Corporate Governance

Multiple Class Action Lawsuits Filed Against Crocs

By Adam Aldrich

Since Crocs, Inc. ("Crocs") reported its third quarter earnings at the end of October, 2007, at least three shareholder lawsuits have been filed against the company. The complaints charge Crocs and certain of its officers and directors with violations of the Securities Exchange Act of 1934. More specifically, Sections 10(b) and 20(a) thereof, and Rule 10b-5.

Crocs makes colorful resin based shoes for various leisure and sporting activities. From its humble beginnings in Boulder, Colorado, Crocs' popularity has grown rapidly, both domestically and internationally. However, Crocs has had to address market concerns that its shoes are more than a fad. To grow the market for Crocs products and stave off concerns from the market, Crocs has diversified its product base, introducing new types of shoes, clothing, and accessory lines.  Information and press releases on Crocs can be found here. 

During the first and second quarters of 2007, Crocs’ stock price hovered in the low to mid-twenties. By early summer, however, Crocs' stock price steadily increased. On July 26, 2007, Crocs issued a press release announcing its financial results for the second quarter of 2007. Ronald R. Snyder, Crocs’ Chief Executive Officer, noted “robust demand for our expanded footwear collection and growing accessory categories,” and “rapid expansion and significant growth for Crocs.” On September 27, 2007, Mr. Snyder made statements at Piper Jaffray’s Second Annual London Consumer Conference that Crocs’ was “creating a very sophisticated global infrastructure” in different markets around the world. Based on these statements, and other positive press, Crocs’ stock price continued to grow, reaching its peak of $74.75 on October 31, 2007. 

On October 31, Crocs released its third quarter earnings statement and convened a conference call where it revealed distribution problems in Europe and Japan, costing the company a total of $30 million in lost sales. In addition, Crocs revealed lost sales and seasonal downturn had caused a significant increase in inventory. As a result of the distribution problems, Crocs’ inventories increased to $195.3 million for the third quarter, as compared to $49.1 million for the third quarter of 2006. By the time markets closed on November 1, 2007, Crocs’ stock had dropped 36 percent to $47.74. Soon thereafter, complaints from notable private plaintiff firms began to be filed in the United States District Court for the District of Colorado.

According to the complaints, Crocs and certain of its officers and directors issued materially false and misleading statements that misrepresented, and failed to disclose: (1) distribution problems in Europe and Japan; (2) products showing signs of “seasonality;" and (3) inventory levels rising due to slow sales. As a result of the allegedly material false and misleading statements and failures to disclose, Crocs’ stock traded at artificially inflated prices. Furthermore, the lawsuits allege that Crocs’ officials did not have a reasonable basis on which to make their positive statements about Crocs and its prospects. Finally, the complaints allege that Crocs insiders knew about the non-public information and sold off around 963,000 shares for $64 million.

Crocs' stock price has not recovered since the October 31, 2007, press release and at the time of this article, was trading at or around $29.00. 

The Class Action Complaints can be found on the DU Corporate Governance website.

Full post as published by The Race to the Bottom on January 23, 2008 (boomark / email).