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IN RE LESLIE FAY COS.

October 22, 1993

IN RE THE LESLIE FAY COMPANIES, INC. SECURITIES LITIGATION; This Document Relates To: All Actions

Conner


The opinion of the court was delivered by: WILLIAM C. CONNER

CONNER D.J.:

 BACKGROUND

 In early 1992, through its Chief Executive Officer, J.J. Pomerantz, and its General Counsel, Gordon, Leslie Fay, a well-known manufacturer of women's apparel, made a number of statements which praised the firm's 1991 performance and made positive prognostications as to its anticipated 1992 results. *fn1" Compl. PP 27-30. These representations were supported by the firm's SEC filings. On March 27, 1992, Leslie Fay filed its 1991 Form 10-K report in which it formally reported net income of $ 29.4 million on net sales of $ 836.6 million, or $ 1.55 net income per share, which compared favorably with 1990's net income of $ 29 million on net sales of $ 859 million, or $ 1.53 net income per share. Compl. P 33. Among those who, in their capacity as corporate directors, signed the Form 10-K filing were J.J. Pomerantz, Golub, L.H. Pomerantz, and Gordon. Compl. P 12(a),(b),(d),(e).

 Positive reports of Leslie Fay's performance continued through the first half of 1992. On April 22, 1992, the Company's first quarter Form 10-Q filing reported earnings of $ 0.56 per share, up 2 cents per share compared with the first quarter of 1991. Compl. P 35. In his capacity as Chief Financial Officer of Leslie Fay, Polishan signed each of the Company's Form 10-Q filings. Compl. P 12(c). At the annual meeting on April 29, 1992, J.J. Pomerantz touted Leslie Fay's future prospects, compl. P 36, and on June 5, 1992, the Company announced its intention to repurchase one million shares of its common stock over the next year, it CEO, J.J. Pomerantz, stating:

 
We believe at current levels the shares are sharply undervalued . . . In light of the recent price weakness, we believe the time is opportune to purchase our shares. This decision underscores our confidence in the future of [Leslie Fay].

 Compl. P 37. On July 14, 1992, the Company announced that second quarter earnings, like those of the prior quarter, would be record breaking. Earnings of $ 1,636,000, or $ 0.09 per share, were reported which showed a remarkable improvement over the $ 70,000, or less than $ 0.01 per share, which had been earned in the second quarter of 1991. Compl. P 38. In his September 9, 1992 retirement announcement, Golub, President and Chief Operating Officer of the Company, stated that Leslie Fay was positioned for success in the 1990's despite the difficult economic climate. Compl. P 43.

 The tone of Leslie Fay's public statements began to change in mid-September of 1992. On September 14, 1992, the Company announced that, as a result of the weak economy, it would earn only about $ 0.60 per share in the third quarter of 1992 and that the Company now projected that earnings for 1992 as a whole would approximate those of the prior year. Compl. P 44. J.J. Pomerantz noted that Leslie Fay had been experiencing a "slow order pattern" and "an uneven pace of orders throughout the year". Id. In response, Leslie Fay's stock fell $ 3.00 to a close of $ 12.25 on the day after this announcement. Id. Nonetheless, the Company maintained that it was in a good position to weather this cyclical economic storm. Compl. PP 44,45. Third quarter earnings, announced on October 20, 1992, were consistent with the September 14 forecast. Compl. P 46.

 In February of 1993 the house of cards that was Leslie Fay began to crumble. On February 1, 1993, the Company announced that it had requested that the board of directors' Audit Committee commence an investigation into "accounting irregularities" which might cause Leslie Fay to restate previously reported earnings for 1991 and to eliminate any profit for 1992. Compl. P 47. The Company suspended Corporate Controller Donald Kenia pending the outcome of the investigation, but J.J. Pomerantz insisted, in a widely distributed press release, that the financial viability of the Company was not in jeopardy. Id. On the same day Leslie Fay's General Counsel, Gordon, announced that the Audit Committee would investigate inaccurate entries involving an overstatement of inventory and a reduction of the cost of goods sold. Gordon explained:

 
The people responsible for giving (outside) auditors the company balance sheet, schedules and back-up data were not able to produce them because of these entries.

 On February 26, 1993, Leslie Fay announced the preliminary financial results of the Audit Committee investigation. The $ 29.4 million, or $ 1.55 per share, originally reported as earnings for 1991 was revised to $ 17 million, or $ 0.91 per share. In addition, a loss of $ 13.7 million, or $ 0.72 per share was estimated for 1992. The Company also announced that BDO Seidman had withdrawn its opinion of the Company's 1991 financial statement. Compl. P 60. On March 22, 1993, Polishan, CFO of the Company, took a leave of absence pending the final outcome of the Audit Committee report. Compl. P 61. Finally, on April 5, 1993, Leslie Fay filed a voluntary bankruptcy petition under Chapter 11 of the Federal Bankruptcy Code and, in response, its common stock price fell to $ 2.75 per share. Compl. PP 64,63.

 Although J.J. Pomerantz insisted that Leslie Fay's executives were not aware of the wrongdoing, compl. P 45, he acknowledged that he was in close contact with the Wilkes-Barre office which contained the Company's finance and accounting offices. Indeed J.J. Pomerantz admitted in a Wall Street Journal article that he was in daily contact with Chief Financial Officer Polishan, who was stationed in the Wilkes-Barre facility, and that on a number of occasions during the class period, Polishan ...


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