Toll Brothers Inc. officials agreed to a $16.2 million settlement of claims that they misled shareholders about the company’s prospects while selling stock worth about $615 million, according to court filings.
The accord resolves investor claims that executives of the largest U.S. luxury-home builder wrongfully issued bullish forecasts in the face of falling demand in fiscal 2006 and 2007, according to a filing yesterday in Delaware Chancery Court. The investors also alleged company directors, including co-founders Bruce Toll and Robert Toll, sold shares at inflated prices because of the forecasts, according to a 2008 complaint.
Insurers covering Toll Brothers directors will pay $9.8 million of the settlement while the remaining $6.4 million will be paid personally by individual defendants, according to the filing. The money will be returned to Toll Brothers’ coffers rather than paid to shareholders.
The settlement “confers substantial benefits upon Toll Brothers and its current stockholders,” the investors’ lawyers said in the filing.
Martin Connor, the Horsham, Pennsylvania-based builder’s chief financial officer, declined to comment today on the settlement because it’s still awaiting a judge’s final approval.
Toll Brothers fell 28 cents to $30.39 at 12:19 p.m. in New York trading. The shares had climbed 50 percent this year before today.
The accord comes as Toll Brothers reported higher income than analysts had estimated in part because of an increase in home sales. Net income was $411.4 million, or $2.35 a share, in the three months ended Oct. 31 compared with $15 million, or 9 cents, a year earlier, the company said Dec. 4.
The U.S. housing market is recovering after a six-year slump as low interest rates and rising consumer confidence spur demand for new homes. Construction spending climbed more than economists estimated in October as work on homes jumped to the highest level since November 2008, the Commerce Department reported Dec. 3.
Toll Brothers shareholder Milton Pfeiffer sued the directors in November 2008, accusing them of misleading investors with the forecasts, which included a 20 percent increase in earnings. Other Toll Brothers investors also sued the company in federal court in Philadelphia over the statements.
In the federal suits, executives are alleged to have used the predictions to mislead investors from February 2005 to November 2006, according a Toll Brothers filing with the U.S. Securities and Exchange Commission in 2009.
Pfeiffer’s lawyers contend that during that period, eight members of the homebuilder’s board sold a total of 14 million shares for proceeds of $615 million.
The executives made the predictions while knowing fewer prospective customers were visiting Toll Brothers communities, the plaintiffs alleged. They also knew that the rate at which new contracts were signed was trending lower throughout 2005, according to the Pfeiffer’s complaint.
The targeted forecasts prompted Toll Brothers’ stock to rise to as high as $45.15 in February 2005, Pfeiffer’s lawyers said in the suit. “Defendants promptly disposed of 3.8 million shares of their stock for $166.7 million in proceeds,” Pfeiffer’s lawyers said.
As part of that sale, Robert Toll sold 2.5 million shares, bringing in more than $110 million, while Bruce Toll sold 1 million shares “for proceeds of over $44.3 million,” Pfeiffer’s attorneys said.
In December 2006, Toll Brothers revised projections, cutting the predicted 20 percent earnings growth number to 0.5 percent, according to the Delaware suit.
The settlement resolves Pfeiffer’s case in state court Delaware and two federal suits filed by other Toll Brothers investors in Philadelphia, according to the Delaware filing.
Toll Brothers officials said in the filing outlining the settlement that board members weren’t admitting to any wrongdoing as part of the accord.
The defendants agreed to the settlement to “permit the operation of Toll Brothers without further distraction and diversion of its directors and executive personnel” by the litigation, according to the filing.
Investors’ lawyers will ask Chancery Court Judge Travis Laster to approve the settlement and their request for $4.3 million in fees and expenses, according to court filings. No hearing date has been set on that request.
The Delaware case is Pfeiffer v. Toll, 4140, Delaware Chancery Court (Wilmington).