham and, shortly thereafter, Buffalo Rock moved all of its business to Plastipak. CW10 stated that Constar was unable to compete with Plastipak’s greater manufacturing efficiencies. To do so would have required Constar to upgrade its equipment, which it did not do (and could not do financially). Because of the loss of Buffalo Rock, the Company was forced to close the Birmingham plant in September 2003. 104. After the IPO, and at the July 30, 2003 analyst conference call, Defendant Hoffman admitted that Constar had already lost the Buffalo Rock business in the period immediately preceding the IPO, and that this was a significant blow to the Company since Buffalo Rock was the largest independent Pepsi bottler in the South Eastern United States. During the July 30, 2003 27 Case 2:03-cv-05020-EL Document 58 Filed 06/18/2004 Page 29 of 63 conference call, Defendant Hoffman also admitted that Constar had lost the Powerade account prior to the IPO, and that this was another significant loss of business. e. 105. Loss of the Anheuser-Busch Business CW11 is a former Constar account sales manager in the Company’s Central United States Sales Division, who was employed for approximately 2 years, until September 2003. CW11 reported to L. William Secoy, Senior Vice President of Sales and Marketing (“Secoy”), who reported directly to Defendant Hoffman. According to CW11, Constar lost several key accounts immediately prior to, and shortly after, the IPO. 106. One of the most significant losses was the Anheuser-Busch account. Constar manufactured between 20 million and 30 million plastic beer bottles at a price of $0.15 per bottle for Anheuser-Busch using the Company’s Oxbar multi-layer technology. According to CW11, beer is oxygen-sensitive and exposure causes spoilage. The Company’s Oxbar technology was intended to protect container contents from oxygen exposure. 107. However, in Spring 2002, Anheuser-Busch began complaining about the quality of the plastic beer bottles manufactured at Constar’s Collierville, TN and Havre de Grace, MD plants. According to CW11, Anheuser-Busch complained that the Constar bottles did not satisfy AnheuserBusch’s specifications for the prevention of oxygen transmission. In fact, CW11 stated that analysis showed that the Constar bottles had a significantly higher transmission ratio of oxygen than its competition. 108. CW11 stated that Constar’s competitor, Owens-Illinois, Inc. (“Owens-Illinois”), developed a competing technology using a nylon barrier between each layer of plastic that effectively kept oxygen from permeating the beer. Anheuser-Busch originally split orders for plastic beer bottle production between Constar and Owens-Illinois. According to CW11, however, by Fall 2002, Anheuser-Busch switched all of its business to Owens-Illinois because Constar was not able to overcome its manufacturing difficulties to resolve the oxygen permeability issue. 109. According to CW11, the loss of the Anheuser-Busch account resulted in a loss of between $3 million and $4.5 million for the Company. More importantly, however, the loss of the 28 Case 2:03-cv-05020-EL Document 58 Filed 06/18/2004 Page 30 of 63 account was a major setback for Constar because the problems with the Oxbar technology foreclosed the Company from securing other accounts using this technology. f. 110. Loss of the Folgers Coffee Business CW8 also stated that Constar had manufactured 8 and 12 ounce plastic containers for Folgers Coffee (“Folgers”) for approximately 17 years. According to CW8, the Folgers’ instant coffee jars manufactured by Constar were custom PET applications. The Company manufactured approximately 35 million Folgers’ jars a year. While Constar’s Reserve, LA facility produced more than 150 million containers a year, including conventional PET beverage bottles for a variety of water, juice, and soft-drink customers, CW8 stated that Constar did not make much money from the manufacture of these other products, and that Folgers’ products were the most profitable containers manufactured by Constar at the plant. 111. This was corroborated by CW12, a former Constar employee who worked at Constar’s Reserve, LA plant from 1985 to September 2003, as a lead technician responsible for running the Folgers PET department. CW12 stated that employees at Reserve were always told at plant meetings conducted by operations manager Art Setty and plant manager Dennis Charbonnet, that the Folgers’ business was the most profitable for Constar. According to CW12, Folgers accounted for 80 percent of the profits at the Reserve, LA facility. CW12 also stated that the relationship with Folgers had been especially good over the years, with very few quality complaints. 112. In discussions with representatives of Proctor & Gamble, Folgers’ parent, CW8 learned that Proctor & Gamble had approached Constar some time in 2000 about developing a plastic, blow-molded coffee canister to replace Folgers’ traditional 39 ounce metal coffee canister. However, CW8 stated that the Proctor & Gamble representatives stated that Constar did not want to spend the capital necessary to upgrade its machinery to manufacture the new canisters. 113. CW8 learned about the possible loss of the Folgers business in mid-to-late 2002. CW8 stated that in the Summer of 2002, it had been reported that Liquid Containers Inc. (“Liquid Containers”), a Chicago-based competitor of Constar, was planning to open a plant in Hammond, LA, 30 miles away from Constar’s Reserve facility. In December of 2002, CW8 was instructed that 29 Case 2:03-cv-05020-EL Document 58 Filed 06/18/2004 Page 31 of 63 he could make no new hires, even to replace workers lost to attrition. CW8 also stated that a plan to install a new supervisor at the Reserve plant was cancelled in December 2002, after the candidate had already completed a three month training program. CW8 attributed this to the imminent loss of the Folgers’ account. 114. CW8 confirmed the loss of the Folger account in February 2003 in conversations with Proctor & Gamble purchasing agents in New Orleans, who handled the placement of orders with, and shipments from, Constar. CW8 stated that the purchasing agents stated that when Constar had informed Folgers that the Company would not upgrade its equipment to manufacture the new line of plastic coffee canisters, Proctor & Gamble had decided to withdraw all its business from Constar. The Company, however, had requested that Proctor & Gamble not reveal the loss of the business to anyone at the Reserve facility. 115. CW13 is a former Company employee who worked at the Company’s Reserve, LA facility from 1987 until September 2003. CW13 held various positions in the Company, including maintenance leadsperson, machine operator, and technician. 116. CW12 and CW13 confirmed the information regarding Folgers provided by CW8. CW12 stated that Folgers approached Constar prior to the IPO, and indicated that it wanted to expand its business with the Company. CW12 and CW13 stated that Folgers wanted Constar to manufacture plastic coffee canisters for national distribution. According to CW12 and CW13, Folgers informed Constar that if it refused the canister business, Folgers would also withdraw its instant coffee jar business from the Company. According to CW12 and CW13, to produce the new coffee canisters, Constar would have had to buy new, state-of-the-art extrusion machinery with a far more rapid production rate than the equipment it was using. Constar refused to do so and Folgers withdrew its instant coffee jar business from the Company. 117. CW13 stated that the foregoing was common knowledge at the Reserve plant for at least a year prior to the plant’s closure in September 2003. Likewise, CW12 learned about the loss of the Folgers business about one year to one and one-half years before the plant closed. CW13 also confirmed that Folgers took its business to Liquid Containers. 30 Case 2:03-cv-05020-EL Document 58 Filed 06/18/2004 Page 32 of 63 118. According to CW8, Liquid Containers now handles all the instant coffee manufacturing previously done by Constar, as well as the manufacture of Folgers’ plastic coffee canisters. CW13 further stated that Liquid Containers’ Hamond plant uses high-speed machinery that can apply pressure-sensitive labels by embedding the labels in the canisters, technology that Constar did not possess. g. 119. Loss of the Mobil Oil Business CW5 stated that at about the time of the IPO, Constar lost the account to manufacture motor oil quart containers for Mobil Oil. CW5 stated the account that was Constar’s biggest oil container account, with the Company’s daily output exceeding 350,000 units per day. 120. CW5 stated that Constar lost the business because the Company was outbid by a competitor, possibly Graham Packaging. CW5 stated that immediately after hearing that Constar lost the account, the Company laid-off half of the Houston plant’s employees, approximately 90 people. The plant continued to produce the oil quart containers for a few months thereafter with a skeleton crew. 121. CW5 stated that Constar was outbid because of equipment problems. CW5 stated that Graham manufactured its own wheel machines, which produced the quart oil containers. CW5 stated that Constar, however never obtained new wheel machines from its suppliers. 3. 122. The Negative Impact of Resin Price Increases According to the Registration Statement, PepsiCo (including PepsiCo’s subsidiaries) is the Company’s largest customer, accounting for 35% of Constar’s 2001 revenue. 123. The Registration Statement represented that most of Constar’s contracts allowed the Company to pass increases in the price of resin through to its customers. However, the Registration Statement did not disclose that PepsiCo was largely immune to the Company’s attempts to pass through resin price increases, despite the fact that the Company’s contract with PepsiCo allowed for the pass through. 124. According to CW1, resin costs are the single greatest cost in production and account for between 63% and 70% of the total cost of each bottle. PepsiCo is able to undercut the provision 31 Case 2:03-cv-05020-EL Document 58 Filed 06/18/2004 Page 33 of 63 permitting resin price increases to “pass through” by shifting into cans from plastic bottles, thus reducing the quantity of plastic bottles it buys when the price of plastic bottles rises. CW1 noted that cans are made from aluminum or steel. Aluminum is recyclable so there is less need for new supply. Steel is “dirt cheap” and, therefore, is always a ready substitute. CW1 explained that PepsiCo would promote metal cans by running sales in the super market. As a result, Constar faced a situation in which it could not pass through resin price increases to its largest customer without experiencing cuts in volume. 125. CW1 further explained that volume cuts create another serious problem because the conventional PET business is volume sensitive. CW1 said the volume cuts make it difficult to absorb fixed asset costs, “if you run only 75% of capacity, you die.” According to CW1, the volume reduction increases per unit fixed costs, reducing the increase in margin resulting from the price pass-through, essentially burdening Constar with the resin price increase. 126. CW1 stated that the contractual “pass-through” of resin price increases is, therefore, “academic” because PepsiCo sells ounces, “and they don’t care whether it’s in cans or bottles.” CW1 also said that PepsiCo is known also to play “quality games” in response to attempts to enforce the contractual pass-through provision. CW1 explained that PepsiCo might raise “mysterious issues” about bottle quality, which could put the bottle maker “in limbo for period up to 90 days, because a food product is involved.” 4. 127. Lost Business Opportunities CW14 is a former Constar account manager for the Southeastern region of the U.S. CW14 was employed by Constar from 1999 through October 2001. CW14 reported directly to John Pfeiffer, the Regional Vice President of Sales, who, in turn, reported to Secoy. Secoy reported directly to Defendant Hoffman. 128. According to CW14, Constar repeatedly lost business opportunities due to its unwillingness, or inability, to make necessary capital expenditures. For example, during 2000-2001, CW14 attempted to develop several significant custom and conventional PET contracts. Constar 32 Case 2:03-cv-05020-EL Document 58 Filed 06/18/2004 Page 34 of 63 was unable to secure these contracts, however, because it would not, or could not, upgrade its outdated manufacturing equipment. 129. One such contract was with Austin Nichols & Company (“Austin Nichols”) for the annual production of 200 million custom-plastic bottles for the chocolate drink product called “Yahoo.” Yahoo was marketed in glass bottles, and Austin Nichols was interested in a complete conversion to polypropylene bottles with an EVOH (ethylene vinyl alcohol) liner that could withstand high temperatures during the beverage-fill process. CW14 attempted to solicit the business for months, and after about a year of discussions with Yahoo, Constar pulled out of consideration in the summer of 2001. According to CW14, Constar chose not to pursue the bid because it didn’t want to upgrade its equipment to manufacture the bottles. CW14 explained that Constar needed to purchase rotary-wheel machines to produce the bottles, at a cost of between $3and-$5 million. CW14 explained, “[a]s far as I was concerned, I would have said, ‘Hey, bite the bullet for six months, have the contract signed and go up (in per-unit price) afterwards,’ but Constar wanted almost an immediate return on investment over a small period of time, and they just didn’t want to do it.” 130. In addition, CW14 explained that Constar was also unable to offer competitive pricing on the Yahoo plastic bottles. CW14 explained that Yahoo was then-using glass bottles purchased for $89 per-thousand-units, and that Constar’s bid was $113 per-thousand units for plastic bottles. CW14 stated, “[w]hen you’re talking millions of units, that’s a lot of money. That was a difference that Austin Nichols and Constar couldn’t come to grips on.” 131. In the summer of 2001, CW14 was also soliciting Riley Foods for a contract to produce 25 million units of custom containers and closures (caps) on an annual basis for differentflavored instant powdered teas. The contract represented approximately $2.85 million in annual revenues for Constar. According to CW14, Constar’s bid included a 10% premium over costs on closures, and a 5% to 8% premium over costs on containers. CW14 said the Company’s bid “was very, very ... competitive. We were a little bit higher, but not much, nothing that I would say would throw the deal off.” 33 Case 2:03-cv-05020-EL Document 58 Filed 06/18/2004 Page 35 of 63 132. However, CW14 was instructed to add 20% to Constar’s planned bid price by his immediate supervisor, John Pfeiffer. CW14 responded that Constar’s bid would no longer be competitive if they did so, and it would “kill” the deal. CW14 tried to salvage the deal by recalculating the bid using cheaper material; a polypropylene plastic rather than a high-density plastic, but, with the 20% increase demanded by Pfeiffer, Constar’s bid was still too high. Constar’s rivals - Ring Can and Phoenix Closure - ultimately won the Riley Foods business. 133. According to CW14, Pfeiffer’s instruction to add 20% to the bid price resulted from an e-mail from Secoy in the summer of 2001, urging all salespeople to add a 20% mark-up on any custom contract. According to CW14, Secoy, who came from the “closure” side of Crown, which mostly involved metal lids, was ignorant of plastic-bottle manufacturing, and still approached the industry from a “can” mentality. 134. In mid-to-late 2001, CW14 stated that Constar lost a conventional PET water-bottle bid for Dole Foods to a Mexican competitor. The contract called for making 20-to-30 million units annually for distribution in Central America. Constar’s rival was able to win the business due to superior equipment – a “six-station” Sidel machine that could produce 6,000 units per hour. CW14 explained, “[a]gain, Constar didn’t want to invest the money in buying a new machine and they didn’t have a used one to compete against it.” Constar was bidding on the account with two Sidel machines, with only two stations each. CW14 estimated the cost of a new, “six-station” Sidel machine to be $5 million. 5. 135. Constar Was Plagued by Defective Products In addition, Constar’s antiquated equipment caused pervasive product defect problems with customers such as PepsiCo. 136. CW15 is a former inventory control and shipping/receiving employee at Constar’s Dallas, TX facility, who was employed by the Company from 1999 through February 2003. 137. According to CW15, the Dallas facility had chronic problems with the 2-liter bottles manufactured for PepsiCo-Tulsa. According to CW15, the bottles manufactured at the Dallas facility had holes in the neck and feet. CW15 stated that the problem was due to the poor quality of 34 Case 2:03-cv-05020-EL Document 58 Filed 06/18/2004 Page 36 of 63 the preforms manufactured in a Constar plant in Mexico. CW15 stated that there were color defects and insufficient plastic in the preforms. CW15 stated that approximately four out of 10 boxes had defective preforms. CW15 said that the problem was exacerbated by the poorly trained machine operators who couldn’t adjust the equipment to compensate for the flawed preforms. 138. According to CW15, the problems became so pronounced that PepsiCo threatened to cancel its contract with the Company in May 2002. CW15 stated that the problems even endangered the Company’s relationship with PepsiCo on a national level. 139. Part of CW15’s job involved grinding the unusable and defective preforms into raw material for sale to a recycling company. CW15 handled 20,000 to 30,000 preforms per day, and was constantly behind in grinding the defective preforms. CW15 stated, “[m]y little area stayed stacked up. We had bottles everywhere.” 140. The defective product problems were confirmed by CW16, a former forklift operator and material handler in the Dallas facility. CW16 was employed by the Company from 2000 until August of 2003. 141. According to CW16, a lot of damaged bottles came to the Dallas facility from other plants and these defective products were then shipped to customers. CW16 stated that most of the damage were dents or crushed necks on 2-liter bottles. CW16 stated that Constar employees would frequently and purposefully load damage goods for shipment, particularly near the end of their shift. CW16 explained that otherwise it took two to three hours to replace the damaged goods. However, CW16 explained that this would cause PepsiCo to file damage reports, complaining that everything shipped was damaged. a. 142. PepsiCo’s Sale of Inferior Resin to Constar Another reason for the substantial number of defective products shipped to PepsiCo, according to CW6, was the use of inferior resin. CW6 stated that, under its contract with PepsiCo, Constar was required to purchase Futura Resin from PepsiCo for use in the manufacture of PesiCo bottles. However, CW6 stated that Futura Resin was inferior to Eastman Resin, which is a fasterheating resin that with greater elasticity that would not cause holes in the bottle feet. CW6 stated 35 Case 2:03-cv-05020-EL Document 58 Filed 06/18/2004 Page 37 of 63 that Eastman Resin was available from other resin suppliers. According to CW6, the use of the inferior resin caused holes in the feet of as much as 10% of the bottles manufactured for PepsiCo at the Company’s Havre de Grace, MD facility. Despite the fact that Constar used Futura Resin only because PepsiCo demanded that it do so, the Company had to absorb the costs of the defective bottles. 143. To offset some of the losses, and to try to conserve its already low margins, CW6 stated that the Havre de Grace plant secretly re-ground the bad bottles and added them to virgin resin at a ratio of 5-to-95 percent to produce new bottles. CW6 explained that while this ratio was a commonly accepted norm in plastics manufacturing, PepsiCo prohibited the use of any percentage of “regrind” in its bottles. CW6 stated, “Pepsi had a very strict rule of no regrind in our bottles and we did it. That plays a big role in quality right there. It’s your regrind that produces imperfections and contaminations in your material.” 6. 144. Pre-IPO Price Concessions and Financial Forecasts According to CW11, shortly before the IPO, there was “a lot of momentum to get the numbers to look as good as possible.” CW11 stated that in the Fall of 2002, Constar offered rebates to large-volume purchasers. For example, CW11 explained that if a customer purchased large volume, such as 300 million units, the Company might offer a dollar discount per thousand. 145. CW11 stated that customers received rebates by either reaching their volume requirements during the year or taking a portion of the rebate upon placement of an order. CW11 explained that the latter caused accounting problems because the Company would bill the customer for the full retail price, but, if the customer exercised its rebate, it would pay less than the invoiced amount. 146. CW11 stated that the discrepancies in customer billing and payments caused a large volume of “chargebacks” at Constar. CW11 stated that chargebacks were a constant problem at the Company. 147. CW11 also stated that the Company’s management “was pushing the envelope” in the financial forecasts issued just prior to the IPO. CW11 stated that in August-September 2002, 36 Case 2:03-cv-05020-EL Document 58 Filed 06/18/2004 Page 38 of 63 Constar issued forecasts based on sales force projections. CW11 stated that management accepted the customers’ maximum projected purchase forecasts, despite experience with particular customers that showed their forecasts were typically far off, and used those numbers to impress investors. 148. For example, CW11 stated that in August-September 2002, Constar forecasted the purchase of 40 million units in 2003 by Mount Olympus, a Utah mineral/spring water company. CW11 stated that the forecast was made at the corporate level and approved by Secoy. In January 2003, CW11 received an updated forecast from Mount Olympus for half of the original forecast. II. THE IPO REGISTRATION STATEMENT MISSTATED THE ABOVE MATERIAL ADVERSE INFORMATION 149. On November 14, 2002, Constar filed with the SEC the Registration Statement for the issuance of 10.5 million shares of Constar common stock, priced as follows: PER SHARE TOTAL Public offering price $12.00 $126,000,000 Underwriting discounts $0.84 $8,820,000 Proceeds to Crown $11.16 $117,180,000 150. The IPO was accomplished through the Registration Statement. Each of the Individual Defendants signed the Registration Statement and collectively were responsible for the accuracy of the offering documents. 151. With respect to the PET packaging market, the Registration Statement and Prospectus stated, in pertinent part: We are a leading global producer of PET, or polyethylene, terephthalate, plastic containers for food and beverages. We believe that PET represents one of the most rapidly growing packaging markets worldwide. We are one of the largest North American suppliers of PET containers for conventional PET applications in soft drinks and water. We also have an expanding position in the growing custom PET market. Custom PET containers are used for food, juices, teas, sport drinks, new age beverages, beer and flavored alcoholic beverages, all of which require advanced technologies, processing know-how and innovative designs. The PET packaging market is expanding as a result of growth in the beverage and food markets and conversions into PET packaging from traditional packaging materials such as glass, metal, and paperboard. In conventional PET applications, growth is largely due to new introductions of multi-pack single serve soft drinks in supermarkets 37 Case 2:03-cv-05020-EL Document 58 Filed 06/18/2004 Page 39 of 63 and club stores and the increased popularity of single serve bottled water. Growth in custom applications is driven by demand for single serve beverages and convenience food products, and is facilitated by consumer preferences for PET’s combination of transparency, resealability, light weight, and shatter resistance. Until recently, the limited availability of commercially proven technologies constrained the growth of custom PET applications. We believe that we have the patented technology and full-service deign [sic] capabilities necessary to capture expected large scale conversion opportunities for PET packaging. [Emphasis added.] 152. The statement in the Registration Statement that the Company believed it had “the patented technology and full-service [design] capabilities necessary to capture expected large scale conversion opportunities for PET packaging” is materially false and misleading. As described above, the Company used antiquated manufacturing equipment that was less efficient than its competitors’ equipment and, therefore, Constar could not offer competitive pricing, nor could it comply with new customer product design demands. Also, the Company experienced frequent complaints concerning product defects. Moreover, the Company’s proprietary Oxbar technology did not function properly, causing Anheuser-Busch to cancel its business with the Company. Indeed, as described above, these problems caused mass defections by the Company’s customers. Accordingly, neither Constar’s technology nor design capabilities were such that the Company could expect to capture large scale PET conversion opportunities. 153. With respect to the Company’s strategy, the Registration Statement stated: Our objective is to grow and compete profitably in the PET container packaging market. We seek to lead conversions from other packaging materials in new PET product categories, while we continue to grow with our customers and our markets in conventional or established custom PET applications. We will continue to focus on the development and commercialization of bottle design, bottle forming and technologies that allow us to further leverage our existing manufacturing and distribution infrastructure, and our strong customer relationships. This particularly applies to the significant opportunities we believe exist in the custom PET market. In support of these strategies, we plan to be a leader in all the markets we serve by: continuing to serve the demanding needs of the world’s leading consumer product companies with the PET products, services, product development and reliability they need to support their markets; 38 Case 2:03-cv-05020-EL Document 58 Filed 06/18/2004 Page 40 of 63 investing in capacity expansion in all categories of PET bottle markets where profitable growth can be supported by appropriate contractual terms with our customers; remaining a high-quality, low-cost operator implementing best-practices manufacturing disciplines in every manufacturing activity we undertake; favoring the overhead efficiency, flexibility and utilization benefits of large scale manufacturing plants while maintaining the geographic presence that allows us to offer freight efficiency and service convenience to our customers; and attracting and retaining the skills and talent necessary to achieve our goals while fostering an environment of service and teamwork throughout our workforce. 154. The statements in the Registration Statement concerning the Company’s investment in “capacity expansion” and “remaining a high-quality, low-cost operator implementing bestpractices manufacturing disciplines,” are materially false and misleading. As detailed above, Constar used antiquated equipment that was at least two generations old. This equipment was less efficient, producing less PET products per machine per hour, than the state-of-the-art equipment used by the Company’s competitors. Moreover, the Company was unwilling, or unable, to invest in new equipment necessary for “capacity expansion.” 155. Likewise, the Company experienced frequent customer complaints about product defects that were caused by, among other things, its outdated equipment. In addition, because the Company’s manufacturing equipment was outdated, it could not and did not offer competitive pricing. As detailed above, this resulted in the mass defection of Constar’s customers. Therefore, the Company was not perceived by its customers as, a “high-quality, low-cost operator.” 156. In addition, in the section entitled “Competitive Strengths,” the Registration Statement stated: We believe that we are strongly positioned within the PET industry because of our: *** Technology And Product Development Expertise *** 39 Case 2:03-cv-05020-EL Document 58 Filed 06/18/2004 Page 41 of 63 We believe our proprietary Oxbar and hot-fill technologies give us a competitive advantage in the custom PET market Creative And Innovative Product Design Capability Our innovative products include award-winning Oxbar multi-layer beer bottles, vacuum absorbing multi-layer juice bottles, and the first long neck PET bottle commercialized for a hot-fill application. 157. Each of the foregoing statements is materially false and misleading. As detailed above, Constar did not possess “technology and product development expertise,” nor did its Oxbar technology give the Company a competitive advantage in the custom PET market. Constar’s Oxbar technology did not work properly, and the Company was unwilling, or unable, to satisfy customer demands for the manufacture of new product designs due to the limitations of its outdated equipment. Therefore, the Company lacked a creative and innovative product design capability. 158. Under “Risk Factors,” the Registration Statement stated: If we are unable to generate sufficient cash from operations to service our debt and fund our operations, or if we are unable to refinance our debt, we may have to defer capital expenditures or sell assets to generate cash, which could weaken our competitive position. [Emphasis added.] 159. The foregoing statement is materially false and misleading because the Company had, since at least 1996, lacked sufficient cash from operations to make any significant capital expenditures. As a consequence, the Company continued to use outdated equipment which put it at a significant competitive disadvantage. Thus, while the statement in the Registration Statement describes Constar’s inability to generate sufficient cash to fund debt and make necessary capital expenditures as a mere contingency, at the time the statement was made, that possibility had been long realized. Because the Registration Statement represents that there was only a risk of this situation occurring in the future, when the Company’s competitive position was already impaired due its lack of sufficient cash to make necessary capital expenditures, this statement is materially false and misleading. 160. The Registration Statement further stated: Significant technological changes could render our existing technology or our products and services obsolete. The markets in 40 Case 2:03-cv-05020-EL Document 58 Filed 06/18/2004 Page 42 of 63 which we operate are characterized by rapid technological change, frequent new product and service introductions and evolving industry standards. We attribute much of our recent competitive success to our existing technology, and our ability to compete may dissipate if our existing technology is rendered obsolete. If we are unable to successfully respond to these developments or do not respond in a cost-effective way, our net sales and profitability may decline. To be successful, we must adapt to rapidly changing markets by continually improving our products and services and by developing new products and services to meet the needs of our customers. Our ability to develop these products and services will depend, in part, on our ability to license leading technologies useful in our business and develop new offerings and technology that address the needs of our customers. Similarly, the equipment that we use may be rendered obsolete by new technologies. A significant investment in new equipment may reduce our profitability. [Emphasis added.] 161. The foregoing statements, concerning the mere possibility that the Company’s technology and equipment may become obsolete is materially false and misleading. As detailed above, Constar had been using obsolete equipment and technology since at least 1996. As a consequence, the Company could not effectively compete, and experienced mass defection of customers, adversely affecting Constar’s profitability. Thus, while the statement in the Registration Statement describes the obsolescence of Constar’s technology and equipment as a mere contingency, at the time the statement was made, that possibility had been long realized. Because the Registration Statement represents that there was only a risk of this situation occurring in the future, when the Company’s equipment had already been rendered obsolete by new technologies, this statement is materially false and misleading. 162. The Registration Statement also stated: If we do not have adequate funds to make our capital expenditures or if the expected benefits of capital expenditures are not achieved, our business may be impaired and our profitability reduced. Our business is capital intensive, and our equipment is currently operating at near full capacity. We expect to have substantial capital needs in the near future for capacity expansion. If we do not have funds available to satisfy our capital expenditure requirements, we may not be able to pursue our strategy for profitable growth. We cannot be certain that our capital needs will not be larger than expected. We also can not be certain that the expected benefits of any capital expenditures will be achieved. [Emphasis added.] 41 Case 2:03-cv-05020-EL Document 58 Filed 06/18/2004 Page 43 of 63 163. The foregoing statement that “if” at some future point the Company does not have adequate funds to make capital expenditures that its business may be impaired and profitability reduced, is materially false and misleading. As detailed above, at the time the Registration Statement was issued, the Company already lacked the funds necessary to make critical and long overdue equipment upgrades that had been needed since at least 1996. Thus, while the statement in the Registration Statement describes Constar’s inability to make necessary capital expenditures due to a lack of cash as a mere contingency, at the time the statement was made, that possibility had been long realized. Because the Registration Statement represents that there was only a risk of this situation occurring in the future, when the Company’s already lacked funds to upgrade its equipment, this statement is materially false and misleading 164. The Registration Statement also stated: PET bottle manufacturing is capital intensive, requiring both specialized production equipment and significant support infrastructure for power, high pressure air and resin handling. Our existing infrastructure provides us with the ability to place new capacity into existing facilities at a relatively low incremental cost compared to the cost of building a new facility. We are able to apply to the new operations the planning and production skills and, in many cases, molds and production equipment of our existing operations. Our large-scale operations and diverse product offerings allow us to pursue efficient strategies for asset acquisition and utilization. For example, we are able to maintain our competitive cost position as we grow by purchasing state-of-the-art manufacturing equipment for our high-volume product lines and redeploying existing machines to lower volume and specialty product lines. [Emphasis added.] 165. The foregoing statement concerning the Company’s ability to maintain its competitive cost position due to its purchase of “state-of-the-art manufacturing equipment” is materially false and misleading. As detailed above, Constar did not, in fact, use state-of-the-art manufacturing equipment, but instead used equipment that was two generations older than that of its competitors. As a result of its use of outdated equipment, Constar’s cost position was not competitive. 166. The Registration Statement further stated: Because our machinery has been continuously maintained and upgraded, and because the speed and capacity of our equipment are 42 Case 2:03-cv-05020-EL Document 58 Filed 06/18/2004 Page 44 of 63 generally comparable to the equipment of our competitors, we believe that our manufacturing platform is cost competitive. Equipment suppliers to our industry have continually made improvements in output and performance at lower capital cost per unit of output. Subject to demand for the capacity, we seek to maintain and improve our competitive cost position by acquiring the highest speed state of the art equipment on each occasion that we increase capacity. We believe that we are advantaged by opportunities that exist to deploy existing high speed equipment in some of the newly converting specialty custom applications, enhancing both operating efficiency and capital efficiency throughout our system. [Emphasis added.] 167. The foregoing statement, that the Company continuously upgraded its equipment so that the speed and capacity of the equipment is comparable to that of its competitors, is materially false and misleading. As described above, Constar’s failure to upgrade its equipment and/or invest in new, state-of-the-art equipment, rendered the Company unable to effectively compete with its competitors. Moreover, because Constar utilized antiquated manufacturing equipment with slower production speeds, its manufacturing platform was not cost competitive. 168. Likewise, the statement concerning the Company’s maintenance and improvement of its competitive cost position by “acquiring the highest speed state of the art equipment on each occasion that we increase capacity,” is materially false and misleading because rather than expanding capacity, the Company was reducing capacity through plant closures caused by customer defections. Further, Constar had not acquired state-of-the-art manufacturing equipment since at least 1996. In addition, the statement that “[w]e believe that we are advantaged by opportunities that exist to deploy existing high speed equipment in some of the newly converting specialty custom applications,” was materially false and misleading because the Company failed to disclose that it lacked the capital necessary to purchase and deploy high speed equipment for the manufacture of specialty custom applications. 169. With respect to the Company’s Oxbar technology, the Registration Statement stated: We believe that our Oxbar oxygen-scavenging technology, which increases product shelf life by inhibiting oxygen from penetrating the packaging, is the best performing technology for the preservation of oxygen sensitive products and is cost competitive with other available technologies. [Emphasis added.] 43 Case 2:03-cv-05020-EL Document 58 Filed 06/18/2004 Page 45 of 63 *** We believe our proprietary Oxbar and hot-fill technologies give us a competitive advantage in the custom PET market. 170. The foregoing statements concerning Oxbar as the “best performing technology for the preservation of oxygen sensitive products,” and Constar enjoying a competitive advantage because of Oxbar, are materially false and misleading. As detailed above, Anheuser-Busch repeatedly complained that the bottles manufactured by Constar using the Oxbar technology failed to keep oxygen from being transmitted to the beer. Indeed, according to a former employee of the Company (CW11), an analysis of Constar’s product showed that it transmitted oxygen at a higher rate than that of its competitor, Owens-Illinois. As a result, Anheuser-Busch, which had initially split its order of the plastic beer bottles between Constar and Owens-Illinois, ultimately, gave all of its business to Constar’s competitor. 171. The Registration Statement also stated: Some foods and beverages are sensitive to oxygen and require special protective packaging. We believe that Oxbar, our proprietary oxygen-scavenging technology, is recognized as the best available technology for the protection of oxygen sensitive products. [Emphasis added.] 172. The foregoing statement that the Company believes that Oxbar “is recognized as the best available technology for the protection of oxygen sensitive products,” is materially false and misleading for the reasons stated above in paragraph 170. Because Constar’s Oxbar technology was not effective and was not recognized by Anheuser-Busch as the best available technology, defendants could not have reasonably held the belief that it was. 173. With respect to the impact of price fluctuations in the price of resin, the Registration Statement stated: We use large quantities of plastic resin in manufacturing our products and increases in the price of resin may increase our cost of products sold, reduce our profitability and reduce our prospects for growth.... Although most of our contracts permit us to pass the price of resin through to our customers, market conditions may not permit us to fully pass through any future resin price increases. Significant increases in resin prices, coupled with an inability to promptly pass such increases on to customers, may increase our cost of products sold and reduce our profitability. [Emphasis added.] 44 Case 2:03-cv-05020-EL Document 58 Filed 06/18/2004 Page 46 of 63 174. The foregoing statements, concerning the contractual provisions that permit resin price increases to be passed through to the Company’s customers, as well as the possible impact of an inability to do so, are materially false and misleading. While Constar did disclose that it may not be able to pass through resin price increases to customers due to market conditions, the Company failed to disclose that it was virtually impossible to pass through resin price increases to its largest customer PepsiCo. 175. As detailed above, when faced with a pass through of an increase in resin costs, PepsiCo simply switched to, and increased, the sales volume of its canned products, thereby lowering its volume of PET bottle orders. According to CW1, this lower volume negates, or outweighs, the benefit of the contractual pass through provision because it increases the manufacturer’s per unit fixed costs. Therefore, as a practical matter, Constar was precluded from passing through increased resin costs due to the threat of decreased order volume by PepsiCo. 176. CW1 also stated that PepsiCo would raise product defect issues if a manufacturer attempted to pass through resin cost increases, which could shut down a production line because the packaging of food products is involved. The Company’s failure to disclose that it is unable to pass through resin cost increases to its largest customer, sales to which constituted 35% of the Company’s 2001 revenues, made the foregoing statements concerning the price increase pass through materially false and misleading. 177. With respect to PepsiCo and resin purchases, the Registration Statement stated: PepsiCo may choose to supply us with an increasing amount of resin, which may reduce our profitability. Because we are a large purchaser of resin, we enjoy significant leverage in negotiating resin purchase agreements. To the extent that PepsiCo exercises this right with respect to an increasing amount of resin, the amount of resin that we purchase will decline and we may lose some of our leverage in negotiating resin purchase agreements. 178. The foregoing statement concerning the risk associated with the possibility that PepsiCo could choose to supply the Company with an increasing amount of resin is materially false and misleading because it fails to disclose that Constar was forced to purchase inferior quality Futura 45 Case 2:03-cv-05020-EL Document 58 Filed 06/18/2004 Page 47 of 63 Resin from PepsiCo, which caused an increase in the number of product defects, adversely impacting Constar’s margins. 179. As noted above, CW6 reported that PepsiCo’s Futura Resin was inferior to Eastman Resin, which was available from other resin suppliers. According to CW6, at PepsiCo’s insistence, however, Constar used the inferior Futura Resin to manufacture bottles for PepsiCo. The use of the inferior resin caused holes in the feet of as much as 10% of the bottles manufactured for PepsiCo at the Company’s Havre de Grace, MD facility. Despite the fact that Constar used Futura Resin only because PepsiCo demanded that it do so, the Company had to absorb the costs of the defective bottles. 180. The Registration Statement further stated: As is common in our industry, our contracts are generally requirementsbased, granting us all or a percentage of the customer’s actual requirements for a particular period of time, instead of a specific commitment of unit volume. Most of our customer contracts contain provisions permitting us to pass resin price changes through to our customers as adjustments to selling price. PET resin is our principal raw material and a major component of our cost. When we use this mechanism to pass resin price changes through to our customers, the price changes generally affect our net sales and cost of sales in approximately equal amounts and do not generally affect our gross profit except as a result of valuation and timing issues. [Emphasis added.] 181. The foregoing statements concerning the contract provisions for the pass through of resin price increases, and the effect of the utilization of this provision on the Company’s gross profit, are materially false and misleading for the reasons stated in paragraphs 174-76, 178-79, above. 182. In connection with the effect of resin price increases on gross profit, the Registration Statement stated: As discussed above, our agreements with customers typically have provisions that insulate our gross profit from changes in resin prices by allowing us to pass those changes through to our customers with equivalent price changes for our products. [Emphasis added.] 183. The foregoing statement concerning insulation of the Company’s gross profit from changes in resin prices due to the contractual pass through provisions is materially false and misleading for the reasons stated in paragraphs 174-76, 178-79, above. As indicated, PepsiCo is able to use its market position and the availability of alternative packaging materials to avoid invocation 46 Case 2:03-cv-05020-EL Document 58 Filed 06/18/2004 Page 48 of 63 of the contractual pass through provision. Accordingly, an increase in resin costs is borne by Constar, adversely impacting the Company’s gross profits. III. CONSTAR’S FALSE FINANCIAL STATEMENTS 184. In order for Constar to complete the IPO, simultaneously issue $175 million in Senior Subordinated Notes, and maintain its credit rating and access to the capital markets, Defendants caused the Company to falsely report its financial results for the nine months of 2002, ended September 30, 2002. Such financial results were contained in the Registration Statement. Defendants did so by improperly failing to write down the value of Constar’s impaired goodwill of at least $183 million in a timely manner, resulting in overstated goodwill and total assets on the balance sheet and overstated net income for the nine months ended September 30, 2002, on the income statement. 185. A goodwill impairment charge of $183 million incurred prior to the IPO would have been material, representing a 55% reduction of total goodwill. Consequently, such a substantial charge would have had a drastic and material negative effect on net income and earnings per share (“EPS”) for the nine months ended September 30, 2002, the results for which were incorporated in the Registration Statement. Metrics, such as net income and EPS, are closely scrutinized by investors, and the impact of a $183 million charge would have been detrimental to the success of the IPO. 186. Moreover, this accounting impropriety violated generally accepted accounting principles (“GAAP”) and SEC rules. GAAP are those principles recognized by the accounting profession as the conventions, rules and procedures necessary to define accepted accounting practice at a particular time. SEC Regulation S-X (17 C.F.R. §210.4-01(a)(1)) states that financial statements filed with the SEC which are not prepared in compliance with GAAP are presumed to be misleading and inaccurate, despite footnote or other disclosure. Regulation S-X requires that interim financial statements must also comply with GAAP. 17 C.F.R. §210.10-01(a). 47 Case 2:03-cv-05020-EL Document 58 Filed 06/18/2004 Page 49 of 63 A. 187. Constar’s Goodwill Was Overstated Goodwill, as defined by SFAS No. 142, Goodwill and Other Intangible Assets, is “the excess of the cost of an acquired entity over the net of the amounts assigned to assets acquired and liabilities assumed.” SFAS 142 ¶ F1. The goodwill on Constar’s balance sheet was the result of Crown’s 1992 acquisition of Constar. As a result of the acquisition, Crown recorded goodwill of approximately $486 million to be amortized ratably over 40 years. By the time of the IPO and after the $50 million write down of goodwill related to the European operations discussed below, the carrying value of the goodwill was still significant at $331.8 million, which represented nearly 50% of the total assets ($700 million) and $131.8 million more than the Company’s total stockholders’ equity ($200 million). 188. According to the Registration Statement, Constar adopted the provisions of SFAS 142 effective January 1, 2002. This standard requires companies to cease amortizing goodwill and instead review goodwill and other intangible assets for impairment upon adoption of SFAS 142 and at least once annually thereafter. Goodwill must also be tested between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value on the books. SFAS 142 ¶ 28. 189. In the Registration Statement, Constar provides the following few examples of events or circumstances that could reduce fair value: book value exceeding market capitalization, loss of a major customer, loss of intellectual property rights, decrease in demand for products, loss of key personnel, increase in raw material costs, unanticipated competition. An impairment review may be required at any time these events or circumstances occur. 190. The first step of the goodwill impairment test - used to identify potential impairment - compares the fair value of an entire reporting unit with its carrying amount, including goodwill. If the fair value exceeds carrying value, goodwill of the reporting unit is considered not impaired and the second step of the impairment test is unnecessary. However, if fair value is less than carrying value, the second step of the test - used to measure the amount of impairment loss - is required. In this step, implied fair value of the goodwill of the reporting unit is compared to the carrying amount 48 Case 2:03-cv-05020-EL Document 58 Filed 06/18/2004 Page 50 of 63 of that goodwill. If the carrying value exceeds the implied fair value of the goodwill, an impairment charge needs to be recognized in the amount of the excess. 191. As stated in Constar’s 2002 10-K, during the second quarter of 2002, Constar completed its transitional impairment review and recognized an impairment charge in its European reporting unit of $50.059 million (13.1% of total goodwill) as a cumulative effect of a change in accounting principle as of January 1, 2002. During this review, Constar evaluated its European and US reporting units separately. In Note 7 of its 2002 10-K, Constar describes, Historically, Constar’s operations were reported through Crown’s Americas and Europe reporting segments. However, the operations within Europe and the U.S. are similar in the nature of their products, production processes, the types of classes of customers for products and the methods used to distribute products. Accordingly, Constar has only one reportable segment but has identified the following reporting units as of January 1, 2002: United States and Europe. 192. Since the IPO, the Company has had only one reporting unit, meaning that the US and Europe operations are no longer separated for goodwill impairment testing, but instead are tested in the aggregate. B. 193. Constar’s Goodwill Was Impaired Although Constar took a charge of $50.059 million to write down goodwill in 2002 (months before the IPO), the $50 million charge was grossly inadequate. Goodwill was further impaired because: (a) the US reporting unit had not been performing as well as the European reporting unit, which took a $50 million charge to writedown goodwill; (b) the fair market value of the entire Company was only approximately $200 million; (c) the Company had been experiencing declining demand for its products; (d) the offering price in the IPO was repeatedly lowered to reflect the market’s reaction to the Offering; (e) by the time of the IPO, many key customers had already terminated their relationship with Constar, or were in the process of doing so; (f) the industry was experiencing downward pricing pressure combined with increasing resin prices; and (g) Constar’s competitors were writing down goodwill in 2002. 194. Although Constar acknowledged that its goodwill attributable to its European operations was impaired, the Company failed to recognize any impairment charge for the U.S. 49 Case 2:03-cv-05020-EL Document 58 Filed 06/18/2004 Page 51 of 63 reporting unit. From at least 1999 through 2001, net sales in Europe had been growing at a faster rate than in the U.S. Constar admitted in its 2002 Form 10-K that the PET container business was a rapidly growing component of the European packaging market due to accelerating conversion trends in water, soft drinks, juices and beer, and other products. In contrast, by late 2002, the U.S. market had already done much of its transitioning to plastic bottles. Nevertheless, defendants failed to write-off impaired goodwill associated with Constar’s U.S. operations. 195. Thus, the $331.8 million of goodwill on the books was grossly overstated. During the period 2001 to 2002, and prior to the IPO, Crown was desperate for cash and attempted to sell Constar to other companies, including Ball. According to CW1, when Crown approached Ball, a Constar competitor, about purchasing Constar, the price was in the low $200 million range and the net asset base was in the $100-$150 million range, indicating that goodwill was only worth approximately $50-$150 million. Accordingly, the reported goodwill of over $331 million was severely impaired and should have been written down in accordance with FAS 142. 196. CW1 also stated that initially, in 1992 when Crown acquired Constar, several other companies, including Ball and American National Can Co., had also looked at the possibility of purchasing Constar but decided not to because the price was too high, indicating that Constar’s goodwill was overvalued from the date Crown initially purchased it. 197. Furthermore, Constar’s inventory balances were unusually high as of September 30, 2002. Normally, following a company’s busiest seasons (for Constar, these were the summer months), inventory should be low. Defendant Hoffman confirmed the foregoing in statements to analysts during a Q2 ‘03 earnings conference call, stating that “at the end of September, like typically, we’ll be at our typical low inventory levels.” On that same call, Defendant Hoffman further stated, “normally, in November/December, we start building for next year,” indicating that inventory levels should be increased at year end over the September 30 levels. However, total inventory increased more than $7.4 million from December 31, 2001 to September 30, 2002, an increase of 10%. Of that, finished goods inventory increased $9.4 million, representing an increase of 30.4%. Increasing inventory, particularly finished goods inventory, is a sign of declining demand, 50 Case 2:03-cv-05020-EL Document 58 Filed 06/18/2004 Page 52 of 63 especially, where as here, the entity concludes its busiest portions of the year. The trend of increasing inventory continued as Constar’s total inventory as of December 31, 2002, increased $11.4 million, or 15.2%, compared to December 31, 2001. Finished goods inventory as of December 31, 2002, increased $20.9 million, or 67.7%, over the prior year. Such slacking demand due to loss of customers, or otherwise, is a factor that Constar was required to consider in evaluating the fair value of the Company in connection with its goodwill impairment review. 198. Moreover, at the time of the IPO, Constar acknowledged in the Registration Statement that the expected IPO price had been declining and that such movement in market capitalization was an indicator of fair value. Constar stated, “As the initial public offering price of our common stock moves closer to the low end of the expected price range of $12.00 to $14.00 per share, it becomes more likely that we will need to perform an impairment review, though we may be required to perform an impairment review even at the top of the range.” This concept was reinforced by Constar in its 2002 Form 10-K, which states, in pertinent part: “If the Company’s share price or operating results sustain an extended decline, this could trigger an impairment review.” Constar’s IPO price ultimately was $12, the lowest point of the expected range. This factor should also have triggered an impairment review and indicated the need to write-off overvalued goodwill. 199. Constar had also lost several key customers immediately preceding the IPO, including Buffalo Rock, Folgers, PowerAde/Coca-Cola, Exxon/Mobil, and Anheuser-Busch. In addition, PepsiCo, Constar’s largest customer, had been threatening to terminate its business with Constar. There was excess capacity in the PET manufacturing industry and, as a result, bottlers and other PET users were able to readily change to new suppliers. This, combined with the fact that Constar’s manufacturing equipment was old and inefficient, placed Constar at a distinct competitive disadvantage. As discussed in ¶¶ 81-90 above, several CW’s confirmed that it was no secret that Constar was at least two generations behind in its plant equipment and, therefore, could not successfully compete in the marketplace. Such information indicated that future cash flows would continue to decrease, a further indication that goodwill was impaired. 51 Case 2:03-cv-05020-EL Document 58 Filed 06/18/2004 Page 53 of 63 200. In an effort to retain its remaining customers, Constar was forced to enter new contracts with these customers at substantially reduced prices and upon other unfavorable terms that significantly diminished Constar’s margins, cash flows, and profitability. Excess capacity in the industry had created downward pricing pressure. This downward pricing, combined with the rising resin prices (the impending war was increasing oil prices which have a direct impact on resin prices), warranted lower earnings and cash flow projections for the next several years, further indicating that goodwill was impaired. 201. At the same time, Constar’s competitors were taking significant charges for impairment of goodwill. For example, Owens-Illinois incurred a $460 million (15.2%) goodwill impairment charge in the first quarter of 2002 for its consumer products reporting unit of its Plastics Packaging segment, which Owens-Illinois disclosed operates in a highly competitive and fragmented industry. Owens-Illinois also disclosed in 2002 that excess capacity in the industry had created downward pricing pressure that warranted lower earnings and cash flow projections for the next several years; such conditions resulted in a lower fair value. Constar, however, made no such disclosure in 2002 and failed to take an impairment charge for its U.S. reporting unit, which was experiencing the same pricing pressures as Owens-Illinois. 202. Similarly, Consolidated Container, which is also in the plastic packaging industry, took a significant charge for goodwill impairment in 2002. The charge was for $290 million, or 58% of goodwill. Among the reasons cited by Consolidated Container for the write-down was that “market trading multiples for publicly traded peer companies have declined.” Constar made no such disclosure in 2002 and failed to take an impairment charge for its U.S. reporting unit, which was also experiencing the same declines in market trading multiples as Consolidated Container. 203. It was not until Constar’s annual review of goodwill in the second quarter of 2003, approximately six months after the IPO, that the Company finally admitted that its goodwill was impaired. The Company incurred a charge of $183 million in the second quarter of 2003, representing a write-down of 55% of goodwill and 24% of total assets as of June 30, 2003. Specifically, Constar made the following disclosure in its Form 10-Q for the second quarter of 2003: 52 Case 2:03-cv-05020-EL Document 58 Filed 06/18/2004 Page 54 of 63 Due to the trading price of the Company’s common stock, operating results that reflect lower volumes of domestic conventional product sales related to weather conditions, increased handling and shuttling costs and other factors, the Company has determined that a goodwill impairment exists as of June 30, 2003. Based on a preliminary assessment, the Company recognized an estimated impairment charge of $183 million in the second quarter of 2003. The fair value of the Company was determined by quoted market prices of the Company’s common stock plus a control premium. 204. Constar subsequently confirmed in its Form 10-Q for the third quarter of 2003, that no adjustments needed to be made to the preliminary estimate of $183 million. 205. In sum, goodwill was overstated and should have been written down prior to the IPO in accordance with GAAP. C. 206. Other GAAP Violations In addition to the GAAP and SEC violations described above, the Company also violated the following fundamental GAAP principles: (a) The principle that interim financial reporting should be based upon the same accounting principles and practices used to prepare annual financial statements was violated (APB No. 28, ¶ 10); (b) The principle that financial reporting should provide information that is useful to present and potential investors and creditors and other users in making rational investment, credit and similar decisions was violated (FASB CON No. 1, ¶ 34); (c) The principle that financial reporting should provide information about the economic resources of an enterprise, the claims to those resources, and effects of transactions, events and circumstances that change resources and claims to those resources was violated (FASB CON No. 1, ¶ 40); (d) The principle that financial reporting should provide information about how management of an enterprise has discharged its stewardship responsibility to owners (stockholders) for the use of enterprise resources entrusted to it was violated. To the extent that management offers securities of the enterprise to the public, it voluntarily accepts wider responsibilities for accountability to prospective investors and to the public in general (FASB CON No. 1, ¶ 50); 53 Case 2:03-cv-05020-EL Document 58 Filed 06/18/2004 Page 55 of 63 (e) The principle that financial reporting should provide information about an enterprise’s financial performance during a period was violated. Investors and creditors often use information about the past to help in assessing the prospects of an enterprise. Thus, although investment and credit decisions reflect investors’ expectations about future enterprise performance, those expectations are commonly based at least partly on evaluations of past enterprise performance (FASB CON No. 1, ¶ 42); (f) The principle that financial reporting should be reliable in that it represents what it purports to represent was violated. That information should be reliable as well as relevant is a notion that is central to accounting (FASB CON No. 2, ¶¶ 58-59); (g) The principle of completeness, which means that nothing is left out of the information that may be necessary to insure that it validly represents underlying events and conditions was violated (FASB CON No. 2, ¶ 79); and 207. The principle that conservatism be used as a prudent reaction to uncertainty to try to ensure that uncertainties and risks inherent in business situations are adequately considered was violated. The best way to avoid injury to investors is to try to ensure that what is reported represents what it purports to represent (FASB CON No. 2, ¶¶ 95, 97). IV. CONSTAR’S TRUE ADVERSE BUSINESS CONDITIONS ARE DISCLOSED TO THE MARKET AND CONSTAR STOCK PRICE COLLAPSES 208. On July 29, 2003 Constar’s financial problems finally came to light when the Company alerted the market of its disappointing financial results in a press release entitled “Constar International Inc. Announces 2003 Second Quarter Results,” which stated in part that: For the second quarter, the company reported a quarterly net loss of $4.0 million or a loss of $0.33 per diluted share compared to net income of $7.2 million or $0.60 per diluted share in the second quarter of 2002. Net sales for the second quarter increased 5.3 percent to $203.4 million compared to the prior year period of $193.1 million. The growth in net sales reflects increased shipments of custom products, the pass-through of increased resin prices, and benefits resulting from strengthening foreign currencies against the U.S. dollar. The increase in net sales was partially offset by reduced domestic shipments in conventional products and implementation of price reductions associated with contract extensions. 54 Case 2:03-cv-05020-EL Document 58 Filed 06/18/2004 Page 56 of 63 "The second quarter was a challenging one for Constar," commented Michael J. Hoffman, President and Chief Executive Officer. "The lack of demand for our customer's products was exacerbated by poor weather conditions and contributed to reduced volume in our domestic conventional market. Additionally, we experienced slower than expected ramp-up of new customers and product conversions in the United States and Europe. Without the expected growth, we were unable to offset the previously announced business losses and the price concessions given in exchange for added volume and contract extensions." *** In addition, gross profit was adversely impacted by slower than expected customer ramp-ups and conversions, an unfavorable shift in product mix and the implementation of price reductions to extend long-term contracts and increase volume. During the quarter, gross profit was also impacted by an increase in the company's group, property and casualty insurance costs. 209. Also on July 30, 2003, Constar held a telephonic conference with analysts, where Defendants Hoffman and Cook disclosed that Constar’s poor financial results were due to the loss of customers, including Folgers, Powerade and Buffalo Rock. During the conference call, Defendant Hoffman also admitted that Constar was suffering margin erosion because Constar did not have special technology for producing custom PET products. Defendant Hoffman explained: “Custom product that can now be made with off-the shelf technology, that there isn’t a lot of know-how, isn’t a lot of proprietary technology, we will see margin erosion.” As a result of these disclosures Constar’s stock price collapsed from a trading high of $9.17 per share on July 28 to a trading low of $6 per share on July 30, with volume of over 1.56 million shares traded that day. 210. As the market continued to digest theses negative revelations over the following trading days, Constar’s stock continued to decline. By August 5, 2003, the price of Constar stock fell to $5.25 per share. 211. Two weeks later, on August 14, 2003, Constar finally admitted that its financial position was not as previously stated, when it issued a press release entitled “Constar International Inc. To Recognize Goodwill Impairment.” In pertinent part, Constar stated: Constar International Inc. today reported that it expects to record a non-cash charge to earnings for the second quarter of 2003 to reflect the impairment of goodwill under FAS 142. Due to the trading price 55 Case 2:03-cv-05020-EL Document 58 Filed 06/18/2004 Page 57 of 63 of the Company's common stock and other factors, the Company has determined that a goodwill impairment exists. The Company is curr ently assessing the potential impact of the impairment, and while the assessment is not yet complete, the Company expects that the impairment charge will be material. As a result, the Company has delayed filing its quarterly report on Form 10-Q for the second quarter of 2003 until the assessment is completed. The Company expects to file its quarterly report on or before August 19, 2003. 212. Subsequently, Constar acknowledged that it would take a $183 million charge in the second quarter of 2003 to write- off this impaired goodwill. 213. On September 5, 2003, the Philadelphia Inquirer reported that Constar was closing its Reserve, Louisiana and Birmingham, Alabama facilities, further confirming the impact of the conditions that were in existence at the time of the IPO. This Philadelphia Inquirer article explained: “Contributing to the poor financial results are the losses of at least two significant customers. Also, Constar agreed to price reductions to secure contract extensions with PepsiCo Inc. Constar expected the lower prices to lead to higher volumes, which failed to materialize.” 214. The material false and misleading statements and material omissions contained in Constar’s Registration Statement caused Constar stock to trade at artificially inflated prices. On September 5, 2003, when this lawsuit was filed, Constar’s stock closed at $5.20 per share - a more than 65% decline from its $12 per share IPO price. This lawsuit was filed on behalf of Plaintiffs and other similarly situated Constar common stock purchasers who paid artificially inflated prices for Constar common stock pursuant or traceable to the Registration Statement and suffered significant damages as a result. COUNT I Against All Defendants (except Crown) for Violation of Section 11 of the Securities Act 215. Plaintiffs repeat and reallege each and every allegation contained above as if fully set forth herein. This Count is asserted against Constar, the Underwriter Defendants, and the Individual Defendants for violations of Section 11 of the Securities Act, 15 U.S.C. §77k. 56 Case 2:03-cv-05020-EL Document 58 Filed 06/18/2004 Page 58 of 63 216. Plaintiffs and the members of the Class purchased Constar common stock issued pursuant to the Registration Statement filed by the Company with the SEC and declared effective by the SEC on November 14, 2002. 217. Each of the Defendants named herein is liable because the Registration Statement/Prospectus was materially false and misleading; contained untrue statements of material fact; omitted to state material facts necessary to make the statements made in the registration statement, under the circumstances in which they were made, not misleading; and failed to disclose material facts. 218. The Company is the registrant for the IPO and filed the Registration Statement. Constar is the “issuer” of the common stock sold in the IPO as defined in Section 11(a)(5) of the Securities Act. As the issuer, Constar is liable to Plaintiffs and the members of the Class for the misstatements in, and the omissions from, the Registration Statement. 219. The Individual Defendants signed the Registration Statement and otherwise caused it to be prepared, filed with the SEC, and circulated to the public. Each of the Individual Defendants is liable to Plaintiffs and the members of the Class as a “person who signed the registration statement” as defined in Section 11(a)(1) of the Securities Act. 220. The Individual Defendants were directors and/or officers of Constar when the Registration Statement became effective. Each of the Individual Defendants is liable to Plaintiffs and the members of the Class as a “director” as defined in Section 11(a)(2) of the Securities Act. 221. The Underwriter Defendants issued, caused to be issued, and participated in the issuance of the materially false and misleading Registration Statement. Each of the Underwriter Defendants acted as “underwriters” for the IPO, as that term is defined in Section 11(a)(5) of the Securities Act. 222. The Underwriter Defendants owed to the purchasers of Constar stock in the Offering, including Lead Plaintiffs and members of the Class, the duty to make a reasonable and diligent investigation of the statements contained in the Registration Statement, including the Prospectus, at the time it became effective, to assure that those statements were true and that there was no 57 Case 2:03-cv-05020-EL Document 58 Filed 06/18/2004 Page 59 of 63 omission to state material facts required to be stated in order to make the statements contained therein not misleading. 223. Each of the Individual Defendants and the Company owed to the purchasers of Constar stock in the Offering, including Lead Plaintiffs and members of the Class, the duty to make a reasonable and diligent investigation of the statements contained in the Registration Statement, including the Prospectus, at the time it became effective. This duty included performing an appropriate investigation to ensure that the statements contained therein were true, and that there were no omissions of material fact required to be stated in order to make the statements contained in the Registration Statement/Prospectus not misleading. 224. None of the Defendants named herein made a reasonable investigation or possessed reasonable grounds for the belief that the statements described above, which were contained in the Registration Statement, were accurate and complete in all material respects. 225. At the time Plaintiffs purchased Constar common stock in the IPO, they did not know nor did any member of the Class know, or by the reasonable exercise of care could have known, of the facts concerning the inaccurate and misleading statements and omissions alleged herein. 226. Plaintiffs and the members of the Class purchased Constar common stock prior to the date the Company made generally available to its securities holders, an earnings statement covering a period of at least 12 months beginning after the effective date of the Registration Statement. 227. In connection with the IPO and sale of the common stock, Defendants, directly or indirectly, used the means and instrumentalities of interstate commerce and the United States mail. 228. This action was brought within one year after the discovery of the untrue statements and omissions and within three years after the common stock was sold to the public in the IPO. 229. By reason of the foregoing, Defendants violated Section 11 of the Securities Act and are liable to Plaintiffs and the members of the Class, each of whom has been damaged by reason of such violations. 58 Case 2:03-cv-05020-EL Document 58 Filed 06/18/2004 Page 60 of 63 COUNT II Against the Individual Defendants and Defendant Crown for Violations of §15 of the Securities Act 230. forth herein. 231. The Individual Defendants were controlling persons of Constar within the meaning Plaintiffs repeat and reallege each and every allegation contained above as fully set of Section 15 of the Securities Act by virtue of their positions as senior officers and directors of Constar and their power to control Constar’s corporate actions and the transactions alleged herein, which give rise to Constar’s liability under the securities laws. In particular, the Individual Defendants directly controlled the contents and the issuance of the false and misleading Registration Statement/Prospectus. 232. Defendant Crown was a controlling person of Constar within the meaning of Section 15 of the Securities Act by virtue of its ownership of 100% of Constar’s stock until the IPO, and its power to control Constar’s corporate actions and the transactions alleged herein which give rise to Constar’s liability under the securities laws. In particular, Crown directly controlled the contents and of the Registration Statement/Prospectus. 233. None of the Individual Defendants nor Crown made a reasonable investigation or possessed reasonable grounds for the belief that the statements contained in the Registration Statement/Prospectus for the IPO were true and devoid of any omissions of material fact. Therefore, by reason of their status as controlling persons of the Company, as alleged herein, pursuant to Section 15 of the Securities Act, each of these Defendants is liable jointly and severally with and to the same extent that Constar is liable to Plaintiffs and the members of the Class as a result of the wrongful conduct alleged herein. PRAYER FOR RELIEF WHEREFORE, Plaintiffs on their own behalf, and on behalf of the other members of the Class, pray for judgment as follows: A. Declaring this action to be a proper class action, certifying plaintiff as the Class representative and its counsel as Class counsel; 59 Case 2:03-cv-05020-EL Document 58 Filed 06/18/2004 Page 61 of 63 B. Declaring and determining that the Defendants violated the federal securities laws by reason of their conduct as alleged herein; C. Awarding money damages against the Defendants, jointly and severally, in favor of the Plaintiffs and the other members of the Class for all losses and injuries suffered as a result of the acts and transactions complained of herein, together with pre-judgement interest on all of the aforesaid damages which the Court shall award from the date of said wrongs to the date of judgment herein at a rate the Court shall fix; D. Awarding Plaintiffs their costs and expenses incurred in this action, including reasonable attorneys’, accountants’, and experts’ fees; and E. Awarding such other relief as may be just and proper. JURY DEMAND Plaintiffs hereby demand a trial by jury. Dated: June 17, 2004 LAW OFFICES BERNARD M. GROSS, P.C. /s/ Deborah R. Gross Validation No. DG639 _______________________________________ Deborah R. Gross, I.D. No. 44542 1515 Locust Street, Second Floor Philadelphia, PA 19102 Telephone: (215) 561-3600 Liaison Counsel for Lead Plaintiffs and the Class BERNSTEIN LIEBHARD & LIFSHITZ, LLP Sandy A. Liebhard Jeffrey M. Haber Timothy J. MacFall Stephanie M. Beige 10 East 40th Street, 22nd Floor New York, NY 10016 Telephone: (212) 779-1414 60 Case 2:03-cv-05020-EL Document 58 Filed 06/18/2004 Page 62 of 63 LERACH COUGHLIN STOIA & ROBBINS LLP Steven W. Pepich Brian O. O’Mara 401 B Street, Suite 1700 San Diego, California 92101 Telephone: (619) 231-1058 Counsel for Lead Plaintiffs and the Class 61 Case 2:03-cv-05020-EL Document 58 Filed 06/18/2004 Page 63 of 63 CERTIFICATE OF SERVICE I, Robert P. Frutkin, hereby certify that a true and correct copy of the foregoing Consolidated Amended Class Action Complaint was served by hand delivery to the below listed counsel of record on this 17th day of June 2004: Michael L. Kichline, Esquire Dechert LLP 4000 Bell Atlantic Tower 1717 Arch Street Philadelphia, PA 19103-2793 Attorney for Defendants ROBERT P. FRUTKIN 62