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This Suit Isn’t Going Back on the Rack

December 20, 2007
Corporate Governance Newsletter

A shareholder lawsuit alleging inventory shenanigans recently overcame defendants’ challenges. The motion to dismiss filed by Jos. A. Bank Clothiers, Inc., an upscale men’s haberdasher, and its senior officers, Robert N. Wildrick, David E. Ullman and R. Neal Black, was recently denied by a federal court judge.

In its complaint, lead plaintiff Massachusetts Laborers’ Annuity Fund alleges that defendants actively concealed from investors the inventory and profit-margin crisis facing Jos. A. Bank during 2005. Gross misjudgments about the response to the clothier’s fall/winter 2005 merchandise line and poor execution of the company’s aggressive store expansion initiative led to a pile-up of inventory. To liquidate this unprecedented glut, defendants drastically discounted prices and held continuous company-wide sales. While defendants were able to boost sales in the short term, this “success” came at a significant long-term cost – sales of the company’s higher-margin spring 2006 and core merchandise suffered greatly, lowering profit margins and damaging the company’s overall financial performance.

Despite knowing the full truth about the company’s problems, defendants repeatedly assured the market that all was well. These positive statements about Jos. A. Bank’s financial condition continued throughout the class period until defendants revealed that expected earnings and gross profit margins had nosedived. The market reacted negatively to these disclosures. Indeed, in addition to a 29% drop in stock price, market analysts began openly questioning the candor of defendants and the credibility concerning defendants’ previously sunny forecast. In the meantime, Jos. A. Bank’s President and CEO quietly unloaded over 74% of his holdings during the same period and netted almost $36 million in illegal proceeds.

Defendants moved to dismiss the complaint, arguing that it failed to allege a material misrepresentation, holding fraudulent mindset (or scienter), and loss causation. In a well-reasoned opinion, Judge William M. Nickerson rejected all of these arguments and determined that, based on the exhaustive testimony from 18 confidential witnesses, plaintiffs “alleged material misrepresentations and omissions in satisfaction of . . . §10(b) as well as [a] compelling inference of scienter.” On the issue of loss causation, Judge Nickerson concluded that plaintiffs’ “broad allegations” of a significant stock drop following defendants’ disclosure of true facts about Jos. A. Bank’s financial condition and gross profit margins were “sufficient to satisfy the loss causation pleading requirements for a §10(b) claim at this stage of the litigation.”

“This is a significant victory for Jos. A. Bank’s shareholders in a very difficult jurisdiction,” said Jack Reise, a Coughlin Stoia partner prosecuting the case. Added partner Douglas Wilens, “Now that we have defeated the motion to dismiss, we fully expect that discovery will further reveal the truth about the defendants’ scheme to defraud Jos. A. Bank’s shareholders.”

Lefkoe v. Jos. A. Bank Clothiers, Inc., No. 06-cv-1892, Memorandum Opinion (D. Md. Sept. 10, 2007).

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