Case 4:11-cv-03250 Document 40 Filed in TXSD on 03/22/12 ...securities.stanford.edu/.../2012322_r01c_11CV03250.pdfIn re IMPERIAL SUGAR COMPANY § Civil Action No. 4:11-cv-03250-LHR

Case 4:11-cv-03250 Document 40 Filed in TXSD on 03/22/12 Page 1 of 81

UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF TEXAS

HOUSTON DIVISION

In re IMPERIAL SUGAR COMPANY § Civil Action No. 4:11-cv-03250-LHR SECURITIES LITIGATION §

§ JURY TRIAL DEMANDED

JUDGE LEE H. ROSENTHAL

CONSOLIDATED CLASS ACTION COMPLAINT


By and through its undersigned counsel, Lead Plaintiff Carpenters Pension Fund of Illinois

(“Lead Plaintiff” or “Plaintiff”) alleges the following against Defendants Imperial Sugar Company

(“Imperial” or the “Company”), John C. Sheptor (“Sheptor”), and Harold P. Mechler (“Mechler”)

(collectively, “Defendants”), upon personal knowledge as to those allegations concerning Plaintiff

and, as to all other matters, upon the investigation of counsel, which included, without limitation: (a)

review and analysis of public filings made by Imperial and other related parties and non-parties with

the Securities and Exchange Commission (“SEC”); (b) review and analysis of press releases and

other publications disseminated by certain of the Defendants and other related non-parties; (c)

review of news articles and shareholder communications; (d) review of other publicly available

information concerning Imperial, the other Defendants, and related non-parties; (e) consultation with

experts; and (f) interviews with factual sources, including individuals formerly employed by

Imperial.

I. SUMMARY OF THE ACTION

1. This is a federal securities class action against Imperial and certain of its officers

and/or directors for violations of the federal securities laws. Plaintiff brings this action on behalf of

itself and the Class under the Securities Exchange Act of 1934 (the “Exchange Act”). Plaintiff

alleges that between December 29, 2010 and August 4, 2011, inclusive (the “Class Period”),

Defendants engaged in a fraudulent scheme to artificially inflate the Company’s stock price by

concealing from the market that Imperial was forced to rely on direct competitors to meet customer

demand as a result of Imperial’s significant loss of refinery capacity and continued problems at its

Port Wentworth refinery. Plaintiff further alleges that Defendants knew, but failed to disclose, that

Imperial was purchasing refined sugar from its competitors and having them “co-pack” the

Company’s own sugar to fulfill contractual obligations, and that these practices increased the

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Company’s operating costs and compressed the Company’s margins. As a result of this fraud, as

more fully described below, shareholders suffered millions of dollars in losses.

2. Imperial was incorporated in 1924 and holds itself out as one of the largest processors

and marketers of refined sugar in the NAFTA region. The Company’s products include granulated,

powdered, liquid, and brown sugars marketed in a variety of packaging options, which are sold

under private labels and various brand names ( i.e. , Dixie Crystals). Imperial refines, packages, and

distributes sugar through two refineries located in Port Wentworth, Georgia and Gramercy,

Louisiana.

3. Prior to the start of the Class Period, the Company lost much of its refinery capacity

due to an industrial accident at its Port Wentworth refinery, which caused death and injury to many

of the Company’s workers. As a result of this accident, production at the Company’s Port

Wentworth refinery – which amounted to 60% of the Company’s refinery capacity – was suspended

for more than a year. While the Company restarted limited production at Port Wentworth in the

middle of 2009, it continued to experience operational difficulties with this refinery and was

struggling to attain pre-accident production levels. Accordingly, Imperial became increasingly

reliant on its Gramercy refinery.

4. Despite the Company’s significant reliance on Gramercy for capacity, in November

2009, the Company was forced into a joint venture with Cargill, Inc. (“Cargill”) and Louisiana Sugar

Growers and Refiners Inc. (“SUGAR”) known as the Louisiana Sugar Refinery, LLC (“LSR”),

which required it to give up its Gramercy refining activities at the beginning of 2011. If the

Company did not participate in LSR, it would lose its raw sugar supply in Louisiana and be “left

high and dry.” As the Company faced continued problems at its Port Wentworth refinery, it was

unable to absorb the loss of Gramercy.

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5. Due to the loss of Imperial’s refinery capacity at Gramercy and the continued

production issues at the Company’s Port Wentworth refinery, Defendants were required to take

drastic steps in order to meet customer demand and to retain customers. According to former

Company employees, during the Class Period, Defendants were forced to rely on competitors to help

them meet their obligations to customers. In particular, the Company hired competitors to pack

approximately 50% of the Imperial retail segment – a process known as co-packing. Additionally,

the Company was forced to purchase refined sugar from competitors to meet customer needs.

6. The Company’s reliance on competitors to purchase and co-pack refined sugar

significantly increased Imperial’s operating expenses. Moreover, by paying premiums to

competitors for these services, Imperial was helping its competitors’ bottom line to Imperial’s own

detriment. These added expenses, which were further exacerbated by the Company’s operational

deficiencies at Port Wentworth and other inefficiencies, caused the Company’s gross margins to

erode.

7. In addition to the myriad problems the Company was facing and associated mounting

expenses, the Company’s business model was at the mercy of competitive pressures. Unlike many

of its competitors, Imperial was a non-integrated producer forced to buy raw sugar in the market and

was subject to the market’s price volatility. Accordingly, it was crucial for Imperial to be able to

offset rising raw sugar costs by raising prices, which it was no longer able to do because of customer

relationships that were strained due to Imperial’s production issues and increased pressure from

integrated sugar producers, particularly from Mexico.

8. Defendants were intimately aware of the continued operational deficiencies at Port

Wentworth, the Company’s reliance on competitors for co-packing and refined sugar, and the impact

competitive pressures were having on the Company’s ability to raise prices through their receipt of

daily emails, participation in monthly conference calls, and through Defendant Sheptor’s frequent

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presence at the Port Wentworth refinery and involvement in purchasing decisions. Despite this,

throughout the Class Period, they misled the market by repeatedly touting the improvements of the

Company’s Port Wentworth facility and the Company’s ability to raise prices to maintain acceptable

price spreads between raw and refined sugar.

9. Eventually, Defendants’ house of cards came falling down. On August 5, 2011, just

one quarter after the Company issued glowing financial results and represented to the market that

Imperial had turned a corner, Defendants revealed that, among other things, the Company had

suffered a significant loss, its gross margins had been crushed, and the Company’s Port Wentworth

refinery was still suffering from severe operational difficulties. In sum, the Company admitted that

it had been unable to turn around its business and that its financial position was tenuous at best.

10. Analysts were “shell-shocked” by this rapid turn of events and expressed disbelief

that raw sugar prices were solely to blame. As a result of Defendants’ announcements, and the

resulting analyst commentary, Imperial’s stock price plummeted approximately 66% , falling a

staggering $15.40 a share, from a close of $23.19 on August 4, 2011 to close at $7.79 on August 8,

2011, causing millions in investor losses.

II. JURISDICTION AND VENUE

11. The claims asserted herein arise under and pursuant to Sections 10(b) and 20(a) of the

Exchange Act, 15 U.S.C. §§78j(b) and 78t(a), and Rule 10b-5 promulgated thereunder by the SEC,

17 C.F.R. §240.10b-5. This Court has jurisdiction over the subject matter of this action pursuant to

28 U.S.C. §1331 and Section 27 of the Exchange Act, 15 U.S.C. §78aa.

12. Venue is proper in this District pursuant to Section 27 of the Exchange Act (15

U.S.C. §78aa), and 28 U.S.C. §1391(b). Imperial maintains its principal executive offices in this

District. Many of the false and misleading statements were made in or issued from this District, and

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many of the acts and transactions giving rise to the violations of law complained of occurred in this

District.

13. In connection with the challenged conduct, 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

markets.

III. PARTIES

A. Plaintiff

14. Plaintiff Carpenters Pension Fund of Illinois was appointed to serve as Lead Plaintiff

in this action by Order of this Court dated February 1, 2012 [Dkt. No. 35]. Plaintiff purchased

Imperial securities at artificially inflated prices during the Class Period and suffered an economic

loss when the true facts about the Company’s business and financial condition were disclosed and

the stock price resultantly declined.

B. Defendants

15. Defendant Imperial was incorporated in Texas in 1924 and is headquartered in Sugar

Land, Texas. As further detailed below, the Company refines, packages and/or distributes cane sugar at

refineries located in the states of Georgia and Louisiana. During the Class Period, Imperial also marketed

sugar and other sweeteners in Mexico and Canada through its joint venture operations.

16. Defendant Sheptor is, and was at all relevant times, President, Chief Executive

Officer (“CEO”), and a director of Imperial. Defendant Sheptor signed and certified the Company’s

Forms 10-Q and 10-K during the Class Period.

17. Defendant Mechler is, and was at all relevant times, Senior Vice President and Chief

Financial Officer (“CFO”) of Imperial. Defendant Mechler signed and certified the Company’s

Forms 10-Q and 10-K during the Class Period.

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18. Defendants Sheptor and Mechler are collectively referred to herein as the “Individual

Defendants.”

19. During the Class Period, the Individual Defendants, as senior executive officers of the

Company, were privy to confidential and proprietary information concerning Imperial, its

operations, finances, financial condition, and present and future business prospects. The Individual

Defendants also had access to material adverse non-public information concerning Imperial, as

discussed in detail below. Because of their positions with Imperial, the Individual Defendants had

access to non-public information about Imperial’s business, finances, products, markets, and present

and future business prospects via access to internal corporate documents, conversations and

connections with other corporate officers and employees, attendance at management and/or board of

directors meetings and committees thereof, and via reports and other information provided to them in

connection therewith. Because of their possession of such information, the Individual Defendants

knew or recklessly disregarded that the adverse facts specified herein had not been disclosed to, and

were being concealed from, the investing public.

20. The Individual Defendants are liable as direct participants in the wrongs complained

of herein. In addition, the Individual Defendants, by reason of their status as senior executive

officers, were “controlling persons” within the meaning of Section 20(a) of the Exchange Act and

had the power and influence to cause the Company to engage in the unlawful conduct complained of

herein. Because of their positions of control, the Individual Defendants were able to, and did,

directly or indirectly, control the conduct of Imperial’s business.

21. The Individual Defendants participated in the drafting, preparation, and/or approval

of the various public and shareholder and investor reports and other communications complained of

herein and were aware of, or recklessly disregarded, the misstatements contained therein and

omissions therefrom, and were aware of their materially false and misleading nature. Because of

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their executive and managerial positions with Imperial, each of the Individual Defendants had access

to the adverse undisclosed information about Imperial’s business prospects, financial condition, and

performance as particularized herein, and knew or recklessly disregarded that these adverse facts

rendered the positive representations made by or about Imperial and its business issued or adopted

by the Company materially false and misleading.

22. The Individual Defendants, because of their positions of control and authority as

officers of the Company, were able to, and did, control the content of the 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.

23. 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 the

narrowly defined group of Defendants identified above. Each of the above officers of Imperial, by

virtue of his high-level position with the Company, directly participated in the management of the

Company, was directly involved in the day-to-day operations of the Company at the highest levels,

and was privy to confidential proprietary information concerning the Company and its business,

operations, growth, financial statements, and financial condition, as alleged herein. The Individual

Defendants were involved in drafting, producing, reviewing, and/or disseminating the false and

misleading statements and information alleged herein, were aware, or recklessly disregarded, that the

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false and misleading statements were being issued regarding the Company, and approved or ratified

these statements in violation of the federal securities laws.

24. As senior executive officers and as controlling persons of a publicly traded company

whose common stock was, and is, registered with the SEC pursuant to the Exchange Act and was,

and is, traded on the NASDAQ Stock Market (“NASDAQ”) and governed by the federal securities

laws, the Individual Defendants had a duty to promptly disseminate accurate and truthful

information with respect to Imperial’s financial condition and performance, growth, operations,

financial statements, business, products, markets, management, earnings, 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 Imperial’s securities would be based upon truthful and accurate

information. The Individual Defendants’ misrepresentations and omissions during the Class Period

violated these specific requirements and obligations.

25. The Individual Defendants are liable as participants in a fraudulent scheme and

course of conduct that operated as a fraud or deceit on purchasers of Imperial’s publicly traded

securities by disseminating materially false and misleading statements and/or concealing material

adverse facts. The scheme deceived the investing public regarding Imperial’s business, operations,

management, and the intrinsic value of Imperial’s common stock and caused Plaintiff and other

members of the Class to purchase Imperial common stock at artificially inflated prices.

26. Defendants are liable for: (i) making false statements; and/or (ii) failing to disclose

adverse facts known to them about Imperial. Defendants’ fraudulent scheme and course of business

that operated as a fraud or deceit on purchasers of Imperial common stock was a success, as it: (i)

deceived the investing public regarding Imperial’s prospects and business; (ii) artificially inflated the

price of Imperial’s common stock; and (iii) caused Plaintiff and other members of the Class to

purchase Imperial’s common stock at inflated prices.

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IV. SUBSTANTIVE ALLEGATIONS 1

A. Background of the Company

27. Imperial was incorporated in 1924 and is the successor to a cane sugar plantation and

milling operation founded in Sugar Land, Texas in the early 1800s. See Form 10-K for the fiscal

year ended September 30, 2010, filed with the SEC on December 29, 2010. The Company touts

itself as one of the largest processors and marketers of refined sugar in the NAFTA region. Id. The

Company’s products include granulated, powdered, liquid, and brown sugars marketed in a variety

of packaging options, ranging from 6 oz. shakers to 50-pound bags. Id. Imperial sells its products

under private labels or various brands, including Dixie Crystals®, Imperial®, and Holly®. Id.

Imperial sells to customers directly and indirectly through wholesalers and distributors. Id. The

Company’s customers include retailers, restaurant chains, distributors, and industrial customers,

principally food manufacturers. Id.

28. Imperial refines, packages, and distributes cane sugar at refineries located in Port

Wentworth, Georgia (located near Savannah) and Gramercy, Louisiana. Id. In fiscal 2007, the

Company’s Port Wentworth refinery comprised approximately 60% of the Company’s capacity to

produced refined sugar.

29. In addition, the Company was involved in three joint venture entities that produced

and marketed sugar and sugar-related products during the Class Period. For example, during the

Class Period, Imperial had a 50% equity interest in Wholesome Sweeteners, Inc. (“Wholesome”), a

company that produces organic cane sugar, agave syrup, honey and other specialty sweeteners. Id.

The Company also participated in a 50/50 joint venture with Ingenios Santos, S.A. de C.V., or

Santos, that was formed in November 2007 and markets sugar products in Mexico and the U.S.

1 All confidential witnesses are described in the masculine to protect their identities.

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under the name Comercializadora Santos Imperial S. de R.L. de C.V., or “CSI.” Id. According to

the Company, Santos owns and operates five sugar mills that produce refined sugar and estandar, a

less refined sugar traditionally sold in Mexico. Id. Through their agreement, Santos and Imperial

marketed all of their respective sugar products sold in Mexico through the joint venture. Id. “The

joint venture entity also exports Santos’ sugar products to the U.S., which are marketed by the

Company or may be used as a raw material in its U.S. refineries.” Id. at 5. In addition, as further

detailed below, in November 2009, the Company entered into a joint venture known as LSR with

Cargill and SUGAR to refine cane sugar in Gramercy, Louisiana in a refinery adjacent to the

Company’s existing refinery. Id.

B. The Company Loses the Majority of Its Refinery Capacity

1. The Port Wentworth Accident

30. Prior to the Class Period, the Company lost much of its refinery capacity, limiting its

operations and increasing its operating costs. First, on February 7, 2008, the Company’s Port

Wentworth refinery experienced a devastating industrial accident, entailing an explosion and fire,

which killed 14 workers and injured 36 others. 2 The accident was found to be the product of

inadequate equipment design, poor maintenance, and ineffective housekeeping. Ultimately, the U.S.

Department of Labor’s Occupational Safety and Health Administration (“OSHA”) required Imperial

to pay $4,050,000 in penalties for 124 violations found at its Port Wentworth plant after the

explosion.3 Moreover, after an inspection of its Gramercy facility, the Company was forced to pay

2 See Dewan, Shaila, “Report Cites Lack of Precautions in 2008 Sugar Plant Fire,” September 24, 2009, The New York Times , http://www.nytimes.com (last visited March 7, 2012).

3 Dep’t of Labor, OSHA, Office of Communications, US Dep’t of Labor announces Imperial Sugar will pay more than $6 million and implement extensive safety and health abatement measures (July 7, 2010), http://www.osha.gov/pls/oshaweb/owadisp.show_document?p_table=NEWS_ RELEASES&p_id=17955.

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an additional $2 million for 97 violations found there in March 2008. Id. The citations alleged,

among other safety and health hazards, that the Company failed to properly address combustible

sugar dust hazards. Id. As part of its settlement with OSHA, Imperial also agreed to correct all

deficiencies at both of its plants, conduct regular internal safety inspections and employee training,

and hire an independent expert at each plant to ensure adequate avenues of communication on

worker safety and health issues within the Company. Id.

31. Significantly, the Port Wentworth accident suspended production at the refinery,

which amounted to 60% of the Company’s refinery capacity, for more than a year and led to a host

of operational and financial problems from which the Company never fully recovered.

2. Port Wentworth Never Returned to Normalcy

32. Although the Company began limited production at Port Wentworth in the middle of

2009, it was never able to fully recover from the accident. The former Senior Buyer 4 recalled that

during his entire employment with Imperial Sugar, “the Company was struggling.” “The refinery in

Port Wentworth was not putting out what it should.” This former employee explained that following

the 2008 explosion at Port Wentworth, the Company re-built the packaging facility with new

equipment. However, most of the employees at the facility were employed by Imperial Sugar prior

to the explosion, and did not know how to operate the new equipment. As a result, the former Senior

Buyer estimated that the Port Wentworth facility was running at only 40% capacity during his entire

employment with the Company (June 2010 through June 15, 2011).

4 The former Senior Buyer was employed with the Company from June 2010 through June 15, 2011 and reported to Packaging Manager Yvette Woodward and Director of Supply Chain Luis Silva (who reported to Defendant Sheptor). In this capacity, he was responsible for purchasing the Company’s raw material and packaging. In addition, he was responsible for all contract negotiations and the entire supply chain budget and created all purchase orders for all of the sugar the Company contracted to purchase from suppliers.

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33. Moreover, older portions of the Port Wentworth facility, which had not been replaced

following the accident, continued to cause a number of significant problems for the Company.

According to the former Process Engineer Team Leader, 5 the “old mill” at Port Wentworth used for

refining sugar was not part of the Company’s re-build following the accident. Rather, the insurance

proceeds from the industrial accident only paid for the packaging part of the plant. “There was no

money to fix the old refining equipment.” This former employee explained that the Company “went

through two years of hell trying to get that old mill to run,” but that it was “well known internally”

that the Company did not have the money to fix it. Indeed, as the former Senior Manager of

Logistics stated, 6 Port Wentworth was a “money pit.”

3. The Company Was Forced to Give Up Its Only Fully Operational Refinery

34. While the Company began limited bulk sugar production at its Port Wentworth

refinery in the summer of 2009 and initiated packaging production in the fall of 2009, it was forced

to rely on its Gramercy refinery in order to try to keep up with business. See Form 10-K for the

fiscal year ended September 30, 2010, filed on December 29, 2010. Indeed, the former Senior

Manager of Logistics recalled that because the Port Wentworth refinery was struggling to keep up,

Gramercy had to do more packaging. Although the Gramercy plant was capable of producing five to

5 The former Process Engineer Team Leader was employed with the Company from February 2010 until November 2011. In this capacity, he reported to Vice President of Technology Brian Harrison, who reported to Plant Manager Thomas Rathke. During his employment, the former Process Engineer Team Leader was in charge of the Process Engineering for the Programmable Logic Control (“PLC”), which was used for packaging at Port Wentworth.

6 The former Senior Manager of Logistics was employed with the Company from May 2006 through January 2011 at the Company’s Sugar Land, Texas headquarters. This former employee reported to the Senior Director of Logistics and Customer Service Michael Wilson. In this capacity, he oversaw every aspect of the Company’s logistics, including warehousing, trucks, and bulk and liquid stations.

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six railcars a day of sugar, the Gramercy plant was instead refining only one railcar per day

throughout 2010 because the Gramercy facility had to devote so much capacity to packaging.

35. And, although the Company was completely reliant on Gramercy to maintain its

business, in November 2009, the Company entered into the LSR joint venture with Cargill and

SUGAR. Each member, including Imperial, was required to contribute $30 million in cash or assets

to capitalize the venture. To fund this, Imperial contributed land and its existing Gramercy refinery

assets (as of December 31, 2010) to the joint venture.

36. Giving up its Gramercy refining activities at a time when the Company’s Port

Wentworth refinery had not returned to pre-accident production levels compounded the problems the

Company was already experiencing. However, according to the former Senior Manager of

Logistics, Imperial was forced into the LSR joint venture. This former employee explained that

there were two major sugar growing co-ops in Louisiana and that Domino Sugar had connections

with one of the sugar co-ops and Cargill formed a relationship with the other co-op. Once Cargill

established this relationship with the sugar co-op, it planned to open a bulk facility two miles down

the road from Imperial’s Gramercy refinery. If Cargill opened the bulk facility, “Gramercy would be

left high and dry.” And, without Port Wentworth being fully operational, “Sheptor had to keep

Imperial sugar in stores.” Accordingly, the former Senior Manager of Logistics explained that in

order to protect itself, Imperial was forced to get into the joint venture.

37. According to the former Senior Manager of Logistics, under the terms of the joint

venture, all the bulk business in Gramercy went to the joint venture and Imperial was left with some

small packaging lines. The Company ended up losing approximately 50% of its revenue from

Gramercy because “all the 25, 50, and 100 pound bags were considered bulk, and went to the joint

venture.” As Imperial could produce and package only for retail at the Gramercy facility, all of the

industrial sugar was being sourced from Port Wentworth.

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C. The Company Was Unable to Meet Customer Demand

38. As the former Senior Buyer explained, while the Company had anticipated that the

Port Wentworth facility would be capable of absorbing the Gramercy refining capacity, it was not.

According to the former Senior Buyer, the Company shut down the Gramercy facility too soon. The

former Retail Customer Service Representative, 7 confirmed that the Company was unable to meet

customer demand and constantly had problems filling customer orders. Indeed, the former Retail

Customer Service Representative explained that Turner, the Master Planner, distributed a daily Late

Report and a Daily Cuts report using the Company’s Foresight planning software (“Foresight”), and

distributed this report on a daily basis. The Late Report was sent via e-mail every day to all of the

Vice Presidents, and also to Defendant Sheptor. He stated that “[w]e were constantly getting lists of

orders to delay” and that some days the lists contained page after page of orders to delay. The delays

for orders would be anywhere from one week to three months.

39. The former Retail Customer Service Representative explained that the Company’s

Walmart private label account was an example of Imperial’s inability to fill orders. This former

employee described the Walmart account as a “big deal” and that it was a significant amount of

business for the Company. Indeed, the former Senior Buyer explained that the Company obtained

two Walmart distribution centers as customers in late Fall 2010 and that these two distribution

centers supplied approximately 50 Walmart stores. According to the former Retail Customer

Service Representative, when the new account was announced, there were considerable internal

7 The former Retail Customer Service Representative was employed with the Company as a Customer Service Representative in the Company’s Retail customer service department, as one of three customer service representatives and a team lead that serviced Retail. This former employee worked for Imperial Sugar for 10 years, until he departed from the Company in September 2011. In this capacity, he was responsible for managing several accounts, including Walmart and Meadowbrook Meats (“MBM”). This former employee reported to Master Planner Sheila Turner (“Turner”).

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discussions about how the Company would be able to provide the sugar. He stated that Imperial

“took on the account knowing they couldn’t meet the orders.” When this former employee asked

Turner, the Master Planner, about the potential problems of providing the sugar for the Walmart

private label sugar, the former Retail Customer Service Representative was told: “Just place the

orders and we will make it work. We will move things around if we have to.” According to this

former employee, Defendant Sheptor instructed them “to go after the business, when he knew we

couldn’t service them.” “It shocked us that the CEO was forcing everyone to sell, sell, sell,” when

everyone knew the Company could not fill orders. He added that: “We had no control over what

amount of sugar we were producing.”

40. Additionally, the Company’s attempt to meet Walmart’s demand put a strain on its

ability to satisfy the needs of other customers. The former Retail Customer Service Representative

explained that he was told on a number of occasions that because Walmart was such a big account, it

was the top priority and that sugar was provided to Walmart first. Moreover, the former Senior

Buyer stated that Walmart put a lot of strain on Port Wentworth’s packaging capacity. According to

the former Senior Buyer, Walmart was very specific that its sugar had to be packaged in Port

Wentworth. However, Walmart required five or six truckloads per day per distribution center. As

each truckload of sugar typically consists of 42,500 to 48,000 pounds of sugar, the Walmart account

took up 70% of the packaging capacity at Port Wentworth. Indeed, the former Senior Buyer recalled

that in late 2010, “everyone was screaming about being able to support Walmart demand.”

Regardless, because the Company wanted Walmart as a customer and Walmart took up so much

packaging capacity, the Company had to outsource to keep up with demand. Accordingly, the

former Senior Buyer stated that Imperial outsourced products that it could make easily.

41. According to the former Senior Buyer, Imperial quickly lost Walmart as a customer

on February 1, 2011 because Imperial missed too many shipments and could not supply the

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distribution centers. This was confirmed by the former Retail Customer Service Representative, who

conveyed that, as a result of Imperial’s inability to produce enough sugar and the concomitant delays

in supplying it, Imperial ended up losing the Walmart business. Likewise, the Company lost MBM

and Swank as customers in early 2011 as a result of late orders.

D. The Company Was Forced to Turn to Competitors to Meet Demand

42. Due to the Company’s loss of refinery capacity at its Gramercy refinery and the

continued production and packing issues at Imperial’s Port Wentworth refinery, Defendants were

forced to take drastic steps in order to meet customer demand and to retain customers. According to

former Company employees, Imperial turned to competitors to “co-pack” its sugar when the

Company could not keep up and also purchased refined sugar from competitors to meet its

obligations to customers.

1. The Company Relied on Competitors to “Co-Pack” Its Sugar

43. As detailed above, as a result of the Company’s loss of packaging capacity, the

former Senior Buyer explained that Imperial “couldn’t pack to demand.” Consequently, the

Company was forced to send much of its packaging to “co-packers” to be filled. Because Port

Wentworth was not capable of filling the capacity requirements created by the Gramercy closure, all

of the production that had been done at Gramercy had to be sent outside.

44. The former Senior Buyer estimated that approximately 50% of the Imperial Retail

business was co-packed, or packed by a competitor. He stated that “all of the brown sugar, some

powdered and the two pound, four pound, five pound, and ten pound granulated was all co-packed.”

In some instances, Imperial would send refined sugar to be packed as well. The former Senior Buyer

explained that Imperial used co-packers for an abundance of retail customers and that the two

biggest retail customers were Piggly Wiggly and Food Lion.

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45. The former Senior Buyer explained the process for filling an order after the Gramercy

refinery closed. He stated that once Imperial took an order from a customer, Imperial planners in

Sugar Land, Texas figured out what had to be made at the plant. The former Senior Buyer explained

that the Company tracked orders and did planning through excel spreadsheets. When the planners

determined that the Imperial Sugar plants were not capable of filling a customer order, the Senior

Buyer would contact co-packers. The former Senior Buyer explained that the Company used several

different co-packers, including Tekpak, Inc., Flexpak USA, Inc., Kpak, Diamond Crystal Brands,

Inc. (“DCB”), Domino, CPC, Inc., Brady Enterprises, Inc., and U.S. Sugar.

46. The former Senior Buyer further explained that of the co-packers that Imperial used,

the Company’s competitor U.S. Sugar was by far the biggest. 8 The Company had a co-packing

arrangement with U.S. Sugar even prior to the start of the Senior Buyer’s employment with the

Company in June 2010. Once the former Senior Buyer knew his packaging requirements, he would

get on the phone with U.S. Sugar Vice President of Supply Chain Steve Ward (“Ward”). The

ongoing nature of Imperial’s co-packing relationship with U.S. Sugar is evident from the fact that

every Tuesday afternoon, the former Senior Buyer, Planner Kristin Locum and Imperial Sales

Accounting Supervisor Carolyn Meyer participated in a conference call with Ward to go over the

packing U.S. Sugar did for Imperial Sugar the week before. 9 According to the former Senior Buyer,

U.S. Sugar packaged five or six truckloads of sugar on behalf of Imperial every week.

8 The Company itself has indicated that U.S. Sugar’s marketing cooperative – United Sugars – is one of its “key sugar competitors.” See Form 2010 10-K for the fiscal year ended September 30, 2010, filed with the SEC on December 29, 2010. United Sugars is owned in part by U.S. Sugar. See Meet United Sugars, http://www.unitedsugars.com/meetUSC.html (last visited March 21, 2012).

9 Based on his weekly conference calls with U.S. Sugar’s Ward, the former Senior Buyer recalled that the practice of having U.S. Sugar package sugar for Imperial took place from prior to his employment (June 2010) through the end of his employment (June 15, 2011).

- 17 -


47. The Company’s use of co-packers was evident from its packaging. As the former

Retail Customer Service Representative explained, there were sugar “lot numbers” on the

Company’s sugar packages and associated with the sugar in its system. “Lot numbers” are

comprised of a letter, followed by three numbers and then followed by another letter. The first letter

in the lot number showed where the sugar was packaged. For example, all of the lot numbers for

sugar packaged in Gramercy started with a “C” and the lot numbers for sugar packaged at Port

Wentworth started with an “S.” Lot numbers beginning with an “X” and “W” indicate that the sugar

had been packaged by an outside company.

48. Co-packing added significant operating costs for Imperial. According to the former

Senior Buyer, Imperial had to pay co-packers a “tolling fee” for using their equipment. The tolling

fee that Imperial paid to U.S. Sugar was approximately 50-60 cents per pound of sugar packaged.

The former Senior Buyer also explained that a truckload of sugar could contain 48,000 pounds of

packaged sugar. Multiplying the minimum tolling fee of $.50 per pound charged by U.S. Sugar by

the five trucks per week at 48,000 pounds per truck, the former Senior Buyer determined that

Imperial was paying approximately $500,000 per month to U.S. Sugar (48,000 x 5 x $.50 =

$120,000 per week) to pack sugar.

49. On top of this, the Company would have to pay a marked-up price and freight for the

sugar if it had to buy it from a competitor like U.S. Sugar. Indeed, as further detailed below, the

former Senior Buyer explained that the Company did not always have enough sugar. If the

Company did not have the ability to send the sugar to co-packers, then it also had to pay the

competitor’s price for the sugar, which was 15-20% higher than Imperial had to pay. Moreover,

Imperial was paying for freight to ship the packaging and sometimes sugar to U.S. Sugar and to have

U.S. Sugar ship the packaged sugar back to Imperial distribution centers.

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50. Accordingly, the former Senior Buyer explained that paying another firm to package

sugar “was killing the margins.” When referring to the Company’s practice of using co-packers, the

former Senior Buyer stated that there was no way to service retail customers, such as Piggly Wiggly

and Food Lion, and make money the way the Company was operating. The former Senior Buyer

further explained that the use of co-packers had a negative impact on the Company margins, because

the Company was getting charged $.15 to $.20 more per pound than if it packed the sugar itself. Not

only did the former Senior Buyer find the financial impact to Imperial to be egregious, but he could

not believe that Imperial would provide proprietary pricing and customer information to a major

competitor. He stated that “[i]t is a major threat if they have your price points.”

2. The Company Purchased Refined Sugar from Competitors to Meet Customer Obligations

51. In addition to sending sugar out to competitors for packing, the former Senior

Manager of Logistics explained that Imperial had to buy sugar all the time to keep up with sales.

This former employee explained that at the time the Port Wentworth facility initially re-started in

early 2009, the Company had three or four warehouses of sugar. “We had a bunch of sugar to start

the process.” However, due to the Company’s lack of production capacity, it soon began having to

purchase refined sugar from domestic and Mexican sources, including direct competitors of the

Company. Indeed, because the Company was unable to refine enough sugar, “we had to do

something.” “We had to bring in bulk Mexican sugar to keep up with the Industrial business.” The

former Senior Manager of Logistics recalled that the Company also bought a considerable amount of

refined sugar from CSC Sugar, LLC, a competitor based in Joplin, Missouri, during the last two

years of his employment. During his final year of employment, the former Senior Manager of

Logistics recalled the Company had to purchase 10-20 railcars from CSC on five or six occasions.

52. The former Senior Buyer explained that the Company continued to purchase refined

sugar from U.S. Sugar, the Michigan Sugar Company, and Santos throughout his entire employment

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with the Company (through June 15, 2011). The former Senior Buyer knew of the purchases of

refined sugar from competitors because he was tasked with creating the purchase orders. In fact,

Senior Vice President Pat Hennebery would send him a request to create the purchase orders and

would tell the former Senior Buyer how many pounds to purchase and at what price.

53. The former Customer Service Representative 10 also confirmed Imperial’s purchase of

refined sugar from competitors such as Michigan Sugar Company during the Class Period. This

former employee explained that “Imperial was always behind” and that Imperial bought sugar from

Michigan Sugar all the time. He further stated that “ . . . we called it ‘backdooring it.’” The former

Customer Service Representative elaborated that “[w]e called it backdooring because they didn’t

want their customers to know.” For example, the former Customer Service Representative stated

that if General Mills called Imperial Sugar needing ten trucks of white sugar and there was no way

Imperial could fill the order, Imperial would call Michigan Sugar asking for the sugar. According to

this former employee, Imperial’s purchase of refined sugar from competitors, including Michigan

Sugar, U.S. Sugar, and Domino, happened on a daily basis during 2011. Indeed, the former

Customer Service Representative explained that there were a handful of customer orders every day

they could not meet. The former customer service representative recalled that General Mills and

Kellogg’s were two big customers that Imperial often had difficulty filling orders for. This former

employee stated that “Imperial was pushing product they didn’t have.” The customers never knew

10 The former Customer Service Representative was employed with the Company for approximately five years, ending in October 2011. In this capacity, the former Customer Service Representative reported to Customer Service Manager Diane Walsh, who reported to Vice President of Sales Operations George Muller. Moreover, this former employee was contracted out to provide customer service on behalf of Michigan Sugar. Accordingly, for transactions between Imperial and Michigan Sugar, the former Customer Service Representative prepared invoices from Michigan Sugar to Imperial Sugar. Indeed, Michigan Sugar Chief Marketing Officer Jerry Coleman would call the former Customer Service Representative and request an invoice for sugar purchased by Imperial.

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that the sugar came from Michigan Sugar. Rather, Imperial would receive an order and purchase the

required sugar from Michigan Sugar. Then, Michigan Sugar would invoice Imperial for the sugar

and Imperial would charge the customers.

54. Accordingly, the Company’s reliance on competitors for refined sugar and co-packing

significantly increased Imperial’s operating costs and crushed the Company’s margins.

E. High Operating Costs Caused the Company’s Gross Margins to Erode

55. According to the former Senior Manager of Logistics, the decrease in the Company’s

operating margins was directly related to the inability of the Port Wentworth plant to keep up with

demand. “If refining can’t keep up with demand, you have to buy bulk from other suppliers and we

had to send a lot of the retail out to co-packers.” According to the former Senior Manager of

Logistics, Imperial never budgeted for purchasing sugar from competitors or having competitors co-

pack sugar. This former employee knew for certain that the added costs were not part of his initial

transportation budget. The former Senior Manager of Logistics explained that purchasing sugar

from competitors and co-packing blew up his budget. Indeed he relayed that, “[w]e had to explain

each month why we were so far over-budget.” Moreover, the former Senior Buyer explained he was

“sure that purchasing the refined sugar impacted margins” because “they were charging more for the

sugar than if we refined it ourselves.”

56. In sum, during the Class Period, Imperial’s lack of production capacity due to the

closing of its Gramercy plant and significant problems at its Port Wentworth refinery rendered it

unable to meet customer demand. In turn, the Company resorted to drastic measures to retain

customers, including reliance on direct competitors for purchases of refined sugar and co-packing,

which resulted in increased operating costs, and ultimately caused Imperial’s gross margins to

decline significantly. Moreover, by turning to competitors to meet its supply and packaging needs,

the Company was actually supporting its competitors’ bottom line to the Company’s own detriment.

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F. Defendants Knew of the Company’s Capacity Problems, Operating Issues, and Reliance on Competitors to Meet Customer Demand

57. As further detailed above, Defendants were intimately aware of Imperial’s capacity

issues and the Company’s reliance on competitors to meet customer demand. According to the

former Senior Manager of Logistics, the capacity problems at Port Wentworth were widely known.

Indeed, this former employee explained that Defendant Sheptor participated in daily calls with the

Plant Manager and received an “email tracker” every morning that detailed the performance at the

plant, and performance compared to goal. According to the former Senior Manager of Logistics,

Defendant Sheptor knew exactly what Imperial’s capacity was. In addition, “John was there all the

time. He had his office there and he had his own coveralls and hard hat.” “John knew exactly what

was going on at that plant.” Defendant Sheptor’s knowledge of the problems at Port Wentworth was

confirmed by the former Customer Service Representative, who stated that Defendant Sheptor held a

monthly town hall meeting which took place during the middle of the month. This former employee

recalled that during the Town Hall meetings, Defendant Sheptor “would always acknowledge the

problems at Port Wentworth.”

58. Moreover, the former Retail Customer Service Representative explained that

Defendant Sheptor knew about the delays in filling customer orders. He stated that Defendant

Sheptor “was getting the same reports we were and he was always in Sheila’s [Turner] office talking

about it.” Moreover, the former Retail Customer Service Representative explained that Imperial

Sugar executives (including Sheptor) were always talking with their doors open about where the

sugar was going to come from.

59. In addition, the former Senior Manager of Logistics explained that Imperial tracked

sales and sugar demand through Foresight. Imperial sales personnel input sales data into Foresight,

which was used to determine how the Company would supply customers. Indeed, based on the

information in Foresight, the Director of Sales, the Vice President of Sales Planning, and the

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Director of Sales Planning “would decide if we need more sugar, and they would take it to [the

Senior Vice President of Commodities] Pat Henneberry.” “If we needed to purchase more sugar, Pat

and [the Director of Sales] would take it to John [Defendant Sheptor].” Moreover, the former Senior

Manager of Logistics stated: “John had the final say on all purchases and was absolutely aware of all

of the co-packers.” This was corroborated by the former Senior Buyer, who stated that Defendant

Sheptor was aware of the sugar purchases because “Pat would have to get approval from John

[Sheptor] for the price.”

60. Moreover, the former Senior Buyer explained that both Defendants Sheptor and

Mechler were very familiar with the problem of not being able to increase pricing. The former

Senior Buyer explained that he participated in a monthly conference call, which included Defendants

Sheptor and Mechler, as well as the Vice President of Industrial Sales and the Vice President of

Retail Sales. The conference call took place two or three days after the end of each month. On each

call during the former Senior Buyer’s employment with the Company, the participants discussed

what the market would bear for price and margins. Accordingly, the former Senior Buyer stated that

Defendants Sheptor and Mechler were very familiar with prices and margins and knew that they

could not raise prices.

G. The Company’s Business Model Was at the Mercy of Competitive Pressures

61. In addition to the myriad operating and capacity problems that Imperial was facing

which resulted in increased operating costs for the Company, the Company faced an uphill battle in

offsetting the rising cost of raw sugar during the Class Period. Unlike certain of its competitors,

Imperial does not grow its own sugar and has to purchase all of its raw sugar in the market.

Accordingly, when raw sugar prices rose, as they did throughout the Class Period, it was critical that

the Company be able to offset this increased cost by raising its prices accordingly. Throughout the

Class Period, Defendants knew (and later admitted) that they were facing increasing pressure from

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competitors because of their lack of vertical integration ( i.e. , Imperial did not grow its own sugar)

and structural changes that increasingly benefited competitors at the expense of the Company.

Indeed, Defendants admitted that Mexican competition alone had become a significant factor over

the previous 18 months:

“I’ll just make one comment about Mexico and Hal has additional response to your question. In the last, call it 18 months, there has been construction in Mexico to be able to package their production in US equivalent sizes. If you go back to the period that you are referring to, they didn’t have that capability and most of that product came into the US either as bulk or it came in as 50-kilo bags, which weren’t very friendly for customers to use in the US.” See ¶98 below. “That’s changed substantially in the last 18 months. Product directly now comes in 15 and 25-pound bags, it comes in retail private label bags, so the effective competition is much more severe out of Mexico than it was even three years ago.” Id.

62. Moreover, Defendants knew they were unable to raise prices to customers because, as

detailed above, they were already having a multitude of problems satisfying customer demand,

keeping customers happy, and ultimately retaining them. In particular, the former Senior Buyer

explained, Imperial was unable to pass along the increased costs of co-packers or the Company’s

increased costs to acquire refined sugar. “We had to hold prices because our customers were all

watching what our competition was charging.” In the wake of the Company not being able to

supply sugar, due to the Port Wentworth explosion, the Company had to offer rebates and discounts

in order to get the customers back. As a result, there was no way for the Company to pass increased

costs to customers. Indeed, as one analyst explained, “[i]t is difficult to increase price to customers

that have experienced order delays in the past or are generally concerned about [Imperial’s] ability to

deliver.” See PAA Research LLC report dated December 1, 2011.

63. Despite Defendants’ knowledge of the impact of then-existing competitive pressures

on its business and the Company’s inability to raise prices without losing customers, Defendants

continued to falsely tout Imperial’s ability to raise prices to compensate for the rising prices of raw

sugar while only providing vague warnings to investors that they would be able to achieve such

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spreads in the future. See, e.g., ¶ 88 (“Sales and operations improvements lead [sic] to significantly

better margins. Margins increased due to higher domestic prices, which outpaced raw sugar cost

increases. Demand for Imperial’s products is increasing, and with the tightening of supply in the US,

we are experiencing expanding margins.”).

64. Ultimately, the many problems that plagued the Company came to a head, when the

Company’s increased operating costs, coupled with rising raw sugar costs, and its inability to raise

prices due to competitive pressures crushed Imperial’s gross margins. Just one quarter after the

Company issued glowing financial results and led the market to believe that Imperial had finally

returned to normalcy, Defendants revealed that, in fact, the Company was suffering from a host of

issues which challenged its very ability to survive.

65. Analysts were shocked by this rapid turn of events, noting their “disbelief” and that

the Company’s earnings were “far short of expectations.” As detailed further below, one analyst

expressed that the Company’s “business was at a point where we believe the absolute best return

would come from dissolution of the Company.” Defendants’ announcements and resulting analyst

commentary caused the stock price to plummet approximately 66% over the next two trading days,

causing investors to lose millions.

V. DEFENDANTS’ FALSE AND MISLEADING CLASS PERIOD STATEMENTS11

66. The Class Period begins on December 29, 2010. On that date, the Company issued a

press release summarizing its fourth quarter and fiscal year 2010 results and reiterating

improvements at Port Wentworth, stating in pertinent part:

“Imperial Sugar Company took important strategic steps in fiscal 2010 while managing the challenges associated with restoring full production at the Port

11 Emphasis is added unless otherwise noted.

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Wentworth refinery,” stated John Sheptor, president and CEO of Imperial Sugar. “As production rates at the Port Wentworth refinery increased during the year, we identified facility and process modifications necessary to return the refinery to historical operating levels. We completed the last major modification in October 2010, and output improved significantly. While production days and fixed costs had a negative impact on fiscal 2010 results, the improvements that we have made should lead to sustained results at higher rates in 2011.”

Sheptor continued, “Other important steps were taken in 2010 to strengthen our business and provide a path to a stronger future. Construction of the new refinery in Louisiana by our recently formed joint venture is well under way, with completion targeted for the summer of 2011. Our Natural Sweet Ventures initiative provides an exciting opportunity to expand our portfolio of all natural sweeteners. Customer interest in our stevia/sucrose products under the Steviacane(TM) brand name has been encouraging. The continued success of our strategic Mexican alliance was invaluable in dealing with the increasing complexities arising in the NAFTA sugar region, while Wholesome Sweeteners experienced significant top line and earnings growth from their organic and fair trade portfolio of sweeteners.”

67. Also on that date, Imperial issued its Form 10-K for the fiscal year ending September

30, 2010, touting improvements at the Port Wentworth refinery while misleading the market as to the

extent of its co-packing arrangements. The Form 10-K stated in pertinent part:

We also operate a distribution facility in Ludlow, Kentucky and we contract for throughput and storage at a number of warehouses and distribution stations. Co-packers are used under contract for small volume specialty products.

* * *

The Port Wentworth refinery’s production ramped up during fiscal 2010 following the restart of the refinery which occurred in the summer of 2009.

* * *

Net sales increased 73.8% in fiscal 2010 driven by increased sugar sales volume and higher prices. Sales volumes increased 51.9% primarily due to the ramp up in production volume from the Port Wentworth refinery, partially offset by decreased sugar purchased from other producers.

68. Moreover, Defendants Sheptor and Mechler signed Sarbanes-Oxley (“SOX”)

certifications, which stated in pertinent part:

1. I have reviewed this annual report on Form 10-K of Imperial Sugar Company;

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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 registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant 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 registrant, 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) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) evaluated the effectiveness of the registrant’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

(d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are

- 27 -


reasonably likely to adversely affect the registrant’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 registrant’s internal control over financial reporting.

69. On the next day, December 30, 2010, the Company hosted a conference call with

various securities analysts. Defendants Sheptor and Mechler participated in the call. During the

call, the Individual Defendants touted the improvements the Company had made to its Port

Wentworth refinery and that the Company was on its way to “returning the refinery to pre-tragedy

capacity.” In his opening remarks, Defendant Sheptor stated as follows:

Results in the fourth quarter were negatively influenced by a 4.4 million pound average daily melt rate at the Port Wentworth refinery that constrained our sales volume. The refinery performance did not improve from the previous quarter, forcing us to purchase contract cover from other suppliers, and in some cases causing default on contract delivery resulting in customer complaints -- customer claims. A charge totaling $4.4 million was established in the quarter to account for unresolved customer claims.

During the first week of October, we made changes to the refinery process at the Port Wentworth plant in an attempt to resolve obstacles in production that we had encountered. These changes resulted in significantly improved performance, enabling a 13% melt rate increase, resulting in an October-November average rate of 5.1 million pounds per day. In this period, many production days exceeded our historical average rate of 5.9 million pounds per day.

Additional benefits were also achieved, including improved sugar yields, improved sugar quality due to reduced fine-grain generation, and reduced Sweetwater generation that lowered reprocessing costs. In many ways, this change in the refining process was a huge success and a critical step forward to returning the refinery to pre-tragedy capacity.

*

Start-up of the new refinery is planned for the summer of 2011. A 50% capacity improvement, versus the existing refinery, is expected when the new facility reaches capacity in 2012.

*

We are encouraged, as we finished our first fiscal quarter 2011, with the improved performance of the Port Wentworth refinery, the initiation of the next phase of the LSR venture, continued growth of Wholesome Sweeteners, and the excellent early

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interest in Stevia Cane. 2010 was a year challenged with recovery, a 30-year raw sugar high – raw sugar price high, and expectations not met. We inspire [sic] to do much better in our performance, with the keys to that success being future Port Wentworth production rate and the joint venture growth.

70. In addition, Defendant Mechler offered the following comments in pertinent part:

We continue to make strides in returning our core operations to normal levels and returning the Company to profitability.

* * *

In general, we achieved sales volumes in the past two quarters in line with pre-accident levels at a time when prices for both refined sugar and raw cane sugar, our largest input cost, are at historically high levels. Our margin basis -- I should say, on a margin basis, we have been successful thus far at maintaining acceptable spreads between raw and refined sugar prices.

71. In the question and answer session that followed, analysts questioned the performance

of the Company’s Port Wentworth refinery and Defendants reassured investors that the Port

Wentworth refinery would return to higher levels of production and that Defendants were unaware

of any customer issues in the first fiscal quarter of 2011 (which had begun two months prior to the

call):

Hamed Khorsand - BWS Financial - Analyst

And my last question -- given that we are so close to the end of this quarter, from a volume standpoint, are you pleased with performance? Was it seasonally in line with what you were expecting from volume performance in this quarter?

Hal Mechler - Imperial Sugar Company - CFO, EVP

Couple of -- we were pleased with the performance of the Port Wentworth refinery, as John referred to, in October-November. We did reduce production rates in December in Port Wentworth.

* * *

Brad Safalow - PAA Research – Analyst

Just going back to Port Wentworth, you were nice enough to include the breakout in the K as far as production rates. How long will it be until the silo construction is done? I think you said early January. It’s -- obviously, tomorrow is the end of the year. Do you expect to be back online the second week of January, or you’re not sure yet as far as getting back to the October-November levels?

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John Sheptor - Imperial Sugar Company - President, CEO

Sure. Brad, the construction process will be -- is scheduled to be completed just before January 15, so right at the middle of the month.

To put the silos back online will require about a four-day shutdown to do the mechanical reconnection and clean out the silos before we begin producing sugar that’s for sale. Whether we do that -- we could do that as early as, call it, January 15. Whether we do it January 15 or defer that change, that shutdown, a few weeks will depend upon where we are relative to demand, inventory levels, performance in Gramercy as that refinery starts back up and we restart our packaging operation there.

So we’re holding open the possibility that we may defer bringing the silos online so we don’t have to take that shutdown in the middle of the month. But it could be as early as mid-January, and we may defer the decision a couple -- I would say probably a couple of weeks might be the outside on that.

Brad Safalow - PAA Research - Analyst

And is it your expectation that you will get back to 5 million pounds, plus, of aggregated production at Port Wentworth, once you bring the silos back online?


Our expectation is that the plant will return to the higher levels of production that we were demonstrating at the beginning of November as soon as the silos are back online.

I’d just repeat my comment before that the average for October and November was 5.1 million pounds. Towards the end of that period, it was running better than the average, and we exceeded the historical capacity of 5.9 million pounds about a third of the time. So we are hopeful that when we have a longer running period, we will be able to demonstrate the true capability of the changes that we made.

* * *


And then, last question and I’ll jump back in the queue, for the first quarter of 2011, can you just let us -- or detail any charges you will take for severance or other related one-time expenses related to the transfer of Gramercy? And then, do you guys anticipate having any customer delay, customer cancellation charges in the quarter?


To the last question, the answer is no. We don’t -- we unfortunately have the opportunity to look back for 90 days now, almost, in setting the reserves at the end of September. And we believe and we are not aware of any customer issues that are not covered in the charges we took last year, to your last question.

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* * *

72. Analysts reacted positively to Defendants’ statements regarding the Company’s

fourth quarter and fiscal year end 2010 results and Defendants’ positive assessment of the

improvements to the Port Wentworth refinery and the impact that this would have for 2011

production levels. For example, following these Company announcements, analysts stated as

follows:

(a) In a report dated December 29, 2010, Rafferty Capital Markets, LLC focused

on the Company’s positive disclosures regarding Port Wentworth, stating: “A primary driver of our

Buy rating on shares of IPSU is the return to production at the Port Wentworth refinery. The

company’s 2010 results point to a dramatic improvement in production at Port Wentworth, up to

12,494k cwt in 2010 from 1,146k cwt in 2009. We estimate the Port Wentworth refinery is now

operating above 95% of its capacity.” The report concluded that “[t]oday’s results indicate IPSU’s

Port Wentworth refinery is improving capacity utilization as expected” and therefore, in spite of

margin pressures affecting sales prices, “we believe IPSU is well-positioned for a return to

profitability in F2011.”

(b) On December 30, 2010, PAA Research LLC issued a report stating that

expectations of “significant production gains at the company’s Port Wentworth refinery” were

“mostly on point.” The report projected that the Company’s shares would experience “material

gains” in 2011, supported primarily by Defendants’ statements on Port Wentworth: “Perhaps most

importantly, senior management has not been as optimistic about ongoing production levels at the

company’s Port Wentworth refinery over the past two-years as they were on today on the [sic]

earnings conference call . For a management team that generally likes to keep expectations low, we

were encouraged by their confidence that the Port Wentworth refinery could achieve average daily

production volumes of 5.5-6.0MM lbs/day once the silo repairs are completed.” (emphasis in

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original). The report concluded, “We expect IPSU shares to witness substantial upside over the

coming months as investor [sic] become increasingly aware of the favorable dynamics in the US

sugar market and the company achieves production benchmarks at Port Wentworth.”

(c) On January 3, 2011, Janney Capital Markets released a report highlighting the

Company’s “steady progress” and reiterating a “Neutral” rating of the Company’s stock. The report

stated that the Port Wentworth facility “looks set to return to 100% productivity in FY11,” despite

continued issues such as silo repairs.

73. For the reasons stated above in the Substantive Allegations section, and as further

detailed herein, the statements contained in the 2010 Form 10-K, the December 29, 2010 earnings

press release, and the December 30, 2010 conference call, which touted, among other things, the

improved performance of the Port Wentworth refinery and the Company’s achievement of pre-

accident sales volumes, were false and misleading when made or omitted material facts to make such

statements not false or misleading because:

(a) although Imperial had re-opened its Port Wentworth refinery, it continued to

experience significant operational problems and was only running at 40% capacity, reducing the

volume of sugar produced by Imperial ( see, e.g. , ¶¶32-33);

(b) the Company was forced to participate in the LSR joint venture to keep

Imperial sugar in stores even though it further compounded the capacity issues the Company was

already experiencing (see, e.g. , ¶¶34-37);

(c) the Port Wentworth refinery was unable to absorb the capacity loss from the

closing of the Gramercy refinery, causing the Company to lose important customers ( see, e.g. , ¶¶38-

41);

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(d) Defendants failed to reveal that they were continuing to “cover” from other

suppliers by purchasing refined sugar from them and paying them to pack significant quantities of

Imperial sugar ( i.e. , as much as 50% of its retail business) (see, e.g. , ¶¶42-53);

(e) charges taken by Defendants in 2010 did not resolve all customer issues ( see,

e.g. , ¶¶39-53);

(f) these practices significantly increased Imperial’s operating costs and eroded

the Company’s margins, while supporting its competitors’ business ( see, e.g. , ¶¶55-56);

(g) the Company’s business model was failing in light of increasing competitive

pressures and structural changes that benefited competitors at the expense of the Company ( see, e.g. ,

¶¶61-63);

(h) as a result, Defendants knew they were unable to raise prices to meet rising

raw sugar costs because of the Company’s already-strained relationships with its customers and

increasing competition from both domestic and Mexican producers ( see, e.g. , ¶¶61-64); and

(i) the Company’s 2010 Form 10-K was materially false and misleading because

it failed to disclose (in violation of Item 303 of regulation S-K) these materially adverse conditions

to the market.

74. As a result of the foregoing, any risk warnings that may have been provided by

Defendants in their Class Period statements, including statements that it was possible that the

Company may not be able to protect its sales position, service customer requirements, raise prices to

offset raw sugar costs, or compete with sugar producers that were vertically integrated and better

able to secure a supply of raw materials at reasonable costs, were not meaningful, were themselves

false and misleading, and did not shield Defendants from liability on the basis that such statements

were “forward-looking” in that when such statements were made, as detailed above in the

Substantive Allegations section, Defendants had actual knowledge of the falsity of the statements

- 33 -


being made, recklessly disregarded contrary information demonstrating the falsity of such

statements, and/or omitted material facts that would have made such statements not false.

75. On February 7, 2011, the Company issued a press release announcing its first quarter

fiscal 2011 financial results, which continued to tout improvements at the Port Wentworth refinery

and increased sales volumes. This press release stated in pertinent part:

Net sales for the quarter ended December 31, 2010 increased to $227.4 million compared to $173.8 million for the same period in the prior year. The increased revenues were due to 11% higher sales volumes and 18% higher refined prices.

* * *

“A number of important milestones were reached during the past few months as we continue to implement our strategic vision and position the company for the future,” stated John Sheptor, president and CEO.

* * *

“The process modifications implemented in the Port Wentworth refinery at the beginning of October produced immediate improvements in refinery results ,” added Sheptor. “The refined silo repairs were completed by the contractor in mid-January and we anticipate placing the silos back in service in early February. We are anxious to continue the ramp-up in production in Port Wentworth once the silos are on line.”

76. Also, on this date, the Company filed its Form 10-Q for first quarter fiscal 2011, the

period ending December 31, 2010. The Form 10-Q stated in pertinent part:

*

Net sales increased 31% for the three months ended December 31, 2010, compared to the same period in the prior year. Domestic sugar volumes increased 9.0% for the quarter primarily due to increased distribution at key retailers in the consumer channel. Prior year’s first quarter consumer sales volumes were constrained as individual packaging lines were initiated at the rebuilt Port Wentworth facility during the period. Domestic sales prices increased 18.8% for the quarter.

*

Manufacturing costs per cwt in Port Wentworth improved compared to the same period last year as the increased average daily melt helped improve fixed cost absorption. Repairs and maintenance cost increases along with higher depreciation partially offset the absorption benefit. Port Wentworth total refined sugar production in the quarter increased over the prior year although daily production rates are still below normal levels achieved in fiscal 2006 and 2007.

- 34 -


*

77. The Form 10-Q contained SOX certifications signed by Defendants Sheptor and

Mechler that were substantially similar to those in ¶68 above.

78. Also, on February 7, 2011, the Company held a conference call with various

securities analysts. Defendants Sheptor and Mechler participated in the call. During the call, the

Individual Defendants touted improvements in manufacturing costs at Port Wentworth and strength

in sales volumes. In his opening remarks, Defendant Sheptor stated in pertinent part:

Operations during the first six weeks of the quarter were remarkably improved versus previous quarters due to the Port Wentworth refinery process change completed the first week of the fiscal year. Daily melt rates steadily improved with the number of days surpassing the historical capacity.

*

As we begin the new quarter, sales volumes have strengthened across all channels.

79. In addition, Defendant Mechler stated in pertinent part:

The 31% revenue increase was driven by higher refined prices and increases in consumer sales volumes as we regained distribution with key retailers. Domestic industrial volumes, while lower than the preceding fiscal quarter, are in line with pre-accident first-quarter levels. Prices for both refined and raw cane sugar are at historically high levels and have demonstrated extraordinary volatility over the last 18 months.

On a margin basis, thus far, we have largely been successful at maintaining acceptable spreads between raw and refined sugar prices. We did see improvements in Port Wentworth’s unit manufacturing costs as throughput rates increased during the quarter.

80. In the question and answer session that followed, analysts questioned Defendants on

Port Wentworth’s impact on gross margins and Defendant Mechler responded as follows:


Okay. And then can you guys -- I just want to make -- sure this is related to an earlier question and the disclosure in the Q that 3.9% hit the gross margins from Gramercy. It would seem the implications of that is that you would see a significant improvement sequentially from first quarter to second quarter in your gross margins just as a function of not having Gramercy as part of the Company on a consolidated basis. Is that fair?

- 35 -


Hal Mechler - Imperial Sugar Company - SVP & CFO

I think it is fair to say that if you had not had Gramercy in the first quarter, the gross margin number would have been higher by that roughly 3.9%. So I think that is a reasonable conclusion, Brad, that Port Wentworth, the way that it has been running, would, without Gramercy’s higher cost, would improve gross margin.

81. In addition, Defendants answered questions regarding the Company’s increase in

domestic sugar volume:

Mitch Pinheiro - Janney Montgomery Scott – Analyst

Okay, just last question. You’d said that your domestic sugar volume was up 9%. You referenced new distribution. Is that -- could you talk about that new distribution? I kind of thought also there might be easy comps in there, as well.


I didn’t understand the last point, Mitch. You might need to expound, but new distribution certainly compared to -- the 9% is compared to a year ago. A year ago, we were just bringing up packaging operations in Port Wentworth. The first packaging lines came onstream in September of 2009, the last one in December of 2009. We had been out of distribution with a number of key retailers during the shutdown of that plant, particularly regional retailers and regional distribution networks for national retailers.

We have regained those -- substantially all of those retail distribution and that’s the increase in consumer volumes that we saw during the current quarter. On a comp basis current quarter, we are 45% ahead of a year ago. If you take consecutive quarter, which is certainly another meaningful comparison, we are 1.5%, 2% ahead of the consecutive quarter on the consumer channel of business.

Mitch Pinheiro - Janney Montgomery Scott - Analyst

Okay. What I meant by easy comps was you explained it as I thought. So you are regaining distribution that you had lost?


That’s correct.

Mitch Pinheiro - Janney Montgomery Scott – Analyst

And then was there any -- is there any cost to reestablishing that distribution, slotting or any other upfront costs that may have been expensed in this quarter?


- 36 -


No, there is not -- we don’t -- we have not had to pay slotting to regain that distribution. There is some promotional costs. Our promotional expenses and advertising expenses are a little up this quarter compared to year ago, but that is more to reinforce the brand, particularly regionally in the Southeast.

82. Analysts reacted positively to Defendants’ statements regarding the Company’s first

quarter fiscal 2011 results and Defendants’ positive assessment of the improvements to the Port

Wentworth refinery and the impact that this would have on refinery results and gross margins. For

example, following these Company announcements, analysts stated as follows:

(a) On February 7, 2011, PAA Research LLC issued a report recommending the

Company’s stock as a “Long” investment and expressing a “more enthusiastic” view of the stock’s

upside potential. The positive tone was based largely on perceived progress at the Port Wentworth

facility: “IPSU is closer to achieving normalized production levels at Port Wentworth than at any

point in the past 3-years . . . . even with the silo issues at Port Wentworth the company achieved its

highest average daily production rate in 1Q11 since the refinery accident. The silos are slotted to

come back online in the next two weeks after which we anticipate average daily melt rates could

return to 5.5 million lbs. in fairly short order. This would enable IPSU to operate at 22-23 days a

month schedule to fulfill customer needs, which would significantly enhance the company’s gross

margins.” In a subsequent report dated March 25, 2011, PAA Research LLC reiterated its positive

view of the Company, emphasizing the “substantial upside” of Company shares.

(b) In a report dated February 7, 2011, BWS Financial Inc. maintained its “Hold”

rating on Company shares, and projected financial gains based on continued improvements at the

Port Wentworth refinery: “Port Wentworth should see gradual improvement in refining capabilities

over the next few months. The amount of sugar IPSU is able to sell in the coming quarters would be

the determinant of the Company posting profit in a given quarter. We have made some changes to

our earnings model to reflect the operating level and refining efficiencies expected from Port

- 37 -


Wentworth over the course of the fiscal year. The small margin improvements we have included in

our earnings model would be enough to allow IPSU to report a quarterly profit.”

(c) In a report dated February 9, 2011, Janney Capital Markets maintained its

“Neutral” rating on Company shares, noting: “Production rates at Port Wentworth continued to

improve in the first quarter, before construction deficiencies were detected in the new bulk silos

forcing Imperial to bring them off line for repairs (back in service in Feb 2011). On the bright side,

manufacturing costs are improving as the capacity ramps and allows for fixed cost absorption.”


detailed herein, the statements contained in the first fiscal quarter 2011 Form 10-Q, the February 7,

2011 earnings conference call, and the February 7, 2011 press release, which touted, among other

things, the improved performance of the Port Wentworth refinery as a result of modifications and

repairs to the refinery, were false and misleading when made or omitted material facts to make such


(a) Imperial continued to experience significant operational problems and was

only running at 40% capacity, reducing the volume of sugar produced by Imperial ( see, e.g. , ¶¶32-

33);





closing of the Gramercy refinery, causing the Company to lose important customers ( see, e.g. , ¶¶38-

41);

- 38 -


(d) the Company was forced to rely on competitors to meet customer demand and

was purchasing refined sugar from them and paying them to pack significant quantities of Imperial

sugar (i.e. , as much as 50% of its retail business) (see, e.g. , ¶¶42-53);

(e) these practices significantly increased Imperial’s operating costs and eroded


(f) the Company’s business model was failing in light of increasing competitive


¶¶61-63);

(g) as a result, Defendants knew they were unable to raise prices to meet rising



(h) the Company’s first fiscal quarter 2011 Form 10-Q was materially false and

misleading because it failed to disclose (in violation of Item 303 of regulation S-K) these materially

adverse conditions to the market.











- 39 -


85. On May 10, 2011, Imperial issued a press release reporting its second fiscal quarter

2011 financial results, and touting progress at Port Wentworth and significant margin expansion,

stating in pertinent part:

Imperial Sugar Company (NASDAQ:IPSU) today reported a net income of $4.2 million, or $0.34 per diluted share, for the second fiscal quarter ended March 31, 2011, compared to a net loss of $33.3 million, or $2.82 per diluted share, for the second fiscal quarter of 2010.

* * *

“We are pleased with the progress made in a number of areas during the second quarter,” commented John Sheptor, president and CEO of Imperial Sugar. “We achieved sales price increases during the second quarter and successfully managed raw costs in a volatile price environment, so as to expand margins significantly.”

Sheptor continued, “After a challenging re-start early in the quarter, LSR’s operation of the existing Gramercy refinery is providing a steady flow of bulk sugar for our grocery packaging operation. The reconnection of the silos in Port Wentworth, which was deferred until the first week of April, went smoothly, and the refinery has begun to ramp up production rates again .”

* * *

Lower manufacturing costs and improved yields at the Port Wentworth refinery contributed to the improved operating results.

For the three months ended March 31, 2011, gross margin as a percent of sales increased to a positive 5.4% compared to a negative 19.6% in the prior year quarter.

* * *

Net sales for the current six-month period were $419.6 million compared to $382.6 million during the same period last year primarily due to higher domestic sugar prices. A reduction in sales volumes from the contribution of the Gramercy refinery was substantially offset by the ramp up in volumes at the Port Wentworth refinery.

Gross margin as a percent of sales for the six months ended March 31, 2011 improved to 1.6% compared to a negative 7.4% for the same period last year primarily due to higher refined sugar prices.

86. Also, on May 10, 2011, the Company issued its Form 10-Q for the second fiscal

quarter of 2011, the period ended March 31, 2011. The Form 10-Q stated in pertinent part:

- 40 -


For the three months ended March 31, 2011, gross margin as a percentage of sales increased to 5.4% compared to a negative 19.6% in the prior year quarter. The increase in gross margin percentage is primarily due to higher refined sugar sales prices, as well as the effect of recognizing losses on raw sugar derivatives in the prior year quarter which were intended to hedge raw sugar purchases in later periods. Gross margin as a percent of sales for the six months ended March 31, 2011 improved to 1.6% from a negative 7.4% for the same period last year primarily due to higher refined sugar prices partially offset by higher raw sugar costs.

* * *

Manufacturing costs per cwt in Port Wentworth improved compared to the same quarter and six month periods last year as the increased average daily melt helped improve fixed cost absorption. Sugar yields also improved and gross margin increased by 3.5% for the quarter ended March 31, 2011 and 1.1% for the six months ended March 31, 2011 largely as a result of these lower costs and improved yields.

87. The second fiscal quarter 2011 Form 10-Q also contained SOX certifications signed

by Defendants Sheptor and Mechler that were substantially similar to that in ¶68 above.

88. On the next day, May 11, 2011, the Company hosted a conference call with various

securities analysts. Defendants Sheptor and Mechler participated in the call. During the call, the

Individual Defendants touted the Company’s sales and operations improvements, the lack of

obstacles to elevate the refinery to capacity levels, and the substantial improvement of refinery yields

which approached Imperial’s historical best practice. In his opening remarks, Defendant Sheptor

stated as follows:

. . . . We have many positive accomplishments and emerging industry trends to communicate to you today. I will speak to the industry and business subjects and Hal will review financial highlights.

It is with great pleasure that we announced a $0.34 per share earnings this quarter, the first profit for ongoing operations in three years. It was 39 months ago that we experienced the tragedy in Port Wentworth, Georgia, and many people have worked diligently to help us complete this recovery. We have accomplished an important milestone with our first profitable quarter, excluding insurance recoveries, and we are optimistic about our future.

Sales and operations improvements lead [sic] to significantly better margins. Margins increased due to higher domestic prices, which outpaced raw sugar cost increases. Demand for Imperial’s products is increasing, and with the tightening of supply in the US, we are experiencing expanding margins.

- 41 -


Port Wentworth melt rate improved to 4.2 million pounds per day in the quarter. We reintegrated the silos in early April, and took the opportunity prior to Easter to refine lower quality raw sugar in inventory.

During the first ten days of May, we have melted approximately 5.1 million pounds per day, or 86% of capacity. This matches the best period of operations that we have achieved since restarting the plant in 2009. We will continue working to raise our rate, but will moderate days of operation to meet sales demand. Refinery yields have substantially improved and are approaching our historical best practice. This is a result of process improvements completed in the first quarter.

*

Production improvements at Port Wentworth and Gramercy have increased service levels to their highest levels since 2008, regularly exceeding 96%.

89. In the question and answer session that followed, Defendant Sheptor answered

questions regarding the performance of the Port Wentworth refinery:

Mitch Pinheiro - Janney Capital Markets - Analyst

Okay. As far as -- back to -- there was a question on Port Wentworth and your production days and the melts. I think, John, you mentioned the melt for the first ten days of -- it was 5.1 million a day. So does that flip it off with the silo reconnection -- post that connection?

John Sheptor - Imperial Sugar Co - President, CEO

In fact the -- this is John -- the silo reconnection gives us two benefits. First, it gives us the ability to manage moisture in the sugar much more efficiently. That allows us to run the refinery harder. And secondly, it gives us a buffer between our shipping and packaging facilities in the refinery, which also allows us to run the refinery faster and shut-down days, and to operate shipping and packaging off the inventory in the silos. The three silos represent approximately three days of production, which allows us to move to a 12-2 or a 5-2 production schedule, depending upon the demand that we have to meet customer’s requirements. So our expectation is, with the silos online, that we don’t have any process obstacles to elevate the refinery to capacity levels. And we will continue with that as -- to action for the operating team.

90. Defendant Mechler also responded to statements regarding the benefit the Company

expected from its spot business in the second half of 2011 based on increased production:


Okay. And then if I could squeeze one last question in. Is it fair to say that a year ago you guys had very little sugar available to sell on the spot basis, particularly in the second half of fiscal 2010? So perhaps this year comparing the potential profitability of that business, there should be some benefit to you?

- 42 -


Hal Mechler - Imperial Sugar Co - CFO

That’s very much a true statement, Brad, in fact the results show that we oversold the second half of 2010 -- overcommitted, and therefore, suffered some of the cover requirements for our customers, as we reported previously. So that is very much a true statement.

91. The market reacted positively to Defendants’ statements regarding the Company’s

second quarter fiscal 2011 results and Defendants’ positive assessment of the improvements to the

Port Wentworth refinery and the impact that this would have on refinery results and gross margins.

In particular, analysts responded to the apparent progress at the Company’s Port Wentworth refinery.

For example:

(a) On May 11, 2011, PAA Research LLC issued a report recommending the

Company’s stock as a “Long” investment and raising revenue and EPS estimates based on

“expectations of improved price realization and higher margin levels as production rates at the

company’s refineries and packaging facilities improve.” The report added: “Perhaps there’s a real

reason as to why IPSU’s normally dour management team sounded as positive as we have ever heard

them on today’s earnings conference call – operating results are improving far more rapidly than we

expected even just 48 hours ago.” In a subsequent report dated August 1, 2011, PAA Research LLC

reflected that “IPSU have gained an astounding 71% since the company reported a big positive

earnings surprise for 2Q11, compared to a -4% decline in the S&P 500.” The report cited three

factors driving the rapid increase in the stock, the first of which was “[i]nvestor recognition that the

vast majority of the company’s production issues at its Port Wentworth refinery are now behind it.”

(b) On May 11, 2011, Janney Capital Markets issued a report noting the

Company’s “stronger than expected second quarter performance is encouraging,” including

improved manufacturing costs and higher production at the Port Wentworth refinery. Less than a

month later, in a report dated June 2, 2011, Janney Capital Markets upgraded the Company’s stock

- 43 -


from “Neutral” to “Buy” based on “our more optimistic view of near-term earnings performance and

increased confidence in our longer-term view of the company’s earnings power.”

(c) On May 11, 2011, Rafferty Capital Markets, LLC issued a report raising

Company revenue and earnings estimates and upgrading Company shares from “Hold” to “Buy.”

The report called the Company an “interesting small cap turnaround story” and noted: “Although we

have seen a significant run-up in the shares recently, we believe that with the silos at Port Wentworth

now online, and production issues being ironed out in Gramercy, there is a greater level of

confidence in the company’s ability to return to sustained profitability.”

(d) On May 16, 2011, BWS Financial Inc. issued a report upgrading the

Company’s stock from “Hold” to “Buy.” The report noted that the Company had returned to

profitable operations in the second quarter and that “gross margin expansion” was likely to continue

through the end of the fiscal year, and possibly into fiscal year 2012. The report stated that the

Company had “finished their Port Wentworth, Georgia rebuilding,” resulting in a “fully operational

refinery” that would allow the Company to take advantage of rising sugar prices.

92. As a result of Defendants’ announcements, and resulting positive analyst

commentary, the price of Imperial stock rose $2.31 to close at an artificially inflated price of $15.83

on May 16, 2011. The stock continued to rise an additional $7.36 to close at an artificially inflated

price of $23.19 on August 4, 2011, the day prior to Defendants’ announcement of the Company’s

third quarter fiscal 2011 financial results. In total, the stock rose an astonishing 71.5% in the wake

of Defendants’ positive statements regarding second quarter fiscal 2011 results.


detailed herein, the statements contained in the second fiscal quarter 2011 Form 10-Q, the May 10,

2011 earnings press release, and the May 11, 2011 analyst call, which touted, among other things,

the Company’s sales and operations improvements, the lack of obstacles to elevate the refinery to

- 44 -


capacity levels, and the substantial improvement of refinery yields which approached Imperial’s

historical best practice, were false and misleading when made or omitted material facts to make such


(a) Imperial continued to experience significant operational problems and was

only running at 40% capacity, reducing the volume of sugar produced by Imperial ( see, e.g. , ¶¶32-

33);





Gramercy refinery ( see, e.g. , ¶37);

(d) the Company was forced to rely on competitors to meet customer demand and

was purchasing refined sugar from them and paying them to pack significant quantities of Imperial

sugar (i.e. , as much as 50% of its retail business) (see, e.g. , ¶¶42-53);

(e) these practices significantly increased Imperial’s operating costs and eroded


(f) the Company’s business model was failing in light of increasing competitive


¶¶61-63);

(g) as a result, Defendants knew they were unable to raise prices to meet rising



- 45 -


(h) the Company’s 2011 second fiscal quarter Form 10-Q was materially false and

misleading because it failed to disclose (in violation of Item 303 of regulation S-K) these materially

adverse conditions to the market.











VI. THE TRUTH IS REVEALED

95. On August 5, 2011, the truth was revealed when Imperial issued its third fiscal

quarter 2011 financial results. First, in a press release issued before the market opened, the

Company stated in pertinent part:

Imperial Sugar Company Announces Third Fiscal Quarter 2011 Results

Imperial Sugar Company (NASDAQ:IPSU) today reported a net loss of $16.1 million, or $1.35 per diluted share, for the third fiscal quarter ended June 30, 2011, compared to a net loss of $5.7 million, or $0.48 per diluted share, for the third fiscal quarter of 2010. Higher raw sugar cost which along with lower volumes reduced gross margin was the primary reason for the loss in the current quarter.

“Our inability to increase prices in the face of higher raw sugar costs because of competitive pressures from domestic and Mexican sources was the principal driver of the quarter’s disappointing results,” commented John Sheptor, President and CEO of Imperial Sugar. “Raw sugar purchased during the quarter was priced largely against the March and May futures contracts, which peaked near $40 per hundredweight prior to the USDA import quota announcement in early April. The subsequent

- 46 -


decline in the raw sugar futures market which occurred after the quota announcement was only temporary and the raw market has rallied back to near the same level. Our raw sugar costs in the fourth fiscal quarter should see little relief, while sales prices thus far in the fourth quarter have only improved modestly.”

Gross margin as a percent of sales was a negative 6.1% for the third fiscal quarter, compared to 0.7% for the third quarter of fiscal 2010. The prior year’s third quarter margins benefited from the recognition of raw sugar derivative gains intended to hedge subsequent periods; gross margin without such gain was a negative 3.4% of sales for the prior year’s third quarter.

*

Net sales for the third fiscal quarter were $197 million, compared to $261 million for the same period last year. The reduction in quarterly sales was principally due to the loss of direct sales volumes from the Gramercy refinery, which has been operated since January 2011 by Louisiana Sugar Refining LLC (“LSR”), a one-third owned joint venture, offset in part by higher sales prices.

Manufacturing costs for the quarter did not improve from the same period in the prior year. The Port Wentworth refinery’s progress toward full production rates was hampered by raw sugar quality and mechanical reliability, including significant interruptions in the steam boilers providing power to the plant. The refinery operated at an average daily melt rate of 4.5 million pounds, approximately 75% of average rates prior to the 2008 industrial accident.

Commented Sheptor, “The Company is reviewing potential operating and capital improvements, particularly in the utilities, raw sugar melt and water management areas of the refinery, to begin addressing mechanical reliability in these operations. These areas, which were not part of the reconstruction efforts following the accident, have proved to be impediments to sustaining efficient operations at the production rates achieved prior to the accident.”

*

For the nine-month period ended June 30, 2011 the Company reported a net loss of $20.8 million, or $1.75 per diluted share, compared to net income of $139.2 million, or $11.53 per diluted share, for the same period last year.

*

96. On the same day, on August 5, 2011, the Company held an earnings conference call

with analysts, in which Defendants further explained the Company’s third quarter 2011 financial

results. In his opening remarks, Defendant Sheptor stated in pertinent part:

Our third quarter results were very disappointing. Margins eroded due to rising raw sugar prices and competitive pressure that impacted our ability to increase prices to cover higher raw sugar costs. The world industry was forecast by industry

- 47 -


analysts to move from deficit to surplus in this calendar year, and world prices had fallen by early May in anticipation of that transition.

* * *

Domestic competition between Mexican imports and US producers has intensified throughout all channels.

Suppliers of refined sugar for export became available as Mexican millers achieved a good harvest and high fructose corn syrup imports displaced sugar demand. Mexican millers were able to offer these supplies at attractive prices to compete for sales share in the US. This condition has continued into the current quarter and sales prices have shown little improvement from our reported results for the third quarter.

Port Wentworth performance has not improved since reintegrating the silos in April. Reliability of equipment in the older sections of the refinery that were not replaced following the 2008 industrial accident has continued to challenge the operations team. Significant repairs were required to boilers, kilns and cooling towers during the quarter resulting in more frequent and longer outages leading to lower production levels.

Although plant performance did not materially limit sales volume or service levels in this quarter, production cost was negatively impacted by increased refining days and higher maintenance. Potential improvements are being reviewed to begin addressing mechanical reliability in these operations.

In addition, preventative maintenance actions have been and are being expanded, although unplanned downtime continues to be excessive. Maintenance and engineering efforts are focused on the most frequent and most significant failures to eliminate root causes and additional CapEx resources will likely be required.

*

97. In addition, Defendant Mechler stated in pertinent part:

For our third fiscal quarter ended June 30, 2011, we reported net loss of $16.1 million, or $1.35 per diluted share, on revenues of $197 million compared to last year’s third quarter loss of $5.7 million on sales of $261 million. Last year’s results included an $11 million pre-tax mark-to-market gain on raw sugar futures contracts.

This quarter’s results were impacted by significant margin compression, driven by a 34% increase in the costs of raw sugar purchased over the same period in 2010, while sales prices increased only 21%. On a consecutive quarter basis, raw sugar purchase price was up 12% against a sales price increase of less than 3%. Our inability to pass through higher raw sugar costs, particularly at the spot grocery and distributor channels, reduced gross margin as a percent of sales.

On a hedge accounting basis, excluding the impact of LIFO liquidations, gross margin was a negative 7.3% this quarter compared to a positive 7.9% in the second

- 48 -


quarter of this year. Competitive pressures both from domestic and Mexican suppliers severely limited price increases in the face of rising raw sugar costs.

Notably, Mexican sugar imports, which the USDA estimates will comprise 11% of US fiscal 2011 sugar supplies, which is almost double the 2010 level, showed no signs of slowing during the quarter. The Mexican government in June announced the allowance of 150,000 tons of imports of world sugar into Mexico to backfill for the inventory draw down from heavy shipments to the US.

* * *

Revenue in the quarter declined 25% as a result of the lower overall volumes driven principally by the contribution of Gramercy, the Gramercy refining assets to LSR in January, which more than offset the higher refined sugar prices. Consumer volumes did increase on both a comparable and consecutive quarter basis. We did not see improvements in Port Wentworth unit manufacturing costs, as production rate improvements were hampered by raw sugar quality and mechanical reliability issues.

* * *

Capital expenditures totaled $20 million for the first nine months, which included completing the required improvements in Gramercy under the LSR agreement. We expect to spend $25 million of capital expenditures for the full fiscal year 2011, principally on completing safety initiatives and normal replacement projects. We are examining a number of potential projects at the Port Wentworth refinery, which are likely to maintain capital expenditures above historical capital replacement capital levels for the next several years.

* * *

Finally, we allowed our option to acquire the remaining 50% of Wholesome Sweetener to expire at the end of May. In accordance with our joint venture agreement, Imperial and our joint venture partner, Edward Billington and Sons, are exploring strategic options for our Wholesome investment, including, but not limited to, the potential sale of Wholesome. No decision in that regard has been made and there can be no assurance that any transaction regarding Wholesome will result. We do not intend to comment further or disclose developments regarding strategic transactions unless and until a specific transaction is approved by the parties.

* * *

98. In the question and answer session that followed, analysts focused on the Company’s

dramatic negative turn in performance since the previous quarter. In response to analyst questions,

Defendants revealed that Imperial’s gross margin compression was due to their inability to raise

prices to meet significant costs but continued to mislead the market regarding their reliance on

- 49 -


competitors for co-packing and to purchase refined sugar, which raised their costs and significantly

contributed to gross margin compression:

Hamed Khorsand - BWS Financials – Analyst

Good morning, guys. Just a couple questions here. On the first one is how fast do you think you can raise prices at the retail and foodservice level in the coming months?


Hamed, I think as we indicated in the Q and in our remarks here, we have not been successful yet in raising prices materially thus far this quarter. The ability to raise prices is a function of the competitive market set, not surprising, and thus far that has not allowed for that to happen.

Hamed Khorsand - BWS Financials - Analyst

And then my main question is how the business turns since you guys reported last quarter and basically in May, and looks like the business just turned around from your commentary at that time to what transpired in the quarter in about basically a month and-a-half. I mean, is that how fast the business turned around for you guys?


Again, I think it comes back, as we summarized, to the margin compression, and the margin compression, at its root, traces to the inability to raise prices to match raw sugar costs. That was not -- while we expected to and intended to and attempted to, we were not able to accomplish that during the quarter.

* * *

Allen Root - Altima Partners – Analyst

Hi, thanks for taking my question. And I basically think it has to be asked on given the margin performance and the turn around in the operation, whose head is going to roll for this type of hedge performance and this type of gross margin performance and what is the plan? You’re basically a nonintegrated processor, so job number one is to operate the assets at high levels of operating rate and job two is to manage spread a little more appropriately. So what changes are you putting in place to the spread program and is anybody going to sort of take responsibility for this and step up and say we did a bad job and we’re making a change?


....In the past, through this period of high prices, we have been successful in pushing those higher prices or achieving price increases in those spot markets to maintain that spread.

- 50 -


This quarter, for all the competitive reasons that we described, we did not. We were not successful increasing prices to match the raw price increases. So I think it is inappropriate or perhaps incorrect to characterize the spread compression as a failure of the hedging program because, again, we’re dealing with a spot market on the refined side, and the closest to a spot market that exists on the raw sugar side.

Allen Root - Altima Partners - Analyst

Okay. All right. So there is basically nothing you could have done about it?


What we did and could do was attempt to increase prices in the spot markets to match the raw sugar increase.


So then I am just not getting --

Hal Mechler - Imperial Sugar Co – CFO

Allen, and the other thing to keep in mind, just a competitive dynamic here, is half of US production is from the beet sugar industry who doesn’t buy raw sugar. Mexico, which now constitutes 11% in round numbers, this year projected 11% of the domestic US supply, doesn’t buy raw sugar.

Allen Root - Altima Partners – Analyst

Right.


They don’t buy raw sugar in the same manner. They have a different program in Mexico that’s completely disconnected from the US raw sugar market. So a substantial portion of the US competition is not even influenced on the cost side by the raw sugar market. So that does moderate, if you will, the influence of the raw sugar market, on the refined sugar market.

* * *


....Even if your integrated cane producer -- I mean, do you think there is a competitive dynamic out there where people are basically intentionally -- because if you are roughly speaking the high cost producer, they’re essentially not making all the money they can on the refining assets or the transfer pricing from the integrated cane producers is sort of below market, let’s put it that way, if everybody is in the same scenario or if they all operated the business the same way and they transfer price based on futures curves, everybody’s refining operations would feel similar levels of pain, so is there a competitive dynamic where you think people are trying to

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take market share or it is a utilization -- so my point is how do those people operate the business and is this a competitive issue going forward where people will be subsidizing their refining operations by not using market-based transfer of the internally produced cane, if that’s here?

The question ultimately is how big of a disadvantage is being nonintegrated to you in this environment?


I understand your question. For me to ascribe motivation, first of all, all of our competitors are private, so we don’t have a view into their results like you have into ours, and to ascribe -- and to know what their internal policies relative to transfer pricing is, the answer is we don’t know. And to ascribe motivation would be inappropriate. That is the facts of today.


Okay. I will leave it at this. And then I know -- I mean, it is just -- I wasn’t personally ready to deal with the gross margin volatility that we’ve experienced.

* * *


And just so we understand historically, again, I have only followed the Company for seven years, obviously, things change when the tariff went away in Mexico, but even in I think 2008 you had 1.4 million tons come from Mexico. Was pricing as big an issue -- competitive pricing from Mexico as big an issue that year? Obviously, there were some specific issues with your company, but is this something that is you view is structural or is it an anomaly I guess is what it comes down to?


This is John. I’ll just make one comment about Mexico and Hal has additional response to your question. In the last, call it 18 months, there has been construction in Mexico to be able to package their production in US equivalent sizes. If you go back to the period that you are referring to, they didn’t have that capability and most of that product came into the US either as bulk or it came in as 50-kilo bags, which weren’t very friendly for customers to use in the US.

That’s changed substantially in the last 18 months. Product directly now comes in 15 and 25-pound bags, it comes in retail private label bags, so the effective competition is much more severe out of Mexico than it was even three years ago.


The other comment, and I think, Brad, you somewhat alluded to it, in 2008 there was 800,000 tons imported from Mexico, the Savannah refinery was not running. And so, essentially, Mexico, with all of the logistical challenges that John referred to, was

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filling the gap created by the Port Wentworth refinery because that’s about the same tonnage in very round numbers.

What has changed structurally since then is the movement of high fructose corn syrup into Mexico, displacing over by most estimates over a million tons or over 20% of the Mexican production or consumption, I guess I should say, in Mexico, and that has freed up additional volumes to come to the US either as raw sugar or refined sugar and this year, because of price dynamics, the majority is coming as refined sugar apparently.


Okay. I will turn it over.


I would say that is a structural difference to your question.

* * *

Mitch Pinheiro - Janney Capital Markets – Analyst

Okay. When you look at Port Wentworth and some of the efficiency issues, when would you anticipate Port Wentworth to operate at sort of normalized levels of efficiency given the issues that you stated?


This is John. I think there is a couple of comments to make to your question. The first is we run on a volume basis to demand, and so the number of days that we operate will vary from month to month based on orders that we need to fulfill.

If you look at the third quarter, on a volume basis, we met all of our orders and so we are not constrained on a sales side by production. Having said that, the efficiency is certainly -- efficiency of how we produce is a key objective of the operations team, and they have not met the expectations that we had for the facility. They have had continued reliability problems in the older part of the refinery that was not rebuilt after the industrial accident, and reliability is of significance in this quarter in the utilities area.

We have called out specifically that we’ve had substantial downtime associated with the boilers, repairs that we needed to make. We have our engineering team and our maintenance team focused on the most persistent problems. They are increasing our preventative and predictive maintenance actions to date. We have not seen a substantial improvement in unplanned downtime, and we continue to address the root causes that they identify in their assessment of equipment run life.

It is becoming increasingly more clear that maintenance action alone isn’t going to be sufficient to improve the operating reliability of the facility, and we are assessing what type of capital demands we will have to address reliability. It isn’t

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possible to predict for you when we will run at a different melt rate, and we certainly are giving all efforts possible from the operating team to make that sooner than later.

Hal, I don’t know if you have any additional comments in that regard.


Only to sort of emphasize, reemphasize, restate a bit John’s comment that in this quarter, at least, refinery rates did not limit sales volumes. We’ve talked about pressures in the marketplace, competitive pressures, and that certainly mitigated demand for our refinery. We ran 78 days, I think, in the quarter, and four or five of those were the downtime in early April that we talked about previously for the silos. But we had the capacity, the capability I should say, to run a few additional days had the demand required it.

The impact is, in the current quarter and has been over prior quarters, on the cost side. I think last quarter, I gave you a range of estimates of the impact of costs. I would say it is not dissimilar probably to the lower end of that range, something probably south, if I put it on a gross margin percentage basis, south of 2%, probably 1.5%. Purely in terms of if you ran at a high rate, you would run fewer days, burn less energy, pay less overtime.

There is also a repair and maintenance cost component of that, but purely looking at that absorption of energy and people, the higher rates cost us something in that 1.5%, 2% margin points range. So it is a contributor. It was a contributor this quarter. It was not the substantial issue in the current quarter, if that helps.

Mitch Pinheiro - Janney Capital Markets – Analyst

That helps. And then so I guess we should assume that sort of the current maintenance and those kind of issues will continue for the next quarter or two until you have a sort of a longer term capital fix in place?


We certainly have the engineering focus and effort to develop those solutions, whether they’re maintenance related or whether they’re capital related . We do expect that there will be capital needs and we have tried to signal that, say that in this report. That will be above and beyond the normal capital maintenance levels. And how quickly we can execute those, Mitch, it’s hard to say. Until you know the solution, it’s hard to say how quickly those can be executed or at what cost.

* * *

Ian Horowitz - Rafferty Capital Markets - Analyst

Okay. And kind of the inverse of Mitch’s question regarding Wholesome, is there any consideration or discussion in handing this asset over to putting that asset up for sale kind of going down the alternative path and getting out of this refining business?

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I would say there is not active consideration of that alternative.

Ian Horowitz - Rafferty Capital Markets Analyst

I mean, some of this exposure or some of this difficulty we have seen in this quarter has been due to the lack of integration and the reliance on TRQ sugar. I mean, could one argue that assets, domestic refining assets are in better hands or in more stable hands with a more integrated platform, not to say that you guys should not be continuing to pursue these new opportunities that you guys have uncovered over the last couple years that really have proven out to be much higher margin, much higher growth opportunity?


Ian, I hear your thesis and understand it. Again, I will repeat that at this time there is not an active consideration for reversing that thought process.

* * *

Steven Pedian - SAP Capital Management - Analyst

And then just to touch on the Wholesome, I know you’ve somewhat exhausted the conversation as much as you could, but I want to go back to this idea of selling an asset that is arguably your best performing asset, highest growth business, and, again what the rationale behind that given the difficulties on the refining side?


Steve, I really can’t comment much more than I already have on where that process is and analysis is, that decision-making process is at the current stage. It is something under consideration with no decisions made, and a lot of strategic alternatives and view points are being explored, but nothing concrete at this stage.

* * *

99. The same day, Defendants filed the Company’s quarterly report on Form 10-Q for the

third fiscal quarter ended June 30, 2011 with the SEC. This 10-Q elaborated on the financial

troubles that the Company was experiencing. In particular, the Form 10-Q contained the following

disclosures:

Results for the third fiscal quarter ended June 30, 2011 were significantly impacted by rising raw sugar costs in a period of more modest sales price increases, negatively impacting margins. . . . Competitive pressures from Mexican and domestic sugar sources limited the ability to pass on higher raw sugar costs in the form of sales price increases, particularly in the spot grocery and distributor channels.

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In June 2011, the USDA reported a 6% increase in sugar beet acreage planted for this fall’s harvest, which together with continued high levels of refined sugar imports from Mexico, have sustained competitive sales pressure, limiting our ability to raise sales prices thus far in the fourth fiscal quarter.

For the three months ended June 30, 2011, we reported a net loss of $16.1 million or $1.35 per diluted share, compared to a net loss of $5.7 million or $0.48 per diluted share during the third fiscal quarter of the prior year. For the nine months ended June 30, 2011, we reported a net loss of $20.8 million or $1.75 per diluted share, compared to net income of $139.2 million or $11.53 per diluted share for the same period last year. The recognition of insurance and derivative gains and losses had a significant impact on our reported earnings for the comparative periods.

* * *

For the three months ended June 30, 2011, gross margin as a percentage of sales decreased to a negative 6.1% compared to a positive 0.7% gross margin in the prior year quarter. On a hedge accounting basis excluding the effects of LIFO inventory liquidations, gross margin for the current quarter was a negative 7.3%, compared to a positive 7.9% for the immediately preceding second fiscal quarter and a negative 6.3% in the third quarter of fiscal 2010. The decrease in gross margin percentage is primarily due to increases in raw sugar costs which exceeded sales price increases thereby compressing margins. The domestic sales price increases of 2.9% on a consecutive quarter basis and 21.2% versus the same quarter of the prior year compare to increases in raw sugar purchases (on a raw market basis) of 12.4% and 33.5% respectively. Our ability to increase prices during the third quarter was limited by competition from both domestic and Mexican sources of supply. Mexican imports of refined sugar have increased significantly this year, as high fructose corn syrup imported from the U.S. has displaced refined sugar consumption in Mexico, resulting in a surplus of refined sugar in Mexico. Additionally, in June the Mexican government announced the allowance for 150,000 tons of imported sugar into Mexico from the world market, to compensate for the over shipment of refined sugar to the U.S.

* * *

Final inspections of the newly constructed bulk sugar silos at the Port Wentworth refinery revealed construction deficiencies by the contractor which required taking the silos offline for repairs at the end of November 2010. Although the silo repairs were completed in mid-January, the silos were not placed back in service until the first week of April 2011 in an effort to minimize the impact on servicing customers’ needs. The refinery ran at reduced production rates during this period from December 2010 through March 2011. The Port Wentworth refinery’s progress toward full production rates during the third fiscal quarter was hampered by mechanical reliability, including significant interruptions in the steam boilers providing power to the plant.

* * *

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The Company allowed its option to acquire the remaining 50% equity interest in Wholesome Sweeteners to expire on May 31, 2011. The Company and its partner are exploring strategic alternatives for the joint venture including the potential sale of the business. Under the Wholesome joint venture agreement, either partner can cause the joint venture company to be sold to a third party if certain conditions specified in the agreement are met. There can be no assurance that any transaction involving Wholesome will occur.

100. In addition, the Company’s Form 10-Q for the third fiscal quarter ended June 30,

2011 revealed alarming cash and debt problems stemming from the Company’s ongoing

operational problems. The Company’s cash and cash equivalents plummeted from $2.9 million to

just $0.3 million between the end of the second and third fiscal quarters. As cash evaporated, the

Company aggressively drew down on its revolving loan facility with Bank of America, N.A. (the

“Credit Agreement”), increasing total borrowings from $23 million to $78.8 million (over 240%)

during the same period. As a result, the Company warned that its borrowing availability could fall to

such a low level that the Company would be forced to meet certain financial covenants in order to

avoid an event of default under the Credit Agreement. One such covenant required a minimum

EBITDA of $20 million for the trailing four quarter period, a threshold the Company stood well

below (at negative $9.8 million) for the four quarter period ending on June 30, 2011.

The Company’s Form 10-Q described this increasingly dire situation as follows:

The Credit Agreement has no financial covenants unless availability (defined as the borrowing base, less actual borrowings and letters of credit) is less than $20 million at any time or less than $25 million for a period of five consecutive business days. Should such minimum availability not be maintained, a minimum of $20 million of EBITDA (defined in the Credit Agreement as earnings before interest, taxes, depreciation and amortization, on a hedge accounting basis) for the trailing four quarter period would be required until availability has been greater than $30 million for three consecutive months. Had this financial covenant applied as of June 30, 2011, EBITDA for the trailing four quarter period would have been a negative $9.8 million. As a result of the Company’s future cash needs, including for capital expenditures, pension contributions and margin requirements of the commodity futures program, as well as the need to fund possible future operating losses in the event current margin pressures continue, the Company’s borrowing availability in the fourth quarter and beyond may be reduced to levels that would trigger the applicability of the financial covenants and other restrictions under the Credit Agreement. In such an event, it is possible that the Company will not be in

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compliance with such covenants and will need to seek a waiver from its lenders in order to avoid an event of default under the Credit Agreement.

101. The market reacted negatively upon learning that the Company was continuing to

experience operational issues at its Port Wentworth refinery, the Company’s costs had risen, and that

this had crushed the Company’s gross margins. While the Company blamed the prices of raw sugar

and competition for its gross margin decline, these factors had been an issue for the Company for

several quarters and were not the primary cause of the Company’s gross margin compression. This

is evidenced by the commentary of stunned analysts following the Company’s announcement. For

example:

(a) On August 5, 2011, Janney Capital Markets published a report announcing a

downgrade of the Company’s stock from “Buy” to “Neutral” and lowering Company earnings

estimates. Noting Company earnings “far short of expectations,” the report expressed various

concerns related to the Port Wentworth facility, including “lower volume on a slower-than-forecast

ramp-up,” production inefficiencies, the need for additional capital to fix mechanical problems and

expectations of “no near-term improvement.”

(b) On August 8, 2011, BWS Financial Inc. issued a report stating its “disbelief”

as to the rapid change in the Company’s business dynamics. The report stated, in pertinent part:

“The rapid change in the business climate leaves us with concerns IPSU might not be in prime

financial shape to weather the storm. IPSU’s management cited deficiencies in the

manufacturing process at Port Wentworth, Georgia that would need to be addressed. The

compounded effects of a negative gross margin and a non-ideal production process could hinder

IPSU’s ability to reach profitability .” The report concluded that “IPSU’s business is at a point

where we believe the absolute best return would come from dissolution of the Company.”

(c) In a report dated August 8, 2011, PAA Research LLC stated that it was “shell-

shocked” by the Company’s “stunningly poor 3Q11 earnings results,” citing the Company’s

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“ongoing production rate issues at the Port Wentworth refinery and management’s inability to

execute.” The report noted that the Company’s Port Wentworth outlook was “in sharp contrast to

comments from management on the company’s 2Q11 conference call. ” In light of these issues,

the report announced: “We are lowering our 4Q11 and FY12 revenue and EPS estimates to reflect

slightly lower realized prices and more importantly ongoing production issues at the company’s Port

Wentworth refinery.” Additionally, the report noted that “there’s more competition in US from

Mexican refined sugar exports, but that dynamic has been in place for several quarters now; if

anything the pace of refinado (Mexican refined sugar) supply entering the US has slowed more

recently.”

102. As Defendants’ announcement and resulting analyst commentary made its way into

the market, the market reacted negatively, causing the Company’s stock price to plummet by

approximately 66% as it fell $15.40 per share from a close of $23.19 on August 4, 2011 to close at

$7.79 on August 8, 2011, on abnormally high trading volume, resulting in millions in investor losses.

At the outset of the massive sell-off on August 5, 2011, the Company was at one point the worst

performer in the U.S. stock market. 12

VII. POST-CLASS PERIOD REVELATIONS

103. Following the end of the Class Period, it continued to become clear to the market that

the true cause of the Company’s gross margin compression and dire financial condition was the

continued operational issues at the Port Wentworth refinery and the Company’s lack of refinery

capacity rather than the prices of raw sugar, as Defendants had explained. Indeed, a PAA Research

LLC report dated December 1, 2011 stated in pertinent part:

12 Market Talk: Get Into Blue Chips Now, Says Fund Manager , DOW JONES FACTIVA (Aug. 5, 2011).

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Management will continue to destroy shareholder value. Of all the issues that IPSU faces, this is the one that concerns us the most. IPSU’s CEO has faced a number of unprecedented challenges, most notably the Port Wentworth refinery accident in February 2008. Nearly four years after the accident, the refinery still is not operating on a normal schedule and the path to achieving 5MM+ daily melt rates consistently remains elusive. Management’s inability to restore Port Wentworth production levels is effectively the single issue that has caused all of the company’s other problems. It is difficult to increase price to customers that have experienced order delays in the past or are generally concerned about IPSU’s ability to deliver. Running the plant an extra 5-7 days a month is costly and hurts margins. At normalized production rates and refined/raw sugar spreads, IPSU will generate copious free cash flow, even after pension payments. In short, management execution is the one problem that solves them all.

104. On December 19, 2011, BWS Financial, Inc. issued an analyst report, which stated in

pertinent part:

We have decided, after a new round of surprises from the Company, to drop coverage on Imperial Sugar (IPSU- No Rating). Citing a delay in receiving audited financials from its joint ventures, and time required for estimating an impairment charge against assets, IPSU has decided to delay the filing of their 2011 10-K. The Company did disclose certain financial metrics for the fiscal year that could be reported once the audit is complete. Like many, we have been surprised by the magnitude of everything gone wrong for the Company. Management, by notfully communicating the extent of what is actually going on at IPSU, is being uncooperative and impairing our ability to thoroughly analyze the stock.

Refined sugar prices are at peak prices where a refiner should be making large amounts of cash, but that has not been the case at IPSU. The Company has been battling bottleneck issues at the refinery, which we believe might end up requiring the Company to spend many more months in repairing, as well as capital that is hard to come by.

With the lack of communication by management, and the erosion in cash, leads us to believe IPSU could face the hardship of finding buyers for its assets. Such buyers could opt for IPSU to file for protection and in hopes of purchasing the assets for pennies on the dollar. LSR was sold for $12 million loss. With such a scenario looming, and no timeline as to a recovery at IPSU, we are deciding to drop coverage of the shares. We believe there are risks from variables in the business than hoping management is able to make right and the shares popping to $10.

105. Moreover, a Houston Chronicle article entitled “Investors Sour on Imperial Sugar,”

published on December 22, 2011, reported that these issues had continued to take a toll on the

Company and would lead to its possible demise:

The sweet dreams have soured for Imperial Sugar. - 60 -


One of the oldest businesses in Texas told investors last week its year-end financial report with the Securities and Exchange Commission would be delayed, and that its auditor is likely to question the company’s ability to continue as a going concern.

That’s accounting speak for a warning the company could go broke.

Sugar Land-based Imperial said it now expects to report a loss of as much as $55 million for its fiscal fourth quarter, which ended Sept. 30, compared with a profit of $137 million a year earlier.

A third-quarter loss, announced in August, triggered a 59 percent plunge in its stock price from a high of $24.49. The slide has persisted, with shares closing Tuesday at $3.30. Last month, Imperial suspended its quarterly dividend.

Chief executive John Sheptor told me he couldn’t discuss the matter because the company is in a “quiet period.”

In earlier statements, the company blamed its financial struggles on high prices for raw sugar and deep discounts from Mexican sugar refiners.

As of September, the midwestern U.S. wholesale price for refined sugar was 57 cents a pound, and raw sugar was selling for about 39 cents, according to the U.S. Department of Agriculture. In other words, the price spread was about 18 cents, one of the highest since at least 1987, based on data from the U.S. Sugar Alliance. For much of the past 25 years, spreads were between 2 cents and 6 cents a pound.

It’s unlikely, given the current price spreads for sugar and Imperial’s position in the market, that it’s being undercut by cheap competitors.

The company could simply cut prices to preserve market share.

Imperial, it seems, has bigger problems.

In 2008, a dust explosion at its refinery in Port Wentworth, Ga., near Savannah, killed 14 workers, and Imperial suspended production at the refinery, which accounted for about 60 percent of its capacity, for more than a year. In financial filings, Imperial said profit suffered in 2009 and last year because production at the Georgia refinery hadn’t returned to full capacity.

At the time, it told investors that modifications at the plant would result in improved results this year.

While the company’s profit improved, its sales began to lag the previous year’s, and in June it blamed the weak results on declining consumer demand and deep discounts from rivals. It also cited operating problems at Port Wentworth and higher production costs both there and at its other plant in Gramercy, La., which were affecting margins.

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Last week, Imperial said it sold its stake in a separate joint venture with Cargill and Sugar Growers and Refiners, a Louisiana cooperative, for $18 million.

Two years ago, when the joint venture was announced amid much fanfare, Imperial Sugar said its investment was $30 million., and its share wound up being more because of cost overruns. In other words, it’s taking a big loss on the sale of the plant, which had also been a drag on earnings. For the quarter ended in June, Imperial booked a $3.2 million loss from the Louisiana project.

In other words, Imperial, which traces its roots to the Republic of Texas, appears to be struggling with production problems at both its plants. That, rather than price competition, may be why it sees customer demand declining despite high price spreads. If they’re unable to get orders filled, customers may be left with a bitter taste and turn to Imperial’s competitors.

106. In addition, following the close of the Class Period, the Company was forced to sell

off various joint venture interests and suspend its quarterly dividend:

(a) On November 3, 2011, the Company announced that it had suspended

payment of its regular quarterly dividend of $0.02 per common share “in light of the continued

pressure on its gross margins and liquidity primarily caused by sustained high raw sugar prices and

competitive refined sugar pricing.” In the same announcement, the Company disclosed that it had

sold its 50% interest in the Mexican joint venture CSI to a partner in the joint venture, Ingenios

Santos, for $5.5 million in cash.

(b) On December 16, 2011, the Company announced that it had sold its one-third

joint venture interest in LSR and certain Louisiana real estate parcels to its partners in the joint

venture for a price of $18 million. The Company stated that it chose to sell these assets “rather than

make additional capital contributions needed by the venture.”

(c) On March 7, 2012, the Company agreed to sell its 50% joint venture interest

in Wholesome to an affiliate of Arlon Group for approximately $55 million to $60 million in cash,

subject to adjustment based on Wholesome’s working capital and revolving credit borrowings at the

time of closing (expected to occur in April 2012).

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VIII. LOSS CAUSATION

107. As detailed throughout and further herein, Defendants’ fraudulent scheme artificially

inflated Imperial’s stock price by failing to disclose that: (a) although Imperial had re-opened its Port

Wentworth refinery, it continued to experience significant operational problems and was only

running at 40% capacity, reducing the volume of sugar produced by Imperial; (b) the Company was

forced to participate in the LSR joint venture to keep Imperial sugar in stores even though it further

compounded the capacity issues the Company was already experiencing; (c) the Port Wentworth

refinery was unable to absorb the capacity loss from the Gramercy refinery, causing the Company to

lose important customers; (d) the Company was forced to rely on competitors to meet customer

demand and was purchasing refined sugar from them and paying them to pack significant quantities

of Imperial sugar; (e) these practices significantly increased Imperial’s operating costs and eroded

the Company’s margins, while supporting its competitors’ business; (f) the Company’s business

model was failing in light of increasing competitive pressures and structural changes that benefited

competitors at the expense of the Company; and (g) as a result, Defendants knew they were unable

to raise prices to meet rising raw sugar costs because of the Company’s already-strained

relationships with its customers and increasing competition from both domestic and Mexican

producers. These false and misleading statements, individually and collectively, concealed

Imperial’s true financial circumstances and future business prospects, resulting in the stock being

artificially inflated until, as indicated herein, the relevant truth about Imperial was revealed. While

each of these misrepresentations was independently fraudulent, they were all motivated by

Defendants’ desire to artificially inflate Imperial’s stock price and the image of its future business

prospects to give the market the false notion that the Company had resolved production issues with

Imperial’s Port Wentworth refinery, that the Company had sufficient production capacity to meet

customer demand, and that the Company was able to raise prices to offset the increasing price of raw

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sugar. These false and misleading statements and omissions, among others, had the intended effect

of preventing the market from learning the full truth and keeping the Company’s stock price

artificially inflated throughout the Class Period. Indeed, Defendants’ false and misleading

statements had the intended effect and caused, or were a substantial contributing cause of Imperial’s

stock trading at artificially inflated levels, reaching as high as $25.68 during the Class Period.

108. The true picture of Imperial’s business, operations, and finances was finally disclosed

to the market beginning on August 5, 2011. On that date the market learned that Imperial had

experienced a net loss of $16.1 million for the third quarter of 2011 (more than three times the loss it

experienced for the third quarter of 2010), the Company continued to experience significant

problems at its Port Wentworth refinery, and the Company’s gross margins had eroded significantly.

These disclosures revealed to the market that Imperial’s financial condition was not as strong as

Defendants had previously touted and that the Company’s business had not returned to normalcy or

pre-accident production levels.

109. When Imperial provided the market with these revelations, it was an indication to the

market that Defendants’ prior Class Period statements were false and misleading. As a result of the

information revealed to the market on August 5, 2011, and resulting analyst commentary, the market

cast doubt on the veracity of Defendants’ prior statements, causing Imperial’s stock to plummet

$15.40 a share, or approximately 66%, from a close of $23.19 on August 4, 2011 to close at $7.79 on

August 8, 2011, on abnormally high trading volume. The market’s negative reaction to Imperial’s

August 5, 2011 revelations is demonstrated in the stock chart below:

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3500000

3000000

2500000

2000000

1500000

1000000

500000

0

25 23 21 19 Dollars 17 15

Volume

13 --- Price

11 9 7 5

8/4/2011 8/5/2011 8/8/2011

Date

110. The rapid decline in Imperial’s stock price following the Company’s August 5, 2011

disclosures was a direct and foreseeable consequence of the revelation of the falsity of Defendants’

Class Period misrepresentations and omissions to the market. Thus, the revelation of truth at the

close of the Class Period, as well as the resulting clear market reaction, support a reasonable

inference that the market understood that Imperial’s prior statements were false and misleading. In

sum, as the truth about Defendants’ prior misrepresentations and concealments was revealed, the

Company’s stock price quickly sank, the artificial inflation came out of the stock, and Plaintiff was

damaged, suffering true economic losses.

111. The decline in Imperial’s stock price by approximately 66% from August 4, 2011

through August 8, 2011 was the direct result of the nature and extent of the revelations made to

investors and the market regarding the Company’s net losses, continued problems at its Port

Wentworth facility, significant operating costs, gross margin erosion, and inability to raise prices due

to the impact of competition on its business model that had been concealed or misrepresented by

Defendants’ scheme and misstatements.

112. The timing and magnitude of Imperial’s stock price decline negates any inference that

the losses suffered by Plaintiff was caused by changed market conditions, macroeconomic or

industry factors, or Company-specific facts unrelated to Defendants’ fraudulent conduct. This point

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is evidenced by the chart below which demonstrates the clear divergence of Imperial’s stock price

from its peer index 13 as the revelation of the truth became known to the market:

Imperial Sugar vs. Amex Consumer Staple Index (IXR)

July 1, 2011 = 100 July 1, 2011 - August 31, 2011 140 120 100 80 60 40 20

0 7/1/2011 7/8/2011 7/15/2011 7/22/2011 7/29/2011 8/5/2011 8/12/2011 8/19/2011 8/26/2011

IXRIPSU

113. The economic loss, i.e. , damages, suffered by Plaintiff was a direct and proximate

result of Defendants’ scheme and misrepresentations and omissions that artificially inflated

Imperial’s stock price and the subsequent significant decline in the value of Imperial’s stock when

the truth concerning Defendants’ prior misrepresentations and fraudulent conduct entered the market

place.

IX. ADDITIONAL SCIENTER

114. The Individual Defendants acted with scienter in that they knew or recklessly

disregarded that the public documents and statements issued or disseminated in the name of the

Company were materially false and misleading, and knowingly or severely recklessly substantially

participated or acquiesced in the issuance or dissemination of such statements or documents as

primary violators of the federal securities laws.

13 The Company has identified the American Stock Exchange Consumer Staple Index (“IXR”) as a relevant peer index. See Form 10-K for the fiscal year ended September 30, 2011, filed on January 5, 2012.

- 66 -


115. The Individual Defendants, by virtue of their receipt of information reflecting the true

facts regarding Imperial and its business practices, their control over and/or receipt of Imperial’s

materially misleading misstatements and/or their associations with the Company that made them

privy to confidential proprietary information concerning Imperial, were active and culpable

participants in the fraudulent scheme alleged herein. The Individual Defendants knew and/or

severely recklessly disregarded the falsity and misleading nature of the information, which they

caused to be disseminated to the investing public. The ongoing fraud as described herein could not

have been perpetrated over a substantial period of time, as occurred, without the knowledge and/or

severe recklessness and complicity of personnel at the highest level of the Company, including the

Individual Defendants.

116. As further detailed above in ¶¶27-29, sugar refining and packaging was Imperial’s

core operation during the Class Period. Indeed, the Company holds itself out as the “largest

processors and marketers of refined sugar in the NAFTA region.” Moreover, the Individual

Defendants were high-ranking officers ( i.e. , CEO and CFO) who were heavily involved with, and

had day-to-day responsibilities concerning the Company’s core business of sugar refining and

packaging. Accordingly, through the receipt of internal reports and involvement with daily

operations, the Individual Defendants were intimately aware of Imperial’s true financial condition,

continued problems with the Port Wentworth refinery, capacity issues, and reliance on competitors

to meet customer demand, during the Class Period.

117. In addition to the numerous allegations throughout the Complaint, herein incorporated

by reference, demonstrating the Individual Defendants’ scienter, for the reasons further detailed

herein, each of the Individual Defendants had knowledge of or recklessly disregarded that the public

statements and documents the Company issued or disseminated were materially false and

misleading.

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118. Defendants also undertook the affirmative obligation to obtain knowledge in order to

ensure the Company’s disclosures to the market were truthful by executing SOX certifications ( see,

e.g. , ¶68).

119. The Individual Defendants acted with scienter in that they knew or recklessly

disregarded that the public documents and statements issued or disseminated in the name of the

Company were materially false and misleading, and knowingly or severely recklessly substantially

participated or acquiesced in the issuance or dissemination of such statements or documents as

primary violators of the federal securities laws.

X. PRESUMPTION OF RELIANCE: FRAUD ON-THE-MARKET DOCTRINE

120. The market for Imperial’s publicly traded securities was open, well-developed, and

efficient at all times. As a result of the Defendants’ materially false and misleading statements and

failures to disclose, Imperial’s publicly traded securities traded at artificially inflated prices during

the Class Period. Plaintiff and other members of the Class purchased or otherwise acquired

Imperial’s publicly traded securities relying upon the integrity of the market price of those securities

and the market information relating to Imperial, and have been damaged thereby.

121. At all relevant times, the market for Imperial’s securities was an efficient market for

the following reasons, among others:

(a) Imperial’s stock met the requirements for listing and was listed and actively

traded on the NASDAQ, a highly efficient and automated market;

(b) As a regulated issuer, Imperial regularly made public filings, including its

Forms 10-K, Forms 10-Q, and related press releases with the SEC and the NASDAQ;

(c) Imperial regularly communicated with public investors via established market

communication mechanisms, including through regular disseminations of press releases on the

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national circuits of major newswire services and through other wide-ranging public disclosures, such

as communications with the financial press, and other similar reporting services; and

(d) Imperial was followed by several securities analysts employed by major

brokerage firms, such as PAA Research LLC, BWS Financial Inc., and Janney Capital Markets,

among others, who wrote research reports that were distributed to the brokerage firms’ sales force

and the public at large. Each of these reports was publicly available and entered the public

marketplace.

122. As a result of the foregoing, the market for Imperial’s securities promptly digested

current information regarding Imperial from all publicly available sources and reflected such

information in the prices of Imperial’s securities.

123. Under these circumstances, all purchasers of Imperial’s securities during the Class

Period suffered similar injury through their purchase of Imperial’s securities at artificially inflated

prices and a presumption of reliance applies.

124. At the times they purchased or otherwise acquired Imperial’s securities, Plaintiff and

other members of the Class were without knowledge of the facts concerning the wrongful conduct

alleged herein and could not reasonably have discovered those facts. As a result, the presumption of

reliance applies. Plaintiff will also rely, in part, upon the presumption of reliance established by a

material omission.

125. In sum, Plaintiff will rely, in part, upon the presumption of reliance established by the

fraud-on-the-market doctrine in that:

(a) Defendants made public misrepresentations or failed to disclose facts during

the Class Period;

(b) The omissions and misrepresentations were material;

(c) The Company’s securities traded in an efficient market;

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(d) The misrepresentations alleged would tend to induce a reasonable investor to

misjudge the value of the Company’s securities; and

(e) Plaintiff and the other members of the Class purchased the Company’s

securities between the time Defendants misrepresented or failed to disclose material facts and the

time the true facts were disclosed, without knowledge of the misrepresented or omitted facts.

XI. NO SAFE HARBOR

126. The federal statutory safe harbor providing for forward-looking statements under

certain circumstances does not apply to any of the allegedly false and misleading statements pleaded

in this complaint. Many of the specific statements pleaded herein were not identified as “forward-

looking statements” when made. To the extent there were any forward-looking statements, there

were no meaningful cautionary statements identifying important factors that could cause actual

results to differ materially from those in the purportedly forward-looking statements. Alternatively,

to the extent that the statutory safe harbor does apply to any forward-looking statements pleaded

herein, Defendants are liable for those false and misleading forward-looking statements because, at

the time each of those forward-looking statements were made, the particular speaker knew that the

particular forward-looking statement was false or misleading and/or the forward-looking statement

was authorized and/or approved by an executive officer of Imperial who knew that those statements

were false or misleading when made. Moreover, to the extent that Defendants issued any disclosures

designed to “warn” or “caution” investors of certain “risks,” those disclosures were also false and

misleading since they did not disclose that Defendants were actually engaging in the very actions

about which they purportedly warned and/or had actual knowledge of material adverse facts

undermining such disclosures.

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XII. PLAINTIFF’S CLASS ACTION ALLEGATIONS

127. Plaintiff brings this action as a class action pursuant to Federal Rule of Civil

Procedure 23(a) and (b)(3) on behalf of a class consisting of all those who purchased or otherwise

acquired the publicly traded common stock of Imperial between December 29, 2010 and August 4,

2011, inclusive, and who were damaged thereby (the “Class”). Excluded from the Class are

Defendants, the officers and directors of the Company, at all relevant times, members of their

immediate families and their legal representatives, heirs, successors or assigns, and any entity in

which Defendants have or had a controlling interest.

128. Because Imperial has millions of shares of stock outstanding and because the

Company’s shares were actively traded on the NASDAQ, members of the Class are so numerous

that joinder of all members is impracticable. According to Imperial’s SEC filings, as of shortly

before the close of the Class Period, Imperial had approximately 12,243,446 shares outstanding.

While the exact number of Class members can only be determined by appropriate discovery,

Plaintiff believes that Class members number at least in the thousands, and that they are

geographically dispersed.

129. Plaintiff’s claims are typical of the claims of the members of the Class because

Plaintiff and all of the Class members sustained damages arising out of Defendants’ wrongful

conduct complained of herein.

130. Plaintiff will fairly and adequately protect the interests of the Class members and

have retained counsel experienced and competent in class actions and securities litigation. Plaintiff

has no interests that are contrary to, or in conflict with, the members of the Class it seeks to

represent.

131. A class action is superior to all other available methods for the fair and efficient

adjudication of this controversy since joinder of all members is impracticable. Furthermore, as the

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damages suffered by individual members of the Class may be relatively small, the expense and

burden of individual litigation make it impossible for the members of the Class to individually

redress the wrongs done to them. There will be no difficulty in the management of this action as a

class action.

132. Questions of law and fact common to the members of the Class predominate over any

questions that may affect only individual members in that Defendants have acted on grounds

generally applicable to the entire Class. Among the questions of law and fact common to the Class

are:

(a) whether Defendants violated the federal securities laws as alleged herein;

(b) whether Defendants’ publicly disseminated press releases and statements

during the Class Period omitted and/or misrepresented material facts;

(c) whether Defendants breached any duty to convey material facts or to correct

material facts previously disseminated;

(d) whether Defendants participated in and pursued the fraudulent scheme or

course of business complained of herein;

(e) whether Defendants acted willfully, with knowledge or severe recklessness, in

omitting and/or misrepresenting material facts;

(f) whether the market prices of Imperial’s securities during the Class Period

were artificially inflated due to the material nondisclosures and/or misrepresentations complained of

herein; and

(g) whether the members of the Class have sustained damages as a result of the

decline in value of Imperial’s stock when the truth was revealed and the artificial inflation came out

and, if so, what is the appropriate measure of damages.

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COUNT I FOR VIOLATIONS OF SECTION 10(b) OF THE EXCHANGE ACT AND RULE 10b-5

PROMULGATED THEREUNDER AGAINST ALL DEFENDANTS

133. Plaintiff repeats and realleges the allegations set forth above as though fully set forth

herein. This claim is asserted against all Defendants.

134. During the Class Period, Imperial and the Individual Defendants, and each of them,

carried out a plan, scheme and course of conduct which was intended to and, throughout the Class

Period, did: (i) deceive the investing public, Plaintiff, and other Class members, as alleged herein;

(ii) artificially inflate and maintain the market price of Imperial’s publicly traded securities; and (iii)

cause Plaintiff and other members of the Class to purchase Imperial’s publicly traded securities at

artificially inflated prices. In furtherance of this unlawful scheme, plan, and course of conduct,

Imperial and the Individual Defendants, and each of them, took the actions set forth herein.

135. These Defendants: (i) employed devices, schemes, and artifices to defraud; (ii) made

untrue statements of material fact and/or omitted to state material facts necessary to make the

statements not misleading; and (iii) engaged in acts, practices, and a course of business which

operated as a fraud and deceit upon the purchasers of the Company’s securities in an effort to

maintain artificially high market prices for Imperial’s securities in violation of Section 10(b) of the

Exchange Act and Rule 10b-5. These Defendants are sued as primary participants in the wrongful

and illegal conduct charged herein. The Individual Defendants are also sued as controlling persons

of Imperial, as alleged below.

136. In addition to the duties of full disclosure imposed on Defendants as a result of their

making affirmative statements and reports or participating in the making of affirmative statements

and reports to the investing public, they each had a duty to promptly disseminate truthful information

that would be material to investors in compliance with the integrated disclosure provisions of the

SEC as embodied in SEC Regulation S-X (17 C.F.R. §210.01, et seq .) and S-K (17 C.F.R. §229.10,

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et seq .) and other SEC regulations, including accurate and truthful information with respect to the

Company’s operations, sales, product marketing and promotion, financial condition, and operational

performance so that the market prices of the Company’s publicly traded securities would be based on

truthful, complete, and accurate information.

137. Imperial and the Individual Defendants, individually and in concert, directly and

indirectly, by the use, means, or instrumentalities of interstate commerce and/or of the mails,

engaged and participated in a continuous course of conduct to conceal adverse material information

about the business, business practices, sales performance, product marketing and promotion,

operations, and future prospects of Imperial as specified herein.

138. These Defendants each employed devices, schemes, and artifices to defraud, while in

possession of material adverse non-public information and engaged in acts, practices, and a course of

conduct as alleged herein in an effort to assure investors of Imperial’s value and performance and

continued substantial sales, financial and operational growth, which included the making of, or the

participation in the making of, untrue statements of material facts and omitting to state material facts

necessary in order to make the statements made about Imperial and its business operations and future

prospects in light of the circumstances under which they were made, not misleading, as set forth

more particularly herein, and engaged in transactions, practices, and a course of business which

operated as a fraud and deceit upon the purchasers of Imperial’s securities during the Class Period.

139. The Individual Defendants’ primary liability and controlling person liability arise

from the following facts, among others: (i) the Individual Defendants were high-level executives at

the Company during the Class Period; (ii) the Individual Defendants, by virtue of their

responsibilities and activities as senior executive officers, were privy to, and participated in the

creation, development, and reporting of, the Company’s internal sales and marketing plans,

projections, and/or reports; (iii) the Individual Defendants enjoyed significant personal contact and

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familiarity with, were advised of, and had access to other members of the Company’s management

team, internal reports, and other data and information about the Company’s financial condition and

performance at all relevant times; and (iv) the Individual Defendants were aware of the Company’s

dissemination of information to the investing public which they knew or recklessly disregarded was

materially false and misleading.

140. Each of the Defendants had actual knowledge of the misrepresentations and

omissions of material facts set forth herein, or acted with severely reckless disregard for the truth, in

that each failed to ascertain and disclose such facts, even though such facts were available to each of

them. Such Defendants’ material misrepresentations and/or omissions were done knowingly or with

deliberate recklessness and for the purpose and effect of concealing Imperial’s operating and

financial condition, sales practices, intrinsic value, and future business prospects from the investing

public and supporting the artificially inflated price of its securities. As demonstrated by the

Individual Defendants’ overstatements, misstatements, and omissions of the Company’s financial

condition and performance throughout the Class Period, the Individual Defendants, if they did not

have actual knowledge of the misrepresentations and omissions alleged, were reckless in failing to

obtain such knowledge by deliberately refraining from taking those steps necessary to discover

whether those statements were false or misleading.

141. As a result of the dissemination of the materially false and misleading information

and failure to disclose material facts, as set forth above, the market prices of Imperial’s securities

were artificially inflated during the Class Period. In ignorance of the fact that market prices of

Imperial’s publicly traded securities were artificially inflated and relying directly or indirectly on the

false and misleading statements made by Defendants, or upon the integrity of the market in which

the securities trade, and/or on the absence of material adverse information that was known to or

disregarded with deliberate recklessness by Defendants but not disclosed in public statements by

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Defendants during the Class Period, Plaintiff and the other members of the Class acquired Imperial’s

securities during the Class Period at artificially high prices and were damaged thereby, as evidenced

by, among others, the stock price declines described above.

142. At the time of said misrepresentations and omissions, Plaintiff and other members of

the Class were ignorant of their falsity and believed them to be true. Had Plaintiff and the other

members of the Class and the marketplace known of the true financial performance, operating

condition, sales practices, and other fraudulent business practices, future prospects, and intrinsic

value of Imperial, which were not disclosed by Defendant, Plaintiff and other members of the Class

would not have purchased or otherwise acquired their Imperial publicly traded securities during the

Class Period; or, if they had acquired such securities during the Class Period, they would not have

done so at the artificially inflated prices which they paid.

143. By virtue of the foregoing, Imperial and the Individual Defendants have each violated

Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder.

144. As a direct and proximate result of Defendants’ wrongful conduct, Plaintiff and the

other members of the Class suffered damages in connection with their respective purchases and sales

of the Company’s securities during the Class Period, as evidenced by, among others, the stock price

decline discussed above, when the artificial inflation was released from Imperial’s stock.

COUNT II FOR VIOLATIONS OF SECTION 20(a) OF THE EXCHANGE ACT AGAINST THE

INDIVIDUAL DEFENDANTS

145. Plaintiff repeats and realleges the allegations set forth above as though fully set forth

herein. This claim is asserted against the Individual Defendants.

146. The Individual Defendants acted as controlling persons of Imperial within the

meaning of Section 20(a) of the Exchange Act as alleged herein. By virtue of their high-level

positions with the Company, participation in and/or awareness of the Company’s operations and/or

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intimate knowledge of the Company’s fraudulent marketing practices and actual performance, the

Individual Defendants had the power to influence and control and did influence and control, directly

or indirectly, the decision making of the Company, including the content and dissemination of the

various statements which Plaintiff contends are false and misleading. The Individual Defendants

were provided with, or had unlimited access to, copies of the Company’s reports, press releases,

public filings, and other statements alleged by Plaintiff to be misleading prior to and/or shortly after

these statements were issued and had the ability to prevent the issuance of the statements or cause

the statements to be corrected.

147. In addition, the Individual Defendants had direct involvement in the day-to-day

operations of the Company and, therefore, are presumed to have had the power to control or

influence the particular transactions giving rise to the securities violations as alleged herein and

exercised the same.

148. As set forth above, Imperial and the Individual Defendants each violated Section

10(b) and Rule 10b-5 by their acts and omissions as alleged in this Complaint. By virtue of their

controlling positions, the Individual Defendants are liable pursuant to Section 20(a) of the Exchange

Act. As a direct and proximate result of the Individual Defendants’ wrongful conduct, Plaintiff and

other members of the Class suffered damages in connection with their purchases of the Company’s

securities during the Class Period, as evidenced by, among others, the stock price decline discussed

above, when the artificial inflation was released from Imperial stock.

XIII. PRAYER FOR RELIEF

WHEREFORE, Plaintiff, on its own behalf and on behalf of the Class, prays for relief and

judgment, as follows:

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(a) Declaring that this action is a proper class action and certifying Plaintiff as a

class representative pursuant to Rule 23 of the Federal Rules of Civil Procedure and Plaintiff’s

counsel as Class Counsel for the proposed Class;

(b) Awarding compensatory damages in favor of Plaintiff and the other Class

members against all Defendants, jointly and severally, for all damages sustained as a result of

Defendants’ wrongdoing, in an amount to be proven at trial, including interest thereon;

(c) Awarding Plaintiff and the Class their reasonable costs and expenses incurred

in this action, including attorneys’ fees and expert fees; and

(d) Such other and further relief as the Court deems appropriate.

XIV. JURY TRIAL DEMANDED

Plaintiff hereby demands a trial by jury.

DATED: March 22, 2012 SCHWARTZ, JUNELL, GREENBERG & OATHOUT, LLP

ROGER B. GREENBERG State Bar No. 08390000 Federal I.D. No. 3932 THANE TYLER SPONSEL III State Bar No. 24056361 Federal I.D. No. 690068

/s/ Roger B. Greenberg ROGER B. GREENBERG

Two Houston Center 909 Fannin Street, Suite 2700 Houston, TX 77010 Telephone: 713/752-0017 713/752-0327 (fax)

Liaison Counsel for Plaintiff

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ROBBINS GELLER RUDMAN & DOWD LLP

JACK REISE (pro hac vice) STEPHEN R. ASTLEY (pro hac vice) 120 East Palmetto Park Road, Suite 500 Boca Raton, FL 33432 Telephone: 561/750-3000 561/750-3364 (fax)

Lead Counsel for Plaintiff

CAVANAGH & O’HARA JOHN T. LONG 407 East Adams Street Springfield, IL 62701 Telephone: 217/544-1771 217/544-9894 (fax)

Additional Counsel for Plaintiff

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CERTIFICATE OF SERVICE

I HEREBY CERTIFY that on March 22, 2012, I electronically filed the foregoing with the

Clerk of the Court using the CM/ECF system, which will send a Notice of Electronic Filing to all

counsel of record.

/s/ Roger B. Greenberg ROGER B. GREENBERG

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Case 4:11-cv-03250 Document 40 Filed in TXSD on 03/22/12 ...securities.stanford.edu/.../2012322_r01c_11CV03250.pdfIn re IMPERIAL SUGAR COMPANY § Civil Action No. 4:11-cv-03250-LHR

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