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1 MILBERG WEISS BERSHAD ORIGINALHYNES & LERACH LLP2 WILLIAM S. LERACH (68581)
JAN M. ADLER (105266)
3 SPENCER A. BURKHOLZ (147029)TOR GRONBORG (179109)
4 600 West Broadway, Suite 1800San Diego, CA 92101
5 Telephone: 619/231-1058 cn 0^ roT
6 SAVETT FRUTKIN PODELL & RYAN, P.C. CLERK '1CTCOUT
7 STUART H. SAVETT i,,TRALDISTRICTOFCANIA
ROBERT P. FRUTKIN E DIVISIONATSANTAANADEPUTY
8 320 Walnut Street, Suite 508Philadelphia, PA 19106
9 Telephone: 215/923-5400
• 10 LAW OFFICES OF BERNARD M.GROSS, P.C.
11 DEBORAH R. GROSS1500 Walnut Street
12 Sixth FloorPhiladelphia, PA 19102
13 Telephone: 215/561-3600
14 Attorneys for Plaintiffs
15 [Additional counsel appear on signature page.]
16UNITED STATES DISTRICT COURT
17CENTRAL DISTRICT OF CALIFORNIA
18SOUTHERN DIVISION
70 19
4/‘ 20 JAMES FRENKIL, CARA DEBRA MARKS, ) No.5ACVC/17—rk.01 LHC/ nnNme)TRUSTEE, GERSHON KREUSER, EFRAIM ) A
21 HIRSCH and ALAN FRIEDMAN, On Behalf ) CLASS ACTIONof Themselves and All Others )
22 Similarly Situated, ) COMPLAINT FOR VIOLATION OF) THE SECURITIES EXCHANGE ACT
23 Plaintiffs, ) OF 1934 AND THE SECURITIES) ACT OF 1933
24 vs. ))
25 MOSSIMO, INC., MOSSIMO GIANNULLI ) •and ERIC R. HOHL, )
26 ) •Defendants. ) Plaintiffs Demand A .
27 ) Trial By Jury
28
ENTERED ICMS
1 Plaintiffs, individually and on behalf of all other persons
2 similarly situated, by their undersigned attorneys, allege as
3 follows:
4 NATURE OF ACTION
5 1. Plaintiffs bring this action as a class action on behalf
6 of themselves and all other persons who purchased the common stock
7 of Mossimo, Inc. ("Mossimo" or the "Company") issued pursuant to
8 the Registration Statement and Prospectus ("Prospectus"), dated
9 February 22, 1996, for an initial public offering of 4,600,000
10 shares of common stock at $18 per share ("IPO"), and on the open
11 market from February 22, 1996 through January 14, 1997 (the "Class
12 Period") to recover damages caused by defendants' violations of
13 federal securities laws.
14 2. Mossimo is a men's and women's activewear and sportswear
15 designer that began designing beachwear and more recently expanded
16 into higher end designer sportswear. The Company reported enormous
17 growth, with its sales increasing from $15.9 million in 1991, to
18 $72 million in 1995. On February 22, 1996, Massimo went public
19 through an $82.8 million IPO. The Company sold 2,000,000 shares at
20 $18 per share, while Mossimo Giannulli ("Giannulli") sold 2.6
21 million shares, netting more than $43 million. In addition, of the
22 Company's $32 million in proceeds from the IPO, approximately $17
23 million was paid to Giannulli in connection with the termination of
24 Mossimo's status as a Subchapter S corporation. In the Prospectus
25 and in public statements and communications following the IPO,
26 Mossimo held itself out as a rapidly expanding, emerging designer
27 company targeting an attractive market niche -- teens to mid-30's
28
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1 -- that was "very early in its growth curve," and "only beginning
2 to scratch the surface of several key opportunities."
3 3. In an effort to achieve this growth, aommencing in 1995,
4 defendants decided to transform Mossimo's historically profitable
5 business, that of a small-niche designer of beachwear, into that of
6 a designer of a full line of men's and women's activewear, selling
7 products in up-scale "in-store" shops located in major department
8 and specialty stores nationwide. Defendants made the decision to
9 execute this transformation with an expanded line of menswear and
10 a new line of womenswear for the Fall 1996 season to be showcased
11 in a rapidly expanding number of "in-store" shops to be opened
12 throughout 1996. Typically, it takes Mossimo one year to complete
13 the cycle from design to shipment and, accordingly, by the Fall of
14 1995, defendants developed their schedules for design, production,
15 and shipment of the new and expanded Fall 1996 lines to be in the
16 stores in a timely fashion. Adherence to the schedule was critical
17 because defendants knew that if samples or finished lines of
18 apparel products were shipped late, it would further delay
19 production of final products and the products would either be
20 returned by the retail store to Massimo or would have to be deeply
21 discounted by Mossimo, in either case leading to greatly reduced
22 profits.
23 4. At or around the same time (the Fall of 1995), Giannulli,
24 who was the sole owner of Mossimo, determined to "cash-in" on the
25 Company's historical success. Although he had previously taken
26 significant distributions from the Company, Mossimo did not
27 generate sufficient cash to enable Giannulli to reward himself at
28 the levels he desired. Thus, the individual defendants determined
-3-
1 to take Mossimo public through an IPO of 20% of the Company's
2 outstanding stock, thereby enabling Giannulli to retain control of
3 Mossimo and amass great personal wealth. As a result of the IPO
4 and the cash distributions Giannulli caused Mossimo to make to
5 himself from the IPO, Giannulli pocketed approximately $60 million,
6 while the Company netted approximately $16 million.
7 5. In order to maximize the IPO share price, defendants
8 determined to complete the IPO in the small window of time during
9 which the Company was still reporting the results of its
10 historically profitable niche business (revenue and net income had
11 grown from $22 million and $1.5 million, respectively, in 1993 to
12 $72 million and $11.5 million, respectively, in 1995) and before
13 the time when the Company would begin reporting the results from
14 sales of its new and expanded womenswear and menswear lines, in the
15 third quarter of 1996 (the three month period ending September 30,
16 1996).
17 6. Unbeknownst to the market, however, defendants had taken
18 certain critical actions in 1995, prior to the IPO, in connection
19 with the Company's transformation to a high-profile designer of
20 menswear and womenswear, steps which would severely impact the
21 profitability of these new lines, and which would delay disclosure
22 of the true cost of developing these new lines until the third
23 quarter of 1996. Thus, Mossimo was able to continue to report
24 significant profits through the first half of 1996 (the period
25 immediately following the IPO) based on the historical
26 profitability of its niche business and create the expectation in
27 the market that Mossimo would achieve additional profitability when
28 the new lines were shipped in the third quarter of 1996. These
-4-
I critical actions included the fact that defendants changed from
2 their long-time low cost sourcing agents and sources for sampling
3 and manufacture (which had enabled Mossimo to report substantial
4 profit margins) to new, much larger companies which were much more
5 expensive for Mossimo to use and over which Mossimo had much less
6 control. Defendants also had hired many new designers, who
7 significantly increased design, sample and production costs.
8 Consequently, defendants were greatly increasing the cost structure
9 of Mossimo's new menswear and womenswear lines, which would
10 negatively impact the profit margins on these products. Thus,
11 defendants knew prior to the IPO and thereafter, that when Mossimo
12 began to report revenues on its new menswear and womenswear lines
13 in its third quarter of 1996, the Company's profit margins would be
14 greatly reduced. •
15 7. By expanding its products to include the new menswear and
16 womenswear lines for the Fall 1996 season and, at the same time,
17 changing over to new sourcing agents and sources for sampling and
18 manufacture, defendants knew that they would have to meet strict
19 deadlines for design, payment to the manufacturers, sampling and
20 shipment in order to meet Mossimo's own shipment delivery
21 deadlines. By September 11, 1995, defendants had established
22 production and shipping deadlines for manufacturers for the Fall
23 1996 samples. The deadline for shipping sample lines was set for
24 January 18, 1996, for different sample lines. Soon thereafter, by
25 October 26, 1995, defendants developed their shipment schedule for
26 the Fall 1996 lines. In order to have the Fall 1996 lines in the
27 retail stores in a timely fashion, defendants determined, and
• 28 promised customers, that they would ship 15% of the lines between
-5-
1 June 15 and July 15, 1996, 38% in the month of July 1996, 36% in
2 the month of August 1996 and 11% in the month of September 1996.
3 In the months prior and subsequent to the IPO, defendants knew, but
4 did not disclose, that their operations were seriously out of
5 control to the point where Mossimo was continually missing these
6 deadlines and incurring significantly increased costs due to a
7 myriad of undisclosed problems, including, inter alia, the halting
8 of weekly design and production meetings; the abandonment of
9 production timelines; the hiring of many new designers who, having
10 come from big design houses such as Calvin Klein, were greatly
11 increasing the costs of design, samples and production by
12 constantly changing the designs and ordering expensive fabrics; by
13 failing to make timely payment to manufacturers who, in turn, would
14 refuse to ship until payment was received; and changing confirmed
15 orders, all of which resulted in cost overruns which Mossimo had to
16 absorb. As a result, defendants knew, but did not timely disclose,
17 that they would incur increased costs and delivery problems in
18 connection with the new menswear and womenswear lines for the Fall
19 1996 and holiday seasons and that, as a result, Mossimo's third and
20 fourth quarter profits would be greatly reduced. Defendants knew
21 or recklessly disregarded that, as a result of the adverse facts
22 concerning Mossimo's business, the Company would incur greatly
23 increased costs, make late shipments to its customers, and be
24 forced to sell out-of-season merchandise at markdown prices, all of
25 which would materially reduce the Company's profit margins.
26 8. In 1995, prior to the IPO, defendants also had decided to
27 capitalize the costs associated with the design and production of
28 samples of the new and expanded womenswear and menswear lines for
-6-
1 the Fall 1996 season. Previously, Mossimo had expensed these costs
2 as incurred. However, because defendants knew the new costs
3 attributed to the expansion of the Company's product lines would be
4 significant and they did not want to negatively impact Mossimo's
5 profitability immediately after the IPO, defendants changed
6 accounting practices. As a result of this change in accounting
7 practices, defendants knew that Mossimo would not expense the costs
8 associated with the Company's expansion of its product lines until
9 shipment of the products. Defendants further knew, as alleged in
10 17, that the vast majority of these products would not be shipped
11 until the third quarter of 1996, ended September 30, 1996.
12 Defendants' decision to change accounting practices in this manner
13 enabled the Company to continue to report sizable profits in the
14 first half of 1996, based on Mossimo's high margins for its
15 historical products, without yet having to expense the significant
16 and ever-growing costs of the new Fall lines, which in turn enabled
17 defendants to continue to misrepresent to the market, in the IPO
18 and in their public statements subsequent thereto, that Mossimo was
19 increasingly profitable, successfully producing its new Fall lines
20 and growing its business in a "controlled manner." In reality, and
21 as defendants knew but did not disclose, the costs of design and
22 production were growing ominously.
23 9. To further mislead the market, defendants specifically
24 misrepresented in the February 22, 1996 Prospectus that, based on
25 their experience to date in developing and producing the new
26 menswear and womenswear lines for the Fall 1996 season, Mossimo
27 would incur only an additional $1.3 million in costs and that these
28 additional costs would negatively impact margins only in the first
-7-
1 two quarters of 1996. In reality, and as defendants knew, those
2 costs would greatly exceeded $1.3 million and would primarily
3 impact profit margins in the second half of 1996.
4 10. In the Prospectus, defendants emphasized Mossimo's
5 strategy to continue to expand its business "in a controlled
6 manner" by expanding its "in-store" shop program and by broadening
7 and deepening its product offerings through an expansion of its
8 men's sportswear line and the introduction of a new young women's
9 designer sportswear line. Defendants also knew, but did not
10 disclose, that their decision, made prior to the IPO, to greatly
11 expand the number of "in-store" shops in major department and
12 specialty stores throughout the United States to serve as a
13 showcase for the new, high-profile menswear and womenswear lines,
14 would greatly increase Mossimo's costs as those "in-store" shops
15 were opened in the months subsequent to the IPO. Defendants
16 described this strategy as the second prong of their "controlled
17 growth" and specifically stated in the Prospectus that "[t]he costs
18 of the shops are generally shared between the retailer and the
19 Company." Defendants, however, knew at the time of the IPO and
20 thereafter, but did not disclose, that in order to achieve their
21 "in-store" shop strategy, they would have to increase from 50% to
22 70% their contribution to the total cost of the "in-store" shops at
23 key department and specialty stores. In addition, at the same
24 time, defendants determined that an additional key aspect of the
25 in-store shop growth strategy required expansion of Mossimo's
26 retail coordinator program and the introduction of shop managers
27 and merchandisers at significant additional cost to Mossimo. As a
28 result, defendants knew that the costs associated with the
-8-
1 expansion of the "in-store" shop program would increase
2 dramatically, further eroding Mossimo's profit margins and that,
3 coupled with Mossimo's inability to ship its new menswear and
4 um:menswear lines to these "in-store" shops in a timely manner, that
5 the entire "in-store" shop program would greatly increase Mossimo's
6 costs and its success was likely to be jeopardized at key
7 retailers.
8 11. Defendants also failed to disclose at the time of the IPO
9 and thereafter that they had hired many new designers who were not
10 familiar with the production policies of the previous designer.
11 These new designers were developing samples for each color of a
12 specific style rather than developing one prototype and using
13 swatches. This change in designing samples for attracting retail
14 customers greatly increased the costs to be incurred for the Fall
15 menswear and womenswear lines. Due to defendants' decision to
16 defer recognition of these costs, they were aware prior to the IPO
17 that these costs would be written off in the quarter that the lines
18 were shipped (Fall 1996), causing gross margins to be negatively
19 impacted. Defendants eventually wrote off $1.5 million of these
20 sample costs in the third quarter of 1996, which severely impacted
21 Mossimo's gross profits.
22 12. Throughout the Spring and Summer of 1996, Massimo
23 continued to report explosive sales growth and strong margins,
24 while assuring the market that its menswear business continued to
25 perform well and that the new womenswear line was being
26 enthusiastically received by retailers. Mossimo's stock price,
27 which was issued on the IPO at $18 per share, quickly rose to more
28 than $50 per share on June 3, 1996. However, defendants knew that
-9-
1 their positive statements and financial statements were false and
2 misleading when reported and/or made, and that, as Mossimo had
3 rapidly expanded, defendants had completely lost control of the
4 Company's operations and finances such that the Company was
5 incurring huge costs in developing its new product lines, and was
6 unable to ship merchandise to customers in a timely fashion. By
7 September 1996, defendants knew that they would have to disclose
8 their reduced profits and, therefore, the weakness in Mossimo's
9 operations and finances, so they began to try to "manage" Mossimo's
10 stock price gradually lower to avoid a major sharp stock drop that
11 might expose their wrongdoing and result in their being sued.
12 Thus, on September 23, 1996, defendants revealed a portion of the
13 adverse facts known to them in a press release, announcing that
14 Mossimo was expected to report lower earnings for the third
15 quarter, ended September 30, 1996, despite a 40% increase in sales.
16 Defendants revealed that Mossimo's gross margins had been
17 restrained by "unusually high production development costs" and
18 "cost inefficiencies" from changing and adding sourcing agents and
19 manufacturers. As a result of these partial revelations, Mossimo's
20 stock price dropped from a close of $41 on September 20, 1996, to
21 close at $34 on September 23, 1996, and $30-1/2 on September 24,
22 1996. Nevertheless, defendants continued to reassure the market
23 that the Company's business was still progressing well. For
24 example, defendant Giannulli told the Los Angeles Times on October
25 11, 1996 that "all is fine," and Mossimo represented to analysts
26 that it had gotten its costs back in line and that the set-back was
27 only temporary.
28
- 10 -
1 13. On November 7, 1996, Mossimo again shocked the market by
2 further revealing that the Company's gross profit margins would be
3 only 31%, even lower than those pre-announced on September 23,
4 1996. Defendants revealed that the Company had had to sell $4.1
5 million of out-of-season merchandise at a substantial discount and
6 that the Company's marketing expenses going forward would be
7 significantly increased because of additional promotional costs
8 associated with Mossimo's expansion of its in-store shops in
9 department stores. As a result of this partial and incomplete
10 disclosure, Mossimo's stock price plunged 25% in a single day to
11 close at $16-112.
12 14. Nevertheless, defendants continued to reassure the market
13 that the Company's business was successful and that it was working
14 through these "growing pains." Finally, •before the market opened
15 on January 15, 1997, Mossimo issued a press release revealing that
16 it expected to report lower-than-anticipated earnings in the fourth
17 quarter of 1996, in the range of only $0.03 to $0.08 per share,
18 compared with analysts' estimates of $0.18 per share. The Company
19 revealed that the earnings were impacted by a physical inventory
20 shortage, by late product deliveries that required price
21 concessions to retailers, and by higher-than-normal levels of out-
22 of-season merchandise. Mossimo also revealed that it would be
23 forced to restrain its sales growth to only 15% for the coming year
24 in an attempt to establish control over its operations. As a
25 result of these revelations, Mossimo's stock price, which had
26 traded as high as $51-1/8 per share during the Class Period,
27 plummeted to as low as $8-7/8 per share, an 83% drop.
28
- 11 -
1 15. Each of the defendants' positive statements about
2 Mossimo's business during the Class Period was materially false and
3 misleading when issued, and failed to disclose, inter alia, the
4 following adverse information which was then known only to
5 defendants through their access to internal Mossino data:
6 (a) That Mossimo's rapid growth was severely straining
7 its design and production functions, such that it was incurring
8 spiraling design, sampling and production costs and was
9 increasingly unable to complete design and production work and to
10 get manufactured products to retailers in a timely fashion;
11 (b) That as early as the Fall of 1995, Mossimo was
12 experiencing major problems with the implementation of its Fall
13 1996 menswear and womenswear lines. By that time, Massimo was
14 severely behind schedule on key aspects of the schedule which were
15 necessary for timely shipment in the Fall of 1996, since the
16 complete cycle (design to shipment) was approximately one year;
17 (c) That Massimo had hired a significant number of
18 additional new designers who were unable to complete designs for
19 the new women's and menswear lines. The failure to timely complete
20 designs led to cost overruns and delays in samples being made,
21 resulting in sales representatives being forced to use only
22 computer models to sell the women's Fall 1996 line;
23 (d) That in late November 1995, for example,
24 merchandising Vice-President Ed Whitehead and other executives met
25 with designers to discuss the design problems and the fact that it
26 was evident at that time that the Fall 1996 men's line would be
27 jeopardized because the sample garments had not yet been ordered;
28
- 12 -
1 (e) That many of the samples for the men's Fall 1996
2 line were not ordered until January 1996, four months later than
3 usual and too late to comply with Mossimo's own schedule which had
4 established January 18, 1996 as the last date for shipment of the
5 samples;
6 (f) That in addition to hiring a significant number of
7 new designers, defendants also decided to change the sourcing
8 agents and manufacturers that Mossimo used for both samples and
9 finished garments, leading to significant additional costs which
10 would negatively affect profit margins. The new manufacturers were
11 significantly more expensive than those previously used by Mossimo.
12 For example, in December of 1995, defendants changed one of their
13 long-time manufacturer's agents to Cinnabar Traders, Ltd., which
14 charged a 7 to 8 percent commission versus the 5 to 6 percent
15 commission Mossimo had been paying its former agent;
16 (g) That the change in manufacturer's agents/sources
17 resulted in greatly increased costs, both directly in increased
18 commissions and in the higher prices Mossimo had to pay for
19 garments. Additional costs also were incurred by Mossimo because
20 these manufacturers were being required to complete samples in a
21 short period of time or to change production in mid-stream due to
22 the failure of Mossimo to complete the final design phase on a
23 timely basis in the Fall of 1995;
24 (h) That in April 1995, Mossimo executives began to
25 abandon the Company's system of meeting on a weekly basis, which
26 had previously permitted the Company to keep up to date on
27 production, design and sampling schedules. As a result, personnel
28 began failing to keep to the calendar schedules. For the Fall 1996
- 13 -
1 lines, the calendar system was completely abandoned, and no system
2 was in place to track production and costs;
3 (i) That delays in shipping goods to retailers were
4 leading to order cancellations, price concessions, and excessive
5 out-of-season merchandise, adversely impacting Mossimo's margins
6 and profitability;
7 (j) That Mossimo's increased emphasis on sales through
8 an expanded number of "in-store" shops in department stores and
9 high-end specialty retailers would severely impact margins because
10 Mossimo was being required to increase its share of the costs,
11 including costly advertising and retail promotion programs, from
12 50% to 70%;
13 (k) That Mossimo's inability to deliver its new men's
14 and women's lines to in-store shops in a timely manner would
15 jeopardize the in-store shop program at key retailers;
16 (1) That Mossimo's design of its new women's sportswear
17 line was not, contrary to defendants' representations, largely
18 completed, but was still undergoing costly and time-consuming
19 production and sampling leading to excessive costs;
20 (m) That there was no basis for projecting gross margins
21 for the third quarter of 1996 of 41% when defendants knew that they
22 had capitalized the huge costs associated with the Fall lines,
23 which costs would be expensed in the third quarter, greatly
24 reducing Mossimo's gross margins;
25 (n) That there was no basis in October 1996 for
26 Giannulli's representation that all was "fine;" and
27 (o) That there was no basis for representing after the
28 third quarter that Mossimo had gotten its costs back in line.
- 14 -
1 16. The following chart demonstrates the price action of
2 Mossimo's shares during the Class Period:
3 Mossimo Inc.
4 February 23, 1996 - January 21, 1997Daily Stock Prices
5 60
6
7 50-
8
40 —9 e.c
10 2m 30 —
11
12 7520 —
13
1410 —
15
3_6 0 I 1
0223/96 05/14/96 08102196 10/22/96 01M3/97
17 04/03/96 06/24196 09/12/96 12/02/96
18
19
20
21 17. The following chart shows the price of Mossimo's stock as
22 compared to a composite index of similar apparel companies from
23 February 22, 1996 to September 16, 1997. This chart demonstrates
24 that the price action of Massimo shares was due to company-specific
25 events and not to market forces. Notably, Mossimo stock
26 dramatically outperformed the composite apparel group after the
27 commencement of defendants' fraudulent course of conduct with the
28 February 22 1 1996 IPO. Following the IPO, defendants' materially
- 15 -
1 false and misleading statements and omissions continued to boost
2 Mossimo's stock price far above the comparative index measure. As
3 Mossimo's stock price sunk, relative to other apparel companies'
4 stock prices, defendants continued to keep the stock at or near the
5 composite index, fraudulently reassuring the market that the
6 Company's business was operating successfully. Finally, on
7 January 15, 1997, defendants' fraudulent conduct was revealed.
8 Mossimo stock has never recovered and continues to lag
9 significantly behind the composite index measure.
10
11 Mossimo, Inc.12
vs. H&Q Branded Consumer Products - Apparel Group13
February 22, 1996 - September 16, 1997
14 300
15 Mossimo
16250 -
17 8200
0 -
II
-
H&Q Apparel Group18 to
CD
19 r"a 15Pi
2 0
2 1 -00 100
22
23 50 -
24
0 I 1 _
25 22-Feb-96 12-Jul-96 29-Nov-96 22-Apr-97 10-Sep-97
2602-May-96 20-Sep-96 10-Feb-97 01 -Jul-97
27
28
- 16 -
(
1 JURISDICTION AND VENUE
2 18. This Court has subject matter jurisdiction over this
3 class action pursuant to 28 U.S.C. §1331, §27 of the Securities
4 Exchange Act of 1934 ("Exchange Act"), 15 U.S.C. §78aa and §22 of
5 the Securities Act of 1933 . (the "Securities Act"), 15 U.S.C. §77v.
6 19. The claims asserted herein arise under §§10(b) and 20(a)
7 of the Exchange Act, 15 U.S.C. §§78j(b) and 78t(a), and SEC Rule
8 10b-5 promulgated thereunder, 17 C.F.R. §240.10b-5, and §§11 and 15
9 of the Securities Act, 15 U.S.C. §§77k and 77(o).
10 20. Venue is proper in this District pursuant to §27 of the
11 Exchange Act and 28 U.S.C. §1391(b) and §22 of the Securities Act.
12 Mossimo's corporate headquarters and principal place of business is
13 located in Irvine, California and the wrongful acts charged herein,
14 including the dissemination of materially false and misleading
15 information in conjunction with the offer and sale of Mossimo's
16 securities, occurred in this District.
17 21. In connection with the wrongful acts alleged in this
18 Complaint, acting directly or indirectly, defendants used the means
19 and instrumentalities of interstate commerce including, but not
20 limited to, the mails, interstate telephone or wire communications,
21 as well as the facilities of the national securities markets.
22 THE PARTIES
23 22. (a) Plaintiff James Frenkil purchased 500 shares of
24 Mossimo common stock on March 6, 1996 at $27.43 per share, 500
25 shares on March 15, 1996 at $31.73 per share, 500 shares on
26 April 8, 1996 at $30.50 per share, 700 shares on April 23, 1996 at
27 $33.38 per share, 300 shares on April 23, 1996 at $33.24 per share,
28 500 shares on June 14, 1996 at $44.36 per share, 500 shares on
-17-
1 June 25, 1996 at $40.19 per share, 500 shares on July 15, 1996 at
2 $37.16 per share, 500 shares on October 3, 1996 at $30.09 per share
3 and 500 shares on November 7, 1996 at $23.39 per share and was
4 damaged thereby.
5 (b) Plaintiff Cara Debra Marks, Trustee, purchased 100
6 shares of Massimo common stock on February 22, 1996 at $18 per
7 share and 100 shares on September 10, 1996 at $45-1/8 per share and
8 was damaged thereby.
9 (c) Plaintiff Efraim Hirsch purchased 1,000 shares of
10 Mossimo common stock on November 11, 1996 at $15-7/8 per share and
11 2,000 shares on November 11, 1996 at $16-5/8 per share and was
12 damaged thereby.
13 (d) Plaintiff Alan Friedman purchased 100 shares of
14 Mossimo common stock on February 27, 1996 at $18 per share and was
15 damaged thereby.
16 (e) Plaintiff Gershon Kreuser purchased 3,000 shares of
17 Mossimo common stock on November 8, 1996 at $17-1/8 per share and
18 was damaged thereby.
19 23. Defendant Mossimo is a corporation organized and existing
20 under the laws of Delaware with its principal executive offices
21 located at 15320 Barranca Parkway, Irvine, California. Massimo is
22 a designer of men's and women's activewear and sportswear, with a
23 focus on the contemporary, fashion-minded consumer. Mossimo
24 designs are distributed to approximately 800 department stores and
25 specialty chain stores and more than 1,100 independent specialty
26 retailers. Its common stock has been listed and traded on the New
27 York Stock Exchange ("NYSE") since the consummation of the IPO on
28 February 22, 1996. During the Class Period, Massimo traded
- 18 -
1 actively in an efficient, open and well-informed market which
2 assimilated the information it disseminated publicly.
3 24. Defendant Giannulli founded Mossimo and was its sole
4 shareholder prior to the IPO. Giannulli is the lead designer,
5 President, Chief Executive Officer ("CEO") and Chairman of the
6 Board of Mossimo. Giannulli owns approximately 70% of the common
7 stock of Mossimo after selling 2.6 million shares in the IPO,
8 netting himself proceeds in excess of $43 million. In addition, in
9 connection with the IPO and the termination of Mossimo's status as
10 a Subchapter S corporation, Giannulli received approximately $17
11 million in distributions from Mossimo, which funds came from
12 Mossimo's IPO proceeds. Thus, of the proceeds of the offering of
13 $82.8 million, Giannulli pocketed $60 million, the underwriters
14 nearly $5.8 million, and the Company a net $16.48 million. Because
15 of defendant Giannulli's positions with Mossimo, he knew the
16 adverse non-public information about its business, finances,
17 products, markets and present and future business prospects via
18 access to internal corporate documents (including Mossimo's
19 operating plans, budgets and forecasts and reports of actual
20 operations compared thereto), conversations and connections among
21 Board members, corporate officers and employees, attendance at
22 management and Board of Directors' meetings and committees thereof
23 and via reports and other information provided to him in connection
24 therewith. Giannulli signed the Registration Statement filed with
25 the SEC for the IPO and subsequently signed Mossimo's reports on
26 Form 10-Q for the quarters ending March 31, 1996 (signed on May 10,
27 1996), June 30, 1996 (signed on August 14, 1996), and September 30,
28 1996 (signed on November 7, 1996).
- 19 -
1 25. Defendant Eric R. Hohl ("Hold") was Chief Operating
2 Officer ("COO"), Secretary, Chief Financial Officer ("CFO") and a
3 director of the Company until September 1996, when a separate CFO
4 was hired. At the time of Mossimo's IPO, Giannulli and Hohl were
5 the sole directors. Because of defendant Hohl's position with
6 Mossimo, he knew the adverse non-public information about its
7 business, finances, products, markets and present and future
8 business prospects via access to internal corporate documents
9 (including Mossimo's operating plans, budgets and forecasts and
10 reports of actual operations compared thereto), conversations and
11 connections among Board members, corporate officers and employees,
12 attendance at management and Board of Directors' meetings and
13 committees thereof and via reports and other information provided
14 to him in connection therewith. Hohl signed the Registration
15 Statement filed with the SEC for the IPO and subsequently signed
16 Mossimo's reports on Form 10-Q for the quarters ended March 31,
17 1996 (signed on May 10, 1996) and June 30, 1996 (signed on August
18 14, 1996).
19 26. Defendants Giannulli and Hohl (the "Individual
20 Defendants"), by reason of Giannulli's position as CEO and as a
21 director of Mossimo, and by reason of Hohl's positions as COO and
22 CFO and as a director of Mossimo, were controlling persons of
23 Massimo and had the power and influence, and exercised the same, to
24 cause Mossimo to engage in the conduct complained of herein.
25 27. Under the federal securities laws and the Federal Rules
26 of Civil Procedure, as applicable, it is appropriate to treat the
27 Individual Defendants as a group for pleading purposes and to
28 presume that the materially false and misleading information
-20--
,
1 conveyed or disseminated in the Company's public filings, press
2 releases and other publications during the Class Period, as alleged
3 herein, were the collective actions of the Individual Defendants.
4 By virtue of their high-level position(s) with the Company, each of
5 the Individual Defendants directly participated in Mossimo's
6 management, were directly involved in the day-to-day operations of
7 the Company at its highest levels, and were privy to confidential
8 proprietary information concerning Mossimo, its operations,
9 finances, financial condition and present and future business
10 prospects. The Individual Defendants were involved in drafting,
11 producing, reviewing and/or disseminating the false and misleading
12 statements detailed herein, were aware that such materially false
13 and misleading statements were being issued regarding the Company,
14 and approved or ratified these statements, in violation of the
15 federal securities laws.
16 MOTIVE AND OPPORTUNITY
17 28. The Individual Defendants, because of their positions
18 with the Company, controlled and/or possessed the power and
19 authority to control the contents of its Prospectus, quarterly and
20 annual reports, press releases and presentations to securities
21 analysts and thereby the investing public. The defendants prepared
22 or were provided with copies of the Company's reports and press
23 releases alleged herein to be misleading prior to or shortly after
24 their issuance and had the ability and opportunity to prevent their
25 issuance or cause them to be corrected. Because of their positions
26 and access to material non-public information available to them but
27 not to the public, these defendants knew or recklessly disregarded
28 that the adverse facts specified herein had not been disclosed to
- 21 -
1 and were being concealed from the public and that the positive
2 representations which were being made were then materially false
3 and misleading. Despite his duty not to sell his Mossimo stock
4 under such circumstances, defendant Giannulli did so.
5 29. Each of the defendants is liable as a primary violator,
6 for making materially false and misleading statements, and for
7 participating in a fraudulent scheme that operated as a fraud or
8 deceit on purchasers of Mossimo stock during the Class Period. The
9 defendants pursued a fraudulent scheme in furtherance of their
10 common goal, i.e., inflating the price of Massimo stock by making
11 materially false and misleading statements and concealing material
12 adverse information. The fraudulent scheme was designed to and
13 did: (i) deceive the investing public, including plaintiffs and
14 members of the Class; (ii) artificially inflate the price of•
15 Mossimo stock during the Class Period; (iii) cause plaintiffs and
16 members of the Class to purchase Mossimo stock at inflated prices;
17 and (iv) permit the Company and Giannulli to sell 2 million and 2.6
18 million shares of Mossimo stock, respectively, at $18 per share,
19 generating net proceeds to the Company and Giannulli of $32.4
20 million ($17 million of which was distributed to Giannulli), and
21 $43 million, respectively.
22 30. The defendants' motive to engage in this conduct included
23 their desire (i) to inflate the price of Mossimo's stock sold in
24 the February 22, 1996 IPO; (ii) to permit Giannulli to sell off
25 large amounts of his Mossimo stock at inflated prices; and (iii) to
26 cover up and conceal Mossimo's deteriorating business and prospects
27 to protect and enhance their executive positions and the
28 substantial compensation and prestige they obtained thereby.
- 22 -
1 31. In recent years, Mossimo had reported revenue and
2 earnings growth exceeding 60% on an annual basis. As a result of
3 this track record, Mossimo stock traded at a price earnings
4 multiple reserved for premier growth companies with track records
5 of meeting market expectations for high profit growth. For the
6 reasons pleaded herein, maintaining an image of strong growth and
7 thus a high stock price was extremely important to Mossimo's top
8 executives.
9 MOSSIMO'S GUIDANCE TO SECURITIES ANALYSTSAND ITS USE OF THEM AS A CONDUIT TO FEED FALSE
10 INFORMATION TO THE SECURITIES MARKETS
11 32. Analysts employed by securities firms prepare written
12 reports and make recommendations from time to time about public
13 companies such as Mossimo. In writing their reports about Mossimo,
14 these analysts relied in substantial part upon information provided
15 by and statements and reports made publicly by the Company,
16 information provided to them privately by the Company, and
17 assurances by the Company that information in the analysts' reports
18 was not at material variance from the Company's internal knowledge
19 of its operations and prospects.
20 33. Mossimo is followed by securities analysts employed by
21 brokerage houses which issue reports and make recommendations
22 concerning Mossimo's common stock to their clients. Because
23 Mossimo did not become a publicly traded company until the
24 February 22, 1996 IPO, but still traded at price-earning ratios
25 generally reserved for premier companies with significant financial
26 histories, its stock price was particularly sensitive to the
27 Company's and analysts' statements regarding the Company's
28 potential for future profits and margins. Mossimo used its
-23-
1 communications to analysts to assure them that Mossimo's business
2 operations were strong, that the new menswear and womenswear lines
3 would perform well and increase Mossimo's earnings per share, that
4 costs for the in-store shop program were under control and that the
5 in-store shop program would lead to greater sales and profits.
6 Defendants Giannulli and Hohl were the primary Mossimo employees
7 who communicated with the analysts on behalf of Mossimo, and who
8 conducted the conference calls with analysts for Massimo. The
9 securities analysts following Massimo, including Smith Barney (Faye
10 Landes), Merrill Lynch (Brenda Gall) and Robertson Stephens & Co.
11 (Janet J. Kloppenburg), reiterated these representations in their
12 research reports in which they publicly projected that Mossimo
13 would earn up to $0.28 and $0.23 per share in the third and fourth
14 quarters, respectively, of 1996.
15 34. During the Class Period, it was the Company's practice to
16 have Giannulli and Hohl communicate regularly with securities
17 analysts at the firms identified above, to discuss, among other
18 things, the Company's prospects, its products, operating results
19 and anticipated revenues, and to provide detailed "guidance" to
20 these analysts with respect to the Company's business and projected
21 revenues and earnings. These communications included, but were not
22 limited to, frequent telephone conference calls, meetings, and
23 analyst briefings in which the defendants discussed many aspects of
24 the Company's operations and financial prospects. The defendants
25 knew that by participating in these regular, -periodic
26 communications with analysts, the Company would disseminate
27 information to the investment community and investors would rely
28 and act upon such information (i•e•, make purchases and sales of
-24-
1 the Company's securities). Defendants Giannulli and Hohl had these
2 communications with analysts in order to issue false and misleading
3 information to the market by means of and through the analysts,
4 thus using them as instrumentalities to issue favorable reports on
5 Mossimo, to falsely present the business and future prospects of
6 Massimo to the marketplace and to artificially inflate the market
7 price of Mossimo common stock, in violation of the federal
8 securities laws. Similarly, defendants violated the securities
9 laws through false information they provided to the Company's
10 investment bankers (Merrill Lynch and Smith Barney) in establishing
11 an inflated IPO price.
12 35. The information about Mossimo contained in the various
13 securities analysts' reports quoted herein were obtained from or
14 based on information obtained from Mossimo, as discussed above.
15 Mossimo knew of these reports, their contents, that they were based
16 on information provided by the Company, and that they would be
17 issued to members of the investing public, be circulated throughout
18 the investment community and impact the trading price of Mossimo's
19 common stock. The Company endorsed these reports, adopted them as
20 its own and placed its imprimatur on them as well as the
21 projections, forecasts and statements contained therein, by
22 assuring the analysts of their accuracy and by approving of their
23 issuance. Despite their duty to do so, the defendants failed to
24 correct these statements during the Class Period.
25 36. The investment community, and in turn, investors, relied
26 and acted upon the information communicated in these written
27 reports recommending that investors purchase Mossimo common stock.
28 Defendants manipulated and inflated the market price of Mossimo
- 25 -
'
1 stock by falsely presenting to analysts, through regular meetings
2 and during telephonic and written communications, the prospects of
3 the Company and by failing to disclose the true adverse information
4 about the Company that was known only to them.
5 FALSE AND MISLEADING STATEMENTSDURING THE CLASS PERIOD
637. On February 22, 1996, WP issued its final Prospectus for
7its IPO, which became effective on that date. In the Prospectus
8for the IPO, defendants described Mossimo's plan "to expand its
9business in a controlled manner." The two key components of the
10Mossimo growth strategy described in the Prospectus were (i) to
11"Expand Mossimo's In-Store Shop Program" to create a retail
12environment consistent with Mossimo's distinctive image, and
13(ii) to expand its product offerings, including an expansion of the
14men's sportswear line and the introduction of a new line of women's
15sportswear that defendants were preparing for the Fall of 1996.
1638. Defendants' statements in the Prospectus that Mossimo
17would "expand its business in a controlled manner" were false and
18misleading when made for the reasons set forth in ¶15 above, and
19below. The true facts, which were then available to defendants,
20but which defendants failed to disclose, included:
21(a) that Mossimo's control over its operations and
22production calendar had been abandoned, resulting in an inadequate
23or nonexistent means to track production and costs. In early 1995,
24Mossimo began the implementation of a calendar which outlined the
25steps for design, production and shipment and established specific
26deadlines for the Fall 1996 apparel lines. The first calendared
27steps in the process should have begun in June 1995. This calendar
28
- 26 -
1 process for the men's division had 129 "steps" which involved the
2 entire production process -- planning, design, samples, costing,
3 off-shore sourcing, shipping status, etc. This calendar system had
4 been set up by an outside consultant in the Fall of 1993, and
5 called for a calendar to be implemented for each line in each
6 division, for each season. Pursuant to the calendar system, a team
7 of Mossimo executives including Giannulli and Hohl, was supposed to
8 meet on a weekly basis to review the status of deadlines for each
9 line. The calendar system was a means of keeping track of
10 deadlines and tracking costs. In April 1995, however, Mossimo
11 executives began to abandon the system, ignoring the calendar and
12 failing to meet on a weekly basis. As a result, personnel began
13 failing to keep to the calendar's production schedules. For the
14 Fall 1996 lines, the calendar system was completely abandoned, and
15 no system was in place to track production and costs;
16 (b) That manufacturers were not being given sufficient
17 lead-times to complete and deliver finished goods to customers in
18 a timely manner. As Mossimo switched manufacturers and failed to
19 adequately track production, the Company was incurring enormous
20 sampling and production-design cost overruns on its new and
21 expanded lines, which defendants knew would result in delays in
22 shipments to its customers, leading to order cancellations,
23 increasing markdowns and the accumulation of excessive out-of-
24 season inventory. Because of delayed deliveries, goods would be
25 late for the selling season, and Massimo would be stuck with out-
26 of-season goods which would have to be sold at greatly reduced
27 margins;
28
-27-
1 (c) That Mossimo's shipments of samples for its Fall
2 1996 lines were drastically behind schedule. In late November
3 1995, defendants knew that shipment dates of samples to and from
4 source manufacturers/agents, including Betso Garment Factory-HK,
5 Jai Expo-Madras, Vivon-HK, Fine Arts Madras and Vestiments-Madras,
6 were being extended and would lead to delays in final shipment.
7 Recognizing this adverse situation, Mossimo was forced to take
8 drastic action. For example, in November 1995, Mossimo asked an
9 Italian supplier to source alternative fabrics for its sample and
10 asked that the samples be delivered in an unusually short time
11 frame -- 10 days -- for the Fall 1996 men's line. The supplier
12 reacted negatively to this request, stating that it was impossible
13 to comply with such a short schedule;
14 (d) That, contrary to its planned "controlled"
15 expansion, Mossimo's operations were out of control. By expanding
16 its product lines to include the new menswear and womenswear lines
17 for the Fall 1996 season and, at the same time, changing over to
18 new designers and sourcing agents/manufacturers for sampling and
19 manufacture, defendants knew that they would have to meet strict
20 deadlines for design, payment, sampling and shipment in order to
21 meet Mossimo's own shipment delivery deadlines. In the months
22 prior to the IPO, defendants knew, but did not disclose, that
23 Mossimo's operations were already seriously out of control to the
24 point where Mossimo was continually missing internal and retailer
25 deadlines and incurring significantly increased costs due to a
26 myriad of undisclosed problems including, inter alia, halting
27 weekly design and production meetings; abandoning production
28 timelines; hiring many new designers who, having come from big
- 28 -
1 design houses such as Calvin Klein, were greatly increasing the
2 costs of samples by constantly changing the sample designs and
3 ordering expensive sample materials; failing to make timely
4 payments to sources who, in turn, would refuse to ship until
5 payment was received; and changing confirmed orders, all of which
6 resulted in cost overruns which Mossimo had to absorb. As a
7 result, defendants knew, but did not timely disclose, that they
8 would incur increased costs and delivery problems in connection
9 with the new menswear and womenswear lines for the Fall 1996 and
10 holiday seasons and that, as a result, Mossimo's third and fourth
11 quarter profits would be greatly reduced. Defendants knew or
12 recklessly disregarded that, as a result of the adverse facts
13 concerning Mossimo's business, the Company would incur greatly
14 increased costs, make late shipments to its customers, and be
15 forced to sell out-of-season merchandise at markdown prices, all of
16 which would materially reduce the Company's profit margins; and
17 (e) That prior to the IPO, Mossimo was encountering
18 serious quality control problems. The lack of a quality control
19 department caused a significant amount of returns in the first and
20 second quarters of 1996 (including shipments to customer
21 Burlington).
22 39. Defendants described Mossimo' s "in-store" shop program in
23 the Prospectus as follows:
24 A significant aspect of the Company's strategy is
25 its in-store shops in department and selected specialty
26 retail stores. This program enables Mossimo to design a
. 27 retail space consistent with the Company's image and is
28 intended to enable the retailers to display, stock and
- 29 -
1 sell a greater volume of the Company's products. The
2 Company believes that these in-store shops build longer
3 term retailer commitment to the Company's products and
4 consumer recognition of the Mossimo brand name. As of
5 December 31, 1995, the Company had installed 11 in-store
6 shops in nine department and specialty retail store
7 chains, including Macy's, Bon Marche and Dayton Hudson,
8 and currently plans to install approximately 50
9 additional men's in-store shops in 1996. In 1996, the
10 Company expects to add five additional department and
11 specialty retail store chains, including Dillards, to the
12 nine chains currently participating in its men's in-store
13 shop program. The costs of the shops are generally
14 shared between the retailer and the Company.
15 40. Defendants' statements in the Prospectus regarding the
16 in-store shop program were false and misleading when made. The
17 true facts, which were available to defendants, but which
18 defendants failed to disclose, included:
19 (a) That Mossimo's shift to in-store shops required
20 significantly more expensive advertising and retail promotion
21 programs. Based, in part, on defendants' experience with the in-
22 store shop program since early 1995, it was materially misleading
23 for defendants to describe the in-store shop program as a key
24 growth strategy, to state that Mossimo would open approximately 50
25 new in-store shops in 1996, and to include a misleading risk
26 disclosure that there could be "no assurance" that the expansion of
27 this program would "favorably impact . . . profitability," without
28 revealing the significant negative impact that defendants knew the
- 30 -
1 strategy would have on Mossimo's profitability, due to the huge
2 promotional costs to Mossimo associated with the in-store shops.
3 When defendants began to reveal the impact of this program on its
4 margins for the third and fourth quarters of 1996, the price of
5 Mossimo's common stock on the NYSE declined significantly on large
6 trading volume;
7 (b) That Mossimo would be required to pay an
8 increasingly higher percentage of in-store shop costs to expand the
9 program in key retailer establishments. Defendants represented in
10 the Prospectus that Mossimo would share the costs with retailers,
11 thereby conveying the impression that Mossimo would share these
12 costs of the in-store shops equally. Defendants knew, however,
13 prior to the IPO, that the Company's costs for the in-store shops
14 would increase from 50% to 70% in order to allow Mossimo to
15 effectively compete for prime floor space and meet its five year
16 projections. Moreover, prior to the IPO, defendants determined
17 that an additional key aspect of the in-store shop growth strategy
18 required expansion of Mossimo's retail coordinator program and the
19 introduction of shop managers and merchandisers, at significant
20 additional cost to Mossimo. As a result of these facts, defendants
21 knew that the costs of the expansion of the in-store shop program
22 would increase dramatically, further eroding Mossimo's profit
23 margins and that, coupled with Mossimo's inability to ship its new
24 menswear and womenswear lines to these in-store shops in a timely
25 manner, the entire in-store shop program would greatly increase
26 Mossimo's costs without achieving substantially increased revenues
27 and was also likely to be jeopardized at key retailers; and
28
- 31 -
1 (c) That Mossimo's in-store shop program would
2 negatively affect the Company's margins and profits. Prior to the
3 IPO, Mossimo generated the bulk of its sales from smaller specialty
4 stores and surf shops, as to which costs were relatively low. By
5 increasing its emphasis on sales through larger chains and
6 department stores, defendants knew or recklessly disregarded that
7 Mossimo's expenses would increase dramatically, severely affecting
8 Mossimo's operating margins and profitability. Defendants knew,
9 but failed to reveal in the Prospectus, that Mossimo's shift to
10 department store sales would require, to be effective,
11 significantly more costly advertising and retail promotion
12 programs, and that Mossimo would in effect be forced to absorb a
13 large portion of the promotional expenses to obtain the requisite
14 space for in-store shops.
15 41. The second key component of Mossimo's strategy -- "to
16 expand its business in a controlled manner" -- was the expansion of
17 its men's sportswear line and the introduction in the Fall of 1996
18 of its women's sportswear line. The Prospectus created the false
19 impression that the new women's sportswear line had already largely
20 been designed, by repeatedly representing that "the Company has
21 designed a collection of young women's designer sportswear." While
22 the Prospectus noted that gross margins would "moderately decrease"
23 as sales of these lines expanded because their margins were lower
24 than activewear margins, the Prospectus represented that much of
25 the costs of the expansion and introduction of these lines had
26 already occurred or would only affect margins in the first half of
27 1996, after which, presumably, sales would provide a greater base
28 over which to spread expenses:
- 32 -
1 The Company has been able to achieve lower operating
2 expenses as a percentage of net sales primarily due to
3 its ability to spread fixed costs over an increased sales
4 base. During 1995, the Company expended substantial
5 efforts to build the infrastructure necessary to support
6 growth of its men's apparel line and to establish its
7 women's sportswear line. In 1995, the Company began to
8 incur costs to support the design, sourcing, marketing
9 and distribution of the women's sportswear line, which is
10 not anticipated to produce revenues until the third
11 quarter of 1996. Additional costs associated with the
12 growth of the men's apparel line and development of the
13 women's line are anticipated, based on expenditures to
14 date, to be approximately $1.3 million in 1996. These
15 expenses will negatively impact operating margins in the
16 first half of 1996.
17 42. Defendants' statements in the Prospectus that additional
18 costs for the Company's new menswear and womenswear lines would
19 only affect margins in the first half of 1996 were false and
20 misleading when made. The true facts, which were then available to
21 defendants, but which defendants failed to disclose, included:
22 (a) That Mossimo's new women's line was behind schedule
23 and far from being completed. Contrary to the representations in
24 the Prospectus, development of the new women's line was far from
25 complete, and Mossimo was incurring rapidly increasing, high
26 production development costs in connection with its men's and
27 women's Fall 1996 sportswear lines, as a result of its over-
28 sampling of offerings and delays and changes in its sourcing;
-33-
•
1 (b) That additional costs associated with the expansion
2 of the men's and women's lines would be significantly higher than
3 disclosed. Prior to the IPO, Massimo hired new designers at high
4 salaries for the Fall 1996 lines who were not familiar with the
5 Company's operations and, as a result, incurred substantial
6 additional costs. The new designers were developing samples for
7 each color of a specific style rather than developing one prototype
8 and using swatches. This change in designing samples for
9 attracting retail customers increased the costs to be incurred for
10 the Fall 1996 men's and women's lines. Tony Cherbak, Mossimo's
11 CFO, admitted in an October 15, 1996 conversation with Merrill
12 Lynch that Mossimo had hired new designers prior to the IPO who
13 used their own sourcing manufacturers which were more expensive
14 than Mossimo's existing sourcing manufacturers. Defendants failed
15 to disclose these changes and increased costs that existed at the
16 time of the IPO;
17 (c) That Mossimo changed sourcing agents and
18 manufacturers to accommodate the new designers, leading to
19 significant additional costs which would negatively affect profit
20 margins. The new manufacturers were significantly more expensive
21 than those previously used by Massimo. For example, in December of
22 1995, defendants changed one of their long-time manufacturer's
23 agents to Cinnabar Traders, Ltd., which charged a 7 to 8 percent
24 commission versus the 5 to 6 percent commission Mossimo had been
25 paying its former agent. The ' change in manufacturers/agents
26 increased costs, both directly in increased commissions and in the
27 higher prices Mossimo had to pay for garments. Additional costs
28 also were incurred by Mossimo because these manufacturers were
- 34 -
1 being required to complete samples in a short period of time or to
2 change production in mid-stream due to the failure of Mossimo to
3 complete the final design phase on a timely basis in the Fall of
4 1995;
5 (d) That Mossimo's rapid growth was severely straining
6 its design and production functions, such that it was incurring
7 spiraling design, sampling and production costs and was
8 increasingly unable to complete design and production work and to
9 get manufactured products to retailers in a timely fashion.
10 Defendants knew, but failed to disclose, that as early as the Fall
11 of 1995, Mossimo was experiencing major problems with
12 implementation of its Fall 1996 men's and women's lines. By that
13 time, Mossimo was severely behind schedule on certain aspects of
14 the schedule which were necessary for timely shipment in the Fall
15 of 1996. The complete cycle (design to shipment) was approximately
16 one year. As of the Fall of 1996, however, Mossimo had hired a
17 significant number of additional new designers who were unable to
18 complete designs for the new women's and men's lines. The failure
19 to timely complete designs led to cost overruns and delays in
20 samples being made. As a result, sales representatives were forced
21 to use only computer models to sell the women's Fall 1996 line.
22 The line was sold to buyers for a fixed price without defendants
23 even knowing where the garments would be made or how much it would
24 cost to make them. In late November 1995, merchandising Vice
25 President Ed Whitehead and other executives met with designers to
26 discuss the design problems, and the fact that it was evident at
27 that time that the Fall 1996 men's line would be jeopardized
28 because the sample garments had not yet been ordered; and
- 35 -
1 (e) That Mossimo's decision to defer expensing the costs
2 associated with desiqn and production of the new men's and women's
3 lines would negatively impact profit margins in the third and
4 fourth quarters of 1996. Prior to the IPO, defendants had decided
5 to capitalize costs associated with the design and production of
6 the new and expanded women's and men's lines for the Fall 1996
7 season. Previously, Mossimo had expensed these costs as incurred.
8 However, because defendants knew the new costs would be significant
9 and they did not want to negatively impact Mossimo's profitability
10 immediately after the IPO, defendants changed accounting practices.
11 As a result, defendants knew that Mossimo would not expense those
12 costs until shipment of the products in the third quarter of 1996,
13 ended September 30, 1996. This decision enabled defendants to
14 continue to report sizable profits in the first half of 1996, based
15 on Mossimo's high margins for its historical products, without yet
16 having to expense the significant and ever-growing costs associated
17 with the new Fall 1996 lines. This enabled defendants to continue
18 to misrepresent to the market, in the IPO and in their statements
19 subsequent thereto, that Mossimo was increasingly profitable,
20 successfully producing its new Fall 1996 lines and growing the
21 business in a "controlled manner." In reality, and as defendants
22 knew but did not disclose, the costs of design and production were
23 growing ominously, for the reasons alleged above. Mossimo was
24 experiencing and would continue to experience increasingly high
25 design and production development costs relating to its Fall 1996
26 men's and women's sportswear lines because defendants were
27 expending huge sums for hundreds of sample designs, including
28 fabrics, patterns and styles, many of which would never be sold to
- 36 -
1 the market, and were incurring additional costs from changing the
2 Company's agents/sources for manufacturing.
3 43. The generic "risk factors" or warnings of possible
4 adverse factors that "could" impact Mossimo's business in the
5 Prospectus did not fully and adequately disclose the concrete
6 problems with Mossimo's operating and finances known to defendants
7 and were themselves false and misleading for several reasons.
8 First of all, the statements that "there can be no assurance" that
9 certain future events would or would not occur were nothing but
10 generic generalities that are true of all future events and did not
11 disclose that the defendants knew then that certain operating
12 problems were already in existence. To warn that certain events
13 "could" have an adverse impact on Mossimo's results for operations
14 was misleading in making it appear that there was only a risk that
15 these events could occur when, in fact, defendants knew at the time
16 of the IPO that Mossimo's operations were careening out of control.
17 44. After the IPO, defendants continued to misrepresent and
18 conceal facts regarding the true state of Mossimo's business,
19 operations and finances.
20 45. On March 19, 1996 and March 22, 1996, Merrill Lynch
21 analyst Brenda Gall ("Gall") issued her initial buy recommendation
22 for Mossimo. The Merrill Lynch analyst received information for
23 the report from Mossimo executives, who misled the analyst about
24 Mossimo's business and financial condition, intending and
25 anticipating that this false information would reach the market.
26 In telephone conversations on February 20, 1996, February 21, 1996,
27 March 13, 1996, March 15, 1996, and March 18, 1996, analyst Gall
28 spoke with defendants Giannulli and Hohl, as well as Don Kerkes and
- 37 -
1 Pam Sargent, two other key Mossimo executives. The March 19, 1996
2 report stated that the start-up costs for the new Fall 1996 lines
3 would only impact Mossimo's margins in the first half of 1996, and
4 that earnings would not be impacted thereafter. The same report
5 stated, "[w]e expect EPS to approach $3.00 p/s in the year 2000 on
6 sales comfortably in excess of $300 million." This information (as
7 well as other positive information in the report) was provided by
8 Mossimo executives in a February 20, 1996 conversation with Gall.
9 Gall was also informed in a February 21, 1996 conversation that
10 only $1.3 million in additional costs for the men's and women's
11 lines needed to be absorbed in the first half of 1996, which
12 contradicted the facts defendants knew about the substantial costs
13 the Company was incurring for sampling and as a result of the
14 changing of source manufacturers, which would be expensed in the
15 Company's third quarter of 1996. The same report stated that the
16 costs for the in-store shops would be shared 50/50, when internally
17 defendants knew from the Company's five-year business plan that
18 Mossimo would have to pay for 70% of the costs in order to obtain
19 valuable floor space. In a March 13, 1996 conversation, Don Kerkes
20 told Gall that sales were going quite well and that the Company did
21 not anticipate going overbudget for Fall 1996. This information
22 was incorporated into Gall's reports, culminating in the statement
23 in the March 22, 1996 report that "we expect last half EPS to be up
24 more than 30%." The March 19, 1996 report also stated that due to
25 "management's policy of over-selling by some 15-to-20%," the
26 accumulation of obsolete inventory was minimized, which
27 contradicted defendants' knowledge that the Company had no control
28 over its inventories, and which led ultimately to Mossimo's
- 38 -
1 disclosure in early January 1997 that it had to take a write-down
2 for out-of-season merchandise and a shortage of physical inventory.
3 The statements contained in the March 19, 1996 and March 22, 1996
4 Merrill Lynch reports, which were based on information provided by
5 the above-referenced Mossimo executives, were false and misleading
6 because of the adverse conditions known to defendants but not
7 disclosed, as set forth in I3[15, 38, 40, 42 and ¶53 below.
8 46. On March 28, 1996, Smith Barney, one of the two co-lead
9 underwriters (with Merrill Lynch) of Mossimo's IPO, initiated its
10 post-IPO research coverage of the Company with a report rating
11 Mossimo as "outperform." The report was based on information
12 obtained from defendants and emphasized that Massimo was "very
13 early in its growth cycle" with "virtually untapped growth
14 opportunities in the near term," including the rollout of in-store
15 shops and a new womenswear line. The report emphasized the
16 importance of Mossimo's development of in-store shops and its new
17 Fall women's sportswear line:
18 The men's sportswear line, which encompasses denims,
19 knits and wovens, is currently being rolled out to major
20 department stores. Mossimo is in 17 department store
21 chains and 600 department store doors, with the potential
22 of reaching 1100 doors within two years. In addition,
23 the company is setting up in-store shops in major
24 department stores. The company opened 11 shops during
25 1995 in accounts such as Macy's and Dillards Department
26 Stores, and has commitments for 50 additional shops in
27 1996. The shops, which vary in size from 600-1,000
28 square feet, are generally adjacent to young men's brands
- 39 -
1 such as Guess, Levi's and NIKE. MGX generally shares the
2 $50-per-square-foot cost of setting up the shop with the
3 retailer, and has found that sales increase at least 50%
4 with the installation of a shop.
5 We think that Mossimo has the potential to ultimately
6 roll out upwards of 300 shops, which would be only in the
7 biggest department store doors. At an average of 800
8 square feet and $500 per square foot in sales, this would
9 translate into close to $100 million in revenues . . . .
10 Our estimate of 300 shops may therefore, in fact, be
11 somewhat conservative.
12 Womanswear
13 Mossimo is slated to enter the women's sportswear
14 business in fall 1996 along with many other new
15 vendors. . . . The early read on womenswear orders is
16 very positive, and we are forecasting $7.4 million in
17 womenswear revenues for FY96 and $15 million for FY97.
18 * * *
19 Second Half 1996
20 For the second half of 1996, we are forecasting a
21 sales increase of 35.5% We are forecasting an 8.5%
22 increase in activewear and 45.9% in sportswear. In
23 addition, the company will begin to ship womenswear for
24 fall in late 2Q96, and we are forecasting $7.4 million in
25 sales for this line in 1996. We expect a return to more
26 normalized margins in the second half and some leverage
27 on the SG&A expenses related to the new hires. We are
28 forecasting net income of $3.70 million and EPS of $0.25
-40--
•
1 (on more shares) for 306, vs. $2.69 million and EPS of
2 $0.21 a year ago, and 4Q96 net income of $3.11 million
3 and EPS of $0.21 vs. $2.42 million and EPS of $0.19 for
4 4Q95.
5 These statements, which were based on information provided by
6 defendants with the intention and anticipation that it would reach
7 the market, were false and misleading due to the adverse conditions
8 known to defendants but not disclosed, as set forth in 5515, 38,
9 40, 42 above and 553 below.
10 47. On May 6, 1996, Smith Barney reported on its recent visit
11 to Mossimo headquarters and after meeting with several members of
12 Mossimo's management team, including Giannulli, Hohl, Pam Sargeant,
13 head merchant for womenswear, and Ed Whitehead, Vice President of
14 Merchandising, Smith Barney reported, as follows:
15 Last week we visited privately with the management of
16 Mossimo at company headquarters in Irvine, California.
17 During our visit we learned that the company's core
18 menswear business continues to perform very well, and
19 that the new womenswear line, which is being launched
20 this fall, has been received very enthusiastically by
21 some key retailers.
22 * * *
23 The upcoming launch of womenswear also seems to be going
24 very well. . . . We remain comfortable with our estimate
25 of $7 million in womenswear revenues in 1996.
26 These statements, which were based on information provided by
27 defendants with the intention and anticipation that it would reach
28 the market, were false and misleading because of the adverse
- 41 -
1 conditions known to defendants but not disclosed, as set forth in
2 1115, 38, 40, 42 above and 553 below.
3 48. On May 8, 1996, Mossimo issued a press release announcing
4 record operating results for the first quarter ended March 31,
5 1996. The Company reported that net sales for the quarter rose 45%
6 to $24.4 million from $16.8 million in the comparable 1995 period.
7 Pro forma net income advanced 22% to $4.0 million, or $.28 per
8 share, from $3.3 million, or $.25 per share in the prior year. The
9 Company reported that sales of men's activewear increased 17% while
10 its men's sportswear line increased 110%. The release quoted
11 defendant Giannulli as stating: "'We are particularly pleased with
12 the significant growth in sales within our existing account base,
13 attributable in part to the success of our in-store shop program
14 • • • • f Defendants failed to disclose the adverse
15 contemporaneous conditions that existed at that time, as set forth
16 above in ¶115, 38, 40, 42 above and 153 below, including the fact
17 that Mossimo's costs for in-store shops would be increasing from
18 50% to 70%, which would negatively impact earnings.
19 49. On May 8, 1996, defendants held a conference call with
20 securities analysts. The information related by defendants to
21 analysts on this call was summarized in a Smith Barney report:
22 The company added 13 new in-store shops in the quarter
23 for a current total of 24 shops. The shops are
24 performing very well and average 500 square feet and see
25 sales of approximately $500 per square foot. Management
26 indicated that an in-store shop typically experiences
27 sell-throughs that are 50%-100% better than a location
28 without an in-store. The company also believes that it
- 42 -
1 will open more than the 55 in-store shops it had forecast
2 by year-end and believes that in 1997 it will open in
3 excess of 100 doors. MGX [Mossi]no] is focused on
4 increasing business to its existing accounts through the
5 construction of in-store shops and we believe that it
6 does not need to open new doors to achieve growth
7 projections.
8 * * *
9 The company also highlighted several new product
10 initiatives. Management indicated that orders for the
11 women's spOrtswear line, expected to debut at retail late
12 in 2Q96, have far exceeded expectations. The company
13 will likely ship only 65% of the orders received, as
14 management feels prudence dictates caution with regard to
15 the fashion content of the line. We believe this will
16 leave the retailers "hungry" for product and will likely
17 increase the appeal of the brand.
18 In the conference call, defendants stated that the infrastructure
19 for the new women's and men's lines would only affect margins in
20 the second quarter of 1996, and leveraging of their expenses would
21 occur in the third quarter. These statements were false and
22 misleading because of the adverse conditions known to defendants as
23 set forth in 515, 28, 40, 42 above and 553 below.
24 50. In Mossimo's report on Form 10-Q for the quarter ended
25 March 31, 1996, signed by defendants Giannulli and Hohl on May 10,
26 1996, defendants reported the same financial results previously
27 announced on May 8, 1996, failing to disclose the adverse
28
- 43 -
1 conditions known to defendants, as set forth in 5515, 38, 40, 42
2 above and 553 below, which rendered the statements false when made.
3 51. On May 8, 1996, underwriter Smith Barney released a
4 research report repeating defendants' positive statements. Based
5 on conversations with defendants, Smith Barney projected EPS of
6 $0.25 and $0.21, respectively, for the third and fourth quarters of
7 1996. The report stated:
8 The company's SG&A margin of 20% was in-line with
9 our forecast. Although the company did not see any
10 leverage off the larger sales base, this is due to the
11 infrastructure ramp-up required for expansion of the
12 men's sportswear line and the coming launch of
13 womenswear. We do not expect this upward SG&A pressure
14 to begin to subside until 3Q96 when the revenues from
15 womenswear begin to offset the absolute dollar increases
16 in SG&A.
17 These statements, which were based on information provided by
18 defendants with the intention and anticipation that it would reach
19 the market, were false and misleading because of the adverse
20 conditions known to defendants but not disclosed, as set forth in
21 5515, 38, 40, 42 above and 553 below.
22 52. Three days later, Merrill Lynch, the other co-lead
23 underwriter of Mossimo's IPO, issued a positive report on Mossimo.
24 The report stated that Mossimo's Fall orders were strong, up
25 approximately 35%, which did not include Mossimo's new women's
26 sportswear line, orders for which were "running well above plan."
27 With respect to Mossimo's "in-store shops," the Merrill Lynch
28 report stated:
-44-
1 AGGRESSIVE "IN-STORE SHOP" OPENING PROGRAM:
2 Currently, Mossimo's main focus with its existing lines
3 is toward achieving increased retail penetration by
opening "in-store shops." The company ended 1995 with 11
5 men's shops open, has added 13 so far this year and hopes
6 to have 61 Men's and 10 Women's in operation by calendar
7 year end, with most scheduled to open in the third
8 quarter. Approximately 100 additional "in-stores" are
9 expected to be added each year for the next several
10 years. Following the opening of a shop, sell-throughs in
11 the stores typically increase between 50 and 100 percent.
12 The report also stated that Mossimo had incurred its costs for the
13 infrastructure for the new women's and men's lines, and it would
14 begin leveraging these costs in the second half of 1996. Analyst
15 Gall obtained the information for this report from discussions with
16 defendants, including separate May 8, 1996 conversations with
17 defendants Hohl and Giannulli. Giannulli informed Gall that
18 inventory had increased to $11.4 million, but that this increase
19 was in line with sales growth. This information provided by
20 Giannulli was published in the analyst's report. The statements
21 contained in the report, which were based on information provided
22 by defendants with the intention and anticipation that it would
23 reach the market, were all false and misleading because defendants
24 failed to reveal the enormous operational problems that the Company
25 was encountering, including their design and production delays,
26 manufacturing difficulties and inability to ship product on a
27 timely basis, failure to record expenses and relieve inventories
28
- 45 -
1 properly, and the other adverse conditions set forth in 515, 38,
2 40, 42 above and ¶53 below.
3 53. The above statements, in 5545-52, were false and
4 misleading when made because of the adverse, contemporaneous
5 information known to defendants, as set forth in 5515, 38, 40 and
6 42 above, and the following contemporaneous conditions:
7 (a) By March 1996, defendants were advised that
8 Mossimo's failure to timely pay for excess fabric costs in
9 situations where Mossimo had confirmed orders and then subsequently
10 reduced the quantities was causing manufacturers to hold up
11 shipments of piece goods to the factories, thereby jeopardizing
12 timely shipment.
13 (b) By April 1996, Mossimo employees were urging that
14 Mossimo begin a weekly meeting process with senior Mossimo officers
15 to ensure Mossimo's ability to monitor available stock position,
16 factory capacity, delivery dates and production schedules. Mossimo
17 had previously disbanded its weekly meetings in the summer of 1995,
18 causing delays and increased costs that defendants concealed from
19 the public.
20 (c) By April 1996, defendants were advised by one of
21 their new Hong Kong manufacturing agent/sources that due to
22 Mossimo's constant amendments of previously confirmed orders and
23 previously confirmed designs and its failure to provide letters of
24 credit, the factories could not begin production.
25 (d) In April 1996, Mossimo was advised by one of its
26 Hong Kong agents that because Mossimo had not sent the factory the
27 sew-bye and patterns for Fall 1996 items until early April,
28 delivery could not be made to Mossimo until the last week in June,
- 46 -
1 which was too late for Mossimo to meet its shipment dates to many
2 of its accounts.
3 (e) By April 1996, defendants knew and internally
4 expressed major concerns that Mossimo's margins for certain of its
5 product manufactured overseas would be reduced by 10%-15% due to
6 increased duty quotes from Mossimo's customs broker.
7 (f) In May 1996, defendants expressed serious concerns
8 that pricing of samples was drastically high, that increases in
9 Mossimo's wholesale cost of basic fabrics would not be able to be
10 passed through to the retail accounts, and that Mossimo would have
11 to absorb the increased wholesale costs imposed by the factories
12 because the product was already sold to retail accounts at a
13 confirmed price.
14 (g) In May 1996, defendants were advised that late
15 changes to design would negatively affect delivery dates for
16 certain products for the Fall 1996 line.
17 (h) Mossimo's returns had increased by approximately 40%
18 from the first quarter to the second quarter 1996.
19 54. On June 17, 1996, Robertson Stephens & Co. ("Robertson
20 Stephens") issued a report upgrading its rating on Mossimo from
21 "long-term accumulate" to "buy," after communicating with
22 defendants. The report stated:
23 After a recent conversation with Mossimo management, we
24 feel more than comfortable with business trends and we
25 feel that given the stock's recent sell off of 13.4% that
26 it now is appropriate to upgrade our rating on Mossimo
27 from LTA to buy. Business trends remain firm across all
28 divisions and importantly bookings for spring and fall in
-47-
1 both men's and women's are trending well ahead of
2 planned, portending earnings upside could be achieved.
3 Our discussions with management have also revealed that
4 initial tests of the women's line in a select group of
5 stores has been excellent.
6 The report projected that Mossimo's sales would grow at least 37.5%
7 in each of the next two years and that gross margins would decrease
8 over the next two years to only 41.1% from 42.7% in fiscal year
9 1995 due to a greater proportion of men's and women's sportswear
10 sales, which carry lower gross margins. These statements, which
11 were based on information provided by defendants with the intention
12 and anticipation that it would reach the market, were false and
13 misleading because of the adverse conditions known to defendants
14 but not disclosed, as set forth in 11115, 38, 40, 42 above.
15 55. On July 10, 1996, Robertson Stephens issued another
16 report on Mossimo based on communications with defendants. This
17 report again represented that Mossimo's business trends remained
18 "robust," with order patterns for the second half of 1996 running
19 at least in line with plans and demand for the new women's line
20 outstripping management's expectations. The report represented
21 that after speaking with Mossimo management, Robertson Stephens
22 remained very comfortable with its second quarter projections and
23 believed that upside potential might exist. These statements,
24 which were based on information provided by defendants with the
25 intention and anticipation that it would reach the market, were
26 false and misleading because of the adverse conditions known to
27 defendants but not disclosed, as set forth in 5515, 38, 40, 42, 53
28 above and 564 below.
- 48 -
1 56. On July 11, 1996, Merrill Lynch analyst Gall issued a
2 report recommending that investors accumulate Mossimo shares. The
3 report stated that "In our contacts with management we were
4 encouraged that business is trending above expectations,"
5 "[r]esponse to the new Women's Sportswear line has been excellent,"
6 and "despite IPO, infrastructure and startup expenses, net income
7 should be up about 36%," with 1996 earnings per share estimates of
8 $1.05-$1.07, and 1997 earnings per share estimates increasing to
9 $1.35-1.40. Gall based her report on company-specific information
10 provided by defendants Giannulli and Hohl, with the intention and
11 anticipation that it would reach the market, in conversations on
12 May 15, 1996, June 7, 1996 and June 17, 1996. These statements
13 were false and misleading because of the adverse conditions known
14 to defendants but not disclosed, as set forth in ff15, 38, 40, 42
15 and 53 above and f64 below.
16 57. On July 15, 1996, Robertson Stephens included Mossimo in
17 its new focus list.
18 58. On August 1, 1996, Smith Barney reported on a meeting it
19 held with defendants Giannulli and Hohl:
20 We recently met privately with Mossimo Giannulli,
21 Chairman of Mossimo and Eric Hohl, the company's COO and
22 CFO, and came away highly enthusiastic about the
23 company's prospects. Highlights of our conversation
24 follow:
25 The company will be reporting Q2 EPS on
26 Thursday, August 8. We now think that our
27 estimate of $0.23 versus $0.24 a year ago
28 could be conservative, as we think that our
- 49 -,
1 revenue estimate of $23.5 mm versus $18.3 mm a
2 year ago may be too low given the company's
3 strong sales momentum. We believe that we may
4 have the opportunity to revise our FY96 EPS
5 revenues estimates up, especially since the
6 company's womenswear line appears to be
7 exceeding expectations.
8 These statements, which were based on information provided by
9 defendants with the intention and anticipation that it would reach
10 the market, were false and misleading because of the adverse
11 conditions known to defendants but not disclosed, as set forth in
12 1115, 38, 40, 42 and 53 above and 164 below.
13 59. On August 8, 1996, Mossimo issued a press release
14 reporting its second quarter results, including earnings per share
15 of $0.26. The release stated that defendant Giannulli attributed
16 the strong financial performance to "significant increases in the
17 men's sportswear line and strong response to orders from initial
18 tests of the company's new women's sportswear collection." Also on
19 August 8, 1996, Mossimo sponsored a conference call between
20 Giannulli and Hohl and analysts to discuss Mossimo's 1996 second
21 quarter financial results. In response to a question on inventory,
22 defendant Hohl stated that Mossimo had $15.9 million in inventory,
23 of which $1 million was women's finished goods. Defendants also
24 stated in the conference call that Mossimo expected to see the
25 leveraging of fixed expenses in the third and fourth quarters of
26 1996. Giannulli further stated in the conference call that "we are
27 careful to make sure we have the infrastructure in place to support
28 our growth." These statements, which were based on information
- 50 -
1 provided by defendants with the intention and anticipation that it
2 would reach the market, were false and misleading because of the
3 adverse conditions known to defendants but not disclosed, as set
4 forth in 5515, 38, 40, 42 and 53 above and 564 below.
5 60. As a result of the August 8, 1996 conference call, in
6 which Giannulli and Hohl discussed Mossimo's second quarter
7 results, and other communications with defendants, Smith Barney, in
8 an August 8, 1996 research report, reiterated its Outperform
9 rating, stating that "[t]he primary driver behind the better than
10 expected quarter was higher than forecast revenues from the
11 company's new womenswear line." The analysts were clearly misled
12 by defendants' failure to disclose the extent of the capitalized
13 costs associated with the men's and women's lines which were
14 decimating Mossimo's profit margins at this time, and the Smith
15 Barney report, which was based on information provided by Giannulli
16 and Hohl, accordingly contained false and misleading information.
17 Smith Barney further reported that:
18 [All segments of the company's business performed very
19 well and both gross margins and SG&A were better than
20 expected. We are raising our 3Q96 EPS estimate to $0.26
21 from $0.25 and our 4Q97 EPS estimate to $0.23 from $0.21
22 to incorporate new information that we learned on the
23 conference call.
24 * * *
25 The company's gross margin of 43.3% was 30 basis points
26 better than expected, and its expense margin of 21.4% was
27 140 basis points better than expected. We believe that
28 the potential exists for further expense leverage going
- 51 -
1 forward as the company's infrastructure expansion
2 continues to produce incremental sales increases.
3 The company has also formed a subsidiary to bring T-shirt
4 screening in-house and expects to improve margins on
5 screened T's by 20% in 1997.
6 * * *
7 We continue to like the Mossimo story a great deal
8 . . . .
9 These statements, which were based on information provided by
10 defendants with the intention and anticipation that it would reach
11 the market, were false and misleading because of the adverse
12 conditions known to defendants but not disclosed, as set forth in
13 1515, 38, 40, 42 and 53 above and 164 below.
14 61. Also on August 9, 1996, Robertson Stephens issued a
15 research report, repeating information discussed in the August 8,
16 1996 conference call and in other communications with defendants.
17 The report stated: "[C]urrent business momentum appears to be very
18 robust, and the company is now actively pursuing many new business
19 avenues, which before this conference call the company had not made
20 public." The report noted that second quarter gross margin fell
' 21 slightly, as expected, to 43.4% from 43.8%, due to the dramatic
22 growth in the Company's sportswear lines. The report represented
23 that selling, general and administrative expenses ("SG&A") also
24 grew significantly, to 21.4% of sales versus 19.3% of sales as the
25 Company significantly increased its sportswear design and sourcing
26 team and hired an in-house sales force to market its new women's
27 line. The report repeated statements by management concerning
28 business initiatives that should help Mossimo's sales growth in the
- 52 -
1 next several quarters. The report described how Mossimo had
2 conducted a 200-door test of a small line of women's clothing in
3 June and July 1996 as a pilot to its announced introduction of a
4 Fall women's line shipping in August 1996. The line was
5 represented by defendants to have sold through at extremely high
6 rates, giving the Company high confidence that the line was
7 appropriately positioned and designed. Mossimo also represented
8 that the number of doors through which the Fall womenswear line
9 would be sold had been increased from 500-600 doors to 1100 doors,
10 450 of these being department stores and that it had opened two
11 major new department store accounts, Neiman Marcus and
12 Bloomingdale's, for introduction in the Fall and holiday season.
13 The Company also announced in the conference call that it had
14 brought in-house its previously subcontracted screen printing
15 function, which it represented would come on-line in November 1996,
16 enabling Mossimo to "improve significantly" its gross margins on
17 its screen printed T-shirts. Based on the information provided by
18 defendants, the Robertson Stephens analyst concluded that its
19 revenue estimates for the third and fourth quarters could prove to
20 be "quite conservative," and that, while management expected gross
21 margins to decline somewhat as growth in sportswear lines
22 continued, the Company did expect that SG&A leverage would begin in
23 the second half of 1996 and would become more significant in fiscal
24 year 1997. The Robertson Stephens analyst concluded, based on
25 defendants' representations, that: "The company's impressive 20%-
26 plus operating margins [would] flatten in 2H:96 and [ ] begin to
27 improve in F1997." These statements, which were based on
28 information provided by defendants with the intention and
- 53
1 anticipation that it would reach the market, were false and
2 misleading because of the adverse conditions known to defendants
3 but not disclosed, as set forth in 5115, 38, 40, 42 and 53 above
4 and 1[64 below.
5 62. On August 14, 1996 Merrill Lynch issued another positive
6 report stating "Growth prospects remain excellent," with a third
7 quarter earnings per share estimate of $.28, and that:
8 "We expect sales and earnings to register accelerating
9 momentum in the last half, fueled by a stronger than
10 expected performance in the new women's sportswear line
11 (sales are expected to total $13 million this year and
12 $30 to $35 million next) and continued rapid growth in
13 men's sportswear volume (up more than 50% in the last
14 have and close to that again next year).
15 This report was based on conversations with defendants, in
16 particular information provided to Gall on August 8, 1996 in a
17 conversation with defendant Hohl in which he projected earnings per
18 share of $1.06-$1.08 for fiscal year 1996, which was repeated in
19 the report. Gall also received company-specific information from
20 defendant Hohl in conversations on July 10, 1996, and July 17,
21 1996, in which he informed Gall that everything was very good at
22 the Company, and that Gall's third and fourth quarter 1996
23 estimates were too conservative. These statements, which were
24 based on information provided by defendants with the intention and
25 anticipation that it would reach the market, were false and
26 misleading because of the adverse conditions known to defendants
27 ' but not disclosed, as set forth in I1115, 38, 40, 42 and 53 above
28 and ¶64 below.
- 54 -
1 63. On August 15, 1996, Massimo filed its report on Form 10-Q
2 for the second quarter ended June 30, 1996, signed by defendants
3 Giannulli and Hohl. The report contained the same financial
4 information previously announced on August 8, 1996. These
5 statements were false and misleading because of the adverse
6 conditions known to defendants but not disclosed, as set forth in
7 5515, 38, 40, 42 and 53 above and 1164 below.
8 64. The statements set forth in 5554-63 above, in particular
9 the positive statements about the success of the womenswear line,
10 were false and misleading because of the adverse conditions known
11 to defendants but not disclosed, as set forth in 5515, 38, 40, 42
12 and 53 above and the following contemporaneous conditions:
13 (a) Mossimo already had incurred substantial costs for
14 the women's line in excess of its revenues and its budgets for
15 these costs in the third quarter; and
16 (b) Total costs of goods sold were already $6 million
17 over budget by August 1996.
18 65. As Mossimo's third quarter was coming to a close,
19 defendants realized that they could no longer conceal the negative
20 factors affecting Mossimo's operations and finances. Thus, Massimo
21 knew it was going to have to reveal the truth regarding its
22 operations and financial condition. Defendants hoped, however,
23 that by gradually trickling out negative information about Mossimo
24 rather than properly and fully disclosing the complete truth, they
25 could "manage" Mossimo's stock price downward gradually over time
26 and thus avoid a sudden catastrophic collapse in Mossimo's stock
27 price that would infuriate investors, attract attention, and likely
28 lead to their being sued for fraud. Thus, in an attempt to manage
- 55 -
1 the stock price down slowly, in late September 1996, defendants
2 began to make partial but incomplete and misleading revelations
3 about Mossimo's business, operations and finances. On September
4 23, 1996, just six weeks after its very bullish conference call
5 with analysts, defendants issued a press release revealing that
6 Mossimo expected to report lower earnings for the third quarter,
7 despite a 40% increase in sales. The press release revealed that
8 the Company expected earnings for the third quarter to be in the
9 range of $0.14 to $0.16 per share, compared with $0.21 per share in
10 the prior year's third quarter, and compared with analysts'
11 expectations between $0.24 and $0.28 per share. The press release
12 revealed that gross margins had been restrained by "unusually high
13 production development costs" and "cost inefficiencies from changes
14 in, and the addition of, sourcing agents and related contract
15 manufacturers." Defendants, however, continued to misrepresent the
16 truth. In an effort to mislead the market into believing that the
17 "cost inefficiencies" which greatly reduced Mossimo's margins arose
18 only in the third quarter, Giannulli falsely stated that cost
19 inefficiencies from changes in, and the addition of sourcing agents
20 and related manufacturers in the third quarter also contributed to
21 lower margins. As alleged above in 515, defendants changed and
22 added numerous sourcing agents and related manufacturers commencing
23 in 1995 and the resulting "cost inefficiencies" occurred throughout
24 the first half of 1996. The release revealed that results for the
25 fourth quarter were also expected to reflect a higher level of
26 production costs although the impact would be substantially less
27 than in the third quarter. The release quoted defendant Giannulli
28 as stating: "While we are disappointed by the impact of higher
- 56 -
1 costs experienced thus far in the third quarter, the company's
2 fundamentals continued to be strong as evidenced by the significant
3 customer demand for Mossimo products." As a result of these
4 revelations, Mossimo's stock price dropped from a close of $41 on
5 Friday, September 20, 1996, to close at '$34 on September 23, 1996,
6 and $30-1/2 on September 24, 1996, on record trading of more than
7 3.5 million shares.
8 66. In connection with this announcement, defendants
9 communicated with securities analysts to get them to issue reports
10 attempting to reassure the market that revenues and momentum at the
11 Company remained strong. For example, Smith Barney analyst Faye
12 Landes issued a report noting that margins for the third quarter
13 would be in the 35% range versus expectations of 41% as a result of
14 the increases in the cost of product development. Based on
15 defendants' representations, Landes reported that Mossimo's
16 management had taken the necessary steps to rectify the problems
17 leading to the lower third quarter gross margins and that it did
18 not foresee any spill-over effect into 1997. Based on defendants'
19 reassurances, a Robertson Stephens analyst reported: Me continue
20 to view [Mossimo] as very attractive and believe these cost issues
21 should begin to be mitigated in Q4 . . . ." These statements,
22 which were based on information provided by defendants with the
23 intention and anticipation that it would reach the market, were
24 false and misleading because of the adverse conditions known to
25 defendants.
26 67. On October 11, 1996, the Los Angeles Times reported on an
27 interview with defendant Giannulli, quoting him as reassuring the
28 market that, despite the announcement on September 23, 1996,
- 57 -
1 everything was fine with the Company: "In an interview Thursday,
2 though, Giannulli said that his ten-year-old company 'stubbed a
3 toe, but we are moving forward and all is fine. We are the same
4 company we were three weeks ago' before the earnings slip was
5 revealed, he said." These statements were false and misleading
6 because of the adverse conditions known to defendants but not
7 disclosed.
8 68. Also on October 11, 1996, The Wall Street Journal
9 reported that, in response to an inquiry by the NYSE, Mossimo said
10 that it "was not aware of any material developments' at the
11 company that would explain a continued sharp drop in its stock."
12 These statements were false and misleading because of the adverse
13 conditions known to defendants but not disclosed.
14 69. On the same day the Los Angeles Times and The Wall Street
15 Journal published defendants' false and misleading statements set
16 forth in ff67-68, Smith Barney issued a research report, based on
17 defendants' assurances that "there is no fundamental reason for the
18 price weakness in MGX stock over the past several days." The
19 report emphasized that conversations with Company management
20 confirm that inventories are in line with expectations and
21 "inventory levels are no cause for concern." These statements,
22 which were based on information provided by defendants with the
23 intention and anticipation that it would reach the market, were
24 false and misleading because of the adverse conditions known to
25 defendants but not disclosed.
26 70. On October 14, 1996, Merrill Lynch issued a report
27 upgrading its intermediate term opinion on Mossimo from neutral to
28 accumulate, based on communications with defendants. The report
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1 represented: "It is our understanding that MGX [Mossimo] has gotten
2 costs back in line. This should prove to be a temporary issue
3 affecting only the 3Q." These statements, which were based on
4 information provided by defendants with the intention and
5 anticipation that it would reach the market, were false and
6 misleading because of the adverse conditions known to defendants
7 but not disclosed.
8 71. In an October 23, 1996 Wall Street Journal article,
9 Mossimo denied concerns that it's unsold merchandise was causing an
10 inventory problem. These statements were false and misleading
11 because of the adverse conditions known to defendants but not
12 disclosed.
13 72. On November 7, 1996, Mossimo issued a press release
14 partially revealing that, despite substantially higher revenues for
15 the third quarter ended September 30, 1996, the Company had lower
16 earnings due to "unusually high product development costs." As a
17 percentage of sales, the release revealed that gross profits
18 decreased to 32% versus 41% in the same quarter of 1995, a level
19 much lower than was pre-announced on September 23, 1996.
20 73. On November 7, 1996, Mossimo also conducted a conference
21 call with securities analysts. During the conference call,
22 defendants revealed that, during the final week of the third
23 quarter, the Company had to sell $4.1 million of out-of-season
24 merchandise at a substantial discount. Defendants admitted that
25 the out-of-season merchandise was a result of cancellations by
26 customers because of late deliveries. Defendants were aware, prior
27 to and after the IPO, that the Company would be accumulating
28 excessive out-of-season inventory because they were seriously
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1 behind schedule in the design, sample, and production of the final
2 products for the Company's Fall 1996 lines and were missing key
3 deadlines which needed to be met to ship these products on a timely
4 basis. Defendants also revealed in the November 7, 1996 conference
5 call that Mossimo's marketing expenses would increase significantly
6 because of additional promotional costs associated with Mossimo's
7 expansion of its in-store shops in department stores. This
8 disclosure was new to the market, but had been known by defendants
9 prior to the IPO since they knew these costs would be necessary to
10 grow its in-store shops. Notwithstanding these revelations,
11 defendants nevertheless continued to conceal the Company's
12 inventory shortages and sought to reassure the market that the
13 Company's business continued to be successful, and that it was
14 working through these "growing pains," and expected strong fourth
15 quarter momentum. Nevertheless, Mossimo's stock plunged on these
16 revelations, dropping 25% on November 8, 1996, to close at $16-1/2
17 on trading of more than 1.7 million shares.
18 74. Also on November 8, 1996, defendants filed Mossimo's
19 report on Form 10-Q for the third quarter, signed by defendant
20 Giannulli. The report contained the same false and misleading
21 financial information as was announced in the November 7, 1996
22 press release.
23 75. Finally, before the market opened on January 15, 1997,
24 Mossimo issued a press release revealing that it expected to report
25 sharply higher sales for the fourth quarter, but lower-than-
26 anticipated earnings. The Company revealed that earnings for the
27 fourth quarter would likely be in the range of only $0.03 to $0.08
28 per share, compared with $0.19 in the fourth quarter of the prior
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1 year, and compared with current analyst consensus estimates of
2 $0.18 per share. The Company revealed that earnings were impacted
3 by an inventory shortage, by higher than normal levels of out-of-
4 season merchandise, and by late product deliveries during the
5 holiday season that required price concessions to retailers.
6 Massimo also revealed that it was scaling back its expansion plans,
7 and expected sales growth to only be 15% for the 1997 year.
8 Mossimo also revealed that it was attempting to develop new
9 information systems and had hired a new controller. As a result of
10 these revelations, Mossimo's stock price, which had traded as high
11 as $50-1/8 per share during the Class Period, plummeted to as low
12 as $8-7/8 per share.
13 DEFENDANTS' RESPONSIBILITY FOR INTERNALACCOUNTING CONTROL AND FOR FINANCIAL REPORTING
1476. Defendants had a responsibility to maintain sufficient
15and adequate accounting controls to accurately report Mossimo's
16financial results. It is well settled that the representations
17made by a company in its financial statements and in other
18financial disclosures to the public are the representations of that
19company's management. Indeed, even when a company issues audited
20financial statements together with the report of that company's
21independent auditors, that report always expressly provides that
22"the financial statements are the responsibility of [the company's]
23management."
2477. To accomplish the objectives of accurately recording,
25processing, summarizing and reporting financial data, a company
26must establish an internal control structure. Pursuant to
27§13(b)(2)(A) and (B) of the Exchange Act, Mossimo was required to
28
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1 "make and keep books, records, and accounts, which, in reasonable
2 detail, accurately and fairly reflect the transactions and
3 dispositions of the assets of the issuer; and devise and maintain
4 a system of internal accounting controls sufficient to provide
5 reasonable assurances that -- (i) transactions are executed in
6 accordance with management's general or specific authorization;
7 (ii) transactions are recorded as necessary (I) to permit the
8 preparation of financial statements in conformity with generally
9 accepted accounting principles . . . ."
10 78. Moreover, according to Appendix D to the Statement on
11 Auditing Standards No. 55, Consideration of the Internal Control
12 Structure in a Financial Statement Audit ("SAS 55"), management
13 should consider, among other things, such objectives as (i) making
14 certain that "[t]ransactions are recorded as necessary . . . to
15 permit preparation of financial statements in conformity with
16 generally accepted accounting principles . . . [and) to maintain
17 accountability for assets," and (ii) making certain that "[t]he
18 recorded accountability for assets is compared with the existing
19 assets at reasonable intervals and appropriate action is taken with
20 respect to any differences."
21 79. As described in SAS 55, the applicability and importance
22 of specific control environment factors, accounting system methods
23 and records, and control procedures that an entity should establish
24 should be considered within the context of such criteria as an
25 entity's size, its organization and ownership characteristics, the
26 nature of its business, the diversity and complexity of its
27 operations, the entity's method of processing data, and its
28 applicable legal and regulatory requirements. These requirements
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1 ensure that transactions are accurately recorded and that, prior to
2 the public disclosure of any financial information, such
3 transactions are compared to the existing assets (e.g., comparing
4 inventory as recorded on a company's books to those amounts
5 actually "on hand") to eliminate any discrepancies between the
6 recorded and actual amounts.
7 80. According to SAS 55:
8 Establishing and maintaining an internal control
9 structure is an important management responsibility. To
10 provide reasonable assurance that an entity's objectives
11 will be achieved, the internal control structure should
12 be under ongoing supervision by management to determine
13 that it is operating as intended and that it is modified
14 as appropriate for changes in conditions.
15 Defendants violated their duty to maintain sufficient and adequate
16 accounting controls and to accurately report Mossimo's results of
17 operations and financial condition. In fact, in November 1995,
18 defendants were advised by Mossimo's auditors, Deloitte & Touche,
19 that its computer system was inadequate and would be burdened by
20 the increased demands of Mossimo becoming a public reporting
21 company. Defendants concurred with Deloitte & Touche's assessment
22 of the Company's computer system but did not take any action to
23 correct the problem or disclose any inadequacies until January
24 1997.
25 FALSE FINANCIAL STATEMENTS
26 81. In order to support their misrepresentations regarding
27 the success of the Company's expansion program and growth strategy,
28 the defendants knew it was essential that the Company report strong
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1 gross profit and operating margins in the first three quarters of
2 1996, after the IPO. Thus, the defendants caused the Company to
3 improperly report its results for the first three quarters of 1996
4 by overstating gross profits in each of those quarters. Thus, the
5 financial statements for the first, second and third quarters of
6 fiscal 1996 were materially overstated and presented in violation
7 of generally accepted accounting principles ("GAAP").
8 82. In each of the Reports on Form 10-Q for the first, second
9 and third quarters of 1996, Mossimo included the following
10 statement:
11 In the opinion of management, the financial statements
12 contain all adjustments, consisting only of normal
13 recurring adjustments, necessary for a fair presentation
14 of the balance sheets as of December 31, 1995 and (the
15 respective quarter during 1996], the statements of income
16 for the three month period ended (the respective period]
17 1995 and 1996 . . . .
18 83. For the first and second quarters of 1996, Mossimo
19 reported gross margins of 43.1% and 43.4%, respectively, up from
20 39.7% in the fourth quarter of 1995.
21 84. The aforementioned statement included in the Reports on
22 Form 10-Q and the accompanying financial results, including gross
23 margins, were false and misleading as Mossimo had failed to
24 properly report cost of sales and its inventory associated with
25 revenues it was recognizing, causing those results to be presented
26 in violation of GAAP and to not be a "fair statement" of Mossimo's
27 financial results.
28
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1 85. GAAP are those principles recognized by the accounting
2 profession as the conventions, rules and procedures necessary to
3 define accepted accounting practice at the particular time.
4 Regulation S-X (17 C.F.R. §210.4-01(a)(1)) states that financial
5 statements filed with the SEC which are not prepared in compliance
6 with GAAP are presumed to be misleading and inaccurate, despite
7 footnote or other disclosure.
8 86. GAAP requires that costs of products sold be matched
9 against the revenues associated with the sale of those products at
10 the time the sale takes place: "A major objective of accounting for
11 inventories is the proper determination of income through the
12 process of matching appropriate costs against revenues."
13 Accounting Research Bulletin, No. 43, Chptr. 4, Stmt. 2.
14 87. Massimo violated GAAP by recognizing revenue and failing
15 to relieve, or reduce, inventory on its books for the amount of
16 product shipped to customers which was associated with the sales
17 the Company was recognizing and failing to reduce reported revenue
18 to reflect shrinkage or inventory loss.
19 88. Ultimately, in the fourth quarter of 1996, when Mossimots
20 results were being audited by its outside accountants and a
21 physical count of its inventory was made, Mossimo was forced to
22 reveal that it would incur a significant charge for a shortfall
23 from its reported inventory versus the inventory actually on hand.
24 This charge was partly responsible for the significant shortfall in
25 earnings and operating margins Mossimo reported for the fourth
26 quarter of 1996. In the first part of 1996, Mossimo had
27 effectively borrowed earnings from the fourth quarter of 1996.
28
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1 89. Further, the undisclosed adverse information concealed by
2 defendants during the Class Period is the type of information
3 which, because of SEC regulations, regulations of the national
4 stock exchanges and customary business practice, is expected by
5 investors and security analysts to be disclosed and is known by
6 corporate officials and their legal and financial advisors to be
7 the type of information which is expected to be and must be
8 disclosed.
9 STATUTORY SAFE HARBOR
10 90. The statutory safe harbor provided for forward-looking
11 statements under certain circumstances does not apply to any of the
12 allegedly false statements pleaded in this Complaint. Pursuant to
13 the language of the statute, the safe harbor does not apply to
14 false statements in the IPO Registration Statement and Prospectus.
15 None of the other post-IPO statements made by defendants (f548, 49,
16 50, 59, 63, 65 and 72-74) were accompanied by meaningful cautionary
17 statements identifying important factors that could cause actual
18 results to differ materially from the statements made.
19 Alternatively, to the extent that the statutory safe harbor does
20 apply to any statements pleaded herein, the defendants are liable
21 for those statements because at the time each of those statements
22 was made, the speaker knew the statement was false and the
23 statement was authorized and/or approved by an executive officer of
24 Mossimo who knew that those statements were false when made.
25 FRAUD-ON-THE-MARKET DOCTRINE
26 91. Plaintiffs will rely, in part, upon the presumption of
27 reliance established by the fraud-on-the-market doctrine in that:
28
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1 (a) Defendants made public misrepresentations or failed
2 to disclose material facts during the Class Period;
3 (b) The omissions and misrepresentations were material;
4 (c) The stock of the Company traded in an efficient
5 market;
6 (d) The misrepresentations alleged would tend to induce
7 a reasonable investor to misjudge the value of the Company's
8 securities;
9 (e) Plaintiffs and the members of the Class purchased
10 their Massimo securities between the time the defendants failed to
11 disclose or misrepresented material facts and the time the true
12 facts were disclosed, without knowledge of the omitted or
13 misrepresented facts;
14 (f) Mossimo met the requirements for listing and was
15 listed on the NYSE, a highly efficient and automated market;
16 (g) As a regulated issuer, Mossimo filed periodic public
17 reports with the SEC;
18 (h) The Company's trading volume was substantial,
19 averaging above 118,298 shares per day during the Class Period,
20 thereby reflecting numerous trades each day; and
21 (i) The Company was followed by analysts employed by
22 brokerage firms who wrote reports which were distributed to the
23 sales force and certain customers of their respective brokerage
24 firms and which were available to the public.
25
26
27
28
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1 COUNT I
2 (Violations Of §10(b) Of The Exchange ActAnd SEC Rule 10b-5)
392. Paragraphs 1-91 of this Complaint are realleged and
4incorporated herein by reference. This claim is asserted against
5all defendants.
693. During the Class Period, defendants, carried out a plan,
7scheme and course of conduct which was intended to and did (a) de-
8ceive the investing public, including plaintiffs and the other
9Class members, as alleged herein; (b) artificially inflate and
10maintain the market price of Mossimo securities; and (c) cause
11plaintiffs and other members of the Class to purchase Mossimo
12securities at inflated prices. In furtherance of this unlawful
13scheme, plan and course of conduct, defendants took the actions set
14forth herein.
1594. During the Class Period, defendants (a) employed devices,
16schemes, and artifices to defraud; (b) made untrue statements of
17material fact and/or omitted to state material facts necessary to
18make the statements made not misleading; and (c) engaged in acts,
19practices and a course of business which operated as a fraud and
20deceit upon purchasers of the Company's stock in an effort to
21maintain artificially high market prices for Mossimo's securities,
22in violation of §10(b) of the Exchange Act and SEC Rule 10b-5.
2395. The statements made by defendants during the Class Period
24that are detailed herein were materially false and misleading
25because, at the time they were made, defendants knew or recklessly
26ignored, but failed to disclose, the material facts set forth
27herein.
28
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1 96. As alleged herein, defendants acted with scienter because
2 (a) they knew that the public documents and statements issued or
3 disseminated in the name of the Company during the Class Period
4 were materially false and misleading, or recklessly disregarded the
5 fact that such statements were materially false and misleading;
6 (b) knew (or were reckless in not knowing) that such statements or
7 documents would be issued or disseminated to the investing public;
8 and (c) knowingly and substantially participated (or acquiesced) in
9 the issuance or dissemination of such statements or documents. As
10 detailed herein, defendants, by virtue of their access to and
11 receipt of material information reflecting the true facts regarding
12 Mossimo, their control over, receipt and/or modification of the
13 Company's materially misleading misstatements, and/or their
14 associations with the Company which made them privy to confidential
15 proprietary information concerning Mossimo, participated in the
16 fraudulent scheme alleged herein. The Individual Defendants, who
17 were senior officers of the Company, had full and complete
18 knowledge of Mossimo's financial condition and operations and/or
19 read or had access to reports documenting the Company's troubles
20 prior to the times when the misrepresentations and omissions
21 alleged herein were made.
22 97. Defendants' motives for engaging in the fraudulent
23 conduct alleged herein included their desire to inflate the market
24 value of Mossimo's securities, improve the Company's balance sheet,
25 maintain the Company's financing and attract investor capital.
26 98. The Individual Defendants' motives for engaging in the
27 fraud and wrongdoing alleged herein included: (a) their desire to
28 protect and enhance their executive positions and the substantial
- 69 -
1 compensation, benefits and prestige they obtained thereby;
2 (b) preserve themselves in management positions with the Company as
3 long as possible; (c) enhance the value of their personal stock
4 holdings and options; and (d) engage in insider trading while the
5 price of Mossimo's stock was inflated.
6 99. Giannulli's insider selling is additional evidence
7 probative of defendants' bad faith and scienter. As set forth
8 herein, while defendants were issuing false and misleading
9 statements about the Company's business prospects, Giannulli, who
10 had access to confidential information and was aware of the truth
11 about Mossimo and its operations, was benefitting from the
12 fraudulent and wrongful course of business or conduct described
13 herein by selling large amounts of the Company's stock at
14 artificially inflated prices without disclosing the material
15 adverse facts about Mossimo to which he was privy. Giannulli sold
16 shares of Mossimo common stock during the Class Period for total
17 proceeds exceeding $43 million.
18 100. In ignorance of the artificially inflated market prices
19 of Mossimo's publicly traded securities, and relying on the
20 integrity of the market in which such securities traded, the
21 integrity of the regulatory process and the truth of
22 representations made to appropriate agencies at the time of the
23 IPO, and/or on the absence of material adverse information that was
24 known to defendants but not disclosed by them during the Class
25 Period, plaintiffs and the other members of the Class acquired
26 Mossimo's securities during the Class Period at artificially
27 inflated prices and were damaged thereby.
28
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1 101. Had plaintiffs and the other members of the Class and the
2 securities market known of Mossimo's true financial condition and
3 business prospects, which were not disclosed by defendants,
4 plaintiffs and the other members of the Class would not have
5 purchased or otherwise acquired their Mossimo securities during the
6 Class Period or, if they had acquired such securities, they would
7 not have done so at the artificially inflated prices which they
8 paid. Hence, plaintiffs and the members of the Class were damaged
9 by defendants' violations of §10(b) and SEC Rule 10b-5.
10 COUNT II
11 (Control Person Liability Under §20(a)Of The Exchange Act)
12102. Paragraphs 1-101 of this Complaint are realleged and
13incorporated herein by reference. This claim is asserted against
14the all defendants.
15103. At all relevant times, the defendants acted as
16controlling persons of Mossimo within the meaning of §20(a) of the
17Exchange Act, as alleged herein. By virtue of their stock
18ownership, executive positions, membership on the Board of
19Directors, or their participation in and/or awareness of Mossimo's
20operations and knowledge of the Company's financial condition, the
21defendants had the power to influence and control (and did influ-
22ence and control), directly or indirectly, the operations of the
23Company, including the content and dissemination of the false and
24misleading statements detailed herein. Each of the defendants was
25provided with and/or had unlimited access to copies of the
26Company's reports, press releases, public filings and other
27statements prior to and/or shortly after these statements were
28
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1 issued and had the ability to prevent the issuance of the state-
2 ments or to cause the statements to be corrected.
3 104. The defendants had a duty to promptly disseminate
4 truthful information that would be material to investors in
5 compliance with the SEC's integrated disclosure provisions, as
6 embodied in SEC Regulation S-X (17 C.F.R. §§210.01 et sea.) and S-K
7 (17 C.F.R. §§229.10 et seq.), and other SEC regulations, including
8 accurate and truthful information with respect to the Company's
9 operations, financial condition and earnings so that the market
10 price of Mossimo's common stock would be based on truthful,
11 complete and accurate information.
12 105. By reason of such fraudulent and wrongful conduct, the
13 defendants are liable as control persons pursuant to §20(a) of the
14 Exchange Act. As a direct and proximate result of defendants'
15 wrongful conduct, plaintiffs and the other members of the Class
16 suffered damages in connection with their purchases of the
17 Company's securities during the Class Period.
18 COUNT III
19 (Violations of 11 of the Securities Act)
20 106. Paragraphs 1-91 of this Complaint are realleged and
21 incorporated by reference as though fully set forth herein except
22 as to any allegations of fraud, willful intent, a fraudulent
23 scheme, or insider selling. This claim, which arises under §11 of
24 the Securities Act, is asserted on behalf of plaintiff Cara Debra
25 Marks, Trustee ("Marks"), as well as the other members of the Class
26 who purchased shares of stock in the IPO or whose shares can be
27 traced to the IPO. This claim is asserted against all defendants
28
- 72
1 and is based upon principles of strict liability and does not sound
2 in fraud.
3 107. Mossimo's stock was sold to the public in the IPO via the
4 Registration Statement and Prospectus and defendants are strictly
5 liable for the false and misleading statements contained therein.
6 Defendant Massimo was the registrant for the IPO and defendants
7 Giannulli and Hohl were signatories to the Registration Statement
8 and Prospectus and/or controlling persons of Massimo. These
9 defendants owed purchasers of the Company's stock a duty to ensure
10 that the statements in the Registration Statement and Prospectus
11 were true and that there was no omission to state any material fact
12 required to be stated in order to make the statements contained
13 therein not misleading. Defendants knew (or, in the exercise of
14 reasonable care, should have known) of the material misstatements
15 and omissions contained in the Registration Statement and
16 Prospectus as set forth herein.
17 108. Defendants issued or caused to be issued a materially
18 false and misleading Registration Statement and Prospectus which
19 misrepresented or failed to disclose, inter alia, the material
20 facts set forth above. As a direct and proximate result of
21 defendants' wrongful conduct, the price of Mossimo's stock was
22 artificially inflated in the IPO and plaintiffs and the Class
23 members who purchased in the IPO (or whose shares can be traced to
24 the IPO) suffered substantial damages in connection with the
25 purchase of Massimo's common stock.
26 109. Plaintiff Marks and members of the Class acquired Mossimo
27 shares issued pursuant to, or traceable to the Registration
28 Statement.
- 73 -
1 110. Plaintiffs and other members of the Class purchased or
2 otherwise acquired their Mossimo stock without knowledge of the
3 untruths or omissions alleged herein and were thus damaged by
4 defendants' misconduct and by the material misstatements and
5 omissions in the Prospectus.
6 111. This class action was brought within one year after the
7 revelations which led to the discovery of the untrue statements and
8 omissions and within three years after Mossimo stock was offered to
9 the public.
10 COUNT IV
11 (Control Person Liability Under S15 of the Securities Act)
12 112. Paragraphs 1-91 of this Complaint are realleged and
13 incorporated by reference as though fully set forth herein except
14 as to any allegations of fraud, willful intent, fraudulent scheme,
15 or insider selling. This claim is asserted against all defendants
16 and is based upon principles of strict liability and does not sound
17 in fraud.
18 113. At all relevant times, defendants acted as controlling
19 persons of the Company within the meaning of S15 of the Securities
20 Act. By reason of their senior management positions and/or
21 directorships, their ownership of Mossimo stock and/or their
22 conduct of the IPO, defendants had the power to influence (and
23 exercised the same) to cause Mossimo to engage in the unlawful acts
24 and conduct complained of herein.
25 114. By reason of such wrongful conduct, defendants are liable
26 under S15 of the Securities Act. As a direct and proximate result
27 of their wrongful conduct, plaintiffs and the other members of the
28
-74-
•
1 Class suffered damages in connection with their purchases of
2 Mossimo's common stock.
3 PLAINTIFFS' CLASS ACTION ALLEGATIONS
4 115. Plaintiffs bring this action as a class action pursuant
5 to Rule 23(a) and (b)(3) of the Federal Rules of Civil Procedure on
6 behalf of all persons (the "Class") who purchased Mossimo common
7 stock from February 22, 1996 (the date of the IPO) through January
8 14, 1997, inclusive, and who were damaged thereby. Excluded from
9 the Class are defendants, the underwriters for the IPO (Merrill
10 Lynch and Smith Barney), the officers and directors of Mossimo,
11 members of their immediate families and their legal representa-
12 tives, heirs, successors, or assigns, and any entity in which
13 defendants have or had a controlling interest.
14 116. The members of the Class are so numerous that joinder of
15 its members is impracticable. While the exact number of Class
16 members is unknown to plaintiffs at this time and can only be
17 ascertained through appropriate discovery, plaintiffs believe that
18 there are thousands of members in the Class. There were 4.6
19 million shares sold to the public in the IPO and millions of shares
20 were actively traded on the NYSE, an efficient market, during the
21 Class Period. At all relevant times, Mossimo's common stock traded
22 in a well-developed and efficient market, as that term is construed
23 under the federal securities laws. Record owners and other members
24 of the Class may be identified from records maintained by Mossimo,
25 or its transfer agent, and may be notified of the pendency of this
26 class action by mail, using a form of notice similar to that
27 customarily used by courts in securities fraud class actions.
28
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1 117. Plaintiffs' claims are typical of the claims of the
2 members of the Class because the latter were similarly affected by
3 defendants' wrongful conduct, as complained of herein.
4 118. Plaintiffs will fairly and adequately protect the
5 interests of the members of the Class and have retained counsel who
6 are competent and experienced in class action and securities fraud
7 litigation.
8 119. Common questions of law and fact exist as to all members
9 of the Class and predominate over any questions affecting
10 individual members of the Class only. Among the questions of law
11 and fact common to the Class are:
12 (a) Whether the federal securities laws were violated by
13 defendants' acts, as alleged herein;
14 (b) Whether defendants participated in and pursued the
15 common course of wrongful conduct complained of herein;
16 (c) Whether documents, press releases and other
17 statements disseminated to the investing public and the Company's
18 shareholders during the Class Period misrepresented and/or omitted
19 material facts about Mossimo's business, management, sales,
20 markets, financial condition and future business prospects;
21 (d) Whether statements made by defendants to the
22 investing public during the Class Period misrepresented and/or
23 omitted material facts about Mossimo's business and finances;
24 (e) Whether the market price of Mossimo's common stock
25 during the Class Period was artificially inflated due to the
26 material misrepresentations and failure to correct the material
27 misrepresentations complained of herein; and
28
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1 (f) Whether the members of the Class have sustained
2 damages and, if so, the proper measure of damages.
3 120. A class action is superior to all other available methods
4 for the fair and efficient adjudication of this controversy since
5 joinder of all members is impracticable. Further, because the
6 damages suffered by individual Class members may be relatively
7 small (albeit significant), the expense and burden of individual
8 litigation makes it impossible for members of the Class to
9 individually redress the wrongs done to them. There will be no
10 difficulty in the management of this action as a class action.
11 BASIS OF ALLEGATIONS
12 121. This Complaint is pleaded in accordance with the Federal
13 Rules of Civil Procedure, including Rule 11. Because the PSLRA,
14 §21D(c) of the Exchange Act [15 U.S.C. §78u-4(c)], requires
15 complaints to be pleaded in conformance with Federal Rule of Civil
16 Procedure 11, plaintiffs have alleged the foregoing based upon the
17 investigation of their counsel, which included a review of
18 Mossimo's SEC filings, securities analysts' reports and advisories
19 about the Company, press releases issued by the Company, media
20 reports about the Company and discussions with former employees and
21 consultants. Pursuant to Rule 11(b)(3), plaintiffs believe that
22 after reasonable opportunity for discovery, substantial evidentiary
23 support will likely exist for the allegations set forth at 11515,
24 38, 40, 42, 53 and 64.
25
26
27
28[
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1 PRAYER FOR RELIEF
2 WHEREFORE, plaintiffs pray for judgment as follows:
3 1. Declaring this action to be a proper class action on
4 behalf of the Class as defined herein under Rule 23(a) and (b)(3)
5 of the Federal Rules of Civil Procedure;
6 2. Awarding plaintiffs and the members of the Class
7 compensatory damages;
8 3. Awarding plaintiffs and the members of the Class
9 pre-judgment and post-judgment interest, as well as reasonable
10 attorneys' fees, expert witness fees and other costs;
11 4. Awarding extraordinary, equitable and/or injunctive
12 relief as permitted by law, equity and the appropriate federal law
13 remedies including the placement of a constructive trust upon the
14 sale proceeds of those shares sold and/or disposed of by Giannulli
15 and the proceeds from the February 1996 IPO; and
16 5. Awarding such other relief as this Court may deem just
17 and proper.
18 JURY TRIAL DEMAND
19 Plaintiffs hereby demand a jury trial.
20 DATED: September 22, 1997MILBERG WEISS BERSHAD
21 HYNES & LERACH LLPWILLIAM S. LERACH
22 JAN M. ADLERSPENCER A. BURKHOLZ
23 TOR GRONBORG
24 apte„ 25
JAN M. ADLER26
600 West Broadway, Suite 1800
27 San Diego, CA 92101Telephone: 619/231-1058
28
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1 SAVETT FRUTKIN PODELL &RYAN, P.C.
2 STUART H. SAVETTROBERT P. FRUTKIN
3 320 Walnut Street, Suite 508Philadelphia, PA 19106
4 Telephone: 215/923-5400
5 LAW OFFICES OF BERNARD M.GROSS, P.C.
6 DEBORAH R. GROSS1500 Walnut Street
7 Sixth FloorPhiladelphia, PA 19102
8 Telephone: 215/561-3600
9 SOLTAN & ASSOCIATESVENUS SOLTAN
10 660 Newport Center DriveSuite 320
11 Newport Beach, CA 92660Telephone: 714/729-3100
12WOLF HALDENSTEIN ADLER
13 FREEMAN & HERZ, LLPFRANCIS M. GREGOREK
14 600 West Broadway, Suite 1800San Diego, CA 92101
15 Telephone: 619/338-4599
16 LAW OFFICES OF CHARLES J.PIVEN
17 CHARLES J. PIVEN111 South Calvert Street
18 Suite 2700Baltimore, MD 21202
19 Telephone: 410/332-0030
20 BERNSTEIN LIEBHARD & LIFSHITZSANDY A. LIEBHARD
21 274 Madison AvenueNew York, NY 10016
22 Telephone: 212/779-1414
23 KAUFMAN, MALCHMAN, KIRBY& SQUIRE, LLP
24 IRA M. PRESS919 Third Avenue, 11th Floor
25 New York, NY 10022Telephone: 212/371-6600
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1 ABBEY, GARDY & SQUITIERI, LLPMARK C. GARDY
2 212 East 39th StreetNew York, NY 10016
3 Telephone: 212/889-3700
4 STULL, STULL & BRODYJULES BRODY
5 6 East 45th Street4th Floor
6 New York, NY 10017Telephone: 212/687-7230
7STULL, STULL & BRODY
8 EDWARD P. DIETRICH10940 Wilshire Blvd.
9 Suite 2300Los Angeles, CA 90024
10 Telephone: 310/209-2468
11 Attorneys for Plaintiffs
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MOSSIMO\CLC01475.CPT
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