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Lawsuit says Fedex misled investors on TNT
Fedex downplayed the effects of a cyberattack on subsidiary TNT Express until this past December, misleading investors and violating federal securities laws, a class action lawsuit filed against the Memphis company alleges.
The lawsuit claims Fedex and company executives pushed a positive narrative that “lacked a reasonable basis” about the ability of TNT, which it bought for $4.8 billion in a deal announced in 2016, to meet goals and retain business following a 2017 cyberattack.
The lawsuit was filed in the Southern District of New York by securities class action firm Pomerantz LLP.
Fedex made misleading statements about the TNT integration from Sept. 19, 2017, to Dec. 18, 2018, that caused members of the class action to purchase Fedex stock “at artificially inflated prices,” the lawsuit says. Here’s a look at promotions, hirings and other noteworthy business events in the Memphis area:
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The securities fraud suit covers those who have acquired Fedex common stock during that time period. Those in the class action “have suffered significant losses and damages” as a result, the lawsuit says, and it’s seeking compensatory damages in an amount to be determined at trial.
In a statement, Fedex said it “intends to vigorously defend itself against these allegations and will respond accordingly.”
Cyberattack hits TNT
The $4.8-billion TNT Express acquisition significantly boosted Fedex’s presence in Europe and gave it access to an “unparalleled” road network that will improve transit times, the company has said. Post-acquisition, Fedex Express anticipated its fiscal year 2020 operating income would jump $1.2 to $1.5 billion above its 2017 amount.
But a 2017 cyberattack known as “Notpetya,” which the White House later blamed Russia for, devastated TNT’S systems as Fedex was integrating the company into its operations. TNT packages either experienced large delays or were lost following the cyberattack, the lawsuit says.
In the company’s most recent earnings call, Chairman and CEO Fred Smith said the cyberattack would have put TNT in dire straits had it not been acquired by Fedex and been aided by “the fantastic work of our IT team.”
“Had it not been that TNT had been a subsidiary of Fedex, the company would have been bankrupt,” he said.
Fedex has said previously the cyberattack cost it $400 million, but CFO Alan Graf said on the earnings call that’s “an old number.”
“That’s never been updated, but it continues to be a problem for us in terms of integration, as we have to basically rebuild a system that TNT had and then integrate it with the network that we’ve got on the purple side, and it’s cost us a lot more money and slowed it down and it’s made it more complex,” Graf said.
Fedex expects TNT integration costs to total $1.7 billion.
‘Lacked a reasonable basis’
The lawsuit says Fedex quelled concerns about the attack on the Sept. 19, 2017, earnings call as it “assured investors that all critical TNT systems were fully restored” after. Fedex stuck by its Express operating income target and its stock price jumped, it added.
But the lawsuit alleges large TNT customers took their business elsewhere following the cyberattack, restoring the TNT network took much longer than disclosed and Fedex wasn’t on track to reach the operating income target. Thus, Fedex’s positive statements about the TNT integration “lacked a reasonable basis,” it says.
Fedex didn’t fully reveal TNT’S struggles until announcing quarterly results this past December, the lawsuit says. The company said then it wouldn’t reach the Express income improvement target by 2020.
“Management still expects to realize the benefits from TNT Express that were anticipated when the company was acquired,” Fedex said at the time. “However, lower-than-expected express package volume due to European economic weakness that accelerated during the quarter and is expected to continue, and a change in service mix following the June 2017 cyberattack on TNT Express, will delay the anticipated realization of these benefits.”
Fedex President Raj Subramaniam said in the company’s most recent earnings call that the TNT integration has seen “tremendous momentum” in the past few months. Operational integration should be “substantially complete” by the end of fiscal 2020, leading to faster service at a lower cost, he said.
Reach Max Garland at max. garland@commercialappeal.com or 901-529-2651.