The Lovesac Company, a Stamford-based beanbag and sectionals furniture-maker that discovered and disclosed errors on quarterly financial reports has been sued by an investor who claims that the company intentionally misled the market.
Albert Gutknecht of Larimer County, Colorado accused Lovesac, founder and CEO Shawn Nelson and now-retired CFO Donna Dellomo of violating federal securities laws, in a class action lawsuit filed Dec. 19 in U.S. District Court, Bridgeport.
He claims that the defendants engaged in a scheme to “artificially inflate and maintain the market price” and cause investors to “acquire Lovesac securities and options at artificially inflated prices.”
Lovesac did not reply to a message asking for its side of the story.
The dispute concerns quarterly financial reports for the three-month periods ending this past Jan. 29 and April 30.
On Aug. 16, Lovesac disclosed that its audit committee had discovered errors that understated shipping costs and thereby inflated the gross profit, operating income and net income by millions of dollars.
Investors could no longer rely on the two financial statements, Lovesac announced, and the numbers would be recalculated.
The quarterly reports had also stated incorrectly that Lovesac’s financial controls and procedures were effective.
On Aug. 17, the day after the disclosure, Lovesac closed at $23.76 on the NASDAQ Stock Market, for a one day drop of 70-cents per share, or nearly 3%.
Had investors who bought Lovesac shares from March 30 to Aug. 16 known that the financial statements were inaccurate, the complaint states, they would not have acquired the securities.
The share price as of the market close on Dec. 27 was $26.04, nearly 10% higher than Aug. 16, the day before the errors were disclosed.
Gutknecht alleges that Nelson and Dellomo knew that the financial statements were wrong, because of their positions and access to non-public information, and concealed the facts from the public. Or, they acted with reckless disregard for the truth by failing the ascertain the facts.
He is demanding unspecified damages on behalf of himself and hundreds or thousands of investors who bought Lovesac securities from March 30 to Aug. 16.
