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UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK
Civil Action No. 06 Civ. 13761 (CM)(KNF) IN RE TOP TANKERS, INC. SECURITIES
LITIGATION
Judge Colleen McMahon
JURY TRIAL DEMANDED
CORRECTED AND AMENDED CONSOLIDATED CLASS ACTION COMPLAINT
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TABLE OF CONTENTS SUMMARY OF THE ACTION ......................................................................................................1 JURISDICTION AND VENUE .................................................................................................... .. 5 PARTIES ....................................................................................................................................... .. 5 CONTROL PERSON ALLEGATIONS/GROUP PLEADING .................................................... ..6
DEFENDANTS' FRAUDULENT SCHEME ............................................................................... .. 8 A.
B.
TOPT Goes Public in July 2004 .................................................................................... ..8
The 2006 Restatement: Defendants' Fraudulent Accounting For The Seller's Credit Associated With The Sale-Leaseback Agreements .................................................................................................................... .. 9 1. Defendants' Fraudulent Accounting for the Seller's Credit .................................... ..9 2. E&Y Resigns Over A Material Accounting Disagreement With TOPT's Decision to Restate ........................................................................... 11 3. The December 2006 Restatement ............................................................................ 15 4. Defendants' Acknowledgment of Their Accounting Fraud .................................... 16
THE TRUTH BEGINS TO BE REVEALED ............................................................................... 18 THE DISASTROUS AFTERMATH OF DEFENDANTS' FRAUD ........................................... 19 DEFENDANTS' FALSE AND MISLEADING STATEMENTS DURING THE CLASS PERIOD ................................................................................................................... 23 ADDITIONAL SCIENTER ALLEGATIONS ............................................................................. 30 GAAP VIOLATIONS ................................................................................................................... 33 LOSS CAUSATION ..................................................................................................................... 38
APPLICABILITY OF PRESUMPTION OF RELIANCE: FRAUD-ONTHE-MARKET DOCTRINE ........................................................................................................ 40 INAPPLICABILITY OF SAFE HARBOR ................................................................................... 41 CLASS ACTION ALLEGATIONS .............................................................................................. 43
CAUSES OF ACTION .................................................................................................................. 44
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COUNT I
Violation Of Section 10(b) Of The Exchange Act And Rule IOb-5 Against Defendants ............................... Violation of Section 20(a) of the Exchange Act Against The Individual Defendants .................................
........................ 44
COUNT II
...................... 48 ...................... 49 ...................... 49
PRAYER FOR RELIEF .................................................................................... JURY DEMAND ...............................................................................................
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Lead Plaintiff Joseph A. DeShayes, Jr. ("Plaintiff' or "Lead Plaintiff'), individually and on behalf of Ann P. DeShayes, his wife, Susan A. Keenan and Joel M. Keenan, his daughter and son-inlaw, and On Site Drapery Cleaning, Inc., a business managed by Mr. DeShayes, and on behalf of all persons or entities who purchased or otherwise acquired the common stock of Top Tankers, Inc. (the "Company" or "TOPT") between March 13, 2006 and November 29, 2006, inclusive (the "Class Period"), by and through their undersigned attorneys, allege the following upon information and belief; except as to those allegations concerning Lead Plaintiff, which are alleged upon personal knowledge. Lead Plaintiff's information and belief allegations are based upon, inter alia, investigation by and through their undersigned attorneys, including, without limitation, the review and analysis of. (i) filings made by TOPT with the United States Securities and Exchange Commission ("SEC"); (ii) press releases , public statements , news articles and other publications disseminated by TOPT and the Individual Defendants ; (iii) TOPT's analyst conference calls; (iv) securities analysts' reports concerning TOPT; and (v) other publicly available information concerning TOPT and the Individual Defendants. SUMMARY OF THE ACTION This is a federal securities class action brought under sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the "Exchange Act"), 15 U.S.C. 78j(b), 78t(a), and the rules and regulations promulgated thereunder by the SEC, including Rule I Ob-5, 17 C.F.R. 240.1 Ob-5. Lead Plaintiff brings these claims on behalf of a class (the "Class") consisting of all persons and entities who purchased or otherwise acquired the common stock of TOPT during the Class Period at artificially inflated prices and were damaged thereby. 2. According to the Company ' s website , TOPT is engaged in the world-wide transport of
liquid and petroleum cargoes. TOPT owns and/or operates 21 double-hulled tankers with a total
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cargo capacity of over 2 million deadweight tonnage or DWT. TOPT's strategy , according to its website, is to focus on optimizing return on the Company's investments and maximizing shareholder value through, among other things, the acquisition of vessels. 3. On March 13, 2006, the first day of the Class Period, Defendants announced that the
Company had entered into sale and leaseback agreements for thirteen vessels (the "2006 Sale and Leaseback Transactions") for a total price of $550 million. According to TOPT, approximately $96 million of the $550 million would be gain on the sale of these vessels and of that $96 million, $82 million would be recognized as deferred gain over the terms of the leases, or over 5 to 7 years. Deferred gain from the 2006 Sale and Leaseback Transactions was included in the Company's first and second quarter results for 2006. 4. Defendants recklessly issued materially false and misleading financial statements in
connection with TOPT's accounting for the 2006 Sale and Leaseback Transactions. As part of the related agreements, Defendants arranged for 10% of the total value of the transactions, or $55 million, to be held by the lessors as a "seller's credit" that was not payable to TOPT until three months after the end of the charter period, and after full performance by TOPT under the agreements . Totally unbeknownst to investors , and in direct violation of Generally Accepted Accounting Principles ("GAAP"), Defendants improperly included the $55 million gain from the "seller's credit" up-front, as part of the $96 million gain on the sale of the vessels. 5. Under GAAP , a seller ' s credit should not be booked as a gain until the end of the
contractual term because it is contingent on completion of the seller-lessee's lease payments. In violation of GAAP, Defendants padded the reported total book gain (and the deferred gain on the sale) by including the $55 million seller ' s credit in its financial statements for the first and second
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quarters of 2006, well before the Company had fulfilled its obligations under the 2006 Sale and Leaseback Transactions. 6. On May 11, 2006, the Company released it financial results for the first quarter 2006.
According to Defendant Pistiolis, TOPT had achieved its highest-ever earnings per share in the first quarter 2006. On this positive news, TOPT shares rose $0.55 to close at $8.57 per share on May 11, 2007 on heavy trading volume of 3,110,500 shares. On August 3, 2006, TOPT disclosed its financial results for the second quarter of 2006. While the Company reported a loss of income of $0.17 per share, TOPT reported an operating gain of $89,000. 7. The truth about Defendants ' fraud began to be revealed on June 27, 2006, when TOPT
announced that the SEC was commencing an informal investigation into all of the Company's acquisitions from 2004 onwards, including the 2006 Sale and Leaseback Transactions. This
announcement caused the price of TOPT common stock to fall from an opening price of $7.45 per share on June 27, 2006 to a closing price of $6.43 on June 28, 2006, a 13.69% one-day decline, on heavy trading volume of 539,900 shares on June 27, 2006 and 1,114,0300 shares on June 28, 2006, respectively. 8. Later, on November 29, 2006, the Company stunned the market when it announced in
a press release ( 1) that its independent auditor Ernst & Young, LLP ("E&Y") had resigned due to a disagreement with the Company over the accounting treatment for certain aspects of the 2006 Sale and Leaseback Transactions during its review of the Company's third quarter operating results, and (2) that it intended to restate its financial statements for the first and second quarter of fiscal year 2006. According to TOPT, E&Y disagreed with the Company's treatment of the seller's credit associated with the sale and leaseback agreements and, as a result, requested that TOPT restate its results for the first and second quarters of 2006. Even though TOPT eventually restated its results
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for the first and second quarters of 2006, E&Y still felt that it was necessary to resign as the Company's independent auditor. To date, E&Y has remained silent regarding the Company's cursory explanation of the events surrounding its resignation. Nor has it stated whether it agrees or disagrees with the Company's version of the events in question, as required by SEC regulations. See Regulation S-K 304(a), 17 CFR 229.304(a). 9. In the same November 29, 2006 press release , the Company further stated that it
would restate its interim financial statements and earnings reports for the first and second quarters of 2006 to correct material misstatements with respect to the accounting for the 2006 Sale and Leaseback Transactions. 10. On December 7, 2006, the Company restated its financial statements for the first and The Restatement, as described herein, would
second quarters of 2006 (the "Restatement").
eventually reduce the Company's previously announced net income per share by up to $0.01 per share for the first quarter of 2006, or from a previously reported amount of $1.06 to $1.05 net income per share, and up to $0.07 per share for the second quarter of 2006, or from a loss of income of $0.17 per share to a loss of income of $0.24 per share. The Restatement has, and will continue to, deprive the Company of the ability to recognize $0.07 per share in gain for each quarter going forward through to the end of the lease periods under the sale and leaseback agreements. 11. Defendants ' fraudulent scheme allowed TOPT to report an operating gain of $89,000
in the second quarter 2006. Significantly, as a result of the Restatement, this operating gain was transformed into an operating loss of $1,640,000 - a difference of 105.4%. 12. On this news, TOPT's common stock price sank $0.82 per share from a close of
$5.86 on November 28, 2006, to a close at $5.04 on November 29, 2006, a decline of 14%, on unusually heavy trading volume of 2,671 ,100 shares.
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13.
The 2006 Sale and Leaseback Transactions would ultimately prove financially
disastrous for the average TOPT shareholder and continue to inhibit the Company's profitability to this day, as described in detail herein. In fact, as shipping trade publication Trade Winds noted in a March 8, 2007 article titled "Leases Tip Top", "[aJdditional charter expenses from sale and leaseback deals in the year were the main reason for an overfour-times drop in year-on-year net earnings at... TOPT last year [20061. "(emphasis added). JURISDICTION AND VENUE 14. The claims asserted herein arise under and pursuant to Sections 10(b) and 20(a) of the
Exchange Act, and Rule I Ob-5 promulgated thereunder. 15. This Court has jurisdiction over the subject matter of this action pursuant to Section
27 of the Exchange Act (15 U.S.C. 78aa), and 28 U.S.C. 1331 and 1337. 16. Venue is proper in this Judicial District pursuant to Section 27 of the Exchange Act,
and 28 U.S.C. 1391(b) and (c). Many of the acts and transactions alleged herein, including the
preparation and dissemination of materially false and misleading information, occurred in substantial
part in this District. Additionally, the Company conducts business and maintains its principal executive offices in this Judicial District. 17. 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 mails, interstate telephone communications and the facilities of the national securities exchange. PARTIES 18. Lead Plaintiff Joseph A. DeShayes, Jr. ("Mr. DeShayes") purchased common shares
of TOPT on behalf of himself, his wife, Ann P. DeShayes, his daughter and son-in-law, Susan C. Keenan and Joel M. Keenan, and the business he started and currently manages, On Site Drapery
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Cleaning, Inc., during the Class Period and was damaged thereby. By this Court's Order of July 30, 2007, Mr. DeShayes was appointed Lead Plaintiff in this action. 19. Defendant TOPT is incorporated in the Marshall Islands, with its principal offices
located at I Vassilissis Sofias Str. & Meg., Alexandrous Str., 154 24, Maroussi, Greece. 20. Defendant Evangelos Pistiolis ("Pistiolis") founded TOPT in 2000. He was, at all
relevant times during the Class Period, President and CEO of TOPT. He has also served on the Company's Board of Directors since July 2004. Defendant Pistiolis signed the Company's annual report on Form 20-F for the year ended December 31, 2005 and signed the CEO certifications required by the Sarbanes Oxley Act of 2002 (defined herein). As President and CEO of Sovereign Holdings, Defendant Pistiolis held between 4.4% and 5.3% of TOPT common shares during the Class Period. 21. Defendant Stamatios Tsantanis ("Tsantanis") was at all relevant times during the
Class Period , the Chief Financial Officer ("CFO") of TOPT. He has also served on the Company's Board of Directors since July 2004. Defendant Tsantanis signed each of the Forms 6-K that were filed during the Class Period and signed the CFO certifications required by the Sarbanes Oxley Act of 2002 (defined herein). 22. Collectively, Defendants Pistiolis and Tsantanis are referred to herein as the
"Individual Defendants." The Individual Defendants and TOPT are collectively referred to herein as "Defendants." CONTROL PERSON ALLEGATIONS/GROUP PLEADING 23. The Individual Defendants were heavily involved in the Company's day-to-day
business . They had access to information concerning the Company' s business, operations , products, operational trends, financial statements, markets and present and future business prospects by means of their access to internal corporate documents, conversations and connections with other corporate
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officers and employees, attendance at management and Board of Directors meetings and by reports and other information provided to them in connection therewith. 24. All statements alleged herein to be false and misleading with respect to the
Company's 2006 sale and leaseback transactions and the Company's financial results were grouppublished statements and were the collective work of the Individual Defendants. 25. It is appropriate to treat the Individual Defendants as a group for pleading purposes
and to presume that the false, misleading and incomplete information conveyed in the Company's public filings, press releases and other publications as alleged herein are the collective actions of this narrowly defined group of Defendants. In addition to their direct involvement in the Company's day-to-day operations at the highest levels and their access to all Company information, the Individual Defendants were directly involved in drafting, producing, reviewing and/or disseminating the false and misleading statements and information alleged herein. As such, they were aware, or recklessly disregarded, that the false and misleading statements were being issued, and approved or ratified these statements in violation of the federal securities laws. 26. As officers and controlling persons of a publicly held company whose common stock
was, and is, registered with the SEC pursuant to the Exchange Act, and was traded on the Nasdaq National Market Exchange (the "NASDAQ "), and governed by the provisions of the federal securities laws, the Individual Defendants each had a duty to disseminate promptly, accurate and truthful information with respect to the Company's financial condition and performance, growth, operations, financial statements, business, markets, management, earnings and present and future business prospects, and to correct any previously issued statements that had become materially misleading or untrue, so that the market price of the Company's publicly traded common stock would be based upon truthful and accurate information. The Individual Defendants'
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misrepresentations and omissions during the Class Period violated these specific requirements and
obligations.
27. The Individual Defendants, because of their positions of control and authority as
officers and/or directors of the Company, were able to and did control the content ofthe various SEC filings, press releases and other public statements pertaining to the Company during the Class Period. Each Individual Defendant was provided with copies of the documents alleged herein to be misleading prior to or shortly after their issuance and/or had the ability and/or opportunity to prevent their issuance or cause them to be corrected. Accordingly, the Individual Defendants are responsible for the accuracy of the public reports and releases detailed herein and are therefore primarily liable for the representations contained therein. 28. Each of the Defendants is liable as a participant in a fraudulent scheme and course of
business that operated as a fraud or deceit on purchasers of TOPT common stock by disseminating
materially false and misleading statements and/or concealing material adverse facts. The scheme deceived the investing public regarding TOPT's financial statements , business, operations, management and the intrinsic value of TOPT common stock, and allowed Defendants to artificially inflate the price of Company shares and caused Lead Plaintiff and other members of the Class to purchase TOPT common stock at artificially inflated prices. DEFENDANTS' FRAUDULENT SCHEME A. TOPT Goes Public in July 2004 29. TOPT is a provider of international seaborne transportation services carrying refined
petroleum products and crude oil. As of December 31, 2006, the Company's fleet consisted of 24 vessels, including 18 vessels for which it had entered into sale and leaseback transactions in 2005
and 2006.
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30.
TOPT was formed in January of 2000 under the laws of Marshall Islands under the On April 30, 2004, Ocean Holdings, Inc . became Trans Ocean
name Ocean Holdings , Inc.
Petroleum Tankers, Inc. Ten days later, on May 10, 2004, the Company changed its name again, this time to Top Tankers, Inc. 31. In July 2004, the Company's common stock was listed on the NASDAQ in
connection with its IPO. Since the days when it was known as Ocean Holdings, Inc., through the IPO and throughout the Class Period , Defendants Pistiolis and Tsantanis served as CEO and CFO of TOPT, respectively.
B.
The 2006 Restatement: Defendants' Fraudulent Accounting For The Seller's Credit Associated With The Sale And Leaseback Agreements 1. 32. Defendants' Fraudulent Accounting for the Seller's Credit On March 13, 2006, TOPT announced the sale and immediate leaseback of 13 vessels
for a period of five or seven years:
TOPT Announces Sale and Leaseback of Thirteen Vessels and Distribution of $7.50 Per Share Special Dividend ATHENS , Greece, March 13 -- TOPT Inc (NASDAQ:TOPT) announced today the sale of thirteen vessels and the immediate leaseback to the Company for a period of five to seven years. The lease is a bareboat charter, with TOPT continuing to operate and commercially manage the vessels.
The aggregate sale price of the thirteen vessels is approximately $550 million, and the net cash proceeds from this transaction (after repayment of corresponding vessel loans and other expenses) are expected to be approximately $240 million. The Company expects to generate a book gain of approximately $ 90 million, which will be amortized over the respective lease period . The leases of the vessels following their sale are expected to qualify as operating leases under U.S. GAAP. 33. The leases, executed in March and April 2006, were "bareboat charters," meaning that
the Company remained responsible for the operation and management ofthe vessels, including all of
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the expenses associated with the vessel's operation and the lease payments (or "charter-hire" rates). According to the Company, after the transaction closed, the aggregate sale price of the vessels was $550 million, with net cash proceeds (less repayment of vessel loans and other expenses) of approximately $240 million. 34. As part of the agreement, TOPT arranged for 10% of the total value of the
transactions, or $55 million, to be held as a "seller's credit." The general purpose of a seller's credit in shipping agreements is to secure a portion of the seller-lessee's payments (in this case , TOPT) to the owner-lessor. Indeed, as Defendants ultimately admitted in December 2006, "[u]nder the terms of sale and leaseback transactions, upon completion of the sale of the vessels, the Company received 90% of the consideration, or $495 million. The remaining 10% of the consideration or $55 million, commonly referred to as `Seller's Credit,' was not due from the purchaser until not later than three months after the end ofthe bareboat charter period or upon the resale ofthe vessels by the purchaser, if earlier." (emphasis added). 35. Emerging Issues Task Force Bulletin ("EITF") 86-17, Deferred Profit on Sale-
Leaseback Transaction with Lessee Guarantee of Residual Value, states that "[t]he amount of deferred profit equal to the gross guarantee," or seller's credit should not be included in the total book gain that is amortized over the lease period and "should be deferred until the guarantee is resolved at the end of the lease term." (explaining the application of Financial Accounting Standard ("FAS") No. 13, Accountingfor Leases). Simply put, a seller's credit will only be paid to the sellerlessee upon the successful completion of all of the seller-lessee's obligations under the lease agreements at the end of the lease period. The payment of a seller's credit, therefore, is contingent and could never be recognized as income up-front.
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36.
TOPT reported a total book gain of $96 million up-front on the 2006 Sale and
Leaseback Transactions. The Company then deferred and amortized over the relevant lease period of five to seven years a total gain of $82 million, which is the total gain including the present value of the seller's credit. 37. In direct contravention of GAAP rules regarding seller's credits, and unbeknownst to
investors, however, Defendants sought to pad the reported total book gain (and the deferred gain) by including the $55 million seller's credit up-front. Indeed, the Company admitted in December 2006 that the total book gain of $96 million included the entire amount of the seller's credit - the payment of which was clearly contingent upon the successful completion of all loan payments due five to seven years in the future. 2. E&YResigns Over A Material Accounting Disagreement With TOPT's Decision to Restate As discussed above, on November 29, 2006, TOPT announced the resignation of
38.
E&Y, its independent auditors. The press release stated that E&Y resigned during the review of the Company's third quarter operating results due to a disagreement with the Company over the accounting treatment of certain aspects of the sale and leaseback of thirteen vessels that closed in
March and April 2006.
39. According to the Generally Accepted Auditing Standards ("GAAS"), disagreements
between management and the auditor pertaining to the application of accounting principles must be communicated by the auditor to the company's audit committee even if the disagreement is resolved to the auditors' satisfaction . See AU 380.13. 40. Communications between the accountant and the audit committee are also required in
connection with quarterly review engagements . See AU 722 . Regarding matters that may impact whether the interim financial statements conform to GAAP, the standard requires an accountant to
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first communicate the issue to the appropriate level of management, and then communicate the issue to the audit committee . AU 722.29. Additionally, the standard states that if the audit committee
does not respond to the matter appropriately, the accountant should evaluate whether to resign from the review engagement and as the entity's auditor . AU 722.31. 41. Once an auditor resigns, in order to provide more transparency to investors, SEC
regulations require a public company to inform the public that there has been a change in auditors. Specifically, Regulation S-K 304(a), 17 CFR 229.304(a), provides that the company, in this case, TOPT, must disclose information regarding the departure , including, inter alia, whether the auditors were terminated or resigned and whether there were any disagreements with the auditors, including the nature of such disagreements. 42. release: This resignation occurred as the Company and E&Y were in ongoing discussions to finalize their review of the third quarter 2006 results. The discussions related to a disagreement over the accounting treatment of certain aspects of the sale and leaseback of thirteen vessels that closed in March and April 2006. The Company believes that its accounting treatment of the sale and leaseback transactions, which was also approved by the Audit Committee of the Company's Board of Directors, was appropriate. E&Y had previously reviewed the Company's interim unaudited financial statements and the relevant earnings releases for the first and second quarters of 2006. However, the Company has decided to restate its interim unaudited financial statements for the first and second quarters of 2006, in accordance with E&Y's later recommendations. 43. Defendant Pistiolis further illuminated the Company's position on the sequence of To that end, the Company disclosed the following in the November 29, 2006 press
events leading up to E&Y's resignation during the December 7, 2006 analyst conference call, stating:
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... after consultation with E&Y, we deferred and amortized the total book gain from the sale of the vessels over the relevant lease periods. This was done both for our first and second quarter financial statements. E&Y reviewed those statements and based on the comfort letter covering the first quarter in connection with consult equity offering that we were conducting at the time. However, some time later other E& Ypersonnel rereviewed the seller 's credit and decided they should be treated as residual value guarantees. This would result in the deferral of the seller's credit. We had a number of conversations and communications with E&Y in Athens and the United States, in which E&Y could not convince us that their position was correct and we could not convince them that our position was correct. Accordingly, we decided to approach the staff of the Securities and Exchange Commission for its views to see if we could reach a resolution, and we informed E&Y that we were going to do this. However, E&Y later told us that they were not happy with our having approached the SEC and then criticized our submission. Although we differed very much with E&Y's interpretation, we decided to withdraw our submission to the SEC and to restate our financial statements for the first and second quarters 2006. Despite our agreement to withdraw our submission and restate our first and second quarters, relations broke down to the point that E& Y decided they did not want to continue as our auditors. Notwithstanding the resignation, we decided to restate our first and second quarter financials. Purposely, and also some time after it had completed its reviews of the financial statements for the first and second quarter, E&Y rated the adequacy of support for the consulting period be paid to an independent third party in connection with the sale leasebacks. Our Audit Committee believed that it was working on an agreed plan with E&Y to try to resolve the points of this matter. Again, despite management and Audit Committee's efforts to resolve all open matters, E&Y decided to resign. The Audit Committee has engaged independent Counsel to look into the points raised by E&Y. (emphases added). 44. Once a company has made the necessary disclosures, as TOPT did on November 29,
2006, the company must then request that the former auditor, in this case E&Y, draft a letter addressed to the SEC stating whether the former auditor agrees with the statements made by the -13-
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company regarding the resignation or termination and, if not, stating the respects in which the former auditor disagrees with the company 's version of the events . See 17 CFR 229.304 (a)(3). Once the company receives the former auditor's position letter, it must immediately file the letter with the SEC. See id.; see also, Lynn E. Turner, Jason P. Williams & Thomas R. Weirich, An Inside Look at Auditor Changes, The CPA Journal, November 2005 Issue, available at http://www.nysscpa.org ("When an auditor is informed by a company that it has been terminated, or informs the company that it will no longer serve as the independent auditor, the auditor is required to send a form letter directly to the Office of the Chief Accountant of the SEC. This letter must be sent within four business days, and is matched with the Form 8-K filings.") 45. While TOPT filed its version of the events leading up to the resignation of E&Y on
November 29, 2006, the Company has yet to file a letter with the SEC setting forth E&Y's agreement or disagreement with the Company's version of the events surrounding the resignation. Thus, contrary to the express mandate of Regulation S-K, investors have not been provided the information regarding the abrupt and ominous resignation of E&Y that the SEC has deemed necessary to provide investors with transparency. 46. Indeed, such transparency is imperative where, as here, the facts simply do not add up.
According to the Company, E&Y recommended that it restate the first and second quarter financial statements for 2006. Even though TOPT eventually complied with this recommendation and
restated per E&Y's purported instructions, E&Y inexplicably elected to resign as the Company's external auditor anyway. 47. Typically , "[s]uch a disagreement may be an indication that the company is
attempting to apply improper, aggressive , or non-GAAP accounting that the auditor is unwilling to accept." See Turner, Williams & Weirich Article, available at http://www.nysscpa.org . Investors,
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however , have not been informed of E&Y 's position regarding their resignation, as is required by SEC regulations, and therefore, cannot assess whether or not E&Y resigned for the reasons provided by the Company in the November 29, 2006 press release. 3. 48. The December 2006 Restatement On December 7, 2006, TOPT restated its first and second quarter 2006 financial
results in which it acknowledged it had improperly accounted for the seller's credit. In the press release announcing the Restatement, the Company stated: Restatement of first, second quarter and first half of 2006 unaudited financial statements The Company reported a restatement of first, second quarter and first half of 2006 unaudited financial statements resulting from the accounting treatment of certain aspects of the sale and leaseback transactions that were completed in March and April 2006(2). The sale and leaseback transactions involved the sale of 13 vessels to financial institutions unaffiliated with the Company, for a consideration of $550 million, and their simultaneous leaseback under bareboat charters to separate subsidiaries of the Company for a period of five to seven years. Under the terms of the sale and leaseback transactions, upon completion of the sale of the vessels, the Company received 90% of the consideration, or $495 million. The remaining 10% of the consideration or $55 million, commonly referred to as "Seller's Credit," was not due from the purchaser until not later than three months after the end of the bareboat charter period or upon the sale of the vessels by the purchaser, if earlier. The main purpose of the Seller's Credit is to secure a portion of the seller-lessee's payments to the owner-lessor. The sale and leaseback transactions resulted in a total book gain of $96 million. The Company deferred and amortized over the relevant charter period of five to seven years the total gain of $82 million (which is the total gain including the present value of the Seller's Credit. This amount was included in part in "Deferred Income" in the Company's interim unaudited financial statements for the first quarter of 2006, and in full in the Company's interim unaudited financial statements for the second quarter of 2006. The Company has decided to restate its interim unauditedfinancial statements and exclude the Seller's Credit of $55 million from the total gain and to defer recognition of the full amount until payment. The non-cash effect from deducting the Seller's Credit of $55 million from the total gain of $96 million, is to reduce net income per share by $0.01 and $0.07 for the first and second quarter of 2006, respectively. The net income per share in all
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subsequent quarters until December 31, 2010 will be reduced by approximately $0.07. (emphasis added). 49. As a result of the fraudulent inclusion of the $55 million into the total book gain,
Defendants were able to recognize $96 million in total book gain (or a deferred gain of $82 million) instead of $41 million, less then half of the publicly reported total book gain. In doing so,
Defendants were able to inflate its reportable income, income per share and operating income for the first and second quarters of 2006, thereby, inter alia, masking a much more serious net loss and net loss per share in the second quarter of 2006. Significantly, the Restatement would transform the Company's previously reported operating income for second quarter 2006 of $89,000 into an operating loss of $1,640,000. 50. Had Defendants been allowed to continue to project the fiction of a $96 million total
book gain, the Company would have been guaranteed to recognize at least $0.07 of income per share each and every quarter until the expiration of the lease periods under the sale and leaseback agreements. For example, the net loss per share for the three months ended September 30, 2006 would have been $0.28 per share, as opposed to the actual loss of $0.35 per share. Instead of net income per share of $0.47 per share for fiscal year 2006, the Company would have been able to recognize $0.69 in net income per share. 4. 51. Defendants' Acknowledgment of Their Accounting Fraud Defendants knowingly accounted for the seller's credit with the understanding that the
seller's credit was contingent on the payment of all the amounts owed under the lease agreements over the five to seven year period and, therefore, could not be included in the book gain to be amortized over the lease period. For example, during the May 11, 2006 analyst conference call, Defendant Tsantanis stated that the Company "had successfully concluded the sale and immediate
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leaseback of 13 vessels for a period of 5-7 years. The total deal size was $550 million, which includes 10% seller's credit payable to us at the end of the leasing period." (emphasis added). While Defendant Tsantanis further reported that the total book gain was $96 million, with a deferred gain on the sale of $82 million, he never stated that the $96 million fraudulently included the $55 million seller 's credit. 52. During the same call, Defendant Pistiolis further demonstrated that Defendants were
aware of the contingent nature of the seller's credit, as highlighted below in an exchange between Reynard Goldman of Goldman & Goldman Investments and Defendant Pistiolis: Goldman : On the leasing of your tankers, after the period of the 5 to 7 years; is there a buyback availability for you or what are the termination terms? Pistiolis : There is no call option or put option built into the actual lease contracts. But at that point in time you can always freely negotiate to buy them back if you wish to. But we don't have to. We don't have to do that, so the termination is pretty much - you go through your 5 to 7 year period and you pay your lease and at the end of the date it goes back to the current owners. Goldman : Can you detail for us Pistiolis : And then of course we will be receiving the seller's credit at the end of the day, right ? So they have kept back that seller 's credit. Goldman : I'm sorry. I didn't hear you correctly. Pistiolis : We also at the end of the lease period, we are getting back the seller's credit. Goldman : Oh you get back the 53 [sic] million credit. Pistiolis : That is correct. Goldman : So at that point, in other words, they are holding their funds in escrow up to that time. Pistiolis : That is correct. Goldman : Do you receive interest on that?
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Pistiolis : No. Goldman : So therefore that is basically a deposit with them for the period of the seven years? Pistiolis : That is correct. (emphases added). 53. It is therefore clear from this exchange that Defendants Pistiolis and Tsantanis knew
that the seller's credit was not payable to the Company until the expiration of the lease terms. Defendants were therefore at least reckless in publishing financial statements that recognized the seller's credit. THE TRUTH BEGINS TO BE REVEALED 54. On June 27, 2006, TOPT admitted in a Form 424B5 supplemental prospectus that the
SEC had begun an informal investigation of the Company, including activities related to all acquisitions from 2004 to the present and specifically the 2006 sale and leaseback transactions, and the special dividend of $7.50. In response to this news , TOPT's stock price fell from an opening price of $7.45 on June 27, 2006 to a closing price of $6.43 per share on June 28, 2006, a 13.69% one-day decline, on heavy trading volume. 55. On November 29, 2006, the Company stunned the market by announcing that its
outside auditor, E&Y, had resigned while TOPT and E&Y were in ongoing discussions to finalize E&Y's review of the Company's third quarter results. As set forth in detail above, E&Y allegedly resigned over a disagreement with the Company regarding the need to restate TOPT's financial results for the first and second quarters of 2006. Because E&Y has not expressly agreed or
disagreed with the Company' s version of the events surrounding its resignation , there is no way for investors to determine whether E&Y agrees or disagrees with the Company 's version of the events surrounding its abrupt resignation.
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56.
As explained herein, the resignation of a company's independent auditor is, as
Trade Winds termed it in a December 1, 2006 article, a "rare and troubling event." Cantor Fitzgerald stated in its November 29, 2006 analyst report that "[t]he resignation of Top Tanker's independent auditors, coupled with the previously announced SEC inquiry into the company's 13 vessel sale/leaseback transaction, raises serious concerns about the company 's operations ." (emphasis
added).
57. In the same November 29, 2006 press release in which it announced E&Y's
resignation, the Company also announced that it would have to restate its financial results for the first and second quarters of 2006 because Defendants had improperly accounted for certain aspects of the 2006 Sale and Leaseback Transactions. For the first time, the market became aware that there was a serious problem with the 2006 sale and leaseback transactions. 58. In reaction to the news of E&Y's unexpected resignation and the Restatement of two
quarters of historical results, the price of TOPT' s common stock sank $0.82 per share from the closing price on November 28, 2006 of $5.86, a decline of 14%, to close on November 29, 2006 at $5.04, on unusually heavy trading volume. 59. As described in detail at 48 above, the Company announced the details of the
Restatement on December 7, 2006. THE TROUBLING AFTERMATH OF DEFENDANTS' FRAUDULENT SCHEME 60. The nature of Defendants' fraud wreaked havoc on TOPT's investors. Defendants
took over half of the Company's assets - 13 total vessels - and monetized them under agreements whereby the vessels were leased back to TOPT at charter-hire rates that, given the vessels' vulnerability to the spot market price, were untenable for the Company. Then, Defendants
distributed a large amount of the funds received from the sale and leaseback transactions as a "special dividend", further crippling the Company ' s cash flow . As Trade Winds noted in a March 8,
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2007 article titled "Leases Tip Top ," "[aJdditional charter expensesfrom sale and leaseback deals in the year were the main reason for an over four-times drop in year-on-year net earnings at... TOPT last year. " (emphasis added) 61. As set forth herein, it is clear that it was TOPT investors who have suffered from
these actions while the Defendants profited. 62. In a December 15, 2006 Trade Winds article titled "What Went Wrong With TOPT,"
the author hypothesizes how the Company will need to fix its balance sheet and appease investors, and details the dreadful effects for the Company of the 2006 Sale and Leaseback Transactions: However, the impact on the balance sheet has been harsh. The quarterly financial figures from TOPT show it brought in revenues of $50m in the three months to 30 September 2005. This figure rose to over $70m for the same period of 2006. But whereas Pistiolis spent less than $2m on chartering in tonnage in the third quarter of2005, this year thefigure was a whisper under $30m due to the sale and leaseback arrangement. (emphasis added). 63. Beginning in April 2006, analysts began to wonder whether TOPT would be able to
achieve the necessary break-even rates it required for each of the chartered vessels given the spot market price slump. The issue of the Company's high break-even rates was thrown into stark relief on November 29, 2006 after TOPT's announced that E&Y had resigned. A Cantor Fitzgerald analyst report from the same date suggests that "the company's near term earnings potential to be limited due to the recently soft rate environment, a relatively high breakeven cost structure (due to higher charter-hire expenses), and a heavy, extended dry-docking schedule," concluding that it "see[s] no short term catalyst to keep the stock above our NAV/share calculation of $5.15" per share. 64. The situation had deteriorated to such a level by March 2007 that Cantor Fitzgerald
opined that "[g]iven the company's high cash breakeven levels due to significant charter-hire expenses, we suggest that the company may incur additional debt in order to finance normal
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operations." (emphasis added). Just the day before, on March 8, 2007, TOPT had reported an operating loss of $0.28 per share for the fourth quarter of fiscal year 2006. 65. By May 2007, the Company was desperate to relieve itself of the bareboat charter hire
expenses and to push its stock price over $5.00 per share - a price that it had not seen since before its devastating November 2006 announcements . In a May 25, 2007 article entitled "TOPT' Mulls a
Stock Split", Trade Winds reported:
Top is trying to climb out of a rut that has since March seen the share trade below $5, a line of demarcation that wards off some potential investors, said Cantor Fitzgerald analyst Natasha Boyden in an interview this week.
`Many investors won't invest or can't invest in a stock that is below $5,' Boyden said . `That' s a problem for them . Among other things, it prevents investors from buying the stock on margin.'
Shares trading below $5 are effectively consider `penny stocks' - much more risky and susceptible to manipulation and therefore subject to restrictions. Top traded above $18 in better days.
Pistiolis and company face such tricky choices because the March 2006 saleleaseback of 13 tankers, which resulted in a $7.50-per-share special dividend to investors saw Top agree to charter-in rates that have proved onerous as the spot market has fallen. While Top has been dogged by other problems - an informal inquiry by US securities regulators, the resignation of its accountants and a raft of shareholder lawsuits - its core wounds are self inflicted.
`Everything stems from the sale-leaseback,' Boyden said. `They are stuck with some very high charter rates that allow very little cash flow. It is not a good position to be in. When you combine that with a large amount of dry docking -more than 600 days of off-hire last year alone - it's a reason for concern. (emphases added).
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66.
On May 29, 2007 , in a press release titled "TOPTAnnounces Re Acquisition ofFour
Suezmax Tankers, and Unwinding ofFive Bare-Boat Charters", the Company stated that it had reacquired four out of the original 13 tankers sold and leased back under bare boat charters under the March 2006 transactions" in an effort to "improve the daily breakeven rates ofits Suezmaxfleet." (emphasis added) According to the press release, TOPT was forced to rely upon bank debt to finance 70% of the re-acquisition of these tankers. 67. In its June 28, 2007 report, Cantor Fitzgerald noted "that the company has much
progress to make before it will return to profitability. TOPT sill has costly lease arrangements on a further five of its leased back Suezmaxes." 68. By July 2007, the Company had unwound two more bareboat charters. The owner-
lessors of the Restless and the Victorious sold the vessels to third parties and TOPT jumped at the chance to unwind two more bareboat charters. 69. During TOPT's August 3, 2007 analyst conference call, Jonathan Chappell, an analyst
with JP Morgan, asked about the circumstances surrounding the sale of the Restless and the Victories and TOPT's agreement to unwind the charters and inquired whether Defendant Pistiolis "view[ed] that as an opportunity to continue to lower your break-even costs and remove some ofthe higher charter end expenses?" Defendant Pistiolis replied that the decision was part of a strategy of "mainly reducing the costs" - costs that had been incurred as a result of the March and April 2006 sale and lease back transactions that had been entered into only to profit the Pistiolis family to the detriment of other TOPT' s shareholders. 70. These 2006 Sale and Leaseback Transactions have therefore proven to be an
unmitigated disaster for TOPT and its shareholders.
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DEFENDANTS' FALSE AND MISLEADING STATEMENTS DURING THE CLASS PERIOD 71. Throughout the Class Period, Defendants issued materially false and misleading
statements and/or omissions regarding the accounting for the sale and leaseback transactions in March and April 2006. 72. As explained above in 29-53, Defendants recklessly concealed the following
information from investors:
(a) The seller ' s credit associated with the sale and leaseback transactions, totaling $55 million, would not be paid , if at all, unless and until TOPT completed its lease payments under the sale and leaseback agreements; That in direct contravention of GAAP principles (as discussed herein), Defendants caused the entire amount of seller's credit to be included in the Company's reported net book gain; and That the Company's financial results for the first and second quarter of 2006 were materially misstated and in violation of GAAP, including the Company's previously reported operating income for second quarter 2006 of $89,000, which was transformed into an operating loss of $1,640,000;
(b)
(c)
73.
On March 13, 2006, TOPT announced the sale and leaseback of 13 vessels for an
aggregate sale price of approximately $ 550 million in a press release . TOPT filed the press release as an attachment to a Form 6-K signed by Defendant Tsantanis and filed with the SEC on the same date. According to the Company: ...the net cash proceeds from the transaction (after repayment of corresponding vessel loans and other expenses) are expected to be approximately $ 240 million. The Company expects to generate a book gain of approximately $90 million, which will be amortized over the respective lease periods. The lease of the vessels following their sales are expected to qualify as operating leases under U.S. GAAP. (emphasis added). 74. Defendants also posted a power point presentation for investors on the Company's
website. The presentation is dated March 13, 2006 and states, inter alia, that the sale and leaseback
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transactions would result in proceeds of $550 million to be used to pay expenses and repay debt ($255m), as seller's credit ($55m), as working capital ($30m) and to fund a dividend ($210m at $7.50 per share). 75. As explained supra in 72 and Section B, above, the statements set forth in 73-74
were materially false and misleading at the time they were made. Defendants recklessly accounted for the 2006 Sale and Leaseback Transactions, demonstrating thereby that whatever internal controls were in place were ineffective in the face of management manipulation and distortion. 76. Significantly, during the Class Period, analysts often parroted Defendants' materially
false and misleading statements, utilizing such statements as the basis for recommending that investors purchase the Company's stock. For example, a Cantor Fitzgerald analyst report dated March 13, 2006 maintained its "BUY" rating of TOPT and adopted Defendants ' statements regarding the 2006 Sale and Leaseback Transactions: This morning, TOPT announced that it had sold and leased back nine Suezmax vessels and four Handymax vessels for an aggregate sale price of $550 million, with net proceeds (following repayment of corresponding vessel loans and other expenses) of $240 million. The company expects to generate a book gain of $90 million, amortized over the respective lease periods... 77. On April 13, 2006, the Company filed its annual report for the year ended December
31, 2005 on Form 20-F with the SEC. TOPT stated the following regarding the 2006 Sale and
Leaseback Transactions: Sale and lease-back (Unaudited): In early March, the Company concluded the sale and leaseback of thirteen vessels (M/T Flawless, M/T Timeless, M/T Stopless, M/T Priceless, M/T Limitless, M/T Endless, M/T Faultless, M/T Noiseless, M/T Stainless, M/T Spotless, M/T Doubtless, M/T Faithful and M/T Vanguard) for a period of five to seven years. The Manager shall continue to be responsible for the operation and commercial management of the vessels. The aggregate sale price of the vessels amounted to $ 550,000 and the net cash proceeds after repayment of corresponding vessel loans and other expenses are expected to be approximately $ 240,000. The Company expects to generate a gain of approximately $ 90,000, which will be
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amortized over the respective lease period. The leases of the vessels following their sale are expected to qualify as operating leases under U.S. GAAP. (emphasis added). 78. The annual report was signed by Defendant Pistiolis. Defendants Pistiolis and
Tsantanis certified the following: CERTIFICATION OF THE PRINCIPAL EXECUTIVE OFFICER [Defendants Pistiolis and Tsantanis each], certify that: 1. I have reviewed this annual report on Form of 20-F TOPT Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this report; 4. The Company's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-I 5(e)) for the Company and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) evaluated the effectiveness of the Company's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the period covered by this annual report that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting.
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5. The Company's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Company's internal control over financial reporting. 79. Furthermore, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002, Defendants Pistiolis and Tsantanis , as TOPT's CEO and CFO, respectively, certified: (1) "[t]he Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934"; and (2) "[t]he information contained in the Report fairly presents, in all material respects, the financial condition and results of the operations of the Company." 80. The Company's annual report also set forth the following with respect to its internal
controls and the integrity of its financial statements: ITEM 15. CONTROLS AND PROCEDURES Evaluation of disclosure controls and procedures. On the date of this report, the Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as amended. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective in alerting them timely to material information relating to the Company required to be included in the Company's periodic Securities and Exchange Commission filings.
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Changes in internal controls. There have been no significant changes in our internal controls or in other factors that could have significantly affected those controls subsequent to the date of the Company's most recent evaluation of internal controls, including any corrective actions with regard to significant deficiencies and material weaknesses.
ITEM 16B. CODE OF ETHICS
As a foreign private issuer, we are exempt from the rules of the Nasdaq National Market that require the adoption of a code of ethics. However, we have voluntarily adopted a code of ethics that applies to our principal executive officer, principal financial officer, principal accounting officer and persons performing similar functions. We will also provide any person a hard copy of our code of ethics free of charge upon written request. Shareholders may direct their requests to the attention of Mr. Evangelos Pistiolis. 81. As explained supra in 72 and Section B, above, the statements set forth in 77-80
were materially false and misleading at the time they were made. In short, Defendants recklessly accounted for the 2006 Sale and Leaseback Transactions, demonstrating thereby that whatever internal controls were in place were ineffective in the face of management manipulation and distortion. 82. On May 11, 2006, the Company announced its operating results for the first quarter
ended March 31, 2006 in a press release attached as an exhibit to a Form 6-K. The Form 6-K was filed on the May 12, 2006 and was signed by Defendant Tsantanis. The Company reported the following financial results: For the three months ended March 31, 2006, the Company reported net income of $30,404,000, or $1.06 per share, compared with net income of $19,121,000, or $0.69 per share, for the first quarter of 2005. The weighted average numbers of basic shares used in the computations were 28,099,212 and 27,830,990 for the first quarters of 2006 and 2005, respectively. The results for the first quarter of 2006 include net charges of $3,246,000, or $0.12 per share of special items(1) that affected the Company's net income for the first quarter of 2006 that are typically excluded by securities analysts in their published estimates of the Company's financial results, which are described in Appendix A of this release. For the three months ended March 31, 2006, operating income was $38,213,000, compared with $20,975,000
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for the first quarter of 2005. EBITDA(1) for the first quarter of 2006 was $55,850,000, compared with $29,719,000 for the first quarter of 2005. Voyage revenues for the first quarter of 2006 were $101,746,000, compared to $47,291,000 recorded in the first quarter of 2005. Evangelos J. Pistiolis, President and Chief Executive Officer of TOPT Inc, commented, "The first quarter of 2006 was one of the most important periods in our history. Not only did we achieve our highest quarterly EPS of $1.06, but we also concluded a significant $550 million sale and leaseback transaction which has resulted in a significant return of $7.50 per share to our shareholders."
(emphases added).
83. Also on May 11, 2006, the Company held a conference call with analysts and
investors to discuss its first-quarter 2006 results. Both Defendants Pistiolis and Tsantanis confirmed the results for the first quarter 2006. On the call, Defendant Tsantanis stated: As Evangelos [Pistiolis] mentioned, we successfully concluded the sale and immediate leaseback of thirteen vessels for a period of five to seven years. The total deal size was $550M which includes ten percent seller's credit payable to us at the end of the leasing period. The net book gain from the transaction was $82M which under U.S. GAAP is amortized over the period of th e lease. (emphasis added). 84. During the conference call, Dave Golnick, an analyst for Financial America Securities
inquired about the effect of the 2006 Sale and Leaseback Transactions on the results for the first quarter: Golnick: My question is - and I didn't peruse the financial release, but on the amortization over a 5-year period of the sale and leaseback of the vessels; how much, if any, was per share involved in the $1.06 for the March quarter. Tsantanis : It's approximately 4.8 million, so if you do that - hold on one second - that's approximately $0.20. Golnick : $0.20, okay. Tsantanis : $0.17, $0.17.
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85. K.
On June 1, 2006, the Company filed its first quarter results with the SEC on Form 6-
The Form 6-K was signed by Defendant Tsantanis and reiterated the results previously
announced on May 11, 2006. 86. As explained supra in X72 and Section B, above, the statements set forth in J82-85
were materially false and misleading at the time they were made. Defendants recklessly concealed the fraudulent accounting for the 2006 Sale and Leaseback Transactions, demonstrating thereby that whatever internal controls were in place were ineffective in the face of management manipulation and distortion. 87. On August 3, 2006, TOPT announced its operating results for the second quarter and
first half of 2006 in a press release attached as an exhibit to a Form 6-K filed with the SEC on August 10, 2006. The Form 6-K was signed by Defendant Tsantanis and stated the following: TOPT Reports Second Quarter and First Half 2006 Financial Results ATHEN, Greece, Aug . 3/PRNewswire -FirstCall / -- TOPT Inc (Nasdaq: TOPT) today announced its operating results for the second quarter and first half of 2006. For the three months ended June 30, 2006, the Company reported net loss of $4,911,000, or $0.17 per share, compared with net income of $13,552,000, or $0.49 per share, for the second quarter of 2005. The weighted average numbers of basic shares used in the computations were 29,586,783 and 27,830,990 for the second quarters of 2006 and 2005, respectively. The results for the second quarter of 2006 include net charges of $359,000, or $0.01 per share of special items(1) that affected the Company's net loss for the second quarter of 2006 that are typically excluded by securities analysts in their published estimates of the Company's financial results, which are described in Appendix A of this release. For the three months ended June 30, 2006, operating income was $89,000, compared with $19,200,000 for the second quarter of 2005. EBITDA for the second quarter of 2006 was $10,188,000, compared with $33,128,000 for the second quarter of 2005. Voyage revenues for the second quarter of 2006 were $69,857,000, compared to $56,329,000 recorded in the second quarter of 2005. For the six months ended June 30, 2006, the Company reported net income of $25,493,000, or $0.86 per share, compared with net income of
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$32,673,000, or $1.17 per share, for the first half of 2005. The weighted average numbers of basic shares used in the computations were 28,847,107 and 27,830,990 for the first half of 2006 and 2005, respectively. The results for the first half of 2006 include net charges of $3,605,000, or $0.13 per share of special items that affected the Company's net income for the first half of 2006 that are typically excluded by securities analysts in their published estimates of the Company's financial results, which are described in Appendix A of this release. For the six months ended June 30, 2006, operating income was $38,302,000, compared with $40,175,000 for the first half of 2005. EBITDA for the first half of 2006 was $66,038,000, compared with $62,847,000 for the same period last year. Voyage revenues for the six month period ended June 30, 2006 were $171,603,000, compared to $103,620,000 recorded in the first half of 2005. (emphases added). 88. Also on August 3, 2006, the Company held a conference call with analysts and
investors with respect to its second-quarter 2006 financial statements. On the call, Defendant Pistiolis and Defendant Tsantanis confirmed and reiterated the results for the second quarter and first
half of 2006.
89. As explained supra in X72 and Section B, above, the statements set forth in TT87-88
were materially false and misleading at the time they were made. Defendants recklessly concealed the fraudulent accounting for the 2006 Sale and Leaseback Transactions, demonstrating thereby that whatever internal controls were in place were ineffective in the face of management manipulation and distortion. ADDITIONAL SCIENTER ALLEGATIONS 90. As alleged herein, Defendants acted with scienter in that Defendants knew or were
reckless in not knowing that the public documents and statements issued or disseminated in the name of the Company were materially false and misleading; knew that such statements or documents would be issued or disseminated to the investing public; and recklessly and substantially participated or acquiesced in the issuance or dissemination of such statements or documents as primary violations of the federal securities laws. As set forth elsewhere herein in detail, Defendants, by virtue of their
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receipt of information reflecting the truth regarding TOPT, their control over TOPT's materially misleading misstatements and/or their positions with the Company, participated in the fraudulent scheme alleged herein. 91. Defendants knew and/or recklessly disregarded the falsity and misleading nature of
the information that they caused to be disseminated to the investing public. The ongoing fraudulent scheme described herein could not have been perpetrated without the knowledge and complicity of TOPT's senior officers, including the Individual Defendants. 92. As described above, under GAAP, the Company's restatement of its first and second
quarter 2006 financial results is an admission that the Company's financial statements during the Class Period were material misrepresentations . The accounting improprieties admitted by TOPT in the Restatement were the direct result of the knowing and/or reckless conduct of TOPT and the Individual Defendants. The Restatement itself supports a strong inference of scienter, and concedes that the Company lacked adequate disclosure controls, contrary to Defendants' statements during the Class Period. E&Y, furthermore, believed that Defendants' had accounted for the sale and leaseback transactions incorrectly and in violation of GAAP. Even though the Company agreed to restate these quarters per E&Y's recommendations, E&Y still felt compelled to resign as TOPT's independent
auditor.
93. With respect to the Individual Defendants' false and misleading statements during the
Class Period, there is additional evidence of their fraudulent conduct and intent, including, but not limited to, the following particularized allegations set forth below. 94. The statements made by Defendants on March 13, May 11, and August 3, 2006 were
each premised , in part, on the Company 's receiving the seller's credit, described by Defendant Pistiolis on May 11, 2006 as money "held in escrow" for return to the Company. The Individual
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Defendants knew or were reckless in not knowing, however, that the 10% seller's credit should not have been reported as a gain under GAAP. Defendant Tsantanis was, at all relevant times, the CFO and as such, was intimately involved with all accounting issues associated with the 2006 Sale and Leaseback Transactions. During the May 11, 2006 conference call with analysts, moreover,
Defendants Pistiolis and Tsantanis both demonstrated that they not only knew the terms of the deal but understood that the seller's credit would not be payable to the Company until the end of the lease period if TOPT made all required payments under the sale and leaseback agreements , as set forth in
detail above.
95. The Individual Defendants managed, led, supervised, and were the decision-makers
with respect to the Company's sale and leaseback of 13 vessels in March and April of 2006. During the May 11, 2006 conference call, when asked if the Company would continue to sell and leaseback vessels, Defendant Pistiolis demonstrated that he was the ultimate decision-maker when it came to entering into these type of transactions: "I'm not necessarily planning to stop doing that ... I would like to think and decide how we're going to go forward in terms of growing the Company and buying more ships and stuff like that." (emphasis added). 96. Defendant Tsantanis signed the Company's materially false and misleading Forms 6-
K filed with the SEC, including those dated March 13, 2006, March 20, 2006, May 12, 2006, June 1, 2006, August 10, 2006 and March 8, 2007, as described more fully herein. Defendant Pistiolis signed the Company 's false and misleading Form 20-F filed with the SEC on April 13, 2006. Each of these reports was misleading for the reasons stated herein. The Individual Defendants also certified that the Company's annual report on Form 20-F, filed April 13, 2006, stating it fairly presented in all material respects the financial condition of the Company.
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GAAP VIOLATIONS 97. GAAP are those principles recognized by the accounting profession and the SEC as
the conventions, rules, and procedures necessary to define accepted accounting practice at a particular time. Those principles are the official standards adopted by the American Institute of Certified Public Accountants (`AICPA"), a private professional association , through three successor groups it established: the Committee on Accounting Procedure, the Accounting Principles Board, and the Financial Accounting Standards Board ("FASB") 98. In order to inflate the price of TOPT common stock and , in violation of GAAP, TOPT
falsely reported its financial results from the first and second quarters of 2006 and the first half of 2006 by improperly accounting for the seller's credit associated with the 2006 sale and leaseback transactions. 99. During the Class Period , TOPT's press releases (that included information derived
from the Company's financial statements) and periodic reports filed with the SEC on Forms 6-K materially overstated TOPT's operating results due to the Company ' s improper and fraudulent accounting for the 2006 sale and leaseback transactions. 100. GAAP provides guidance regarding the recording of a variety of lease transactions,
including the 2006 Sale and Leaseback Transactions used by TOPT, in Financial Accounting Statement ("FAS") No. 13, Accountingfor Leases. The provisions of FAS No. 13 have been further clarified by the publication of Emerging Issues Task Force Abstract ("EITF") 86-17, Deferred Profit on Sale-Leaseback Transaction with Lessee Guarantee ofResidual Value. Accordingly, EITF 86-17 states the following regarding the determination of the amount and timing of recognition of profit associated with guarantees or seller's credit: The Task Force reached a consensus that profit equal to the present value of the periodic rents plus the gross amount of the guarantee should be deferred at the date of sale. ... The amount of deferred profit equal to the gross
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guarantee should be deferred until the guarantee is resolved at the end of the lease term. The remaining deferred profit, equal to the present value of the periodic rents, should be amortized in relation to gross rent expense over the lease term. Some Task Force members believed that this accounting is appropriate because the guaranteed amount represents a contingent gain. (emphasis added) 101. In direct contravention of FAS No. 13 and EITF 86-17, TOPT included the seller's
credit, totaling $55 million, in the net book gain recognized by the Company on the 2006 Sale and Leaseback Transactions. According to the terms of the sale and leaseback agreements, the seller's credit, which secured a portion of TOPT's payments to the owner-lessor of the 13 vessels, was "not due from the purchaser until not later than three months after the end of the bareboat charter period [of 5 to 7 years] or upon resale of the vessels by the purchaser, if earlier." Thus, the payment of the seller's credit was contingent on the successful completion of the sale and leaseback agreements.' In accordance with applicable GAAP provisions, therefore, the seller's credit should have been entirely deferred from income until it was paid to the Company at the end of the lease terms. 102. TOPT's restatement of its previously issued financial statements for the quarters
ended March 31, 2006 and June 30, 2006, as well as the six-month period ended June 30, 2006, are an admission that the originally reported amounts were materially incorrect and in violation of GAAP. On November 29, 2006, TOPT disclosed the following regarding its restatement of its financial statements:
' According to FAS No. 5, Accountingfor Contingencies, "contingencies that might result in gains usually are not reflected in the accounts since to do so might be to recognize revenue prior to its realization." Id. at 17(a); see also Financial Accounting Concept Statemetn ("FASCON") No. 5, Recognition and Measurement in Financial Statements ofBusiness Enterprises, 84(g) ("If collectibility of assets received for product, services, or other assets is doubtful, revenues and gains may be recognized on the basis of cash received.") (emphasis added).
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The Company reported a restatement of first, second quarter and first half of 2006 unaudited financial statements resulting from the accounting treatment of certain aspects of the sale and leaseback transactions that were completed in March and April 2006.
The Company deferred and amortized over the relevant charter period of five to seven years the total gain of $82 million (which is the total gain [$96 million] including the present value of the Seller's Credit.) This amount was included in part in "Deferred Income" in the Company's interim unaudited financial statements for the first quarter of 2006, and in full in the Company's interim unaudited financial statements for the second quarter of 2006. The Company has decided to restate its interim unaudited financial statements and exclude the Seller's Credit of $55 million from the total gain and to defer recognition of the full amount until payment. The non-cash effect from deducting the Seller's Credit of $55 million from the total gain of $96 million, is to reduce net income per share by $0.01 and $0.07 for the first and second quarter of 2006, respectively. The net income per share in all subsequent quarters until December 31, 2010 will be reduced by approximately $0.07. 103. In admitting that it had improperly accounted for the 2006 Sale and Leaseback
Transactions, Defendants violated at least the above-referenced GAAP provisions, rendering TOPT's financial statements for the first and second quarters of 2006 materially false and misleading. 104. FAS No. 154, Accounting Changes and Error Corrections, defines a restatement as
"...the process of revising previously issued financial statements to reflect the correction of an error in those financial statements." FAS No. 154 only applies to material items oferror. Moreover, the standard defines an error in previously issued financial statements, in relevant part, as follows: [A]n error in recognition, measurement, presentation, or disclosure in financial statements resulting from mathematical mistakes , mistakes in the application of GAAP, or oversight or misuse offacts that existed at the time the financial statements were prepared. A change from an accounting principle that is not generally accepted to one that is generally accepted is a correction of an error. FAS No. 154, 2(h) (emphasis added).
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105.
Further, SEC Regulation S-X (17 C.F.R. 210.4-01(a)(1)) states that financial
statements filed with the SEC which are not prepared in compliance with GAAP are presumed to be misleading and inaccurate, despite footnotes or other disclosures. Regulation S-X also requires that interim financial statements must comply with GAAP, with the exception that interim financial statements need not include disclosures wich would be duplicative of disclosures accompanying annual financial statements (17 C.F.R. 210.10-01(a)). 106. As discussed above, management is responsible for preparing financial statements that
conform to GAAP. Indeed, the AICPA professional standards state that "management is responsible for adopting sound accounting policies.. .The entity's transactions and the related assets, liabilities and equity are within the direct knowledge and control of management." The standards go on to state that the "fair presentation of financial statements in conformity with Generally Accepted Accounting Principles is an implicit and integral part of management responsibility." 107. Accordingly, as a publicly traded company, TOPT is required by the Exchange Act to maintain book and records in sufficient detail to reflect the transactions ofthe company and therefore prepare financial statements in accordance with GAAP. Specifically , the Exchange Act requires that public companies: (A) make and keep books, records, and accounts, which, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the issuer; devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances thati) transactions are executed in accordance with management's general or specific authorization; transactions are recorded as necessary (I) to permit preparation of financial statements in conformity with generally accepted accounting principles or any other criteria applicable to such statements, and (II) to maintain accountability for assets.
(B)
ii)
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See 15 U.S.C 78m(b)(2) 108. Defendants Pistiolis and Tsantanis have further acknowledged their responsibilities as
senior management under GAAP and certified, during the Class Period, that there were sufficient internal controls over financial reporting. See 78, 80. In contravention of these certifications and in violation of the Exchange Act, Defendants' fraudulent accounting for the 2006 Sale and Leaseback Transactions demonstrates clearly that whatever internal controls were in place during the Class Period were entirely ineffective. 109. The adverse information concealed by Defendants during the Class Period was in
violation of Item 303 of Regulation S-K (17 C.F.R. 229.303) relating to management ' s discussion and analysis of financial condition and results of operations, under the federal securities laws. Specifically, under Item 303(b) related to interim financial statements, Defendants are required to update the market on material changes to TOPT's financial condition and results of operations. Here, Defendants failed to inform the market of the fact that the Company's financial results were fraudulently inflated by the inclusion of the seller's credit related to the 2006 Sale and Leaseback Transactions. 110. In addition to the aforementioned errors, TOPT's financial statements for the first and
second quarters of 2006 violated , inter alia, the following GAAP principals: (a) The principle that interim financial reporting should be based upon the same accounting principles and practices used to prepare annual financial statements (APB No. 28, 10); The principle that financial reporting should provide information that is useful to present and potential investors and creditors and other users in making rational investment, credit and similar decisions (FASB Statement of Concepts No. 1, 34); The principle that financial reporting should provide information about the economic resources of an enterprise, the claims to those resources, and the effects of transactions, events, and circumstances that change resources and claims to those resources (FASB Statement of Concepts No. 1, 40);
(b)
(c)
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(d)
The principle that financial reporting should provide information about an enterprise ' s financial performance during a period. Investors and creditors often use information about the past to help in assessing the prospects of an enterprise. Thus, although investment and credit decisions reflect investors' and creditors ' expectations about future enterprise performance, those expectations are commonly based at least partly on evaluations of past enterprise performance . (FASB Statement of Concepts No. 1, 42); The principle that financial reporting should provide information about how management of an enterprise has discharged its stewardship responsibility to owners (stockholders) for the use of enterprise resources entrusted to it. "To the extent that management offers securities of the enterprise to the public, it voluntarily accepts wider responsibilities for accountability to prospective investors and to the public in general." (FASB Statement of Concepts No. 1, 50); The principle that financial reporting should be reliable in that it represents what it purports to represent. That information should be reliable as well as relevant is a notion that is central to accounting (FASB Statement of Concepts No. 2, 58-59); The principle of completeness, which means that nothing material is left out of the information that may be necessary to ensure that it validly represents underlying events and conditions (FASB Statement of Concepts No. 2, 79); The principle that financial reporting should be verifiable in that it provides a significant degree of assurance that accounting measures represent what they purport to represent (FASB Statement of Concepts No. 2, 81); The principle that conservatism be used as a prudent reaction to uncertainty to try to ensure that uncertainties and risks inherent in business situations are adequately considered. (FASB Statement of Concepts No. 2, 95, 97); The principle that contingencies and other uncertainties that affect fairness of presentation of financial data at an interim date shall be disclosed in those interim reports in the same manner required for annual reports (Accounting Principles Board Opinion No. 28); and The principle that management should provide commentary relating to the effects of significant events upon the interim financial results (Accounting Principles Board Opinion No. 28). LOSS CAUSATION
(e)
(f)
(g)
(h)
(i)
(j)
(k)
111.
Lead Plaintiff and the Class were damaged as a result of the Defendants' fraudulent
conduct as set forth herein. Throughout the entire Class Period, Defendants misrepresented their
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failure to properly account for the seller's credit associated with the 2006 Sale and Leaseback Transactions and repeatedly misrepresenting TOPT's true financial results for the first and second fiscal quarters of 2006. 112. Plaintiffs, composed of Lead Plaintiff and thousands of Class members, purchased
TOPT's common stock at artificially inflated prices in reliance on Defendants' false and misleading statements. But for Defendants' misrepresentations and fraudulent acts, Plaintiffs would not have purchased TOPT securities, or would not have purchased them at the artificially inflated prices at which they were trading during the Class Period. 113. Plaintiffs suffered damages as the truth about the accounting for seller's credit
gradually became known and, thereby, negatively affected TOPT's common stock price. 114. The first partially corrective disclosure was included in the June 27, 2006 There, TOPT announced that the SEC was
supplemental prospectus filed on Form 424B5.
commencing an informal investigation into all acquisitions from 2004 onwards, the 2006 Sale and Leaseback Transactions and the $7.50 special dividend. On that date, prior to the filing of the June 27, 2006 Form 424B5, TOPT common stock opened at a price of $7.45 per share. After the June 27,
2006 Form 424B5 was filed, the stock closed at $6.98.
On June 28, 2006, the first full day of
trading after the Company filed the Form 424B5, the stock fell further to a closing price of $6.43, for a total loss of $1.02 per share or 13.69% based on this news, on heavy trading volume. 115. Defendants, however, failed to fully disclose that the Company had not properly
accounted for the seller's...