Donnelley Directors Hid Yellow Pager's Fiscal Failure, Suit Says

Officers and directors of R.H. Donnelley Corp. deceived investors about the Yellow Pages publisher's failing fiscal health while their company-buying binge bankrupted the firm, shareholders charge in a securities fraud suit filed in federal court in Delaware.

Two union pension funds say that because of intentional deception by top officers, investors were blindsided when Donnelley's stock price fell from $66 to 6 cents a share and the Cary, N.C., firm filed for bankruptcy protection in May.

The suit was filed two days after the company announced it began to seek approval of a reorganization plan that would enable it to emerge from bankruptcy in early 2010.

"Based on what we know to date, we believe the allegations set forth in the proposed securities class-action complaint are without merit, and we will vigorously defend any securities class action pursued against the company and its officers and/or directors," the company said in a statement to Andrews Publications.

Donnelley, a Yellow Pages publisher and commercial Internet search company, had taken on unsustainable amounts of long-term debt to finance its acquisition of similar companies in an effort to transform itself into the dominate provider of online, commercial search services, the suit says.

The company acquired the AT&T directory business as well as the Embarq directory business from Sprint Nextel Corp. and Dex Media from Qwest Communications International Inc., causing its debt load to increase from $2 billion in 2003 to $10 billion by 2008, the plaintiffs allege.

Donnelley's advertising revenue plummeted during the recession that began in 2008. However, CEO David Swanson continued to falsely claim that the ad losses were only temporary and did not put the company on the brink of bankruptcy, the investors say.

The suit claims Swanson was aided by President and COO George Bednarz and CFO Steven Blondy in a scheme to:

• Deceive the investing public regarding Donnelley's business prospects;
• Artificially inflate the firm's stock price based on false information; and
• Dupe investors into purchasing Donnelley's stock at inflated prices.

The suit, which seeks class-action status, alleges securities fraud and says the defendant officers and directors misused their positions as "control persons" at Donnelley.

To comment, ask questions or contribute articles, contact West.Andrews.Editor@ThomsonReuters.com.

The plaintiffs are represented by P. Bradford deLeeuw and Joseph Rosenthal of Rosenthal, Monhait & Goddess in Wilmington, Del., and Darren Robbins, David Walton and Catherine Kowalewski of Coughlin Stoia Geller Rudman & Robbins in San Diego.