UNITED STATES DISTRICT COURT CENTRAL DISTRICT OF …securities.stanford.edu/filings-documents/1029/... · 2004/02/02 · -2-consisting of all other pe rsons who purc hased the common

-1-

UNITED STATES DISTRICT COURTCENTRAL DISTRICT OF CALIFORNIA

_________________________________________

ROBERT LECHTER, Individually and On Behalfof All Others Similarly Situated,

Plaintiffs,

vs.

VANS, INC., ANDREW J. GREENEBAUM, andGARY SCHOENFELD,

Defendants.

_________________________________________

)))))))))))))

CIVIL ACTION NO. ________

CLASS ACTION COMPLAINTFOR VIOLATIONS OF FEDERAL SECURITIES LAWS

JURY TRIAL DEMANDED

Plaintiff, Robert Lechter (“Plaintiff”), individually and on behalf of all other persons

similarly situated, by Plaintiff’s undersigned attorneys, for Plaintiff’s complaint against defendants,

alleges the following based upon personal knowledge as to Plaintiff and Plaintiff’s own acts, and

information and belief as to all other matters, based upon, inter alia, the investigation conducted by

and through Plaintiff’s attorneys, which included, among other things, a review of the defendants’

public documents, conference calls and announcements made by defendants, United States Securities

and Exchange Commission (“SEC”) filings, wire and press releases published by and regarding

Vans, Inc. (“Vans” or the “Company”), and information readily obtainable on the Internet. Plaintiff

believes that substantial evidentiary support will exist for the allegations set forth herein after a

reasonable opportunity for discovery.

NATURE OF THE ACTION

1. This is a federal Class Action brought by the Plaintiff on behalf of himself and a Class

-2-

consisting of all other persons who purchased the common stock of Vans, Inc. (NASDAQ: VANS),

between March 24, 1999 and May 23, 2002, inclusive (the “Class Period”), seeking to recover

damages caused by Defendants’ violations of federal securities laws and pursue remedies under the

Securities Exchange Act of 1934 (the “Exchange Act”).

JURISDICTION AND VENUE

2. The claims asserted herein arise under and pursuant to Sections 10(b) and 20(a) of

the Exchange Act, (15 U.S.C. §§ 78j(b) and 78t(a)), and Rule 10b-5 promulgated thereunder (17

C.F.R. §240.10b-5).

3. This Court has jurisdiction over the subject matter of this action pursuant to §27 of

the Exchange Act (15 U.S.C. §78aa) and 28 U.S.C. § 1331.

4. Venue is proper in this Judicial District pursuant to §27 of the Exchange Act, 15

U.S.C. § 78aa and 28 U.S.C. § 1391(b). Many of the acts and transactions alleged herein, including

the preparation and dissemination of materially false and misleading information, occurred in

substantial part in this District.

5. In connection with the acts, conduct and other wrongs alleged in this complaint,

defendants, directly or indirectly, used the means and instrumentalities of interstate commerce,

including but not limited to, the United States mails, interstate telephone communications and the

facilities of the national securities exchange.

THE PARTIES

6. Plaintiff,________, purchased the common stock of Vans, as set forth in the

accompanying certification attached hereto and incorporated herein by reference, and has suffered

damages as a result of the wrongful acts of defendants as alleged herein.

-3-

7. Defendant Vans is a corporation organized and existing under the laws of Delaware

with its principal place of business located at 15700 Shoemaker Avenue, Santa Fe Springs,

California 90670-5515.

8. Defendant Gary Schoenfeld (“Schoenfeld”) was, at all relevant times during the Class

Period, the Company’s Chief Executive Officer and President.

9. Defendant Andrew J. Greenebaum (“Greenebaum”) was, at all relevant times during

the Class Period, the Company’s Chief Financial Officer and Senior Vice President.

10. Defendants Schoenfeld and Greenebaum are collectively referred to hereafter as the

“Individual Defendants.” During the Class Period, each of the Individual Defendants, as senior

executive officers and/or directors of Vans, were privy to non-public information concerning its

business, finances, products, markets and present and future business prospects via access to internal

corporate documents, conversations and connections with other corporate officers and employees,

attendance at management and Board of Directors meetings and committees thereof and via reports

and other information provided to them in connection therewith. Because of their possession of such

information, the Individual Defendants knew or recklessly disregarded the fact that adverse facts

specified herein had not been disclosed to, and were being concealed from, the investing public.

11. Each of the Individual Defendants are liable as a direct participant with respect to a

fraudulent scheme and course of business that operated as a fraud or deceit on purchasers of Vans

common stock by disseminating materially false and misleading statements and/or concealing

material adverse facts. The scheme deceived the investing public regarding the Company’s business,

operations, management, and the intrinsic value of Vans common stock and caused Plaintiff and

other members of the Class to purchase Vans common stock at artificially inflated prices.

-4-

12. In addition, the Individual Defendants, by reason of their status as senior executive

officers and directors were each a “controlling person” within the meaning of Section 20 of the

Exchange Act and had the power and influence to cause the Company to engage in the unlawful

conduct complained of herein. Because of their position of control, the Individual Defendants were

able to and did, directly or indirectly, control the content of various SEC filings, press releases, and

other public statements pertaining to the Company during the Class Period.

13. The Individual Defendants, because of their positions with Vans were provided with

copies of Vans’ reports and press releases alleged herein to be misleading, prior to or shortly after

their issuance and had both the ability and opportunity to prevent their issuance or cause them to be

corrected. The Individual Defendants had the opportunity to commit the fraudulent acts alleged

herein. Accordingly, each of the Individual Defendants is responsible for the accuracy of the public

reports and releases detailed herein and is therefore primarily liable for the representations contained

therein.

14. The Individual Defendants are liable, jointly and severally, as direct participants in

and co-conspirators of, the wrongs complained of herein.

CLASS ACTION ALLEGATIONS

15. Plaintiff brings this action as a federal class action pursuant to Federal Rules of Civil

Procedure 23(a) and (b)(3) on behalf of a class (the “Class”), consisting of all those who purchased

the common stock of Vans between March 24, 1999 and May 23, 2002, inclusive, (the “Class

Period”) and who were damaged thereby. Excluded from the Class are defendants, the officers and

directors of the Company, members of their immediate families and their legal representatives, heirs,

successors or assigns and any entity in which defendants have or had a controlling interest.

-5-

16. The members of the Class are so numerous that joinder of all members is

impracticable. Throughout the Class Period, Vans’ common stock was actively traded on the

NASDAQ Stock Exchange (“NASDAQ”). While the exact number of Class members is unknown

to Plaintiff at this time and can only be ascertained through appropriate discovery, Plaintiff believes

that there are hundreds or thousands of members in the proposed Class.

17. Plaintiff’s claims are typical of the claims of the members of the Class, because

plaintiffs and all of the Class members sustained damages arising out of defendants’ wrongful

conduct complained of herein.

18. Plaintiff will fairly and adequately protect the interests of the Class members and has

retained counsel who are experienced and competent in class actions and securities litigation.

19. A class action is superior to all other available methods for the fair and efficient

adjudication of this controversy, since joinder of all members is impracticable. Furthermore, as the

damages suffered by individual members of the Class may be relatively small, the expense and

burden of individual litigation make it impossible for the members of the Class to individually

redress the wrongs done to them. There will be no difficulty in the management of this action as a

class action.

20. Questions of law and fact common to the members of the Class predominate over any

questions that may affect only individual members, in that defendants have acted on grounds

generally applicable to the entire Class. Among the questions of law and fact common to the Class

are:

(a) Whether the federal securities laws were violated by Defendants’ acts as

alleged herein;

-6-

(b) Whether the Company’s publicly disseminated press releases and statements

during the Class Period omitted and/or misrepresented material facts;

(c) Whether defendants breached any duty to convey material facts or to correct

material acts previously disseminated;

(d) Whether the defendants acted willfully, with knowledge or recklessly, in

omitting and/or misrepresenting material facts; and

(e) Whether the members of the Class have sustained damages and, if so, what is

the appropriate measure of damages.

SUBSTANTIVE ALLEGATIONS

Background

21. Vans is a global sports-and-lifestyle company that merchandises, designs, sources

and distributes VANS-branded active-casual and performance footwear, apparel and accessories for

Core Sports, including skateboarding, snowboarding, surfing, wakeboarding, BMX riding and

motocross.

Materially False and Misleading Statements Made During the Class Period

22. The Class Period commences on March 24, 1999. At that time, the Company

announced financial results for the third fiscal quarter and nine months ended February 27, 1999.

Net sales for the quarter increased 4.6% to $45.5 million, compared to $43.5 million for the third

quarter of fiscal 1998. Net income was $ 635,000 versus net income of $ 2.3 million in the same

period last year, and diluted earnings per share was $0.05 versus diluted earnings per share of $0.17

in the third quarter of fiscal 1998. Net sales for the nine months increased 10.5% to $ 156.6 million,

compared to $141.7 million for the corresponding nine months of fiscal 1998. Net income was $7.9

-7-

million, versus net income of $9.2 million in the same period last year, and diluted earnings per share

was $0.58 versus diluted earnings per share of $0.66 in the first nine months of fiscal 1998.

23. Commenting on these results, defendant Schoenfeld stated:

"While the business as a whole is admittedly short of our expectations12 months ago, we are encouraged by early indications of someimprovement in the footwear industry, coupled with several importantaccomplishments of our own over the past few months. Specificallyin the third quarter, we achieved double-digit comp store salesincreases which represents the 17th consecutive quarter of compgains, we posted double digit growth in our international business,and significantly reduced our domestic inventory. Additionalhighlights included the announcement of a strategic partnership withThe Mills Corporation (NYSE : MLS) to finance three morelarge-scale skate parks, signing of a three-year agreement to licenseour Switch step-in boot binding technology to Nike (NYSE : NKE),formation of a joint venture with Pacific Sunwear of California Inc.(NASDAQ : PSUN) to produce and distribute VANS apparel,opening of our regional office in Europe, and completion of the $ 5million stock buy back program." . . . "For the first time in more than18 months, we are confident that the Company will post positivegains in this next quarter, both at retail and wholesale in the U.S. andinternationally and believe this trend will continue into fiscal 2000.(a)From an expense standpoint, we still have some significant projectsto complete in the fourth quarter including our transition in Europefrom third party distributors to a regional operation with local salesagents; the launch of our first three VANS Triple Crown stores alongwith two additional stores in Europe; and the introduction ofe-commerce on our web site, www.vans.com. Yet as we look aheadto fiscal 2000, we believe that the various initiatives we haveundertaken will largely be in place and that we should bewell-positioned for significant increases in sales as well as expandingmargins.". . . "While withstanding the challenges of the footwearindustry over the past two years, Vans has maintained its vision ofbecoming a leading lifestyle company and expanding beyond aone-dimensional wholesale footwear business. We have invested inour people, our brand and our distribution channels both in the U.S.and abroad, while simultaneously creating important and uniquestrategic initiatives to further enhance our future prospects for bothtop line and bottom line performance."

-8-

24. On April 13, 1999, Vans filed its quarterly report with the SEC on Form 10-Q. The

Company’s Form 10-Q was signed by defendant Schoenfeld and reaffirmed the Company’s

previously announced financial results.

25. On July 19, 1999, Vans announced financial results for the fourth quarter and fiscal

year ended May 31, 1999. Net sales for the current quarter increased 47.9% to $48.5 million,

compared to $32.8 million for the fourth quarter of fiscal 1998. Net income was $819,000, versus

a net loss of $ 11.8 million in the same period last year, which reflected a one-time restructuring

charge and write-down of domestic inventory of $ 11.9 million, after tax, in such period. Diluted

earnings per share was $ 0.06 versus a loss of $ 0.89 per share in the fourth quarter of fiscal 1998.


Our solid results for the quarter were fueled in particular bysignificant growth in Europe and Japan as well as continued strengthin our retail business. We achieved positive gains in all channels,posting double digit increases in both our domestic wholesale andretail business and a triple digit increase in our international business.Coming off a difficult last 18-24 months in the overall footwearenvironment, we are very pleased with our sales and earnings resultsand reduced inventory levels, which coupled with the strongsell-throughs we are currently experiencing bodes well for us as wehead into back to school and begin our new fiscal year."

27. On August 30, 1999, Vans filed its annual report with the SEC on Form 10-K405.

The Company’s Form 10-K405 was signed by defendant Schoenfeld and reaffirmed the Company’s


28. On September 22, 1999, Vans announced record financial results for the first fiscal

quarter ended August 28, 1999. Net sales for the quarter increased 25.5% to $82.2 million,

compared to $65.5 million for the first quarter of fiscal 1999. Net income rose to $5.9 million,

-9-

versus net income of $4.7 million in the same period last year, and diluted earnings per share

increased to $0.42 versus diluted earnings per share of $0.35 in the first quarter of fiscal 1999.

29. Commenting on these results defendant Schoenfeld stated:

"We are very pleased with our sales and earnings results for the firstquarter and our sell-throughs in the marketplace were very strong asare booking trends for the Spring. Our strong performance gives usconfidence that the strategic initiatives we have enacted over the last12 to 18 months are successfully translating into heightened brandawareness as well as increased sales and profits. Additional highlightsduring the quarter included the first shipment of VANS apparel toPacific Sunwear stores from our joint venture, Van Pac, LLC, theopening of our second skatepark in Bakersfield, California, and theprofitable launch of e-commerce on our website."

30. On October 12, 1999, Vans filed its quarterly report with the SEC on Form 10-Q.

The Company’s Form 10-Q was signed by defendant Schoenfeld and reaffirmed the Company’s


31. On December 16, 1999, Vans announced financial results for the second fiscal quarter

and six months ended November 27, 1999. Net sales for the quarter increased 26.9% to $57.8

million, compared to $45.6 million for the second quarter of fiscal 1999. Net income was $2.7


was $0.19 versus diluted earnings per share of $0.19 in the second quarter of fiscal 1999. Net sales

for the six months increased 26.0% to $140.0 million, compared to $111.1 million for the

corresponding six months of fiscal 1999. Net income rose to $8.6 million, versus net income of $7.3

million in the same period last year, and diluted earnings per share increased to $0.60 versus diluted

earnings per share of $0.53 in the first six months of fiscal 1999.


-10-

"We are pleased to report our second quarter and first half of fiscal2000 sales and earnings results, and as evidenced by our backlog forthe third quarter which is up more than 30% both in the U.S. andinternationally, we are entering the new millennium and the secondhalf of our fiscal year on track for significant growth in sales andearnings."

33. On January 11, 2000, Vans filed its quarterly report with the SEC on Form 10-Q. The

Company’s Form 10-Q was signed by defendant Schoenfeld and reaffirmed its previously announced

financial results.

34. On March 22, 2000, Vans announced financial results for the third fiscal quarter and

nine months ended February 26, 2000. Net sales for the quarter increased 48.9% to $67.8 million,

compared to $45.5 million for the third quarter of fiscal 1999. Net income increased to $1.7 million

versus net income of $635,000 in the same period last year, and diluted earnings per share more than

doubled to $0.12 versus diluted earnings per share of $0.05 in the third quarter of fiscal 1999. Net

sales for the nine months increased 32.7% to $207.7 million, compared to $156.6 million for the

corresponding nine months of fiscal 1999. Net income was $10.3 million, versus net income of $7.9

million in the same period last year, and diluted earnings per share was $0.72 versus diluted earnings

per share of $0.58 in the first nine months of fiscal 1999.


“We are extremely pleased with our nearly 50% increase in sales andthe more than doubling of earnings for the third quarter. These resultsdemonstrate the continued strong growth of the VANS brand, as wellas our ability to leverage our infrastructure."

***

"We are very encouraged by the strong performance of our U.S.wholesale business which was up more than 40% versus last year.The robust growth in our international business, fueled predominantly

-11-

by sales increases in France and Germany, along with earlier springdeliveries, underscores the increasing strength of the VANS brandworldwide, and our retail business remains strong, led by continuedsolid comp gains."

***

"During a challenging period of significant structural change in thefootwear industry over the last three years, we have worked hard tobuild a strong platform on which to grow our business into the futureand create shareholder value. We have successfully developedproprietary properties such as the VANS TRIPLE CROWNSERIES(R) and the VANS skate parks, formed strategic partnershipswith a host of market leaders including Pacific Sunwear (NASDAQ:PSUN) and Sony PlayStation(R), and attracted some of the best talentin the industry. We are on track for completing a very solid year andwith worldwide bookings for back-to-school up more than 20%, welook forward to maintaining substantial sales and earnings growth aswe head into fiscal 2001."




37. On July 25, 2000, Vans announced financial results for the fourth fiscal quarter and

fiscal year ended May 31, 2000. Net sales for the quarter increased 35.5% to $65.8 million,

compared to $48.5 million for the fourth quarter of fiscal 1999. Net income increased 116.5% to

$1.8 million versus net income of $819,000 in the same period last year, and diluted earnings per

share doubled to $0.12 versus diluted earnings per share of $0.06 in the fourth quarter of fiscal 1999.

Net sales for the fiscal year increased 33.3% to $273.5 million, compared to $205.1 million for fiscal

year 1999. Net income was $12.1 million, up 38.5%, versus net income of $8.7 million in the same

period last year, and diluted earnings per share was $0.84 versus diluted earnings per share of $0.64

in fiscal 1999.

-12-

38. Commenting on theses results, defendant Schoenfeld stated:

"Fiscal 2000 was a banner year for Vans on a number of differentlevels and sets the stage for what we believe will be another strongyear in fiscal 2001," said Gary H. Schoenfeld, Vans' President andChief Executive Officer. "From a financial standpoint, we grew ouroverall sales by 33%, achieved retail comp store gains of 8.2%, withan increase in net income of 38% for the year. Our fourth quarter wassimilarly strong, as we doubled our earnings on a 35% increase insales. These results underscore the continued strong growth of theVANS brand, as well as our ability to leverage our infrastructure."

. . . "Beyond our financial achievements, we had a number ofimportant strategic initiatives which were successfully undertakenthis past year including: the initial roll-out of VANS skate parks, therespective launch of apparel and sunglasses with Pacific Sunwear andSunglass Hut, our first foray into the video game market through ourlicense agreement with Sony Playstation(TM), the acquisition of HighCascade Snowboard Camp(TM), the premier summer snowboardcamp located on the glacier of Mt. Hood, the profitable launch ofe-commerce on Vans.com, and the addition of Motorola, Ford andGillette as sponsors of the VANS Triple Crown(TM) Series whichhas now been expanded to 21 top events with a TV reach in excess of200 million homes worldwide."

39. On August 29, 2000, Vans filed its annual report with the SEC on Form 10-K. The

Company’s Form 10-K was signed by defendant Schoenfeld and reaffirmed the Company’s



quarter ended August 26, 2000. Net sales for the quarter increased 21.4% to $100.6 million,

compared to $82.9 million for the first quarter of fiscal 2000. Net income rose 28.0% to $7.6


increased 23.8% to $0.52, versus diluted earnings per share of $0.42 in the first quarter of fiscal

2000.

-13-


"Vans' first $100 million quarter is a great testament to the sports andlifestyle positioning of our brand and an exciting accomplishment forour team," said Gary H. Schoenfeld, President and Chief ExecutiveOfficer of Vans. "More importantly, we continue to translate thesesales gains into strong earnings growth. Comp store sales increasedto 15.3% during the key six week back-to-school period through mid-September and Holiday and early Spring bookings are up more than20%."

42. On October 10, 2000, Vans filed its annual report with the SEC on Form 10-Q. The



43. On December 18, 2000, Vans announced record financial results for the second

quarter of fiscal 2001 ended November 25, 2000. Net sales for the quarter increased 24.6% to $73.2

million versus$58.8 million last year with net income up 10.5% to $2.9 million versus $2.7 million

and diluted earnings per share of $0.20 versus$0.19, in line with consensus estimates. For the first

six months of fiscal 2001, sales increased 22.7% to $173.9 million versus $141.7 million last year

and net income increased 22.6% to $10.5 million versus $8.6 million with an 18.3% increase in

diluted earnings per share to $0.71 compared to $0.60.


"We continue to be pleased with the performance and strengtheningof the VANS brand on a global basis," said Gary H. Schoenfeld,President and Chief Executive Officer of Vans. "Highlights duringthe quarter included particularly strong performance in our retailstores, very positive response to the direction and execution of bothour Women's and Outdoor categories, the successful opening of oursixth VANS skatepark in Houston, Texas, and being named FootwearNews Company of the Year."

. . . "From a financial perspective, the 18% decline in the euro

-14-

compared to the second quarter last year significantly masked the truestrength of our business. On a constant dollar basis, the Company'ssales for the quarter would have been approximately $74.6 million,up 27%, with a similar growth rate in earnings per share toapproximately $0.24 compared to $0.19 last year."

45. On January 9, 2001, Vans filed its annual report with the SEC on Form 10-Q. The



46. On March 21, 2001, Vans announced record financial results for the third quarter of

fiscal 2001 ended February 24, 2001. Net sales for the quarter increased 21.1% to $83.3 million

versus$68.8 million last year and net income increased 50.3% to $2.6 million versus $1.7 million,

with a 41.7% increase in diluted earnings per share of $0.17 versus $0.12. For the first nine months

of fiscal 2001, sales increased 22.2% to $257.2 million versus $210.5 million last year and net

income increased 27.2% to $13.1 million versus $10.3 million, with a 20.8% increase in diluted

earnings per share to $0.87 compared to $0.72.


"Our accomplishments over this past quarter are another strongindication of the progress our Company has made on a number ofdifferent levels. Each strategic move has helped to further Vans'position as a leading sports and lifestyle brand for the youth market."

"From a financial perspective, we were able to translate a 21% salesgain into a 42% increase in earnings per share[.]". . . "On the productfront, our efforts were recognized last month with the Design inExcellence Award from Footwear+ and will be further demonstratedby the upcoming launch of signature shoes for Core Sports(TM) iconsGeoff Rowley, Jeremy McGrath and Corey Nastazio. Our uniquemarketing and brand building initiatives continue to pay off as theVans-produced film "Dogtown and Z-Boys" received both theAudience Choice Award and the Best Director Award for adocumentary at the Sundance Film Festival. Finally, we recently

-15-

announced network and cable television partnerships with NBCSports and Fox Sports Net for the Vans Triple Crown(TM) Series,underscoring the increasing popularity of Core Sports(TM) and Vans'recognition as the leader in the Core Sports industry."

48. On April 10, 2001, Vans filed its annual report with the SEC on Form 10-Q. The



49. On April 27, 2001, Vans announced that it has filed a registration statement with the

SEC for the offer and sale of 2,500,000 shares of the Company's common stock. The underwriters

would have the option to purchase up to an additional 375,000 shares to cover over-allotments. The

Company intended to use the net proceeds from its sale of shares for the repayment of bank debt,

payment of expenditures and working capital related to the addition of new retail stores and skate

parks, and working capital.

50. In conjunction with this press release, Vans filed a registration statement with the

SEC on Form S-3 on April 27, 2001. The Company’s Form S-3 was signed by the Individual

Defendants and reaffirmed the Company’s previously announced financial results.

51. On May 23, 2001, Vans announced the commencement of a public offering of

2,800,000 shares of the Company's common stock at $23.15 per share, which represented an increase

of 300,000 shares above the initial filing. All of the shares are being offered by the Company. The

Company had granted the underwriters an option to purchase up to 420,000 shares to cover

over-allotments. The common stock was being offered under Vans' registration statement that was

declared effective on May 23, 2001 by the SEC. The offering is expected to close on May 30, 2001.

52. On July 24, 2001, Vans announced record financial results for the fourth quarter and

-16-

fiscal year ended May 31, 2001. Net sales for the fourth quarter increased 27.5% to $85.2 million

versus $66.8 million last year and net income increased 52.2% to $2.7 million versus $1.8 million.

For fiscal 2001, total sales increased 23.0% to $341.2 million versus $277.3 million and net income

before the cumulative effect of the accounting change discussed below increased 27.7% to $15.4

million versus $12.1 million.

53. For the fourth quarter, total U.S. sales, including sales through Vans’ U.S. retail

stores, increased 33.0% to $62.2 million, versus $46.8 million for the same period a year ago. U.S.

wholesale sales increased 41.8% to $38.0 million, versus $26.8 million a year ago. Sales through

the Company’s U.S. retail stores increased 21.1% to $24.3 million in the fourth quarter of fiscal

2001, from $20.0 million for the same period a year ago. Comparable store sales for the fourth

quarter were up 9.2% versus the same period last year, the twenty-sixth consecutive quarter of such

increase. Total international sales rose 14.8% to $23.0 million compared to $20.0 million a year ago.

Gross margins for the quarter increased 130 basis points to 44.0% vs. 42.7% reflecting better first

margins, improved inventory management and increased retail store and skate park channel mix.

Inventory was $52.8 million at May 31, 2001, a 5.4% increase over the prior year. The Company

ended the fiscal year with $59.7 million in cash and $2.3 million in long-term debt.

54. Commenting on these results defendant Schoenfeld stated:

“Our fourth quarter performance was a strong finish to fiscal 2001,marking another great year of better than 20% growth in sales andprofits[.]” . . . “Over the past 12 months, we have significantlyimproved our product, expanded our retail presence, further enhancedour management team, added to our proprietary brand buildinginitiatives and substantially increased our liquidity.”

***

-17-

. . . “Our financial highlights for the year included: a 23% increasein total sales led by domestic wholesale up 29% and same store salesup almost 13%; a 28% gain in net income; and roughly $60 millionin cash on the balance sheet with a well-controlled 5% increase ininventory. On the product and merchandising front we madeconsiderable progress in both our men’s and women’s footwear, andfrom a retail perspective, we opened a net seven new stores and threeVANS large-scale skateparks to end the fiscal year with 134 storesand seven skate park locations, respectively.”

***“Our ability to expand fourth quarter sales by more than 27%,increase same store sales by more than 9% and grow net income bymore than 52% is a testament to the ongoing strength of the VANSbrand and our popularity among today’s youth market. Additionally,we were very pleased to achieve these results while managing to aless than $3.0 million increase in inventory.” For the first quarter offiscal 2002, ending August 25, 2001, the Company expects total salesto increase approximately 15% to 20% versus the correspondingperiod a year ago, and it continues to believe it will meet the FirstCall consensus diluted earnings per share estimate of $0.59 for thefirst quarter and $1.20 for the full fiscal year. . . . “Our Company’scontinued achievements financially and in the marketplacedemonstrate the increasing breadth of our business and the uniqueleadership position of our brand. We are mindful of the currentuncertain retail and economic environment, yet we remain focused oncapitalizing on the opportunities we have created and adding to ourgrowth in sales, earnings and shareholder value.”

55. On August 29, 2001, Vans filed its annual report with the SEC on Form 10-K405.

The Company’s Form 10-K405 was signed by the Individual Defendants and reaffirmed the

Company’s previously announced financial results.


quarter ended September 1, 2001. Net sales for the quarter increased 17.4% to $118.0 million,

compared to $100.6 million for the first quarter of fiscal 2001. Net income rose 60.4% to $11.3


-18-

increased 27.1% to $0.61, versus diluted earnings per share of $0.48 in the first quarter of fiscal 2001


"While the tragedy of September 11 has adversely affected ourbusiness over the past two weeks and our outlook for the secondquarter, we are very pleased to report our first quarter which reflectsthe biggest and most profitable quarter in our company's history[.]". . . "First quarter sales of $118 million exceeded the Company's totalrevenues for the year five years ago and net income of$11.3 millionalmost matched the full year's income of $12.1 million in fiscal 2000demonstrating the continued success of our brand strategy and strongconnection with the youth market."

58. On October 16, 2001, Vans filed its quarterly report with the SEC on Form 10-Q.

The Company’s Form 10-Q was signed by the Individual Defendants and reaffirmed the Company’s


59. On December 19, 2001, Vans announced financial results for the second quarter of

fiscal 2002 ended December 1, 2001. Net sales for the quarter were $68.3 million versus $74.5

million last year with net income of $0.5 million versus $3.2 million and diluted earnings per share

of $0.03 versus $0.21, in line with consensus estimates. For the first six months of fiscal 2002, sales

were $186.4 million versus $175.1 million last year, net income was$11.9 million, versus $10.7

million, and diluted earnings per share was $0.64 compared to $0.72.


"While we were able to achieve our revised earnings projections forthe quarter, the business climate remains challenging in thenear-term[.]". . . "As a result of the very different retail environmentof the past three months, we expect our results for the next twoquarters to lag behind last year. Looking ahead to June and thebeginning of fiscal 2003, we are optimistic about our prospects andthe ability to regain our previous momentum."

***

-19-

. . . "The slowdown in consumer spending has adversely affected ourretail and wholesale businesses. Having achieved twenty-sevenconsecutive quarters of comp store gains, we had a decline of almost9% in the second quarter with our 95 California-based storesexperiencing double-digit decreases in contrast to a positivemid-single digit increase for the rest of our stores. Our at-oncebusiness with the larger, family footwear chains was also particularlysoft with the biggest bright spot being a better than 50% growth inour business with core skate and surf shops. Our internationalbusiness was generally in line with what we had previously indicated,with particular strength in England and Japan offsetting sales belowplan in Canada and South America."

61. On January 15, 2002, Vans filed its quarterly report with the SEC on Form 10-Q. The

Company’s Form 10-Q was signed by the Individual Defendants and reaffirmed the Company’s


62. On March 20, 2002, Vans announced financial results for the third quarter of fiscal

2002 ended March 2, 2002. Net sales for the quarter were $82.2 million versus $80.9 million last

year with net income of $483,000 versus $2.0 million and diluted earnings per share of $0.03 versus

$0.13, in line with consensus estimates. For the first nine months of fiscal 2002, sales were $268.5

million versus $256.0 million last year, net income was $12.3 million, versus $12.3 million, and

diluted earnings per share was $0.67 compared to $0.82.


"With sales and net income roughly flat for the first nine months ofthe year, our business remains challenging in the near term[.]" . . ."Wholesale bookings are behind last year, with particularly difficultcomparisons in our women's business, and our retail comps havecontinued to run negative since September 11th, further impacting ourmargins and profits."

***

-20-

"There are some important bright spots in our business including thecontinued growth of our men's footwear in the independent skateshops, as well as in the key lifestyle specialty accounts. The growthof our apparel joint venture with Pacific Sunwear is also acceleratingand our balance sheet remains strong as we continue to tighten ourinventory and have approximately$45 million in cash."

***

"While remaining opportunistic toward other facets of our business,our short term priorities are focused in three major areas: footwearand apparel design and development, retail merchandising andexpense management. We believe we have built a great brand and arefocused on the tasks at hand as we look to re-establish our sales andearnings momentum in fiscal '03."


Company’s Form 10-Q was signed by the Individual Defendants and reaffirmed the Company’s


65. The statements referenced above in ¶¶ 22-64 were each materially false and

misleading because they failed to disclose and misrepresented the following material adverse facts

which were known to defendants or recklessly disregarded by them: (1) that the Company improperly

recognized revenue in violation of Generally Accepted Accounting Principals (“GAAP”); (2) that

Company accomplished its illegal revenue recognition scheme by sending products to third-party

distributors and holding the products there until a buyer could be found; (3) that the defendants

entered into this scheme because defendants knew that its skate parks were losing cash and its sales

were falling flat; and (4) as a result of the defendants’ illegal scheme, the Company’s financial

results and net income were materially overstated at all relevant times.

-21-

THE TRUTH BEGINS TO EMERGE

66. On May 23, 2002, Vans announced preliminary results for the fourth quarter and

fiscal year ending May 31, 2002, revisions to its guidance for fiscal 2003, plans to close its

Bakersfield, California skate park and take an impairment charge with respect to its Denver,

Colorado skate park, and a write-down of certain slow-moving inventory. Vans stated that, based

on current trends, the Company now expects to report net sales in the range of $60.0 million to $61.0

million for the fourth quarter ending May 31, 2002, versus $85.2 million for the corresponding

period in the previous year. For the quarter, the Company expects domestic wholesale sales to be

approximately $17.0 million, retail sales to be approximately $23.5 million, with same-store sales

down roughly 8%, and international sales to be approximately $19.5 million. In addition, the

Company now expects to report a diluted earnings per share loss of approximately ($0.20) for the

fourth quarter, excluding the after-tax charges and one-time expenses discussed below, compared

to earnings per share of $0.16 for the same period last year. The Company expects to incur after-tax

charges and one-time expenses of approximately $8.6 million, or ($0.48) per diluted share, in the

fourth quarter, of which roughly $7.7 million is non-cash. Of the total after-tax charges and one-time

expenses, $1.2 million is associated with the planned closure of the Bakersfield skate park, $2.3

million is associated with the write-down of fixed assets at the Denver skate park, $2.7 million is

related to operations in Latin America, severance payments and certain other assets, and $2.4 million

is related to the write-down of slow-moving inventory. Including the charge and one-time expenses,

the Company expects to report a diluted earnings per share loss of approximately ($0.68) for the

fourth quarter.

67. The market reacted swiftly to the news with shares of Vans falling 19.87% or $2.53

-22-

per share to close at $10.20 per share on May 24, 2002.

VANS’ VIOLATION OF GAAP RULES

68. GAAP states that “revenue should not be recognized until it is realized or realizable

and earned.” FASB Concepts Statement No. 5, ¶83. The conditions for the recognition of revenue

are met when “persuasive evidence of an arrangement exists, delivery has occurred or services have

been rendered, the seller’s price is fixed or determinable, collectibility of the sales price is reasonably

assured and when the entity has substantially performed the obligations which entitle it to the

benefits represented by the revenue.” Here, Vans improperly recognized revenue when revenue from

such transactions was not realizable and earned, which is in violation of GAAP.

69. Given these accounting irregularities, the Company announced financial results

that were in violation of GAAP, the Company’s own announced revenue recognition policies, and

the following principles:

(a) The principle that “interim financial reporting should be based upon the same

accounting principles and practices used to prepare annual financial statements” was

violated (APB No. 28, ¶10);

(b) The principle that “financial reporting should provide information that is useful to

present to potential investors and creditors and other users in making rational

investment, credit, and similar decisions” was violated (FASB Statement of Concepts

No. 1, ¶34);

(c) The principle that “financial reporting should provide information about the

economic resources of an enterprise, the claims to those resources, and effects of

transactions, events, and circumstances that change resources and claims to those

-23-

resources” was violated (FASB Statement of Concepts No. 1, ¶40);

(d) The principle that “financial reporting should provide information about an

enterprise’s financial performance during a period” was violated (FASB Statement

of Concepts No. 1, ¶42);

(e) The principle that “completeness, meaning that nothing is left out of the information

that may be necessary to insure that it validly represents underlying events and

conditions” was violated (FASB Statement of Concepts No. 2, ¶79);

(f) The principle that “financial reporting should be reliable in that it represents what it

purports to represent” was violated (FASB Statement of Concepts No. 2, ¶¶58-59);

and

(g) The principle that “conservatism be used as a prudent reaction to uncertainty to try

to ensure that uncertainties and risks inherent in business situations are adequately

considered” was violated. (FASB Statement of Concepts No. 2, ¶95).

70. The adverse information concealed by defendants during the Class Period and

detailed above was in violation of Item 303 of Regulation S-K under the federal securities law (17

C.F.R. 229.303).

UNDISCLOSED ADVERSE FACTS

71. The market for Vans’ common stock was open, well-developed and efficient at all

relevant times. As a result of these materially false and misleading statements and failures to

disclose, Vans’ common stock traded at artificially inflated prices during the Class Period. Plaintiff

and other members of the Class purchased or otherwise acquired Vans common stock relying upon

the integrity of the market price of Vans’ common stock and market information relating to Vans,

-24-

and have been damaged thereby.

72. During the Class Period, defendants materially misled the investing public, thereby

inflating the price of Vans’ common stock, by publicly issuing false and misleading statements and

omitting to disclose material facts necessary to make defendants’ statements, as set forth herein, not

false and misleading. Said statements and omissions were materially false and misleading in that

they failed to disclose material adverse information and misrepresented the truth about the Company,

its business and operations, as alleged herein.

73. At all relevant times, the material misrepresentations and omissions particularized

in this Complaint directly or proximately caused or were a substantial contributing cause of the

damages sustained by plaintiff and other members of the Class. As described herein, during the

Class Period, defendants made or caused to be made a series of materially false or misleading

statements about Vans’ business, prospects and operations. These material misstatements and

omissions had the cause and effect of creating in the market an unrealistically positive assessment

of Vans and its business, prospects and operations, thus causing the Company’s common stock to

be overvalued and artificially inflated at all relevant times. Defendants’ materially false and

misleading statements during the Class Period resulted in plaintiff and other members of the Class

purchasing the Company’s common stock at artificially inflated prices, thus causing the damages

complained of herein.

ADDITIONAL SCIENTER ALLEGATIONS

74. As alleged herein, defendants acted with scienter in that defendants knew that the

public documents and statements issued or disseminated in the name of the Company were

materially false and misleading; knew that such statements or documents would be issued or

-25-

disseminated to the investing public; and knowingly and substantially participated or acquiesced in

the issuance or dissemination of such statements or documents as primary violations of the federal

securities laws. As set forth elsewhere herein in detail, defendants, by virtue of their receipt of

information reflecting the true facts regarding Vans, their control over, and/or receipt and/or

modification of Vans’ allegedly materially misleading misstatements and/or their associations with

the Company which made them privy to confidential proprietary information concerning Vans,

participated in the fraudulent scheme alleged herein.

75. Defendants knew and/or recklessly disregarded the falsity and misleading nature of

the information which they caused to be disseminated to the investing public. The ongoing

fraudulent scheme described in this complaint could not have been perpetrated over a substantial

period of time, as has occurred, without the knowledge and complicity of the personnel at the highest

level of the Company, including the Individual Defendants.

76. Additionally, during the Class Period, defendants were motivated to inflate the

Company’s financial performance so that defendants could accomplish a $64 million secondary

offering, which occurred on or about May 23, 2001.

APPLICABILITY OF PRESUMPTION OF RELIANCE: FRAUD-ON-THE MARKET DOCTRINE

77. At all relevant times, the market for Vans’ common stock was an efficient market for

the following reasons, among others:

(a) Vans’ stock met the requirements for listing, and was listed and actively traded

on the NASDAQ, a highly efficient and automated market;

(b) As a regulated issuer, Vans filed periodic public reports with the SEC and the

-26-

NASDAQ;

(c) Vans regularly communicated with public investors via established market

communication mechanisms, including through regular disseminations of press releases on the

national circuits of major newswire services and through other wide-ranging public disclosures, such

as communications with the financial press and other similar reporting services; and

(d) Vans was followed by several securities analysts employed by major brokerage

firms who wrote reports which were distributed to the sales force and certain customers of their

respective brokerage firms. Each of these reports was publicly available and entered the public

marketplace.

78. As a result of the foregoing, the market for Vans’ common stock promptly digested

current information regarding Vans from all publicly available sources and reflected such

information in Vans’ stock price. Under these circumstances, all purchasers of Vans’ common stock

during the Class Period suffered similar injury through their purchase of Vans’ common stock at

artificially inflated prices and a presumption of reliance applies.

NO SAFE HARBOR

79. The statutory safe harbor provided for forward-looking statements under certain

circumstances does not apply to any of the allegedly false statements pleaded in this complaint.

Many of the specific statements pleaded herein were not identified as “forward-looking statements”

when made. To the extent there were any forward-looking statements, there were no meaningful

cautionary statements identifying important factors that could cause actual results to differ materially

from those in the purportedly forward-looking statements. Alternatively, to the extent that the

statutory safe harbor does apply to any forward-looking statements pleaded herein, defendants are

-27-

liable for those false forward-looking statements because at the time each of those forward-looking

statements was made, the particular speaker knew that the particular forward-looking statement was

false, and/or the forward-looking statement was authorized and/or approved by an executive officer

of Vans who knew that those statements were false when made.

COUNT IViolation of Section 10(b) of the Exchange Act And Rule 10b-5

Promulgated Thereunder Against All Defendants

80. Plaintiff repeats and reiterates the allegations set forth above as though fully set forth

herein. This claim is asserted against all defendants.

81. During the Class Period, defendant Vans and the Individual Defendants, and each of

them, carried out a plan, scheme and course of conduct which was intended to and, throughout the

Class Period, did: a) deceive the investing public, including plaintiff and other Class members, as

alleged herein; b) artificially inflate and maintain the market price of Vans’ common stock; and c)

cause plaintiff and other members of the Class to purchase Vans’ common stock at artificially

inflated prices. In furtherance of this unlawful scheme, plan and course of conduct, defendants Vans

and the Individual Defendants, and each of them, took the actions set forth herein.

82. These defendants: a) employed devices, schemes, and artifices to defraud; b) made

untrue statements of material fact and/or omitted to state material facts necessary to make the

statements not misleading; and c) engaged in acts, practices, and a course of business which operated

as a fraud and deceit upon the purchasers of the Company's common stock in an effort to maintain

artificially high market prices for Vans’ common stock in violation of Section 10(b) of the Exchange

Act and Rule 10b-5. These defendants are sued either as primary participants in the wrongful and

illegal conduct charged herein. The Individual Defendants are also sued as controlling persons of

-28-

Vans, as alleged below.

83. In addition to the duties of full disclosure imposed on defendants as a result of their

making of affirmative statements and reports, or participation in the making of affirmative

statements and reports to the investing public, they each had a duty to promptly disseminate truthful

information that would be material to investors in compliance with the integrated disclosure

provisions of the SEC as embodied in SEC Regulation S-X (17 C.F.R. § 210.01 et seq.) and S-K (17

C.F.R. § 229.10 et seq.) and other SEC regulations, including accurate and truthful information with

respect to the Company's operations, financial condition and performance so that the market prices

of the Company's common stock would be based on truthful, complete and accurate information.

84. Vans and the Individual Defendants, individually and in concert, directly and

indirectly, by the use, means or instrumentalities of interstate commerce and/or of the mails, engaged

and participated in a continuous course of conduct to conceal adverse material information about the

business, business practices, performance, operations and future prospects of Vans as specified

herein.

85. These defendants employed devices, schemes and artifices to defraud, while in

possession of material adverse non-public information and engaged in acts, practices, and a course

of conduct as alleged herein in an effort to assure investors of Vans’ value and performance and

continued substantial growth, which included the making of, or the participation in the making of,

untrue statements of material facts and omitting to state material facts necessary in order to make the

statements made about Vans and its business operations and future prospects in the light of the

circumstances under which they were made, not misleading, as set forth more particularly herein,

and engaged in transactions, practices and a course of business which operated as a fraud and deceit

-29-

upon the purchasers of Vans’ common stock during the Class Period.

86. Each of the Individual Defendants' primary liability, and controlling person liability,

arises from the following facts: a) each of the Individual Defendants was a high-level executive

and/or director at the Company during the Class Period; b) each of the Individual Defendants, by

virtue of his responsibilities and activities as a senior executive officer and/or director of the

Company, was privy to and participated in the creation, development and reporting of the Company's

internal budgets, plans, projections and/or reports; c) the Individual Defendants enjoyed significant

personal contact and familiarity with each other and were advised of and had access to other

members of the Company's management team, internal reports, and other data and information about

the Company's financial condition and performance at all relevant times; and d) the Individual

Defendants were aware of the Company's dissemination of information to the investing public which

they knew or recklessly disregarded was materially false and misleading.

87. These defendants had actual knowledge of the misrepresentations and omissions of

material facts set forth herein, or acted with reckless disregard for the truth in that they failed to

ascertain and to disclose such facts, even though such facts were available to them. Such defendants'

material misrepresentations and/or omissions were done knowingly or recklessly and for the purpose

and effect of concealing Vans’ operating condition, business practices and future business prospects

from the investing public and supporting the artificially inflated price of its common stock. As

demonstrated by defendants' overstatements and misstatements of the Company's financial condition

and performance throughout the Class Period, the Individual Defendants, if they did not have actual

knowledge of the misrepresentations and omissions alleged, were reckless in failing to obtain such

knowledge by deliberately refraining from taking those steps necessary to discover whether those

-30-

statements were false or misleading.

88. As a result of the dissemination of the materially false and misleading information

and failure to disclose material facts, as set forth above, the market price of Vans’ common stock

was artificially inflated during the Class Period. In ignorance of the fact that market prices of Vans’

common stock were artificially inflated, and relying directly or indirectly on the false and misleading

statements made by defendants, or upon the integrity of the market in which the common stock

trades, and/or on the absence of material adverse information that was known to or recklessly

disregarded by defendants but not disclosed in public statements by defendants during the Class

Period, plaintiff and the other members of the Class acquired Vans common stock during the Class

Period at artificially high prices and were damaged thereby.

89. At the time of said misrepresentations and omissions, plaintiff and other members of

the Class were ignorant of their falsity, and believed them to be true. Had plaintiff and the other

members of the Class and the marketplace known of the true performance, business practices, future

prospects and intrinsic value of Vans, which were not disclosed by defendants, plaintiff and other

members of the Class would not have purchased or otherwise acquired their Vans common stock

during the Class Period, or, if they had acquired such common stock during the Class Period, they

would not have done so at the artificially inflated prices which they paid.

90. By virtue of the foregoing, Vans and the Individual Defendants have each violated

Section 10(b) of the Exchange Act, and Rule 10b-5 promulgated thereunder.

91. As a direct and proximate result of defendants’ wrongful conduct, plaintiff and the

other members of the Class suffered damages in connection with their respective purchases and

sales of the Company's common stock during the Class Period.

-31-

SECOND CLAIMViolation Of Section 20(a) Of

The Exchange Act Against The Individual Defendants

92. Plaintiff repeats and reiterates the allegations as set forth above as if set forth fully

herein. This claim is asserted against the Individual Defendants.

93. Each of the Individual Defendants acted as a controlling person of Vans within the

meaning of Section 20(a) of the Exchange Act as alleged herein. By virtue of their high-level

positions with the Company, participation in and/or awareness of the Company's operations and/or

intimate knowledge of the Company's actual performance, the Individual Defendants had the power

to influence and control and did influence and control, directly or indirectly, the decision-making of

the Company, including the content and dissemination of the various statements which plaintiff

contends are false and misleading. Each of the Individual Defendants was provided with or had

unlimited access to copies of the Company's reports, press releases, public filings and other

statements alleged by plaintiff to be misleading prior to and/or shortly after these statements were

issued and had the ability to prevent the issuance of the statements or cause the statements to be

corrected.

94. In addition, each of the Individual Defendants had direct involvement in the day-to-

day operations of the Company and, therefore, is presumed to have had the power to control or

influence the particular transactions giving rise to the securities violations as alleged herein, and

exercised the same.

95. As set forth above, Vans and the Individual Defendants each violated Section 10(b)

and Rule 10b-5 by their acts and omissions as alleged in this Complaint. By virtue of their

controlling positions, the Individual Defendants are liable pursuant to Section 20(a) of the Exchange

-32-

Act. As a direct and proximate result of defendants' wrongful conduct, plaintiff and other members

of the Class suffered damages in connection with their purchases of the Company's common stock

during the Class Period.

WHEREFORE, plaintiff prays for relief and judgment, as follows:

(a) Determining that this action is a proper class action, designating plaintiff as Lead

Plaintiff and certifying plaintiff as a class representative under Rule 23 of the Federal Rules of Civil

Procedure and plaintiff’s counsel as Lead Counsel;

(b) Awarding compensatory damages in favor of plaintiff and the other Class

members against all defendants, jointly and severally, for all damages sustained as a result of

defendants’ wrongdoing, in an amount to be proven at trial, including interest thereon;

(c) Awarding plaintiff and the Class their reasonable costs and expenses incurred in

this action, including counsel fees and expert fees; and

(d) Such other and further relief as the Court may deem just and proper.

JURY TRIAL DEMANDED

Plaintiff hereby demands a trial by jury.

Dated: February 2, 2004 CAULEY GELLER BOWMAN &RUDMAN, LLPSamuel H. Rudman, EsquireDavid A. Rosenfeld, Esquire200 Broadhollow Road, Suite 406Melville, NY 11747(631) 367-7100

Attorneys for Plaintiff

-33-

Documents

UNITED STATES DISTRICT COURT CENTRAL DISTRICT OF …securities.stanford.edu/filings-documents/1029/... · 2004/02/02 · -2-consisting of all other pe rsons who purc hased the common