According to the Final Judgment and Order of Dismissal with Prejudice entered on March 17, 2006, and signed by U.S. District Judge Joseph H. McKinley, Jr., the Court approves the settlement set for in the Stipulation, and the Court hereby dismisses with prejudice and without costs (except as otherwise provided in the Stipulation) the Litigation against the Defendants. That day, the Court further entered separate Orders approving the Plan of Allocation and awarding Lead Plaintiffs’ Counsel’s attorneys’ fees and reimbursement of expenses as well as reimbursement of Lead Plaintiffs’ expenses.
By the Notice of Pendency and Settlement of Class Action, dated December 15, 2005, a settlement in the amount of $23,200,000 in cash has been reached by the parties. A hearing will be held on March 3, 2006 for the purpose of determining (1) whether the proposed Settlement is fair, reasonable and adequate and whether it should be approved by the Court; (2) whether the proposed Plan of Allocation is fair, just, reasonable and adequate; (3) whether the application of Lead Counsel and Lead Plaintiffs for an award of attorneys’ fees and expenses should be approved; and (4) whether a Judgment should be entered dismissing the Litigation with prejudice as against Defendants.
Earlier, according to the same Notice, when Fruit petitioned for bankruptcy on December 29, 1999, automatically staying this action, plaintiffs argued vigorously that the stay should be lifted, and on March 9, 2000, the bankruptcy court granted their ex parte application to lift the stay. Plaintiffs later filed a complaint for violations of the Exchange Act against Ernst & Young LLP (“E&Y”) on June 28, 2000, and E&Y moved to dismiss plaintiffs’ complaint on September 12, 2000. On December 20, 2000, the Court granted E&Y’s motion to dismiss. Plaintiffs then filed an amended complaint on March 29, 2001, which E&Y moved to dismiss on May 30, 2001. Plaintiffs opposed this motion on July 2, 2001, but the Court again dismissed the case, and denied leave to file a second amended complaint. Plaintiffs subsequently filed an appeal on November 27, 2001. After oral argument the Sixth Circuit Court of Appeals affirmed the District Court’s decision on October 14, 2003 on grounds that the case against E&Y was barred by the statute of limitations. The Supreme Court denied plaintiffs’ petition for writ of certiorari. Discovery in this case has been extensive. The parties have engaged in extensive settlement efforts over the past year including many discussions among the parties’ counsel and with Defendants’ insurance carriers, several meetings, including with mediator the Honorable Nicholas Politan, a retired federal district court judge, and numerous in-person and telephonic settlement conferences with Magistrate Judge Goebel.
On September 29, 1998, the Court appointed New England Health Care Employees Pension Fund, David Sovde and the National Industry Pension Fund as Lead Plaintiffs. Defendants filed their motion to dismiss on September 30, 1998, and the Court denied that motion on August 18, 1999, finding plaintiffs had provided ample specificity in support of their allegations of fraud. Defendants therefore filed their answer to plaintiffs’ class action complaint on September 24, 1999, denying the material allegations of the complaint and raising certain additional defenses. On March 28, 2000, the Court granted plaintiffs’ motion for class certification, appointing New England Heath Care Employees Pension Fund and the National Industry Pension Fund as class representatives.
The original complaint charges Fruit and certain of its officers and directors with violations of the Securities Exchange Act of 1934. The complaint alleges that in 1996, Fruit reported increasing gross margins and strong EPS and cash flow growth, especially during Fruit's 2ndQ, 3rdQ and 4thQ of '96. As a result of Fruit's 1996 performance, which was coupled with forecasts of even stronger EPS growth and cash flow in 1997 and 1998, Fruit's stock was a very strong performer, moving up to $38 by year-end '96 and on to a Class Period high of $44-7/8 per share in March 1997.
During the class period, the complaint alleges that defendants told investors Fruit was enjoying strong demand for most of its products, had accelerated the move of its sewing operations offshore, achieving a five-year program in just two and one-half years, which was "yielding concrete and positive results," i.e., providing operating efficiencies and reducing costs which would boost Fruit's gross margins in '97, '98 and '99. However, Fruit's apparent return to prosperity, higher gross margins, large "free" cash flow and strong EPS was quite short-lived. In July 1997 Fruit revealed very disappointing 2ndQ '97 results, well below forecasted levels and that it expected poor results for the balance of 1997.
The complaint further alleges that Fruit then reported astonishingly large losses, in excess of $530 million (more than $7 per share), in the 3rdQ and 4thQ of '97, negative cash flow for ' 97 and increased debt levels for '97, due to poor sales of its T-shirt products and the failure of Gitano brand to reach profitability, operating inefficiencies and increased costs, including problems with its new VMI system, and an inability to produce profitable goods in high demand because of chaos in its new Mexican and Caribbean sewing facilities and continued losses in its European operations. Fruit announced more plant closures and the firing of more than 7,500 more workers. As a result Fruit's stock fell to $22-3/4 in January 1998.
The complaint also alleges that while Fruit's stock was inflated during the Class Period, Fruit's top executives named as defendants also sold almost 1.4 million shares of their Fruit stock for $46+ million in proceeds.