On March 20, 2000, District Court Judge Gary L. Taylor approved a $13.0 million settlement of the State Actions and Federal Action. There were no objections to the settlement. The settlement was funded by the Company's insurance coverage, a portion of which the Company obtained during the second quarter of 1999. On April 19, 2000, the settlement became final.
According to the firm's 10-Q filing dated 5/15/2000, on January 23, 1997, plaintiff Chaile Steinberg filed a purported class
action suit against the Company and certain other defendants on behalf of
individuals who purchased the Company's common stock in the initial public
offering pursuant to the Registration Statement and Prospectus (Prospectus),
dated February 22, 1996, and on the open market from February 22, 1996 through
January 14, 1997 (the "Class Period"). On April 7, 1997, the plaintiffs Igor
Glaudnikov, Cara Debra Marks and Lois Burke filed a second related action
against the same defendants. The two cases were subsequently consolidated by
court order, dated May 19, 1997. Both STEINBERG and GLAUDNIKOV (collectively,
the "State Actions") contain identical factual allegations, and only differ in
the number of shares purchased by plaintiffs and the California residence of two
of the plaintiffs in the GLAUDNIKOV action.
The State Actions allege that defendants made false and misleading
statements and intentionally concealed material negative information in the
Prospectus and afterward during the Class Period, which artificially inflated
prices for the Company's common stock. Plaintiffs contend that the class was
damaged in an unspecified amount as a result of this artificial inflation of the
Company's stock price.
On September 23, 1997, a federal class action complaint was filed on behalf
of plaintiff James Frenkil by the same law firm that represents the plaintiffs
in the State Actions (the "Federal Action"). One of the named plaintiffs in the
Federal Action is a plaintiff in the State Actions. The class period and
precipitating events are the same as in the State Actions, but the federal
complaint purports to allege violations of certain federal securities laws. On
October 17, 1997, the judge stayed the Federal Action pending resolution of the
Defendants filed a general demurrer in the State Actions, challenging the
legal sufficiency of the complaints. On June 26, 1997, the judge sustained the
defendants' demurrer, finding that neither complaint pleaded facts sufficient to
constitute causes of action against the defendants. The judge sustained the
demurrer as to four of the causes of action with leave to amend, and as to the
fifth cause of action for unlawful, unfair or fraudulent business practices and
false or misleading advertising without leave to amend.
On July 9, 1998, plaintiffs filed their first amended consolidated
complaint against the same defendants, alleging three causes of action. On
September 22, 1998, defendants filed a general demurrer to the first amended
consolidated complaint. On March 16, 1999, the judge sustained the demurrer as
to the Company with respect to two of the three causes of action with leave to
amend. As to the third cause of action, the judge sustained the demurrer as to
the Company with respect to three of the five plaintiffs with leave to amend,
and overruled the demurrer with respect to the other two plaintiffs. On April
14, 1999, plaintiffs filed their second amended consolidated complaint, alleging
one cause of action. Thereafter, plaintiffs expressed a desire to file a third
amended consolidated complaint. On June 24, 1999, the parties stipulated that
plaintiffs must file a third amended consolidated complaint on or before July
30, 1999. Plaintiffs did not file a third amended consolidated complaint.
The original complaint alleges that Mossimo went public on February 22, 1996 through an $82.8 million public offering in which certain insiders sold shares. The complaint charges that the company made various positive statements about its future prospects and continued to report "explosive sales growth and strong margins." The complaint alleges that the company knew that its positive statements and its financial statements were false and misleading when reported because Mossimo had rapidly expanded and defendants had lost control of the company's operations and finances. The complaint alleges that in an attempt to conceal these facts defendants gradually revealed in a series of announcements that: (1) Mossimo's gross margins were being restrained by "unusually high production development costs" and "cost inefficiencies" from changing and adding sourcing agents and manufacturers; (2) the company had to sell large amounts of out-of-season merchandise at a substantial discount; (3) the company's marketing expenses would be significantly increased; and (4) earnings were being impacted by a physical inventory shortage.