Professor Alan Palmiter quoted in Bloomberg Businessweek regarding potential class-action lawsuit involving Furniture Brands International

Furniture Brands International Inc. is facing a class-action lawsuit from investors who accuse the company and its management of deliberately misleading them about its financial status prior to entering Chapter 11 bankruptcy protection Sept. 9.

The lawsuit was filed in the Eastern District of Missouri for the U.S. District Court. It was filed against the company; Ralph Scozzafava, its chairman and chief executive; and Vance Johnston, its chief financial officer.

The lawsuit seeks to cover investors who bought Furniture Brands stock between Feb. 13 (share price $10.57) and Aug. 5 (share price $2.21).

On Aug. 6, the company said in its second-quarter earnings report that it was facing liquidity issues that could require significant cost-reduction efforts including the potential sales of non-core or underperforming assets. The share price dropped 38 percent, or by 84 cents, to $1.37 on that news.

During the class-action period, the company conducted a 1-for-7 reverse stock split, which raised the share price at that time from 99 cents to $6.93, but also reduced the number of shares outstanding from 56.4 million to about 8.06 million.

The plaintiff, Theodore Pizanis of Clayton, Mo., said the defendants “fraudulently inflated FBN’s stock price during the class period by disseminating materially false and misleading statements, and failing to disclose material information known or recklessly disregarded by defendants, concerning the company’s true financial condition, operation and business prospects.”

In particularly, the plaintiff accuses Furniture Brands and its management of not fully disclosing the weakness in its wholesale business, that its trade name were being carried with an inflated value and it was having severe liquidity issues.

“As a result, the plaintiff and other class members have suffered significant losses and damages. The timing and magnitude of FBN’s common stock price decline negates any inference that the loss suffered by plaintiff and the other class members was caused by changed market conditions, industry factors or company-specific facts unrelated to the defendants’ fraudulent conduct.”

Furniture Brands officials declined to comment Wednesday on pending litigation.

Furniture Brands was in the early 2000s the largest U.S. furniture manufacturer at $2.2 billion in annual sales, primarily driven by N.C.-based divisions Broyhill Furniture Industries Inc., HDM Furniture Industries Inc. and Thomasville Furniture Industries Inc.

However, it had seen eight years of revenue declines, according to John Baugh, an analyst with Stifel Nicolaus. In the past 12 years, Furniture Brands has eliminated at least 8,860 jobs in North Carolina, including at least 2,874 in the Triad, in pursuit of lower labor costs in Asia that have not contributed to increased sales.

On Oct. 2, a U.S. Bankruptcy Court judge approved a $280 million stalking-horse bid for the company’s assets by KPS Capital Partners. A stalking horse typically sets the floor for a potential auction bid for assets.

Gauging by other class-action lawsuits filed by investors involving Triad companies, the Furniture Brands plaintiffs have a stiff legal task ahead.

According to a July 24 report on class-action lawsuits by Cornerstone Research and Stanford Law School, “a larger percentage of cases are being dismissed compared with previous years.” Dismissals have risen from 50 percent in 2008 to 53 percent in 2009 and 56 percent in 2010.

Alan Palmiter, associate dean of graduate programs at Wake Forest School of Law, said the biggest challenge for class-action plaintiffs in federal securities cases is proving management deliberately kept news about deteriorating financial conditions from investors.

“It’s one thing to show management was overly optimistic about their financial status, and another to prove they were committing fraud,” Palmiter said. He said he wasn’t sure if Furniture Brands’ bankruptcy status would sway a judge to side with the plaintiff.

Read the full story here.