FILED - Wolf Haldenstein Adler Freeman & Herz LLP file-stam… · members and officers to execute...

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VERIFIED SHAREHOLDER DERIVATIVE COMPLAINT

L AW OFFICES OF

KE L L E R ROHRB ACK L .L .P . 1201 THIRD AVENUE, SUITE 3200

SEATTLE, WASHINGTON 98101-3052

T E L E P H O N E : ( 2 0 6 ) 6 2 3 - 1 9 0 0 F A C S I M I L E : ( 2 0 6 ) 6 2 3 - 3 3 8 4

SUPERIOR COURT OF WASHINGTON IN AND FOR KING COUNTY

TOM AND AMY WILLIS and GARY WILKERSON, individuals, Derivatively on Behalf of Nominal Defendant COINSTAR, INC., Plaintiffs, vs. ARIK A. AHITOV, PAUL D. DAVIS, DAVID M. ESKENAZY, ROBERT D. SZNEWAJS, DEBORAH L. BEVIER, RONALD B. WOODARD, DANIEL W. O’CONNOR, TIMOTHY J. HALE and DONALD R. RENCH, Defendants, And COINSTAR, INC., a Delaware corporation, Nominal Defendant,

CASE NO.

VERIFIED SHAREHOLDER

DERIVATIVE COMPLAINT

COME NOW PLAINTIFFS, Tom and Amy Willis and Gary Wilkerson (collectively,

“Plaintiffs”), by and through their attorneys, allege upon personal knowledge and upon

information and belief as to all other matters, based in part upon the investigation conducted by

FILED11 APR 12 PM 4:22

KING COUNTYSUPERIOR COURT CLERK

E-FILEDCASE NUMBER: 11-2-13508-0 SEA

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counsel, which included, inter alia, a review of Securities and Exchange Commission (“SEC”)

filings, news reports, analyst reports, press releases, and other publicly available documents, as

follows:

I. INTRODUCTION

1. This action is brought on behalf of Nominal Defendant Coinstar, Inc. (“Coinstar”

or the “Company”) against the defendants named herein (collectively “Defendants”), including

the members of the Coinstar Board of Directors (“Board” or “Director Defendants”) and certain

of its officers (the “Officer Defendants”), to recover for the losses suffered by the Company as a

result of Defendants’ breaches of fiduciary duty in connection with the Company’s commission

of illegal acts, failure to implement sufficient controls and failure of oversight, which has

exposed Coinstar to millions of dollars in damages, criminal and civil penalties, as well as loss of

goodwill and other economic and pecuniary damages.

2. As alleged herein, the Defendants, members of the Board, have breached their

fiduciary duties of due care, loyalty, good faith and candor by allowing the Company’s Board

members and officers to execute stock trades based on material, non-public information in

violation of federal law and to make false and misleading statements regarding the Company’s

financial prospects. Among other things, the Board has failed to reasonably oversee and

mandate the contemporaneous dissemination of material information concerning the Company’s

financial prospects. In addition, certain members of the Board exploited the market’s false

confidence in the Company by engaging in illegal stock transactions based on material, non-

public information concerning the Company’s prospects. As a result of its failure to institute

and/or enforce sufficient controls to prevent these illegal acts by Board members, the Board has

breached its fiduciary duties to Coinstar and has exposed the Company to civil and criminal

liability.1

1 Moreover, as alleged, infra, demand is excused due to the fact that a majority of the Coinstar Board

was involved in the illegal stock transactions discussed herein, rendering it impossible for the Board to

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3. As recently as October of 2010, prospects looked very bright for Coinstar. The

Company was reporting increased sales, revenues and profit from continuing operations. For

example, on October 28, 2010, Coinstar filed its quarterly report for the third quarter of the 2010

fiscal year, reporting that sales had climbed by a striking 42% over the same quarter the previous

year, meeting analysts’ estimates. See Coinstar Inc., Current Report (Form 8-K), at Ex. 99.1

(Oct. 28, 2010). In addition, revenues for Coinstar’s DVD rental business, Redbox Automated

Retail, LLC (“Redbox”), increased over 54% as compared with the third quarter of 2009. Id.

4. Coinstar’s positive news and projections were very well-taken by the market,

leading to a dramatic rise in the Company’s per share price. Indeed, announcement of Coinstar’s

fourth quarter 2010 earnings forecast caused the Company’s common stock to rise 24% in the

space of one day, October 28th. Things improved further just a few weeks later, when rumors hit

the market suggesting that Amazon.com, Inc. (“Amazon”) was considering a merger or buyout

of the Company. See, e.g., Jeanine Poggi, What’s Amazon’s Next M&A Target?, The Street

(Nov. 8, 2011), http://www.thestreet.com/story/10915132/1/whats-amazons-next-ma-target.html

(“Elsewhere in the movie segment, a deal with Coinstar (CSTR), owner of Redbox DVD kiosks,

is also popping up as a possibility. Coinstar announced that it is talking with potential partners

for a streaming service to compete with Netflix.”).

5. It was during this short-lived appreciation in Coinstar common stock that

Defendants sold thousands of shares of Coinstar common stock. Indeed, six of the seven

members of the Board, Defendants Arik A. Ahitov, Paul D. Davis, David M. Eskenazy, Robert

D. Sznewajs, Daniel W. O’Connor and Ronald B. Woodard, sold over $1.35 million in Coinstar

common stock shares between November 2, 2010 and November 23, 2010. As would become

evident just a few weeks later, the trades made by the Coinstar directors and officer were based

on non-public information concerning decreased earnings in the Company’s Redbox subsidiary

due to inventory and vendor problems.

objectively consider a demand under Rule 23.1 of the Rules of the Court of Chancery of the State of Delaware (“Chancery Rules”). Del. Ch. Ct. R. 23.1(a).

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6. On January 12, 2011, the extraordinary amount of insider stock sales were

explained, at least in part, when Coinstar announced that circumstances had changed and the

Company would not meet its prior revenue and earnings estimates for the fourth fiscal quarter of

2010. Press Release, Coinstar, Inc., Coinstar, Inc. Announces Preliminary 2010 Fourth Quarter

Results and Updated Full Year 2011 Guidance (Jan. 13, 2011) (available at

http://coinstar.org/us/pressreleases/1516026?opendocument). The reasons given by Coinstar for

the expected downturn in earnings raised considerable question about the Company’s prior

guidance. For instance, Coinstar stated that the Company had “underestimated the impact that

the” 28-day delay imposed by various movie distributors on rental DVDs would have on its

earnings. Also, Coinstar related inventory problems that led to a decrease in revenue, due to

weak demand for Blu-Ray DVDs. This confused and dismayed most analysts who, taking the

Company’s previous statements at face value, believed the 28-day delay to be of little

consequence and Redbox’s inventory management to be beyond reproach.2

2 As the following colloquy between Coinstar’s Chief Financial Officer (“CFO”), J. Scott Di Valerio,

and an analyst during the Company’s third quarter earnings call illustrates, Coinstar led investors to believe that inventory was firmly under control and the 28-day delay problem was a non-issue:

[Analyst]: [Coinstar had] a pretty significant uptick in gross margin. Was that a function

of lower DVD costs from removal of studio workarounds and lower cost of 28-day delayed disks or was it more inventory management or was it a combination of all those? And what are you anticipating for gross margin in Q4 and 2011 for just general trends?

[Di Valerio]: Thanks, Mike. This is Scott. Yeah, we certainly—the gross margin this

quarter, we benefited from the fact that we had a full quarter of contracts signed with all the major studios. You think back to the third quarter last year, I believe we signed the Sony and the Paramount deal during the third quarter. And we still had other distribution—other studios that were out buying through other distribution means. So, certainly having the contracts in place and buying with the studios has helped us in our margins for this third quarter, along with, you know, certainly, the team is getting better and better around inventory management and buying the right amount of titles as it relates to going through—getting through into the kiosks.

Coinstar, Inc., Coinstar, Inc. 2010 Third Quarter Conference Call, http://phx.corporate-

ir.net/phoenix.zhtml?c=92448&p=irol-eventdetails&eventid=3389798 (last visited Apr. 7, 2011).

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7. The market reacted vigorously to Coinstar’s misstatements and omissions in the

Company’s earlier projections and market guidance. In the space of just two trading days

Coinstar’s stock lost over 27% of its market value, or more than $500 million in market

capitalization. Unsurprisingly, the announcement of the ‘revised’ guidance also sparked a

number of investigations and civil lawsuits claiming violations of Sections 10(b) and 20(a) of the

Securities and Exchange Act of 1934 (the “Exchange Act”), 15 U.S.C. §§ 78j(b), 78t(a).

8. Aside from the loss of millions of dollars in market capitalization, Coinstar faces

a number of serious and costly penalties related to illegal insider stock transactions and false and

misleading statements. False and misleading statements made in relation to the Company’s

financial prospects and projections are punishable under the Exchange Act and expose the

Company to various civil and criminal penalties for fraud. See 15 U.S.C. § 78j(b), 17 C.F.R.

240.10b-5. Similarly, stock transactions made on the basis of material, non-public information

are punishable both civilly and criminally. See 15 U.S.C. § 78j(b); 17 C.F.R. 240.10b-5. In

addition, the Company faces loss of goodwill and market and investor confidence due to the

serious breaches of fiduciary duty as alleged herein.

9. As a direct and proximate result of the breaches of fiduciary duty described

herein, Defendants have damaged the Company and are therefore liable for damages and other

relief which the Court may deem necessary and proper.

II. JURISDICTION AND VENUE

10. This Complaint is filed and these proceedings are instituted under the provisions

of, inter alia, Section 2.08.010 of the Revised Code of Washington.

11. The violations alleged in this Complaint have been committed in whole or in part

in King County, in the State of Washington, by Defendants named herein. Specifically, Nominal

Defendant Coinstar has its principle place of business in King County, Washington and conducts

a substantial portion of its business within the State of Washington. In addition, the Director

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Defendants, identified infra, are all members of the Board of Coinstar, which has its principal

place of business in King County, Washington.

12. Accordingly, this Court has jurisdiction over all matters raised and parties

identified herein. Also, because all of the Defendants reside and/or may be found in King

County, Washington, venue is proper in this Court.

III. PARTIES

A. Plaintiffs

13. Plaintiffs Tom and Amy Willis are, and were at all times relevant to this

Complaint, owners of shares of Coinstar common stock.

14. Plaintiff Gary Wilkerson is, and was at all times relevant to this Complaint, an

owner of shares of Coinstar common stock.

B. Nominal Defendant

15. Nominal Defendant Coinstar is incorporated in Delaware and maintains its

executive offices at 1800 114 Ave SE, Bellevue, Washington 98004, in this judicial district.

Coinstar provides automated retail solutions in the United States and internationally. The

Company owns and operates self-service coin-counting machines, which enable consumers to

convert their coins into dollar bills, gift cards, or an e-certificate, and also installs and operates

DVD kiosks, which enable customers to rent or purchase movies. As of December 31, 2009, the

Company owned and operated 19,200 coin-counting machines and 22,400 DVD kiosks. As of

October 28, 2010, Coinstar derived approximately 80% of its revenue from DVD sales through

the Company’s kiosks.

C. Director Defendants

16. Defendant Paul D. Davis (“Davis”), at all relevant times, was and is the Chief

Executive Officer (“CEO”) of Coinstar. Defendant Davis made material misstatements and

omissions of fact and certified the Company’s SEC filings including its Form 10-Q for 3Q 2010

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filed with the SEC on October 28, 2010. On November 2, 2010, Defendant Davis exercised

27,459 options, sold $987,102 in Coinstar common stock, and recognized a profit of $160,091.

17. Defendant Deborah L. Bevier (“Bevier”) has been Chairman of the Board of

Coinstar since 2008. Defendant Bevier also serves as a member of the Audit Committee and has

done so throughout the relevant time period. Defendant Bevier made material misstatements and

omissions of fact and certified the Company’s SEC filings, including its Form 10-Q for 3Q 2010

filed with the SEC on October 28, 2010.

18. Defendant Ronald B. Woodard (“Woodard”) has been a director of Coinstar since

August of 2001. Woodard is chairperson of MagnaDrive Corporation (an industrial magnetic

coupling manufacturer). Woodard co-founded MagnaDrive in April 1999 after a 32-year career

with The Boeing Company, where he held numerous positions including president of The Boeing

Commercial Airplane Group. Mr. Woodard is currently a director of AAR Corp. (a provider of

aftermarket support to the aviation and aerospace industry) and Continental Airlines, Inc. (a

commercial airline company). On November 8, 2010, Defendant Woodard exercised 12,500

options, sold $769,500 worth of Coinstar common stock, and recognized $467,400 in proceeds.

19. Defendant David M. Eskenazy (“Eskenazy”) has been a director of Coinstar since

August of 2000. Eskenazy also serves as a member of the Audit Committee and has done so

throughout the relevant time period. He has been a principal in Esky Advisors LLC (a business

advisory services firm) since October 2008. He served as the chief operating officer of Investco

Financial Corporation (a real estate development and management company in the Puget Sound

region) from April 2008 to September 2008, and as chief investment officer from January 2007

to March 2008. Between November 9 and 12, 2010, Defendant Eskenazy exercised 7,000

options, sold $563,503 in Coinstar common stock, and received $372,403 in proceeds.

20. Defendant Robert D. Sznewajs (“Sznewajs”) has been a director of Coinstar since

August of 2002. Sznewajs also serves as a member of the Audit Committee and has done so

throughout the relevant time period. Since January 2000, Mr. Sznewajs has served as President,

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Chief Executive Officer, and a member of the Board of Directors of West Coast Bancorp (a bank

holding company). On November 9 and 10, 2010, Defendant Sznewajs sold 2,900 shares of

Coinstar common stock for proceeds of $178,085.

21. Defendant Arik A. Ahitov (“Ahitov”) has been a director of Coinstar since May

of 2008. Ahitov also serves as a member of the Audit Committee and has done so throughout

the relevant time period. Ahitov is currently a Vice President and portfolio manager of

Shamrock Capital Advisors, Inc. (“Shamrock Capital”) (a registered investment advisor), a

position he has held since September 2006. Mr. Ahitov has also served as a portfolio manager

for the Shamrock Activist Value Fund since September 2004. Shamrock Capital and its affiliates

own over 5% of the outstanding shares of Coinstar. On November 2, 2010, Defendant Ahitov

exercised 6,529 stock options and sold $380,967 in Coinstar common stock for proceeds of

$161,096.

22. Defendant Daniel W. O’Connor (“O’Connor”) was a member of the Coinstar

Board during all times relevant to this Complaint. Defendant O’Connor joined the Coinstar

Board in February of 2009 and retired effective March 18, 2011. On November 23, 2010,

Defendant O’Connor exercised 1,483 stock options and sold $243,900 worth of Coinstar

common stock for proceeds of approximately $203,169.

D. Officer Defendants

23. Defendant Donald R. Rench (“Rench”) is Coinstar’s General Counsel and

Corporate Secretary. Rench joined Coinstar in March 2000 and served as corporate counsel

through August 2002. In March 2002, Rench assumed the responsibilities of corporate secretary

and in August 2002 was promoted to General Counsel. Previously, Rench served as corporate

counsel for NetManage, Inc. and Wall Data, Inc. Rench was also an attorney in private practice

in Cincinnati, Ohio for six years. Between November 3, 2010 and November 12, 2010, Rench

exercised 32,565 stock options, sold 32,057 shares of Coinstar common stock, and recognized

approximately $1,104,177 in proceeds.

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24. Defendant Timothy J. Hale (“Hale”) is Interim Chief Customer Officer at

Coinstar, responsible for sales and client relations. Prior to that, Defendant Hale was Vice

President of Client Relations at Coinstar’s subsidiary, Redbox. On November 18, 2010, Hale

sold 1,900 shares of Coinstar common stock for proceeds of $112,613.

25. Defendants Hale and Rench are collectively referred to herein as the “Officer

Defendants.”

26. The Director Defendants and the Officer Defendants are sometimes collectively

referred to herein as the “Individual Defendants.”

IV. THE INDIVIDUAL DEFENDANTS’ FIDUCIARY DUTIES

27. By reason of their positions as officers and/or directors of the Company and

because of their ability to control the business and corporate affairs of the Company, the

Individual Defendants owed the Company and its shareholders the fiduciary obligations of good

faith, trust, loyalty and due care, and were and are required to use their utmost ability to control

and manage the Company in a fair, just, honest and equitable manner. The Director Defendants

were and are required to act in furtherance of the best interests of the Company and its

shareholders so as to benefit all shareholders equally and not in furtherance of their personal

interest or benefit. Each director and officer of the Company owes to the Company and its

shareholders the fiduciary duty to exercise good faith and diligence in the administration of the

affairs of the Company and in the use and preservation of its property and assets, and the highest

obligations of fair dealing.

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

directors and/or officers of the Company, were able to and did, directly and/or indirectly,

exercise control over the wrongful acts complained of herein.

29. In order to faithfully discharge their duties, the officers and directors of the

Company were required to exercise reasonable and prudent supervision over the management,

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policies, practices and controls of the Company. By virtue of such duties, the officers and

directors of the Company were required to, among other things:

a) exercise good faith in ensuring that the affairs of the Company were

conducted in an efficient, business-like manner so as to make it possible to

provide the highest quality performance of its business;

b) exercise good faith in ensuring that the Company was operated in a

diligent, honest and prudent manner and complied with all applicable federal and

state laws, rules, regulations and requirements, including acting only within the

scope of its legal authority;

c) exercise good faith in supervising the preparation, filing and/or

dissemination of financial statements, press releases, audits, reports or other

information required by law, and in examining and evaluating any reports or

examinations, audits or other financial information concerning the financial

condition of the Company;

d) exercise good faith in ensuring that the Company’s financial statements

were prepared in accordance with Generally Accepted Accounting Principles

(“GAAP”); and

e) refrain from unduly benefiting themselves and other Company insiders at

the expense of the Company.

30. The Individual Defendants, particularly the members of the Audit Committee,

were responsible for maintaining and establishing adequate internal accounting controls for the

Company and ensuring that the Company’s financial statements were based on accurate financial

information.

31. According to GAAP, to accomplish the objectives of accurately recording,

processing, summarizing and reporting financial data, a corporation must establish an internal

accounting control structure. Among other things, the Individual Defendants were required to:

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(1) make and keep books, records and accounts, which, in reasonable detail, accurately and fairly

reflect the transactions and dispositions of the assets of the issuer; and (2) devise and maintain a

system of internal accounting controls sufficient to provide reasonable assurances that – (a)

transactions are executed in accordance with management’s general or specific authorization;

and (b) transactions are recorded as necessary to permit preparation of financial statements in

conformity with GAAP.

32. Coinstar’s Audit Committee Charter provides that the Audit Committee shall,

among other things:

(c) Review Financial Statements and Financial Disclosure

(i) Prior to filing any periodic report, meet with management and the independent auditor to review and discuss the annual audited financial statements and quarterly financial statements, including the Company’s disclosures under “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and the report of the independent auditor thereon and to discuss any off-balance sheet structures and significant issues encountered in the course of the audit work, including any restrictions on the scope of activities, access to required information or the adequacy of internal controls.

(ii) Regularly review with the independent auditor any audit problems or difficulties and management’s response, including adjustments noted or proposed by the independent auditor but not taken (as immaterial or otherwise) by management, communications between the audit team and the national office concerning auditing or accounting issues, and any management or internal control letters issued or proposed to be issued by the auditor. Review and discuss with the independent auditor the responsibilities, budget and staffing of the Company's internal audit function and proposed plans for the coming year, including intended level of support for and coordination with the external audit process.

(iii) If so determined by the Committee, based on its review and discussion of the audited financial statements with management and the independent auditor, its discussions with the independent auditor regarding the matters required to be discussed by SAS 61, and its discussions regarding the auditor's independence, recommend to the Board whether the audited financial statements be included in the Company's annual report on Form 10-K.

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(iv) Review earnings press releases in advance including all quarterly earnings releases. Discuss or review financial information and earnings guidance provided to analysts and rating agencies; this discussion or review may be done generally; does not require the Committee to discuss in advance each instance in which the Company may provide earnings guidance.

(d) Periodic Assessment of Accounting Practices and Policies and Risk and

Risk Management

(i) Obtain and review timely reports from the independent auditor regarding (1) all critical accounting policies and practices to be used, (2) all alternative treatments of financial information within GAAP that have been discussed with management, ramifications of the use of such alternative disclosures and treatments, and the treatment preferred by the independent auditor, and (3) other material written communications between the independent auditor and management, such as any management letter or schedule of unadjusted differences.

(ii) Review at least annually (a) major issues regarding accounting principles and financial statement presentations, including any significant changes in the Company's selection or application of accounting principles, and major issues as to the adequacy of the Company's internal controls and any special audit steps adopted in light of material control deficiencies; (b) analyses prepared by management and/or the independent auditor setting forth significant financial reporting issues and judgments made in connection with the preparation of the financial statements, including analyses of the effects of alternative GAAP methods on the financial statements; and (c) the effect of regulatory and accounting initiatives on the financial statements of the Company.

(iii) Review changes in promulgated accounting and auditing standards that may materially affect the Company’s financial reporting practices.

(iv) Review any reports by management regarding the effectiveness of, or any deficiencies in, the design or operation of disclosure controls and procedures or internal controls and any fraud, whether or not material, that involves management or other employees who have a significant role in the Company's internal controls. Review any report issued by the Company's independent auditor regarding management's assessment of the Company's internal controls.

(v) Discuss policies with respect to risk assessment and risk management, including the Company’s major financial risk exposures

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and the steps management has taken to monitor and control such exposures.

(e) Related-Party Transactions

Review and approve all relatedperson transactions (as defined in Item 404 of Regulation S-K, as promulgated by the SEC), including transactions between the Company and its senior officers or directors or affiliates of officers or directors.

Coinstar, Inc., Audit Committee Charter, http://media.corporate-ir.net/media_files/IROL/92/92448/AuditCommittee08.pdf (April 3, 2008).

33. As Coinstar’s most recent proxy filing describes, the Audit Committee is

responsible for ensuring compliance with Coinstar’s Code of Ethics, as well as legal and

regulatory requirements:

The purpose of the Audit Committee is to assist the Board of Directors in oversight of (i) the integrity of Coinstar’s financial statements, (ii) Coinstar’s compliance with legal and regulatory requirements, (iii) the independent registered public accounting firm’s qualifications and independence, (iv) the performance of Coinstar’s independent registered public accounting firm and the internal auditors, and (v) compliance with Coinstar’s code of ethics for senior financial officers and with Coinstar’s code of conduct for all Coinstar personnel. The Audit Committee retains the authority and responsibility to select, evaluate, and, where appropriate, replace the independent registered public accounting firm. The Audit Committee may retain independent counsel and accountants and other professionals to assist it without seeking Board approval with respect to the selection, fees, or terms of engagement of any such advisors.

Coinstar, Inc., Proxy Statement (Schedule 14A) (Rule 14a-101), at 10 (Apr. 23, 2010).

34. Further, as Coinstar’s Corporate Governance Principles provide, it is the

responsibility of members of the Board to ensure the long-term interests of the Company are

being looked after:

The Company’s business is conducted by its employees, managers and corporate officers led by the chief executive officer (“CEO”), with oversight from the Board. The Board selects the CEO and works with the CEO to elect/appoint other corporate officers who are charged with managing the business of the Company. The Board has the responsibility of overseeing, counseling and directing the corporate officers to ensure that the long-term interests of the Company are being

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served. The Board and the corporate officers recognize that the long-term interests of the Company are advanced when they are responsive to the concerns of shareholders, customers, suppliers, business partners, employees and communities. *** The Board's general oversight responsibilities include, but are not limited to, the following: (1) review the long-range business plans of the Company and monitor performance relative to achievement of those plans; (2) consider long-range strategic issues and risks to the Company; (3) approve policies of corporate conduct that promote and maintain the integrity of the Company; and (4) evaluate the CEO’s performance and review the Company’s succession plan for the CEO.

Coinstar, Inc., Corporate Governance Principles, http://phx.corporate-

ir.net/phoenix.zhtml?c=92448&p=irol-govguidelines (last updated June 4, 2007).

35. In addition, members of the Board are to “act ethically at all times,” place the

Company’s interests above their own and provide shareholders with all pertinent information

available:

Ethics and Conflicts of Interest

The Board expects the directors, officers and employees to act ethically at all times and acknowledge their adherence to the policies comprising the Company’s codes of ethics and conduct. The Board will promptly disclose any waivers from the Company’s Code of Conduct, which applies to the Board. If an actual or potential conflict of interest arises for a director, the director shall promptly inform the Chairman of the Board or the Chairperson of the Nominating and Governance Committee. All directors will recuse themselves from any discussion or decision affecting their personal, business or professional interests. The Company shall not, directly or indirectly, extend or maintain credit, arrange for or renew an extension of credit in the form of a personal loan to or for any director or executive officer. Board’s Interaction With Stakeholders

The CEO and other corporate officers are responsible for establishing effective communications with the Company’s stakeholders, including shareholders, customers, communities, employees, suppliers, creditors, and corporate partners. It is the policy of the Board that management speaks for the Company.

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Coinstar, Inc., Corporate Governance Principles, http://phx.corporate-

ir.net/phoenix.zhtml?C=92448&P=irol-govguidelines (last updated June 4, 2007).

36. As described herein, the Director Defendants have breached their fiduciary duties

to Coinstar and in doing so have breached the Company’s Corporate Governance Principles and

Code of Ethics that they themselves instituted by engaging in insider stock transactions and

failing to provide shareholders with material information concerning the financial condition and

future prospects of the Company.

V. SUBSTANTIVE ALLEGATIONS

37. Coinstar, incorporated on October 12, 1993 under the laws of the State of

Delaware, is a provider of automated retail services. Coinstar’s business is composed of two

primary business segments: 1) change processing services — under the Coinstar brand name, and

2) DVD rental services — under the trade name of Coinstar’s subsidiary, Redbox. Coinstar also

provides money transfer services through its Travelex Money Transfer Limited subsidiary,

acquired in 2006.

38. In recent years, it is Coinstar’s Redbox DVD rental business which has driven

profits and revenues, representing approximately 80% of Coinstar’s total revenues. Redbox

operates over 30,000 self-service DVD kiosks, which allow consumers to rent or purchase DVDs

at over 26,000 locations across the United States. Also, Redbox now offers high definition Blu-

Ray DVDs, in addition to standard definition DVDs. Redbox kiosks are primarily located at

locations with heavy foot traffic, such as grocery stores, malls, pharmacy stores and airports.

There are no membership fees and customers need only have a valid credit card, which they

swipe through the machine, in order to rent a DVD. After renting the DVDs customers have

access to the disc for 24 hours for a flat fee, with additional fees charged for extra days.

However, customers may return the DVD to any Redbox kiosk location, rather than just the

kiosk at the original rental location.

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39. Redbox’s revenues are primarily generated from fees charged for purchase and/or

rental of DVDs. The DVDs are acquired from vendors, most of which are large movie and

entertainment distribution companies, such as Paramount Home Entertainment, Inc.

(“Paramount”), Universal Studios Home Entertainment, LLC (“Universal Studios”), 20th Century

Fox Home Entertainment, LLC (“20th Century Fox”), Warner Home Video (“Warner”),

Lionsgate Films, Inc. (“Lionsgate”), and SPHE Scan Based Trading Corporation (“Sony”).

Coinstar and Redbox are dependent upon licenses from these distributors in order to provide

DVDs to customers on a timely basis. In return for discounts and access to high-demand DVDs,

Redbox agrees to purchase minimum quantities of DVDs. As discussed below, a number of

distributors have begun instituting certain delays in their licensing scheme, limiting Redbox’s

ability to maintain margins and provide high-demand DVDs to consumers in a timely manner.

A. Positive News

40. In mid-2010, things were looking very good for Coinstar’s burgeoning Redbox

DVD rental service. On October 28, 2010, the Company announced its earnings for the third

fiscal quarter of 2010 (“3Q 2010”), along with guidance to the market as to the fourth quarter of

2010 (“Q4 2010”) and the first quarter of 2011 (“Q1 2011”).

41. The Q3 2010 earnings announcement was very positive indeed, reporting

increases in sales, revenues and profits from continuing operations. Among other things,

Coinstar reported that sales revenue — 80% of which is Redbox DVD rental and sales revenue

— had increased by a remarkable 42% over the same quarter the previous year, meeting

analysts’ rather optimistic estimates. See Coinstar, Inc., Current Report (Form 8-K), at Ex. 99.1

(Oct. 28, 2010). That number represented a more than 54% increase in Redbox revenues over

the same quarter the previous year. Id. Also, as reported below, income from continuing

operations had more than doubled over the same quarter the previous year:

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COINSTAR, INC.

CONSOLIDATED STATEMENTS OF NET INCOME (in thousands, except per share data)

(unaudited)

For the Three

Months Ended

September 30,

For the Nine Months Ended

September 30,

2010 2009 2010 2009 Revenue $ 380,187 $ 267,725 $1,045,665 $734,322 Expenses:

Direct operating (1) 255,449 184,483 722,204 502,884 Marketing 7,811 4,154 16,375 10,837 Research and development 1,699 1,360 4,928 3,916 General and administrative 37,655 26,004 101,053 76,368 Depreciation and other (1) (2) 30,626 22,047 93,054 62,616 Amortization of intangible assets 756 928 2,620 2,684 Litigation settlement 0 0 5,379 0

Total expenses 333,996 238,976 945,613 659,305

Income from operations 46,191 28,749 100,052 75,017 Other income (expense):

Foreign currency and other, net (130) 12 (177) (19) Interest income 48 3 135 39 Interest expense (8,741) (9,357) (27,167) (24,470) Early retirement of debt 0 (1,082) 0 (1,082)

(8,823) (10,424) (27,209) (25,532)

Income from continuing operations before income

taxes 37,368 18,325 72,843 49,485 Income tax expense (15,969) (6,706) (29,364) (17,435)

Income from continuing operations 21,399 11,619 43,479 32,050 Income (loss) from discontinued operations, net of tax (1,894) 29,744 (4,165) 21,861

Net income 19,505 41,363 39,314 53,911 Net income attributable to non-controlling interests 0 0 0 (3,627)

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For the Three

Months Ended

September 30,

For the Nine Months Ended

September 30, Net income attributable to Coinstar, Inc $ 19,505 $ 41,363 $ 39,314 $ 50,284

Basic Earnings Per Share:

Basic earnings per share from continuing operations attributable to Coinstar, Inc. $ 0.68 $ 0.38 $ 1.38 $ 0.96

Basic earnings (loss) per share from discontinued operations attributable to Coinstar, Inc. (0.06) 0.98 (0.13) 0.73

Basic earnings per share attributable to Coinstar, Inc. $ 0.62 $ 1.36 $ 1.25 $ 1.69

Diluted Earnings Per Share: Diluted earnings per share from continuing operations

attributable to Coinstar, Inc. $ 0.66 $ 0.38 $ 1.35 $ 0.94

Diluted earnings (loss) per share from discontinued operations attributable to Coinstar, Inc. (0.06) 0.96 (0.13) 0.72

Diluted earnings per share attributable to Coinstar, Inc. $ 0.60 $ 1.34 $ 1.22 $ 1.66

Weighted Average Shares Outstanding: Shares used in basic per share calculations 31,411 30,437 31,364 29,829 Shares used in diluted per share calculations 32,382 30,840 32,179 30,209

Coinstar, Inc., Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act

of 1934 (Form 10-Q), at 3 (Oct. 28, 2010).

42. More importantly, Coinstar’s projections for Q4 2010 and beyond were more than

glowing, promising similar increases in operating revenues and income. As the Company stated

in its earnings release:

“Coinstar’s exceptional third quarter performance demonstrates the strength of our leading Coin and DVD businesses, and our ability to execute, drive operational efficiencies and deliver what our consumers want,” said Paul Davis, chief executive officer of Coinstar, Inc. “We are confident in our growth

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prospects and believe we are in a great position to continue creating value through our automated retail strategy.”

***

“Focus on our consumers, our partners and growing profitably continued to drive strong growth at the top and bottom line,” said J. Scott Di Valerio, chief financial officer of Coinstar, Inc. “Our solid financial and operating performance enables us to invest for the future and focus on returns for our shareholders. Looking to 2011, we are excited about the opportunities ahead across our businesses.”

Coinstar, Inc., Current Report (Form 8-K), Ex. 99.1, at 1 (Oct. 28, 2010).

43. Particularly encouraging, were statements regarding Coinstar’s agreements with

various studios, which would allow Redbox to provide movies to consumers on a timely basis:

Income from operations for the third quarter of 2010 was $46.2 million, which resulted in an operating margin of 12.1%, including $1.4 million in share-based payments expense related to the company’s agreements with Sony Pictures Home Entertainment (Sony) and Paramount Home Entertainment Inc. This compares with income from operations of $28.7 million and an operating margin of 10.7% in the third quarter of 2009 that included $1.1 million in share-based payments expense related to the Sony agreement.

Coinstar, Inc., Current Report (Form 8-K), Ex. 99.1, at 1 (Oct. 28, 2010).

44. During a conference call, held on the same date, October 28, 2010, Defendant

Davis and CFO DiValerio further expanded on the positive projections concerning Redbox, its

operations, inventory and pending agreements with the distributors to access high-demand DVD

titles:

[Analyst]: [Coinstar had] a pretty significant uptick in gross margin. Was that a function of lower DVD costs from removal of studio workarounds and lower cost of 28-day delayed disks or was it more inventory management or was it a combination of all those? And what are you anticipating for gross margin in Q4 and 2011 for just general trends? [Di Valerio]: Thanks, Mike. This is Scott. Yeah, we certainly—the gross margin this quarter, we benefited from the fact that we had a full quarter of contracts signed with all the major studios. You think back to the third quarter last year, I believe we signed the Sony and the Paramount deal during the third quarter. And we still had other distribution—other studios that were out buying through other distribution means. So, certainly having the contracts in place and buying with

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the studios has helped us in our margins for this third quarter, along with, you know, certainly, the team is getting better and better around inventory management and buying the right amount of titles as it relates to going through—getting through into the kiosks.

Coinstar, Inc., Coinstar, Inc. 2010 Third Quarter Conference Call, http://phx.corporate-

ir.net/phoenix.zhtml?c=92448&p=irol-eventdetails&eventid=3389798 (last visited Apr. 7, 2011).

45. The press reported the positive news widely, lauding Coinstar for the continuing

increases in revenue and optimistic outlook:

Coinstar Inc., owner of the Redbox movie-rental kiosks, jumped the most in five years in Nasdaq Stock Market trading after its third-quarter profit and 2011 forecast exceeded analysts’ estimates. Coinstar, based in Bellevue, Washington, rose $11.32, or 24 percent, to $57.58 at 4 p.m. in New York, the biggest gain since October 2005. The shares more than doubled this year. The company, along with Netflix Inc., will continue to profit from rentals of DVDs because they offer consumers better value than video-on-demand or rentals available through cable or satellite services, said Michael Pachter, an analyst at Wedbush Securities in Los Angeles who has an “outperform” rating on Coinstar’s shares. The company plans to expand into online service next year. “It’s them and Netflix; they’re going to divide the world,” Pachter said in an interview. “Because Coinstar offers lower rental costs than VOD at slightly less convenience, there’s a lot of room for these guys to grow.” Profit from continuing operations rose to $21.4 million, or 66 cents a share, from $11.6 million, or 38 cents, a year earlier, Coinstar said in a statement. That beat the 50-cent average of seven analysts’ estimates compiled by Bloomberg. Sales climbed 42 percent to $380.2 million, the company said, compared with the $381.8 million average of 12 estimates. DVD revenue jumped 54 percent. Taking Customers Coinstar, with about 28,500 DVD kiosks, is picking up customers as Blockbuster Inc. and Movie Gallery close stores. Movie Gallery, based in Dothan, Alabama, filed for bankruptcy protection in February and is liquidating. Blockbuster, the Dallas-based movie-rental chain, also declared bankruptcy and is closing some outlets as it seeks to restructure its debts.

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This quarter, Coinstar forecasts revenue will rise to $415 million to $440 million and earnings will increase to 79 cents to 85 cents a share. Analysts were projecting 77 cents on sales of $422.5 million, the average of eight estimates compiled by Bloomberg. In a filing, Coinstar projected 2011 profit of $3 to $3.50 a share from continuing operations on revenue of $1.8 billion to $1.95 billion. On that basis, the company was projected by analysts to earn $2.93 a share on sales of $1.8 billion, the average of 10 analysts’ estimates compiled by Bloomberg. Digital Strategy Coinstar plans to form a partnership in 2011 with an existing player in digital downloads to save money on building its own infrastructure and gain faster access to content, Chief Executive Officer Paul Davis said on a conference call. “It’s really getting down to choosing the right partner,” said Davis, who declined to answer questions about the exact timing of its planned digital rollout. Citing the company’s plan to begin offering digital downloads, Northland Securities analyst Darren Aftahi boosted his rating on the stock to “outperform” from “market perform” and raised his price target for the shares to $71. Investors have been waiting for Coinstar to outline a strategy for responding to consumers’ growing preference for downloading videos, according to Paul Coster, a JPMorgan Chase & Co. analyst who rates the stock “neutral.” Netflix, which mails DVDs and streams movies, said last week it signed up 1.93 million new subscribers in the third quarter, raising the total to 16.9 million. “DVD kiosk revenue opportunity will peak in 2011 owing to loss of share of the home entertainment market to online video services,” Coster wrote in an Oct. 25 note to investors.

Cliff Edwards, Coinstar Jumps as Profit, Forecast Exceed Estimate, BLOOMBERG (Oct. 29,

2010), http://www.bloomberg.com/news/2010-10-29/Coinstar-rises-as-profit-outlook-exceed-

analysts-estimates.html.

46. The statement made in Coinstar’s Q3 2010 quarterly report, as well as statements

made during conference calls and in press releases incidental to the quarterly report were false

and misleading when they were made due to the fact that Defendants knew or should have

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known that Coinstar’s Redbox subsidiary was not performing as forecast by the Company.

Indeed, revenues were falling and inventory control problems and distributor delays were

severely impacting the Company’s revenues and income. Nonetheless, the Company’s 3Q 2010

Form 10-Q contained statements regarding the supposed effectiveness of its controls and internal

procedures. Those statements are as follows:

Item 4. Controls and Procedures Evaluation of Disclosure Controls and Procedures We maintain a set of disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Management, with the participation of our Chief Executive

Officer and Chief Financial Officer, has evaluated the effectiveness of the

design and operation of our disclosure controls and procedures as of the end of

the period covered by this report and has determined that such disclosure

controls and procedures are effective.

Coinstar, Inc., Quarterly Report (Form 10-Q), at 33 (Oct. 28, 2010) (emphasis added).

47. However, as the market and investors would soon learn, the optimistic outlook

was not warranted and Coinstar’s forecast and estimates were false and misleading due to

problems with DVD inventory and availability from distributors, all of which was known to

Defendants when the grossly inflated estimates were given.

B. Stock Price Increase on Positive News and Insider Stock Sales

48. Coinstar’s positive news and projections were very well-taken by the market,

leading to a dramatic rise in the Company’s per share price. Indeed, announcement of Coinstar’s

fourth quarter 2010 earnings forecast caused the Company’s common stock to rise 24% in the

space of one day, October 28. Things improved further just a few weeks later when rumors hit

the market suggesting that Amazon was considering a merger or buyout of the Company. See,

e.g., Jeanine Poggi, What’s Amazon’s Next M&A Target?, The Street (Nov. 8, 2011),

http://www.thestreet.com/story/10915132/1/whats-amazons-next-ma-target.html (“Elsewhere in

the movie segment, a deal with Coinstar(CSTR), owner of Redbox DVD kiosks, is also popping

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up as a possibility. Coinstar announced that it is talking with potential partners for a streaming

service to compete with Netflix.”).

49. Indeed, the market believed that Coinstar was heading for prosperity, with

continually rising margins and revenue:

Coinstar (CSTR – Snapshot Report), best known for its coin-counting kiosks in many convenience and grocery stores, is coming off of its seventh consecutive earnings surprise, which sent shares to all-time highs. The continual earnings boosts are in part due to the company’s ownership of the increasingly popular redbox kiosks, a self-service DVD vendor. There are now roughly 40,000 redbox kiosks under Coinstar’s management nationwide. While the valuations look high initially, with earnings expected to more than triple investors do not mind paying a premium. Coinstar said its top line grew 42%, to $380 million, during the third quarter, which was announced on Oct 28. The cash cow remains to be the DVD revenue, rising over 54% to $306 million. Investors were more than happy with earnings per share coming in 15 cents higher than expected, at 66 cents. This was Coinstar’s seventh consecutive earnings surprise. Estimates Climbing CEO Paul Davis described the results as exceptional and went on to raise guidance, which spurred analysts to do the same. After 8 upward revisions the Zacks Consensus Estimate for fiscal 2010 is up 24 cents, to $2.19. Next year’s projections are up 52 cents on average, to $3.32. Given these targets, earnings are expected to more than triple by the end of 2011, given the $1.06 earned in 2009. Valuations Shares of CSTR are not quite the bargain that the DVD rentals are, but at 19 times the 2011 estimates and with a PEG of 1.4, it is not overpriced either. In fact, these valuations are lower than the historic averages for CSTR. Also, as long as the growth story keeps improving, investors have no trouble buying up shares. Following the earnings release, the stock quickly jumped to an all-time high after the news. CSTR is taking a breather right now, but as investors get used to the higher price, it should continue higher.

Bill Wilton, Coinstar’s Aggressive Growth is Worth Your Spare Change, Zacks.com (Nov. 10,

2010), http://blogs.forbes.com/zacks/2010/11/10/coinstars-aggressive-growth-is-worth-your-

spare-change/.

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50. It was during this short-lived appreciation in Coinstar common stock that the

Individual Defendants exercised stock options and sold thousands of shares of Coinstar common

stock.

51. Six of the seven members of the Board, Defendants Ahitov, Davis, Eskenazy,

Sznewajs, O’Connor and Woodard sold over $1.5 million in Coinstar common stock shares

between November 2, 2010 and November 23, 2010. As would become evident just a few weeks

later, the trades made by the Individual Defendants were based on non-public information

concerning decreased earnings in the Company’s Redbox subsidiary due to inventory and vendor

problems.

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Directors Person Date Transaction Shares Price Value Proceeds

Arik A. Ahitov 11/2/2010 Exercise of Options 3,401 ($30.72) ($104,479)

11/2/2010 Exercise of Options 3,128 ($36.89) ($115,392)

11/2/2010 Open-Market Sale 6,529 $58.35 $380,967

$161,096

Paul Davis 11/2/2010 Exercise of Options 16,252 ($30.82) ($500,887)


11/2/2010 Other Sale 17,019 $58.00 $987,102

$160,091 David M. Eskenazy 11/11/2010

Exercise of Options 1,500 ($27.60) ($41,400)



11/11/2010 Open-Market Sale 3,033 $62.36 $189,138

11/12/2010 Open-Market Sale 3,500 $63.29 $221,515


11/9/2010 Open-Market Sale 2,000 $61.05 $122,100

11/10/2010 Open-Market Sale 500 $61.50 $30,750

$372,403 Robert D. Sznewajs 11/9/2010 Open-Market Sale 2,300 $61.75 $142,025

11/10/2010 Open-Market Sale 600 $60.10 $36,060

$178,085 Ronald B. Woodard 11/8/2010



11/8/2010 Open-Market Sale 12,500 $61.56 $769,500

$467,400

Daniel W. O'Connor 11/23/2010


11/23/2010 Exercise of Options 429 ($30.72) ($13,179)

11/23/2010 Open-Market Sale 1,817 $62.25 $113,108

11/23/2010 Open-Market Sale 2,083 $62.79 $130,792

$203,169

Sub-Total $1,542,245

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Officers

Person Date Transaction Shares Price Value Proceeds

Timothy J. Hale 11/18/2010 Open-Market Sale 1,900 $59.27 $112,613

$112,613

Donald R. Rench 11/12/2010 Exercise of Options 5,821 ($30.07) ($175,037)




11/12/2010 Open-Market Sale 17,265 $60.99 $1,052,992

11/2/2010 Open-Market Sale 3,000 $58.70 $176,100



11/3/2010 Open-Market Sale 11,792 $59.03 $696,082

$1,104,177

Sub-Total $1,216,789

Total $2,759,034

52. As the timing of the above transactions make clear, the Individual Defendants

were eager to sell thousands of shares as soon as they could in order to maximize the impact of

the positive guidance that they had related during the Q3 2010 earnings call, conference call and

related statements to the market. Defendants knew, based on their inside information concerning

Redbox’s inventory control and distributor problems, that Coinstar’s earnings would not live up

to the estimates given.

C. Misstatements and Omissions Become Evident

53. On January 12, 2011, the other shoe dropped and Coinstar was forced to disclose

the truth about Redbox’s inventory and distributor problems. Moreover, the revelation explained

the extraordinary amount of insider stock sales that had taken place in November 2010, when

Coinstar finally announced that circumstances had changed and the Company would not meet its

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prior revenue and earnings estimates for the fourth fiscal quarter of 2010. Press Release,

Coinstar, Inc., Coinstar, Inc. Announces Preliminary 2010 Fourth Quarter Results and Updated

Full Year 2011 Guidance (Jan. 13, 2011) (available at

http://coinstar.org/us/pressreleases/1516026?opendocument). As the Coinstar press release

stated in pertinent part:

The company expected stronger performance from the titles scheduled for release during the 2010 fourth quarter holiday season, particularly from the slate of 28-day delay and higher-priced Blu-ray™ titles, despite a 16% lower box office for scheduled releases compared with those in fourth quarter 2009. In addition, in anticipation of demand for new releases that did not materialize, redbox removed older inventory early, impacting revenue and gross margin. Further, redbox consumers utilized “rent and return anywhere” to a higher level than expected, which caused temporary imbalances in available titles across the kiosk network. As a result, the company expects fourth quarter 2010 GAAP earnings per share (EPS) from continuing operations between $0.65 and $0.69 on a fully diluted basis, compared with guidance in the range of $0.79 to $0.85. GAAP EPS includes a reduction of $0.02 per share due to the expected increase in diluted share count of 1.3 million as a result of convertible debt and option exercise dilution and $0.02 per share due to expected higher share based expense related to the higher share price at the end of the quarter. Paul Davis, chief executive officer of Coinstar, Inc., said, “Overall, the

performance of the redbox business during the fourth quarter was not in line

with our forecast. This was redbox’s first holiday season with 28-day

delayed titles, and we underestimated the impact that the delay would have

on demand during the fourth quarter. We also expected much better

performance from Blu-ray and had purchased to a higher level of demand.

While consumer visits to the kiosks remained strong, the number of movies

per visit, or basket size, was lower than planned. We have already taken a

number of decisive steps to better align content purchases with our

consumers’ behavior, including offering more day and date titles and better

allocating Blu-ray titles to high demand areas. In addition, since inventory migration reflects the popularity of our rent and return anywhere capability, we have made adjustments in our field processes to minimize the impact of higher levels of migration on overall rentals. While some measures such as changes in purchasing take longer to impact financial performance, early results give us confidence that we have begun taking the right steps to address these issues and position the business for further success, which we will discuss further on our earnings call on February 3.

Id. (emphasis added).

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54. The reasons given by Coinstar for the expected downturn in earnings raised

considerable questions about the Company’s prior guidance. For instance, Coinstar stated that

the Company had “underestimated the impact that the” 28-day delay imposed by various movie

distributors on rental DVDs would have on its earning. Also, Coinstar related inventory

problems that led to a decrease in revenue due to weak demand for Blu-Ray DVDs. This

confused and dismayed most analysts who, taking the Company’s previous statements at face

value, believed the 28-day delay to be of little consequence and Redbox’s inventory management

to be beyond reproach.

55. Moreover, these statements directly contradicted statements which had been made

by the Company just a few weeks earlier. For example, as discussed above, in late October,

Coinstar had given the impression that Redbox’s inventory system was robust and the ‘problem’

with the distributors had been solved — implying that a 28-delay period would not be instituted

and/or if it was, it would have no impact whatsoever on Redbox revenues. See supra ¶ 33.

56. The market reacted vigorously to the revelation that Coinstar’s previous guidance

had been misstated. In the space of just two trading days Coinstar’s stock lost over 27% of its

market value, or more than $500 million in market capitalization. Unsurprisingly, the

announcement of the ‘revised’ guidance also sparked outrage in the press and the announcement

of a number of investigations and civil lawsuits claiming violations of Sections 10(b) and 20(a)

of the Securities and Exchange Act, 15 U.S.C. §§ 78j(b), 78t(a). As The Street reported:

The company pre-announced lower Q4 revenue and earnings, guiding $391 million, below the company’s prior forecast of $415 million to $440 million, and shy of the average estimate of $427 million. EPS is now expected in a range of 65 cents to 69 cents, versus a prior 79 cents to 85 cents. Analysts have been modeling 84 cents. Demand for newer releases fail to meet the company’s expectations, and having cleared older inventory in advance of new releases left the company with less on hand to make up for that demand. The company also cut its 2011 forecast to $1.70 billion to $1.85 billion, and EPS of $2.60 to $3.10, below the average estimate of consensus $1.87 billion and $3.34. Previously, the company had forecast $1.80 billion to $1.95 billion, and EPS of $3 to $3.50.

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Tiernan Ray, Coinstar Plunges 31%: Cuts Q4, 2011 Forecast, The Street (Jan. 13, 2011),

http://blogs.barrons.com/techtraderdaily/2011/01/13/coinstar-halted-news-pending/.

57. When the actual numbers for Q4 2010 were revealed, the news was indeed bad.

As the market feared, Redbox revenues had been severely hampered by the lack of timely access

to DVDs from major distributors, such as Universal, Warner and Fox:

[T]he studio licensing agreements we entered into during 2010 with Warner, Universal Studios, and 20th Century Fox provide that DVD titles will be available 28 days after the DVD becomes available for purchase at retail outlets. These delayed rental windows have resulted in the shifting of the availability of certain titles relative to historic patterns, most notably certain titles have shifted from the fourth quarter holiday season into the first quarter of the following year.

*** Revenue from our DVD Services segment in the fourth quarter of 2010 was lower than we initially anticipated. As a result, on January 13, 2011, we announced certain preliminary fourth quarter results and our stock price decreased substantially. This caused us to reevaluate the fair value of the DVD Services reporting unit. In doing so, we considered the price of our stock after the announcement as well as our new expectations for the reporting unit. The results of this analysis confirmed that the fair value of our DVD Services reporting unit was substantially in excess of its carrying value. Also, the events in the fourth quarter of 2010 were not considered to represent a triggering event that should cause us to reevaluate our Coin Services reporting unit because that reporting unit continued to perform as expected during the quarter.

Coinstar, Inc., Annual Report (Form 10-K), at 3 (Feb. 10, 2011).

58. In addition, Coinstar issued revised guidance regarding Q1 2011, citing inventory

problems and low demand for Blu Ray discs:

The problem: Redbox made some major miscalculations about its DVD inventory. The company purchased too many copies of certain discs and it hasn’t adjusted well to the 28-day delay it’s agreed to with Hollywood. (After studios put DVDs on sale, Redbox can’t start renting the films for a dollar a day until 28 days have passed.) Blu-Ray discs are drawing lower demand than Redbox anticipated, the company saying it learned that ‘the demand curve is different’ for the pricier discs.

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Julia Boorstin, Coinstar Shares Plummet Further on a Weak Q1 Outlook, CNBC (Feb. 3, 2011),

http://www.cnbc.com/id/41416538/Coinstar_Shares_Plummet_Further_on_a_Weak_Q1_Outloo

k.

59. A Bloomberg report expanded on the inventory issues which were revealed to be

plaguing the Company and driving revenues and margins down:

The company bought too many DVDs in the fourth quarter that underperformed, a cost that will carry into the current period, and is now refining how to gauge demand, Chief Financial Officer Scott Di Valerio said today on a call. The forecast marks the second-straight shortfall. Coinstar’s Jan. 13 report of a fourth-quarter miss triggered a 27 percent drop in the shares. “The processes that we have put in place, we believe, will get us into a spot where we are buying at the right levels and driving the right levels of demand,” Di Valerio said. Profit from continuing operations will be 15 cents to 25 cents a share, Bellevue, Washington-based Coinstar said today in a statement. Analysts predict 60 cents, the average of seven estimates in a Bloomberg survey. First-quarter sales will be $400 million to $420 million, Coinstar said. Analysts project revenue of $405.7 million, the average of 11 estimates. Fourth-quarter net income more than tripled to $11.7 million, or 35 cents a share, from $3.36 million, or 11 cents, a year earlier. Sales increased 31 percent to $390.8 million. Excluding some items, profit was 68 cents, compared with the recently lowered average estimate of 67 cents from 9 analysts. They predicted sales of $391.3 million. When Coinstar announced preliminary results last month, the company cited difficulties adjusting purchases to account for a 28-day delay in receiving the latest DVDs from Hollywood. The move gave studios more time to sell movies before offering them for rent.

Michael White, Redbox Operator Coinstar Declines After Profit Forecast Misses Projections,

BLOOMBERG (Feb. 3, 2011), http://www.bloomberg.com/news/2011-02-03/coinstar-falls-after-

first-quarter-forecast-misses.html.

60. By early February it was clear that the statements made by Defendants concerning

Coinstar’s positive outlook for its Redbox subsidiary were completely out of line with the reality

of the situation — known by Defendants at the time the false statements were made. In reality,

Redbox was experiencing slow Blu Ray sales, inventory problems, including, but not limited to

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an undisclosed 28-day waiting period being imposed by some distributors and lower revenues

due to slow consumer sales. All of this information should have been disclosed to shareholders

and the market. By failing to do so, the Individual Defendants breached their fiduciary duties

and exposed the Company to civil and criminal liability and loss of goodwill.

D. Coinstar Faces Serious Consequences for the Individual Defendants’ Breaches of Fiduciary Duty

61. As a result of the insider trading and false and misleading statements made by the

Individual Defendants in October and November of 2010 — as well as the revelation that

Coinstar’s Redbox business was facing serious pressures and decreasing revenue — Coinstar lost

over $500 million in market capitalization.

62. In addition, Coinstar faces a number of serious and costly penalties related to

illegal insider stock transactions and false and misleading statements. False and misleading

statements made in relation to the Company’s financial prospects and projections are punishable

under the Exchange Act and expose the Company to various civil and criminal penalties for

fraud. See 15 U.S.C. § 78j(b); 17 C.F.R. 240.10b-5. Similarly, stock transactions made on the

basis of material, non-public information are punishable both civilly and criminally. See id. In

addition, the Company faces loss of goodwill and market and investor confidence due to the

serious breaches of fiduciary duty alleged herein.

63. To date, a number of private lawsuits have been filed in conjunction with the false

and misleading statements made by Coinstar, including Packer v. Coinstar, Inc., et al., Case No.

C11-133 MJP (W.D. Wash. filed January 24, 2011); Weiss v. Coinstar, Inc., et al., Case No.

C11-202 MJP (W.D. Wash. filed February 4, 2011); Wright v. Coinstar, Inc., et al., Case No.

C110325 MJP (W.D. Wash. filed February 24, 2011); and Dingler v. Coinstar, Inc., et al., Case

No. C11-353 RSL (W.D. Wash. filed March 1, 2011). The result of these actions may well be

payment by the Company itself, or on behalf of a number of the Individual Defendants as

officers of Coinstar, of millions of dollars in legal fees and damages. In addition, Coinstar faces

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potential civil and criminal liability from various government agencies, including, but not limited

to, the SEC and the United States Department of Justice.

64. Coinstar has been — and continues to be — damaged by the breaches of fiduciary

duty, gross mismanagement and lack of meaningful internal controls which would have ensured

Defendants’ compliance with insider trading and anti-fraud laws. As a direct and proximate

result of the breaches of fiduciary duty described herein, Defendants have damaged the Company

and are therefore liable to the Company for damages and other relief which the Court may deem

necessary and proper.

VI. DERIVATIVE ACTION AND DEMAND FUTILITY ALLEGATIONS

65. Demand should be excused as futile given the dependent and conflicted nature of

the Coinstar Board and its members’ interest in the transactions which are the subject of this

action. Indeed, the primary allegations in this Complaint concern actions taken directly by

members of the Board, therefore rendering any objective consideration of a demand wholly

impossible.

66. Of the seven members of the Board, six members—Defendants Ahitov, Davis,

Eskenazy, Sznewajs, Woodard and O’Connor—engaged in illegal stock sales based on material

non-public information, garnering hundreds-of-thousands of dollars in profits for themselves. As

the chart below indicates, the Individual Defendants made large sums of money from the illicit

stock sales, to the detriment of the Company:

Person

No. Options

Exercised

No. Shares

Sold

Total

Profit

Deborah L. Bevier 0 0 0

Arik A. Ahitov 6,529 6,529 $161,096

Paul Davis 27,459 17,019 $160,091

David M. Eskenazy 7,000 9,033 $372,403

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Person

No. Options

Exercised

No. Shares

Sold

Total

Profit

Robert D. Sznewajs 0 2,900 $178,085

Ronald B. Woodard 12,500 12,500 $467,400

Daniel W. O'Connor 1,483 3,900 $203,169

Total 54,971 51,881 $1,542,245

As a result, because a majority of the Board took part in the breaches of fiduciary duty alleged

herein, the Board is necessarily conflicted and unable to objectively assess any demand that may

have been made, rendering it futile.

67. In addition to taking part in the breaches of fiduciary duty and illegal acts alleged

herein, a number of Board members are conflicted under traditional independence measures. For

example, Defendant Davis is CEO of Coinstar and Defendants Sznewajs, O’Connor and Ahitov

all have financial dealings with Coinstar or its subsidiaries, rendering them otherwise dependent

and conflicted. As the most recent proxy solicitation filed by Coinstar sets forth, Defendant

Sznewajs is the President of West Coast Bankcorp, which contracts with Coinstar to provide

services; Defendant O’Connor owns a majority interest in an advisory firm that provides paid

services to the Company; and, Defendant Ahitov is affiliated with Shamrock funds, which owns

more than 5% of Coinstar’s outstanding shares.

68. Moreover, the Director Defendants cannot be presumed to exercise independent

judgment in assessing the merits of a demand, if one were made, due to their personal and

financial interests in the subject matter of many of the claims raised in this Complaint. The

Director Defendants thus would be required potentially to investigate and bring claims against

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themselves for their own misconduct, and subject themselves to liability, embarrassment and risk

of adverse consequences from their other business engagements or interests. In addition, the

Board members are unable to act in an independent and disinterested manner because their

illegal acts and gross negligence, as alleged herein, could expose them to personal liability if

charges are pressed by a government entity.

69. The Defendants’ illegal stock trades and their false and misleading statements

made in furtherance of those stock trades were not made to further the valid business interests of

Coinstar. Instead, they were made to serve the personal financial goals of the Individual

Defendants, to the detriment of the Company and its long-term financial prospects. Had the

Individual Defendants taken proper steps to implement sufficient internal controls concerning the

discovery and reporting of illegal and unethical acts and transactions, the Company would not be

facing criminal and civil liability.

70. Defendants consciously disregarded their fiduciary duties of good faith, loyalty,

candor and due care by committing illegal acts themselves and allowing the Company to conceal

the true financial condition of its operations. For example, Defendants well knew that the

information disseminated to the market and shareholders in October of 2010 was grossly

inaccurate and false. Each of the Individual Defendants — by virtue of their position — has

access to information which did or should have led them to the immediate and direct conclusion

that Coinstar’s Redbox business was confronting difficulties which were causing diminution in

the revenue growth rate, earnings and margins when the false statements were made. In addition,

Defendants knew, or should have known, that the Company’s Redbox inventory processes were

suspect and were exposing the Company to greater costs and decreased earnings, especially in

light of the 28-day waiting period which had been agreed to with certain distributors.

71. The foregoing is especially true with regard to the members of the Coinstar Audit

Committee: Defendants Eskenazy, Sznewajs, Bevier and Ahitov. The nature of membership on

the Audit Committee means that Defendants Eskenazy, Sznewajs, Bevier and Ahitov knew or

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should have known that the statements disseminated by Coinstar in October of 2010 were false

and misleading when made. For example, as alleged above in more detail, Coinstar’s Audit

Committee Charter provides that it is the duty of the Audit Committee to review financial

statements and financial disclosure and review and approve, prior to execution, all related-party

transactions, including transactions between the Company and its officers or directors or

affiliates of officers or directors.

72. Moreover, as Coinstar’s most recent proxy filing describes, and as alleged in more

detail above, the Audit Committee has responsibility for ensuring compliance with Coinstar’s

code of ethics, as well as legal and regulatory requirements. Coinstar, Inc., Proxy Statement

(Schedule 14A) (Rule 14a-101), at 10 (Apr. 23, 2010). Because the members of the Audit

Committee are charged with ensuring legal and financial compliance with the law, Defendants

Eskenazy, Sznewajs, Bevier and Ahitov had access to information which indicated that the

statements and forecasts being made by Coinstar in October in 2010 were false and misleading

when made.

73. Had the Defendants instituted reasonable internal controls, the breaches of

fiduciary duty alleged herein could have been prevented. However, Defendants placed their own

interests ahead of those of Coinstar and/or its shareholders. Indeed, had Defendants simply

adhered to internal controls already in place—and sworn to in the false and misleading Q3 2010

quarterly report—it is likely that the false and misleading statements could have been avoided.

As the Company’s 3Q 2010 Form 10-Q stated:

Item 4. Controls and Procedures Evaluation of Disclosure Controls and Procedures We maintain a set of disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Management, with the participation of our Chief Executive

Officer and Chief Financial Officer, has evaluated the effectiveness of the

design and operation of our disclosure controls and procedures as of the end of

the period covered by this report and has determined that such disclosure

controls and procedures are effective.

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Coinstar, Inc., Quarterly Report (Form 10-Q), at 33 (Oct. 28, 2010) (emphasis added).

74. The acts complained of herein constitute violations of the fiduciary duties owed

by Coinstar’s officers and directors and these acts are incapable of ratification. As such, each of

the Director Defendants face an array of personal liabilities and conflicts of interest that prevent

them from exercising disinterested business judgment regarding the allegations herein.

75. Each of the Director Defendants authorized and/or permitted the false statements

to be disseminated directly to the public or made directly to industry analysts, authorized and/or

permitted the illegal stock transaction and are principal beneficiaries of the wrongdoing alleged

herein, and therefore, could not fairly and fully prosecute an action against Defendants.

COUNT I

Breach of Fiduciary Duty Against the Individual Defendants

76. Plaintiffs incorporate by reference and reallege each and every allegation

contained above, as though fully set forth herein.

77. The Individual Defendants owed and owe Coinstar certain fiduciary obligations.

By reason of their fiduciary relationships, the Director Defendants owed and owe Coinstar the

highest obligation of good faith, fair dealing, loyalty and due care.

78. The Individual Defendants violated and breached their fiduciary duties of care,

loyalty, disclosure, reasonable inquiry, oversight, good faith and supervision.

79. The Individual Defendants also each owed a duty to Coinstar to test, oversee and

monitor their systems of internal control, governance and procedures to ensure that they were

functioning in an effective manner and in compliance with, inter alia, all applicable laws and

regulations.

80. Each of the Individual Defendants had actual or constructive knowledge that they

had caused the Company to misrepresent the adequacy of Coinstar’s internal controls and failed

to promptly correct the Company’s publicly reported financial results and guidance.

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81. As a direct and proximate result of the Director Defendants’ failure to fulfill their

fiduciary obligations, Coinstar sustained significant damages. As a result of the misconduct

alleged herein, the Individual Defendants are liable to the Company.

82. Plaintiffs on behalf of Coinstar have no adequate remedy at law.

COUNT II

Breach of the Fiduciary Duty of Disclosure Against the Individual Defendants



84. The Individual Defendants knowingly caused materially misleading and

incomplete information to be disseminated to Coinstar’s shareholders and the public, as alleged

above. In doing so, the Individual Defendants deliberately misinformed shareholders and the

public, thereby causing injury to the Company. Having chosen to publicly communicate

concerning Coinstar’s financial condition, the adequacy of the Company’s internal controls and

its compliance with government statutes, common law and regulations, the Individual

Defendants had an obligation to be complete, accurate and honest in their disclosures.

85. Coinstar’s public filings and statements failed to disclose material information,

including, among other things, information regarding Coinstar’s subsidiary Redbox and

associated DVD sales and rentals information, which had a material impact on the Company’s

earnings.

86. Plaintiffs, on behalf of Coinstar, have no adequate remedy at law.

COUNT III

Against the Individual Defendants for Reckless and Gross Mismanagement



88. By their actions alleged herein, the Individual Defendants, either directly or

through aiding and abetting, abandoned and abdicated their responsibilities and fiduciary duties

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with regard to prudently managing the assets and business of Coinstar in a manner consistent

with the operations of a publicly held corporation.

89. As a direct and proximate result of the Individual Defendants’ gross and reckless

mismanagement and breaches of duty alleged herein, Coinstar has sustained — or will sustain —

significant damages in excess of a million of dollars.

90. As a result of the misconduct and breaches of duty alleged herein, the Individual

Defendants are liable to the Company. It was the Individual Defendants themselves that initiated

illegal trades — and/or stood by while their colleagues executed such trades — based on

material, non-public information. Had Coinstar maintained any meaningful controls to ensure

compliance with applicable law, it is unlikely that the false statements and illegal acts, alleged

herein, would have occurred. No reasonable person acting in a good faith pursuit of the

Company’s interests could have approved the illegal acts committed by the Individual

Defendants under any circumstances.

91. Plaintiffs on behalf of COINSTAR have no adequate remedy at law.

WHEREFORE, Plaintiffs pray for judgment as follows:

1. Determining that its suit is a proper derivative action and certifying Plaintiffs as

appropriate representatives of COINSTAR for said action;

2. Declaring that each of the Individual Defendants breached his or her fiduciary

duties to COINSTAR;

3. Directing each of the Individual Defendants to account to the Company for all

damages sustained or to be sustained by the Company as a result of the Individual Defendants’

breaches of fiduciary duties;

4. Disgorgement by each Individual Defendant of all compensation paid to them by

COINSTAR and proceeds realized from their transactions in COINSTAR common stock during

the relevant time period;

5. Ordering the Individual Defendants, and those under their supervision and

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control, to implement and enforce policies, practices and procedures on behalf of COINSTAR

and its stockholders that are designed to detect and prevent illegal conduct by COINSTAR

employees, agents and representatives;

6. Directing each of the Defendants to pay pre and post judgment interest at the

highest rate allowable by law on the amount of damages sustained by the Company;

7. Awarding Plaintiffs the costs and disbursements of this action, including

reasonable attorneys’ and experts’ fees, costs and expenses; and

8. Granting such other and further relief as the Court may deem just and proper.

JURY DEMAND

Plaintiffs demand a trial by jury.

Dated: April 12, 2011 KELLER ROHRBACK L.L.P. /s/ Elizabeth A. Leland

Lynn Lincoln Sarko (WSBA#16569) [email protected] Juli E. Farris (WSBA#17593) [email protected] Elizabeth A. Leland (WSBA#23433) [email protected] 1201 Third Avenue, Suite 3200 Seattle, WA 98101 Telephone: (206) 224-7496 Facsimile: (206) 623-3384 WOLF HALDENSTEIN ADLER FREEMAN & HERZ LLP Frank Gregorek Betsy C. Manifold Rachele R. Rickert Patrick H. Moran Symphony Towers 750 B Street, Suite 2770 San Diego, CA 92101 Telephone: (619) 239-4599 Facsimile: (619) 234-4599 Attorneys for Plaintiffs

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