Woodcliff Lake-based Party City Holdco Inc. is facing a class action lawsuit for allegedly misleading shareholders regarding the company’s financial health ahead of filing for Chapter 11 bankruptcy protection.
Announced Aug. 3, the complaint accuses the bankrupt retailer of securities fraud and seeks to recover losses on behalf of investors who were “adversely impacted” between November 2022 and June 2023. According to the suit, Party City reportedly mispresented that it had adequate capital resources to meet liquidity needs for the next 12 months, as well as “omitted there was substantial doubt about the company’s ability to continue as a going concern.”
Additionally, Party City allegedly “downplayed the nature and extent” of its “then-existing liquidity problems,” omitted that its existing credit facilities were insufficient to satisfy operational needs and was unable to obtain additional loans in the normal course of business, according to the suit.
The retailer was also accused of not informing stockholders “that there was a material weakness in its internal control over financial reporting.”
The action comes as Party City reportedly adjusts its plan to exit bankruptcy after struggling to meet financial projections. Recently, the retailer revised its year-over-year growth rate forecast for comparable store sales down to -8.4% from -2.5%.
After filing for Chapter 11 relief in the U.S. Bankruptcy Court for the Southern District of Texas in January, Party City entered into a restructuring agreement with a bondholder group to reduce its $1.67 billion debt load.
Additionally, the company secured $150 million in debtor-in-possession financing to support operations, as well as court approval to keep its 800-plus stores open.
In July, the company modified a key deal with lenders, giving them the option to be repaid in second-lien notes instead of cash. They can also purchase new notes in addition to equity, rather than just buying the stock, the outlet reported.
Altogether, Party City plans to issue $232 million of new debt backed by the company’s assets, with interest to be paid in-kind or in cash, at a 12% rate.
While Party City’s balloon manufacturing and retail business, Anagram, was not part of the bankruptcy proceedings, the company is reportedly in talks with debt holders about spinning off the unit, Bloomberg reported, citing confidential sources.
Following the expected completion of reorganization in the second quarter of 2023, Party City plans to emerge as a non-publicly reporting company. However, the company’s lawyers reported in June that it hadn’t met certain benchmarks related to its restructuring.
Then, in a June 9 filing with the U.S. Securities and Exchange Commission (SEC), Party City revealed that its longtime auditor, Ernst & Young LLP, resigned due to a disagreement over the retailer’s decision to not include a going concern warning in its Q3 2022 report.
“The company strongly disagrees with EY’s assertions in its resignation letter to the extent that they inaccurately imply that the company refused to make any required disclosures under the federal securities laws,” Party City said in the filing.
A few weeks later, the SEC asked Party City to retain documents and data in connection with an “ongoing investigation” by the regulator, according to Bloomberg.
Additional details about the nature of the probe weren’t disclosed, the outlet reported.
Party City did not immediately respond to a request for comment.