UNITED STATES DISTRICT COURT EASTERN DISTRICT OF TEXAS...

Case 6:13-cv-00736-KNM Document 72 Filed 07/18/14 of 40 PageID #: 1488

UNITED STATES DISTRICT COURT

EASTERN DISTRICT OF TEXAS

TYLER DIVISION

ALAN B. MARCUS, Individually and on Behalf of All Others Similarly Situated,

Plaintiff,

vs.

J.C. PENNEY COMPANY, INC., et al.,

Defendants.

Civil Action No. 6:13-cv-00736 (Consolidated)

CLASS ACTION

CONSOLIDATED COMPLAINT FOR VIOLATION OF THE FEDERAL SECURITIES LAWS

956945_1 956945_1


Lead Plaintiff National Shopmen Pension Fund (“Lead Plaintiff”) alleges the following based

upon personal knowledge as to itself and its own acts, and upon an investigation conducted by and

through Lead Plaintiff’s attorneys, which included, among other things, a review of Securities and

Exchange Commission (“SEC”) filings by J.C. Penney Company, Inc. (“JCPenney” or the

“Company”), Company releases, conference calls, public statements issued by defendants, media

reports, analyst reports and consultation with persons familiar with JCPenney’s business. Lead

Plaintiff believes substantial additional evidentiary support will likely exist for the allegations set

forth herein after a reasonable opportunity for discovery.

INTRODUCTION

1. This is a securities fraud class action on behalf of all purchasers of JCPenney

common stock between August 20, 2013 and September 26, 2013, inclusive (the “Class Period”)

against JCPenney, its Chief Executive Officer (“CEO”) and its former Chief Financial Officer

(“CFO”) for making materially false and misleading statements in violation of §10(b) and §20(a) of

the Securities Exchange Act of 1934 (the “1934 Act”) and SEC Rule 10b-5 promulgated thereunder.

2. JCPenney is a publicly traded holding company whose principal operating subsidiary

is the well-known department store J.C. Penney Corporation Inc. JCPenney’s business consists of

selling merchandise and services, including apparel and footwear, accessories, jewelry, home

furnishings and beauty products, to consumers through its brick-and-mortar stores and jcp.com .

During the Class Period, the Company operated over 1,000 stores nationwide.

SUMMARY OF THE ACTION

3. During the Class Period, JCPenney and its senior insiders falsely assured investors

that, heading into the crucial back-to-school and holiday seasons, the Company’s inventory was

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adequate and its liquidity sufficient to sustain the Company through the end of fiscal year 2013.1 For

example, on August 20, 2013, JCPenney announced that, “[g]iven the Company’s current cash

position, along with the undrawn portion of its credit facility, the Company expects to end the year

with in excess of $1.5 billion in overall liquidity.” Later that same day, during a conference call with

investors, defendant Myron E. Ullman, III (“Ullman”), the Company’s CEO, reiterated that “we

expect to have $1.5 billion of available liquidity at year-end.” The Company’s CFO, Kenneth H.

Hannah (“Hannah”), likewise explained that same day that, “[t]he total liquidity available to the

Company is expected to be in excess of $1.5 billion at year-end given the improvements we are

experiencing in the business,” and that “we are not assuming that we need any additional financing.”

The market responded favorably to defendants’ August 20, 2013 statements, sending JCPenney’s

stock price up 6% over the prior day’s closing price.

4. On September 10, 2013, defendants again reassured investors about JCPenney’s

liquidity, when defendants Ullman and Hannah caused the Company to file its Form 10-Q with the

SEC, which stated that “[f]or the remainder of 2013, we believe that our existing cash and cash

equivalents will be adequate to fund our capital expenditures and working capital needs.”

5. As a result of defendants’ Class Period statements, JCPenney’s stock traded at

artificially inflated prices, reaching a Class Period high of $14.65 per share on September 9, 2013.

As the market would learn just two weeks later, however, defendants’ statements were materially

false and misleading when made. The defendants knew, but concealed from the market, that

JCPenney was facing a liquidity crisis and required a cash infusion of almost $1 billion to enable it

to continue to operate through the crucial back-to-school and holiday seasons. Defendants concealed

the true state of JCPenney’s affairs in order to maintain the false impression that the Company’s

1 JCPenney’s fiscal quarters are abbreviated by quarter and year. Thus, “2Q13,” for example, represents the second quarter of fiscal year 2013. JCPenney’s 2013 fiscal year began on February 3, 2013 and ended on February 1, 2014.

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turnaround was proceeding apace and to avoid exacerbating existing concerns by suppliers and their

factors about JCPenney’s liquidity, as the suppliers’ and factors’ confidence was fundamental to the

Company’s ability to continue to operate throughout fiscal 2013 .2

6. The market began to learn the truth about defendants’ deception in late September

2013. After the market closed on September 24, 2013, a Goldman Sachs analyst reported that

JCPenney could face liquidity problems in 3Q13. When the market opened on September 25, 2013,

JCPenney stock responded by declining 15% from $11.62 per share to an intra-day low of $9.93 per

share.

7. Knowing that JCPenney was in the midst of finalizing a massive equity share offering

that would be announced the next day, defendants took immediate steps to reinflate JCPenney’s

flagging stock price. For example, during a Sterne, Agee & Leach Inc. (“Sterne Agee”) conference

on September 25, 2013, defendant Ullman unequivocally told attendees that JCPenney would end

the year with sufficient liquidity and that he “[did] not see conditions for the rest of the year where

[JCPenney] would need to raise liquidity.” Thereafter, JCPenney’s stock price began to recover

from its midday lows, closing at $10.12 per share.

8. The next morning, on September 26, 2013, defendants continued their effort to inflate

JCPenney’s stock price by announcing they were “pleased with [the Company’s] progress thus far in

[its] turnaround efforts” and the Company was “starting to see greater predictability in its

performance across many areas.” Defendants’ efforts paid off, as JCPenney’s stock price rose again,

closing at $10.42 per share, up 3% from the prior day’s close.

2 Factors provide debt financing to suppliers. By selling accounts receivable to a factoring company at a discount, a supplier generates the cash necessary to operate its business. Factoring companies increase their required discount rate – or end their financing arrangement altogether – when they perceive an increased risk that the retailer owing on underlying outstanding accounts payable may not be able to pay timely, or at all, for a supplier’s merchandise.

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9. Just a few hours later, after the market closed on September 26, 2013, JCPenney

stunned investors by announcing that, contrary to defendants’ repeated representations as recently as

that very morning, JCPenney would in fact be raising capital via an $800 million offering of its

common stock. As the truth about JCPenney’s operations and liquidity reached the market, the

artificial inflation dissipated and JCPenney’s stock declined 13% on trading volume almost 1,000%

greater than the average daily volume during the Class Period, causing significant harm to Lead

Plaintiff and the putative class.

JCPenney

$15 ust 20. 2013 - Seøtember 26. 2013

C., 0

.c in

$14 -

$13

\

September 26 2013

August 20, 2013 September 24, 2013 Offering $12 JCPenney 2Q13

$11

Goldman Report JCP Results August 26, 2013 needs larger liquidity

Defendants enter into buffer 30-Day Lockup

September 25, 2013: - Stock drops 15k

September ;::: 27 2013: Stock drops

...................................... . 13%

$10 -

$9 August 26. 2013 - September 25, 2013: 30-Day Lockup

Class Period

$8 08/09/2013

08/27/2013

09/13/2013

10/01/2013 08/19/2013

09/05/2013

09123/2013

JURISDICTION AND VENUE

10. This Court has jurisdiction over the subject matter of this action pursuant to 28 U.S.C.

§1331 and §27 of the 1934 Act (15 U.S.C. §78aa) as the claims asserted herein arise under and

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pursuant to §§10(b) and 20(a) of the 1934 Act (15 U.S.C. §§78j(b) and 78t(a)) and SEC Rule 10b-5

promulgated thereunder (17 C.F.R. §240.10b-5).

11. Venue is proper in this District pursuant to §27 of the 1934 Act and 28 U.S.C.

§1391(b).

12. In connection with the acts and conduct alleged in this complaint, defendants, directly

or indirectly, used the means and instrumentalities of interstate commerce, including, but not limited

to, the United States mails, interstate telephone communications and the facilities of the national

securities exchanges and markets.

PARTIES

13. Lead Plaintiff, the National Shopmen Pension Fund, purchased JCPenney common

stock at artificially inflated prices during the Class Period and suffered damage as a result of

defendants’ alleged misconduct, as detailed in the Certification previously filed, (Dkt. No. 29-2) and

incorporated herein.

14. Defendant JCPenney’s common stock is listed and widely traded on the New York

Stock Exchange (“NYSE”), an efficient market, under the ticker JCP. As of August 20, 2013, there

were approximately 220 million outstanding shares of JCPenney common stock held by thousands

of record holders.

15. Defendant Myron E. Ullman, III has served as the CEO and a director of JCPenney

since April 2013. Defendant Ullman previously served as Chairman of the Board of Directors from

2004 to 2012 and CEO from 2004 to November 2011. As CEO, defendant Ullman spoke on

JCPenney’s behalf in releases, conference calls and SEC filings. Pursuant to §906 of the Sarbanes-

Oxley Act of 2002, 18 U.S.C. §1350, defendant Ullman certified the Company’s Form 10-Q filed

with the SEC on September 10, 2013.

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16. Defendant Kenneth H. Hannah served as Executive Vice President, CFO and a

director of JCPenney from May 2012 through March 24, 2014, when he left the Company. As CFO

during the Class Period, defendant Hannah spoke on JCPenney’s behalf in releases, conference calls,

and SEC filings. Pursuant to §906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. §1350, defendant

Hannah certified the Company’s Form 10-Q filed with the SEC on September 10, 2013.

17. Defendants Ullman and Hannah are referred to herein as the “Individual Defendants.”

18. During the Class Period, the Individual Defendants, as senior executive officers

and/or directors of JCPenney, were in possession of confidential and proprietary information

concerning the Company, its operations, liquidity, business prospects, and overall financial

condition. By reason of their positions within the Company, the Individual Defendants obtained, had

access to and/or were in possession of material, adverse nonpublic information concerning JCPenney

via internal corporate documents and communications with other corporate officers and employees,

attendance at management and/or Board of Directors meetings (and committees thereof), and via the

reports, presentations and other information provided to them in connection therewith. Because of

their possession of such information, the Individual Defendants knew or recklessly disregarded that

the adverse facts specified herein had not been disclosed to, and were being concealed from, the

investing public.

19. As senior executive officers and controlling persons of a publicly traded company

whose common stock was and is registered with the SEC pursuant to the 1934 Act, and was and is

traded on the NYSE and governed by the federal securities laws, the Individual Defendants had a

duty to promptly disseminate accurate and truthful information regarding JCPenney’s operations,

business, financial statements, and financial metrics such as earnings and liquidity, and to correct

any previously issued statements that had become materially misleading or untrue, so that the market

price of JCPenney common stock would be based upon truthful and accurate information.

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Defendants’ materially false statements and omissions during the Class Period violated these

requirements and obligations.

OVERVIEW OF JCPENNEY’S RETAIL OPERATIONS AND FINANCES

20. JCPenney generates revenue by selling merchandise in its department stores and

through its website at jcp.com . Like most retailers, JCPenney does not manufacture its own

merchandise. Rather, the items JCPenney sells are purchased from a vendor or a supplier. 3

21. When JCPenney acquires merchandise from its suppliers, it does not pay for the order

when placed or even upon delivery. Instead, JCPenney’s merchandise is purchased through “open

accounts,” which the Company establishes through contracts with its suppliers. These contracts

require a supplier to deliver goods to JCPenney and for JCPenney to pay for those goods within a

certain specified time period, usually 30 to 45 days after delivery. In some transactions, suppliers

ship merchandise FOB (or freight-on-board shipping point), requiring JCPenney to have previously

placed a letter of credit with the supplier or its factor or broker. In such arrangements, the letter of

credit is drawn down in connection with the shipment of merchandise and at some point must be

replenished to support future purchases. These letters of credit reduce available borrowing under the

Company’s revolving credit facility (“revolver”) by the letters’ face value.

22. From an accounting perspective, when a supplier delivers goods to JCPenney, the

lesser of the cost or market value of those goods (usually the cost) is immediately recognized as

inventory on the asset side of JCPenney’s balance sheet. And, because the goods are not paid for at

the time of delivery, the cost of those goods is also recognized as an accounts payable on the liability

side of the balance sheet. Once JCPenney actually pays for the goods subsequent to delivery, the

3 Vendors typically provide a defined product or brand. Suppliers, by contrast, typically provide a product under the retailer’s name or brand. For example, JCPenney’s St. John’s Bay branded clothes are provided by a supplier. As used herein, “suppliers” refers to vendors and suppliers collectively.

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Company’s cash assets and its accounts payable decrease by the invoice amount while inventory

correspondingly increases by that same amount.

23. The challenge for any retailer like JCPenney is to strike the necessary balance

between inventory and expected sales. Inventory levels and mix anticipate customer demand over a

range of different products and times. If a retailer purchases too much inventory or cannot generate

sufficient sales, the retailer will still owe suppliers for unsold merchandise. If, however, a retailer’s

inventory levels or mix are not adequate to meet customer demand, the retailer will generate lower

sales revenue and will lose customers who cannot find the merchandise they desire.

24. JCPenney monitors its conversion rate, which compares JCPenney’s sales to the level

of customer traffic in its stores. If traffic is high but sales are relatively low, this indicates that the

retailer needs to adjust its inventory as shoppers are not finding suitable products. Like any retailer,

JCPenney’s success hinges on quickly remedying inventory deficiencies because customers who fail

to find what they are looking for more than once are unlikely to return. Thus, to achieve a balance

between inventory supply and customer demand and allow JCPenney to continue to operate

successfully, JCPenney’s inventory must correlate to the Company’s expected sales over the next

quarter or so.

25. In addition to managing inventory in relation to expected sales, JCPenney and the

Individual Defendants actively monitored and managed the timing of inventory acquisition. The lag

between when JCPenney is obligated to pay for inventory and when it receives revenue from

merchandise sales is estimated by a financial metric called the cash conversion cycle, or “CCC.”

The CCC reflects, on average, the number of days between when JCPenney must pay for its

inventory and when JCPenney actually receives cash from the sale of that inventory. Historically,

JCPenney’s CCC has consistently averaged between 30 and 70 days, suggesting that JCPenney pays

for its inventory about a month or two before it receives sales revenue for that same merchandise.

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This reality is not an issue when JCPenney is selling merchandise at a profit and successfully

managing the timing and quantity of its inventory purchases. But, by the beginning of the Class

Period, the Company lacked adequate inventory for fiscal year 2013, its liquidity was constrained

and it was posting unusually low profit margins due to excessive markdowns.

26. JCPenney bridges the time gap between outgoing merchandise payments and

incoming sales revenue via existing liquidity, that is, its cash reserves and, if necessary, its credit

lines.4 Because JCPenney was experiencing financial and operational distress during its turnaround

efforts and throughout 2013, the Company’s liquidity was a key measure of the Company’s

operating success and therefore a primary focus of defendants and the financial markets alike. If the

Company possessed adequate liquidity to acquire the necessary inventory ahead of the back-to-

school and holiday seasons, JCPenney could continue operating successfully through fiscal year-end

2013. Without sufficient existing liquidity or access to additional capital, JCPenney would face a

financial crisis. JCPenney’s liquidity, then, became the lens through which the market viewed

JCPenney’s success and viability.

BACKGROUND TO THE CLASS PERIOD

27. Ullman’s initial tenure as CEO began in 2004. Over the next three years, he

successfully guided the Company, driving the stock price to an all-time high. This success faded

during the financial crisis of 2007-2008. But, even as competing retailers recovered from the

recession, JCPenney lagged behind. For example, between 2004 and 2011, Dillard’s’ and

4 Throughout the Class Period, JCPenney’s liquidity consisted of the cash on its balance sheet and borrowing via the Company’s revolver, which functions similar to a corporate credit card from which JCPenney could borrow from and pay down, subject to a credit limit. However, unlike most credit card balances, JCPenney’s revolver borrowings were collateralized by its inventory and accounts receivable. JCPenney reportedly needed to maintain a minimum of $300-500 million in liquidity to fund its day-to-day operations.

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Nordstrom’s stock prices had more than doubled, while over the same period, the Company’s stock

traded in the same high $30 price range it had traded in 2004.

28. By 2011, JCPenney’s Board of Directors wanted a change and hired former Apple

executive Ron Johnson (“Johnson”) as JCPenney’s CEO. Johnson had successfully managed

Apple’s retail stores under Steve Jobs. In January 2012, the Company revealed its transformation

plans with Johnson’s “[b]lueprint to make jcpenney America’s Favorite Store.” As defendant

Hannah noted in March 2013, Johnson “changed everything in the Company but the address.”

Johnson introduced new merchandise and brands, eliminated traditional brands such as St. John’s

Bay and Southpole (which had generated well over $1 billion in sales annually), ended promotions,

implemented a new pricing strategy, changed the physical structure and presentation of every store,

and changed JCPenney’s corporate identity, including its logo.

29. Johnson’s transformation, however, quickly stalled as costs skyrocketed and

JCPenney’s core customer base – which the Company had successfully served for more than 100

years – rejected the new brands and sent sales plummeting to historic lows. Credit Suisse called the

Company’s fiscal 2012 year-end results a “beyond worst case scenario.” J.P. Morgan analysts

concurred, stating that JCPenney’s fiscal year 2012 results “arguably could not have been worse.”

30. JCPenney’s condition continued to deteriorate in 2013. By April 2013, it was widely

acknowledged that Johnson’s failed transformation had placed the Company in jeopardy. On April

8, 2013, the Board of Directors rehired defendant Ullman to replace Johnson as CEO and right a

listing ship.

31. Defendant Ullman’s initial task was to quickly stabilize the Company’s finances.

Thus, on April 15, 2013, JCPenney borrowed $850 million from its credit revolver to enhance its

liquidity. About a month later, JCPenney borrowed $2.25 billion via a five-year loan (“Term Loan”)

syndicated by Goldman Sachs Bank USA. As one analyst noted, JCPenney secured the Term Loan

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with “everything but the kitchen sink.” Thus, in a matter of four weeks, JCPenney borrowed

approximately $3 billion, doubling the Company’s total debt and encumbering substantially all of its

assets as collateral.

32. Just ten weeks later, half of the $3 billion was already gone. And, by July 2013,

reports began surfacing that JCPenney’s suppliers and their factors were losing faith that the

Company could pay for its massive re-accumulation of inventory. On July 31, 2013, Reuters

reported that one such factor, CIT Group, “abruptly stopped funding some future [merchandise]

shipments to struggling retailer [JCPenney], just months before the all-important holiday season.”

JCPenney’s stock dropped more than 10% on this news. Recognizing the material risk this

information posed to its business, the Company adamantly denied anything was amiss, affirmatively

issuing a release the following day:

J. C. Penney Company, Inc. (NYSE: JCP) said that a news report which appeared yesterday is untrue and that it has been told so directly by CIT, the subject of that report. Contrary to the news report, CIT continues to factor and support deliveries from jcpenney suppliers. In fact, jcpenney continues to have the support of all of its key vendors, who have maintained their shipments to the Company.

33. CIT Group was not the only factor concerned by JCPenney’s financial condition. On

August 13, 2013, the Associated Press reported that another factor was tightening its terms with

JCPenney’s suppliers, stating:

Michael Cipriani of Rosenthal & Rosenthal, a lender in the clothing industry, said that last week it put Penney’s suppliers on a short leash, financially backing orders for Penney for just two to three weeks out. The move was intended to limit its exposure until it can see how Penney succeeds with its turnaround efforts.

* * *

That decision was made based on financial information and the boardroom warfare taking place, Cipriani said.

* * *

If vendors and factors become wary of a store’s creditworthiness, the retailer may have to pay suppliers cash upfront for goods, which can drain cash quickly.

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34. Thus, heading into the Class Period, JCPenney’s liquidity and inventory were subject

to heightened scrutiny from suppliers, factors, analysts and investors.

DEFENDANTS’ FALSE AND MISLEADING STATEMENTS DURING THE CLASS PERIOD

2Q13 Earnings Release and Conference Call

35. The Class Period begins on August 20, 2013, when defendants announced the

Company’s 2Q13 financial results and noted that JCPenney’s “[c]ash and cash equivalents were

$1.535 billion at the end of the quarter,” and emphasized that “ [g]iven the Company’s current cash

position, along with the undrawn portion of its credit facility, the Company expects to end the year

in excess of $1.5 billion in overall liquidity .” The release continued:

Strengthening its Financial Position : During the quarter, the Company bolstered its financial position by entering into a $2.25 billion senior secured term loan. The Company ended the quarter with $1.535 billion in cash and cash equivalents. Taking into account additional funds available under the credit facility, the Company’s total available liquidity is $1.85 billion. Total use of cash is expected to be down substantially in the second half of the year, compared to the first half, as a result of efforts to stabilize the business and reduce capital expenditures. As noted above, the Company expects to end the year in excess of $1.5 billion in overall liquidity .

36. With respect to its supplier relationships, JCPenney and the Individual Defendants

reassured the markets that the Company “continues to receive strong support from its suppliers .”

37. On August 20, 2013, JCPenney also hosted a conference call led by defendants

Ullman and Hannah. During his opening remarks, defendant Ullman again emphasized the strength

of JCPenney’s supplier relationships, stating that “our supplier relationships remain as strong as

ever .” Likewise, defendant Hannah also stated that JCPenney had “ continued support from all of

our suppliers and partners .”

38. Defendant Ullman also addressed the liquidity issue, reiterating that:

We obviously shared with [suppliers] the significant financial support we arranged with Goldman Sachs, which we had put in place in order to make sure that

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we had sufficient liquidity to effectuate the turnaround. And as mentioned in our press release, we expect to have $1.5 billion of available liquidity at year-end .

39. Later in the call, to allay investors’ and suppliers’ concerns about the Company’s cash

burn and financial stability during its turnaround efforts and heading into the key back-to-school and

holiday seasons, defendant Hannah also confirmed that:

The financial actions we took in the quarter enable us to stabilize the business financially and provide us with the necessary resources to complete the turnaround. Given the Company’s current cash position, along with the undrawn portion of our credit facility, we expect to end the year with an excess of $1.5 billion in liquidity .

40. As to JCPenney’s inventory and whether the Company’s existing liquidity was

sufficient to address its inventory needs, defendant Hannah also continued:

Cash and cash equivalents in the quarter – second quarter of 2013 were $1.535 billion, an increase of $714 million from the end of the first quarter of 2013. Our merchandise inventory is $3.155 billion. We invested $357 million in inventory this quarter as we addressed the challenges we faced with respect to inventory in key basic items and private brands. Significant progress has been made and we are confident we will have inventory at appropriate levels throughout the store and online well in advance of the holiday season .

* * *

Our cash balance of $1.535 billion and the used portion of our credit facility provide the Company liquidity of $1.85 billion. The total liquidity available to the Company is expected to be in excess of $1.5 billion at year-end given the improvements we are experiencing in the business .

41. Given the importance of ensuring the Company maintained sufficient liquidity to

finance the necessary inventory build required for the upcoming back-to-school and holiday seasons,

several analysts asked defendants pointed questions on these topics:

(a) A Sterne Agee analyst asked defendant Hannah to expand on the Company’s

“expectations to end the year with . . . $1.5 billion in cash liquidity,” specifically asking about “the

buckets to get there in terms of where you expect inventory levels to finish?” 5 Defendant Hannah

5 The more inventory JCPenney was required to purchase in 3Q13, the larger the drain on the Company’s liquidity. Had JCPenney’s current inventory levels been sufficient going into the back-

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specifically responded “ we are very comfortable that the $1.5 billion liquidity is in line for year-

end .” The analyst redirected defendant Hannah to “touch on inventory,” to which he responded that

JCPenney “expect[s] to see that go up a little bit in Q3 and then that would reverse back in Q4”;

(b) Addressing inquiries by Imperial Capital and Guilford Securities analysts,

defendant Ullman made similar representations regarding the adequacy of JCPenney’s inventory,

confirming “we had to restock basics and sizes and that inventory is now in our assortment ” and

that “we have the inventory to do the business ”; and6

(c) As to liquidity, a JP Morgan analyst asked, “do you guys think that the

Company would need any outside liquidity injections going forward or are you good with what you

have longer term?” Defendant Hannah again responded that “ as we look through the end of the

year, the $1.5 billion of liquidity that we have projected we are not assuming that we need any

additional financing .”

42. Defendants’ August 20, 2013 statements were materially false and misleading when

made. The true facts, which were then known to or recklessly disregarded by defendants, were:

(a) That entering 3Q13, JCPenney’s inventory was substantially depleted in core

categories, including basics and sizes, and JCPenney lacked the inventory it needed “to do the

business.” In fact, defendant Ullman later admitted that “the biggest piece of the [3Q13] inventory

increase [was] our basics and sizes. We were depleted in those areas;”

to-school and holiday seasons as represented, it was realistic to state that its existing liquidity would have been sufficient for JCPenney to survive through fiscal year-end. If, however, there was a substantial inventory shortage that needed to be replenished in 3Q13, then JCPenney would necessarily run out of cash before fiscal year-end because the Company’s existing inventory payables were already at $1.276 billion as of August 3, 2013.

6 “Basics and sizes” refer to the essential clothes and shoes of person’s wardrobe, such as underwear, Dockers’ slacks, dress shirts and T-shirts.

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(b) That defendants concealed the acquisition of at least $600 million in inventory

during 2Q13 by delaying delivery until after the end of 2Q13 (August 3, 2013). The reason why

defendants did so was simple: if JCPenney had accepted delivery in 2Q13 of the $600 million worth

of undisclosed inventory ordered that same quarter, defendants would have been forced to reveal on

August 20, 2013, that JCPenney’s merchandise accounts payable exceeded JCPenney’s available

liquidity as of August 3, 2013. Thus, by scheduling this inventory delivery for after the end of

2Q13, defendants were able to: (1) obtain the requisite back-to-school inventory while concealing

the true magnitude of the Company’s merchandise accounts payable from disclosure in the

Company’s 2Q13 financial statements and its August 2013 public statements; and (2) secure time for

JCPenney to raise additional liquidity and avoid bankruptcy, as payment for inventory delivered

between August 4 and August 20, 2013, would not be due until late September 2013;

(c) That defendants were aware of the significant inventory build between August

4 and August 20, 2013, as automated email “flash sales” reports were made available to defendants

Ullman and Hannah every 30 minutes. These flash sales email reports contained, among other data,

information including sales by region, store and category, which sales information is pertinent to

JCPenney’s inventory acquisition process called open-to-buy (“OTB”) which process began at the

executive level when merchandise funding amounts were established. Because merchandise

acquisition materially impacts JCPenney’s available liquidity and its ability to generate sales, OTB

was closely monitored and subject to regular review and monthly OTB meetings. The OTB process,

including information conveyed in the flash sales email reports, evidenced the Company’s early

August 2013 significant inventory build (far more than the “little bit” acknowledged by defendant

Hannah in ¶41(a)) and its corresponding cash obligations, known by or available to the Individual

Defendants at the time of their August 20, 2013 statements;

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(d) That due to JCPenney’s liquidity concerns, JCPenney’s suppliers were

increasingly not being paid for as long as two to three months beyond the standard net 45-day

payment term. Concern about timely supplier payments reportedly caused factors for the JCPenney

suppliers to tighten credit terms, shorten payment windows, delay funding or back only those orders

coming due in a few weeks. 7 Indeed, serious supplier concerns were a common topic during the

monthly meetings led by defendant Ullman. Thus, contrary to defendants’ statements that JCPenney

was receiving “strong support” from its suppliers, defendants Ullman and Hannah (as well as

JCPenney’s employees and its senior management) knew the suppliers and factors had mounting

concerns about JCPenney’s ability to pay for delivered goods. Consequently, obtaining a major

capital infusion before the end of fiscal 2013 was imperative to JCPenney’s ability to allay the

widespread concerns regarding JCPenney’s ability to pay for delivered goods and avoid bankruptcy 8 ;

(e) That as a result of the prolonged transformation, aggressive inventory build-up

and tightened terms with its suppliers and their factoring companies, defendants did not expect the

Company to end fiscal year 2013 with $1.5 billion in liquidity absent a massive capital infusion of

between $500 million and $1 billion;

(f) That to try to conceal the true state of JCPenney’s balance sheet and its

liquidity deficit, the Individual Defendants caused JCPenney to delay various elements of the

7 Just before the Class Period, problems with one of JCPenney’s factors, CIT Group, were publicized and caused an immediate 10% drop in JCPenney’s stock price. To reassure the market before the important back-to-school and holiday seasons, JCPenney emphasized support from “all of its key vendors.” JCPenney took the additional unusual step of announcing – before 2Q13 ended – that it “continues to have ample liquidity to manage its business with expectations to close the quarter with approximately $1.5B in cash on its balance sheet.”

8 JCPenney belatedly admitted on September 26, 2013, what defendants knew but failed to disclose during the Class Period, that the capital raise “‘has the dual benefit of easing the concerns of our vendors’ and our employees.” Defendant Hannah also admitted that the offering proceeds would “‘take away the concern that our employees and our supplier partners have.’” And, in a meeting for JCPenney’s officers held on September 27, 2013, defendant Ullman candidly admitted that the offering was necessary to avoid bankruptcy.

- 16 - 956945_1


Company’s planned implementation of core operational necessities such as the Oracle e-Business

suite and similar fundamental technologies as part of a company-wide directive to the IT division to

reduce capital expenditures by 20-25%; and

(g) That to facilitate the resignation of former director William A. Ackman

(“Ackman”) and enable Ackman to liquidate 39 million JCPenney shares beneficially owned by

himself and his hedge fund, Pershing Square Capital Management LP, before the market learned of

the Company’s pending liquidity crisis (or ran out of cash) and without the Company driving down

the market price of its shares, defendants negotiated a highly unusual 30-day lock-up period with

Citigroup Global Markets Inc. (“Citigroup”), the underwriter that agreed to purchase Ackman’s

shares and resell them to investors. 9 The length of the lock-up period was an outlier, well below the

norm: 97% of lock-up periods in offerings conducted between January 2013 and May 2014 priced at

more than $200 million were for 45 days or more, over half were for 75 days or more, and none were

shorter than 30 days. When defendants formally entered into this agreement with Ackman and

Citigroup on August 26, 2013, defendants were aware that 30 days was the outer limit of how long

the Company could wait to raise additional capital. See ¶42(a)-(f). Thus, defendants ensured that

the lock-up period was well-below the typical 45 days, which they knew the Company could not

agree to without defaulting on its obligations and/or precipitating a bankruptcy as JCPenney required

a massive capital infusion on or before September 30, 2013. Not coincidentally, JCPenney

announced the stock offering on September 26, 2013, just one day after the lock-up period expired.

9 The agreement provided that “[f]or a period of 30 days after the date of the Prospectus [August 26, 2013] the Company will not . . . offer, pledge, sell, contract to sell . . . or otherwise transfer or dispose of, directly or indirectly, or file with the Commission a registration statement under the Securities Act relating to, any shares of Stock . . . or publicly disclose the intention to make any offer, sale, pledge, disposition or filing . . . without the prior written consent of Citigroup Global Markets Inc.” Thus, the lock-up period expired on September 25, 2013.

- 17 - 956945_1


43. The market reacted favorably to defendants’ August 20, 2013 statements, which led

investors and analysts to believe JCPenney would not need a capital raise before the end of fiscal

2013. For example, an August 20, 2013 Macquarie analyst note concluded that “management’s

well-articulated plan and confidence in the liquidity position were positives” and that

“[m]anagement does not assume the need of additional financing going forward.” Wells Fargo and

Sterne Agee similarly declared that “liquidity is not an immediate issue” and that the Company was

“not assuming additional financing need through [year end].” Likewise, Barclays and Baird notes

succinctly reported that “management expects to end 2013 with $1.5 B in liquidity capacity and no

need for additional capital,” and “[m]anagement does not anticipate a need for outside financing in

2013.”

44. As a result of defendants’ materially false and misleading statements, JCPenney stock

traded at artificially inflated levels as high as $14.39 per share on August 20, 2013, and closed at

$14.01 per share, up 6% over the prior day’s close.

2Q13 Form 10-Q Report

45. On September 10, 2013, JCPenney’s Form 10-Q, signed by defendants Ullman and

Hannah, was filed with the SEC. In the Form 10-Q, defendants again reassured investors about

JCPenney’s liquidity, stating that “[a]s of the end of the second quarter of 2013, our total available

liquidity is $1.85 billion.” The Form 10-Q also stated that “If]or the remainder of 2013, we believe

that our existing cash and cash equivalents will be adequate to fund our capital expenditures and

working capital needs .”

46. Defendants’ September 10, 2013 statement was materially false and misleading when

made. The true facts, which were then known to or recklessly disregarded by defendants, were:

- 18 - 956945_1


(a) That, in addition to the facts detailed in ¶42(a)-(g) above, the reported $1.85

billion in available liquidity at the end of 2Q13 was inadequate to fund JCPenney’s operations

through the end of fiscal 2013;

(b) That, in addition to the facts detailed in ¶42(a)-(g) above, defendants had

taken extraordinary steps to conceal JCPenney’s liquidity crisis long enough to complete an offering,

by, among other things: (1) directing the Company’s IT division to immediately reduce capital

expenditures by 20-25%; and (2) issuing a companywide mandate directing all of JCPenney’s

employees responsible for inventory purchases (“merchants”) to move the delivery dates for

merchandise originally scheduled for delivery in the last weeks of 3Q13 (in October 2013) out to

4Q13 (after November 2, 2013). To comply, merchants were required to cancel existing purchase

orders for the ordered but as yet undelivered 3Q13 merchandise and resubmit new purchase orders

for the identical goods setting delivery for early 4Q13 instead of the latter half of 3Q13, all while

misrepresenting to suppliers the rationale for this maneuver. This directive was designed to, and did,

manipulate JCPenney’s inventory levels and had the same effect on the Company’s finances as the

undisclosed August 2013 inventory build; and

(c) That, as a result of the facts detailed in ¶¶42(a)-(g) and (a)-(b) herein,

JCPenney’s liquid assets were inadequate to allow the Company to operate its business through the

back-to-school and holiday seasons and, as a result, defendants were in the process of completing a

desperately needed capital infusion which defendants intended to conclude immediately after the

lock-up period negotiated by JCPenney and Ackman expired on September 25, 2013.

47. The short, 16-day window between defendants’ September 10, 2013 statement and

the disclosure regarding JCPenney’s true capital requirements further demonstrates that defendants

were aware that their September 10, 2013 statement was false when made.

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48. As a result of defendants’ materially false and misleading September 10, 2013

statement, JCPenney stock continued to trade at artificially inflated levels.

JCPenney’s Principal Accounting Officer Resigns

49. On September 20, 2013, JCPenney’s Senior Vice President and Controller, Mark R.

Sweeney, who served as the Company’s principal accounting officer, suddenly resigned.

INVESTORS BEGIN TO LEARN THE TRUTH

50. After the market closed on September 24, 2013, Goldman Sachs issued a research

report revealing that JCPenney would, in fact, be “look[ing] to build a bigger liquidity buffer.” The

report – issued by the same company that was finalizing an almost $1 billion equity offering – made

detailed assessments concerning JCPenney’s near-term liquidity crisis:

Recent developments

In our view, a combination of weak fundamentals, inventory rebuilding, and an underperforming home department will likely challenge J.C. Penney’s liquidity levels in 3Q. In order to safeguard against a potentially poor 4Q holiday season, it is likely that management will look to build a bigger liquidity buffer, as has been suggested by recent press reports. Although we believe this would be a prudent measure for the company, given our expectation for new capital to come in the form of additional debt (rather than equity), we believe this will be a negative catalyst for creditors.

* * *

Liquidity likely to be tight at end of 3Q

We expect the company to burn in excess of $300mn of cash from inventory investment in 3Q as it rebuilds its private label inventories, which would bring the company closer to what we view as a minimum threshold for cash for JCP: $500mn. Management indicated at the end of 2Q that they were approximately halfway through the process of rebuilding their inventory. For 3Q, we estimate comparable store sales of -3% and gross margins of 30%. This, combined with capital expenditures of $200mn, would cause cash to fall to $755 from $1.535bn at the end of 2Q, as shown in Exhibit 5. Looking ahead, we forecast gradual improvement in comparable store sales. Even in this scenario, liquidity again becomes challenged in 3Q2014. As a result, we expect the company to raise incremental capital through a number of potential liquidity levers to keep liquidity at acceptable levels over the next twelve months.

- 20 - 956945_1


51. The news contained in the September 24, 2013 Goldman Sachs report surprised

investors as, just 14 days earlier, defendants had reassured investors that JCPenney’s existing

liquidity was adequate “for the remainder of 2013.” When the market opened on September 25,

2013, JCPenney stock price dropped to a 13-year intra-day low.

52. Defendants took immediate action to buoy JCPenney’s stock price as they were in the

midst of pricing an almost $1 billion offering that they would announce the next day, and a collapse

in JCPenney’s stock prior thereto would have resulted in a failed offering, which in turn would have

forced JCPenney into bankruptcy. Thus, on the morning of September 25, 2013, Ullman attended an

investor meeting in New York hosted by Sterne Agee. Following that meeting, Sterne Agee

immediately reiterated defendant Ullman’s representations via an upbeat report issued later that

morning, titled “Johnson’s Mistakes = Ullman’s Opportunities.” The report noted several positive

takeaways from Ullman’s presentation, including:

Point #5: Liquidity Not a Problem Today . . . But Trends Need to Inflect in October . Management emphasized that it would end the year with sufficient liquidity ($1.5B – including $1.2B in cash and ~$300M revolver availability). We model $365M in cash burn in 2H13 (-$15M in operating cash flow and $350M cap-ex) and an ending cash balance of $1.17B. While we agree that liquidity will not be an issue through FY13, looking ahead to FY14 we believe that the issue of liquidity remains a big question with working capital typically a use of cash up until 4Q.

53. Defendants’ plan worked: JCPenney’s stock price rebounded from its intra-day low to

close up at $10.12 per share.

54. The next day, September 26, 2013, before the market opened, CNBC.com published

an article titled “JCPenney CEO Ullman doesn’t see need to raise liquidity,” reporting that “ J.C.

Penney CEO Mike Ullman told investors the retailer does not see conditions for the rest of the

year where it would need to raise liquidity .” CNBC repeated the story on live television after the

market opened, again stating that JCP “will not need to raise capital now” as illustrated below:

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55. Also during the morning of September 26, 2013, JCPenney issued a release titled

“JCPenney Responds to Inquiries” which stated JCPenney “is pleased with its progress thus far in

the Company’s turnaround efforts and the traction its initiatives are starting to achieve. Moreover,

the Company said it is starting to see greater predictability in its performance across many areas.”

This release, like defendant Ullman’s statement at the Sterne Agee conference the day before, was

intended to maintain what artificial inflation remained in JCPenney’s stock price in light of the

liquidity rumors permeating the market and misleadingly concealed the fact that JCPenney was just

hours away from announcing an almost $1 billion equity offering.

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56. The Company’s stock price jumped on the morning’s news:

$11.25

$11.00

$10.75

U 0

$10.60 C

$1025

$10.00

$9.75

JCP Intraday Trading 9126/13 10:00 - 12:00

3,000,000

2,600,000

2,000.000

1,600,000

3 1,000,000

500,000

U

- JCP Sham Price = 1adIn Volume

57. Defendant Ullman’s and JCPenney’s September 25 and 26, 2013 statements, as set

forth in ¶¶52, 54-55, were materially false and misleading when made. The true facts, which were

then known to or recklessly disregarded by defendants, were:

(a) That JCPenney’s liquidity situation was far more desperate than represented.

JCPenney’s suppliers’ factors had been selectively approving the Company’s orders, reducing their

coverage on JCPenney orders, and tightening payment terms (including adding surcharges and

shortening payment windows), adding to the Company’s pre-existing inventory and liquidity woes,

all of which had further increased the pressure to raise capital by the end of September 2013. In fact,

earlier in the summer, a factoring company had refused to allow JCPenney to claw back a $100

million dollar letter of credit;

- 23 - 956945_1


(b) That the truth about JCPenney’s actual capital requirements, which directly

conflicted with defendants Ullman’s and JCPenney’s September 25 and 26, 2013 statements, would

be revealed just hours later;

(c) That JCPenney was then in the process of raising more than $800 million via

the issuance of JCPenney common shares in an underwritten offering, a process pursuant to which

JCPenney had already arranged for and commenced the following activities, among other things,

well before September 25, 2013:

• conferred with Goldman Sachs about JCPenney’s serious liquidity deficit;

• had JCPenney’s auditors review pertinent finance materials and prepare a “comfort letter”;

• had Goldman Sachs conduct due diligence, prepare a Commitment Committee Memorandum and/or schedule a committee meeting for review and approval of the offering;

• had Goldman Sachs personnel prepare pro forma financial statements and updated earnings per share estimates; and

• arranged for opinions from counsel;

(d) That defendants’ familiarity with JCPenney’s liquidity position, near-term

inventory needs, and obligations, as detailed in ¶¶42(a)-(g) and 46(a)-(c), confirmed the Company’s

need for a near-term capital raise well before defendants’ late September 2013 statements; and

(e) That as defendant Ullman admitted just days later on September 27, 2013, to

approximately 100 employees at a meeting in Plano, Texas, the offering was necessary for JCPenney

to avoid bankruptcy.

58. As a result of defendant Ullman’s false statement on September 25, 2013, and

JCPenney’s misleading statement on September 26, 2013, JCPenney’s stock continued to trade at

artificially inflated levels, closing up 3% at $10.42 per share on September 26, 2013.

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59. Just hours after their last false statement on September 26, 2013, and after the market

closed, defendants stunned the market by announcing that JCPenney had raised almost $800 million

via the sale of 84 million shares. 10 Ironically, Goldman Sachs – which just the day before had

caused a 15% drop in the Company’s stock price by revealing JCPenney’s need for a bigger

“liquidity buffer”– served as the sole underwriter for the offering. In a release the next day,

defendants announced the offering had been priced at $9.65 per share, a 7% discount to the prior

day’s closing price, which JCPenney and Ullman had struggled mightily to maintain and/or inflate

throughout September 25 and 26, 2013.

60. The market’s reaction to this revelation was swift. On September 27, 2013, analysts

at several securities firms issued reports noting the stark contrast between JCPenney raising almost

$1 billion and defendants’ comments regarding adequate liquidity in the hours, days and weeks

preceding this announcement:

Buckingham Research Group issued a report noting that: “We are concerned about investor and legal backlash given JCP’s public announcement of the equity offering just after JCP’s public commentary indicating that they do not see conditions for the rest of the year where JCP would need to raise capital.” The report also stated that the “sudden timing of and substantial dilution caused by the equity capital raise has caused us great concern about management’s credibility given the events and public commentary over the last few weeks downplaying the need to raise additional capital, particularly in the form of a highly dilutive equity offering.” The report concluded by stating the obvious, that the “timing of the announcement was surprising, if not shocking, as earlier in the day JCP issues a press release commenting that it was pleased with its progress.”

Deutsche Bank issued a report calling the timing of the offering “surprising.”

Wells Fargo issued a report expressing the market’s surprise and stating that: “[T]he company had publicly stated it did not need any additional financing as recently as its Q2 earnings call.”

10 At the time of the offering, JCPenney had approximately 220 million shares outstanding. Thus, the offering diluted existing shareholders by approximately 30% by increasing JCPenney’s shares outstanding by approximately 84 million.

- 25 - 956945_1


61. Media reports in the aftermath likewise focused on the shocking nature of the

disclosures when juxtaposed with defendants’ recent public misrepresentations:

“JCPenney Announces Equity Offer Hours After CEO Ullman Denies Need to Raise Capital . . . . With Goldman Sachs playing both sides of the deal, and CEO Ullman reportedly saying they won’t raise capital, only to see the company raise capital, it seems like management is also trying to figure out how to save the ailing retailer.” (Forbes, September 26, 2014).

“J.C. Penney’s ongoing drama not helping vendor confidence. J.C. Penney shares are plunging as the company plans to raise a billion dollars through a new stock offering, an event that caught many people on Wall Street by surprise, since Penney’s CEO, Mike Ullman, reportedly told investors at a meeting that the company had no plans to do so anytime soon, according to two sources who attended the meeting Wednesday morning .” (CNBC.com, September 27, 2013).

“J.C. Penney Co. . . . sank in New York trading after saying it would sell shares to raise as much as $932 million and lowering its year-end liquidity forecast. . . . Chief Executive Officer Myron Ullman is raising more cash to get J.C. Penney through the holiday season and quell concerns that a Goldman Sachs debt analyst raised in a note predicting that the chain’s liquidity will be strained this quarter. The company stoked those concerns again today when it said it would have $1.3 billion in liquidity at the end of the year, $200 million less than previously forecast. . . . On Aug. 20, it projected more than $1.5 billion, a forecast that didn’t assume it would need additional outside financing .” (Bloomberg , September 27, 2013).

62. As a direct result of the disclosure, JCPenney’s stock price sank over 13% on

September 27, 2013, on extraordinarily high volume of more than 256 million shares, to close at

$9.05 per share, a decline of over 37% from its Class Period high.

63. Following the announcement, defendants admitted what they knew – but the market

had not during the Class Period – that the offering was necessary to “‘eas[e] the concerns of our

vendors’ and our employees” and that only via the offering could defendants, as defendant Hannah

admitted, “‘take away the concern that our employees and our supplier partners have.’” Defendant

Ullman also admitted that the offering was necessary to avoid bankruptcy.

64. An October 10, 2013 article published on Seeking Alpha spoke to the desperate state

of JCPenney and the loss in defendants’ credibility following the equity offering:

- 26 - 956945_1


The punitive nature of this measure . . . speaks to management’s desperation and the company’s lack of capital despite claims that have been made by management – particularly by Mike Ullman and Ken Hannah – that there is a recovery, or that it has enough capital.

* * *

Furthermore, this offering solidifies the inconsistency between what the company has been saying about its finances and reality. . . . The fact that the company decided to dilute shareholders by 84 million shares while the stock was trading at levels not seen in 13 years proves that the company is not financially stable despite direct statements to the contrary.

65. The weeks that followed saw continued market reaction to the disclosures. For

example, an article published by The Motley Fool on October 16, 2013, titled “Here’s Proof That

J.C. Penney Has Lost All Credibility,” recounted Class Period events and their resulting damage to

defendants’ credibility:

[Ullman] forfeited all credibility with an abrupt flip-flop in late September. On Tuesday, Sept. 26, in response to rumors that J.C. Penney was looking to raise cash, Ullman stated that he did not see any need to raise liquidity this year. His statement helped J.C. Penny stock reverse its losses.

However, by that afternoon J.C. Penney had proposed a sale of 84 million new shares. The deal was priced at $9.65 per share on the following day, marking a new low for company stock. Ullman’s public statement that the company was not looking for new financing when it was clearly scrambling for cash destroyed his credibility with investors. . . . Quite simply, nobody believes a word that any J.C. Penney executive says anymore.

LOSS CAUSATION AND THE CLASS MEMBERS’ ECONOMIC LOSS

66. During the Class Period, as detailed herein, defendants engaged in a scheme and

wrongful course of business that was designed to and did artificially inflate JCPenney’s stock price,

which misconduct operated as a fraud and deceit on Class Period purchasers of the Company’s

common stock. Defendants did this by issuing materially false and misleading statements regarding

the adequacy of the Company’s liquidity and its business performance. As the falsity of defendants’

statements was revealed, JCPenney’s stock price fell on September 25, 2013 and on September 27,

2013, as detailed in ¶¶50-62, as the artificial inflation dissipated. As a result of their purchases of

- 27 - 956945_1


artificially inflated JCPenney common stock during the Class Period, Lead Plaintiff and other Class

members suffered significant damages as a result thereof.

67. The market for JCPenney common stock was open, well-developed and efficient at all

relevant times, with average daily trading volume of more than 20 million shares during the Class

Period. As a result of these materially misleading statements and failures to disclose the true state of

the Company’s business performance and financial circumstances, JCPenney stock traded at

artificially inflated prices. Lead Plaintiff and other Class members purchased JCPenney common

stock relying upon the integrity of the market relating to JCPenney common stock and suffered

economic loss as a result thereof.

68. Defendants’ false or misleading statements had the intended effect and caused

JCPenney’s stock to trade at artificially inflated levels.

69. On September 25, 2013, news of JCPenney’s need for a larger “liquidity buffer” was

disclosed to the market, partially revealing the Company’s dire financial situation. On that news,

JCPenney’s stock price declined nearly 15% – which decline cannot properly be attributed to any

market or industry event or force, but rather was a direct result of the disclosure. The final

disclosure of JCPenney’s need for a substantial cash raise of more than $800 million was on

September 26, 2013. On this disclosure, JCPenney’s stock price lost another 13% in value, a

significant decline on extraordinarily heavy trading volume of more than 250 million shares.

70. These stock price declines removed the artificial inflation from JCPenney’s stock

price, causing real economic loss to investors who had purchased JCPenney’s stock during the Class

Period.

71. The declines in JCPenney’s stock price near and at the end of the Class Period were

the direct result of the nature and extent of defendants’ prior false statements and material omissions

being revealed to and/or leaking into the market. The timing and magnitude of JCPenney’s

- 28 - 956945_1


significant stock price declines negates any inference that the loss suffered by Lead Plaintiff and

other Class members was caused by changed market conditions, macroeconomic or industry factors

or Company-specific facts unrelated to defendants’ fraudulent conduct.

72. The economic loss Lead Plaintiff and other members of the Class suffered was a

direct result of defendants’ fraudulent scheme to artificially inflate JCPenney’s stock price and

maintain that price at artificially inflated levels, as was revealed by the subsequent and significant

declines in the value of JCPenney’s stock when defendants’ earlier misrepresentations and omissions

became publicly available.

APPLICABILITY OF THE PRESUMPTION OF RELIANCE: THE FRAUD-ON-THE-MARKET DOCTRINE

73. At all relevant times, the market for JCPenney common stock was an efficient market

for the following reasons, among others:

(a) JCPenney common stock met the requirements for listing, and was listed and

actively traded on the NYSE, a highly efficient and automated market;

(b) JCPenney’s common stock traded on large weekly volumes and millions of

shares were available for arbitrage activity;

(c) As a regulated issuer, JCPenney filed periodic public reports with the SEC

and the NYSE;

(d) JCPenney was eligible to and did file SEC Form S-3 registration statements;

(e) JCPenney regularly communicated with public investors via established

market communication mechanisms, including regular disseminations of press releases on the

national circuits of major newswire services and other wide-ranging public disclosures, such as

communications with the financial press and other similar reporting services; and

(f) JCPenney was followed by a number of securities analysts employed by major

brokerage firms who wrote reports which were distributed to the sales force and certain customers of - 29 -

956945_1


their respective brokerage firms. These reports were publicly available and entered the public

marketplace.

74. As a result of the foregoing, the market for JCPenney common stock promptly

incorporated current information regarding JCPenney from all publicly available sources and

reflected such information in the prices of the stock. Under these circumstances, all purchasers of

JCPenney common stock during the Class Period suffered similar injury through their purchase of

JCPenney common stock at artificially inflated prices and a presumption of reliance applies.

CLASS ACTION ALLEGATIONS

75. Lead Plaintiff brings this action as a class action pursuant to Federal Rule of Civil

Procedure 23(a) and (b)(3) on behalf of a class consisting of all persons or entities who purchased

JCPenney common stock during the Class Period (the “Class”). Excluded from the Class are

defendants, the officers and directors of the Company at all relevant times, members of their

immediate families and their legal representatives, heirs, successors or assigns, and any entity in

which defendants have or had a controlling interest.

76. The Class members are so numerous and geographically dispersed that joinder of all

members is impracticable. JCPenney stock was actively traded on the NYSE. Record owners and

other members of the Class may be identified from records maintained by JCPenney or its transfer

agent and may be notified of the pendency of this action by mail, using the form of notice similar to

that customarily used in securities class actions. While the exact number of Class members is

unknown to Lead Plaintiff, JCPenney reported more than 28,000 record shareholders as of March 18,

2013 and 27,000 record shareholders as of March 17, 2014. Accordingly, Lead Plaintiff reasonably

believes that there are thousands of members in the proposed Class.

- 30 - 956945_1


77. Lead Plaintiff’s claims are typical of the claims of the members of the Class as all

members of the Class are similarly affected by defendants’ wrongful conduct in violation of federal

law that is complained of herein.

78. Lead Plaintiff 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.

79. Common questions of law and fact exist as to all members of the Class and

predominate over any questions solely affecting individual members of the Class. Among the

questions of law and fact common to the Class are:

(a) Whether the federal securities laws were violated by defendants’ acts as

alleged herein;

(b) Whether statements made by defendants to the investing public

misrepresented or omitted material facts about the business, operations and financial conditions of

JCPenney;

(c) Whether the price of JCPenney common stock was artificially inflated during

the Class Period; and

(d) To what extent the Class members have sustained damages and the proper

measure of damages.

80. A class action is superior to all other available methods for the fair and efficient

adjudication of this controversy as joinder of all members is impracticable. Furthermore, as the

damages suffered by individual Class members may be relatively small, the expense and burden of

individual litigation make it impossible for members of the Class to individually redress the wrongs

done to them. There will be no difficulty in the management of this action as a class action.

- 31 - 956945_1


COUNT I

For Violation of §10(b) of the 1934 Act and Rule 10b-5 Against All Defendants

81. Lead Plaintiff repeats and realleges each and every allegation above as if fully set

forth herein.

82. Defendants are liable for making false statements and failing to disclose adverse facts

known to them about JCPenney. Defendants’ fraudulent scheme and course of business that

operated as a fraud or deceit on purchasers of JCPenney common stock was a success, as it: (i)

deceived the investing public regarding JCPenney’s business and financial condition; (ii) artificially

inflated the price of JCPenney common stock; and (iii) caused Lead Plaintiff and other members of

the Class to purchase JCPenney common stock at inflated prices.

83. During the Class Period, defendants participated in the preparation of and/or caused

to be disseminated the false or misleading statements specified above, which they knew or recklessly

disregarded were materially false or misleading in that they contained material misrepresentations

and failed to disclose material facts necessary in order to make the statements made, in light of the

circumstances under which they were made, not misleading.

84. Defendants violated §10(b) of the 1934 Act and Rule 10b-5 in that they:

(a) Employed devices, schemes, and artifices to defraud;

(b) Made untrue statements of material facts or omitted to state material facts

necessary in order to make statements made, in light of the circumstances under which they were

made, not misleading; or

(c) Engaged in acts, practices, and a course of business that operated as a fraud or

deceit upon Lead Plaintiff and others similarly situated in connection with their purchases of

JCPenney stock during the Class Period.

- 32 - 956945_1


85. Defendants, individually and together, directly and indirectly, by the use, means or

instrumentalities of interstate commerce and/or the mails, engaged and participated in a continuous

course of conduct to conceal the truth and/or adverse material information about JCPenney’s

business, operations and financial condition as specified herein.

86. The defendants employed devices, schemes and artifices to defraud, while in

possession of material, adverse, nonpublic information and engaged in acts, practices, and a course

of conduct as alleged herein by, among other things, participating in the making of untrue statements

of material fact and omitting to state material facts necessary in order to make the statements made

about the Company and its business operations and financial status, in the light of the circumstances

under which they were made, not misleading, as set forth more particularly herein, and engaged in

transactions, practices and a course of business which operated as a fraud and deceit upon the

purchasers of JCPenney’s common stock during the Class Period.

87. The defendants had actual knowledge of the misrepresentations and omissions of

material fact set forth herein, or recklessly disregarded the true facts that were available to them.

Defendants’ misconduct was engaged in knowingly or with recklessness disregard for the truth, and

for the purpose and effect of concealing JCPenney’s operating condition and financial status from

the investing public and supporting the artificially inflated price of its common stock.

88. As a result of the dissemination of the materially false or misleading information and

failure to disclose material facts, as set forth above, the market price of JCPenney’s common stock

was artificially inflated during the Class Period. In ignorance of the fact that the market prices of the

Company’s stock were artificially inflated, and relying directly or indirectly on the false and

misleading statements, or upon the integrity of the market in which the Company’s stock traded,

and/or on the absence of material adverse information that was known to or recklessly disregarded

by defendants, but not disclosed in defendants’ public statements during the Class Period, Lead

- 33 - 956945_1


Plaintiff and the other Class members acquired JCPenney’s stock during the Class Period at

artificially high prices and were ultimately damaged thereby.

89. At the time of said misrepresentations and omissions, Lead Plaintiff and other Class

members were ignorant of their falsity, and believed them to be true. Had Lead Plaintiff, and other

Class members and the marketplace known the truth regarding the problems that JCPenney was

experiencing, which defendants did not disclose, Lead Plaintiff and other Class members would not

have purchased or otherwise acquired their JCPenney’s stock, or, if they had acquired its stock

during the Class Period, would not have done so at the artificially inflated prices which they paid.

90. By reason of the foregoing, defendants have violated §10(b) of the 1934 Act and Rule

10b-5.

91. As a direct and proximate result of these defendants’ wrongful conduct, Lead Plaintiff

and the other Class members suffered damages in connection with their Class Period purchases of

JCPenney’s common stock.

COUNT II

For Violation of §20(a) of the 1934 Act Against the Individual Defendants

92. Lead Plaintiff repeats and realleges each and every allegation above as if fully set

forth herein.

93. The Individual Defendants acted as controlling persons of JCPenney within the

meaning of §20(a) of the 1934 Act:

(a) By reason of their positions as executive officers and/or directors, their

participation in and awareness of the Company’s operations and intimate knowledge of the false

statements and omissions made by the Company and disseminated to the investing public, the

Individual Defendants had the power to influence and control and did influence and control, directly

- 34 - 956945_1


or indirectly, the decision-making of the Company, including the content and dissemination of the

various statements which Lead Plaintiff contends are false and misleading;

(b) The Individual Defendants participated in conference calls with investors and

were provided with or had unlimited access to copies of the Company’s reports, press releases,

public filings and other statements alleged by Lead Plaintiff to be misleading before or shortly after

these statements were issued and had the ability to prevent the issuance of the statements or cause

the statements to be corrected; and

(c) Because of their positions as CEO and CFO, the Individual Defendants

directly participated in the Company’s management and were directly involved in JCPenney’s day-

to-day operations. The Individual Defendants also controlled the contents of JCPenney’s quarterly

reports and other public filings, press releases, conference calls, and presentations to securities

analysts and the investing public. The Individual Defendants prepared, reviewed and/or were

provided with copies of the Company’s reports, press releases and presentation materials alleged to

be misleading, before or shortly after their issuance, and had the ability and opportunity to prevent

their issuance or cause them to be corrected and failed to do so.

94. By reason of such conduct, the Individual Defendants are liable pursuant to §20(a) of

the 1934 Act.

PRAYER FOR RELIEF

WHEREFORE, Lead Plaintiff prays for judgment as follows:

A. Declaring that defendants are liable pursuant to the 1934 Act;

B. Determining and certifying that this action is a proper class action and certifying Lead

Plaintiff as a class representative pursuant to Rule 23 of the Federal Rules of Civil Procedure;

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C. Awarding compensatory damages in favor of Lead Plaintiff and the Class against

defendants, jointly and severally, for damages sustained as a result of defendants’ wrongdoing, in an

amount to be proven at trial;

D. Awarding Lead Plaintiff and the Class pre-judgment and post-judgment interest as

well as reasonable attorneys’ fees, costs and expenses incurred in this action; and

E. Awarding such other relief as the Court may deem just and proper.

JURY DEMAND

Lead Plaintiff demands a trial by jury.

DATED: July 18, 2014 ROBBINS GELLER RUDMAN & DOWD LLP

X. JAY ALVAREZ JAMES A. CAPUTO DANIELLE S. MYERS DAVID J. HARRIS, JR. AUSTIN P. BRANE

s/JAMES A. CAPUTO JAMES A. CAPUTO

655 West Broadway, Suite 1900 San Diego, CA 92101-8498 Telephone: 619/231-1058 619/231-7423 (fax)

Lead Counsel for Lead Plaintiff

WARD & SMITH LAW FIRM T. JOHN WARD, JR. (State Bar No. 00794818) JACK WESLEY HILL (State Bar No. 24032294) 1127 Judson Road, Suite 220 Longview, TX 75601 Telephone: 903/757-6400 903/757-2323 (fax)

Liaison Counsel

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CERTIFICATE OF SERVICE

I hereby certify that on July 18, 2014, I authorized the electronic filing of the foregoing with

the Clerk of the Court using the CM/ECF system which will send notification of such filing to the e-

mail addresses denoted on the attached Electronic Mail Notice List, and I hereby certify that I caused

to be mailed the foregoing document or paper via the United States Postal Service to the non-

CM/ECF participants indicated on the attached Manual Notice List.

I certify under penalty of perjury under the laws of the United States of America that the

foregoing is true and correct. Executed on July 18, 2014.

s/ JAMES A. CAPUTO JAMES A. CAPUTO

ROBBINS GELLER RUDMAN & DOWD LLP

655 West Broadway, Suite 1900 San Diego, CA 92101-8498 Telephone: 619/231-1058 619/231-7423 (fax)

E-mail: [email protected]

956945_1 956945_1

CM/ECF LIVE - U.S. District Court:txed- Page 1 of 2


Mailing Information for a Case 6:13-cv-00736-KNM

Electronic Mail Notice List

The following are those who are currently on the list to receive e-mail notices for this case.

• Thomas Robert Ajamie [email protected] ,[email protected],[email protected]

• X Jay Alvarez [email protected]

• Thomas Emerson Bilek [email protected],[email protected]

• Austin P Brane [email protected]

• James Albert Caputo [email protected]

• Roger F Claxton [email protected]

• David J Harris , Jr [email protected]

• Jack Wesley Hill [email protected],[email protected],[email protected]

• Michael Kevin Hurst [email protected],[email protected],[email protected],[email protected],[email protected],[email protected]

• JC Penney Investor Group [email protected]

• Daniel Ward Jackson [email protected] ,[email protected],[email protected]

• Michael E Jones [email protected],[email protected]

• Brian C Kerr [email protected]

• Rocky M Lawdermilk [email protected],[email protected]

• Jason Jacob Mendro [email protected],[email protected]

• Danielle Suzanne Myers [email protected],[email protected]

• Ira Michael Press [email protected]

• William Kelly Puls [email protected],[email protected],[email protected]

• Darren Jay Robbins [email protected],[email protected]

• Samuel H Rudman [email protected] ,[email protected]

• Michael W Stocker [email protected] ,[email protected],[email protected],[email protected],[email protected]

• Robert C Walters [email protected],[email protected],[email protected]

https://ecf.txed.uscourts.gov/cgi-bin/MailList.pl?104687307336538-L_1_0-1 7/18/2014

CM/ECF LIVE - U.S. District Court:txed- Page 2 of 2


• David Conrad Walton [email protected],[email protected]

• Thomas John Ward , Jr [email protected],[email protected],[email protected]

• Meryl L Young [email protected],[email protected],[email protected]

Manual Notice List

The following is the list of attorneys who are not on the list to receive e-mail notices for this case (who therefore require manual noticing). You may wish to use your mouse to select and copy this list into your word processing program in order to create notices or labels for these recipients.

• (No manual recipients)

https://ecf.txed.uscourts.gov/cgi-bin/MailList.pl?104687307336538-L_1_0-1 7/18/2014

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