releases published by home depot; (4) analyst...
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releases published by Home Depot ; (4) analyst reports concerning the Company ;
and (5) newspaper and magazine articles (and other media coverage) regarding
Home Depot and its business .
Many of the facts supporting the allegations contained herein are known
only to the defendants or are exclusively within their custody and/or control .
Plaintiff believes that further substantial evidentiary support will exist for the
allegations in this Complaint after a reasonable opportunity for discovery .
I .. NATURE OF THE ACTION
1 . This is a securities class action brought on behalf of all purchasers of
Home Depot's publicly-traded securities between May 29, 2001 and February 22,
2005, inclusive (the "Class Period"), which securities were artificially inflated as a
result of violations of the federal securities laws arising out of defendants' (a)
dissemination of false and misleading statements concerning the Company's
financial results and operations ; and (b) systematic manipulation of Home Depot's
sales and earnings figures .
2 . Former and current Home Depot employees have revealed that the
Company deceived vendors and falsified Home Depot's financial results through
fraudulent return-to-vendor {"RTV") policies by which Home Depot improperly
inflated what it charged vendors to cover the cost of defective and/or damaged
merchandise . Those employees further disclosed that these improper practices
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have been going on for longer than a decade and that the pressure to manipulate
vendor chargebacks came from Company management, including one senior
operations executive who authored a memo on the subject in April 2002 . In
addition, it appears that there is documentary proof that senior Company officials
have been aware of (for some time) the Company's improper vendor charegebacks
fi-om, among other sources, Home Depot store employees .
3 . Throughout the Class Period, the defendants published false and
misleading financial statements which failed to disclose that the Company's store
sales numbers and net income were artificially and materially inflated by virtue of
the improper chargeback money .
4 . In January 2006, it was reported that the SEC had opened in August
2005 an informal inquiry into whether Home Depot had inflated its profits through
vendor payments intended to cover the cost of defective and/or damaged
merchandise .
I :[. JURISDICTION AND VENUE
5 . This action arises under Sections 10(b), and 20(a) of the Exchange
Act of 1934 ("Exchange Act"), 15 U .S .C. §§ 78j(b) and 78t(a), and Rule lOb-5
promulgated thereunder, 17 C .F.R. § 240.1Ob-5 .
6 . This Court has subject-matter jurisdiction over this action pursuant to
Section 27 of the Exchange Act, 15 U .S .C. § 78aa, and 28 U .S .C . § 1331 .
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7 . Venue is proper in this District pursuant to Section 27 of the
Exchange Act and 28 U .S.C . § 1391 . Many of the acts and practices complained
of herein occurred in substantial part in this District . Home Depot maintains its
headquarters in this District at 2455 Paces Ferry Road, N .W., Atlanta, Georgia
30339 .
8 . In connection with the acts, transactions and conduct alleged herein,
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 a national securities exchange and
market .
I'll. PART IES
A. Plaintiff
9 . Plaintiff, John Mizzaro, as set forth in the accompanying certification
( i:ncorporated by reference herein), purchased the publ icly traded securities of
Home Depot at an artificially inflated price during the Class Period .
B. Defendants
1 . Home Depot
10 . Defendant Home Depot is a Delaware corporation, with its principal
place of business located in Atlanta, Georgia . Home Depot securities are listed on
the New York Stock Exchange ("NYSE") under the symbol "HD" . According to
the Form 10-K that it filed with the SEC on or about March 29, 2006, the
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Company is the world's largest home improvement retailer and the second largest
retailer in the United States, based on net sales for the fiscal year ended January 29,
2006 ("Fiscal 2005") . At the end of Fiscal 2005, Home Depot was operating 2,042
stores . Home Depot stores sell a wide assortment of building materials, home
improvement and lawn and garden products . Home Depot stores also offer a
variety of installation services .
2 . Individu al Defendants
11 . Defendant Robert L . Nardelli ("Nardelli") has served as Chairman of
the Board of Home Depot since January 2002 and as President and Chief
Executive Officer of Home Depot since December 2000 . Defendant Nardelli
participated in the issuance of, made statements in, signed, and/or certified as
accurate, the Company's false and misleading press releases and SEC filings
during the Class Period . Because of Defendant Nardelli's position, he knew the
adverse non-public information about the business of Home Depot as well as its
finances and present and future business prospects, via access to internal corporate
documents, conversations and connections with other corporate officers and
employees, attendance at management (and/or Board of Directors') meetings and
via reports and other information provided to him in connection therewith .
12. Defendant Carol B . Tome {"Tome"} has been Executive Vice
President and Chief Financial Officer of Home Depot since May 2001, and prior
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thereto, had been Senior Vice President - Finance and Accounting/Treasurer of the
Company since February 2000 . From 1995 until 2000, she served as Home
Depot's Vice President and Treasurer . In her present position, Defendant Tome is
responsible for all corporate finance matters, including financial reporting,
financial planning & analysis, financial operations, divisional finance, internal
audit, investor relations, treasury and tax . Defendant Tome participated in the
issuance of, made statements in, signed, and/or certified as accurate, the
Company's false and misleading press releases and SEC filings during the Class
Period. Because of Defendant Tome's position, she knew the adverse non-public
information about the business of Home Depot as well as its finances and present
and future business prospects, via access to internal corporate documents,
conversations and connections with other corporate officers and employees,
attendance at management meetings and via reports and other information
provided to her in connection therewith .
13 . By certifying (where required by the Sarbanes-Oxley Act of 2002)
various of the Company's SEC filings, Defendants Nardelli and Tome represented
that (a) those filings accurately portrayed the Company's financial condition ; and
(b) each had inspected the Company's disclosure and internal financial reporting
controls and found them to be effective .
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14. Defendant Kenneth G. Langone ("Langone") was a co-founder of
Home Depot and, according to the Company's Definitive Proxy Statement filed
April 11, 2005, beneficially owns over 17 million shares of Home Depot stock .
Defendant Langone also has been a member of the Company's Board since 1978
and has served as Home Depot's "Lead Director" since 1998 . As Lead Director,
Defendant Langone, inter alia, (a) acts as a liaison between non-management
directors and Company management ; (b) chairs the executive sessions of non-
management directors; and (c) consults with the Chairman of the Board on the
agenda for Board meetings and other matters pertinent to the Company and the
Board. A June 2002 article in Fortune referred to Defendant Langone as "arguably
the most powerful person at Home Depot ." Defendant Langone also (a) recruited
Defendant Nardelli to join Home Depot as its President in 2000 ; (b) served on the
Company's Audit Committee for a portion of Class Period ; and (c) signed certain
of the Company's false and misleading SEC filings .
15. Defendant Berry R. Cox ("Cox") was a Director of Home Depot from
1978 until June 2005 . In a statement issued by Defendant Home Depot in June
2005, Defendant Cox was described as "one of [Home Depot's] original investors"
and a "steadfast supporter of the company through each phase of our growth over
the past 25 years ." From the beginning of the Class Period until August 2002,
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Defendant Cox served as the Chairman of Home Depot's Audit Committee .
Defendant Cox signed certain of the Company's false and misleading SEC filings .
16 . Defendant John L. Clendenin ("Clendenin") has been a Director of
Home Depot since 1996. From August 2002 to the present, Mr. Clendenin has
served as Chairman of Home Depot's Audit Committee. Defendant Clendenin
signed certain of the Company's false and misleading SEC filings .
17. The Company's Audit Committee Charter (the "Charter") sets forth
that among the primary purposes of this committee is to "assist the Board of
Directors in fulfilling its oversight of . . .the integrity of the Company's financial
statements" and "the performance of the Company's internal audit function . . . ."
The Charter adds that "[i]n fulfilling its purpose, the Committee shall review : (a)
the financial reports and other financial information of the Company; (b) the
Company's systems of internal controls and procedures and disclosure controls and
procedures ; and (c) the Company's auditing, accounting and financial reporting
processes generally ."
18 . Accordingly, as chairmen of the Audit Committee during a portion of
the Class Period, both Defendant Cox and Defendant Clendenin had the
responsibility to, among other things, monitor the Company's financial reporting
processes and internal control systems and review the Company's financial
statements prior to their public dissemination. Defendants Cox and Clendenin
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knew that Home Depot's financial statements would be subsequently referred to
and incorporated within the Company's public filings . Consequently, Defendants
Cox and Clendenin had an obligation to ensure that those financial statements were
not false and misleading. Nevertheless, as detailed herein, as a result of
I:>efendants Cox and Clendenin's intentional or reckless disregard of their duties,
Home Depot published financial statements that were materially false and
misleading.
19 . Defendant Larry M. Mercer ("Mercer") is a former officer of Home
Depot. Defendant Mercer was employed by the Company for approximately 23
years, from 1979 until his retirement during the second half of 2002 . From the
start of the Class Period until his retirement, Defendant Mercer served as Home
Depot's Executive Vice President of Store Operations . In that capacity, Defendant
Mercer was responsible for operations at the Company's retail locations .
According to press accounts, following his retirement, Defendant Mercer served as
an advisor to Defendant Nardelli until February 2004 . In April 2002, while
employed as the Company's Executive Vice President of Store Operations,
Defendant Mercer wrote a memorandum to Home Depot store managers in which
he addressed "missed RTV dollars ." According to one news account, this
memorandum discussed "specific categories, such as the electrical and flooring
departments, that had the greatest opportunity to boost chargebacks, and estimated
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that on a Company-wide basis Home Depot was missing out on more than $59
million in credits ." Accordingly, Defendant Mercer actively participated in the
scheme, plan and course of conduct that defrauded Plaintiff and the other members
of the Class during the Class Period .
20 . Defendants Nardelli, Tome, Langone, Cox, Clendenin, and Mercer are
collectively referred to herein as the "Individual Defendants." The Individual
Defendants and Home Depot are collectively referred to herein as the
"Defendants."
IV. CONTROL PERSON ALLEGATIONS/GROUP PLEADING
21 . By virtue of the Individual Defendants' positions within the
Company, they had access to undisclosed adverse information about its business,
operations, operational trends, finances, and present and future business prospects .
The Individual Defendants would ascertain such information through Home
Depot's internal corporate documents (including the Company's operating plans,
budgets and forecasts and reports of actual operations compared thereto),
conversations and connections with other corporate officers and employees,
conversations and connections with vendors and customers, attendance at sales,
management, and Board of Directors' meetings, including committees thereof, and
through reports and other information provided to them in connection with their
roles and duties as Home Depot officers and directors .
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22, It is appropriate to treat the Individual Defendants collectively as a
group for pleading purposes and to presume that the materially false, misleading
and incomplete information conveyed in the Company's public filings and press
releases as alleged herein was the result of the collective actions of the Individual
Defendants identified above . The Individual Defendants, by virtue of their high-
level positions within the Company, directly participated in the management of the
Company, were directly involved in the day-to-day operations of the Company at
the highest levels and were privy to confidential proprietary information
concerning the Company and its business, operations, prospects, growth, finances,
and financial condition, as alleged herein .
23 . The Individual Defendants were involved in drafting, producing,
reviewing, approving and/or disseminating the materially false and misleading
statements and information alleged herein, including SEC filings, press releases,
and other public documents, were aware of or recklessly disregarded the fact that
materially false and misleading statements were being issued regarding the
Company, and approved or ratified these statements, in violation of the federal
securities laws .
24. As officers and controlling persons of a publicly-held company whose
common stock was, and is, registered with the SEC pursuant to the Exchange Act,
and was traded on the NYSE, and governed by the provisions of the federal
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securities laws, the Individual Defendants each had a duty to promptly disseminate
accurate and truthful information with respect to the Company's financial
condition and performance, growth, operations, financial statements, business,
markets, management, earnings and present and future business prospects, and to
correct any previously issued statements that had become materially misleading or
untrue, so that the market price of the Company's publicly traded securities would
be based upon truthful and accurate information . The Individual Defendants'
material misrepresentations and omissions during the Class Period violated these
specific requirements and obligations .
25 . The Individual Defendants, by virtue of their positions of control and
authority as officers and/or directors of the Company, were able to and did control
the content of the various SEC filings, press releases and other public statements
pertaining to the Company during the Class Period . The Individual Defendants
were provided with copies of the documents alleged herein to be misleading prior
to or shortly after their issuance and/or had the ability and/or opportunity to
prevent their issuance or cause them to be corrected . Accordingly, they are
responsible for the accuracy of the public reports and releases detailed herein .
V. CLASS ACTION ALLEGATIONS
26 . Plaintiff brings this action as a class action pursuant to Federal Rules
of Civil Procedure 23(a) and 23(b)(3) on behalf of a class (the "Class") of all
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persons who purchased or otherwise acquired Home Depot securities during the
Class Period, and who were damaged thereby. The Class Period is from May 29,
2001 through February 22, 2005 .
27 . Excluded from the Class are the Defendants herein, members of the
immediate families of the Individual Defendants, any parent, subsidiary, affiliate,
officer, or director of Defendant Home Depot, any entity in which any excluded
person has a controlling interest, and the legal representatives, heirs, successors
and assigns of any excluded person .
28 . The members of the Class are so numerous that joinder of all
members is impracticable . While the exact number of members of the Class is
unknown to Plaintiff at the present time and can only be ascertained from books
and records maintained by Home Depot and/or its agent(s), Plaintiff believes that
there are tens of thousands of members of the Class located throughout the United
States. As of February 22, 2005, Home Depot had issued and outstanding over 2
billion shares of common stock . Throughout the Class Period, Home Depot
common stock was actively traded on the NYSE, with more than 8 .7 billion shares
traded during the Class Period .
29 . Plaintiff will fairly and adequately represent and protect the interests
of the members of the Class . Plaintiff has retained extremely competent counsel
experienced in class and securities litigation and intends to prosecute this action
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vigorously. Plaintiff is a member of the Class and does not have interests
antagonistic to, or in conflict with, the other members of the Class .
30 . Plaintiff's claims are typical of the claims of the members of the
Class. Plaintiff and all members of the Class purchased Home Depot securities at
artificially inflated prices and have sustained damages arising out of the same
wrongful course of conduct .
31 . Common questions of law and fact exist as to all members of the
Class and predominate over any questions solely affecting individual members .
Among the questions of law and fact common to the Class are :
(a) Whether the federal securities laws were violated by the
Defendants' acts and omissions as alleged herein ;
(b) Whether the Defendants participated in and pursued the
common course of conduct and fraudulent scheme complained of herein ;
(c) Whether the Defendants had knowledge of (or were reckless
with respect to) the improper activities described herein ;
(d) Whether the statements disseminated to the investing public,
including investors in Home Depot, during the Class Period omitted and/or
misrepresented material facts about Home Depot's true financial condition,
business operations and future business prospects ;
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(e) Whether Defendants acted knowingly or recklessly in omitting
to state and/or misrepresenting material facts ;
(f) Whether the market price of Home Depot's securities during the
Class Period was artificially inflated due to the non-disclosures and/or
misrepresentations complained of herein ; and
(g) Whether Plaintiff and the other members of the Class have
sustained damages and, if so, the appropriate measure thereof
32 . A class action is superior to other available methods for the fair and
efficient adjudication of this controversy since, among other things, joinder of all
members of the Class is impracticable . Furthermore, as the damages suffered by
many individual Class members may be relatively small, the expense and burden
of individual litigation make it virtually impossible for Class members individually
to seek redress for the wrongful conduct alleged. Plaintiff does not foresee any
difficulty in the management of this litigation that would preclude its maintenance
as a class action .
33 . The names and addresses of the record owners of the shares of Home
Depot common stock and other securities purchased during the Class Period are
available from Home Depot and/or its transfer agent(s) . Notice can be provided to
persons who purchased or otherwise acquired Home Depot common stock by a
combination of published notice and first class mail, using techniques and forms of
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notice similar to those customarily used in other class actions arising under the
f.-deral securities laws .
VI. OVERVIEW OF HOME DEPOT'S FRAUDULENT RTV SCHEME
34 . Each of the Defendants is liable as a participant in a scheme, plan and
course of conduct that operated as a fraud and deceit on Class Period purchasers of
the Company's securities . Throughout the Class Period, Defendants disseminated
materially false and misleading statements and concealed material adverse facts
about Home Depot's operations and financial condition . Specifically, the
Company inflated its revenues and earnings during the Class Period by recording
ill-gotten gains through an unconscionable business plan which relied extensively
upon improper vendor chargebacks .
35 . The Company has publicly boasted of its adoption of (and adherence
to) a strict ethical code . Indeed, the Company's Definitive Proxy Statement dated
April 11, 2005 referenced Home Depot's Code of Ethics (the "Code") as follows :
The Company has adopted a Business Code of Conductand Ethics, which is applicable to all directors, officersand associates of the Company, including the principalexecutive officer and the principal financial andaccounting officer. The Business Code of Conduct andEthics includes a Code of Ethics for Senior FinancialOfficers, which is applicable to the Chief ExecutiveOfficer, Chief Financial Officer, Controller, Treasurer,all Senior Vice Presidents of the Finance Department andother designated financial associates . The complete textof the Business Code of Conduct and Ethics is availableon the Company's web site at www.homedepot.com
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under Investor Relations and is also available in printupon request .
36. According to the Company's website, the Code provides, among other
things, that :
The Home Depot has a strong commitment to ethics andintegrity in everything we do . Our core values define thevery means by which we do business. Doing the rightthing each and every day by our associates, customers,vendors, suppliers and the communities we serve is keyto our ongoing success . It is equally important that wedo those things right .
Each Director, Officer and Associate should always dealfairly with the Company's customers, suppliers,competitors and Associates. None should take unfairadvantage of anyone through manipulation, concealment,abuse of privileged information, misrepresentation ofmaterial facts, or any other unfair practice .
37. However, notwithstanding its alleged adherence to strict ethical
standards, throughout the Class Period, the Company deceived vendors and
falsified Home Depot's financial results through fraudulent RTV policies . More
specifically, throughout the Class Period, the Defendants (a) coerced Home Depot
employees to fraudulently inflate what the Company charged vendors to cover the
cost of defective and/or damaged merchandise ; and (b) pressured suppliers who
complained about excessive chargebacks by threatening to reduce orders of their
products . Throughout the Class Period, fraudulent vendor chargebacks were
"standard practice" at Home Depot stores throughout the United States ; and the
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Company derived significant revenue from that improper conduct . Indeed, the
SEC has opened an informal inquiry regarding whether Home Depot inflated its
profits through vendor payments intended to cover the cost of defective and/or
damaged merchandise .
38 . In the Summer of 2005, Michael Davis, a former employee at a Home
Depot store in Maryland, filed a complaint with the U .S. Department of Labor,
alleging that the Company defrauded vendors when it inflated amounts charged to
them for defective and/or damaged merchandise . As noted in a news article
appearing in the Atlanta Journal-Constitution :
In the complaint against Home Depot, ex-employeeMichael Davis alleges the Atlanta-based chain processedfalse claims and reported fake quantities of defective ordamaged items to vendors to collect added revenue thatcould reach $40,000 to $50,000 a week at a store.
The complaint says certain vendors offered monthlyallowance credits for such items . Davis alleges that,while working as a return-to-vendor clerk, he was told tocharge an amount just below the ceiling, even if the storedidn't have damaged or returned goods worth that much .
Davis claims he falsified documents at the request ofmanagement and was later fired in retaliation for notcooperating with increased requests for padding thereturns to vendors.
(emphasis added) .
39. Mr. Davis' account of Home Depot's fraudulent RTV practices has
been confirmed by other Home Depot employees . As set forth in a January 20,
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2006 article appearing in the New York Post (titled "Surplus Scam Seen -- Home
Depot Overcharge Charged") :
A Home Depot store in Maryland wound up with $1million in excess inventory as a result of overchargingsuppliers to cover the cost of damaged or defectivemerchandise, according to a former employee.
The former employee, Donald Moyer, discussed thesurplus inventory during a deposition last week taken byMark Schwartz, a Bryn Mawr, Pa ., lawyer for anotherformer Home Depot staffer, Michael Davis, who said heblew the whistle on the practice of inflating supplierpayments, known as return-to-vendor credits .
The excess inventory, which, according to Moyer, wasdiscovered during a 2004 audit, shows how inflatedreturn-to-vendor credits can lead to discrepanciesbetween what is actually taking place at a store and whatis recorded in financial records .
Though Moyer's comments related solely to a store inCollege Park, Md., other current and former employeeshave described similar situations at other Home Depotstores in different regions of the country .
~x~ **
Every six months to a year, auditors physically count theinventory at a given store and compare their results to theamount on Home Depot's books, Moyer said .
Last year, auditors counting inventory at the Home Depotstore in College Park, wound up with a startling result .The inventory at the store exceeded the amount recordedon Home Depot's books by $ 1 million.
Usually, the reverse is true, accounting experts said .
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"The book value tends to exceed a store's actualinventory due to theft and breakage," said Edward Ketz,associate professor of accounting at Penn StateUniversity .
Moyer, who at the time was an operations manager at aneighboring store in Aspen Hill, Md ., said that HomeDepot's corporate office sent a team to investigate .
"They determined that the extra inventory was the resultof inflated RTV dollars," Moyer said .
Moyer described how the practice might work: Anemployee could charge a vendor for a light bulb that isneither damaged nor defective, but in good condition .
On the books, that light bulb is recorded as having beenreturned to the vendor, lowering the store's inventory .
In reality, however, the light bulb remains on the storeshelves, thereby giving rise to a discrepancy between the"physical" inventory and the "paper" inventory .
In general, such discrepancies can have a real impact on astore's reported profits, said Ketz, the accountingprofessor. Higher return-to-vendor credits help offsetshrinkage, the loss of merchandise to theft or damage ."By lowering shrinkage, you lower cost of goods soldand thereby boost income," Ketz said .
Based on a rough projection of the College Park store'scost of goods sold, Ketz estimated that the $1 millioninventory discrepancy could have resulted in a 4 percentboost to profits .
(emphasis added) .
40. In a New York Post article dated March 23, 2006 (and titled "Home
Wrecker - Manager Claims Whistle-Blowing Led to Firing"), yet another former
Home Depot employee confirmed the Company's fraudulent RTV practices :
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In her 18 months as an operations manager at HomeDepot, Ellen Sharp was known as a stickler for the rules,so much so that she said her superiors had taken toderisively calling her "Ms. Home Depot."
Sharp, 56, said that she suspects her desire to play by therules resulted in her termination two weeks ago, after shewrote a letter to management voicing concerns over theway the company collects money from vendors to coverthe cost of damaged merchandise .
The practice, known as return-to-vendor credits, hasdrawn scrutiny from other employees, including MichaelDavis, who worked at the same store as Sharp and who issuing the home improvement giant for wrongfultermination .
The issue has sparked an internal investigation by HomeDepot management and has also caught the eye of theSecurities and Exchange Commission, which has openedan informal inquiry into the matter .
Home Depot, in a statement, said that Sharp was placedon leave because of an incident in which she reportedlyviolated company policy in dealing with a customer .Sharp said she improperly apprehended a shoplifter . Thecompany declined to provide details of the incident .
*~~*
Soon after joining Home Depot in September 2004 as anoperations manager in the Aspen Hill, Md ., store, Sharpsaid she found herself at odds with management overreturn-to-vendor practices .
During weekly conference calls, Alan Wells, the districtloss prevention manager suggested that return-to-vendorcredits should equal about 3 percent of a store's weeklysales, according to Sharp, who participated in theconference calls .
Wells declined to comment .
Sharp said that Robert Hommerbocker, the storemanager, would urge her to do a better job of hitting 3percent .
"I told Bob that I was not going to pad the numbers,"Sharp said .
Interestingly, within a short period in late January and early February41 .
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At Aspen Hill, however, return-to-vendor credits wouldnormally total about 1 percent to 2 percent of the store'sweekly sales, according to Sharp, who had directoversight of processing these credits .
Hommerbocker declined to comment for this story .
Sharp eventually expressed her concerns in a letter toHommerbocker dated March 1 .
"As you know," Sharp wrote, "I have always been veryvocal with regard to the Return to Vendor (RTV) andmarkdown practices that occur in the Home Depotsystem."
In the letter, a copy of which was made available to ThePost, Sharp referred to a December incident, in which anemployee placed RTV tags on $3,400 worth of plumbingmerchandise that he took from the sales floor .
Company policy dictates that only merchandise thatcustomers return to the store as damaged or defective canbe catalogued as RTV .
2006, two Home Depot executives left the Company . One of those employees,
according to a February 3, 2006 New York Post report titled "Second Regional
Exec Exits ; Oversaw Inventory," was Chris Spaccaforno, a loss prevention
manager for the Northern region, whose duties included, inter alia, "overseeing
inventory management and shrinkage, the amount of merchandise lost to theft,
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damages or receiving mistakes ." As noted in this press report, "[s]hrinkage has
been a focus point at Home Depot after a former employee, Michael Davis,
accused the retailer of inflating charges to vendors to cover the cost of damaged or
defective merchandise ." Mr. Spaccaforno's departure came just weeks "after the
president of the Northern region [Troy Rice] left the company for reasons that
remain unclear ." In a January 14, 2006 article in the New York Post titled "Top
Home Depot Exec Leaves," it was reported that in his position, Mr. Rice oversaw
"operations for hundreds of [Home Depot] stores ."
42 . Internal controls are an essential component of any corporation's
financial policies and procedures . Simply stated, internal controls consist of all the
steps taken by a corporation for the purpose of: (a) protecting its resources against
waste and fraud ; (b) ensuring accuracy and reliability in accounting and financial
reporting; and (c) securing compliance with applicable law .
43 . Following the initial public disclosures outlining the fraudulent RTV
practices, it was reported in the press that the Company had "introduced a new
computer system that makes it more difficult for store employees to manipulate
return-to-vendor charges ."' This belated attempt by the Company to remediate the
extensive and pervasive fraud at Home Depot compels the conclusion that
1 Suzanne Kapner, "Screw Probe - SEC Eyes Supplier Payments to Home Depot,"New York Post, Jan. 12, 2006 (available on Lexis) .
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throughout the Class Period, there existed at Home Depot materially deficient
internal controls and procedures . These deficient internal controls and procedures,
in turn, rendered the Company incapable of accurately reporting its financial
results .
44 . The statements set forth below concerning the Company's revenue
growth, earnings, and financial performance were each false and misleading . The
(r'.ompany's fraudulent (and undisclosed) RTV scheme, which was a clear v iolation
of its own internal policies, materially inflated the Company's revenues and
earnings and potentially subjected the Company to significant regulatory fines,
penalties and other legal action .
45. As a result of Defendants' material omissions regarding the RTV
scheme that created significant earnings and revenue for the Company, the
investing public (including Plaintiff and the other members of the Class) could not
and did not understand or assess (a) the extent to which Home Depot's ongoing
operations were dependent upon fraudulent vendor chargebacks ; and (b) the risk to
which Home Depot's operations, reported revenue, earnings, and net income were
exposed when the fraudulent RTV scheme ultimately was disclosed publicly .
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VII. FALSE AND MISELADING STATEMENTS DURING THE CLASSPERIOD
46. As detailed herein, during the Class Period, Defendants issued or
caused to be issued materially false and misleading statements that deceived the
investing public as to the Company's financial performance and condition .
47. Many of the false and misleading statements set forth below were
made in Form 10-Q's and Form 10-K's that were certified by Defendant Nardelli
and Defendant Tome in accordance with the Sarbanes-Oxley Act of 2002 . By
certifying those particular Form 10-Q's and Form 10-K's, Defendants Nardelli and
Tome represented, inter alia, that the quality and accuracy of the information
contained therein concerning the Company's financial performance and condition
was safeguarded by internal financial controls in place at the Company, which
were designed to foster the development of reliable financial statements .
A. False and Misleading tatements Relating o Fiscal Year 2001
1 . Form 1p-Q for First Quarter of Fiscal Year 2001
48 . On or about May 29, 2001, Home Depot filed with the SEC a Form
1 O-Q for the first quarter of Fiscal Year 2001 (ending April 29, 2001) . Defendants
Nardelli and Tome signed Home Depot's Form 10-Q for the first quarter of Fiscal
Year 2001 . In that public filing, Home Depot reported that net sales for the first
quarter of fiscal 2001 increased 9 .8% to $12 .2 billion . The Company further
indicated that this increase in sales was partially offset by a 3% decline in
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comparable store-for-store sales. Home Depot also reported that gross profit as a
percent of sales was 30.0% for the first quarter of fiscal 2001 . In addition, the
Company indicated that diluted earnings per share were $0 .27 for the first quarter
of fiscal 2001 .
2. Form 10-0 for Second Quarter of Fiscal Year 2001
49. On or about August 27, 2001, Home Depot filed with the SEC a Form
10-Q for the second quarter of Fiscal Year 2001 (ending July 29, 2001) .
Defendants Nardelli and Tome signed Home Depot's Form 10-Q for the second
quarter of Fiscal Year 2001 . In that public filing, Home Depot reported that net
sales for the second quarter of fiscal 2001 increased 15 .5% to $14 .6 billion . At this
same time, Home Depot also reported that comparable store-for-store sales had
increased 1% for the second quarter of fiscal 2001 . The Company also reported
that gross profit as a percent of sales was 29 .7% for the second quarter of fiscal
2001, and that for the first six months of fiscal 2001, gross profit as a percent of
sales was 29.8%. Home Depot further indicated that net earnings as a percent of
sales were 6 .3% and 5 .8% for the second quarter and first six months of fiscal
2001, respectively. The Company also stated that diluted earnings per share were
$0 .39 and $0.66 for the second quarter and first six months of fiscal 2001,
respectively .
27
3 . Form 10- for Third Quarter of Fiscal Year 2001
50. On or about November 28, 2001, Home Depot filed with the SEC a
Form 10-Q for the third quarter of Fiscal Year 2001 (ending October 28, 2001) .
Defendants Nardelli and Tome signed Home Depot's Form 10-Q for the third
quarter of Fiscal Year 2001 . In that public filing, Home Depot reported that net
sales for the third quarter of fiscal 2001 increased 15 .1% to $13 .3 billion. The
Company also stated that for the first nine months of fiscal 2001, net sales
increased 1 3 .6% to $40 .1 billion . At this same time, the Company also stated that
comparable store-for-store sales were flat for the third quarter of fiscal 2001 . The
Company also reported that gross profit as a percent of sales was 30 .2% for the
third quarter of fiscal 2001, and that for the first nine months of fiscal 2001 gross
profit as a percent of sales was 29 .9%. The Company further stated that its net
earnings as a percent of sales were 5 .9% and 5 .8% for the third quarter and first
nine months of fiscal 2001, respectively. In addition, the Company further
indicated that diluted earnings per share were $0 .33 and $0 .99 for the third quarter
and first nine months of fiscal 2Q01, respectively .
4 . Form 10-K for Fis cal Year 2001
51 . On or about April 19, 2002, Home Depot filed with the SEC a Form
10-K for Fiscal Year 2001 (ending February 3, 2002) . Defendants Nardelli and
Tome signed Home Depot's Form 10-K for Fiscal Year 2001 . In addition,
28
Defendant Nardelli signed this Form 10-K on behalf of Defendant Langone,
Defendant Cox and Defendant Clendenin "pursuant to powers of attorney,
executed on behalf of each such [defendant] ." In that public filing, Home Depot
reported that net sales for fiscal 2001 increased 17 .1% to $53 .6 billion. The
Company also noted that comparable store-for-store sales were flat in fiscal 2001 .
Home Depot further reported that that gross profit as a percent of sales was 30 .2%
for fiscal 2001 . At this same time, the Company stated that its net earnings as a
percent of sales were 5 .7% for fiscal 2001 . According to the Company, diluted
earnings per share were $1 .29 for fiscal 200 1 .
B. False and Misleading Statements Relating to Fiscal Year 2002
1 . Form 10-0 for First Quarter of Fiscal Year 2002
52 . On or about June 4, 2002, Home Depot filed with the SEC a Form 10-
Q for the first quarter of Fiscal Year 2002 (ending May 5, 2002) . Defendants
Nardelli and Tome signed Home Depot's Form 10-Q for the first quarter of Fiscal
Year 2002. In that public filing, Home Depot reported that net sales for the first
quarter of fiscal 2002 increased 17 .1% to $14.3 billion. The Company further
reported that gross profit as a percent of sales was 30 .5% for the first quarter of
fiscal 2002 . At this same time, the Company stated that net earnings as a percent
of sales were 6.0% for the first quarter of fiscal 2002 . The Company further
29
indicated that diluted earnings per share were $0 .36 for the first quarter of fiscal
2002.
2 . Form 10- for Second Quarter of Fiscal Year 2002
53 . On or about August 26, 2002, Home Depot filed with the SEC a Form
10-Q for the second quarter of Fiscal Year 2002 (ending August 4, 2002) .
Defendants Nardelli and Tome signed and certified Home Depot's Form 1 Q-Q for
the second quarter of Fiscal Year 2002. In that public filing, Home Depot reported
that net sales for the second quarter of fiscal 2002 increased 11 .7% to $16 .3 billion,
and that for the first six months of fiscal 2002, sales increased 14 .1% to $30.6
billion . The Company also indicated that comparable store-for-store sales
increased 1% for the second quarter and 3% for the first six months of fiscal 2002 .
The Company further reported that gross profit as a percent of sales was 30 .4% for
the second quarter of fiscal 2002, and that for the first six months of fiscal 2002,
gross profit as a percent of sales was 30 .5% . The Company also stated that diluted
earnings per share were $0 .50 and $0.86 for the second quarter and first six months
of fiscal 2002, respectively .
3 . Form 10-0 for Third Quarter of Fiscal Year 2002
54. On or about December 5, 2002, Home Depot filed with the SEC a
Form 10-Q for the third quarter of Fiscal Year 2002 (ending November 3, 2002) .
Defendants Nardelli and Tome signed and certified Home Depot's Form 10-Q for
30
the third quarter of Fiscal Year 2002 . In that public filing, Home Depot reported
that net sales for the third quarter of fiscal 2002 increased 8 .9% to $14 .5 billion,
and that for the first nine months of fiscal 2002, net sales increased 12 .4% to $45 .0
billion. The Company also noted that comparable store-for-store sales decreased
2.2% for the third quarter of fiscal 2002 and increased 1 % for the first nine months
of fiscal 2002. The Company also reported that gross profit as a percent of sales
was 31 .6% for the third quarter of fiscal 2002, and that for the first nine months of
fiscal 2002, gross profit as a percent of sales was 30 .8%. The Company also stated
that diluted earnings per share were $0 .40 and $1 .26 for the third quarter and first
nine months of fiscal 2002, respectively . With respect to the issue of internal
controls, the Company stated, inter alia, that Home Depot maintained disclosure
controls and procedures and that the Company's Chief Executive Officer and the
Chief Financial Officer had concluded that the Company's disclosure controls and
procedures were "effective ."
4. Form 10-K for Fiscal Year 2002
55. On or about April 21, 2003, Home Depot filed with the SEC a Form
10-K for Fiscal Year 2002 (ending February 2, 2003) . Defendants Nardelli, Tome,
Langone, Cox, and Clendenin signed Home Depot's Form 10-K for Fiscal Year
2002. Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, this Form 10-K
also included certi fications signed by Defendants Nardelli and Tome. In that
31
public filing, Home Depot reported that net sales for fiscal 2002 increased 8 .8% to
$58 .2 billion. The Company further reported that comparable store-for-store sales
were flat in fiscal 2002 . At this same time, Home Depot also stated that gross
profit as a percent of sales was 31 .1% for fiscal 2002 . With regard to the issue of
internal controls, the Company stated, inter alia, that Home Depot maintained
disclosure controls and procedures and that the Company's Chief Executive
Officer and the Chief Financial Officer had concluded that the Company's
disclosure controls and procedures were "effective ."
C. False and Misleading Statements Relating to Fiscal Year 2003
1. Form 10-0 for First Quarter of Fiscal Year 2003
56. On or about June 6, 2003 , Home Depot filed with the SEC a Form 10-
Q for the first quarter of Fiscal Year 2003 (ending May 4, 2003) . Defendants
Nardelli and Tome signed and certified Home Depot's Form 10-Q for the first
quarter of Fiscal Year 2003 . In that public filing, Home Depot reported that net
sales for the first quarter of fiscal 2003 increased 5 .8% to $15 .1 billion. The
Company further reported that comparable store-for-store sales decreased 1 .6% in
the first quarter of fiscal 2003 . At this same time, the Company further stated that
gross profit increased 10.8% to $4.8 billion in the first quarter of fiscal 2003, and
that the gross profit rate as a percentage of sales increased to 32 .0% in the first
quarter of fiscal 2003 . The Company also reported that diluted earnings per share
32
were $0 .39 for the first quarter of fiscal 2003 . With respect to the issue of internal
controls, the Company stated, inter alia, that Home Depot maintained disclosure
controls and procedures and that the Company's Chief Executive Officer and the
Chief Financial Officer had concluded that the Company's disclosure controls and
procedures were "effective ."
2. Form 10- for the Second Quarter of Fiscal Year 2003
57. On or about September 5, 2003, Home Depot filed with the SEC a
Form 10-Q for the second quarter of Fiscal Year 2003 (ending August 3, 2003).
Defendants Nardelli and Tome signed and certified Home Depot's Form 10-Q for
the second quarter of Fiscal Year 2003 . In that public filing, Home Depot reported
that net sales for the second quarter of fiscal 2003 increased 10.5% to $18 .0 billion,
and that for the first six months of fiscal 2003, sales increased 8.3% to
$33 .1 billion. Home Depot further reported that comparable store-for-store sales
increased 2 .2% in the second quarter of fiscal 2003 and increased 0 .4% in the first
six months of fiscal 2003 . At this same time, the Company further announced that
gross profit increased 13 .3% to $5 .6 billion in the second quarter of fiscal 2003,
and that gross profit increased 12 .1 % to $10 .4 billion for the first six months of
fiscal. 2003 . The Company also reported that the gross profit rate as a percent of
sales increased to 31 .2% in the second quarter of fiscal 2003, and that during the
first six months of fiscal 2003 gross profit as a percent of sales was 31 .5%. The
33
Company further announced that diluted earnings per share were $0.56 and $0 .96
in the second quarter and first six months of fiscal 2003, respectively . With
respect to the issue of internal controls, the Company stated, inter alia, that Home
Depot maintained disclosure controls and procedures and that the Company's
Chief Executive Officer and the Chief Financial Officer had concluded that the
Company's disclosure controls and procedures were "effective ."
3. Form 10-0 for Third Quarter of Fisca l Year 2003
58. On or about December 4, 2003, Home Depot filed with the SEC a
Form 10-Q for the third quarter of Fiscal Year 2003 (ending November 2, 2003) .
Defendants Nardelli and Tome signed and certified Home Depot's Form 10-Q for
the third quarter of Fiscal Year 2003 . In that public filing, the Company reported
that net sales for the third quarter of fiscal 2003 increased 14 .7% to $16 .6 billion in
the third quarter of fiscal 2002, and that for the first nine months of fiscal 2003
sales increased 10.3% to $49 .7 billion. The Company also reported that
comparable store-for-store sales increased 7 .8% in the third quarter of fiscal 2003
and increased 2.8% in the first nine months of fiscal 2003 . At this same time, the
Company also reported that gross profit increased 13 .4% to $5 .2 billion in the third
quarter of fiscal 2003, and that gross profit increased 12 .5% to $15 .6 billion for the
first nine months of fiscal 2003 . The Company further stated that the gross profit
rate as a percent of sales decreased to 31 .3% in the third quarter of fiscal 2003, and
34
that in the first nine months of fiscal 2003 gross profit as a percent of sales
increased to 31 .4%. The Company also reported that diluted earnings per share
were $0.50 and $1 .46 in the third quarter and first nine months of fiscal 2003,
respectively. With regard to the issue of internal controls, the Company stated,
inter alia, that Home Depot maintained disclosure controls and procedures and that
the Company's Chief Executive Officer and the Chief Financial Officer had
concluded that the Company's disclosure controls and procedures were
"effective."
4. Form 10-K for Fiscal Year 2003
59 . On or about April 12, 2004, Home Depot filed with the SEC a Form
10-K for Fiscal Year 2003 (ending February 1, 2004) . Defendants Nardelli, Tome,
Langone, Cox, and Clendenin signed Home Depot's Form 10-K for Fiscal Year
2003. Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, this Form 10-K
also included certifications signed by Defendants Nardelli and Tome . In that
public filing, Home Depot reported that net sales for fiscal 2003 increased 11 .3%
to $64.8 billion. The Company also stated that net earnings for fiscal 2003 were
$4 .3 billion . The Company also asserted that comparable store sales in fiscal 2004
were expected to increase 3% to 6%. At the same time, the Company also stated
that gross profit increased 13 .7% to $20.6 billion for fiscal 2003, and that gross
profit as a percent of net sales was 31 .$% for fiscal 2003 . The Company also
35
noted that diluted earnings per share were $1 .88 in fiscal 2003 . With respect to the
issue of internal controls, the Company stated, inter alia, that Home Depot
maintained disclosure controls and procedures and that the Company's Chief
Executive Officer and the Chief Financial Officer had concluded that the
Company's disclosure controls and procedures were "effective ."
D. False and Misleading Statements Relating to Fiscal Year 2004
1 . Form 10-0 for First Quarter of Fiscal Year 2004
60. On or about June 4, 2004, Home Depot filed with the SEC a Form 10-
Q for the first quarter of Fiscal Year 2004 (ending May 2, 2004) . Defendants
Nardelli and Tome signed and certified Home Depot's Form 10-Q for the first
quarter of Fiscal Year 2004. In that public filing, the Company reported that net
sales for the first quarter of fiscal 2004 increased 16 .2% to $17.6 billion. The
Company also noted that gross profit increased 19 .4% to $5 .8 billion for the first
quarter of fiscal 2004, and that gross profit as a percentage of net sales was 32.9%
fir the first quarter of fiscal 2004 . The Company further indicated that diluted
earnings per share were $0 .49 for the first quarter of fiscal 2004 . With regard to
the issue of internal controls, the Company stated, inter alia, that Home Depot
maintained disclosure controls and procedures and that the Company's Chief
Executive Officer and the Chief Financial Officer had concluded that the
Company's disclosure controls and procedures were "effective ."
36
2. Form 10- for the Second Ouarter of Fiscal Year 2004
61 . On or about September 2, 2004, Home Depot filed with the SEC a
Form 10-Q for the second quarter of Fiscal Year 2004 (ending August 1, 2004) .
Defendants Nardelli and Tome signed and certified Home Depot's Form 10-Q for
the second quarter of Fiscal Year 2004 . In that public filing, the Company
reported that net sales for the second quarter of fiscal 2004 increased 11 .0% to
$20.0 billion and further stated that for the first six months of fiscal 2004, sales
increased 13 .3% to $37 .5 billion . According to the Company, net sales growth for
the second quarter and the first six months of fiscal 2004 was driven by, among
other factors, an increase in comparable store sales of 4 .8% and 6.1 %, respectively .
In this public filing, the Company also stated that gross profit increased 18 .8% to
$6.7 billion for the second quarter of fiscal 2004, and 19 .1% to $12 .4 billion for the
first six months of fiscal 2004 . According to the Company, gross profit as a
percentage of net sales was 33 .4% for the second quarter of fiscal 2004, and that
for the first six months of fiscal 2004 gross profit as a percentage of sales was
33 .1%. The Company also reported that diluted earnings per share were $0 .70 and
$1 .18 for the second quarter and first six months of fiscal 2004, respectively . With
respect to the issue of internal controls, the Company stated, inter alia, that Home
Depot maintained disclosure controls and procedures and that the Company's
Company's disclosure controls and procedures were "effective ."
3. Form 10-0-for-Third_Quarter of Fiscal Year 2004
62 . On or about December 2, 2004, Home Depot filed with the SEC a
Company's disclosure controls and procedures were "effective ."
63 . Defendants' statements concerning Home Depot's financial
37
Chief Executive Officer and the Chief Financial Officer had concluded that the
Form 10-Q for the third quarter of Fiscal Year 2004 (ending October 31, 2004).
Defendants Nardelli and Tome signed and certified Home Depot's Form 10-Q for
the third quarter of Fiscal Year 2004 . In that public filing, Home Depot reported
that net sales for the third quarter of fiscal 2004 increased 13 . 1 % to $18.8 billion .
For the first nine months of fiscal 2004, the Company stated that sales had
increased 13 .3% to $56 .3 billion . In this same public filing, the Company also
reported that gross profit increased 20 .4% to $6.3 billion for the third quarter of
fiscal 2004, and 19 .5% to $18 .7 billion for the first nine months of fiscal 2004 .
The Company also stated that diluted earnings per share were $0 .60 and $1 .78 for
the third quarter and first nine months of fiscal 2004, respectively . With regard to
the issue of internal controls, the Company stated, inter alia, that Home Depot
maintained disclosure controls and procedures and that the Company's Chief
Executive Officer and the Chief Financial Officer had concluded that the
performance and condition relating to fiscal years 2001-2004 as set forth above
38
were each false and misleading when made because they misrepresented or omitted
the following material adverse facts that the Defendants knew at the time the
statements were made :
(a) That during fiscal years 2001-2004, Home Depot was engaged
in a scheme to inflate the Company's earnings through fraudulent RTV practices ;
(b) That during fiscal years 2001-2004, Home Depot derived a
material portion of its revenues and profits from fraudulent RTV practices ;
(c) That the Company had failing and deficient internal controls and
procedures and lacked any meaningful ability to accurately report its financial
results ;
(d) That the Company's improper RTV practices were in direct
violation of its own code of conduct ; and
(e) That the Company's illicit scheme vis-a-vis fraudulent RTV
practices potentially subjected Home Depot to substantial regulatory fines, penalties
and other legal action, thereby compromising the Company's overall financial
condition and prospects.
VIII. THE COMPANY PURPORTS TO MAKE A CORRECTIVEDISCLOSURE, BUT FAILS TO REVEAL THE ENT IRE TRUTH
64. Throughout the Class Period, many Home Depot store employees had
voiced their concerns to Company officials regarding Home Depot's fraudulent
inflation of the amount of chargebacks that the Company collected from vendors .
39
Indeed, during February 2004, the Company's corporate office, in a purported
effort to quell the concerns of such employees, circulated a memorandum
professing to address Home Depot's procedures for collecting chargebacks from
suppliers. Notwithstanding the issuance of that memorandum, however, the
Company's fraudulent scheme continued unabated for the first nine months of
2004. Indeed, during that period, Home Depot management continued to pressure
store employees to participate in these fraudulent practices as a means of boosting
the Company's earnings . Concerned with the Company's failure to address their
concerns regarding these vendor practices, Home Depot store employees began to
consider taking their concerns public.
65 . During the fourth quarter of 2004, senior Company management
began to receive reports that Home Depot store employees were considering
revealing publicly the details of Home Depot's fraudulent RTV scheme . Rather
than risk public disclosure of its fraudulent conduct vis-a-vis vendor chargebacks,
the Company resolved at that time to "wind down" the RTV fraud and curtail the
amount of improper vendor chargeback revenue that it would collect. However,
the decision to curtail the fraudulent activity had an immediate and material effect
on the Company's revenue and earnings . Indeed, senior Company management
was aware that its decision would result in Home Depot's (a) failing to exceed (as
it had done in its previous nine quarters) analysts' expectations with regard to
40
diluted earnings per share during the fourth quarter of 2004 ; and (b) revenue and
EBIT growth falling short of historical levels .
66. Faced with declining improper vendor chargeback revenue (and the
impending public release of Home Depot's earnings information for the fourth
quarter of 2004), senior Company management made the further decision that
while Home Depot would disclose the fact that revenue and earnings would fall
short of expectations and/or historical levels, the Company would omit any
reference to the improper vendor chargeback scheme . Thus, in a February 22,
2005 press release, the Company reported a quarterly net profit of $1 .04 billion,
meeting (but not exceeding) analysts' projections of 47 cents per share (this was the
first time in nine quarters that the Company had failed to exceed analysts'
estimates). At that same time, the Company also announced that revenue and
EBIT growth in the fourth quarter of fiscal 2004 fell short of historical levels (at
1. 1 .2% and 10 .5% respectively -- compared to fourth quarter fiscal 2003 growth of
1. 4.5% and 37 .8%, respectively).
67. Following Home Depot's issuance of the February 22, 2005 press
release, the Company's share price declined precipitously . At the close of trading
on February 18, 2005 (the last trading day prior to the issuance of this press
release), Home Depot's shares stood at $42.02 per share . By the close of trading
on April 28, 2005, Home Depot's shares were trading at $35 .09 per share,
41
representing a decline of over 16% since February 18, 2005 and a loss of' market
capitalization of $16 .5 billion .
68 . Notwithstanding Home Depot's partial corrective disclosure,
however, several store employees subsequently began to publicly disclose their
concerns as well as the true extent of Home Depot's fraudulent practices . Indeed,
beginning in August 2005, a series of news articles reported that the Company had
defrauded vendors by inflating what it charged them to cover the cost of defective
and/or damaged merchandise . Based upon discussions with present and former
Home Depot store employees, these news reports indicated, inter alia, that the
Company's overcharging of vendors (a) went beyond a single Home Depot store,
and (b) had been a "common practice" at many locations throughout the chain . In
January 2006, it was widely reported (and confirmed by Company officials) that
the SEC had launched an "informal inquiry" into whether Home Depot used
payments from vendors to inflate the Company's earnings . The SEC's probe
appears to be focused upon the fact that the fraudulent practices described by
Home Depot employees (both present and former) occurred throughout the
country .
69 . Since the Summer of 2004, the Company has denied any RTV
wrongdoing, noting, inter alia, that "[o]ur internal financial controls related to
supplier policies and inventory accounting preclude any potential for a material
42
impact on the company." In addition, in its most recent Form 10-K (filed on or
about March 29, 2006), Home Depot stated that "[i]n August 2005, the Company
received an informal request from the staff of the Securities and Exchange
Commission for information related to the Company's return-to-vendor policies
and procedures" and that it did "not expect that . . . [the SEC's] informal inquiry
will have a material adverse effect on the Company's consolidated financial
position or its results of operations ." However, the foregoing statements by the
Company are dubious in view of, inter alia, the computer system changes made by
Home Depot since the summer of 2005 (see ¶43 supra), and the number of present
and former employees from across the chain who have stated that the fraudulent
RTV practices were standard operating procedure at Home Depot. Moreover,
analysts have begun to doubt the veracity of the Company's assertions regarding
its vendor practices . By way of example, in a recent report on the Company
written by Gradient Analytics, Inc . (which report was issued following the
announcement of the Company's financial results for the fourth quarter of Fiscal
Year 2005), it was noted that :
. . .Home Depot maintains that its "internal financialcontrols related to vendor policies preclude any potentialfor a material adverse effect on the company ." Ouranalysis discovered potential evidence that may runcounter to HD's assertion, however . . .
(emphasis in original) .
43
70 . This report added further that :
HD improved top-line HD improved top-line revenues by15 .9% in Q4 FY2005, boosted by acquisitions and solidorganic growth. Same-store sales grew 5 .5% in Q4(compared to rival Lowe's Companies (LOW) same-store sales growth of 7 .8%). Gross profit margin (GPM)contracted 40 basis points to 33 .8% from 34 .2% in thecomparable quarter. Notwithstanding slight GMPcontraction, operating margin improved to 10.5% due toa 110 basis point reduction in SG&A as a percentage ofrevenue, while earnings grew 23 .4%, benefiting from thereversal of a $22 .0 million deferred tax asset valuationallowance -which increased Q4 earnin gs by $0.01 pershare.
Our main concern is with the 40 basis point reductionin Q4 GPM, as it may be consistent with our "off-balance sheet" thesis. Specifically, if HD wasovercharging vendors or reselling defective merchandiseand subsequently stopped during FY2005 because of itsnew computer system and/or due to the SECinvestigation, the cost of goods sold would increase . Theincrease would make comps difficult because (1) thecompany would be unable to overcharge vendors for thecost of defective or returned merchandise and (2) thecompany might not be able to resell this inventory at azero-basis. CFO Carol B . Tome attributed the decline inGPM to increased penetration of the company's SupplyBusiness (which carries a lower GPM) and shift inproduct mix to lower margin appliances . However, sinceGPM expanded fifteen of sixteen quarters leading up tothe SEC investigation into HD's vendor credit policies,we think it is possible that GPM contraction in two ofthe last three quarters may be a result of issues inaddition to management's explanation .
(emphasis in original) .
44
IX. INAPPLICABILITY OF SAFE HARBOR
71 . As alleged herein, the Defendants acted with scienter in that they
knew, at the time that they issued them, that the public documents and statements
issued or disseminated in the name of Home Depot were materially false and
misleading or omitted material facts ; knew that such statements or documents
would be issued or disseminated to the investing public ; knew that persons were
:likely to reasonably rely on those misrepresentat ions and omissions; and
knowingly and substantially participated or were involved in the issuance or
dissemination of such statements or documents as primary violations of the federal
securities law . As set forth elsewhere herein, the Defendants, by virtue of their (a)
receipt of information reflecting the true facts regarding Home Depot, (b) control
aver, and/or receipt of Home Depot's allegedly materially misleading
misstatements, and (c) access to confidential proprietary information concerning
Home Depot were informed of, participated in and knew of the fraudulent scheme
alleged herein. With respect to non-forward-looking statements and/or omissions,
Defendants knew and/or recklessly disregarded the falsity and misleading nature of
the information which they caused to be disseminated to the investing public .
72 . Defendants' false and misleading statements and omissions do not
constitute forward-looking statements protected by any statutory safe harbor . The
statements alleged to be false and misleading herein all relate to facts and
45
conditions existing at the time the statements were made . No statutory safe harbor
applies to any of the Defendants' material false or misleading statements .
73 . Alternatively, to the extent that any statutory safe harbor is intended to
apply to any forward-looking statement pled herein, the Defendants are liable for
the false forward-looking statement pled because, at the time each forward-looking
statement was made, the speaker knew or had actual knowledge that the forward-
looking statement was materially false or misleading, and the forward-looking
statement was authorized and/or approved by a director and/or executive officer of
Home Depot who knew that the forward-looking statement was false or
misleading. None of the historic or present tense statements made by the
Defendants was an assumption underlying or relating to any plan, projection or
statement of future economic performance , as they were not stated to be such an
assumption underlying or relating to any projection or statement of future
economic performance when made, nor were any of the projections or forecasts
made by the Defendants expressly related to or stated to be dependent on those
historic or present tense statements when made .
X. SCIENTER ALLEGATIONS
74 . As alleged herein, the Defendants acted with scienter in that, inter
alia, the Defendants knew or acted with recklessness with respect to the fact that
the public documents and statements issued or disseminated in the name of Home
46
Depot were materially false and misleading ; knew that such statements or
documents would be issued or disseminated to the investing public ; and knowingly
and substantially participated or acquiesced in the issuance or dissemination of
such statements or documents as primary violations of the federal securities laws .
As set forth elsewhere herein, the Individual Defendants, by virtue of their receipt
of information reflecting the true facts regarding Home Depot, their control over
and/or receipt and/or modification of the allegedly materially misleading
misstatements and omissions described herein, which made them privy to
confidential proprietary information concerning Home Depot, directly and
substantially participated in the fraudulent scheme alleged herein .
75 . Moreover, the ongoing fraudulent scheme described in this Complaint
could not have been perpetrated over a substantial period of time, as has occurred,
without the knowledge of individuals at the highest levels of the Company,
including the Individual Defendants .
XI. APPLICABILITY OF PRESUMPTION OF RELIANCE : FRAUD-ON-THE-MARKET DOCTRINE
76. The market for Home Depot's securities was open, well-developed
and efficient at all relevant times for the following reasons (among others) :
(a) The Company's shares met the requirements for listing, and
were listed and actively traded on the NYSE ;
47
(b) As a regulated issuer, Home Depot filed periodic public reports
with the SEC ;
(c) Home Depot regularly communicated with public investors via
established market communication mechanisms, including through regular
disseminations of press releases on the national circuits of major newswire services
and through other wide-ranging public disclosures, such as communications with
the financial press and other similar reporting services ;
(d) The market reacted to public information disseminated by Home
Depot;
(e) Home Depot was followed by numerous material securities
analysts employed by major brokerage firms who wrote reports which were
distributed to the sales force and certain customers of their respective brokerage
firms . Each of these reports was publicly available and entered the public
marketplace ;
(f) The material misrepresentations and omissions alleged herein
would tend to induce a reasonable investor to misjudge the value of Home Depot
securities; and
(g) Without knowledge of the misrepresented or omitted material
facts, Plaintiff and the other members of the Class purchased or otherwise acquired
Home Depot securities between the time Defendants made the material
48
misrepresentations and omissions and the time the fraudulent RTV scheme was
being wound down, during which time the price of Home Depot securities was
inflated by Defendants' misrepresentations and omissions .
77 . As a result of the foregoing, the market for Home Depot's securities
promptly digested current information regarding Home Depot from all publicly
available sources and reflected such information in Home Depot's securities prices .
Under these circumstances, all purchasers and acquirers of Home Depot's
securities during the Class Period suffered similar injury through their purchase or
acquisition of Home Depot's securities at artificially inflated prices and a
presumption of reliance applies .
XII. LOSS CAUSAT ION
78 . Throughout the Class Period, the price of the Company's stock was
artificially inflated as a direct result of Defendants' long-standing scheme to
fi°audulently misrepresent the Company's financial condition and results .
79. The Company's financial condition and results, including Home
Depot's reliance upon improper vendor chargeback money to inflate Home
Depot's store sales numbers and net income, were material information to Plaintiff
and the other members of the Class. Had the truth been disclosed to the market at
or before the time of the end of the Class Period, Plaintiff and the other Class
members would not have purchased Home Depot stock at all, or would have done
49
so only at substantially lower prices than the artificially inflated prices which they
actually paid.
80. The Company's failure to exceed analysts' expectations with regard to
diluted earnings per share during the fourth quarter of fiscal 2004 (and the fact that
revenue and EBIT growth fell short of historical levels) was not due to results from
Home Depot's ordinary business operations . Rather, these facts were directly
attributable to the Company's decision, during that time period, to curtail the
amount of improper vendor chargeback revenue . Specifically, Home Depot
decided during the fourth quarter of fiscal 2004 ((unbeknownst to those outside of
the Company) to "wind down" the fraudulent conduct as soon as it became
apparent that public disclosure of the RTV fraud was imminent .
81 . Following the issuance of the Company's February 22, 2005 press
release announcing Home Depot's financial results for the fourth quarter of fiscal
2004, the inflation that had been caused by Defendants' misrepresentations and
omissions regarding vendor chargeback money and the RTV scheme was swiftly
eliminated from the price of the Company's securities, causing significant losses to
Plaintiff and the other Class members . Indeed, following the issuance of the
above-referenced press release, the Company's share price declined precipitously .
At the close of trading on February 18, 2005 (the last trading day prior to the
issuance of the above-referenced press release), Home Depot's shares stood at
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$42.02 per share. By the close of trading on April 28, 2005, Home Depot's shares
were trading at $35 .09 per share, representing a decline of over 16% since
February 18, 2005 and a loss of market capitalization of $16 .5 billion .
82 . The decline in the Company's share price following the issuance of
the February 22, 2005 press release, and the resulting losses suffered by Plaintiff
and the other members of the Class, are directly attributable to the market's
reaction to Home Depot's disclosure that it had failed to exceed analysts'
Expectations with regard to diluted earnings per share during the fourth quarter of
fiscal 2004 (and the fact that revenue and EBIT growth fell short of historical
levels), and to the market's adjustment of the Company's stock price to reflect the
foregoing facts .
83 . Defendants' fraudulent conduct, as alleged herein, proximately caused
foreseeable losses to Plaintiff and the other members of the Class .
VIII. CAUSES OF ACTION
COUNT IViolation Of Section 10(b) ofThe Exchange ActAn d Rule 1 Ob-5 Promulgated Thereunder
(Against a ll of the Defend an ts)
84 . Plaintiff repeats and realleges each and every allegation contained
above as if fully set forth herein .
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85 . This Count is asserted by Plaintiff on behalf of itself and the Class
against all the Defendants and is based upon Section 10(b) of the Exchange Act, 15
iJ.S .C . § 78j (b), and Rule I Ob-5, § 240.1Ob-5, promulgated thereunder .
86 . During the Class Period, the Defendants carried out a plan, scheme
and course of conduct which was intended to and, throughout the Class Period, did :
(a) deceive the investing public, including Plaintiff and other Class members, as
alleged herein; (b) artificially inflate and maintain the market price of Home
Depot's securities; and (c) cause Plaintiff and other members of the Class to
purchase or otherwise acquire Home Depot's securities at artificially inflated
prices . In furtherance of this unlawful scheme, plan and course of conduct, the
Defendants, and each of them, took the actions set forth herein .
87. The Defendants: (a) employed devices, schemes, and artifices to
defraud; (b) made untrue statements of material fact and/or omitted to state
material facts necessary to make the statements not misleading by use of means or
instrumentalities of interstate commerce ; and (c) engaged in acts, practices, and a
course of business which operated as a fraud and deceit upon the purchasers and
acquirers of the Company's securities in an effort to maintain artificially high
market prices for Home Depot's securities in violation of Section 10(b) of the
Exchange Act and Rule I Ob-5.
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88 . As a result of their making and/or their substantial participation in the
creation of affirmative statements and reports to the investing public, the
Defendants had a duty to promptly disseminate truthful information that would be
material to investors in compliance with the integrated disclosure provisions of the
:SEC as embodied in SEC Regulation S-K (17 C .F.R. § 229.10, et seq.) and other
SEC regulations, including accurate and truthful information with respect to the
Company's operations and performance so that the market prices of the
Company's publicly traded securities would be based on truthful, complete and
accurate information . The Defendants' material misrepresentations and omissions
as set forth herein violated that duty .
89 . The Defendants engaged in the fraudulent activity described above
knowingly and intentionally or in such a reckless manner as to constitute willful
deceit and fraud upon Plaintiff and the Class . The Defendants knowingly caused
their reports and statements to contain misstatements and omissions of material
fact as alleged herein .
90. As a result of the Defendants' fraudulent activity, the market price of
Home Depot was artificially inflated during the Class Period .
91 . In ignorance of the true financial condition of Home Depot, Plaintiff
and other members of the Class, relying on the integrity of the market and/or on
the statements and reports of Home Depot containing the misleading information,
53
purchased or otherwise acquired Home Depot securities at artificially inflated
prices during the Class Period .
92. The market price of Home Depot's securities declined materially upon
the Defendants' decision to curtail and/or wind down the scheme, plan, and course
of business which operated as a fraud and deceit upon the purchasers and acquirers
of the Company's securities .
93 . Plaintiff (and the Class') losses were proximately caused by
Defendants' active and primary participation in Home Depot's scheme to defraud
the investing public by, among other things, falsifying the Company's financial
results through fraudulent RTV policies . Plaintiff (and the members of the Class)
purchased Home Depot securities in reliance on the integrity of the market price of
those securities, and Defendants manipulated the price of Home Depot securities
through their misconduct as described above . Furthermore, Defendants'
misconduct proximately caused Plaintiff's (and the Class') losses . Plaintiffs (and
the Class') losses were a direct and foreseeable consequence of Defendants' failure
to disclose and their concealment of, inter alia, the true state of the business
operations and financial condition of Home Depot .
94. Throughout the Class Period, Defendants were aware of material non-
public information concerning Home Depot's fraudulent conduct. Throughout the
Class Period, Defendants willfully and knowing concealed this adverse
54
information regarding Home Depot's falsified revenue and sales figures, and
Plaintiffs (and the Class') losses were the foreseeable consequence of Defendants'
concealment of this information .
95 . As a direct and proximate cause of the Defendants' wrongful conduct,
Plaintiff and other members of the Class suffered damages in connection with their
respective purchases and sales of Home Depot securities during the Class Period .
COUNT IIViolation of Section 20(a) of the Exchange Act
(Against the Individual Defendants)
96 . Plaintiff repeats and realleges each and every allegation contained
above as if fully set forth herein .
97. As alleged herein, the Individual Defendants acted as controlling
persons of Home Depot within the meaning of Section 20(a) of the Exchange Act,
15 U.S.C. § 78t(a). By virtue of their executive positions, and/or Board
membership, as alleged above, these individuals had the power to influence and
control and did influence and control, directly or indirectly, the decision-making of
the Company, including the content and dissemination of the various statements
which Plaintiff contends are false and misleading . The Individual Defendants were
provided with or had unlimited access to copies of the Company's internal reports,
press releases, public filings and other statements alleged by Plaintiff to be
misleading prior to and/or shortly after these statements were issued and had the
55
ability to prevent the issuance of the statements or cause the statements to be
corrected .
98 . In particular, the Individual Defendants had direct involvement in the
day-to-day operations of the Company and therefore, are presumed to have had the
power to control or influence the particular transactions giving rise to the securities
`violations as alleged herein, and exercised the same .
99. As set forth above, the Individual Defendants and Home Depot
committed a primary violation of Section 10(b) and Rule 10b-5 of the Exchange
Act by the acts and omissions alleged in this Complaint . By virtue of their
positions as controlling persons of Home Depot, the Individual Defendants are
liable pursuant to Section 20(a) of the Exchange Act . As a direct and proximate
result of the Individual Defendants' wrongful conduct, Plaintiff and the other
members of the Class suffered damages in connection with their purchase or
acquisition of Home Depot securities during the Class Period .
XIV. PRAYER FOR RELIEF
WHEREFORE, Plaintiff prays for relief and judgment, as follows :
(a) Determining that this action is a proper class action ;
(b) Awarding compensatory damages in favor of Plaintiff and the
other class members against all Defendants, jointly and severally, for all damages
56
sustained as a result of the Defendants' wrongdoing, in an amount to be proven at
trial, including interest thereon ;
(c) Awarding Plaintiff and the Class their reasonable costs and
expenses incurred in this action, including counsel fees and expert fees ; and
(d) Awarding such other and further relief as the Court may deem
just and proper.
XV. JURY TRIAL DEMANDED
Plaintiff hereby demands a trial by jury on all claims set forth herein .
Dated : May 12 , 2006
PAGE PERKY, LLC
By:Alan R. Perry, Jr.Ga. Bar No. 5725081040 Crowne Pointe ParkwaySuite 1050Atlanta, Georgia 30338(770) 673-0047
WEISS & LURIE
Joseph H. WeissJames E. Tullman55 1 Fifth AvenueNew York, New York 1017b(212) 682-3025
Attorneys for Plaintiff
CERTIFICATION OF PLAINTIFFPURSUANT TO FEDER AL SECURITIES LAWS
~0 'rt Q /V) k'L2'"A- Z b ("Plaintiff', hereby certifies as follows :1 . I have reviewed the complaint being filed on my behalf and on behalf ofall others
simi larly situated and authorized its fil ing .,2 . . I did not purchase the security that is the subject of this action at the direction of'
counsel or in order to participate i n this private action ..3 . I am willing to serve as a representative party on behalf of the class, includ ing
prov i ding test imony at deposition and trial, if necessary .4 Ta the best o# 'my cu rrent knowledge, I purchased the following shares of Home
Depot, Inc . during the class period referenced in the complaint :Date Purchased or-SW Nom. of hares Price per Share
Uu
s . .three years . .
I will not accept any payment for serving as a representative party on behalf of
knowledge, information and belief ',
S . I hereby certify, under penalty af'perjury, that the foregoing is true and correct -
DATED: May t 1 , 2006l
I have not served as a class representative in a federal securities case in the last
the class beyond Plaintiffs pro rata share of any recovery, except as ordered or approved by the
court, including any award for reasonable costs and expenses (including lost wages) directly
relating to the representation ofthe class
7 . The matters stated in this certification are true to the best of 'my current