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Investors sue USS, allege firm made false statements on prospects

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By KEVIN NEVERS

A federal securities class action lawsuit has been filed against U.S. Steel Corporation, on behalf of investors who purchased USS common stock between Nov. 1, 2016, and April 25, 2017.

The gist of the suit: that certain USS executive officers violated the Securities Exchange Act of 1934 by making “materially false and misleading statements” during that six-month period--“in press releases, analyst conference calls, and SEC filings”--regarding the so-called and at the time much-vaunted “transformational process” dubbed the “Carnegie Way.”

Specifically named in the suit, filed by plaintiff Carmelo Ortiz in the U.S. District Court for the Western District of Pennsylvania: Mario Longhi, who currently serves as USS CEO and on the Board of Directors and who in the period in question also served as president; and David Burritt, who became President and Chief Operating Officer on Feb. 28, 2017, and who before that served as executive vice president and chief financial officer.

As the suit notes, throughout 2016, USS made much of the Carnegie Way, touting its two-phase strategy--to “earn the right to grow” and to “drive and sustain profitable growth”--as a way to “become an iconic industry leader”; to strengthen “our balance sheet, with a strong focus on cash flow, liquidity, and financial flexibility”; and to “improve (its) performance across (its) core business processes.”

To that end, in its annual 2016 report, filed on Feb. 28, 2017, USS pointed to $745 million of specifically Carnegie Way benefits as a sign of “significant progress toward our goal of achieving economic profit across the business cycle,” the suit states. As USS put it, in that annual report, the “Carnegie Way has already driven a shift in the company that has enabled us to withstand the prolonged downturn in steel prices while positioning us for success in a market recovery.”

The suit further notes that investors had other reasons to expect better financials from USS. During that six-month period, “steel market conditions improved substantially,” the suit states. “Indeed, in the first quarter of 2017, the average price of U.S. hot-rolled steel coil . . . rose 55 percent from a year earlier, helped by successful U.S. trade cases against foreign imports. By all accounts, U.S. Steel appeared primed to pounce on the domestic steel market turnaround.”

Then, after the market closed on April 25, 2017, shareholders got some bad news: USS was reporting for the first quarter a net loss of $180 million; a negative operating cash flow of $135 million; a “significant decline” in the company’s flat-rolled segment; and a reduced 2017 outlook that “widely missed analyst expectations, including a 35-percent reduction to 2017 EBITDA guidance.”

Market reaction to the news was “swift and severe,” the suit states, with USS stock opening on April 25, 2017, at $24.18, 22 percent down; and finally closing at $22.78, down 26 percent.

The suit then cites a raft of analysts befuddled by the USS quarterly report:

* Jefferies called the results “abysmal.”

* Axiom speculated that the company’s full-year results were “set to resemble a Nightmare on Elm Street.”

* Morgan Stanley “was struggling to understand how U.S. Steel’s costs moved up so much in the first quarter 2017.”

The suit specifically accuses USS executive officers of “making false statements” and “failing to disclose adverse facts known to them about U.S. Steel,” and so “deceived the investing public regarding U.S. Steel’s prospects and business”; “artificially inflated the price of U.S. Steel common stock”; and caused investors “to purchase U.S. Steel stock at inflated prices and suffer economic loss.”

The suit then cites the “true facts, which were known by defendants but concealed from the investing public” during the six-month period in question:

* “While the company was implementing its Carnegie Way program, it was focused on cutting costs and was not making investments necessary to position U.S. Steel so that it could respond to improved market conditions.”

* “Defendants’ failure to invest in improving capital assets during the industry downturn, in order to report apparent financial improvements, meant that U.S. Steel had higher production costs than its competitors, even in the face of improved pricing, which would negatively impact its financial results.”

* “Defendants were forestalling expensive capital equipment upgrades in order to boost the company’s short-term financial results at the expense of long-term financial performance, leaving U.S. Steel in need of accelerated, costly equipment upgrades that would leave the company years away from generating improved financial performance.”

* “Defendants’ statements regarding the company’s outlook and expected financial performance were false and misleading and lacked a reasonable basis when made.”

* “After the above revelations were revealed to the market, the price of U.S. Steel stock declined significantly as the artificial inflation was removed.”

The suit is seeking compensatory damages on behalf of all class members; reasonable costs and expenses incurred in the action; and any other equitable relief deemed appropriate by the court.

 

Posted 10/24/2018

 
 
 
 

 

 

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