Case 1:14-cv LAK Document 2 Filed 02/14/14 Page 1 of 28 UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK IN01A. Plaintiff.

Transcription

1 Case 1:14-cv LAK Document 2 Filed 02/14/14 Page 1 of 28 UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK JL! DEKAPLA1 Behalf of All Others Similarly Situated, V. Plaintiff, FAIRWAY GROUP HOLDINGS CORP., HERBERT RUETSCH, EDWARD C. ARDITTE, and KEVIN MCDONNELL, CV 0!9 50. CLASS ACTION IN01A COMPLAINT FOR VIOLATION OF THE FEDERAL SECURITIES LAWS DEMAND FOR JURY TRIAL Defendants Plaintiff similarly situated, by her undersigned attorneys, for her complaint against defendants, alleges the following based upon personal knowledge as to herself and her own acts, and information and belief as to all other matters, based upon, inter alia, the investigation conducted by and through her attorneys, which included, among other things, a review of the defendants' public documents, conference calls and announcements made by defendants, United States Securities and Exchange Commission ("SEC") filings, wire and press releases published by and regarding Fairway Group Holdings Corp., ("Fairway" or the "Company"), analysts' reports and advisories about the Company, and information readily obtainable on the Internet. Plaintiff believes that substantial evidentiary support will exist for the allegations set forth herein after a reasonable opportunity for discovery.

2 Case 1:14-cv LAK Document 2 Filed 02/14/14 Page 2 of 28 NATURE OF THE ACTION 1. This is a federal securities class action on behalf of a class consisting of all persons other than defendants who purchased or otherwise acquired Fairway securities between April 16, 2013 and February 6, 2014, both dates inclusive (the "Class Period"), and/or who acquired Fairway shares pursuant or traceable to Fairway's false and misleading Registration Statement and Prospectus in connection with its April 17, 2013 initial public offering ("IPO"), seeking to recover damages caused by defendants' violations of the federal securities laws and to pursue remedies under 11 and 15 of the Securities Act of 1933 ("1933 Act"), and under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the "Exchange Act") and Rule lob-s promulgated thereunder, against the Company and certain of its top officials. 2. Fairway Group Holdings Corp. and its subsidiaries operate in the retail food industry, selling fresh, natural and organic products, prepared foods and hard to find specialty and gourmet offerings along with a full assortment of conventional groceries. The Company operates fourteen stores in the Greater New York metropolitan area, three of which include integrated Fairway Wine & Spirits locations. 3. In the Company's Registration Statement, Fairway touted the Company's "iconic brand," "distinctive marketing strategy," while running the "most productive" stores, leading investors to believe that it would be able to achieve consecutive growth in same store sales, as well as 30% growth in EBITDA for Indeed, during the Class Period, the Company projected "solidly positive same store sales growth," as well as EBITDA growth of 25% for the third quarter of In fact however, the Company was experiencing a contraction in same store sales, increased direct store expenses, and diminished EBITDA growth. 4. Throughout the Class Period, defendants made materially false and misleading statements regarding the Company's business, operational and compliance policies. Specifically, 2

3 Case 1:14-cv LAK Document 2 Filed 02/14/14 Page 3 of 28 defendants made false and/or misleading statements and/or failed to disclose that: (1) Fairway's same store sales were declining; (2) the Company's direct store expenses were increasing; (3) the Company's financial forecasts were wholly unrealistic; and (4) as a result of the foregoing, Fairway's public statements were materially false and misleading at all relevant times. 5. On February 6, 2014, Fairway reported earnings that severely missed analysts' estimates including very disappointing same store sales, as well as increased direct store expenses. Moreover, the Company reported a colossal miss in EBIDTA growth for the third quarter as EBIDTA grew 3.2% over the same period in the prior year compared to growth of "20% - 25%" that management had predicted. Suspiciously, the Company also announced the retirement of CEO Herbert Ruetsch, a mere ten months after the Fairway's IPO. 6. Analysts were skeptical of the Company's explanation for the disappointing results, diminished outlook, as well as the suspicious timing of Ruetsch' s resignation. During a conference call held with analysts after the Company reported its results, one analyst commented: First, an observation, and then a question. For a company with 14 stores, there is an amazingly high level of complexity here. So, my question then is going to be, can you just try to simplify for us what has changed in the fiscal 2015 outlook? Because analysts' estimates have about 30% adjusted EBIDTA growth and now we are looking at 10%. 7. As a result of this news, Fairway securities declined $3.19 or 27.91%, on massive volume, to close at $8.24 on February 7, As a result of defendants' wrongful acts and omissions, and the precipitous decline in the market value of the Company's securities, Plaintiff and other Class members have suffered significant losses and damages. 3

4 Case 1:14-cv LAK Document 2 Filed 02/14/14 Page 4 of 28 JURISDICTION AND VENUE 9. The claims asserted herein arise under and pursuant to 11 and 15 of the 1933 Act (15 U.S.C..77k and 77o), and 10(b) and 20(a) of the Exchange Act (15 U.S.C. 78j(b) and 78t(a)) and Rule 1 Ob-5 promulgated thereunder by the SEC (17 C.F.R Ob..5). 10. This Court has jurisdiction over the subject matter of this action pursuant to 28 U.S.C. 1331, 22 of the 1933 Act and 27 of the Exchange Act. 11, Venue is proper in this District pursuant to 27 of the Exchange Act, 15 U.S.C. 78aa and 28 U.S.C. 1391(b), as defendant is headquartered in this District and a significant portion of the defendants' actions, and the subsequent damages, took place within this District. 12. In connection with the acts, conduct and other wrongs alleged in this Complaint, defendants, directly or indirectly, used the means and instrumentalities of interstate commerce, including but not limited to, the United States mail, interstate telephone communications and the facilities of the national securities exchange. PARTIES 13. Plaintiff, as set forth in the attached Certification, acquired Fairway securities at artificially inflated prices during the Class Period and was damaged upon the revelation of the alleged corrective disclosures. 14. Defendant Fairway is a Delaware corporation with its principal executive offices located at th Avenue, New York, NY United States. Fairway's common stock trades on the NASDAQ Global Stock Market ("NASDAQ") under the ticker symbol "FWM." 15. Defendant Herbert Ruetsch ("Ruetsch") has served at all relevant times as the Company's Chief Executive Officer. rd

5 Case 1:14-cv LAK Document 2 Filed 02/14/14 Page 5 of Defendant Edward C. Arditte ("Arditte") has served at all relevant times as the Company's Chief Financial Officer. 17. Defendant Kevin McDonnell ("McDonnell") has served at all relevant times as the Company's Chief Operating Officer. 18. The defendants referenced above in T are sometimes referred to herein as the "Individual Defendants." SUBSTANTIVE ALLEGATIONS Background 19. Fairway and its subsidiaries operate in the retail food industry, selling fresh, natural and organic products, prepared foods and hard to find specialty and gourmet offerings along with a full assortment of conventional groceries. The Company operates fourteen stores in the Greater New York metropolitan area, three of which include integrated Fairway Wine & Spirits locations. 20. Twelve of the stores were open prior to the beginning of fiscal 2014 and two stores were opened during fiscal 2014: one store in the Chelsea neighborhood of Manhattan, NY, which opened in late July 2013, and another store in Nanuet, NY, which opened in mid-october Seven of the Company's food stores, which the Company refers to as "urban stores," are located in New York City and the remainder, which the Company refers to as "suburban stores," are located in New York (outside of New York City), New Jersey and Connecticut. The Company has determined that it has one reportable segment. Substantially all of the Company's revenue comes from the sale of items at its retail food stores. 5

6 Case 1:14-cv LAK Document 2 Filed 02/14/14 Page 6 of Fairway Group Holdings Corp. was incorporated in the State of Delaware on September 29, 2006 and is controlled by investment funds managed by Sterling Investment Partners L.P. and affiliates (collectively, "Sterling"). 23. On April 22, 2013, the Company completed its initial public offering ("IPO") of 15,697,500 shares of its Class A common stock at a price of $13.00 per share, which included 13,407,632 new shares sold by Fairway and the sale of 2,289,868 shares by existing stockholders (including 2,047,500 sold pursuant to the underwriters exercise of their over-allotment option). The Company received approximately $158.8 million in net proceeds from the IPO after deducting the underwriting discount and expenses related to the IPO. The Company used the net proceeds that it received from the IPO to (i) pay accrued but unpaid dividends on its Series A preferred stock totaling approximately $19.1 million, (ii) pay accrued but unpaid dividends on its Series B preferred stock totaling approximately $57.7 million, (iii) pay $9.2 million to an affiliate of Sterling Investment Partners in connection with the termination of the Company's management agreement with the affiliate and (iv) pay contractual IPO bonuses to certain members of the Company's management totaling approximately $8.1 million. 24. The Company's intent was to use the remainder of the net proceeds, approximately $64.7 million, for new store growth and other general corporate purposes. The Company did not receive any of the proceeds from the sale of shares by the selling stockholders. In connection with the IPO, the Company issued 15,504,296 shares of Class B common stock (of which 33,576 shares automatically converted into 33,576 shares of Class A common stock) in exchange for all outstanding preferred stock and all accrued dividends not paid in cash with the proceeds of the IPO. 6

7 Case 1:14-cv LAK Document 2 Filed 02/14/14 Page 7 of 28 Materially False and Misleading Statements Issued During the Period 25. On April 16, 2013 the SEC declared effective the Form S-i Fairway filed on September 24, 2012 and later amended on February 26, 2013, April 4, 2013, April 12, 2013, and April 16, 2013 (collectively, the "Registration Statement"), in connection with the Company's initial public offering ("IPO") on April 17, The Registration Statement incorporated a prospectus to be used in connection with the offer and sale of Fairway shares. The Registration Statement and Prospectus (collectively, the "Offering Documents") were negligently prepared and, as a result, contained untrue statements of material facts or omitted to state other facts necessary to make the statements made not misleading, and was not prepared in accordance with the rules and regulations governing its preparation. 27. in the Offering Documents the Company stated: We believe our stores are among the most productive in the industry in net sales per store and net sales per square foot as a result of our distinctive merchandising strategies, value positioning and efficient operating structure. We have increased our net sales from $401.2 million in fiscal 2010 to $554.9 million in fiscal 2012, or 38.3%, and our Adjusted EBITDA from $23.9 million in fiscal 2010 to $35.8 million in fiscal 2012, or 49.8%, while significantly investing in corporate infrastructure to support our growth, including new store expansion. We increased our net sales from $404.5 million in the thirty-nine weeks ended January 1, 2012 to $482.5 million in the thirty-nine weeks ended December 30, 2012, or 19.3%, and our Adjusted EBITDA from $24.9 million in the thirty-nine weeks ended January 1, 2012 to $33.8 million in the thirty-nine weeks ended December 30, 2012, or 35.9%, due principally to new store openings and leveraging our infrastructure. We had net losses of $7.1 million, $18.6 million, $11.9 million, $10.0 million and $56.2 million in fiscal 2010, fiscal 2011 and fiscal 2012 and the thirty-nine weeks ended January 1, 2012 and December 30, 2012, respectively. We believe the foliowing strengths contribute to our success as a premier destination food retailer and position us for sustainable growth: 7

8 Case 1:14-cv LAK Document 2 Filed 02/14/14 Page 8 of 28 Iconic brand. We believe our Fairway brand has a well established reputation for delivering high-quality, value-priced fresh, specialty and conventional groceries. Fairway has served millions of passionate customers in the Greater New York City metropolitan area for more than 75 years, recording approximately 12.7 million customer transactions in fiscal We believe the strength of the Fairway brand enhances our ability to: (i) attract a broad demographic of customers from a wider geographic radius than a conventional supermarket; (ii) source hard-to-find, unique gourmet and specialty foods; (iii) build a trusted connection with our customers that results in a high degree of loyalty; (iv) attract and retain highly talented employees; (v) secure attractive real estate locations; and (vi) successfully open new stores. Destination food shopping experience "Like No Other Market". We provide our customers a differentiated one-stop shopping experience by offering a unique mix of product breadth, quality and value in a visually appealing in-store enviromnent. Fairway creates a fun and engaging atmosphere in which customers select from an abundance of fresh foods and other high-quality products while interacting with our attentive and knowledgeable employees throughout the store. Customers will find in our stores a "specialty shop" orientation designed to recreate the best features of local specialty markets, such as a gourmet cheese purveyor, full service butcher shop, seafood market and bakery, all in one location. We believe the distinctive Fairway food shopping experience drives loyalty, referrals and repeat business. Distinctive merchandising strategy. Our merchandising strategy is the foundation of our highly differentiated, one-stop shopping experience. We offer a unique product assortment generally not found in either conventional grocery stores or natural / specialty stores, consisting of a large variety of high-quality produce, meats and seafood, as well as gourmet, specialty and prepared foods and a full selection of everyday conventional groceries. High-quality perishables and prepared foods account for approximately 65% of our sales, compared to the more typical one-quarter to one-third of a conventional grocer's sales. We believe that our distinctive merchandising strategy has enabled us to build a trusted connection with our customers. Powerful store format with industry leading productivity. We believe our stores are among the most productive in the industry in net sales per store, net sales per square foot and store contribution margin. During fiscal 2012, for food stores open more than 13 full months, our net sales per store and net sales per selling square foot averaged $64.8 million and $1,859, respectively. In addition, during fiscal 2012, the contribution margin of our food stores open more than 13 full months was 12.3%. Our highly productive store format delivers attractive returns on investment due to the following key characteristics: High-volurne onestop shopping destination. Our high volumes result in operating efficiencies and generate high inventory turnover, which enables us to maintain a fresher selection of quality perishables than most of our competitors, in turn helping to drive customer traffic and sales. -Attractive product mix. Our broad assortment of

9 Case 1:14-cv LAK Document 2 Filed 02/14/14 Page 9 of 28 high-quality fresh, natural and organic products and prepared foods, which account for approximately 65% of our sales, and specialty items, which account for approximately 7% of our sales, enhance gross margins and store productivity. 28. On June 6, 2013, the Company issued a press release and filed a Form 8-K with the SEC, announcing its financial and operating results for the fourth quarter and fiscal year ended March 31, For the fiscal 2013 fourth quarter, the Company reported an increase of net sales by 19% to $1783 million from net sales of $150.3 million in the same period a year ago and that adjusted EBITDA for the fiscal 2013 fourth quarter increased 24% to $13.5 million, inclusive of $2.5 million of business interruption insurance, from $10.9 million in the fourth quarter of For the full year fiscal 2013, the Company reported an increase of net sales by 19% to $661.2 million in fiscal 2013 from $554.9 million in fiscal 2012 and an adjusted EBITDA increase for fiscal 2013 of 32% to $47.4 million, inclusive of $5 million in business interruption insurance, from $35.8 million in fiscal , On June 6, 2013, the Company filed a Form 10-K with the SEC which was signed by Defendants Ruetsch and Arditte, and reiterated the Company's previously announced quarterly and fiscal year-end financial results and financial position. In addition, the 10-K contained signed certifications pursuant to the Sarbanes-Oxley Act of 2002 ("SOX") by Defendants Ruetsch and Arditte, stating that the financial information contained in the Form 10- K was accurate and disclosed any material changes to the Company's internal control over financial reporting. 31. In the 10-K the Company stated that: We intend to continue our strong growth by expanding our store base in our existing and new markets, capitalizing on consumer trends and improving our operating margins. We opened an additional food store and integrated Fairway Wines & Spirits location in Woodland Park, New Jersey in June 2012, an additional food store in Westbury, New York in August 2012, and an additional 9

10 Case 1:14-cv LAK Document 2 Filed 02/14/14 Page 10 of 28 food store in Manhattan's Kips Bay neighborhood in late December We reopened our Red Hook store, which was temporarily closed due to damage sustained during Hurricane Sandy, on March 1, 2013, and we expect to open an additional food store in Manhattan's Chelsea neighborhood in July 2013 and in Nanuet, New York in fall For the next several years beginning in fiscal 2015, we intend to grow our store base in the Greater New York City metropolitan area at a rate of three to four stores annually. Over time, we also plan to expand Fairway's presence into new, high-density metropolitan markets. Based on demographic research conducted for us by the Buxton Company, a customer analytics research firm, we believe, based on these demographics, we have the opportunity to more than triple the number of stores in our existing marketing region of the Greater New York City metropolitan area, the Northeast market (from New England to the District of Columbia) can support up to 90 stores and the U.S. market can support more than 300 additional stores (including stores in the Northeast) operating under our current fonnat, 32. On August 8, 2013, the Company issued a press release and filed a Form 8-K with the SEC, announcing its financial and operating results for the fiscal 2014 first quarter ending June 30, The Company reported that net sales increased $32 million, or 21%, to $187 million from $155 million in the first quarter of fiscal 2013 and that adjusted EBTTDA increased 12% to $12.7 million in the first quarter of fiscal 2014 from $11.3 million in the first quarter of fiscal On August 8, 2013 the Company filed a Form 10-Q with the SEC which was signed by Defendants Ruetsch and Arditte, and reiterated the Company's previously announced quarterly and fiscal year-end financial results and financial position. In addition, the lo-q contained signed certifications pursuant to the S arb anes- Oxley Act of 2002 ("SOX") by Defendants Ruetsch and Arditte, stating that the financial infonnation contained in the Form 10- Q was accurate and disclosed any material changes to the Company's internal control over financial reporting. 'U

11 Case 1:14-cv LAK Document 2 Filed 02/14/14 Page 11 of In the l0-q, the Company stated that: We intend to continue our strong growth by expanding our store base in our existing and new markets, capitalizing on consumer trends and improving our operating margins. We opened an additional food store and integrated Fairway Wines & Spirits location in Woodland Park, New Jersey in June 2012, an additional food store in Westbury, New York in August 2012, an additional food store in Manhattan's Kips Bay neighborhood in late December 2012 and an additional food store in Manhattan's Chelsea neighborhood in July 2013, after the end of first quarter We reopened our Red Hook store, which was temporarily closed due to damage sustained during Hurricane Sandy, on March 1, 2013, and we expect to open an additional food store in Nanuet, New York in fall For the next several years beginning in fiscal 2015, we intend to grow our store base in the Greater New York City metropolitan area at a rate of three to four stores annually. Over time, we also plan to expand Fairway's presence into new, high-density metropolitan markets. Based on demographic research conducted for us by the Buxton Company, a customer analytics research finn, we believe, based on these demographics, we have the opportunity to more than triple the number of stores in our existing marketing region of the Greater New York City metropolitan area, the Northeast market (from New England to the District of Columbia) can support up to 90 stores and the U.S. market can support more than 300 additional stores (including stores in the Northeast) operating under our current format. We believe that we are well positioned to capitalize on evolving consumer preferences and other key trends currently shaping the food retail industry. These trends include an increasing consumer focus on the shopping experience and on healthy eating choices and fresh, quality offerings, including locally sourced products, as well as growing interest in high-quality, value-oriented private label product offerings. We intend to improve our operating margins through scale efficiencies, improved systems, continued cost discipline and enhancements to our merchandise offerings. We expect store growth will also permit us to benefit from economies of scale in sourcing products and will enable us to leverage our existing infrastructure. 35, On November 7, 2013, the Company issued a press release and filed a Form 8-K with the SEC, announcing its financial and operating results for the fiscal 2014 second quarter ending September 29, For the second quarter of fiscal 2014, the Company reported that net sales increased $22.7 million, or 14.1%, to $183.2 million from $160.5 million in the second 11

12 Case 1:14-cv LAK Document 2 Filed 02/14/14 Page 12 of 28 quarter of fiscal 2013 and that adjusted EBITDA increased 4.7% to $10.6 million in the second quarter of fiscal 2014 from $10.1 million in the second quarter of fiscal On November 7, 2013 the Company filed a Form 10-Q with the SEC which was signed by Defendants Ruetsch and Arditte, and reiterated the Company's previously announced quarterly financial results and financial position. In addition, the 10-Q contained signed certifications pursuant to the S arbanes -Oxley Act of 2002 ("SOX") by Defendants Ruetsch and Arditte, stating that the financial infonnation contained in the Fonu 10-Q was accurate and disclosed any material changes to the Company's internal control over financial reporting. 37. In the lo-q, the Company stated that: We intend to continue our strong growth by expanding our store base in our existing and new markets, capitalizing on consumer trends and improving our operating margins, We opened an additional food store and integrated Fairway Wines & Spirits location in Woodland Park, New Jersey in late June 2012, an additional food store in Westbury, New York in August 2012, an additional food store in Manhattan's Kips Bay neighborhood in late December 2012, an additional food store in Manhattan's Chelsea neighborhood in late July 2013 and an additional food store in Nanuet, New York in mid-october We reopened our Red Hook store, which was temporarily closed due to damage sustained during Hurricane Sandy, on March 1, We expect to open a new store in Lake Grove in Suffolk County, Long Island, NY in Spring 2014, a new store in the TriBeCa neighborhood of Manhattan in the Fall 2014 and a new store in the Hudson Yards neighborhood in west midtown Manhattan in Spring For the next several years beginning in fiscal 2015, we intend to grow our store base in the Greater New York City metropolitan area at a rate of three to four stores annually. Over time, we also plan to expand Fairway's presence into new, high-density metropolitan markets. Based on demographic research conducted for us by the Buxton Company, a customer analytics research firm, we believe, based on these demographics, we have the opportunity to more than triple the number of stores in our existing marketing region of the Greater New York City metropolitan area, the Northeast market (from New England to the District of Columbia) can support up to 90 stores and the U.S. market can support more than 300 additional stores (including stores in the Northeast) operating under our current format. We believe that we are well positioned to capitalize on evolving consumer preferences and other key trends currently shaping the food retail industry. These trends include an increasing consumer focus on the shopping experience and on 12

13 Case 1:14-cv LAK Document 2 Filed 02/14/14 Page 13 of 28 healthy eating choices and fresh, quality offerings, including locally sourced products, as well as growing interest in high-quality, value-oriented private label product offerings. We intend to improve our operating margins through scale efficiencies, improved systems, continued cost discipline and enhancements to our merchandise offerings. We expect store growth will also permit us to benefit from economies of scale in sourcing products and will enable us to leverage our existing infrastructure. 38. During a conference call on November 7, 2013, discussing the fiscal 2014 second quarter, management predicted that same store sales growth would increase around I% or more. Santaro stated that: [W]e estimate that the 5-week month of October, ending November 2, continues to show same-store sales growth of more than 1%, excluding Red [Took and after reflecting the fill effect of Sandy, including, as I mentioned earlier, pre-sandy stocking and post-sandy stocking. So we do feel good about our sales momentum going into the third quarter. And we do expect, at this time, to have solidly positive same-store sales growth for the third quarter. Santaro also stated that "our current guidance for the third quarter adjusted EBITDA is 20% to 25% growth over last year." 39. The statements referenced in J above were materially false and/or misleading because they misrepresented and failed to disclose the following adverse facts, which were known to defendants or recklessly disregarded by them, including that: (1) Fairway's same store sales were declining; (2) the Company's direct store expenses were increasing; (3) the Company's financial forecasts were wholly unrealistic; and (4) as a result of the foregoing, Fairway's public statements were materially false and misleading at all relevant times. The Truth Emerges 40. On February 6, 2014, Fairway reported earnings that severely missed analysts' estimates including very disappointing same store sales, as well as increased direct store expenses. Moreover, reported a colossal miss in EBIDTA growth for the third quarter as 13

14 Case 1:14-cv LAK Document 2 Filed 02/14/14 Page 14 of 28 EBIDTA grew 3.2% over the same period in the prior year compared to growth of "20% -25%" that management had predicted. The Company attributed the decrease in same store sales to the compressed holiday shopping period and the effect of Hurricane Sandy, which benefited sales in the third quarter of fiscal Management also lowered fiscal-fourth-quarter and 2015 guidance, noting that only two stores are now expected to open in fiscal 2015 versus three contemplated in prior guidance. 41. In addition, the Company announced that Ruetsch would step down as Fairway's chief executive officer to allow him to spend more time with his family. 42. Analysts were skeptical of the Company's explanation for the disappointing results, diminished outlook, as well as the suspicious timing of Ruetsch's resignation. During a conference call held with analysts after the Company's earnings announcement on analyst commented: First, an observation, and then a question. For a company with 14 stores, there is an amazingly high level of complexity here. So, my question then is going to be, can you just try to simplify for us what has changed in the fiscal 2015 outlook? Because analysts' estimates have about 30% adjusted EBIDTA growth and now we are looking at 10%. Another analyst commented with regard to "direct store expenses" that while the Company was mentioning that they were "seeing them ramp in the typical fashion," it "sounds like they are coining in a little higher" than expected, 43. On this news, Fairway shares declined $3.19 or 27.91% on massive volume, to close at $8.24 on February 7, As a result of defendants' wrongful acts and omissions, and the precipitous decline in the market value of the Company's securities, Plaintiff and other Class members have suffered significant losses and damages. 14

15 Case 1:14-cv LAK Document 2 Filed 02/14/14 Page 15 of 28 PLAINTIFF'S CLASS ACTION ALLEGATIONS 45. Plaintiff brings this action as a class action pursuant to Federal Rule of Civil Procedure 23(a) and (b)(3) on behalf of a Class, consisting of all those who purchased or otherwise acquired Fairway securities during the Class Period (the "Class"); and were damaged upon the revelation of the alleged corrective disclosures. Excluded from the Class are defendants herein, the officers and directors of the Company, at all relevant times, members of their immediate families and their legal representatives, heirs, successors or assigns and any entity in which defendants have or had a controlling interest. 46. The members of the Class are so numerous that joinder of all members is impracticable. Throughout the Class Period, Fairway securities were actively traded on the NASDAQ. While the exact number of Class members is unknown to Plaintiff at this time and can be ascertained only through appropriate discovery, Plaintiff believes that there are hundreds or thousands of members in the proposed Class. Record owners and other members of the Class may be identified from records maintained by Fairway or its transfer agent and may be notified of the pendency of this action by mail, using the form of notice similar to that customarily used in securities class actions. 47. Plaintiff's claims are typical of the claims of the members of the Class as all members of the Class are similarly affected by defendants' wrongful conduct in violation of federal law that is complained of herein. 48. Plaintiff will fairly and adequately protect the interests of the members of the Class and has retained counsel competent and experienced in class and securities litigation. Plaintiff has no interests antagonistic to or in conflict with those of the Class. 15

16 Case 1:14-cv LAK Document 2 Filed 02/14/14 Page 16 of Common questions of law and fact exist as to all members of the Class and predominate over any questions solely affecting individual members of the Class. Among the questions of law and fact common to the Class are: whether the federal securities laws were violated by defendants' acts as alleged herein; whether statements made by defendants to the investing public during the Class Period misrepresented material facts about the business, operations and management of Fairway; whether the Individual Defendants caused Fairway to issue false and misleading financial statements during the Class Period; whether defendants acted knowingly or recklessly in issuing false and misleading financial statements; whether the prices of Fairway securities during the Class Period were artificially inflated because of the defendants' conduct complained of herein; and whether the members of the Class have sustained damages and, if so, what is the proper measure of damages. 50. A class action is superior to all other available methods for the fair and efficient adjudication of this controversy since joinder of all members is impracticable. Furthermore, as the damages suffered by individual Class members may be relatively small, the expense and burden of individual litigation make it impossible for members of the Class to individually redress the wrongs done to them. There will be no difficulty in the management of this action as a class action. 51. Plaintiff will rely, in part, upon the presumption of reliance established by the fraud-on-the-market doctrine in that: defendants made public misrepresentations or failed to disclose material facts during the Class Period; the omissions and misrepresentations were material; 16

17 Case 1:14-cv LAK Document 2 Filed 02/14/14 Page 17 of 28 Fairway securities are traded in an efficient market; the Company's shares were liquid and traded with moderate to heavy volume during the Class Period; the Company traded on the NASDAQ and was covered by multiple analysts; the misrepresentations and omissions alleged would tend to induce a reasonable investor to misjudge the value of the Company's securities; and Plaintiff and members of the Class purchased, acquired and/or sold Fairway securities between the time the defendants failed to disclose or misrepresented material facts and the time the true facts were disclosed, without knowledge of the omitted or misrepresented facts. 52. Based upon the foregoing, Plaintiff and the members of the Class are entitled to a presumption of reliance upon the integrity of the market. COUNT I For Violation of 11 of the 1933 Act (Against All Defendants 53. Plaintiff repeats and realleges each and every allegation contained above as if fully set forth herein, except as set forth below in Paragraph This Count is brought pursuant to 11 of the 1933 Act, 15 U.S.C. 77k, on behalf of the Class, against all Defendants. 55. This Count does not sound in fraud. All of the preceding allegations of fraud or fraudulent conduct and/or motive are specifically excluded from this Count. Plaintiff does not allege that the Defendants had scienter or fraudulent intent with respect to this Count, insofar as sci enter or fraudulent intent are not elements of a 11 claim. 56. The Registration Statement for the IPO was inaccurate and misleading, contained untrue statements of material facts, omitted to state other facts necessary in order to make the statements not misleading, and omitted to state material facts required to be stated therein. 17

18 Case 1:14-cv LAK Document 2 Filed 02/14/14 Page 18 of Fairway is the registrant for the IPO. The other defendants named herein were responsible for the contents and dissemination of the Registration Statement. 58. As the issuer of the shares, Fairway is strictly liable to Plaintiff and the Class for any misstatements or omissions in the Registration Statement. 59. None of the defendants named herein made a reasonable investigation or possessed reasonable grounds for the belief that the statements contained in the Registration Statement were true, and/or without omissions of any material facts, were not misleading. 60. By reason of the conduct alleged herein, each defendant violated, and/or controlled a person who violated, 11 of the 1933 Act. 61. Plaintiff acquired Fairway shares pursuant and/or traceable to the Registration Statement for the IPO. 62. Plaintiff and the Class have sustained damages. The value of Fairway stock has declined substantially subsequent to and due to defendants violations. 63. At the time of their purchases of Fairway shares, Plaintiff and the other members of the Class were without knowledge of the facts concerning the wrongful conduct alleged herein and could not have reasonably discovered those facts prior to February 6, Less than one year has elapsed from the time that plaintiff discovered or reasonably could have discovered the facts upon which this complaint is based, to the time that Plaintiff filed this complaint. Less than three years elapsed between the time that the securities upon which this Count is brought were offered to the public, and the time Plaintiff filed this complaint. ii

19 Case 1:14-cv LAK Document 2 Filed 02/14/14 Page 19 of 28 COUNT II For Violation of 15 of the 1933 Act (Against The Individual Defendants) 64. Plaintiff repeats and realleges each and every allegation contained above as if fully set forth herein, except as set forth below in 66. Defendants. 65. This Count is brought pursuant to 15 of the 1933 Act against the Individual 66. This Count does not sound in fraud. All of the preceding allegations of fraud or fraudulent conduct and/or motive are specifically excluded from this Count. Plaintiff does not allege that Defendants had scienter or fraudulent intent with respect to this Count, insofar as sci enter or fraudulent intent are not elements of a 15 claim. 67. The Individual Defendants each were control persons of Fairway by virtue of their positions as a director and/or senior officer of Fairway. The Individual Defendants each had a series of direct and/or indirect business and/or personal relationships with other directors and/or officers and/or major shareholders of Fairway. 68. Defendants each were culpable participants in the violations of 11 of the 1933 Act alleged in the prior Count above, based on their having signed or authorized the signing of the Registration Statement and having otherwise participated in the process which allowed the IPO to be successfully completed. COUNT III (Against All Defendants For Violations of Section 10(b) And Rule lob-5 Promulgated Thereunder) 69. Plaintiff repeats and realleges each and every allegation contained above as if fully set forth herein. 19

20 Case 1:14-cv LAK Document 2 Filed 02/14/14 Page 20 of This Count is asserted against defendants and is based upon Section 10(b) of the Exchange Act, 15 U.S.C. 78jb), and Rule lob-5 promulgated thereunder by the SEC. 71. During the Class Period, defendants engaged in a plan, scheme, conspiracy and course of conduct, pursuant to which they knowingly or recklessly engaged in acts, transactions, practices and courses of business which operated as a fraud and deceit upon Plaintiff and the other members of the Class; made various untrue statements of material facts and omitted to state material facts necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading; and employed devices, schemes and artifices to defraud in connection with the purchase and sale of securities. Such scheme was intended to, and, throughout the Class Period, did: (i) deceive the investing public, including Plaintiff and other Class members, as alleged herein; (ii) artificially inflate and maintain the market price of Fairway securities; and (iii) cause Plaintiff and other members of the Class to purchase or otherwise acquire Fairway securities and options at artificially inflated prices. In furtherance of this unlawful scheme, plan and course of conduct, defendants, and each of them, took the actions set forth herein. 72. Pursuant to the above plan, scheme, conspiracy and course of conduct, each of the defendants participated directly or indirectly in the preparation and/or issuance of the quarterly and annual reports, SEC filings, press releases and other statements and documents described above, including statements made to securities analysts and the media that were designed to influence the market for Fairway securities. Such reports, filings, releases and statements were materially false and misleading in that they failed to disclose material adverse information and misrepresented the truth about Fairway's finances and business prospects. 20

21 Case 1:14-cv LAK Document 2 Filed 02/14/14 Page 21 of 28 73, By virtue of their positions at Fairway, defendants had actual knowledge of the materially false and misleading statements and material omissions alleged herein and intended thereby to deceive Plaintiff and the other members of the Class, or, in the alternative, defendants acted with reckless disregard for the truth in that they failed or refused to ascertain and disclose such facts as would reveal the materially false and misleading nature of the statements made, although such facts were readily available to defendants. Said acts and omissions of defendants were committed willfully or with reckless disregard for the truth. In addition, each defendant knew or recklessly disregarded that material facts were being misrepresented or omitted as described above. 74. Defendants were personally motivated to make false statements and omit material infonnation necessary to make the statements not misleading in order to personally benefit from the sale of Fairway securities from their personal portfolios. 75. Information showing that defendants acted knowingly or with reckless disregard for the truth is peculiarly within defendants' knowledge and control. As the senior managers and/or directors of Fairway, the Individual Defendants had knowledge of the details of Fairway's internal affairs. 76. The Individual Defendants are liable both directly and indirectly for the wrongs complained of herein. Because of their positions of control and authority, the Individual Defendants were able to and did, directly or indirectly, control the content of the statements of Fairway. As officers and/or directors of a publicly-held company, the Individual Defendants had a duty to disseminate timely, accurate, and truthful information with respect to Fairway's businesses, operations, future financial condition and future prospects. As a result of the dissemination of the aforementioned false and misleading reports, releases and public statements, 21

22 Case 1:14-cv LAK Document 2 Filed 02/14/14 Page 22 of 28 the market price of Fairway securities was artificially inflated throughout the Class Period. In ignorance of the adverse facts concerning Fairway's business and financial condition which were concealed by defendants, Plaintiff and the other members of the Class purchased or otherwise acquired Fairway securities at artificially inflated prices and relied upon the price of the securities, the integrity of the market for the securities and/or upon statements disseminated by defendants, and were damaged thereby. 77. During the Class Period, Fairway securities were traded on an active and efficient market. Plaintiff and the other members of the Class, relying on the materially false and misleading statements described herein, which the defendants made, issued or caused to be disseminated, or relying upon the integrity of the market, purchased or otherwise acquired shares of Fairway securities at prices artificially inflated by defendants' wrongful conduct. Had Plaintiff and the other members of the Class known the truth, they would not have purchased or otherwise acquired said securities, or would not have purchased or otherwise acquired them at the inflated prices that were paid. At the time of the purchases and/or acquisitions by Plaintiff and the Class, the true value of Fairway securities was substantially lower than the prices paid by Plaintiff and the other members of the Class. The market price of Fairway securities declined sharply upon public disclosure of the facts alleged herein to the injury of Plaintiff and Class members. 78. By reason of the conduct alleged herein, defendants knowingly or recklessly, directly or indirectly, have violated Section 10(b) of the Exchange Act and Rule lob-5 promulgated thereunder. 79. As a direct and proximate result of defendants' wrongful conduct, Plaintiff and the other members of the Class suffered damages in connection with their respective purchases, 22

23 Case 1:14-cv LAK Document 2 Filed 02/14/14 Page 23 of 28 acquisitions and sales of the Company's securities during the Class Period, upon the disclosure that the Company had been disseminating misrepresented financial statements to the investing public. COUNT IV (Violations of Section 20(a) of the Exchange Act Against The Individual Defendants) 80. Plaintiff repeats and realleges each and every allegation contained in the foregoing paragraphs as if fully set forth herein. 81. During the Class Period, the Individual Defendants participated in the operation and management of Fairway, and conducted and participated, directly and indirectly, in the conduct of Fairway's business affairs. Because of their senior positions, they knew the adverse nonpublie information about Fairway's misstatement of income and expenses and false financial statements. 82. As officers and/or directors of a publicly owned company, the Individual Defendants had a duty to disseminate accurate and truthful information with respect to Fairway's financial condition and results of operations, and to correct promptly any public statements issued by Fairway which had become materially false or misleading. 83. Because of their positions of control and authority as senior officers, the Individual Defendants were able to, and did, control the contents of the various reports, press releases and public filings which Fairway disseminated in the marketplace during the Class Period concerning Fairway's results of operations. Throughout the Class Period, the individual Defendants exercised their power and authority to cause Fairway to engage in the wrongful acts complained of herein. The Individual Defendants therefore, were "controlling persons" of Fairway within the meaning of Section 20(a) of the Exchange Act. In this capacity, they 23

24 Case 1:14-cv LAK Document 2 Filed 02/14/14 Page 24 of 28 participated in the unlawful conduct alleged which artificially inflated the market price of Fairway securities. 84. Each of the Individual Defendants, therefore, acted as a controlling person of Fairway. By reason of their senior management positions and/or being directors of Fairway, each of the Individual Defendants had the power to direct the actions of, and exercised the same to cause, Fairway to engage in the unlawful acts and conduct complained of herein. Each of the Individual Defendants exercised control over the general operations of Fairway and possessed the power to control the specific activities which comprise the primary violations about which Plaintiff and the other members of the Class complain. 85. By reason of the above conduct, the Individual Defendants are liable pursuant to Section 20(a) of the Exchange Act for the violations committed by Fairway. PRAYER FOR RELIEF WHEREFORE, Plaintiff demands judgment against defendants as follows: A. Determining that the instant action may be maintained as a class action under Rule 23 of the Federal Rules of Civil Procedure, and certifying Plaintiff as the Class representative; B. Requiring defendants to pay damages sustained by Plaintiff and the Class by reason of the acts and transactions alleged herein; C. Awarding Plaintiff and the other members of the Class prejudgment and postjudgment interest, as well as their reasonable attorneys' fees, expert fees and other costs; and D. Awarding such other and further relief as this Court may deem just and proper. 24

25 Case 1:14-cv LAK Document 2 Filed 02/14/14 Page 25 of 28 Plaintiff hereby demands a trial by jury. Dated: February 14, 2014 DEMAND FOR TRIAL BY JURY 25