Boston Pension Fund Files Class Action Lawsuits Against Six Flags, HP

Two unrelated class action securities lawsuits have been filed on behalf of the Electrical Workers Pension Fund Local 103 of Boston against Six Flags Entertainment Corp. and HP Inc.

The fund is suing Six Flags for allegedly failing to disclose material information related to a failed partnership with a Chinese real estate developer that planned to open 11 of the company’s theme parks in China. And it is suing HP for allegedly making false and misleading statements regarding the firm’s transition from a supplies-centric business model to a hardware-driven business model.

The lawsuit against Six Flags focuses on whether the company and its executives violated federal securities laws by making false and/or misleading statements and/or failing to disclose that a Chinese real estate developer called Riverside that would provide the capital investment for future developments in China faced far more financial distress than had been disclosed to investors.

According to the lawsuit, there was a “high likelihood” that Riverside would default on its payment obligations to Six Flags—which it did—and that the theme park’s international strategy, which it said relied mainly on its exclusive agreements with Riverside to develop Six Flags-branded parks in China to drive revenue growth, was “significantly less promising than represented to investors.” As a result, the lawsuit alleges Six Flags’ “statements about the company’s business, operations, and prospects lacked a reasonable basis.”

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In a Jan. 10 US Securities and Exchange Commission (SEC) filing, Six Flags said that while it “continues to work with Riverside and each of Riverside’s governmental partners, the eventual outcome is unknown and could range from the continuation of one or more projects to the termination of all the Six Flags-branded projects in China.”

Additionally, it said it will “realize no revenue from the China international agreements and expects a negative $1 million revenue adjustment related to the China international agreements.” Six Flags also said it expects aggregate one-time charges of approximately $10 million related to the China international agreements and certain unrelated litigation matters in the fourth quarter. And it adds that “the loss of all the China projects would result in no revenue for that market if Riverside does not cure the default and the company is not able to engage other partners to complete any of the projects.”

The lawsuit says these revelations sent the stock reeling to close at $35.96 per share on the day the filing was made, a drop of nearly 44% from the beginning of the class period on Feb. 13, 2019, when the stock hit an intraday high of $63.87 per share.

“Six Flags downplayed the significance of these disclosures and continued to misrepresent the prospects of the development of its branded parks in China,” the lawsuit said.

In response to the lawsuit, Stephen Purtell, Six Flags Entertainment’s treasurer and head of investor relations, told CIO that “the lawsuit is without merit, and we intend to fight it vigorously.”

Meanwhile, the pension fund’s lawsuit against HP Inc. alleges that the computer hardware company misrepresented and omitted facts concerning the company’s changes to its supplies business strategy, which HP referred to as its “four-box model.”

The complaint alleges that the company falsely emphasized that the four-box model was an accurate, reliable tool to determine demand and revenue in the company’s supplies business, and reassured investors that, based on the four-box model, HP had a “clear line of sight to supply stabilization.” The suit says that the alleged misrepresentations caused shares of HP’s common stock to trade at artificially inflated prices during the class period, which was from Feb. 23, 2017, to Oct. 3, 2019.

According to the lawsuit, “the truth began to emerge” after the market closed on Feb. 27, 2019, when HP reported disappointing total supplies revenue for the first quarter of fiscal 2019 due to weaker-than-expected demand from commercial customers in Europe, the Middle East, and Africa.

“The company blamed these results on an increase in online sales, where the company had a lower market share and faced more competition from cheaper third-party alternatives,” the lawsuit says. “In reporting these results, the company admitted that its four-box model had been based upon incorrect data concerning inventory, market share, and pricing assumptions.”

HP “made materially false and misleading statements and omissions, and engaged in a scheme to deceive the market,” the lawsuit says. “This artificially inflated the price of HP’s common stock and operated as a fraud or deceit.” The suit added that “when defendants’ prior misrepresentations and fraudulent conduct were disclosed to the market, the price of HP’s stock fell precipitously as the prior artificial inflation came out of the price over time.”

The lawsuit said that after the market closed on Oct. 3, 2019, HP announced that it was “departing from the purely transactional supplies-centric business model” and transitioning to a hardware-driven business. The company also said it would be eliminating between 7,000 to 9,000 positions, or up to 16% of its global workforce, over three years as part of a restructuring plan.

During the course of the class period, HP’s stock fell from $23.85 a share to $16.64, a decline of more than 30%. HP Inc. did not respond to requests for comment on the lawsuit.

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Tags: China, Class Action, Electrical Workers Pension Fund Local 103, four-box model, HP Inc., Lawsuits, Riverside, securities, Six Flags Entertainment

Although the alternative assets industry surpassed $10 trillion for the first time in 2019, with an increase of more than $700 billion in just the first half of the year, the future of the industry “looks increasingly challenging,” according to financial data and information provider Preqin.

A new report from Preqin said that while fund managers have benefited from a large influx of capital from investors combined with strong long-term performance, high asset pricing is compressing future returns in most private capital asset classes.

“We observed that financial markets were at a watershed moment, with high asset valuations, economic and political uncertainty, and a challenging period for investment returns ahead,” Mark O’Hare, CEO of Preqin, said in a statement. “Global markets have continued their upwards path, and the outlook is certainly challenging. Alternative assets have a good track record of delivering for their investors, but if they are to continue to do so, it will need to adapt and evolve in response to market challenges and opportunities.”

Hedge fund managers saw “a much-needed recovery” in 2019 as the industry rebounded from losses of 3.06% in 2018 to return 11.45% over the year. Assets under management (AUM) rose 4.6% compared with the previous year to reach $3.61 trillion as of November, which is the highest point since the third quarter of 2018 ($3.62 trillion).

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However, 40% of hedge fund investors Preqin surveyed in November said the performance did not live up to expectations, even though 2019’s performance was only the second time industry returns were in the double digits over the past six years.

The report also said there are some “clear warning signs for the industry,” noting that investors withdrew a net $82 billion from hedge funds in the year to November, which marks the worst year for redemptions since $110 billion was taken out in 2016. It also said net outflows occurred in every major region.

“Shifting investor sentiment also made the market more challenging for new launches,” said the report, as only 529 hedge funds launched in 2019. That’s less than half the number launched in 2018 (1,169) and was the seventh straight year of decline. And liquidations outpaced new funds entering the market, reducing the number of active funds in the industry to 16,256.

Meanwhile capital flows into global private equity were strong in 2019 as investors sought out higher yields to compensate for the lowest gross domestic product (GDP) growth since the global financial crisis and persistently low interest rates. Investors continued to flock to private equity funds, committing more than $500 billion and boosting fund managers’ stockpile of dry powder. The growth in available capital, coupled with an 11% rise in unrealized value, increased assets under management to a record $4.11 trillion as of June.

“However, market conditions are becoming more difficult,” the report said, pointing out that the influx of investable capital and intensifying competition have spurred an increase in asset prices. According to the report, 51% of fund managers and more than 69% of investors said they feel that private equity portfolio company prices are higher compared with 12 months ago. And 44% of fund managers experienced more competition for private equity transactions.

“All this has had a dampening effect on deal flow,” said Preqin, as the value of all private equity-backed buyout deals fell 21% to $389 billion between 2018 and 2019, while venture capital deal value declined by 18% to $223 billion.

Additionally 45% of private equity fund managers said they expect a correction in 2020, and three-quarters believe a shift in investor focus from public markets to private investment will impact private equity.

While the report found challenges facing the hedge fund and private equity industry, the private debt market kept marching on with assets under management hitting a record again with $812 billion as of June. Private debt is now the third-largest asset class in private capital, ahead of infrastructure and natural resources.

“Looking ahead, investors are upbeat about their private debt portfolios,” the report said. “A significant 91% of investors we spoke to will either maintain or increase their allocation to private debt over the longer term.”