Opinion ID: 1975412
Heading Depth: 1
Heading Rank: 3

Heading: The Charging Allegations of the Compliant

Text: The compliant is particularized and clear. In essence, it alleges that Viacom deliberately and improperly frustrated the contractual rights of CVR and VCR holders by artificially and temporarily inflating the Viacom stock price during the critical period in which the values to these holders were adversely affected. When the falsity of the information was learned by the market, Viacom's stock price receded. But then it was too late because the artificial and temporary spike in the stock price hit  as it was allegedly designed to do  during the critical period when the CVR and VCR holders would have received significant compensation for their bargained-for downside protection. The complaint sets forth in detail how the scheme was allegedly perpetrated. Excerpts from the complaint as it relates to the CVRs [8] follow: 2. ... Pursuant to the terms of the CVRs, if Viacom's share price was maintained above $48 before July 7, 1995, holders of the CVRs would receive no additional compensation from Viacom .... These derivative securities had sliding scales so that the further Viacom's price fell below... $48 ..., the more compensation or shares would be issued to the holders of the CVRs.... 3. Following these mergers, the securities market expected Viacom's share price to only increase about $40/ share during 1995. Therefore, the defendant undertook extraordinary, improper and misleading actions, to boost its share price and thereby diminish the amount of compensation and the number of new shares it would issue pursuant to the CVRs.... 4. The inflated results reported by the company successfully, though temporarily, boosted Viacom's stock price. Therefore, when the CVRs came due by July 1995, ... the Company paid far less compensation... than it potentially owed. 5. Viacom misrepresented and concealed facts about its financial results, prospects, accounting practices and expected earnings during the CVR ... valuation periods. Specifically, Viacom inflated its purchase accounting adjustments and consequently understated its amortization costs, thus ballooning its income for the first three quarters of 1995. Viacom also deferred purchases of videos for its Blockbuster Video subsidiary, resulting in lower reported costs during the first three quarters of 1995, thereby further inflating its reported income.    23. After issuing these CVR ... derivative securities to entice the Paramount... shareholders to agree to these acquisitions by Viacom, Viacom then made extensive efforts to boost Viacom's share price and thereby minimize the number of new Viacom shares or other compensation that would have to be issued pursuant to the terms of the CVRs.... To do this Viacom exaggerated its prospects during 1995 and deceptively boosted its 1995 short-term financial results until the final trigger date, September 29, 1995, when the VCRs expired. 24. While it issued positive earnings reports and projections during 1995, Viacom deliberately failed to disclose the following key facts:  Viacom had misleadingly inflated its purchase accounting adjustments as set forth in Accounting Principles Board Opinion No. 16 (APB No. 16) and thus understated its amortization of associated costs. This practice ballooned its income for the first three quarters of 1995.  Viacom also deferred purchases of videos, resulting in lower reported costs, thereby further inflating its reported income during the first three quarters of 1995.  Viacom had acquired Blockbuster Video for an excessive amount. Consequently Viacom should have written down the value of its Blockbuster assets during 1995, rather than carry excess goodwill on its balance sheets. 25. Defendant was successful in its efforts to misleadingly present its 1995 results and thereby caused the price of Viacom shares to rise as high as $54 during the CVR ... valuation periods in 1995. Consequently, the number of shares and other compensation later issued via the formula of the CVRs ... was radically reduced. 26. Defendant's statements to boost share prices and thereby minimize the number of shares issued under the CVRs ... were successful, as demonstrated by securities analysts' adoption of Viacom's projections and the analysts' buy recommendations through 1995.    29. On April 10, 1995, Barron's, however, described Viacom's concern over its exposure from the VCRs, with Viacom's shares only trading at approximately $46: There's big money involved in the Viacom trade because the current market value of the rights is $400 million, and the potential payoff is more than twice that amount. If Viacom's stock holds at its current level, the company will have to issue about 15 million shares of stock, worth $675 million, to holders of the 225 million Variable Common Rights, or VCRs. And, assuming no change in Viacom's shares, the company is expected to redeem its other rights issue, some 55 million of Contingent Value Rights, or CVRs, by paying $165 million in cash or securities. Viacom's total tab rises to $1.3 billion if its stock drops to 36. But if Viacom stock rises to 48 during the valuation periods, one of which begins this week, it has to pay nothing to the CVR holders. And if Viacom shares get to 52, the company has no liability for its VCRs. 30. At this key juncture in April 1995, with the stock still hovering in the mid-40's and the Company facing significant stock dilution if the share price did not rise, Viacom accelerated its efforts to boost Viacom's share price during the upcoming valuation period. In order to accomplish this short term goal, Viacom held a conference on April 24-25 with analysts. Viacom emphasized its significant growth expectations for 1995 and beyond, in its statements to analysts. . . .    32. Viacom's inflated results reported for the quarter fueled analysts' expectations and induced the analysts to recommend buying Viacom stock.    35. Viacom continued reporting inflated results. These results, along with the defendant's bold claims of further expected growth, continued to delude analysts to expect increasing share prices for Viacom....    40. Viacom's stock was inflated during the final months of the pricing periods; therefore, Viacom escaped with little damage, paying only $83 million on its obligations under the CVRs .... At the time the instruments were issued, Viacom had an initial liability of $687 million for the CVRs.... 41. After the final VCR valuation date, September 29, 1995, however Viacom could no longer mask its operating problems. It could no longer defer proper amortization and defer purchases of videos. The result was that after the VCR valuation date, Viacom's reported operating results sank far below previous results. Viacom's share price therefore deteriorated until trading fell to lower levels, even below $40, after September 1995. This price level contrasted to Viacom's previously inflated share prices above $50, caused by Viacom's misleading statements during the key valuation periods in 1995.    42. In 1997 it was disclosed that Viacom had manipulated its results during the CVR and VCR valuation periods. As reported in The Wall Street Journal (WSJ) on February 21, 1997, former controlling shareholder of Blockbuster, Wayne Huizenga, described the misleading statements of Viacom which had previously inflated Viacom's share price.    43. Describing the impact of the accounting and manipulation and consequent inflation of Viacom's shares, the WSJ article noted: Mr. Huizenga complains that Viacom wasn't sufficiently open about the impact of the critical accounting change after the merger.... By writing down... costly inventory, Viacom in effect sharply reduced Blockbuster's expenses. That served to sweeten earnings,.... The strong numbers helped drive up Viacom's stock to a high of $54 a share that year. 44. Confirming this belated disclosure of Viacom's true condition, on August 6, 1997, The Wall Street Journal reported that Viacom Inc. had a second-quarter loss of $195 million, including a $323 million charge related to its attempts to fix its floundering video and music retailer Blockbuster Entertainment. The WSJ article reported that analysts estimated that Blockbuster only had a value of $2.7 billion to $3.6 billion, compared with the $8.4 billion Viacom spent to acquire Blockbuster in 1994. [9] Based upon these facts and the plaintiff's contentions of law, the complaint seeks class action certification, damages and other relief based on two common law counts (and without any reference to the federal securities laws). Count I is based on the common law of contract asserting, in substance, that:  Viacom was obligated to act in good faith and to deal fairly with the CVR holders in carrying out Viacom's obligations under the terms of the CVRs;  Those obligations included proper financial reporting so that the Viacom stock price would be properly set during the valuation periods and that Viacom would refrain from distorting its financial condition so as to affect the CVR holders adversely;  Viacom artificially inflated its stock price and diminished the payout under the CVRs, thereby thwarting the reasonable expectations of the holders of those securities; and  Viacom thereby breached the implied covenant of good faith and fair dealing with the holders of the CVRs. Count II is for restitution based on unjust enrichment. It is based on the following contentions:  That when the CVRs were issued it was understood that Viacom would have to compensate for any shortfall in the Viacom stock price during the valuation periods;  By inflating the stock price, Viacom was able to redeem the CVRs at a much lower cost than if the true value of the shares had been known; and  Therefore, Viacom enriched itself at the expense of the holders, entitling them to restitution in the amount by which defendant unjustly enriched itself. [10]