Stater Bros., which owns 94 Southern California supermarkets, Monday suspended its president and chief executive, Jack Brown, and filed an $11-million suit alleging that he manipulated the chain's profit figures just before it made an initial public offering of stock last November.
The suit alleges that Brown acted with the intent to reduce the initial price level of the company's stock, allowing him to buy large numbers of shares at depressed prices. These purchases were "serious violations" of the federal securities laws, the suit further alleges.
The suit also claims that the manipulation reduced the amount Stater Bros. received in negotiations with its underwriters and that Brown failed to disclose what he had done to the Colton-based company's books.
Brown called the allegations "absolutely false" and slanderous, adding that he has hired counsel to take "appropriate" legal action against the company.
In a telephone interview, Brown alleged that seven of the nine members of the Stater board are "controlled" by Chairman Bernard R. Garrett. Brown further said he believes that Monday's actions stem from a monthly board meeting last Wednesday when he said he would not support management's slate for the March 20 annual shareholders meeting.
The company announcement Monday said its directors appointed Garrett to assume Brown's duties pending further board action. Brown's suspension was stated to be "pending certain legal proceedings initiated by the company against Brown." The announcement did not give any specifics.
Brown said the board notified him of his suspension and the suit at a special meeting Monday. He said he was asked no questions and given no opportunity to comment on the charges. He called the situation "a classic struggle for absolute control of the company by Mr. Bernard Garrett." Garrett and other Stater officials could not be reached for response late Monday.
According to figures supplied by the company, Brown owns 672,835 shares, or 15.2%, of Stater's stock. Brown's holding is second to a 1.6-million-share holding (38.7%) in a voting trust for the children of Garrett.
In its complaint filed in Los Angeles County Superior Court, the company alleges that Brown and unidentified "Does 1 through 70" conspired to induce breach of contract and fiduciary duties and that Brown individually breached his contract and fiduciary duties. The suit said Stater presently is unaware of the true identities of defendants given the fictitious name Doe, a customary legal practice in such circumstances.
Central to the case is the allegation that Brown, knowing of the plan to raise capital, had directed financial personnel last June or July to reduce expected profits by about $600,000. This was accomplished, the suit alleges, by an "arbitrary write-down of physical inventory."
The suit further alleges that Brown concealed this manipulation during repeated questions from auditors, underwriters and company representatives in preparation for the Nov. 7 public offering.
As a result, the company lost at least $1 million in proceeds from the total price offered by the underwriters for its bonds and securities, according to the suit, which also seeks $10 million punitive damages. Although not named in the suit, other public documents show that the lead underwriters were Kidder, Peabody & Co. Also participating were Merrill Lynch Capital Markets and Dean Witter.
Stater's stock traded over-the-counter at between $9 and $10 a share shortly after the public offering. It later rose, and last Friday it jumped $2 a share to $14.50 on news of sharply higher earnings in the first fiscal quarter ended Dec. 29.
But, the suit alleges, Brown had the $600,000 profits put back on the books in late November after public trading began, while in possession of confidential, non-public knowledge that Stater's first-quarter profits would be much higher.
Before doing that, he bought Stater shares that were artificially depressed in price due to the profit adjustments he had directed, the suit claims, further alleging that he bought at least 88,000 of his shares in the public offering and shortly afterward.
Last Thursday, Stater announced that its profits jumped to $1.8 million on $244.6 million in revenue, compared to a $661,000 profit on $191 million in revenue a year earlier.
Brown indicated in the telephone interview that he fell out with Garrett after he learned in the midst of Stater's public offering last November that several companies in which Garrett or his family had obtained control or substantial interest in leveraged buy-outs had been involved in bankruptcy proceedings between 1980 and 1983. Brown read a disclosure of these facts from the company's final prospectus last Nov. 7.
Brown said it was "represented to me" that Garrett would appoint outside directors on the board, but later he said that he would not do so.