A plaintiff identified only as TDH Partners has sued home builder Ryland Group and two of its top-level executives after they reported a substantial plunge in new-home orders at the end of 2003.
Five law firms acting on behalf of a proposed class-action group of shareholders this month filed the lawsuit against Ryland, company CEO Chad Dreier and CFO Gordon Milne. The complaint accused them of securities violations, misrepresentation and insider trading in connection with the company’s quarterly performance.
Ryland Group is a nationwide home builder that specializes in single-family and semi-detached starter homes and homes for move-up buyers.
Company executives shocked investors Jan. 8, when they reported new-home orders plunged 8.9 percent in the fourth quarter of 2003 from the same quarter in 2002. The sharp decline was unexpected and allegedly contradicted the executives’ prior positive statements about production during the quarter, according to the 22-page complaint.
“The defendants waited until after the quarter ended to reveal the truth,” the lawsuit claimed.
The complaint named TDH Partners as the plaintiff, but did not further identify that entity or disclose an address or telephone number. Plaintiff’s attorneys did not return telephone calls concerning the lawsuit.
The lawsuit seeks class-action status on behalf of all investors who purchased Ryland stock from Oct. 22, 2003, through Jan. 7, 2004. The suit was filed Jan. 15 in the U.S. Northern District of Texas Court.
A Ryland spokesperson said the company was unable to comment because it hadn’t yet received the complaint.
The complaint accused the defendants of making a series of material misrepresentations during the proposed class period about Ryland’s financial results and alleged that their actions inflated the company’s stock during that time.
“This manipulation allows the defendants, for compensation purposes and otherwise, to claim higher annual an quarterly stock increases than would have been possible without the false and misleading statements,” the suit alleged.
The 8.9 percent decrease in Ryland’s new-home orders during the fourth quarter was due mostly to a 33 percent decline in the builder’s Texas market. The executives in an Oct. 22 conference call allegedly assured investors that sales in that state weren’t in trouble. Milne allegedly said the small decrease in Texas sales wasn’t due to a product problem.
“Contrary to Milne’s statement, Ryland Group was suffering a severe product problem, as it was offering the wrong product for the market in question and had an oversupply of that product,” the lawsuit alleged.
The complaint claimed the executives didn’t disclose or misrepresented that trouble was unfolding in the Texas market and that Texas buyers were highly resistant to the entry-level homes Ryland offered. It also alleged the executives knew or recklessly disregarded the argument that move-up houses would be better received in that market, but Ryland wasn’t in a position to offer those types of properties.
Milne sold shares of Ryland stock two days after the Oct. 22 conference call at a profit of $1.1 million, according to company SEC filings. Dreier sold $2.5 million worth of his shares on the same day.
“By this sale, Milne received more on one day than he had received from his stock sales in the previous 20 months,” the lawsuit stated.
Six other company executives each sold at least $450,000 worth of company stock during the fourth quarter.
Ryland Group (NYSE: RYL) stock fell $10.16 to $72.89 a share Jan. 8, when the company announced the lower-than-expected new-home orders. Shares were trading at $76.24 today.
The complaint alleged Dreier was under pressure to produce good results in 2003 because critics previously alleged his pay was out of line with the company’s performance. His pay reportedly soared 247 percent in 2002 while the company’s returns were down 9 percent, according to the lawsuit.
New-home sales in the Texas region represented 23 percent of Ryland’s total sales in 2002, according to company statements. Sales in the region reportedly began to decline in the third quarter of 2003, a trend the lawsuit alleged the company downplayed. A quarterly decrease in new-home orders is an important factor to investors who are evaluating the company’s prospects for future earnings.
The lawsuit seeks a jury trial and unspecified damages.
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