Friedman's Inc. ("FRM" or the Company) operated a chain of fine jewelry stores.
The original Complaint charges Defendants with violations of the Securities Exchange Act of 1934. The Complaint alleges that Defendants issued a series of false and misleading statements regarding FRM's financial results and business model, resulting in the Company materially overstating its earnings for the fiscal years 2000 through 2002, and the first three quarters of 2003. The earnings issued and representations concerning those results were false and misleading when made, as FRM's financial statements during the Class Period were in violation of GAAP and SEC rules. These improper practices are now the subject of a Securities and Exchange Commission investigation, as well as an investigation by the Department of Justice.
Specifically, the Complaint alleges that Defendants knew and failed to disclose material adverse information and misrepresented the truth about the Company, its financial performance, earnings momentum, and future business prospects, including: (i) the Company's allowance for doubtful accounts was woefully inadequate; (ii) FRM's credit losses during the Class Period were significantly higher than its reserves and higher than Defendants publicly represented; and (iii) Defendants failed to properly write-off uncollectible receivables, and materially overstated FRM's financial results by maintaining known uncollectible accounts as assets during the Class Period. As a result of the Defendants' false and misleading statements, FRM's stock traded at inflated prices during the Class Period, increasing to as high as $16.15 on September 8, 2003.
The Complaint further alleges that on November 11, 2003, FRM shocked the market by warning about its future performance, and the material adverse impact of the "increase in allowance for doubtful accounts". The Company also revealed that FRM's Chief Financial Officer, Victoria Suglia, had been placed on "leave" as a result of the government investigations. As a result, FRM was forced to dramatically boost its allowance for doubtful accounts, resulting in a sizable charge of as much as $0.43 per share for 2003. In response to the Company's devastating news concerning the financial fraud, FRM's stock price plummeted by more than 40% on volumes of about thirteen times the daily average. The Individual Defendants engaged in such a scheme to inflate the price of FRM securities in order to: (i) protect and enhance their executive positions and the substantial compensation and prestige they obtained thereby; (ii) enhance the value of their personal holdings of FRM securities; (iii) complete public offerings; (iv) prevent violation of the covenants in the Company's credit facility agreement and maximize the amount allowed to be borrowed by the Company under this agreement; and (v) avoid repaying millions of dollars in personal loans from the Company.
According to the docket posted, on February 11, 2004, the Court issued an order consolidating all related cases into one class action lawsuit entitled In re Friedman’s, Inc. Securities Litigation. On June 17, 2004 lead Plaintiffs and co-lead Counsel were appointed, and on September 7, 2004, lead Plaintiffs filed their Consolidated Amended Class Action Complaint. Beginning October 1, 2004, Defendants’ filed their Motions to Dismiss the Amended Complaint, and on September 7, 2005, the Court entered the Order by Judge William S. Duffy, Jr. denying certain Defendants’ Motions to Dismiss, granting in part and denying in part, Ernst & Young’s Motion to Dismiss and granting certain other Defendants’ Motions to Dismiss. On October 28, 2005 Defendants filed their Answers to Lead Plaintiffs’ Amended Complaint. On February 13, 2006, lead Plaintiffs filed a Motion for Class Certification.
According to the Notice of Settlement dated October 27, 2008, four partial settlements have been reached in the action, and together these partial settlements will provide $14.9 million to pay claims from investors who bought the common stock of FRM between January 26, 2000 and August 20, 2004, inclusive, and who were damaged thereby. The $14.9 million cash settlement fund is comprised of (i) a $2.7 million partial settlement with the Individual Settling Defendants, (ii) a $9.5 million partial settlement with Ernst & Young LLP, (iii) a $2.5 million partial settlement with the Underwriter Defendants, and (iv) a $200,000 partial settlement with Phillip Ean Cohen, Morgan Schiff & Co., MS Jewelers Corp. and MS Jewelers LP.
On February 24, 2009, Judge William S. Duffey, Jr. signed the Order and Final Judgment approving the four partial as fair reasonable and adequate. On May 22, 2009, Judge Duffey granted the motion to award attorney’s fees and reimbursement of expenses. Accordingly, the Plaintiffs' co-lead Counsel are awarded attorney's fees in the amount of $4,300,457.26, plus interest, and reimbursement of expenses in the amount of $565,142.48.
