The original complaint charges Wet Seal, and certain of its officers and directors with violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. More specifically, the Complaint alleges that the Company failed to disclose and misrepresented the following material adverse facts which were known to defendants or recklessly disregarded by them: (1) that the Company's strategic initiatives plan was not strengthening the Company's corporate standing. In fact, the Company's strategic initiatives plan was a complete and total disaster that was leading the Company into financial ruin; (2) that demand for the Company's products was based on deep-discounting and that without deep-discounting its products, demand for such was at an all time low; and (3) that as a result of the above, the Company's projections, outlooks, and positive statements, were lacking in any reasonable basis when made. Under the cover of these misleading statements, Defendants Gross and Teitelbaum sold almost $15 million of Wet Seal stock under their control to deceived and mislead investors.
On August 19, 2004, after the market closed, Wet Seal shocked the market by reporting a net loss from continuing operations of $3.20 per share for the second quarter ended July 31, 2004. Following this post-market announcement, shares of Wet Seal shed $1.25 per share, or 59.52 percent, to close at $0.85 per share on unusually high trading volume on August 20, 2004.
NOTE: The Wet Seal, Inc. is a specialty retailer operating stores selling fashionable and contemporary apparel and accessory items designed for female customers. It operates two mall-based chains of retail stores under the names Wet Seal (including the Contempo Casuals stores) and Arden B.
On November 19, 2004, the US District Court for the Central District of California issued an order consolidating the six individual actions previously filed. The court also appointed the Laborers' Group as lead plaintiff and appointed the law firms of Lerach Coughlin Stoia Geller Rudman & Robbins LLP and Barrack, Rodos & Bacine as co-lead counsel for plaintiffs. On February 1, 2005, the lead plaintiffs filed a Consolidated Class Action Complaint. The defendants responded by filing several motions to dismiss the Consolidated Class Action Complaint on April 18, 2005.
In a press release dated September 15, 2005, The Wet Seal, Inc. announced that at the hearing of the motion to dismiss the Consolidated Class Action brought against the Company and several of its former directors and officers in the United States District Court for the Central District of California, Judge Gary Feess granted the motion to dismiss against all the defendants in the lawsuit, including the Company, because, among other things, many of the misstatements alleged in the Complaint were forward-looking statements protected by the Private Securities Litigation Reform Act's Safe Harbor and that plaintiffs had not adequately alleged any actionable misstatements under the Private Securities Litigation Reform Act. Judge Feess granted plaintiffs leave to file an amended Complaint, which is due on November 10, 2005.
In a press release dated November 30, 2005, on November 23, 2005, the lead plaintiffs in the Wet Seal, Inc. Consolidated Class Action filed a Consolidated First Amended Class Action Complaint against, among others, the Company and certain of its former officers and directors in the United States District Court for the Central District of California. The Consolidated First Amended Class Action Complaint, which purports to be brought on behalf of all persons who purchased the Company's publicly-traded securities between November 30, 2003 and August 19, 2004, alleges that the Company violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder, as well as Section 20(a) of that Act, by making false and misleading financial reports and statements during the class period. In September 2005, the United States District Court judge presiding over the Consolidated Class Action granted the Company's motion to dismiss against all the defendants in the originally filed lawsuit, including the Company. At that time, the judge granted plaintiffs leave to file an amended Complaint. The Company intends to file a motion to dismiss the Consolidated First Amended Class Action Complaint.
In January 2006, the defendants filed motions to dismiss the Consolidated First Amended Class Action Complaint.
In a press release dated July 5, 2006, Wet Seal Inc. said the Securities and Exchange Commission has terminated its formal inquiry into the apparel retailer, with no enforcement action recommended. Shares of Wet Seal WTSLA moved up 4.5% to stand at $5.07 in premarket trading on Inet. The investigation grew out of events and announcements surrounding Foothill Ranch, Calif.-based Wet Seal's second quarter 2004 results, and commenced in April 2005. The probe led to class-action litigation alleging violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5.
According to the Company’s FORM 10-K for the fiscal year ended February 2, 2008, on August 28, 2007, the consolidated class action complaint was dismissed without leave to amend in the United States District Court. On September 28, 2007, the plaintiff appealed the decision to the Ninth Circuit Court of Appeals. On March 18, 2008, a stipulated voluntary dismissal was filed by the plaintiffs and us in the United States Court of Appeals for the Ninth Circuit. All parties agreed that the appeal will be dismissed with prejudice and that each party shall bear all of its own costs and attorneys fees, whether they were incurred on the appeal or in the district court.