RiskDecember 5, 2019

Florida Firefighters Pension Sues Resideo for Securities Fraud

Class action suit alleged firm misled investors to artificially inflate share price.

Reported by Michael Katz

The Hollywood Firefighters’ Pension Fund of Hollywood, Fla. is suing home automation products manufacturer Resideo Technologies, Inc. for allegedly making misleading public statements that artificially inflated the company’s share price.

Resideo was formed in October 2018 through a spin-off from parent Honeywell International, Inc. Prior to the spin-off, the business was comprised of Honeywell’s home product portfolio and ADI global distribution business.

The class action securities lawsuit alleges Resideo made multiple misleading public statements, including telling investors that the company would be the market leader in home heating, ventilation and air conditioning controls, and security markets. It also said it would be a worldwide distributor of security and fire protection products. As part of the spin-off, Resideo was promised a license to continue using the Honeywell Home brand of products for 40 years.

“In truth, after the spin-off, Resideo continued to compete directly with its former parent, Honeywell, in the sale of comfort products, including thermostats,” said the complaint. “Honeywell maintained an inventory of a key product line, and cannibalized Resideo’s business. Resideo focused on sales of newer model thermostats despite the popularity of the older model still being sold by Honeywell.”

The suit also said Resideo’s high-margin Residential Thermal Solutions (RTS) business, which sells components to manufacturers of heating systems, faced supply chain issues that were driven by industry declines.

“Despite those declines, Resideo misled investors about its RTS business generally and about the company’s management of its supply-chain in particular,” said the complaint.

The lawsuit said that after the close of trading on Oct. 22, Resideo released preliminary financial results for the third quarter announcing that earnings significantly missed estimates. It also said the company sharply cut back its earnings guidance for 2019 and announced the replacement of its CFO. Resideo’s stock fell $5.73 per share, or 37%, on the news.

The suit says the drivers of the results were the lower sales of thermostats and the performance of the RTS business. It also said the company and CEO Michael Nefkens and CFO Joseph Ragan “made materially false and misleading statements and omissions, and engaged in a scheme to deceive the market.” The suit contends that when their “misrepresentations and fraudulent conduct were disclosed to the market, the price of Resideo’s stock fell precipitously, as the prior artificial inflation came out of the price over time.”

The class action lawsuit covers the period of Oct. 10, 2018 through Oct. 22, 2019. A spokesperson for Resideo said the company doesn’t comment on pending litigation, but that it intends to defend any litigation vigorously.