JC Penney sued on behalf of investors

But while investors may be unhappy, consumer complaints have died down

October 14, 2013

A San Diego law firm has filed a class action suit against J.C. Penney, accusing the beleaguered retailer of federal securities fraud.

The action, submitted by Robbins Arroyo LLP, alleges that the company and certain of its officers violated the Securities and Exchange Act of 1934. Specifically, the suit focuses on events of September 27, when Penney's stock suffered a huge one-day loss.

Previously, the company had announced it was issuing additional stock, using the proceeds to fund operations through the end of the year.

Misrepresentation?

The suit claims that was a misrepresentation. In fact, it says the company would have insufficient liquidity to get through year-end and would require additional investments to make it through the holiday season. The suit further claims Penneys was concealing its need for liquidity so as not to add to its vendors' concerns.

The suit says a September 26th analyst's report found the company would need to take on additional debt to ensure that it had enough cash to keep its business operations going. The following day Penney's common stock fell 13% on the New York Stock Exchange.

While the suit seeks to sign up unhappy Penney's stockholders, the heavy stream of complaints from unhappy consumers – so prevalent beginning with Penney's radical make-over in early 2012 – seems to have died down. A recent Penney's review at ConsumerAffairs, from a young bride-to-be shopping for a ring, was positively glowing.

Glowing review

“Other jewelry retailers and department stores just didn't have what I wanted, and they definitely didn't offer much when it came to prices,” wrote Jamie, of Broken Arrow, Okla. “I found my ring after taking my mom's advice to check JC Penney's site, and there it was! The ring was unique but somehow still classic in style, it was of excellent quality, and it was totally affordable. I showed my fiancé and, needless to say, a few months later I was wearing the ring and planning our wedding! At the proposal, it was the first time I had ever seen my ring in "real life" and it was even better and sparklier (sic) than I had imagined. He was even able to get it on sale and afford the lifetime care package! I have never been happier and I love my ring so much.”

A year ago the retailer was getting very few positive reviews as consumers objected to the change in course the store had taken under new CEO Ron Johnson, a former Apple executive installed at the urging of major board member Bill Ackman.

"Ackman officially exits stage left, having brought an American retailing icon to its knees," Brian Sozzi, CEO and chief equities strategist at Belus Capital Advisors, wrote in a note to clients in August.

Radical changes

In January 2012 J.C. Penney, which had steadily been losing money and had the reputation as a rather conservative and stodgy retailer, attempted to remake itself as younger and hipper, hoping to pull customers from Target and other more contemporary retailers. In the process, they managed to alienate – some analysts think by design– the core J.C. Penney customer base.

The old customers didn't like the new pricing structure, which did away with sales and coupons. It didn't like the make-up of the stores, which jettisoned traditional brands and turned over floor space to vendors for kiosks. The old customers left and the new customers never showed up.

Now the old J.C. Penney is back, doing things the way they did before. Will it be enough to save the brand? Perhaps it's too early to tell.

But the fact that the store gets an online review from a happy consumer – and a young one at that – has got to give the retailer some hope.