TrueCar

A derivative lawsuit filed in Delaware federal court Monday accused TrueCar Inc. of failing to warn investors about changes to its co-branded car-selling website with USAA, which allegedly caused the company to lose hundreds of millions of dollars in market capitalization last year.

According to the complaint, Santa Monica, California-based TrueCar, which operates an internet-based platform for car pricing, disclosed the possibility of changes as merely a risk to its bottom line for nearly a year, when in fact it knew that they were already underway.

The supposedly misleading statements, the filing said, caused TrueCar's stock to trade at artificially inflated prices, before the company was "hammered by massive sales" that erased gains that it had made in the market.

"The individual defendants misleadingly assured investors that USAA’s ability to change the co-branding car buying website it shared with TrueCar was merely a 'risk,' when, in fact, USAA had already decided to implement such changes by early 2017," attorneys for plaintiff Ara Afarian wrote in the 88-page complaint.

"Due to the close and intertwined nature of the partnership between TrueCar and USAA, the individual defendants were well aware of USAA’s decision to implement significant website changes in early 2017 and that it would do so by June 2017, and that such changes would cause the Company’s website traffic, sales, and revenues to materially decline."

San Antonio, Texas-based USAA has historically operated as TrueCar's largest partner for directing customers to the TrueCar website in exchange for marketing fees. The partnership, Afarian said, has generated nearly one-third of TrueCar's annual unit sales, but also gives USAA "broad discretion" to make adjustments to how the firms' co-branded selling site was operated, marketed and promoted.

According to the complaint, USAA decided in January 2017 to implement changes to the site, which included questions requiring USAA members to detail their personal finances and monthly budgets. However, the redesign, which formally launched that June, was not disclosed to investors until November, when TrueCar issues a "dismal earnings report and announced that it had failed to meet its third-quarter guidance," Afarian said.

The complaint also lays out allegations of insider trading against TrueCar's directors and officers, who sold their personal stock holding for "tens of millions of dollars" in ill-gotten profits.

A large portion of the sales, Afarian alleged, coincided with TrueCar's secondary offering in April 2017, which raised about $19 million for the company. According to the complaint, USAA and several entities affiliated with the TrueCar board reaped 90 percent of the proceeds from the offering to the tune of $151.8 million.

Meanwhile, TrueCar's chief financial officer and chief accounting officer were among a group of "company insiders" who offloaded 1.2 million shares for a total of $22 million when TrueCar was trading above its actual value, the filing said.

Last March, a federal judge in California last March greenlighted a securities class action over the same alleged misconduct, finding that plaintiffs in that case had satisfied heightened pleading standards under the Private Securities Litigation Reform Act. To date, Afarian said, the TrueCar board had not initiated its own litigation against the defendants named in the Delaware complaint.

"TrueCar and certain of its officers and directors continue to be exposed to substantial liability for their violations of the federal securities law," he said.

"Accordingly, a pre-suit demand upon the Board was, and is, a useless and futile act. Thus, plaintiff rightfully brings this action to vindicate the company’s rights against its wayward fiduciaries and hold them responsible for the damages they have caused to TrueCar."

TrueCar did not respond Tuesday to an email seeking comment on the complaint.

Afarian, who has invested in TrueCar since March 2015, is represented by Frank J. Johnson and Phong L. Tran of Johnson Fistel in New York and Michael I. Fistel Jr. from the firm's Marietta, Georgia, office. Blake A. Bennett of Cooch and Taylor is acting as local counsel.

An online docket-tracking service did not list attorneys for TrueCar on Tuesday.

The case, filed in the U.S. DIstrict Court for the District of Delaware, is captioned Afarian v. Perry.