According to a press release dated April 30, 2005, the U.S. District Court for the Southern District of New York granted a motion to dismiss the second consolidated class action complaint by a class of Federated Dep't Stores Inc. investors alleging securities fraud by Federated and three of its directors and officers. … The district court held that a motive to maintain the appearance of corporate profitability or investment success did not sufficiently plead scienter as these motives would apply to any corporate defendant. The district court also found that the complaint failed to sufficiently allege recklessness by showing that Federated or its officers knew or should have known about the customer receivable problems of Fingerhut. The complaint contained conclusions and failed to specify facts contained in the audits or review meetings which Federated and its officers possessed that would contradict the allegedly fraudulent public statements.
As previously reported by the Company’s FORM 10-K for the Fiscal Year Ended January 29, 2005, the Company filed a Motion to Dismiss the Complaint on January 22, 2002, and on March 11, 2004, the court dismissed the Complaint without prejudice. On May 18, 2004, the plaintiffs filed a second amended complaint (the “Second Amended Complaint”), asserting the same claims as in the earlier versions of the Complaint. The Company filed a Motion to Dismiss the Second Amended Complaint on July 7, 2004, and is awaiting a response from the Court.
The original complaint charges that defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and Rule 10b-5 promulgated thereunder, by issuing a series of material misrepresentations to the market between February 23, 2000, and July 20, 2000. For example, as alleged in the complaint, on February 23, 2000, Federated issued a press release announcing its financial results for its 1999 fiscal year, which highlighted an 18% increase in year-over-year earnings per share. This statement, the complaint alleges, was materially false and misleading because Federated failed to disclose that it had materially under-reserved for credit delinquencies in its Federated Direct division, which was largely composed of Fingerhut Inc.- a Federated subsidiary.
When the Company revealed, in a July 20, 2000, press release, that rising
credit delinquencies coupled with insufficient reserves for such defaults, would lead to, among other things, a $200-$250 million shortfall in Federated's fall earnings, the Company's stock price plunged by 15% to $23.5 per share-which represented a 44% drop from the class period high of $42.0625 per share on March 21, 2000.