The original complaint alleges that during the Class Period, defendants caused Tag-It to issue numerous press releases and file quarterly and annual reports with the SEC, materially misstating its financial condition, accounts receivable and inventory, and falsely stating that the Company, notwithstanding the loss of its largest customers, was expanding its customer base, continuing sales growth, and improving gross margins. Unbeknownst to investors, as a result of the loss of its largest customers in 2003, millions of dollars in inventory became obsolete and millions of dollars in accounts receivable became uncollectible.
The complaint further alleges that on or around August 15, 2005, Tag-It stunned the market when it revealed its true financial condition, informing investors that the Company was going to report a "significant operating loss" due to an increase in reserves for accounts receivable and inventory. On this news, Tag-It's share price plummeted 41.38% to $1.36 from the prior days closing of $2.32. On August 22, 2005, the Company further disclosed that it was required to increase its reserve for doubtful accounts by $6.4 million and increase its reserve for inventory obsolescence by $1.55 million.
As summarized by the Company’s FORM 10-Q for the quarterly period ended September 30, 2009, on October 12, 2005, a shareholder class action complaint was filed in the United States District Court for the Central District of California (“District Court”) against the Company, Colin Dyne, Mark Dyne, Ronda Ferguson and August F. Deluca (collectively, the “Individual Defendants” and, together with the Company, “Defendants”). The action is styled Huberman v. Tag-It Pacific, Inc., et al., Case No. CV05-7352 R(Ex). On January 23, 2006, the District Court heard competing motions for appointment of lead plaintiff. The District Court appointed Seth Huberman as the lead plaintiff (“Plaintiff”). On March 13, 2006, Plaintiff filed an amended complaint. Plaintiff’s amended complaint alleged that defendants made false and misleading statements about the Company’s financial situation and the Company’s relationship with certain of the Company’s large customers. The action was brought on behalf of all purchasers of the Company’s publicly-traded securities during the period from November 13, 2003, to August 12, 2005. The amended complaint purports to state claims under Section 10(b)/Rule 10b-5 and Section 20(a) of the Securities Exchange Act of 1934. On August 21, 2006, Defendants filed their answer to the amended complaint, denying the material allegations of wrongdoing. On February 20, 2007, the District Court denied class certification. On April 2, 2007, the District Court granted Defendants’ motion for summary judgment, and on or about April 5, 2007, the Court entered judgment in favor of all Defendants. On or about April 30, 2007, Plaintiff filed a notice of appeal with the United States Court of Appeals for the Ninth Circuit (“Ninth Circuit”), and his opening appellate brief was filed on October 15, 2007. Defendants’ brief was filed on November 28, 2007. The Ninth Circuit held oral arguments on October 23, 2008. On January 16, 2009, the Ninth Circuit issued an unpublished memorandum, instructing the District Court to certify a class, reversing the District Court’s grant of summary judgment, and remanding for further proceedings consistent with its decision. The District Court thereafter certified a class and adopted a schedule for the case. On July 31, 2009, the parties entered into a stipulation of settlement intended to settle the matter and result in its dismissal with prejudice. The total settlement proceeds of $5.75 million are to be paid in full by the Company’s insurers without any contribution from the Company or individual defendants. On August 24, 2009, the Court granted preliminary approval of the settlement. Notice has been provided to class members and the Court has set a final fairness hearing on the settlement for December 7, 2009.
On December 7, 2009, the hearing was held and Judge Manuel L. Real approved the final settlement. Judge Real also awarded Plaintiffs Counsel attorneys fees of $1,725,000.00, from the Settlement Fund and reimbursement of expenses in an aggregate amount of $196,993.16. On December 8, 2009, the Court entered the Order and Final Judgment. The case is now dismissed.