According to the Company’s FORM 10-Q for the quarterly period ended April 30, 2005, on December 10, 2004, the Court granted the defendants’ motion to dismiss the consolidated complaint, dismissing certain allegations supporting the claims with prejudice. For those allegations that were not dismissed with prejudice, the Court allowed the plaintiffs to amend, which they did on January 14, 2005. In that amended consolidated complaint, the plaintiffs added a claim under Section 20A of the Securities Exchange Act of 1934 and repled their Sections 10(b) and 20(a) claims based on allegations similar to those in the original consolidated complaint. After the defendants moved to dismiss the amended consolidated complaint, the plaintiffs filed a notice of voluntary dismissal May 13, 2005. The Court issued an order on May 18, 2005 dismissing the case in its entirety without prejudice.
As summarized by the same SEC filing, on various dates between February 4, 2003 and March 25, 2003, 10 purported class action lawsuits were filed in the United States District Court for the Northern District of Texas, Dallas Division, against Michaels Stores, Inc. and certain of the current and former directors and officers of Michaels. All of these lawsuits have been consolidated. The suits assert various claims under Sections 10(b), 20(a), and 20A of the Securities Exchange Act of 1934 related to actions prior to Michaels’ announcement on November 7, 2002, that, among other things, it had revised its outlook for the fourth fiscal quarter of 2002, adjusting downward its guidance for annual earnings per diluted share. The consolidated complaint charges that, prior to that announcement, Michaels and certain of the other defendants made misrepresentations and failed to disclose negative information about the financial condition of Michaels while the individual defendants were selling shares of Michaels common stock.
The original complaint charges Michaels Stores and certain of its officers and directors with violations of the Securities Exchange Act of 1934. The complaint alleges that during the Class Period, defendants repeatedly represented that Michaels Stores' financial condition was strong and that the Company was increasing its market share and would continue to do so in the foreseeable future. The Company was persistent in its claims despite a known downturn in the consumer-goods markets and a very, very difficult earnings environment. In fact, throughout the Class Period, defendants consistently appeared at analyst conferences and in other public forums and made very positive statements about Michaels Stores.
The complaint further alleges that as a result it was only on November 7, 2002, when the Company released results for its third quarter 2002, that investors learned the following: (i) defendants' claims that Michaels Stores' purported "record setting" growth was the result of systems and/or infrastructure upgrades, or any other improvements made by defendants, were false; (ii) many of Michaels Stores' customers were already curtailing their spending for hobby and entertainment - or discretionary purchases - by the inception of the Class Period and, as a result, Michaels Stores was experiencing the same adverse market conditions which were negatively impacting the Company's competitors; (iii) the Company was not "in great shape," it did not have "considerable momentum" and was not proceeding according to guidance sponsored or provided by defendants; and (iv) notwithstanding defendants' efforts to create the materially false impression that the company had achieved record results in the fiscal second quarter, the truth was that Michaels Stores was already suffering from the same adverse market conditions other retailers were experiencing.
The complaint also alleges that during the Class Period, at the time that Michaels Stores was being adversely affected by the aforementioned factors, but prior to any
disclosure to the market, certain of the defendants sold more than $15.3 million worth of their personally held Michaels Stores common stock while in possession of material adverse information. In fact, the CEO and President of the Company sold over 125,000 shares of his privately held Company shares during the Class Period for over $5.8 million in proceeds.