According to the Company’s Form 10-K for the fiscal year ended October 31, 1999,on April 24, 2000, between the Company and Binary Traders, Inc. received final approval from the court. The Company reached an agreement to settle the case filed in 1998 by Binary Traders, Inc. for $5 million, an amount the company's insurance carrier has agreed to pay. On October 13, 1998, Binary Traders, Inc. had filed a complaint on behalf of purchasers of publicly traded securities of St. John during the period of February 25, 1998 to August 20, 1998 (the 'Class Period') against St. John and certain Individual Defendants in the United States District Court, Central District of California, Southern Division (Binary Traders, Inc. v. St. John Knits, Inc. et al.). The complaint, which sought class action certification, alleged that the defendants violated federal securities laws by allegedly making fraudulent statements during the Class Period and sought an unspecified amount of compensatory damages.
On March 15, 2005, the Court entered the Order of the Chief Judge transferring the case from the calendar of Judge A. A. Hauk to the calendar of Judge David O. Carter for all further proceedings. A Notice of entered also reassigning the case from the Western Division to the Southern Division, new case no. 8-98-cv-457 DOC.
The complaint charges St. John Knits and certain of its officers and directors with violations of the Securities Exchange Act of 1934. Specifically, during the first half of the Class Period, Feb. 25, 1998 to May 29, 1998, defendants represented that St. John Knits had expanded its manufacturing facilities and added production shifts to operate around the clock and had already "beg[un] reaping benefits in higher quality and consistency at reduced costs," and the computer-controlled machines were "providing far greater ability to manufacture garments...consistently, and with...exceptional quality." Thus, "these and other upgrades will enable St. John to handle growth at its [20%] historical rates for the foreseeable future."
With respect to St. John Knits' new President and soon-to-be-Chief Executive
Officer Kelly Gray, defendants assured investors that, "Kelly Gray demonstrated
outstanding administrative and creative abilities in her first year as
president." Finally, defendants forecast that St. John Knits would achieve 15%-
20%+ EPS growth going forward and that it would achieve F98 and F99 EPS of
$2.35-$2.45 and $2.70-$2.91, respectively.
Defendants' false statements about the success and profitability of St. John
Knits' business and forecasts of 15%-20% EPS growth during F98-F99 artificially
inflated its stock to a Class Period high of $48-5/16 in April 1998.
However, on May 28, 1998, St. John Knits shocked investors by revealing that
its 2ndQ F98 results would be below forecasted levels due to serious defects in
its garments which had required large product returns and repairs and resulted
in substantial production inefficiencies and increased costs.
While St. John Knits' stock dropped after the May 28, 1998 revelations to as
low as $37-1/2, it continued to trade at artificially inflated levels due to
defendants' continued false reassurances and representations, and recovered,
moving upward to as high as $41-1/8 in mid-July 1998, when defendant Robert
Gray sold 100,000 shares of his St. John Knits stock at $29.15 for $2.9 million
in proceeds on July 13, 1998.
The complaint further alleges that, on Aug. 25, 1998, St. John Knits revealed that its 3rdQ F98 results would be much lower than forecasted due to poor sales at St. John Knits' retail division, as well as excess inventories there and in its factory outlets, and due to continued production problems and labor inefficiencies and that there had been a second recall of defective and imperfect garments. St. John Knits
stock dropped from $28-1/8 on Aug. 25, 1998 to $18 on Aug. 26, 1998, 36% on
huge volume of two million shares, falling to its lowest level in years.