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In re CPI Card Group Inc. Securities Litigation

United States District Court, S.D. New York

October 27, 2017


          Alfred Louis Fatale, III Eric David Gottleib Joel H. Bernstein Michael Walter Stocker Ross Michael Kamhi Labaton & Sucharow LLP Attorneys for Plaintiff

          Phillip C. Kim The Rosen Law Firm P.A. Attorney for Brett Rosenfarb

          Lesley Frank Portnoy Glancy Prongay & Murray LLP Attorney for Steve Bos tic and Waltraud Buchanan

          Peretz Bronstein Bronstein, Gewirtz & Grossman Attorney for John Lorge, Paul Costanzo Jr., Kenyon Riches, and John P. Hodges, Jr.

          Kim Elaine Miller Kahn Swick & Foti, LLC Attorney for Dean Hiser

          Jeffrey Philip Campisi Kaplan Fox & Kilsheimer LLP Attorney for Thomas C. Swieringa

          Thomas Livezey Laughlin, IV Scott Scott, L.L.P. Attorney for Shannon Wayne Myers and Vida Myers

          Carl Zank Pro Se

          James P. Smith, III Dewey & LeBoeuf, L.L.P. Matthew Lawrence DiRisio Winston & Strawn LLP Attorneys for Defendants CPI Card Group, Inc., Steven Montross, David Brush, Jerry Dreiling, Bradley Seaman, Nicholas Peters, Robert Pearce, David Rowntree, Tricor Pacific Capital Partners (Fund IV) US, Limited Partnership, and Tricor Pacific Capital, Inc.

          Adam Selim Hakki Agnes Dunogue Shearman & Sterling LLP Attorneys for Defendants BMO Captial Markets Corp., Goldman, Sachs & Co., CIBC World Markets Inc., Robert W. Baird & Co.

          Incorporated, William Blair & Company, L.L.C, Raymond James & Associates, Inc., Scotia Capital (USA) Inc., and Griffiths McBurney Corp.



         This case arises out of statements made in connection with CPI Card Group's initial public offering ("IPO") of October 15, 2015.[1] The Consolidated Complaint alleges violations of Sections 11 and 15 of the Securities Act.[2] Defendants moved to dismiss the complaint for failure to state a claim upon which relief may be granted.[3] For the following reasons, the motion is denied.


         I. CPI's Business and the "Liability Shift"

         Credit and debit cards traditionally carried encoded data that facilitated transactions in a magnetic stripe on the backs of the cards. Liability for fraudulent card activity fell on the card issuers.

         With the passage of time, it became possible to issue new, presumably more secure, "chip, " or "EMV, " cards[4] that carry encoded information on embedded chips. Effective October 1, 2015, liability for fraudulent activity shifted to merchants and away from card issuers when (a) the latter made "chip" or "EMV" cards available to their customers and (b) fraudulent transactions took place with merchants that did not adopt the technology needed to read the new cards.[5]

         CPI manufactures and sells credit and debit card blanks to banks and other card issuers as part of its business. The 2015 liability shift was a boon to it because it drove card issuers to convert to chip cards, which required the issuers to buy new card blanks from CPI and other suppliers. Business started booming in the second half of 2014 as issuers began to replace their customers' traditional cards with chip cards.[6] CPI, based on an industry consultant's estimates, expected its business to grow from $976 million in 2015 to $1.2 billion in 2019.[7]

         II. The IPO and the Months Following

         a. October and November 2015: The IPO and a Sales Increase in Third Quarter 2015

         On October 15, 2015, CPI conducted an IPO of around $137.5 million of common stock. When CPI announced its third quarter results on November 12, 2015, earnings-per-share were higher than analysts' predictions, and net sales were up from 2015.[8] During a conference call that same day, CPI chief executive officer David Montross said that the third quarter earnings "represented a modest pull forward" of chip card business from the fourth quarter into the third.[9]

         b. February 2016: Sales Are Down in Fourth Quarter 2015

         Then, on February 24, 2016, CPI announced its fourth quarter and 2015 year-end results.[10] Chip card sales during the fourth quarter were down, which was consistent with CPI's expectations following the pull forward in the quarter previous.[11] Montross said during the earnings call that large card issuers were "eas[ing] their pace of EMV card purchases through the second half of the year" to work through pre-existing card inventory because they had made "substantial purchases in the first half of 2015."[12] He predicted that "this dynamic" - large card issuers slowing purchases as they worked through pre-existing inventory - would continue into early 2016; that CPI nevertheless would meet expected growth predictions for 2016 based on its "reasonably good visibility into the overall EMV demand by large issuers;" and that large issuers' purchases of chip cards would be "weighted to the second half of [2016]."[13]

         c. May 2016: First Quarter 2016 Sales Are Down and a Trend Is Announced

         CPI announced its first quarter 2016 results on May 11, 2016.[14] They were below expectations. In a press release describing the quarter's results, CPI announced two trends that were causing it to reduce its guidance range for 2016. "First, the carryover into 2016 of unissued EMV card inventories at the large issuers and processors is much greater than anticipated, and accordingly, their EMV card purchases are being curtailed until inventories return to normal levels. Second, evidence of slower than anticipated EMV conversions for the small to mid-sized issuers . . . leads us to expect a delay to 2017 of a portion of EMV card demand . . . that we had expected in 2016."[15]

         Montross explained more about these trends in an earnings call the same day. Large issuers' "overstocking" of chip cards during 2015, he said, was "much greater than previously understood, " with many issuers in possession of at least a three month supply of excess inventory.[16]He noted the other trend - small- to mid-sized issuers' delayed conversion to chip cards - without much explanation.[17] He predicted also that these trends would lead to a reduction in demand of $35 to $40 million from the original 2016 guidance range.[18] Finally, he alerted investors to "increased competitive intensity for the EMV card orders... leading to greater than expected pressure on EMV card prices in the large issuer market."[19]

         CPI's stock, which had opened at $7.83 per share on May 11, closed at $4.01 per share on May 12.[20]

III. This Litigation

         The plaintiffs here allege that the defendants violated Sections 11 and 15 of the Securities Act of 1933 by publishing a misleading registration statement in connection with CPI's October 15, 2015 IPO.[21] Defendants moved for dismissal under Rule 12(b)(6) of the Federal Rules of Civil Procedure based on what they contend is plaintiffs' failure to state a claim upon which relief may be granted.[22]


         "Sections 11 ... and 15 of the Securities Act impose liability on certain participants in a registered securities offering when the publicly filed documents used during the offering contain material misstatements or omissions."[23] One such actionable omission is the failure to disclose a "material fact required to be stated."[24] Section 11 creates strict liability for ...

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