On June 12, 2018, Cohen Milstein, on behalf of IBEW Local 98 Pension Fund, Lead Plaintiff, and other purchasers of Liberty Tax stock, filed a putative securities class action against Liberty Tax (NASDAQ: TAX), the third largest tax preparation franchise in the United States, for violations of the Securities Exchange Act related to the reckless use of the company by John T. Hewitt, co-founder and former CEO and Chairman of the Board, for his personal sexual exploits, thereby creating a hostile work environment and exposing the company to financial risk and liability.
Case Background
Plaintiffs allege that Hewitt and Chief Financial Officer Kathleen E. Donovan, during the class period of October 1, 2013 through and including February 23, 2018, made a series of false and misleading statements and omissions of material fact concerning the effectiveness of the company’s internal controls and its active efforts to root out fraud and other misconduct so as to conceal from investors the company’s ongoing funding of Hewitt’s reckless conduct that placed the company at risk, permitted the loss of millions of dollars of company funds, and created a detrimental “Tone at the Top” and hostile work environment that reduced productivity and weakened the company’s financial condition.
Specifically, Plaintiffs allege, among other things, that Hewitt, as the CEO and Chairman who was the sole holder of Class B voting stock, treated the company as his “playground,” with the company knowingly condoning and footing the bill for his reckless escapades that included dating countless employees; routinely having sex with employees in his office; using company resources to further his romantic relationships by, among other things, directing the company to hire countless of his girlfriends’ friends and relatives to “made up” positions; billing the company for lavish vacations with his girlfriends; and exposing the company to significant financial risk and liability due to hostile work environment charges.
During this period, the company’s annual net income never exceeded $21.98 million and dropped to as low as $8.69 million, and along with other factors outlined below, led to a steady stream of stock-price declines.
On September 5, 2017, at the recommendation of outside counsel, Skadden, Arps, Slate, Meagher & Flom, LLP, which was hired to investigate a complaint made against Hewitt, the Board removed Hewitt as CEO, but did not disclose to the market the true reason for Hewitt’s termination or the existence of the Skadden investigation report, known as the “Skadden Report.”
Within two months of Hewitt’s ouster, the company was plunged into turmoil as Hewitt began to wield his Class B control and investors began to learn the scope of what Defendants concealed from them.
On November 7, 2017, after the market closed, the company abruptly announced the resignation of its CFO, Kathleen E. Donovan. Company share prices dropped 16.98% the next day, dropping from a close of $13.25 per share on November 7 to close at $11.00 per share on November 8. Two days later, on November 9, 2017, The Virginian-Pilot released a bombshell report titled “Ex-CEO of Liberty Tax likely had sex in his office and dated employees, report says”, containing salacious details from the Skadden Report, which had apparently been leaked.
Within days of information from the Skadden Report becoming public, Hewitt exercised his Class B common stock rights to elect two new directors to the Board, leading to a landslide of director and senior executive resignations, as well as the December 11, 2017 resignation of Liberty Tax’s accounting firm, KPMG LLP, plunging shareholder confidence and shares further.
On February 21, 2018, the company announced the resignation of its sole remaining Class A board member, and upon further aftermarket news and SEC filing on February 23, 2018, announced the appointment of its second CEO within six months and other new senior executives, as well as the departure of yet other senior executives, including the General Counsel, causing shares to plunge again, closing at $8.28 per share.
Lead plaintiff and members of the class seek recovery of damages sustained by them.
The case name is: In re Liberty Tax, Inc. Securities Litigation, Case No. 2:17-CV-07327-NGG-RML, U.S. District Court, Eastern District of New York.