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Jones v. Party City Holdco, Inc.

United States District Court, S.D. New York

February 1, 2017

ROY JONES, et al., Plaintiffs,
PARTY CITY HOLDCO, INC., et al., Defendants.

          Naumon A. Amjed Ryan T. Degnan Andrew L. Zivitz Johnston de F. Whitman, Jr. Meredith L. Lambert KESSLER TOPAZ MELTZER & CHECK, LLP Attorneys for Plaintiffs

          Mark C. Hansen David L. Schwarz Joshua D. Branson KELLOGG, HUBER, HANSEN, TODD, EVANS &FIGEL, P.L.L.C. Attorneys for Defendants Party City HoldcoInc., Thomas H. Lee Partners, L.P., Michael A.Correale, and James M. Harrison

          James P. Smith III Robert Y. Sperling Joseph L. Motto WINSTON & STRAWN LLP Attorneys for Defendants Goldman, Sachs &Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Credit Suisse Securities (USA)LLC, and Morgan Stanley & Co. LLC

          Matthew Solum Elliot C. Harvey Schatmeier KIRKLAND & ELLIS LLP Stuart M. Glass CHOATE HALL & STEWART LLP Attorneys for Defendant Advent International Corporation


          Lewis A Kaplan United Slates District Judge

         This putative class action[1] arises out of statements made in connection with Party City's initial public offering on April 16, 2015. The Consolidated Amended Complaint (the “CAC”) alleges violations of Sections 11, 12(a)(2), and 15 of the Securities Act of 1933.[2] The matter is before the Court on defendants' motions to dismiss the CAC for failure to state a claim upon which relief may be granted.


         The Parties

         M. Erik Meinholz is Lead Plaintiff on behalf of the putative class.[3] Defendant Party City Holdco Inc. (“Party City” or the “Company”) is a global party goods retailer and supplier.[4] During the relevant period, defendant Michael A. Correale was the Company's chief financial officer, and defendant James M. Harrison was the chief executive officer.[5]

         Plaintiffs sue also two beneficial owners of Party City common stock-Thomas H. Lee Partners, L.P. (“THL”) and Advent International Corporation-and Party City's underwriters: Goldman Sachs & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Credit Suisse Securities (USA) LLC, and Morgan Stanley & Co. LLC.[6]

         Part y City's Business

         Party City is the country's largest retailer and world's largest distributor of licensed (e.g., products featuring movie characters) and non-licensed party supplies, including costumes, balloons, decorations, and tableware.[7] Party City generates revenue from wholesale and retail operations, with retail sales representing a higher proportion of the Company's revenue.[8]

         Party City's retail strategy consists of offering customers a “broad selection of continuously updated and innovative merchandise at a compelling value” through approximately 900 superstores, an online website, and over 300 temporary Halloween stores.[9] To that end, the Company maintains a large collection of manufacturing and distribution licenses so that it regularly may introduce new products to “effectively respond to changes in consumer trends.”[10] Although Party City sells non-licensed products as well, its ability to manufacture products for popular brands, such as Disney, Marvel, and the NFL, has been key to its industry success.[11]

         The Frozen “Phenomenon”

         In November 2013, Disney released the movie Frozen, which became a worldwide sensation.[12] Not only did the film generate impressive ticket sales, but “customers rushed to stores in droves to purchase licensed Frozen merchandise.”[13] Demand for the film's merchandise was so high that Disney initially was “caught flat-footed by the massive consumer demand for anything and everything ‘Frozen'”; there were not enough products on the shelves to meet customer demand “until well into 2014.”[14]

         Plaintiffs allege that Party City, as a supplier of Disney merchandise, “attempted to capitalize on what it termed ‘the Frozen phenomenon' in late 2014” by, for example, promoting its line of Frozen costumes for Halloween and including prominent images of Frozen merchandise in an investor presentation.[15]

         The IPO

         In 2011, Party City had filed a registration statement with the Securities Exchange Commission in connection with a planned initial public offering (“IPO”). Ultimately, however, it did not go public and instead sold a majority of its shares to THL in a private deal.[16]

         A few years later, on January 21, 2014, Party City filed another registration statement for a planned IPO of 21, 875, 000 shares of its common stock.[17] In a subsequently filed prospectus, the Company touted its “differentiated, vertically integrated business model” and stated its belief that its “superior selection of party supplies, scale, innovation and service position [it] for future growth across all of [its] channels.”[18] Party City completed the IPO on April 21, 2015, at $17.00 per share, with the underwriters exercising their option to purchase additional shares.[19]

         The Alleged Misstatement or Omission

         Plaintiffs allege that, “unbeknownst to investors at the time of the IPO, the success of Party City's licensed goods in 2014 was due in large part to what Defendants later referred to as the ‘Frozen phenomenon.'”[20] Even though the Frozen “phenomenon” contributed to Party City's success leading up to the IPO, the Company allegedly “said nothing of the sales-driving license in the Offering Documents.”[21] In fact, Party City, plaintiffs contend, represented the opposite by stating in the Registration Statement and Prospectus:

“We hold numerous intellectual property licenses from third parties, allowing us to use various third-party cartoon and other characters and designs on our products, and the images on our metallic balloons and c[ostumes] are principally covered by these licenses. None of these licenses is individually material to our aggregate business.”[22]

         Plaintiffs allege that the statement that none of Party City's third-party licenses individually was material to its aggregate business was materially false or misleading because “Frozen's impact was so material to Party City's business in the second half of 2014 that it could not be offset by Party City's other licenses in the second half of 2015.”[23] Plaintiffs contend that Party City admitted in post-IPO statements that Frozen's impact on its business was a “phenomenon” and an “anomaly” that led to significant decline in Party City's “brand comp sales”-i.e., the year-over-year or quarter-over-quarter change in retail sales from Party City's stores and online website.[24] In sum, plaintiffs claim that

“while the Offering Documents created the misleading impression that Party City could sustain its impressive sales growth in 2014 as customer demand shifted from Frozen to other licensed products, Defendants' subsequent admissions revealed that because customers were not purchasing Frozen products in lieu of other licensed merchandise, Party City's other ‘traditional' licenses did not underper form at the expense of Frozen and were therefore not strong enough to offset the ‘anomaly' of Frozen's material impact on the Company's financial performance.”[25]

         Thus, plaintiffs argue, Frozen in fact was material to Party City's business, and any Company statements suggesting otherwise were false or misleading.[26]

         On the last day of trading before plaintiffs filed their complaint, Party City's shares closed at $11.80, down ...

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