UNITED STATES DISTRICT COURT
Plaintiff Securities and Exchange Commission ("SEC") alleges:
NATURE OF THE ACTION
1. The SEC brings this action against Robert C. Lowes ("Lowes"), for insider trading in the common stock of Tricon Global Restaurants, Inc.("Tricon"), located in Louisville, Kentucky. On August 17, 1998, defendant Lowes, who was then the Chief Financial Officer ("CFO") of Tricon, purchased 5,000 shares of Tricon common stock while he possessed material, non-public information about Tricon's projected financial results for the third and fourth quarters of 1998. On August 19, 1998, Tricon issued a press release announcing that it anticipated better-than-expected financial results for the third quarter and the year. On the day the release was issued, Tricon's stock price rose $4.50 or 14 percent and the Tricon stock Lowes purchased on August 17, 1998 thereby increased in value by $25,625. By purchasing Tricon stock while in possession of material, nonpublic information, the defendant Lowes breached the fiduciary duty he owed to Tricon's shareholders.
2. By virtue of the conduct described in this Complaint, defendant Lowes, directly and indirectly, engaged in acts, practices, and courses of business in violation of Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") [15 U.S.C. §78j(b)] and Rule 10b-5 [17 C.F.R. § 240.10b-5] thereunder.
3. The Commission brings this action, pursuant to Sections 21(d) and (e) and 21A of the Exchange Act [15 U.S.C. §§ 78u(d) and (e) and 78u-1(a)] for an order permanently restraining and enjoining the defendant Lowes, ordering disgorgement of unlawful profits, imposing civil penalties, and for other relief.
JURISDICTION AND VENUE
4. This Court has jurisdiction over this action pursuant to Sections 21(e), 21A and 27 of the Exchange Act [15 U.S.C. §§ 78u(e), 78u-1 and 78aa].
5. Lowes, directly or indirectly, made use of the means or instrumentalities of interstate commerce, or of the mails, or the facilities of a national securities exchange in connection with the transactions, acts, practices and courses of business alleged in this Complaint, certain of which occurred within the District of Columbia.
6. Venue lies in this court pursuant to Section 27 of the Exchange Act [15 U.S.C. §78aa].
7. Lowes, age 56, resides in Santa Barbara, California. From July 1997 through July 1999, Lowes was the CFO of Tricon.
CLAIM FOR RELIEF
Violations of Section 10(b) of the Exchange Act [15 U.S.C. § 78j(b)]
8. Paragraphs 1 through 7 are hereby realleged and incorporated by reference herein.
9. In October of 1997, Tricon was formed when PepsiCo spun off certain restaurant businesses, KFC, Taco Bell and Pizza Hut (the "Concepts"). Tricon is comprised of four operating companies; the three core Concepts, and Tricon Restaurants International. Lowes was hired to be Tricon's CFO. Lowes had significant experience as a senior financial executive. At Tricon, among other duties, Lowes was responsible for the company's financial reporting functions.
10. In December of 1997, in order to improve the company's profitability, Tricon decided to sell restaurants to franchisees and to close unprofitable stores. Tricon also took an unusual accounting charge of $425 million and wrote down the value of the assets that it planned to sell or close. This unusual charge resulted in lowered earnings and net worth for the fourth quarter of 1997.
11. In 1998, another goal of Tricon's was to improve the company's sales performance. Many of the executives at Tricon, including its CEO, considered strong sales to be the biggest indicator of Tricon's financial growth.
Tricon's Financial Performance Improves
12. Tricon's fiscal calendar is divided into three twelve-week quarters and one sixteen-week quarter, and it filed periodic reports with the Commission in accordance with this fiscal calendar. For management and financial reporting purposes, Tricon also subdivided its fiscal year into thirteen sequential four-week periods which were enumerated periods 1 through 13. In fiscal 1998, the first quarter ran from December 28, 1997-March 21, 1998 and included periods 1-3. The second quarter ran from March 22, 1998-June 13, 1998 and included periods 4-6. The third quarter ran from June 14, 1998- September 5, 1998 and included periods 7-9. The fourth quarter ran from September 6-December 26, 1998 and included periods 10-13.
13. On July 27, 1998, Tricon announced that its second quarter earnings were $112 million, or $0.72 per diluted share. These results exceeded Tricon's own internal plan by $0.22 and Wall Street analysts' expectations by $0.26. By this time, Tricon had reduced its debt and interest payments significantly and had completed approximately 40 percent of its goal in selling off unprofitable stores. While Tricon's financial condition was improving, Tricon had not yet achieved the sustained increase in sales it needed to complete its desired financial improvements.
14. During period 7, the first period of the third quarter, June 14-July 11, 1998, Tricon's sales performance began to improve, moving Tricon toward the sales increases it needed to complete its desired financial improvements.
15. On July 21, 1998, at a Board of Directors meeting, Lowes presented and explained to the board, a document he created called the Board of Directors Financial Review. The document and presentation revealed that Tricon's earnings forecasts for the third quarter and for the full-year were ahead of Wall Street analysts' expectations. Tricon forecasted that third quarter operating earnings per share would beat Wall Street analysts' expectations by $0.01 and that third quarter reported earnings per share would beat Wall Street analysts' expectations by $0.16. Tricon also forecasted that full year operating earnings per share would beat Wall Street analysts' expectations by $0.06 and that full-year reported earnings per share would beat Wall Street analysts' expectations by between $0.29 and $0.34. Tricon was predicting a very strong third quarter and expected all operating companies to show double-digit growth versus the prior year. These positive earnings forecasts were nonpublic.
16. During period 8, the second period of the third quarter, July 12-August 8, 1998, Tricon's sales dramatically improved and all operating companies were performing on or above company plan and above company forecast.
17. In 1998, Tricon reported its weekly same store sales data to its executives, including defendant Lowes, in a nonpublic, internal document called the Weekly Business Update. The Weekly Business Update summarized the weekly sales performance and operating profit for Tricon's operating companies. Senior executives at Tricon considered the information contained in the Weekly Business Updates to be an important indicator of Tricon's financial performance.
18. The four Weekly Business Updates for period 8 showed that Tricon had finally attained sustained increased sales, which were needed for the significantly improved financial performance that Tricon had hoped to attain.
Lowes's Purchase of Tricon Stock
19. At the end of period 8, Lowes was out of the office and on vacation from the evening of August 5 to the morning of August 17.
20. On Monday, August 17, at about 8:00 a.m., Lowes returned from vacation to his office. Before he left for vacation, Lowes had received the first two Weekly Business Updates for period 8, dated July 24 and July 31, 1998, which showed a continuing trend from period 7 of positive sales and operating profit for all of Tricon's operating companies. The information contained in these documents was nonpublic.
21. When Lowes returned to his office on August 17, among other mail and documents that arrived for him while he was away, were the last two Weekly Business Updates for period 8, dated August 7 and August 14, 1998. These documents showed continued and greater positive sales and operating profit at the operating companies. They also showed that Tricon was operating above its forecast for the third quarter.
22. Late in the morning of August 17, Tricon's Controller, Robert Carleton, and Assistant Controller for Business Analysis, Timothy Jerzyk, met with Lowes to review and discuss Tricon's consolidated financial results for period 8.
23. At the meeting, Jerzyk gave Lowes a document called the Monthly Forecast Presentation, also referred to within Tricon as the YUM NUMZ document. Each period, Jerzyk was responsible for compiling the Monthly Forecast Presentation or the YUM NUMZ. This document contained the consolidated financial results for Tricon's operating companies. It included results of the key components used to evaluate Tricon's financial performance: system sales, revenues, margin, general and administrative costs, operating profit, operating earnings per share, net facility actions, net income, cash flow and capital spending. The document also contained forecast data for upcoming quarters and for the year. The information contained in the document was nonpublic.
24. At the meeting, Lowes was told that Tricon's continued strong sales performance in period 8, coupled with Tricon's successful refranchising efforts, had resulted in significantly improved profits for the period. The YUM NUMZ document that Lowes received at the meeting showed that Tricon's performance was so strong that Tricon anticipated beating Wall Street analysts' estimates for operating earnings per share by $0.12 for the third quarter and by $0.15 for the year. Tricon anticipated beating Wall Street analysts' estimates for reported earnings per share by $0.15 for the third quarter and by $0.22 for the year. These results and forecasts were nonpublic.
25. Jerzyk was also responsible for presenting the information that was contained in the YUM NUMZ document to Tricon's executives at a monthly meeting called the YUM NUMZ meeting. There was a YUM NUMZ meeting scheduled to occur at 2:00 p.m. on August 17 to announce the consolidated results for period 8.
26. On August 17, from 2:00 p.m. to 3:30 p.m., the YUM NUMZ meeting was held and the period 8 results were presented to Tricon's executives. Lowes attended this meeting. At the meeting, the executives learned the news that the earnings results for period 8 and the forecasts for the third quarter and the year were all significantly better than what Tricon and Wall Street Analysts had expected. Upon learning this information, some executives became concerned about the magnitude of the difference between the Wall Street analysts' expectations and Tricon's own internal forecast. Because of this, either at, or shortly after, the meeting, the executives discussed the possibility of issuing a press release to announce the positive forecasted results.
27. At or about 3:33 p.m., immediately after the YUM NUMZ meeting ended, defendant Lowes called his broker and placed an order to purchase 5000 shares of Tricon stock. Lowes's order was executed at 3:34 p.m. at a price of $31.875 per share.
28. On August 18, 1998, Tricon decided to issue a press release to announce the better-than-expected forecasted earnings results that were discussed internally at the YUM NUMZ meeting.
29. On August 19, Tricon issued the press release announcing its projected increases in earnings. The release stated that for the third quarter, Tricon expected operating profit to be up 30 percent, operating earnings per share to be up over 70 percent and reported earnings per share to be up over 50 percent. The market reacted positively to Tricon's news release and Tricon's stock price closed up $4.50 or 14 percent on August 19. By the close of trading on August 19, the Tricon stock that Lowes purchased on August 17 had increased in value by $25,625.
30. Lowes knew or was reckless in not knowing the facts and circumstances described above.
31. By reason of the foregoing, defendant Lowes directed and indirectly, violated Section 10(b) of the Exchange Act [15 U.S.C. § 78j(b)] and Rule 10b-5 thereunder [17 C.F.R. § 240.10b-5], and is likely to commit such violations in the future unless enjoined from doing so.
PRAYER FOR RELIEF
THEREFORE, the Commission respectfully requests that the Court:
(a) permanently enjoin Lowes from violating Section 10(b) of the Exchange Act [15 U.S.C. § 78j(b)] and Rule 10b-5 [17 C.F.R. § 240.10b-5] thereunder;
(b) order Lowes to disgorge all profits realized from the unlawful trading alleged herein, with prejudgment interest;
(c) order Lowes to pay a civil money penalty under Section 21A of the Exchange Act [15 U.S.C. § 78u-1];
(d) grant such other relief as this Court may deem just and appropriate.