Earlier this week an individual investor sued J.C. Penney (JCP) over the embattled retailer's secondary stock offering last week, which sent shares plunging. The plaintiff, Alan Marcus, says J.C. Penney misled investors in August and September when company execs said they saw no need to raise additional liquidity prior to the end of the year.
Marcus says J.C. Penney concealed knowledge of its liquidity problems so as not to raise concerns among vendors. "As a result of defendants' false statements J.C. Penney stock traded at artificially inflated levels," Marcus said in his complaint. The plaintiff says he purchased 300 shares of JCP on September 26, "just before news of the stock offering seeped into the market." Marcus is seeking class-action status on behalf of shareholders that bought stock between August 20th to September 26th.
Mr. Marcus is right to be upset about his loss. J.C. Penney has deservedly lost most, if not all, of its credibility when it comes to relating to Wall Street. But the role of Goldman Sachs (GS) in this mess is somehow being overlooked. Here's a timeline of events:
* April 29th: Goldman Sachs threw J.C. Penney a lifeline, helping the company raise $1.75 billion through a debt offering.
* September 24th: Goldman Sachs debt analyst initiated J.C. Penney coverage with an "underperform" rating. In a note to clients Goldman cautioned that J.C. Penney's weak fundamentals and high inventory levels might cause management to "look to build a bigger liquidity buffer." J.C. Penney shares closed at $10.12, down 15% from the prior day.
* September 26th: The day plaintiff Alan Marcus claims to have purchased 300 shares of J.C. Penney.
* September 26th (post market close): J.C. Penney announces 84 million secondary stock offering.
* September 27th: Secondary prices at $9.65 per share. The company said later that it expected to net $785.8 million on gross sales of $810.6 million. Ex-expenses, that leaves about $25 million in fees to presumably be split among the lawyers and bankers behind J.C. Penney's secondary. The lead underwriter on the deal was Goldman Sachs.
Nobody is suing Goldman over their involvement with J.C. Penney. If asked Goldman would certainly point to the "Chinese Wall" between analysts and underwriting. The cause and effect relationship between Goldman's "underperform" rating on J.C. Penney's debt, the stock's steep drop and J.C. Penney feeling the need to sell shares more than 20% below where the stock was trading just a week prior can not be proven.
As separate entities Goldman's research and underwriting are technically unrelated. As a collective, Goldman Sachs is just doing what CEO Lloyd Blankfein once famously called "God's work." Goldman birthed a debt product, killed a stock and created millions in underwriting fees. Glory and fees be to Goldman, J.C. Penney and its shareholders get stuck with losses and lawsuits.
Yesterday shares of J.C. Penney closed at $8.72; off 26% since the close on September 24th.
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