District Version 411Case 309cv02133B Document 19 Filed 080910 Pa - PDF document

1 District Version 4.1.1-Case 3:09-cv-0213
District Version 4.1.1-Case 3:09-cv-02133-B Document 19 Filed 08/09/10 Page 93 of 93 PageID 345Mailing Information for a Case 3:09-cv-02133-BElectronic Mail Notice ListThe following are those who are currently on the list to receive e-mail notices for this case.,e_file_sd@rgrdlaw.com,e_file_sd@rgrdlaw.com,dmacdiarmid@glancylaw.com,mmgoldberg@glancylaw.com,info@glancylaw.com,rprongay@glancylaw.com,ralph.miller@weil.com,tom.kuczajda@cwt.com,gillian.groarke@cwt.com,jkendall@kendalllawgroup.com,michelle.hartmann@weil.comManual Notice ListThe following is the

2 list of attorneys who are not on the lis
list of attorneys who are not on the list to receive e-mail notices for this case (who therefore require manual noticing). Youmay wish to use your mouse to select and copy this list into your word processing program in order to create notices or labels for theseDanielle S MyersCoughlin Stoia Geller Rudman & Robbins LLPDarren J RobbinsRobbins Geller Rudman & Dowd LLPhttps://ecf.t1nd.uscourts.gov/cgi-bin/N4ailList.pl?993085078003838-L_728_0-1 Case 3:09-cv-02133-B Document 19 Filed 08/09/10 Page 92 of 93 PageID 344CERTIFICATE OF SERVICE the e-mail addresses

3 denoted on the attached Electronic Mail
denoted on the attached Electronic Mail Notice List, and I hereby certify that IROBBINS GELLER RUDMAN574014_1 Case 3:09-cv-02133-B Document 19 Filed 08/09/10 Page 91 of 93 PageID 343KENDALL LAW GROUP, LLPJOE KENDALL (State Bar No. 11260700)3232 McKinney Avenue, Suite 700SULLIVAN, WARD, ASHER & PATTON, P.C.CYNTHIA J. BILLINGS25800 Northwestern HighwayTelephone: 248/746-0700574014_1 Case 3:09-cv-02133-B Document 19 Filed 08/09/10 Page 90 of 93 PageID 342defendants’ wrongful conduct, plaintiff and other members of the Class suffered damages inPRAYER FOR RELI

4 EFWHEREFORE, plaintiff respectfully pray
EFWHEREFORE, plaintiff respectfully prays for relief and judgment, as follows:proper.JURY TRIAL DEMANDEDE.Telephone: 619/231-1058574014_1 Case 3:09-cv-02133-B Document 19 Filed 08/09/10 Page 89 of 93 PageID 341246.COUNT IIAgainst All Defendants247.plaintiff to be misleading, prior to and/or shortly after these statements were issued, and had theexercised the same.- 86 -574014_1 Case 3:09-cv-02133-B Document 19 Filed 08/09/10 Page 88 of 93 PageID 340§ 10(b) of the Exchange Act and Rule 10b-5. All defendants are sued either as primary participantsmisreprese

5 ntations and/or omissions were made know
ntations and/or omissions were made knowingly or with a reckless disregard for the truthand failure to disclose material facts, as set forth above, the market price of Zale’s publicly traded574014_1 Case 3:09-cv-02133-B Document 19 Filed 08/09/10 Page 87 of 93 PageID 339(a)damages suffered by individual class members may be relatively small, the expense and burden ofCOUNT IViolation of §10(b) of the Exchange Act and Rule 10b-5240.effort to maintain artificially high market prices for Zale’s publicly traded securities in violation of574014_1 Case 3:09-cv-0

6 2133-B Document 19 Filed 08/09/10 Page 8
2133-B Document 19 Filed 08/09/10 Page 86 of 93 PageID 338price at artificially inflated levels and the subsequent significant decline in the value of Zale’s stockCLASS ALLEGATIONS234.maintained by Zale or its transfer agent and may be notified of the pendency of this action by mail,Common questions of law and fact exist as to all members of the Class and574014_1 Case 3:09-cv-02133-B Document 19 Filed 08/09/10 Page 85 of 93 PageID 337stock price, causing real economic loss to investors who had purchased the Company’s publiclyrelied upon. The close examina

7 tion of expenses defendants assured inve
tion of expenses defendants assured investors was taking place at the574014_1 Case 3:09-cv-02133-B Document 19 Filed 08/09/10 Page 84 of 93 PageID 336(c) Zale regularly communicated with the public and investors via establishedsecurities. Under these circumstances, all purchasers or acquirers of Zale securities during the ClassPROXIMATE LOSS CAUSATION/ECONOMIC LOSS228.Zale’s stock price and operated as a fraud or deceit on Class Period purchasers of the Company’si.e., damages, under the federal securities laws.See ¶¶148-150, 173-177. These three drops rem

8 oved the inflation from Zale’s574014_1 C
oved the inflation from Zale’s574014_1 Case 3:09-cv-02133-B Document 19 Filed 08/09/10 Page 83 of 93 PageID 335Alternatively, to the extent that the statutory safe harbor does apply to any forward-lookingFRAUD-ON-THE-MARKET PRESUMPTION225. Plaintiff will rely upon the presumption of reliance established by the fraud-on-the-market doctrine. This presumption provides, inter alia:(a)disclosed, without knowledge of the misrepresented or omitted facts.574014_1 Case 3:09-cv-02133-B Document 19 Filed 08/09/10 Page 82 of 93 PageID 334The company is committed to s

9 trict compliance with all federal and st
trict compliance with all federal and state lawsThe company is a public company and is required to maintain books andand to file various informationendeavor to fulfill these obligations in a full, fair, complete, accurate, timely andestablished corporate governance practices designed to serve the best interests ofThe Company will continue to review andin the corporate governance area.NO SAFE HARBOR224.meaningful cautionary statements identifying important factors that could cause actual results to574014_1 Case 3:09-cv-02133-B Document 19 Filed 08/09/10 Pa

10 ge 81 of 93 PageID 333219. Zale provides
ge 81 of 93 PageID 333219. Zale provides a summary of its Code of Ethics, which states, in part, that it:business operations, including, but not limited to:·\tforbidding insider stock trading in Zale stock or other securities . . . .While the ultimate responsibility for the information included in thesenumerous other employees participate in the574014_1 Case 3:09-cv-02133-B Document 19 Filed 08/09/10 Page 80 of 93 PageID 332controls over financial reporting.their responsibility for those financial statements. Specifically, in response to SEC comment lette

11 rsprovide this confirmation in future fi
rsprovide this confirmation in future filings commencing with the Form 10-Q for thequarter ended January 31, 2009, filed on March 11, 2009.”8The SEC sent comment letters to Zale addressed to Carter on April 10, 2007, May 2, 2008,574014_1 Case 3:09-cv-02133-B Document 19 Filed 08/09/10 Page 79 of 93 PageID 331Insider Trading214.prohibits the selling of Zale securities by any Company officer, employee, or member of the BoardDuring the Class Period, defendant Gordon sold 74.67% of her holdings of Zale’sOther Indicia of Scienter217.574014_1 Case 3:09-cv-02133

12 -B Document 19 Filed 08/09/10 Page 78 of
-B Document 19 Filed 08/09/10 Page 78 of 93 PageID 330212.Name andPositionOfficer, and CFOPresident, Interim75 -574014_1 Case 3:09-cv-02133-B Document 19 Filed 08/09/10 Page 77 of 93 PageID 329Executive Compensation208.fellow Zale executives. According to the Company’s proxy statements filed with the SEC during thepaid out during the Class Period as Zale was issuing artificially inflated financial figures, it was the574014_1 Case 3:09-cv-02133-B Document 19 Filed 08/09/10 Page 76 of 93 PageID 328In re Sunbeam Sec. Litig., No. 98-8258-Civ.-Middlebrooks, SE

13 C Amicus Curiae Brief (S.D. Fla.Defendan
C Amicus Curiae Brief (S.D. Fla.Defendants’ False SOX Certifications Establish Scienter206.required review of the financial statements, evaluation of internal controls, and evaluation ofZale Was on Notice Based on the Previous SEC Investigation into the Company’s207.- 73 -574014_1 Case 3:09-cv-02133-B Document 19 Filed 08/09/10 Page 75 of 93 PageID 327restated as a result of defendants’ misuse of information available to them at the time the financialstatements were originally prepared;(b)as(c)as detailed herein, Zale’s(d)as detailed herein, the(e)moreove

14 r, it is more thaninter alia, to prove t
r, it is more thaninter alia, to prove the falsity and materiality of the original72 -574014_1 Case 3:09-cv-02133-B Document 19 Filed 08/09/10 Page 74 of 93 PageID 326more effective ways to simplify and distinguish our message.” Goldberg further assured investorscommitted to financial[] rigor and discipline. Especially when itGoldberg even told the market Zale was “going through [a]as of February 2008. And Goldberg toldhave gone through and continue to go throughAnd in November 2008, CFO Carter assured investors Zale had been andwill continue to manage ou

15 r expenses . . . very aggressively” – in
r expenses . . . very aggressively” – including advertising expenses.Zale’s Restatement Supports Scienter204.The type of restatement (misuse of the facts) – Zale’s restatement was not the574014_1 Case 3:09-cv-02133-B Document 19 Filed 08/09/10 Page 73 of 93 PageID 325Defendants Carefully Examined Advertising Expenses During the Class Period199.better media placement proved successful in drivingtraffic into the stores.” Analysts also recognized the importance of defendants’ focus on advertisingBurton assured investors Company executives were closely analyz

16 ing advertising“‘focus on expense reduct
ing advertising“‘focus on expense reduction, particularly those [in] marketing that did not generate sufficient sales“‘good expense control resulted in earnings at the high end ofShe also emphasized the large role advertising played in the Company’s plan tomake two of their brands – Zale and Gordon’s – unique and distinct in order to increase earningscustomers” and said the Company was “carefully revealing our sales and marketing strategies to find574014_1 Case 3:09-cv-02133-B Document 19 Filed 08/09/10 Page 72 of 93 PageID 324The decision to offer lifeti

17 me warranties will result in cash sales
me warranties will result in cash sales increase ofthe actual revenue recognized is negativelymatching the underlying expense flow. On an adjustedDeferred revenue is now amortized on a straight line basis over fiveThis accountingThe market was well aware Zale’s earnings would be negatively impacted by thisincome – to meet analysts’ expectations until the deferred revenue could be recognized on theThis deferred revenue recognition methodEPS is then expected to grow by 30% per annum foralso consistently assured investors that deferred earnings were piling u

18 p by reporting figures such as574014_1 C
p by reporting figures such as574014_1 Case 3:09-cv-02133-B Document 19 Filed 08/09/10 Page 71 of 93 PageID 323As a result of these material weaknesses, management concluded that theSCIENTER193.that operated as a fraud or deceit on purchasers or acquirers of Zale’s stock during the Class Period.Defendants Were Motivated to Improperly Inflate Earnings When a Change in Zale’s195.from the sale of the warranty on an accelerated basis as it had done for the two year program, it hadIdeas Conference:574014_1 Case 3:09-cv-02133-B Document 19 Filed 08/09/10 Page 7

19 0 of 93 PageID 3225. The registrant’s ot
0 of 93 PageID 3225. The registrant’s other certifying officer(s) and I have disclosed, based on ourto thedesign or operation of internal control over financial reporting, which are(b)/s/ [ 192. The Company has since admitted, through its restatement, that these certificationsdid not “fairly present in all materialSpecifically, account reconciliations associated with advertising,The responsibility to initiate and approve574014_1 Case 3:09-cv-02133-B Document 19 Filed 08/09/10 Page 69 of 93 PageID 321accuracy of Zale’s financial statements and the effect

20 iveness of Zale’s disclosure controls an
iveness of Zale’s disclosure controls and1.this [annual report on Form 10-K or quarterly report on Formthis report does not contain any untrue statementor omit to state a material fact necessary to make the statementsthe financial statements, and other financialas of, and(c)Evaluated the effectiveness of the registrant’s disclosureand procedures and presented in this report our conclusions aboutthe effectiveness of the disclosure controls and procedures, as of the end ofthe period covered by this report based on such evaluation; and(d)574014_1 Case 3:09-c

21 v-02133-B Document 19 Filed 08/09/10 Pag
v-02133-B Document 19 Filed 08/09/10 Page 68 of 93 PageID 320Adjusted earnings per shareDefendants’ SOX Certifications Were False And Misleading190.results of their evaluation to investors in Zale’s Form 10-K. The following disclosure appeared in theOur management is responsible for establishing and maintaining adequateas such term is defined in Rule 13a-15(f)Under thewe conducted an evaluation of theeffectiveness of our internal control over financial reporting based on the frameworkInternal Control-Integrated Framework issued by the Committee of Sponsor

22 ingBased on our evaluation, our191.that
ingBased on our evaluation, our191.that they had performed evaluations of Zale’s financial statements , disclosure controls, and internalfor the year ended July 31, 2008 and by Carter and Burton on October 1, 2007 in the Form 10-K forOctober 31, 2006, January 31, 2007, April 30, 2007, and October 31, 2007; Carter and Goldberg inZale’s Form 10-K for the year ended July 31, 2008 and in Zale’s Form 10-Qs for the quarters ended574014_1 Case 3:09-cv-02133-B Document 19 Filed 08/09/10 Page 67 of 93 PageID 319Zale’s Accounting Misstatements Were Material188.Thro

23 ugh its restatement of the various finan
ugh its restatement of the various financial figures described above, Zale hasadmitted its Class Period misstatements were material. The materiality of these misstatements is(in millions) FY 2007 andEffect of Misstatements on NetAdvertising CostsDepository Bank Accounts2007(In millions except earnings per shareFY endeddata)7/31/07Originally reported Net5Restated Net Income (Loss)Includes other errors corrected as part of the restatement (Personal Property Tax reserves574014_1 Case 3:09-cv-02133-B Document 19 Filed 08/09/10 Page 66 of 93 PageID 318Reportin

24 g on Advertising Costs (“SOP 93-7”) requ
g on Advertising Costs (“SOP 93-7”) requires that all advertising costs must be eitherZale Also Improperly Accounted for Several Other Items187. As part of its October 2009 restatement, Zale admitted that its financial reporting wasabove during the Class Period. The additional misstatements included improperly accounting forIntercompany Accounts ReceivableThe charge related to an intercompany accounts receivable associated with ourDepository Bank AccountsThe charge corrected the recording of cash receipts from Bailey Banks & BiddleFederal Income TaxesThe

25 charge resulted primarily from an incorr
charge resulted primarily from an incorrect determination made during fiscal574014_1 Case 3:09-cv-02133-B Document 19 Filed 08/09/10 Page 65 of 93 PageID 317185.·\tA significant portion of prepaid advertising costs should have been recorded asIn Zale’s FY09 Form 10-K filed with the SEC on October 29, 2009, the Company disclosed the[C]ertain advertising costs were recorded as prepaid advertising subsequent to the186.of Financial Accounting Concepts No. 5, Recognition and Measurement in Financial Statements of(“FASCON 5”) clearly and concisely states that “

26 [e]xpenses are generallyrecognized when
[e]xpenses are generallyrecognized when an entity’s economic benefits are consumed in revenue-earning activities orFASB Statement of Financial Accounting Concepts No. 6, Elements of Financialmany assets yield their benefits to an(the periods over whichFurther, American Institute of Certified Public Accountants (“AICPA”) Statement of Position 93-7,- 62 -574014_1 Case 3:09-cv-02133-B Document 19 Filed 08/09/10 Page 64 of 93 PageID 316financial statements do not allow a registrant any discretion or election in deciding whether or not tomaterial errors, resul

27 ting fromor oversightor misuse of facts
ting fromor oversightor misuse of facts that existed at the time the financial statements were prepared”; or (b) a changeSee Statement of Financial AccountingAccounting Changes and Error Corrections, ¶¶2, 4-10, 23-26. In thisnot to changematerially false; and (ii) the financial statementsreported during the Class Period were incorrect based on information available to the defendants atZale Improperly Accounted for Advertising Costs184. Zale improperly accounted for advertising costs during the Class Period whichthe Company’s failure to properly account fo

28 r advertising costs resulted in overstat
r advertising costs resulted in overstated net income of(in millions) FY 2007PriorUnderstatement of Advertising(After-tax)574014_1 Case 3:09-cv-02133-B Document 19 Filed 08/09/10 Page 63 of 93 PageID 315(a)Zale understated expenses and overstated net income and EPS by failing toproperly account for prepaid advertising costs; and(b)three quarters of FY09). For FY08, in fact, Zale was forced to restate over 94% of its originallypreviously issued financial statements for fiscal years 2008 and 2007, and interim183.are not prepared in compliance with GAAP are

29 presumed to be misleading and inaccurate
presumed to be misleading and inaccurate, despitefootnotes and other disclosure. Regulation S-X requires that interim financial statements must alsoSee NN190-192.574014_1 Case 3:09-cv-02133-B Document 19 Filed 08/09/10 Page 62 of 93 PageID 314179. The investment community reacted harshly to Zale’s restated financial statements and[W]e believe this is a factor behind the massive sell-SG&A assumptions and the absence of any income tax benefits.In a letter to Zale shareholders, authored by Goldberg and Killion and included infinancial focus was on 3 major dr

30 ivers: SG&A, working capital and realdur
ivers: SG&A, working capital and realduring our year-end financial close, there were items identified thatWe conducted a thorough review and haveWe are taking the necessary steps to strengthen ourDEFENDANTS’ MATERIALLY FALSE AND MISLEADING FINANCIALREPORTING DURING THE CLASS PERIOD181.574014_1 Case 3:09-cv-02133-B Document 19 Filed 08/09/10 Page 61 of 93 PageID 313Our review of accounting for advertising costs also included aAs you wouldattributable to a material weakness in our reconciliationin those periods.from $92.1 million or a loss of $2.89 per shar

31 e to a loss of $99.7 million or a loss o
e to a loss of $99.7 million or a loss ofthe SEC had begun an investigationand requested certain information relating to the matters disclosed in our 8-K. The574014_1 Case 3:09-cv-02133-B Document 19 Filed 08/09/10 Page 60 of 93 PageID 312property taxes. Restated financial information for fiscal 2008 and 2009 is detailed inSubsequent to the Company’s disclosure in its Form 8-K filed on Septemberthe Staff of the Fortthe Securities and Exchange Commission notified theThe Company isSince September 18 we have conducted an exhaustive review of advertisingWe en

32 listed the help of third-party experts a
listed the help of third-party experts andcertain advertising costs previously recorded as prepaid were expensed inThe impact of this adjustment for fiscal 2008 was a charge of $2.7 millionafter tax. For the nine months ended April 30, 2009, the impact of this adjustment574014_1 Case 3:09-cv-02133-B Document 19 Filed 08/09/10 Page 59 of 93 PageID 311On September 17, 2009, management of Zale Corporation (the “Company”)and the Audit Committee of the Company’s Board of Directors, in consultation withthe Company’s independent registered public accounting firm

33 , Ernst & Young LLP,the Company’s previo
, Ernst & Young LLP,the Company’s previously issued financial statements for fiscaland will present the restated financial statements inPrepaid advertising reflected in our balance sheets as ofto certain depository bank account reconciliations and (3) a benefit related toRestated Financial ResultsAs disclosed in the Company’s Form 8-K filing on September 18, 2009,574014_1 Case 3:09-cv-02133-B Document 19 Filed 08/09/10 Page 58 of 93 PageID 310(b)Zale’s earnings and EPS were artificially inflated and its reported financial results were in violationTHE TRU

34 TH BEGINS TO EMERGE AND ZALE RESTATESITS
TH BEGINS TO EMERGE AND ZALE RESTATESITS CLASS PERIOD FINANCIAL FIGURES171.Quarter Results,” which stated in part:- 55 -574014_1 Case 3:09-cv-02133-B Document 19 Filed 08/09/10 Page 57 of 93 PageID 309SG&A was approximately 210 million in the third quarter of 2009, down $22*continued focus on financial rigorincludes a total review of our lease portfolio.·\tEarnings downside versus our estimate came from lower sales, partially offset by*SG&A dollars actually decreased by $22MM, which was encouraging after whatrealize further SG&A reductions through FY10.16

35 8.On June 9, 2009, Zale filed a Form 10-
8.On June 9, 2009, Zale filed a Form 10-Q with the SEC setting forth574014_1 Case 3:09-cv-02133-B Document 19 Filed 08/09/10 Page 56 of 93 PageID 308Revenues for the third quarter of fiscal 2009 were $379 million as comparedinitiative that permanently reduced inventory by $100 million. The Companycompared to the prior year, primarily resulting from the impact of cost reductions164.The following figures were included in Zale’s 3Q09 financialCFO. In addition to her ongoing role as Senior Vice President, Controller, she hasmaintain financial166.During the Ma

36 y 27, 2009 call, Gordon, still serving a
y 27, 2009 call, Gordon, still serving as Interim- 53 -574014_1 Case 3:09-cv-02133-B Document 19 Filed 08/09/10 Page 55 of 93 PageID 307(a)Zale’s earnings and EPS were artificially inflated and its reported financial results were in violation163.On May 27, 2009, Zale issued a press release announcing its574014_1 Case 3:09-cv-02133-B Document 19 Filed 08/09/10 Page 54 of 93 PageID 306percentage of sales, SG&A was 41.9% for the second quarter versus 36.5% last year.for the quarter.The net income for the quarter excluding the goodwill and store charges and t

37 heThe net loss for the quarter from cont
heThe net loss for the quarter from continuing operationsincluding these charges was $23.6 million or $0.74 per shared compared to earningswe intend to be very cautious in all our*Our continued focus on financial rigor will include a total review of ourFinancial rigor is critical in this159.closely examining the Company’s expenses to find ways to cut costs. It stated, in part:We note that Q2 SG&A dollars declined byafter what seemed to be a lack ofprogress on this front last year.160.On March 11, 2009, Zale filed a Form 10-Q setting forth its 2Q09certific

38 ations quoted herein at ¶191.- 51 -57401
ations quoted herein at ¶191.- 51 -574014_1 Case 3:09-cv-02133-B Document 19 Filed 08/09/10 Page 53 of 93 PageID 305after-tax basis, (1) charges related to store impairments of $5.0 million, or $0.16 pershare, and (3) an $18.6 million charge, or $0.58 per share, related to a valuationreserve on foreign tax credits resulting from our decision to revoke our election156.The following figures were included in Zale’s 2Q09 financialmaintaining158.During the February 25, 2009 call, Interim CFO Gordon stated:SG&A was approximately $284 million in the second quart

39 er of 2009 down $18The decline in absolu
er of 2009 down $18The decline in absolute SG&A dollars was574014_1 Case 3:09-cv-02133-B Document 19 Filed 08/09/10 Page 52 of 93 PageID 304(a)Zale’s earnings and EPS were artificially inflated and its reported financial results were in violation155.On February 25, 2009, Zale issued a press release announcing its574014_1 Case 3:09-cv-02133-B Document 19 Filed 08/09/10 Page 51 of 93 PageID 303As stated in the press release, in view of the uncertainties surrounding thesince mid-October show declines in the mid-teens.149. On November 25, 2008, after Zale mis

40 sed expectations and lowered earningswhi
sed expectations and lowered earningswhich stated, in part:in the year-ago quarter.higher SG&A expenses. In addition, a lower-than-expected tax benefit reduced EPSguidance, which previously stood at $1.10-151.On December 8, 2008, Zale filed a Form 10-Q with the SEC setting- 48 -574014_1 Case 3:09-cv-02133-B Document 19 Filed 08/09/10 Page 50 of 93 PageID 302147.On November 25, 2008, Zale hosted a conference call with analystswe haveThe disciplines that we began over the last year are more important than ever.Focusing on our value oriented customer with a

41 price appropriate assortment,most impor
price appropriate assortment,most importantly in thisand capitalmaintainingfinancial rigor and discipline.148.Carter discussed Zale’s 1Q09 financial results during theSG&A was approximately $219 million in the first quarter of 2009, essentially flatrecognized to $16 million of the identified $65 million plus.Our ongoing acute focus on financial rigor to enhance liquidity and*we are committed to continued financial rigor and discipline,inclusive of the additional reductions identified in the areas of inventoryexpense management, and capital. This commitme

42 nt, combined with574014_1 Case 3:09-cv-0
nt, combined with574014_1 Case 3:09-cv-02133-B Document 19 Filed 08/09/10 Page 49 of 93 PageID 301the emotional aspects of its products, will help it coax sales from consumers whoare increasingly tightfisted.False and Misleading Statements Regarding Zale’s Financial Results for the First ThreeQuarters of Fiscal Year 2009First Quarter of Fiscal Year 2009 144.On November 25, 2008, Zale issued a press release announcing itsGoldberg was quoted in the release as stating:deliver strong performance on both store operations and cost control.We have recently elimi

43 nated almost $15 million of additional c
nated almost $15 million of additional capital expenditures145.The following figures were included in Zale’s 1Q09 financialprevious earnings guidance:Company does not believe that itspreviously issued earnings guidance should be relied upon.46 -574014_1 Case 3:09-cv-02133-B Document 19 Filed 08/09/10 Page 48 of 93 PageID 300141. Defendants’ statements regarding Zale’s 4Q08 and FY08 financial results wereto disclose, the following:(b)As detailed in ¶187, defendants also improperly overstated earnings during(c)As detailed in ¶192, the Company lacked adequat

44 e internal controls;(d)Zale’s earnings a
e internal controls;(d)Zale’s earnings and EPS were artificially inflated and its reported financial results were in violation(e)The New York Times published an article entitled “Hoping toNeal Goldberg, the chief executive of the Zale Corporation, is betting thatWhile these are especially gloomy times forretailers, Mr. Goldberg says his company’s marketing campaign, which focuses on45 -574014_1 Case 3:09-cv-02133-B Document 19 Filed 08/09/10 Page 47 of 93 PageID 299139.On September 26, 2008, Zale filed its Form 10-K with the SEC140.In a letter to Zale sha

45 reholders, authored by Goldberg and Zale
reholders, authored by Goldberg and ZaleEarnings from continuing operations in fiscal 2008 were $3.7 million or $0.09 perdiluted share, compared to earnings of $48.1 million or $0.98 per diluted share in theenhancing our operational effectiveness, and (3)maintaining financial rigor.*we have also simplified our marketing message.Product now leads our offering, supported by price. . . .We are now designing marketing campaigns that create an emotional*financial rigor and discipline, particularly in the areas of inventory and expenseas well as the achievement

46 of appropriate returns on our capitalFr
of appropriate returns on our capitalFrom a financial standpoint, we will remain disciplined – focused both on44 -574014_1 Case 3:09-cv-02133-B Document 19 Filed 08/09/10 Page 46 of 93 PageID 298Marketing message. There is so much noise out there in the jewelry sector,and we felt like we really wanted to change it. It’s about product supported by price.Financial rigor, the third part of our initiatives that we set forth to do, andWe have gone through and continue to go through each aspect of theeach driver, and each aspect of the balance sheet, whether i

47 t’s operatingI think the most important
t’s operatingI think the most important thing is to be the most efficient [with advertising costs].On September 17, 2008, Zale executives, including Carter, gave a presentation totold attendees:operational effectiveness and obviously the underlying constant of financial rigor*574014_1 Case 3:09-cv-02133-B Document 19 Filed 08/09/10 Page 45 of 93 PageID 297Total revenues in Q4 were 456 million, compared to 430 million last year, anbenefit from the release of a vacation accrual. Of the benefit, $11 million representhowever, $1.5 millionExcluding this gain,

48 SG&A as a percentage of revenue was 50%.
SG&A as a percentage of revenue was 50%. TheWomen’s Wear Daily published an article entitledShares of Zale Corp. surged more than 20 percent Thursday after the*574014_1 Case 3:09-cv-02133-B Document 19 Filed 08/09/10 Page 44 of 93 PageID 296132.The following figures were included in Zale’s FY08 financial133.On August 28, 2008, Zale hosted a conference call with analystswe exceeded our own expectations for sales, earnings, andour customers, we have simplified our message and brought emotion back to ourWe design marketing campaigns that elevate emotionwas v

49 ery favorably received by all of our key
ery favorably received by all of our key*Underpinning our strategic initiatives is our continued commitment to financialrigor and discipline.*we have diversified our marketing spendto becoming more targeted in both the mediums we use and demographics we are134.During the August 28, 2008 conference call, Carter discussed574014_1 Case 3:09-cv-02133-B Document 19 Filed 08/09/10 Page 43 of 93 PageID 295and a gain on the sale of an unproductive asset of $3.5 million, or $0.10 per share.Company’s gold and silver contracts and a net tax benefit of $6.7 million,

50 or $0.14to earnings of $48.1 million, or
or $0.14to earnings of $48.1 million, or $0.98 per diluted share for the twelve130.Goldberg was also quoted in the August 28, 2008 release as stating:we exceeded our expectations for sales,“To improve performance over the current fiscal year and beyond, we aremaintaining financial discipline. Specific actions we are taking to achieverealizing $65 plus million in ongoing annualized savings; and permanently131.The following figures were included in Zale’s 4Q08 financial574014_1 Case 3:09-cv-02133-B Document 19 Filed 08/09/10 Page 42 of 93 PageID 294(a)Zale’

51 s earnings and EPS were artificially inf
s earnings and EPS were artificially inflated and its reported financial results were in violation129.On August 28, 2008, Zale issued a press release announcing itsreported a net loss from continuing operations for the fourth quarter of fiscal 2008 of574014_1 Case 3:09-cv-02133-B Document 19 Filed 08/09/10 Page 41 of 93 PageID 293In summary, we are committed to maintaining financial rigor and discipline,124.have been there for a while? Will it remain at current levels, could it move higher?What is the direction of that spend?by price. We really want to ma

52 ke sure it resonates emotionally with ou
ke sure it resonates emotionally with our customers. .For marketing spend, we are still going to look to get as efficient as possible125.Analysts reacted positively to Zale’s 3Q08 financial results. On May 22, 2008 forin line withZLCearned $(0.10) in the year-ago quarter.earnings were actually $4MM better than our modeledas gross margins were better than we expected.126.On June 6, 2008, Zale filed a Form 10-Q with the SEC setting forth- 38 -574014_1 Case 3:09-cv-02133-B Document 19 Filed 08/09/10 Page 40 of 93 PageID 292*WeweFinally, our commitment to fin

53 ancial rigor and generating free cash fl
ancial rigor and generating free cash flowWe recognize that expense saves will help drive efficiencies in the nearWe committed to fostering a*themselves. It is imperative that we maintain the same level of financial rigor and123.During the May 22, 2008 call, Carter discussed the Company’sfinancial results for 3Q08. He stated, in part:Our results are in line with expectations and we anticipate fourth quarter margins toSG&A, including the cost of insurance operations, was 49% for the quarterThe company achieved approximatelythat was offset byThe savings ini

54 tiative, continued*574014_1 Case 3:09-cv
tiative, continued*574014_1 Case 3:09-cv-02133-B Document 19 Filed 08/09/10 Page 39 of 93 PageID 291[Zale] reported a net loss from continuing operations for the third quarter of fiscalhave a focused agenda to improve performance and the team has stayed locked-in onsimplifying ourthat is led by product and supported by price. We are enhancingour operational effectiveness through the implementation of our efficiency programwe areby executing on our inventory liquidation$65 plus million in identified expenseand returning value to shareholders through a sign

55 ificant stock repurchase120.The followin
ificant stock repurchase120.The following figures were included in Zale’s 3Q08 financialThe time we have spent in the field reinforces our belief that focus and clarity in36 -574014_1 Case 3:09-cv-02133-B Document 19 Filed 08/09/10 Page 38 of 93 PageID 290116. Defendants’ statements regarding Zale’s 2Q08 financial results were materially falseand misleading when made. Defendants knew or recklessly disregarded, but failed to disclose, theZale’s earnings and EPS were artificially inflated and its reported financial results were in violationand misleading wh

56 en made, had a direct effect on Zale’s s
en made, had a direct effect on Zale’s stock price, which continued to trade atFalse Statement: On May 22, 2008, Zale issued a press release announcing its574014_1 Case 3:09-cv-02133-B Document 19 Filed 08/09/10 Page 37 of 93 PageID 289exceptional experience, it is essential that we reduce the Company’s infrastructurewhich have outpaced its sales growth since 2002. The program we areand will enhance our operationalCreating a culture of cost discipline and financial rigor is vital to Zale’sWhile we recognize that expense saves will help drive efficiencies1

57 15.On March 10, 2008, Zale filed a Form
15.On March 10, 2008, Zale filed a Form 10-Q with the SEC setting574014_1 Case 3:09-cv-02133-B Document 19 Filed 08/09/10 Page 36 of 93 PageID 288Better-Than-Expected EPS. Our Outlook Remains Cautious. Management Sounded MoreThe critical 2Q08 EPS were $1.16 vs. our $1.09 estimate and the Street’s $1.10.and fully diluted shares than weZale, which stated, in part:better than our estimate of $1.10. Most of the112.increasing our EPS estimates and price target toon the news of the company’s plan to reduce costs.113.Business Wire published an article entitled “

58 Zale InitiatesThe program,which seeks to
Zale InitiatesThe program,which seeks to generate $65 plus million in ongoing, annualized savings beginningKey elements of the program include . . . .574014_1 Case 3:09-cv-02133-B Document 19 Filed 08/09/10 Page 35 of 93 PageID 287Finally, we’re committed to financially rigor and discipline. Especiallyinvestments. Creating a culture of discipline and accountability is vital as a107.During the February 21, 2008 call, Carter stated:SG&A including the cost of insurance operations was 36.9% for the quarterprimarily due to deleverage fromwe are going through v

59 ery detailed review of ourAnd as we get
ery detailed review of ourAnd as we get to the finalization of that in the very nearterm, we’ll communicate that.ThatbecauseGoldberg responded:We do spend a lot of money on it. I don’t think we’ve gotten theI thinkSo,We have to get more efficient on that spend. I concur on that. But574014_1 Case 3:09-cv-02133-B Document 19 Filed 08/09/10 Page 34 of 93 PageID 286ended January 31, 2007 included a $2.5 million, or $0.05 per diluted share, positive“We intend to make Zale into a more nimble and efficient organization. Wemaintaining financial rigor and discipli

60 ne overall.”105.The following figures we
ne overall.”105.The following figures were included in Zale’s 2Q08 financial(in Thousands of Dollars)maintainingfinancial rigor and discipline.First, the focus on our value-oriented customer. . . . Merchandising andSimilarly, our marketing message both in store and externally must be sharperdirect mailings. Our overall marketing is at best fair, which is not good enough. We574014_1 Case 3:09-cv-02133-B Document 19 Filed 08/09/10 Page 33 of 93 PageID 28599.false and misleading when made, had a direct effect on Zale’s stock price, which continued to tradese

61 rve as consultant to the Company.Through
rve as consultant to the Company.Through the nationalZales represents leadership and value to thatwe also maintain strong financial discipline102.followed by advertising. And so that is really one of the keys.Second Quarter of Fiscal Year 2008 103.On February 21, 2008, Zale issued a press release announcing itsearnings from continuing operations for the second quarter of fiscalcompared to $77.1 million, or574014_1 Case 3:09-cv-02133-B Document 19 Filed 08/09/10 Page 32 of 93 PageID 284Zale Corp. reported 1Q08 (ended 10/31/07) EPS of $(0.58), in line withg

62 uidance of $(0.59)-$(0.63). We had been
uidance of $(0.59)-$(0.63). We had been estimating $(0.59).97.On December 10, 2007, Zale filed a Form 10-Q with the SEC574014_1 Case 3:09-cv-02133-B Document 19 Filed 08/09/10 Page 31 of 93 PageID 28393.On November 20, 2007, Zale hosted a conference call with analystsQ1 results were in line with expectations. It should be noted that all numbers reflectin line with guidance. Cash from94.Carter reviewed the Company’s 1Q08 financial results it hadWethat returned us to Zales the Diamond StoreWe continue to be aggressive in primetime and highly visible TV spot

63 s.96.EPS. On November 21, 2007, for exam
s.96.EPS. On November 21, 2007, for example, CL King & Associates issued an analyst report entitled574014_1 Case 3:09-cv-02133-B Document 19 Filed 08/09/10 Page 30 of 93 PageID 28289.The Dallas Morning News reported:False and Misleading Statements Regarding Zale’s Financial Results for Fiscal Year 2008First Quarter of Fiscal Year 2008 91.On November 20, 2007, Zale issued a press release announcing its[Zale] reported a net loss of $28.4 million, or $0.58 per share, for the Company’sfirst quarter ended October 31, 2007. As previously announced, the sale of

64 BaileyEarnings performance met expectati
BaileyEarnings performance met expectations for the quarter as we offsetmaintaining good expense control in the92.The following figures were included in Zale’s 1Q08 financial- 27 -574014_1 Case 3:09-cv-02133-B Document 19 Filed 08/09/10 Page 29 of 93 PageID 28187.Itheritage as well as toI am pleased with theand our focus is on(a)(b)As detailed in ¶187, defendants also improperly overstated earnings during(c)As detailed in ¶192, the Company lacked adequate internal controls;(d)Zale’s earnings and EPS were artificially inflated and its reported financial re

65 sults were in violation(e)574014_1 Case
sults were in violation(e)574014_1 Case 3:09-cv-02133-B Document 19 Filed 08/09/10 Page 28 of 93 PageID 28082.The marketing programs, clearly they both have their unique marketingSo that will be a different look and feel to the ads,but they will be similar to last year’s for both Zale’s and Gordon’s. The advertisedSo again, to the customer it willEPS of $(0.11) was in line with management’s recently85.The Company outperformed our FQ3 estimate (adjusted diluted EPS) of -$0.04 byThese were in line with the Company’sof delivering an adjusted EPS at the highe

66 r range of its $0.00-$0.04/share86.On Oc
r range of its $0.00-$0.04/share86.On October 1, 2007, Zale filed a Form 10-K with the SEC settingthe certifications quoted herein at 1[191.574014_1 Case 3:09-cv-02133-B Document 19 Filed 08/09/10 Page 27 of 93 PageID 279Q4 results were in line with expectation. Comp store sales decreased slightly, 0.5%,good expense control resulted in pro forma EPS of*Good expense control resulted in a slight improvement in SG&A as the percent ofIt marked the return of the Zales brand to itsas well as middle America as its core customer. We had theWe tested investment[O]

67 verall, I am pleased with the progress w
verall, I am pleased with the progress we have made to date in repositioning*we have looked at every aspect ofWe reviewed our portfolio strategy, the positioning of the variousFalse Statement: Carter discussed Zale’s 4Q07 and FY07 financial results during thewas $36.7 million, which includes $40.7 million of a noncash charge and other itemsOperating earnings for the quarter on a basisincluding hedge accounting forForcompared toNet income for the quarter was $20,000, or $0.00 per share . . . . ThisForversus $53.6 million or$1.09 per diluted share last year

68 .574014_1 Case 3:09-cv-02133-B Document
.574014_1 Case 3:09-cv-02133-B Document 19 Filed 08/09/10 Page 26 of 93 PageID 278The Company also provided its annual forecast for its fiscal year ending July77.Zale’s August 30, 2007 release also quoted Burton as saying:good expense control resulted in earnings at“Fiscal 2007 was a year in which we focused on going back to the basics. WeWhile many of these initiatives paid off, others have been pared back. We will taketo refine our pricing and promotionalstrategy for this Holiday to drive meaningful earnings improvement in our all-78.The following figur

69 es were included in Zale’s 4Q07 financia
es were included in Zale’s 4Q07 financial79.The following figures were included in Zale’s FY07 financial(in Thousands of Dollars)80.On August 30, 2007, Zale also hosted a conference call with574014_1 Case 3:09-cv-02133-B Document 19 Filed 08/09/10 Page 25 of 93 PageID 27774.Canada News Wire reported John Zimmerman, President of ZaleFourth Quarter of Fiscal Year 2007 and Fiscal Year 2007 76.On August 30, 2007, Zale issued a press release announcing itsfinancial results for 4Q07 and FY07. The release stated:reported net earnings of $1.5 million, or $0.03 pe

70 r diluted share for theEarnings for the
r diluted share for theEarnings for the quarter include, on23. Excluding these items, the Company reported earnings of $0.0 million, or $0.00per diluted share.Net earnings for fiscal year 2007 were $59.3 million or $1.21 per share.These earnings treat forward commodity contracts as derivatives under SFAS 133574014_1 Case 3:09-cv-02133-B Document 19 Filed 08/09/10 Page 24 of 93 PageID 276ZLC reported GAAP EPS of $(0.06) and OpEPS of $0.05 (excl $0.14 impact relatedto jewelry protection plans and $0.03 benefit from derivatives accounting) vs. $0.35in line w

71 ith our estimate of $(0.07) and $0.04, r
ith our estimate of $(0.07) and $0.04, respectively.72.On June 11, 2007, Zale filed a Form 10-Q with the SEC settingforth its 3Q07 financial results, including those discussed above in ¶¶65-68. The Form 10-Q wasAs detailed in ¶187, defendants also improperly overstated earnings duringAs detailed in ¶192, the Company lacked adequate internal controls;(d)Zale’s earnings and EPS were artificially inflated and its reported financial results were in violation574014_1 Case 3:09-cv-02133-B Document 19 Filed 08/09/10 Page 23 of 93 PageID 275And while we remain ca

72 utious, we are maintaining current guida
utious, we are maintaining current guidance of pro forma68.During the May 22, 2007 call, Carter stated:SG&A, including the cost of insurance operations was 47.7% for the quarter69.elaborate in that, please?we are focused on expenseSo the combination of the two would suggest that we can, this is not, givenInstead we’re going70.Q3 Results Slightly Above Expectations; ReiterateThe report stated, in part:Zale Corp. reported 3Q07 (ended April 30, 2007) EPS of $(0.06), compare with ourExcluding a $0.03 non-cash gain related to gold derivativeslosses and a $0.14

73 negative impact due to a change in defe
negative impact due to a change in deferred insurance revenueEPS were $0.05, slightly above management’s recent guidance of EPSat the high of a range of $0.00-$0.04. ZLC earned $0.35 in 3Q06; excluding $0.11 of574014_1 Case 3:09-cv-02133-B Document 19 Filed 08/09/10 Page 22 of 93 PageID 274Third Quarter of Fiscal Year 2007 65.On May 22, 2007, Zale issued a press release announcing itsmillion, or $0.05 per diluted share.good expense control contributed to earnings in-line withwe are maintaining our current earnings guidance for fourth66.The following figu

74 res were included in Zale’s 3Q07 financi
res were included in Zale’s 3Q07 financial67.On May 22, 2007, Zale hosted a conference call with analysts andinvestors to discuss Zale’s 3Q07 financial results. Burton and Carter participated in the call and hadQ3 results were in line with revised expectations. While comp store sales decreasedexpense saves resulted inor EPS of $0.05 when you exclude the impact574014_1 Case 3:09-cv-02133-B Document 19 Filed 08/09/10 Page 21 of 93 PageID 273(d)Zale’s earnings and EPS were artificially inflated and its reported financial results were in violationA significan

75 t focus of the past year has been on the
t focus of the past year has been on the Zales brand. Over theTo gain this traction, we needed to reinvest back into the brand. . . .Our new TV creatives and better media placement was successful in driving64.As an organization, we are working our way through all aspects of thea disciplined approach or a focus on real estate, allwe feel there are operational improvementthrough the evolution of some of the key business- 18 -574014_1 Case 3:09-cv-02133-B Document 19 Filed 08/09/10 Page 20 of 93 PageID 27259.with the Zale brand which is the one that advertis

76 es the most heavily,again, we returned t
es the most heavily,again, we returned to the Diamond Store tag. We have had very positive feedbackWe do not see any changes inWe were pleased also, with the results of our improved media placement this60.On March 9, 2007, Zale filed a Form 10-Q with the SEC settingcertifications quoted herein in ¶191.As detailed in ¶187, defendants also improperly overstated earnings duringAs detailed in ¶192, the Company lacked adequate internal controls;574014_1 Case 3:09-cv-02133-B Document 19 Filed 08/09/10 Page 19 of 93 PageID 271focused on driving shareholder value

77 over the long-term and believe the Comp
over the long-term and believe the Company is being56.On February 21, 2007, Zale hosted a conference call with analystsQ2 results were in line with revised expectations. . . .Here are some of the highlights for the quarter. We gained nice salesin three years, and the first increase in operating earnings in four years. . . .a return to the Diamond Store, new TV creative, and better media*Our focus in the second half is on maximizing gross profit dollars and57.During the February 21, 2007 conference call, Carter noted:SG&A, including the cost of insurance

78 operations was 34.2% for the quarter ver
operations was 34.2% for the quarter versusSG&A has grown as a percent of total. We want a revision of some of thosewhether it is the centralized merchandising that Betsy talked about, thatWe have found that when you look for pennies, youactually can find lots of money. And I think we are trying to make sure the culture574014_1 Case 3:09-cv-02133-B Document 19 Filed 08/09/10 Page 18 of 93 PageID 270Second Quarter of Fiscal Year 2007 52.On February 21, 2007, Zale issued a press release announcing itsnet earnings of $94.8 million or $1.94 per diluted share

79 for theYear-to-date net earnings totaled
for theYear-to-date net earnings totaled $61.7 million or $1.26 per diluted share.53.The following figures were included in Zale’s 2Q07 financial“‘I’m pleased with the progress we’ve made . . . . At the Zales brand, we had our first comparableCustomersreacted favorably to our expanded assortment in our core diamond fashion and bridal categories aswell as our marketing repositioning.’”55.“‘focus on expense reduction, particularly thoseWe are574014_1 Case 3:09-cv-02133-B Document 19 Filed 08/09/10 Page 17 of 93 PageID 26947.Zale’s stock closed on November 1

80 6, 2006 at $30.20 a share, a new 52-week
6, 2006 at $30.20 a share, a new 52-week highOur new TV creative and better media placement was successful in drivingWe will build on this campaign, as well asJewelers’ Circular-Keystone published an article called “ZaleWe’re spending more on TV, buying spots with better visibility on top showsThere’s more emphasis on promotional key itemsduring holiday gift-giving periods and key weekend events, which we back with TVexposure.In-Line Q2 (Jan.) Sales Results and Earnings Guidance.” The report recognized theZLC reported Q2 sales generally consistent with th

81 e trend indicated by the holidaywith cus
e trend indicated by the holidaywith customers reacting favorably to the brand’s significant51.Vice President of Gordon’s, one of Zale’s segments. The Company appointed Steve Lang, who was574014_1 Case 3:09-cv-02133-B Document 19 Filed 08/09/10 Page 16 of 93 PageID 26844. False Statement: On December 8, 2006, Zale filed a Form 10-Q with the SEC settingZale’s earnings and EPS were artificially inflated and its reported financial results were in violation574014_1 Case 3:09-cv-02133-B Document 19 Filed 08/09/10 Page 15 of 93 PageID 26740.The following figure

82 s were included in Zale’s 1Q07 financial
s were included in Zale’s 1Q07 financial41.On November 16, 2006, Zale hosted a conference call withQ1 operating results were on plan. Excluding the impact of derivative accounting,for example, issued an analyst report covering Zale on November 16, 2006 entitled “Q1 Results inReiterate Accumulate Rating.” The report stated, in part:were $(0.45), in line with guidance of $(0.42)-$(0.46) and compared to $(0.47) aThe Dallas Morning News on“‘We have new marketing and are shifting ad dollars to popular574014_1 Case 3:09-cv-02133-B Document 19 Filed 08/09/10 Pag

83 e 14 of 93 PageID 266in place to turn th
e 14 of 93 PageID 266in place to turn things around at the Company, emphasizing responsibility, accountability, and costgiving people responsibility andWe moved quickly to redefine the strategy going forward for the Zales brand.operational cost savings throughout the Company.37.DEFENDANTS’ FALSE AND MISLEADING STATEMENTSISSUED DURING THE CLASS PERIOD38.False and Misleading Statements Regarding Zale’s Financial Results for Fiscal Year 2007First Quarter of Fiscal Year 2007 39.On November 16, 2006, Zale issued a press release announcing its“‘Earnings perform

84 ance met11 -574014_1 Case 3:09-cv-02133-
ance met11 -574014_1 Case 3:09-cv-02133-B Document 19 Filed 08/09/10 Page 13 of 93 PageID 265Burton also made clear she was familiar with Zale’s advertising expenses, responding to an analyst’squestion about “marketing spend” in the first versus second quarters, stating “the actual dollar spendThe Wall Street Journal reported Zale had appointed Burton to thebacked by superb marketing & well-trainedadvertising to Zale’s business plan. In a September 1, 2006 National Jeweler article, Burton wasThe Dallas Morning News reported: “The company will introduce na

85 tional- 10 -574014_1 Case 3:09-cv-02133-
tional- 10 -574014_1 Case 3:09-cv-02133-B Document 19 Filed 08/09/10 Page 12 of 93 PageID 264muddled media campaign and a sales slump that Zale’s said contributed to an almostFort Worth Star-Telegram published an article stating:Chief Financial Officerthe company said late Friday. The Irving-The delay increased both net cash flow from operationsthough revenue and earnings were not affected, he said. Zale said lastcall with analysts and investors, Burton assured investors the Company would work to get “greaterNow on to Zales brand marketing. First, lessons

86 learned from fiscal ‘06. Weneed to targ
learned from fiscal ‘06. Weneed to target the gift giver more effectively and reach both the male gift giver and574014_1 Case 3:09-cv-02133-B Document 19 Filed 08/09/10 Page 1 1 of 93 PageID 263sales and profit.” Shortly thereafter, Paul Leonard also resigned from the position of President ofBoard member, and Charleen Wuellner, Senior Vice President, Corporate Services and formerThe Dallas Morning News reported on February 18, 2006:[t]he key focus is on turning around the Zales brand.” This included reversion to “Theprimarily a result of increased28.Then

87 , on April 11, 2006 The Wall Street Jour
, on April 11, 2006 The Wall Street Journal reported:the Securities and Exchange Commission has initiated aservice agreements, leases, and payroll accrual. In addition, it requested material*574014_1 Case 3:09-cv-02133-B Document 19 Filed 08/09/10 Page 10 of 93 PageID 262misrepresentations and omissions during the Class Period violated these specific requirements andThe scheme: (i) deceived the investing public regarding Zale’s business; (ii) artificially inflated theprice of Zale’s securities; and (iii) caused plaintiff and other members of the class to

88 purchase Zalesecurities at inflated pric
purchase Zalesecurities at inflated prices.BACKGROUND TO THE CLASS PERIOD24.The Dallas Morning News reported: “Zale Corp. president and chief executive Mary L. Forte574014_1 Case 3:09-cv-02133-B Document 19 Filed 08/09/10 Page 9 of 93 PageID 26119.i.e., the market. Each of the Individual Defendants, by virtue of their highinvolved in the day-to-day operations of the Company. The Individual Defendants were involved inaccurate and truthful information regarding the Company’s financial condition and performance,574014_1 Case 3:09-cv-02133-B Document 19 Filed

89 08/09/10 Page 8 of 93 PageID 260purchas
08/09/10 Page 8 of 93 PageID 260purchased Zale securities during the Class Period and, as a result of defendants’ conduct allegedRico, as well as online. Zale is the second largest specialty retailer of fine jewelry in North America,574014_1 Case 3:09-cv-02133-B Document 19 Filed 08/09/10 Page 7 of 93 PageID 2598.into Zale’s accounting practices in 2006 prompted securities fraud litigation against the Companyand the forced departure of Zale’s CFO Mark Lenz (“Lenz”).JURISDICTION AND VENUE9.PARTIES13.of Pipefitters Plan, filed in connection with its motion

90 to be appointed Lead Plaintiff, Pipefit
to be appointed Lead Plaintiff, Pipefitters Plan574014_1 Case 3:09-cv-02133-B Document 19 Filed 08/09/10 Page 6 of 93 PageID 2586.Zale’s advertising budget would be spent efficiently conveyed to the market the consistent messageClass Period.2resulted in a decrease in earnings during FY07 and FY08 in exchange for an increase in deferredThis deferred revenue recognition method will hurtDefendants’ overstatement of earnings during FY07 and FY08 enabled the Company toi.e., the second quarter of FY07 would be574014_1 Case 3:09-cv-02133-B Document 19 Filed 08/

91 09/10 Page 5 of 93 PageID 257Company’s d
09/10 Page 5 of 93 PageID 257Company’s disclosure controls and internal controls over financial reporting. The October 29, 2009in their SOX certifications, implemented effective disclosure controls and internal controls over theexamining each detail of Zale’s expenses – including advertising costs – to determine where dollars“‘good expense control resulted in earnings at the high end of expectations.’”And then in February 2008, for instance, Zale CEO, Neal L. Goldberg (“Goldberg”) assured thegoing through [a] very detailed review of our whole expense stru

92 cture.”Goldberg reiterated to investors
cture.”Goldberg reiterated to investors that Company executives “have gone through and continue to gothrough each aspect of the P&L” as of September 2008. It is common sense that the Company’s574014_1 Case 3:09-cv-02133-B Document 19 Filed 08/09/10 Page 4 of 93 PageID 256INTRODUCTION1.(“FY”) 2008.prepaid advertising costs as an asset on its books, rather than an expense. Zale also restated earningsZale admitted its restatement was done to correct material errors it made by improperly applyinggoverning accounting principles.1Zale’s FY ends on July 31; i.e.

93 , FY 2008 ended on July 31, 2008.574014_
, FY 2008 ended on July 31, 2008.574014_1 Case 3:09-cv-02133-B Document 19 Filed 08/09/10 Page 3 of 93 PageID 255PageZale Was on Notice Based on the Previous SEC Investigation into the Company’s574014_1 Case 3:09-cv-02133-B Document 19 Filed 08/09/10 Page 2 of 93 PageID 254TABLE OF CONTENTSINTRODUCTIONThree Quarters of Fiscal Year 2009Zale’s Jewelry Warranty Program Resulted in Lower Revenues574014_1 Case 3:09-cv-02133-B Document 19 Filed 08/09/10 Page 1 of 93 PageID 253UNITED STATES DISTRICT COURTNORTHERN DISTRICT OF TEXASDALLAS DIVISIONCONSOLIDATED CLAS