Choice Hotels facing class action lawsuit

SILVER SPRING, MD— Only days before Choice Hotels International was able to revel in the opening of its first Cambria Suites hotel (see related story), the company was struck with the news that a class action lawsuit was filed against it in the U.S. District Court for the District of Colorado on behalf of those who purchased the publicly traded securities of Choice Hotels between April 25, 2006 and July 26, 2006. The complaint charges the company and certain Choice Hotels officers and directors with violations of the Securities Exchange Act of 1934, which incorporates insider trading. Since no class has yet been certified for the class action lawsuit, several law firms are currently searching for a lead plaintiff for the case by June 11. Law firms looking to lead the case include Lerach Coughlin Stoia Geller Rudman & Robbins LLP; Schiffrin Barroway Topaz & Kessler, LLP; and Brower Piven. In the lawsuit Choice Hotels has been accused of issuing a series of materially false and misleading statements about the company and its business, operations and prospects. More specifically, it is alleged that Choice Hotels was experiencing last year a significant decline in the number of new hotel franchise contracts, which did not allow it to meet internal expectations. Furthermore, it is accused of exhibiting declining growth in its conversion of hotels into its franchise system. Leading to the lawsuit was the fact that prior to the disclosure of these alleged facts, Choice Hotels insiders allegedly sold more than $16 million of their personally held shares to the public. In addition, by allegedly issuing false statements prior to the perceived performance decline, the company’s stock was supposedly inflated, which could have ultimately caused investors to overpay for Choice Hotels’ securities during the time period in question. The lawsuit further noted that on July 25, 2006, Choice revised its earnings guidance for 2006 downward and reported a decline in new franchise growth and a decrease in hotel conversion volume as part of its second quarter 2006 earnings release. Of course, when Choice revealed those facts, its stock fell $13.30 per share, or about 23%, down to $45.55 on heavy volume. At that time Bear Stearns and Susquehanna Financial downgraded Choice stock. The law firms are now seeking to recover damages on behalf of all those who acquired Choice stock between April 25 and July 26, 2006. Calls seeking comment on the lawsuit from law firms involved in the case were not returned. As for Choice’s response, a spokesperson in its investor relations department explained that such a class action lawsuit is not unusual in the world of publicly traded companies. Nevertheless, he said that this lawsuit against Choice is without merit and baseless. He further refuted the claim that Choice’s conversion transactions were weak in 2006. Regarding declining new franchise agreements, he said that Choice in fact ultimately had a record year in that business area with 720 new franchise agreements in 2006. In summation of the situation moving forward, he explained franchisees should not worry about the lawsuit and that the directors and officers liability insurance that’s in place can take care of such claims. According to one securities lawyer contacted by HOTEL BUSINESS®, Choice Hotels will probably pay some level of damages as a result of the lawsuit, but the amount will most likely be immaterial to the company. Serving as more specific evidence supporting the lawsuit is the fact that during the period from April 25, 2006 to July 26, 2006, there were at least $12 million of direct stock sales by Choice officers and directors, according to Thomson Financial. Three of the biggest Choice Hotels stock sellers during that time period were Janna Morrison, the current division president of mid-market brands; Joseph Squeri, the former president and COO; and Michael DeSantis, a former senior vp and senior strategic advisor. Morrison directly s