albert biagas, et al. v. sunglass hut international, inc...

Case 1 : 97-cv-00191 -KMM Document 22 Entered on FLSD Docket 06/19/1997 of 91 q

l f =!L ED BY ,,

IN THE UNITED STATES DISTRICT COURT 97 JUN 13 PH 3:1 9SOUTHERN DISTRICT OF FLORIDA

C4RLQS JJEtdKECLERp b.S CiST. CT.S.U. OF FL HI

ALBERT BIAGAS; STEPHEN COLANERO;IGINA FLORENS; JOHN F. CURRY, JR.;IALAN ANDERSON; JAMES J. SMITH; GENETWILLNER; GEORGE RUDOLPH; ABRAHAMIGARFINKEL; and ANDREW RUTTENBERG,

Plaintiffs,

V.

JACK B. CHADSEY; EDWARD L. GRUND;ILARRY G. PETERSEN; GEORGE L. PITA; andlSUNGLASS HUT INTERNATIONAL, INC.,

Defendants. I

Civil Action No. 97-0191-CIV-MOORE

AMENDEDCLASS ACTION COMPLAINT

JURY TRIAL DEMANDED

Plaintiffs make the following allegations upon information and belief, except as to the

allegations specifically pertaining to plaintiffs and their counsel, based on the facts alleged below,

predicated upon the investigation undertaken by and under the supervision of plaintiffs' counsel, and

plaintiffs believe that further substantial evidentiary support will exist for the allegations set forth

below after a reasonable opportunity for discovery.

This is a class action brought on behalfof purchasers of securities of Sunglass

Hut International Inc. ("Sunglass Hut" or the "Company") between March 21, 1996 and October 10,

1996 inclusive (the "Class Period"). The defendants are Sunglass Hut and Jack B. Chadsey, Edward

L. Grund, Larry G. Petersen and George L. Pita, who were executive officers and directors of the

Company during the Class Period.

2. As particularized below, throughout the Class Period defendants disseminated

numerous announcements concerning the purported financial success and rapidly expanding sales of

Case 1:97-cv-00191-KMM Document 22 Entered on FLSD Docket 06/19/1997 of 91 q

the Company. Defendants also made numerous positive pronouncements concerning the Company's

existing distribution and inventory systems, marketing efforts and product offerings.

Plaintiffs allege herein that these public statements , which drove Sunglass Hut's

stock price to a high of $32.50 per share during the Class Period, were materially false and misleading

at the time they were made because they failed to disclose, inter AU, that the Company's new

distribution facility was not even close to be being fully operational; that even once the facility was

purportedly fully operational it was saddled with severe systemic problems; that the Company was

experiencing severe problems with its inventory and distribution systems which were materially

undermining the Company's expressed aggressive growth and expansion plans and the meaningful

accounting of its sales and inventory; and that the Company was experiencing a downward trend in

its sales, further limiting its expressed aggressive growth and expansion plans, due to, among other

things, limited product offerings and problems with the Company's marketing efforts.

4. While these serious problems were concealed from the investing public, the

Individual Defendants sold over $5 million worth of their Sunglass Hut stock holdings at or near its

highest price during the Class Period. Sunglass Hut also sold $100 million of convertible debentures

to private investors during the Class Period.

Ultimately, upon disclosure of the true condition of the Company' s business,

its failed expansion, severe ongoing distribution and inventory control and accounting problems and

poor product offerings, the price of Sunglass Hut stock declined to below $7.00 per share, causing

huge losses for Sunglass Hut investors during the Class Period.

JURISDICTION AND VENUE

6. The claims asserted herein arise under and pursuant to Sections 10(b) and

20(a) ofthe Securities Exchange Act of 1934 (the "Exchange Act") [15 U.S.C. §§ 78j(b) and 78t(a)]

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and Rule lOb-5 promulgated thereunder by the Securities and Exchange Commission ("SEC") [17

C.F.R. 240.1 Ob-5].

7. This Court has jurisdiction of this action pursuant to Section 27 of the

Exchange Act, as amended [15 U.S. C. § 78aa], and 28 U.S.C. §§ 1331 and 1337.

8. Venue is properly laid in this District pursuant to Section 27 of the Exchange

Act and 28 U.S.C. § 1391(b) and (c). The acts and conduct complained of, including the preparation,

issuance and dissemination of materially false and misleading information to the investing public,

occurred in substantial part in the Southern District of Florida. Sunglass Hut maintains, and at all

relevant times maintained, its executive offices in this District.

9. In connection with the acts and conduct alleged in this Complaint, defendants,

directly or indirectly, used the means and instrumentalities of interstate commerce, including the mails

and telephonic communications and the facilities ofthe NASDAQ National Market System, a national

securities exchange.

Plaintiffs

10. Plaintiff Albert Biagas, as set forth in the accompanying Schedule A

incorporated by reference herein, purchased Sunglass Hut common stock at artificially inflated prices

during the Class Period, and has been damaged thereby.

11. Plaintiff Stephen Colanero , as set forth in the accompanying Schedule A



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12. Plaintiff Gina Florens, as set forth in the accompanying Schedule A



13. Plaintiff John F. Curry, Jr., as set forth in the accompanying Schedule A



14. Plaintiff Alan Anderson, as set forth in the accompanying Schedule A



15. Plaintiff James J. Smith, as set forth in the accompanying Schedule A



16. Plaintiff Gene Willner, as set forth in the accompanying Schedule A



17. Plaintiff George Rudolph, as set forth in the accompanying Schedule A



18. Plaintiff Abraham Garfinkel, as set forth in the accompanying Schedule A



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19. Plaintiff Andrew Ruttenberg, as set forth in the accompanying Schedule A



20. Defendant Sunglass Hut is a corporation organized and existing under the laws

of the State of Delaware with its principal executive offices located at 255 Alhambra Circle, Coral

Gables, Florida 33134. Sunglass Hut is a specialty retailer of prescription and non-prescription

sunglasses and operates optical and watch stores. The Company operates a chain of over 1,800

stores throughout the United States , Canada, Europe, Singapore, Australia, the Caribbean and

Mexico, offering a purportedly extensive selection of designer, sport and functional sunglasses. The

Company's common stock was actively traded on the NASDAQ National Market System during the

Class Period.

21. Defendant Jack B. Chadsey ("Chadsey") was, at all relevant times, President,

Chief Executive Officer and a Director of the Company. Because of defendant Chadsey's position

with the Company, he knew the adverse non-public information about its finances, products, markets,

present business and future business prospects complained of herein via access to internal corporate

documents (including the Company's operating plans, budgets and forecasts and reports of actual

operations compared thereto), conversations and connections with other corporate officers and

employees, attendance at management and Board of Directors' meetings and committees thereof and

via reports and other information provided to him in connection therewith. During the Class Period,

and as part ofthe fraudulent scheme, defendant Chadsey sold 100,000 shares of Sunglass Hut stock

at artificially inflated prices of between $32.70 and $32.00 per share based on inside information,

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pocketing $3.235 million. On May 30, 1997, Sunglass Hut announced that defendant Chadsey had

resigned from the Company.

22. Defendant Edward L. Grund ("Grund') is, and at all relevant times was, the

Company's Senior Vice President -- Store Operations, Real Estate and Construction. Because of

defendant Grund's position with the Company, he knew the adverse non-public information about its

finances, products, markets, present business and future business prospects via access to internal

corporate documents (including the Company's operating plans, budgets and forecasts and reports

of actual operations compared thereto), conversations and connections with other corporate officers

and employees, attendance at management and Board of Directors' meetings and committees thereof

and via reports and other information provided to him in connection therewith. During the Class

Period and as part of the fraudulent scheme, defendant Grund sold 36,250 shares of Sunglass Hut

stock at artificially inflated prices of between $27.94 and $28.19 per share based on inside

information, pocketing $1.014 million.

23. Defendant Larry G. Petersen ("Petersen") is, and at all relevant times was, the

Company's Chief Financial Officer and Senior Vice President -- Finance. Because of defendant

Petersen's position with the Company, he knew the adverse non-public information about its finances,

products, markets, present business and future business prospects via access to internal corporate

documents (including the Company's operating plans, budgets and forecasts and reports of actual

operations compared thereto), conversations and connections with other corporate officers and

employees, attendance at management and Board of Directors' meetings and committees thereof and

via reports and other information provided to him in connection therewith. During the Class Period,

and as part of the fraudulent scheme, defendant Petersen sold 34,500 shares of Sunglass Hut stock

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at artificially inflated prices of between $27.75 and $28.00 per share based on inside information,

pocketing $961,075.

24. Defendant George L. Pita ("Pita") is, and at all relevant times was, the

Company's Vice President -- Finance and International Development . Because of defendant Pita's

position with the Company, he knew the adverse non-public information about its finances, products,

markets, present business and future business prospects via access to internal corporate documents

(including the Company's operating plans, budgets and forecasts and reports of actual operations

compared thereto), conversations and connections with other corporate officers and employees,

attendance at management and Board of Directors' meetings and committees thereof and via reports

and other information provided to him in connection therewith. During the Class Period, and as part

of the fraudulent scheme, defendant Pita sold 27,500 shares of Sunglass Hut stock at artificially

inflated prices of between $28.19 and $28.69 per share based on inside information, pocketing

$777,325.

25. The individual defendants referred to in paragraphs 21 through 24 are

collectively referred to as the "Individual Defendants." The Individual Defendants were officers

and/or directors of Sunglass Hut at the time the alleged false and misleading statements and omissions

were made and are liable as direct participants in the wrongs complained of herein.

26. In addition, by reason of their management positions, and/or membership on

the Company's Board of Directors, the Individual Defendants were "controlling persons" of the

Company within the meaning of § 20(a) of the Exchange Act. They had the power to influence and

control, and exercised the same, to cause Sunglass Hut to engage in the unlawful conduct complained

of herein.

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27. It is appropriate to treat the Individual Defendants as a group for pleading

purposes and to presume that the false and misleading information conveyed in the Company's

financial statements, public filings, press releases and other publications as alleged herein are the

collective actions of the narrowly defined group of defendants identified above. Each of the above

officers and/or directors of Sunglass Hut, by virtue of his high-level positions with the Company,

directly participated in the management of the Company, was directly involved in the day-to-day

operations ofthe Company at the highest levels, and was privy to confidential proprietary information

concerning the Company and its operations, business practices, finance, financial condition, products

and business prospects as alleged herein . Said defendants were involved in drafting, producing,

reviewing and/or disseminating the false and misleading statements alleged herein, were aware (or

recklessly disregarded) that the false and misleading statements were being issued regarding the

Company and approved or ratified these statements, in violation of the federal securities laws.

28. As officers and/or directors of a publicly-held company whose shares were,

and are, registered with the SEC pursuant to the Exchange Act, traded on the NASDAQ National

Market System, and governed by the provisions of the federal securities laws, the Individual

Defendants each had a duty to disseminate promptly accurate and truthful information with respect

to the Company's financial condition and performance, operations, business, business practices,

products, markets, management , earnings and present and future business prospects, and to correct

any previously- issued statements from any source that had become materially misleading or untrue,

so that the market price ofthe Company's publicly-traded securities would be based upon truthful and

accurate information. Under rules and regulations promulgated by the SEC under the Exchange Act,

specifically Item 303 of the Regulation S-K, the Individual Defendants also had a duty to report all

trends, demands or uncertainties that were reasonably likely to impact (i) Sunglass Hut's net sales,

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Case 1:97-cv-00191-KMM ocument 22 Entered on FLSD Docket 06/19/1997 of 91 q

revenues and/or income; and/or (ii) previously reported financial information such that it would not

be indicative offuture operating results. The Individual Defendants' representations during the Class

Period violated these specific requirements and obligations.

29. The Individual Defendants all participated in the drafting, preparation, and/or

approval of the various financial statements, and public shareholder and investor reports and other

communications complained ofherein and were aware of or recklessly disregarded the misstatements

contained therein and omissions therefrom, and were aware of their materially false and misleading

nature. Because of their Board membership and/or executive positions with Sunglass Hut, each of

the Individual Defendants had access to the adverse undisclosed information about Sunglass Hut's

business prospects and financial condition and performance as particularized herein and knew that

these adverse facts rendered the positive representations made by and about Sunglass Hut and its

business and the financial statements issued by the Company materially false and misleading.

30. In addition, the Individual Defendants, because of their positions of control

and authority, were able to and did control the content of the various financial reports, press releases,

presentations to securities analysts and other public statements pertaining to the Company. The

Individual Defendants were provided with copies of the financial statements and documents alleged

herein to be misleading prior to or shortly after their issuance and had the ability and opportunity to

prevent their issuance or cause them to be corrected. Accordingly, the Individual Defendants are

responsible for the accuracy ofthe financial statements and public reports and releases detailed herein

and are therefore primarily liable for the representations contained therein.

STATEMENTS IN ANALYSTS' REPORTS

31. Sunglass Hut and the Individual Defendants are also responsible and liable for

materially false and misleading representations made in the various analyst reports, described herein,

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throughout the Class Period because those statements were either 1) directly attributed to them; or

2) were adopted or ratified by them.

32. At all relevant times to this action, Sunglass Hut and/or the Individual

Defendants directly met or communicated with analysts and provided detailed and direct guidance

to them regarding the Company's business condition and future prospects. In addition, the Company

and/or the Individual Defendants expressed comfort with estimates contained in analysts reports and

reaffirmed the expectations of analysts, thus entangling themselves in the contents of those

recommendations, opinions, estimates and reports.

PLAINTIFFS' CLASS ACTION ALLEGATIONS

33. Plaintiffs bring this action as a class action pursuant to Federal Rules of Civil

Procedure 23(a) and 23(bX3) on behalf ofthemselves and on behalf of a class (the "Class") of persons

who purchased or otherwise acquired Sunglass Hut securities during the period from March 21, 1996

through and including October 10, 1996 (the "Class Period"), and were damaged thereby. Excluded

from the Class are the defendants herein ; members of the immediate family of each of the Individual

Defendants; the directors and officers of Sunglass Hut; any corporation, firm, partnership, trust or

other person affiliated with any of the foregoing; and the legal representatives, agents, heirs, succes-

sors-in-interest or assigns of any excluded person.

34. The members of the Class are so numerous that joinder of all members is

impracticable . As ofJune 14, 1996, the Company reported that it had 54,176, 516 shares of common

stock outstanding, and, throughout the Class Period , the common stock of Sunglass Hut was actively

traded on the NASDAQ National Market System, an efficient market. The average daily volume of

Sunglass Hut common stock during the Class Period was more than 900,000 shares. The precise

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(

number of Class members is unknown to plaintiffs at this time but Class members are believed to

number in the thousands.

35. Plaintiffs will fairly and adequately represent and protect the interests of the

members ofthe Class. Plaintiffs have retained competent counsel experienced in class action litigation

under the federal securities laws to further ensure such protection and intend to prosecute this action

vigorously.

36. Plaintiffs' claims are typical of the claims of the other members of the Class

because plaintiffs and all the Class members' damages arise from and were caused by the same series

of materially false and misleading representations and omissions made by or chargeable to defendants.

Plaintiffs do not have interests antagonistic to, or in conflict with, the members of the Class.

37. A class action is superior to other available methods for the fair and efficient

adjudication of this controversy. As the damages suffered by individual class members may be

relatively small, the expense and burden of individual litigation make it virtually impossible for most

class members individually to seek redress for the wrongful conduct alleged. Plaintiffs know of no

difficulty that will be encountered in the management of this litigation that would preclude its

maintenance as a class action.

38. Common questions of law and fact exist as to all members of the Class and

predominate over any questions affecting solely individual members of the Class. Among the

questions of law and fact common to the Class are:

(a) Whether the federal securities laws were violated by defendants' acts

as alleged herein;

(b) Whether defendants participated directly or indirectly in the concerted

action or common course of conduct complained of herein;

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t

(c) Whether the documents, filings, releases and statements disseminated

to the investing public omitted and/or misrepresented material facts about the business, performance,

and financial condition of Sunglass Hut;

(d) Whether defendants acted knowingly or recklessly in, directly or

indirectly, omitting to state and/or misrepresenting material facts;

(e) Whether the market price ofthe Company's securities during the Class

Period was artificially inflated due to the non-disclosures and/or misrepresentations complained of

herein; and

(f) The extent of injuries sustained by members of the Class and the

appropriate measure of damages.

39. The names and addresses of the record owners ofthe shares of Sunglass Hut's

common stock purchased during the Class Period are available from the Company and/or its transfer

agent. Notice can be provided to such record owners by a combination of published notice and first-

class mail using techniques and forms of notice similar to those customarily used in class actions

arising under the federal securities laws.

SUNGLASS HUT'S INSIDERS' MOTIVE AND OPPORTUNITY

40. Each of the Individual Defendants had the opportunity to commit and

participate in the fraud. The Individual Defendants were the top officers and directors of Sunglass

Hut and they controlled its press releases, corporate reports, SEC filings, the preparation of its

financial statements and its communications with analysts . Thus, they controlled the public

dissemination of, and could falsify, the information about Sunglass Hut's business, finances and future

prospects that reached the public and impacted the price of its stock.

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(

41. Each of the Individual Defendants also had the motive to commit and

participate in the fraud . Sunglass Hut's stock traded at a price earnings multiple reserved for premier

growth companies with track records of meeting the investment community's expectations for high,

sustained profit growth and expanding operations. This stock performance enabled Sunglass Hut's

corporate executive and directors to exercise stock options and sell stock at large profits, and enabled

Sunglass Hut to raise cash yja a $100 million convertible debt offering to institutional investors and

to grow by using its stock to make acquisitions of other companies and to otherwise aggressively

expand the number ofits stores. In addition, maintaining Sunglass Hut's image of strong profitable

growth, aggressive expansion and its high stock price were extremely important to Sunglass Hut's

top executives and directors who were operating, managing and overseeing a capital-hungry and

growth hungry company in an intensely competitive retail industry. Defendants also wanted to cover

up the problems with and deterioration in Sunglass Hut's business (and their own mistakes and acts

ofmismanagement) to make it appear that Sunglass Hut's business was succeeding and its growth and

expansion continuing , so that its stock price would trade at artificially inflated levels . Any negative

disclosures which were in any way contradictory to the Company's carefully cultivated image would

have caused the stock price to decline appreciably -- as ultimately did occur, after the true facts could

no longer be concealed.

42. The statutory safe harbor, which prevents liability for both oral and written

forward-looking statements, does not apply to those materially false or misleading statements

complained of herein that concerned present or historical facts (fig, t,,g., ¶¶ 71, 72, 80, 84, 87, 97,

104, 109, 111). To the extent that any written or oral statement complained of herein concerned

wholly future events and facts and can thus be deemed forward-looking, such statement is not

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Case 1:97-cv-00191-KMM Document 22 Entered on FLSD Docket 06/19/1997 of 9111

protected by the statutory harbor because either: (1) the statement was not identified as "forward-

looking" (fig, gig , ¶¶ 67, 82, 83, 02); or (2) the statement was not accompanied by meaningful

cautionary statements identifying the important factors described herein that caused actual results to

differ materially from the results in the forward-looking statement (fig, m g., ¶¶ 67, 82, 83, 92) or,

in the case of oral forward-looking statements, and statements made through analysts, the statements

were not accompanied by a statement that additional information concerning factors that could cause

actual results to differ materially from those in the forward-looking statement was contained in a

readily available written document or portion thereof.

43. In addition, the statutory safe harbor does not apply because: (1) in the case

of a statement made by a natural person, the statement was made with actual knowledge by that

person that the statement was false or misleading, or (2) in the case of a statement made by a business

entity, the statement was made with the approval of an executive officer of the Company and was

made or approved by such officer with actual knowledge by that officer that the statement was false

or misleading.

44. Plaintiffs will rely, in part, upon the presumption of reliance established by the

fraud-on-the-market doctrine in that, among other things:

(a) Sunglass Hut common stock met the requirements for listing and was

listed and actively traded on the NASDAQ National Market System, a highly efficient and automated

market;

(b) As a regulated issuer, the Company filed periodic public reports with

the SEC;

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(c) The trading volume ofthe Company's stock was substantial, reflecting

numerous trades each day;

(d) Sunglass Hut was followed by securities analysts employed by a

number of major brokerage firms who wrote reports which were distributed to the sales force and

customers of such firms and which were available to various automated data retrieval services;

(e) Defendants made public statements which failed to disclose material

facts during the Class Period;

(f) The prices of Sunglass Hut securities responded rapidly to news stories

and analyst reports about the Company and information disseminated by the Company and such

information was promptly assimilated into the prices of such securities;

(g) The omissions and misrepresentations were material; and

(h) The omissions and misrepresentations alleged would tend to induce a

reasonable investor to misjudge the value of the Company's securities.

45. Based upon the foregoing, plaintiffs and the other members of the Class are

entitled to a presumption of reliance upon the integrity of the market for the purpose of class

certification as well as for ultimate proof of their claims on the merits. Plaintiffs will also rely, in part,

upon the presumption of reliance established by material omission and upon the actual reliance of

plaintiffs and/or Class members.

DEFENDANTS' FRA D NT SCHEME AND COURSE OF BUSINESS

46. According to Sunglass Hut, it is "the world's largest specialty retailer of

sunglasses with over 1,850 locations worldwide." The Company is also a specialty retailer of

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prescription eyewear and operates optical and watch stores. The Company's stores are located

throughout the United States, Canada, Australia, Europe, Singapore, the Caribbean and Mexico.

47. In recent years, in accordance with the Company's purported strategy to

diversify its businesses, the Company has vastly expanded its product offerings and geographic

locations . As a result of such expansion and diversification, the quality of the Company's financial

results purportedly was less susceptible to such factors as the weather and the economic conditions

in any particular part ofthe United States or the world. Thus, for example, the Company's expansion

into Australian markets purportedly enhanced its ability to produce consistent financial results, since

summer is traditionally the strongest season for the sale of sunglasses and winter in the United States

corresponds to summer in Australia. In addition, in the recent past , the Company, which traditionally

has opened independent franchise outlets in malls, has pursued a strategy of opening "Sunspots",

which are Sunglass Hut boutiques located within larger department stores . The Company also has

opened numerous prescription eyewear stores under the "Eye-X" name and its purportedly fast-

growing "Watch Station" stores. These developments purportedly insulated the Company from the

wide variances in results associated with companies that are highly dependent on single markets or

limited product offerings.

48. In conjunction with the Company' s apparently rapid expansion, the Company

also consolidated its warehouse and distribution facilities, as set forth in detail below. Defendants

portrayed this consolidation and its related inventory and distribution control systems in highly

positive terms, and represented that its new, centralized facilities would immediately enhance the

Company's expansion efforts and result in further sales growth.

49. Thus, at all relevant times, defendants consistently portrayed the Company as

a well-diversified specialty retailer with a variety of product offerings, rapidly expanding worldwide

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sales, and tremendous growth potential facilitated by technologically advanced inventory management

and distribution facilities as well as highly efficient accounting controls for the Company's inventory

and distribution functions.

50. In truth, however, and unbeknownst to the investing public, the Company was

suffering from a variety of serious systemic problems and setbacks which materially undermined

defendants' glowing representations about the Company's then-existing business, strategies and

facilities, which problems can be summarized as follows:

(a) The Company misleadingly stated and implied at all relevant times that

the consolidation of its distribution operations into one facility in Atlanta -- purportedly to

accommodate rapid growth and expansion, enhance efficiency, coordinate shipping and control

inventory -- had already occurred and that the facility was opened and was operating at or near full

capacity, when in fact the facility had only opened for developmental purposes and would not be fully

operational until August 1996. Accordingly, defendants materially overstated the impact the new

facility was having and could in the near future have on the Company's physical inventory and

distribution facilities, its control over the Company's inventory and distribution functions and the

Company's overall financial performance.

(b) Throughout the Class Period, the new distribution facility in Atlanta

was grossly understaffed, the existing staff was inadequately trained, and the facility was poorly

equipped to perform any of its intended functions. The Company actually maintained fewer service

personnel its single consolidated facility than it had in the past devoted to such functions, undermining

the ability of the Company to process orders as quickly as it had been able to in the past. The

Company also maintained far fewer incoming telephone lines (apparently only two lines) for the

receipt ofincoming orders, causing significant delays in the placement of orders, and, on the catalog

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side ofthe Company's business, causing tremendous delays in processing consumer orders, ultimately

leading to numerous caller hang-ups on telephone orders, as well as fewer telephone call orders. An

overextended, inadequately trained and unreasonably small staff at the new distribution center in

Atlanta resulted in delivery delays and an exceptional number of improperly and/or erroneously

processed orders (an estimated 20% of orders were affected by these errors).

(c) Because the Company's highly touted, state-of-the-art automated

distribution system was materially delayed, its distribution system remained manual for much of the

Class Period, causing the distribution system to be significantly less efficient than represented to the

investing public. As the Company was purportedly proceeding with the Atlanta consolidation, in late

June of 1996, a severe breakdown in the Company's order-filling and distribution computer software

meant Sunglass Hut was manually filling orders for 500 of its busiest stores . Additionally, the

Company's purportedly highly automated conveyor belt picking systems were not operable until at

least June 1996, if not considerably later, resulting in considerable delays.

(d) Serious processing problems were causing significant shipping delays

at the new distribution facility, causing lost packages and erratic shipments to stores and to the

market. For example, the entire warehouse department was dependent on a single receiving clerk,

making impossible the separation of store- ordered and catalog-ordered inventory; lost and returned

packages were dumped back into the main receiving area with no accounting; the order center and

customer service areas were at opposite ends of the facility, requiring the hand-carrying of individual

orders back and forth. These problems and others continued to materially impair the reliability of the

Company's purported inventories and the ability of the Company to control and compare current

inventories to comparable prior year periods, and thus to provide any meaningful accounting of orders

and the flow of inventory. Inventory records could not be rectified with purchase orders.

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(e) The Company's inventory levels were growing at an alarming rate and

were simply not being contained or controlled . Rather than being able to "work it off' or return its

bloated and growing inventory to the Company's suppliers, as represented by defendants to the

investing public, the Company was not containing the excessive growth in its inventories. Inventory

levels were accumulating so fast that the Company's ending inventory from the second quarter of

1996 to the third quarter increased from approximately $150 million (already over $75 million above

the prior year quarter) to approximately $180 million, after a previous quarter-to-quarter increase

from approximately $129 million to approximately $150 million. For example, the Company was

experiencing a rapid build-up of Oakley sunglasses which the Company could not and could not

reasonably expect to work off amid declining demand for such products, nor could the Company

reasonably expect to dispose of its bloated inventory by returning unsold products to suppliers with

whom it enjoyed no such rights of return. Moreover, the Company was experiencing serious

problems with employee theft (called "inventory shrinkage" in the industry) at many of its newly

acquired retail stores which were part of the Company's aggressive store expansion, as well as in the

catalog facility at the new distribution center. Packages were being sent out to fill catalog orders, but

orders would either never arrive or would arrive with partial or empty containers. The fact that these

problems were material and were hurting Sunglass Hut's financial results did not escape defendants.

An investigation was performed by Federal Express, at Sunglass Hut's request, during the Class

Period, which revealed that the Company did not even have a basic parcel tracking system or scanner

to control the flow of its catalog inventory. The Company's existing inventory control systems could

not adequately manage these and other inventory problems.

(f) Although the Company sought to capture significant sales and unload

its huge overstock in the 1996 "back-to-school market," which is traditionally a strong selling period

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Case 1 :97-cv-00191 -KMM Document 22 Entered on FLSD Docket 06/19/1997 of 91 q

C

running from approximately the middle of August to the middle of September, the Company was

unable to capitalize on this important selling season as a result of the undisclosed problems relating

to its catalog marketing efforts. Such difficulties caused the Company to delay the commencement

of a massive and expensive catalog campaign purportedly designed to capture the vital back-to-school

market. As a result ofthis delay, the Company's catalog sales substantially missed the back-to-school

market.

(g) The Company's internal distribution and inventory problems throughout

the Class Period were either reflecting , causing and/or contributing to a downward sales and growth

trend for Sunglass Hut, which would require the Company to publicly scale back its planned

expansion of 350 new stores in 1996, despite its representations to the investing public of continued

aggressive growth and the rapid expansion of the number of Sunglass Hut stores. The Company

knew of these trends long before its disclosure in August of 1996 that it would scale back its 1996

expansion to 300 stores, and to 250-275 stores in October of 1996, despite its representations to the

investing public of continued aggressive growth and rapid expansion plans.

(h) The declining trend in sales, swelling inventories, diminished growth

prospects and inadequate and inefficient inventory and distribution controls were so severe that the

Company was unilaterally canceling purchase orders placed with "key" vendors such as Oakley, even

though the Company did not enjoy unlimited rights of return with its vendors. This problem kept

increasing until by July and August of 1996, the Company was canceling or had canceled most or all

of its existing purchase orders with its vendors, including major vendors such as Oakley. Thus,

although defendants acknowledged the Company's increased inventory position in August 1996, they

failed to disclose that the increased inventory position had ripened into a crisis by no later than July,

requiring the Company to cancel all or virtual all of its outstanding orders from vendors.

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(i) In its desperate attempt to maintain sales figures despite the reality of

the then-existing decline in sales and growth trends, the Company was also allowing excessive

amounts of store credit for customer returns, without any meaningful inquiry into whether the

returned products were even purchased at a Sunglass Hut store, or the price paid for the returned

product. The Company was also accepting the return of non-warrantied products, primarily

involving scratched lenses . This additional inventory control problem added to increasing losses on

purported revenue, and further undermined the Company's ability to provide a meaningful accounting

of its sales and inventory.

51. The Individual Defendants had actual knowledge ofthe existence of the above-

described problems, or recklessly disregarded the existence of those problems, as a result of their

positions of control and authority as officers and directors of the Company, by reason of their

management positions and involvement in the day-to-day operations of the Company, including its

inventory and distribution systems and sales growth and expansion plans, and because the problems

outlined above were so severe. The Company's senior management received regular updating

concerning the progress (or lack of progress) in consolidating the Company's warehouses and

automating and enhancing the inventory and distribution process and facilities. The Company's

decision to cancel all outstanding purchase orders by July 1996 emanated from the top management

ofthe Company. And the lack of a coherent policy concerning product returns -- which defendants

understood would directly affect sales -- likewise reflected a systemwide policy or practice, developed

and encouraged by defendants and under their control.

52. Prior to and during the Class Period, rather than disclose the above problems,

Sunglass Hut and the Individual Defendants, in published written statements addressed to the

investing public and/or filed with the SEC, portrayed the then-existing financial and business

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Case 1 :97-cv-00191 -KMM Qocument 22 Entered on FLSD Docket 06/19/1997 of 91 F1

conditions with respect to Sunglass Hut and its prospects as strong and growing rapidly when, in fact,

the Company was suffering from a declining sales trend, a lack of exciting new products, serious

problems in the Company's inventory and distribution control systems and rapidly increasing

inventories . As a result of these problems , after the close of the Class Period, Sunglass Hut would

be forced to take a large write-down for bloated inventories and close approximately 100 stores. This

deception allowed certain executives and insiders of Sunglass Hut to sell substantially all of their

Sunglass Hut holdings for artificially inflated prices and enabled Sunglass Hut to unload $100 million

of 5 1/4% convertible debentures to institutional investors (which, with full disclosure, it could not

do). During March and April, 1996 alone, Sunglass Hut insiders sold approximately $9,000,000

worth of Sunglass Hut stock. Defendant Chadsey sold 100,000 shares for proceeds of over $3.2

million. The stock price of Sunglass Hut dropped from over $30 per share to approximately $9 per

share at the close ofthe Class Period. Sunglass Hut's stock currently trades at approximately $7 per

share, and defendant Chadsey has resigned.

Pre-Class Period Events

53. During 1995 , Sunglass Hut's stock price rose rapidly as investors reacted

enthusiastically to the Company's retailing strategy of being a "category-killer" in the high-margin

sunglass business (j, a dominant market player). However, towards the end of 1995 and continuing

until the beginning of 1996, the stock of Sunglass Hut drifted downward as investors sold out of

retailing stocks in general and specialty retailers, like Sunglass Hut, in particular. Insiders at Sunglass

Hut, who had substantial portions of their net worth tied up in Sunglass Hut stock options, became

worried at the drop in the Company's stock price and embarked on a course of conduct designed to

artificially inflate the price of Sunglass Hut's stock so that they could sell millions of dollars of stock

and so that the Company could sell $100 million in convertible securities at a conversion price and

-22-


C

at a rate of interest that would not have been possible if the investing public had known the full truth

about Sunglass Hut's then-existing financial condition and prospects.

54. Through information provided to analysts, defendants assured the investing

public that the Company's extraordinary expansion would continue in 1996. An October 30, 1995

Gerard Klauer Mattison & Co. report, by analyst T.A. Filandro, discussed these issues in the context

of its continuing "buy" recommendation. As sales in the Sunglass industry more than doubled

between 1986 and 1994, Sunglass Hut (or "RAYS" on NASDAQ) was noted to have found the

"primary market niche," enjoying a 14% compound annual growth rate during that time period.

Issues driving industry growth included the gravitation of consumers to specialty stores and

consumers' heightened awareness of the dangers of ultra-violet (UV) rays. The report noted RAYS

as the "people's choice" for premium sunglasses purportedly because of broad product selection,

superior buying power/best prices and knowledgeable associates. The report noted further RAYS'

planned expansion of product offerings in their "Sunscriptions" plan in the corrective lens market.

Considerable optimism was noted in the Company's international expansion as "management sees the

opportunity to open 850 stores throughout Europe, Mexico, Latin America and the Pacific rim ...

during 1995, RAYS plans to open roughly 45 stores oversees . . . and another 100 overseas next

year."

55. Similarly, an October 24, 1995 William Blair & Co. report, by analyst Mary

Corrigan, gave Sunglass Hut a "solid long-term Buy" recommendation and noted "strong current

momentum in the core business and the potential earnings upside as we sense the company is closer

to committing to rolling out its new business initiatives." This included both Sunscriptions and the

new EyeX stores.

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Case 1:97-cv-00191-KM M

56.

gocument 22 Entered on FLSD Docket 06/19/1997 of 91 q

A December 5, 1995 William Blair & Co. report discussed a presentation by

defendants Chadsey, Petersen and Grund, which "outline[d] the Company's opportunities to continue

its exceptional growth." The report further noted that international growth opportunities appeared

"open-ended" due to small store size, flexible concept, a universal product and "a strong

infrastructure and state-of-the-art systems." The report further noted 350 more stores anticipated

in 1996 with comparable store expectations of 8%. Referring to Grund's comments, the report noted

25%-30% possible annual growth for the next 3-5 years:

We have a high degree of confidence in the company's ability toexecute. With a solid infrastructure and state-of-the-art system ,which Ed Grund discussed during the conference presentation , therollout of the stores [500 projected Sunscriptions stores] appears quitemechanical . [Emphasis added.]

Affecting the stock in the near term at the time, the report noted disappointing same store gains of

4.1% for November, for which "[m]anagement has ruled out any internal factors as reasons for the

weakness and cited weather statistics that appears to confirm that this was a weather issue."

57. In a January 4, 1996 press release , the Company reported sales for the five

weeks ended December 30, 1995, which included an increase of 41.7% above the same period in the

prior year, with comparable store sales up 10.3%. Defendant Chadsey was quoted as stating:

Despite a very difficult retail climate and tough weather conditions,especially the week prior to Christmas, our comparable store salesperformance continued to outpace that of traditional mall-basedretailers, [and w]e attribute this strong performance to discerningshoppers looking for quality gifts at a good everyday value. We lookforward to 1996 and the strengthening of our core Sunglass business,as well as the implementation of exciting new business strategies.

58. A January 10, 1996 "outperform" rating in a Morgan Stanley report by analyst

Sharon E. Pearson "look[ed] for sustained 30% growth rate" in 1996 and noted that "news flow and

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the trend of earnings for RAYS are likely to remain favorable in 1996." This was due, according to

the report, to unit expansion plans and benefits to comparable store sales.

59. On January 19, 1996, Gerard Klauer Mattison & Co., a brokerage house that

has performed banking services for Sunglass Hut, issued a research report on Sunglass Hut by analyst

T.A. Filandro and reiterated its "BUY" rating on the stock . Regarding Sunglass Hut's opportunities

to improve comparable store sales in 1996 , the research report stated that defendant Chadsev

"remarked that the [C]ompany's base comp[arable] expectatio ns for the year are roughly 7%.

inclusive of a 4% increase in the number of units sold and a 3% increase in price [Sunglass Hut]

possesses several opportunities to exceed its base comp expectations for 1996. " [Emphasis added.]

60. The same Gerard Klauer report also included the observations of defendant

Peterson, which placed the expansion plans in context:

Mr. Peterson, Sunglass Hut's CFO, began his portion of thepresentation by reviewing RAYS' current and future expansion plans. . . During 1996, RAYS anticipates opening another 350 stores ,inclusive of the 220 to 240 domestically, 50 to 70 in Europe and 30to 40 in Australia/New Zealand. The Company also expects topossibly announce a joint venture agreement to operate its first storesin the Asian/Pacific region ... By the year 2000, RAYS expects tooperate a minimum of 3,000 stores worldwide. Management believesthey have the opportunity to operate in excess of 4,000 stores withinthe next 6 years.... with consensus expectations [of comparablestore sales increases] in the 7.5% to 8.5% of range for 1996. Mr.Peterson believes RAYS has a chance of beating the predictions byway ofthe previously mention[ed] opportunities in 1996 . [Emphasisadded.]

61. On January 26, 1996, NBC Professional and Financial Network reported an

interview that defendant Chadsey had with Peter Schaknow at the Smith Barney Growth Stock

Conference. At this conference, Chadsey was asked how he "live[d] up to the lofty and continually

growing expectations of Wall Street?" In response, Chadsey stated:

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Case 1 :97-cv-00191 -KMM Document 22 Entered on FLSD Docket 06/19/1997 of 91 q

f

I think . . . The way we answer that is we let the numbers speak forthemselves . At the end of the day, we recognize that we worship the god ofthe high PE multiple . At the end of the day, we are expected to produceabove that , and I think when you see the results at the end of this year [FY1995, ended on February 3, 1996] , our total sales are up 42 percent on top of41 percent last year. Our comp[arable] store sales are going to be up 10percent on top of last year's 79 percent . You just heard me say our storecount was up 94 percent.

I think that's a performance way above the norm and that's why, you know,our multiple's been above the norm, and that's consistent . And I think ifpeople who know our anal s welL know that that same kind ofperformanceis projected over the next several years . [Emphasis added.]

62. During the same interview, defendant Chadsey, in response to a question about

Sunglass Hut's sensitivity to economic swings as compared to other retailers, took the opportunity

in his response to downplay the effects of poor weather on the Company's financial performance. He

stated, inter , as follows:

But, because we're now in global markets we're not as affected by economicswings in a given market, or weather patterns, for that matter. [Emphasisadded.]

63. On February 7, 1996, the Company also announced the consolidation of its

catalog and distribution operations into a new Atlanta facility, effective April 15, 1996. Defendant

Chadsey stated:

The new 60,000 square foot facility in Atlanta will enable us toenhance the efficiency of our distribution functions as well asaccommodate the rapid growth of our company . The Atlanta areaoffers us excellent logistical opportunities to coordinate the shippingofour products to our north American locations. [Emphasis added.]

The same quotation was reprinted in a February 8, 1996 article in The Miami Herald .

64. On February 27, 1996, Sunglass Hut reported that it had signed a letter of

intent with Royal Sporting House Pte Ltd. of Singapore to enter into a joint venture for the purpose

-26-


of opening Sunglass Hut stores throughout Southeast Asia. In the same press release, defendant

Chadsey stated:

We are extremely excited about this opportunity to form a joint venture entitywith Royal Sporting House because the Southeast Asian market hastremendous growth potential. The extensive retail expertise and localinfrastructure ofRoyal Sporting House will complement Sunglass Hut's ownmarketing concepts and facilitate our entry into this new market. [Emphasisadded.]

65. On March 7, 1996, Sunglass Hut reported that sales for the four-week period

ended March 2, 1996 were $32.9 million, an increase of 42.6% above the $23 million reported for

the same period the prior year. Comparable store sales, a key indicator of growth for a company like

Sunglass Hut that is opening hundreds of new stores each year, rose 11.1% during the same four-

week period. Commenting on these results, defendant Chadsey stated: "This strong comparable sales

year for Sunglass Hut " (Emphasis added.)

Class Period Events

66. The positive representations described above were alive and reflected in the

market price of Sunglass Hut securities at the beginning of the Class Period herein. The Class Period

commences on March 21, 1996, the date on which Sunglass Hut announced its financial results for

fiscal year 1995, ended February 3, 1996. Among other things, the Company reported that for the

fiscal year ended February 3, 1996, earnings exclusive of acquisition expenses were $0.52 per share,

a reported increase of 53% compared to reported earnings of $0.34 per share for the same period the

prior year. Earnings inclusive of acquisition expenses were $0.38 per share, or $20.9 million.

Reported sales for the 53 weeks ended February 3, 1996 increased 44.2% to $418. 2 million, as

compared to reported sales of $290.0 million for the 52-week period ended January 28, 1995.

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C

Comparable store sales for the 52-week period ended January 28, 1996 increased 10.3% from the 52-

week period the prior year.

67. Commenting on these results, and in an effort to differentiate the Company

from other specialty retailers, defendant Chadsey made the following statements concerning the

Company's current financial position:

We are extremely pleased to report that fiscal 1995 earnings increased 53%,especially in a year when most retailers were experiencing a difficult retailclimate. Sunglass Hut is undoubtedly the store of choice for savvy sunglassconsumers throughout the world. And continuing along the lines of goodnews, I am pleased to announce the launch of Watch Station, which webelieve has substantial growth potential. Further, when we combine ourWatch Station strategy with the expansion opportunities of our new EyeXpremium optical stores, the long-term growth prospects for Sunglass Hutincrease dramatically . [Emphasis added.]

(Defendant Chadsey' s remarks were also printed in an article in the Miami Herald on March 22,

1996.)

68. Based on the Company's closing stock price on March 21, 1996 ($30.50 per

share), and using the foregoing quarterly earnings data on an annualized basis, Sunglass Hut's price

to earnings ratio (P/E) was approximately 58.65. This P/E multiple reflected the market's premium

valuation for this specialty retailer's stock. The market ascribed this high P/E ratio to Sunglass Hut

stock based on defendants' then-present statements concerning the Company's high growth through

1996 and 1997.

69. Reacting to the March 21, 1996 earnings announcement, a March 26, 1996

Alex Brown & Sons report by analyst Marcia L. Aaron expressly based on informotion and guidance

provided by the Company, gave Sunglass Hut a " strong buy" rating , stating : "RAYS strongly noted

on its conference call that the lower level of leverage in F3Q is not indicative of its ability to leverage

operating expenses in the future," and that "Management believes that it has the potential to leverage

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operating margin through the growth of its core sunglass operations and that new operations - EyeX

and Watch Station - represent additional leveraging opportunities." The report further noted that

"management remains comfortable with inventory levels," and that "[i]nventories are expected to

increase at a slower rate than sales in 1996." These remarks bearing defendant's imprimatur included

no cautionary statements and no identification of existing problems which undermined them.

70. Following up on the March 21, 1996 earnings announcement, and based on

information provided by the Company, a March 29, 1996 Alex. Brown & Sons report by analyst

Aaron reiterated its "strong buy" recommendation as "[n]ew concepts [] provide significant growth

opportunities." These included the Watch Station strategy, the EyeX stores (50 open at the time),

and the accelerated "rollout" ofthe Sunscriptions program, with "200 stores expected ... by the end

of May." Additionally, this analyst report once again noted potential inventory concerns, and

defendants' false assurances that such concerns were unwarranted:

Interest expense above our expectation due to higher inventory levels --management remains comfortable with inventory, levels . . . . Inventoryincreased approximately 80% in F4Q. Management indicated that a coupleof factors attributed to the increase in inventory: (1) 11.5% increase ininventory levels at the core stores, which is in line with the increase in same-store sales; (2) $5 million in extra inventory due to the operation of twowarehouses facilities; (3) very low inventory levels ... at the Sunsationsstores last year, which were increased to normal levels this year. ... and (4)the acquisition of 85 Australian stores. Inventories are expected to increaseat a slower rate than sales in 1996. [Emphasis added.]

Importantly, the same analyst report noted that the "Company believes that it can operate roughly

2,100 Sunglass stores in North America."

71. Shortly thereafter, the April 1996 issue of Catalog A¢e, a trade publication in

the specialty retail industry, included an article about Sunglass Hut's consolidation of its distribution

operations. The article emphasized the purported cost savings and efficiencies of the consolidation,

and quoted Sara Wilkins, a Company spokesperson, as highlighting that:

-29-


The new center enhances the efficiency of our organization . Having all ouroperations under one roof makes trackingcatalog orders and shipments thatmuch easier . [Emphasis added.]

72. On or about April 11, 1996, the Company reported a 7.4% increase in same

store sales in March 1996 over March 1995, and an increase in overall sales for the five week period

ended April 6, 1996 of 34.6% over the comparable period in the prior year. Commenting on these

sales results , defendant Chadsey made the following statement concerning the Company's current

sales trends and conditions:

Despite less than favorable weather conditions and slower than normal malltraffic during the first three weeks of the month, we experienced a rapidacceleration of sales during the Easter week which generated positivemomentum going into the April time eyriod . [Emphasis added.]

73. The foregoing statements between March 21, 1996 and April 11, 1996, which

concerned continued "[l]ong-term growth prospects ", efficiencies from the Company's new

distribution center, the Company's "comfort" with its existing inventory controls and strong sales

momentum moving from March to April, were materially false and misleading at the time they were

made because:

(a) The Company misleadingly implied, in stating that the "new center

enhances the efficiency of our organization" that the consolidation of its distribution operations into

one facility in Atlanta -- purportedly to accommodate rapid growth and expansion, enhance efficiency,

coordinate shipping and control inventory -- had already occurred and that the facility was opened

and was operating at or near full capacity, when in fact the facility had only opened for developmental

purposes and would not be fully operational until August 1996. Accordingly, defendants materially

overstated the impact the new facility was having and could in the near future have on the Company's

physical inventory and distribution facilities, its control over the Company's inventory and distribution

-30-

Case 1:97-cv-00191-KMM ocument 22 Entered on FLSD Docket 06/19/1997 of 9111

functions and the Company's "positive momentum" and continued aggressive growth and sales

strength.

(b) The Company was experiencing severe problems in its existing

inventory and distribution facilities as well as its inventory and distribution control systems, rendering

them alarmingly inefficient. For example, because the Company's automated distribution system was

materially delayed (along with the full operation of the new facility), its distribution system remained

manual for much of the Class Period causing the distribution system to be significantly less efficient

than represented or implied to the investing public. The Company's purportedly highly automated

conveyor belt picking systems were not operable until at least June 1996, if not considerably later,

resulting in considerable delays and further inefficiencies. Serious processing problems were causing

significant shipping delays of purchase orders placed through the Company's catalog. These delays

were leading to the escalating cancellation of orders by catalog customers . Thus, defendants could

not legitimately and truthfully express "comfort" with the Company's inventory position.

(c) The Company was experiencing serious problems with employee theft

(called "inventory shrinkage " in the industry) at many of its newly acquired retail stores , such as the

Sunsations stores , which were part of the Company's aggressive store expansion.

(d) The Company's internal distribution and inventory control problems

were either causing or contributing to a downward sales and growth trend for Sunglass Hut, which

would require the Company to publicly scale back its planned expansion of 350 new stores in 1996,

despite its representations to the investing public of continued aggressive growth, the rapid expansion

of the number of Sunglass Hut stores and purported positive sales momentum.

(e) In an attempt to maintain or bolster sales figures despite the reality of

declining sales and growth trends, the Company was allowing excessive amounts of store credit for

-31-


C

customer returns, often without any meaningful inquiry into whether the returned products were even

purchased at a Sunglass Hut store, or the price paid for the returned product . The Company was also

accepting the return of non-warrantied products, primarily involving scratched lenses. This additional

inventory control problem added to increasing losses on purported revenue, and further undermined

the Company's ability to provide a meaningful, accurate accounting of its sales and true inventory

position and valuation.

74. The Individual Defendants either had actual knowledge of the existence of the

above-described problems, or recklessly disregarded the existence of those problems, as a result of

their positions of control and authority as officers and directors of the Company, by reason of their



outlined above were ongoing and pronounced . Additionally, the foregoing remarks were collectively

designed to and did convey the impression that overall sales trends for the Company were strong,

when in fact they were not. Defendant Chadsey's statements regarding currently accelerating sales

and positive momentum were further materially false and misleading when they were made because

they failed to disclose the adverse facts described above, and because the Company did not have

"positive momentum" and accelerating sales as represented at that time. Indeed, the Company could

not have such momentum given the material difficulties the Company was experiencing with its

dramatically rising inventories and developmentally-delayed new distribution facility.

75. As detailed more fully below, one of the principal reasons Sunglass Hut was

touting its prospects during March and April was to maintain the artificially high stock price to allow

six insiders to sell almost 300,000 shares at prices between $28 and $32.70 per share. Specifically,

the Company's Senior Vice President and Chief Financial Officer, defendant Petersen, exercised

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options for, and sold, 34,500 shares. This sale constituted all of Petersen's exercisable options. The

Company's Vice President of Finance and International Development, defendant Pita, exercised

options for, and sold, 22,500 shares. This sale left Pita with only 5,000 exercisable options. The

Company's Senior Vice President, defendant Grund, exercised options for, and sold, 36,250 shares,

leaving Grund with only 16,000 exercisable options . Vice President Michael Mooar ("Mooar")

exercised for, and sold, 57,000 shares. This sale cleared out Mooar's entire position of exercisable

options and left him with only 4,000 shares . In addition , Vice President ofHuman Resources, Lesley

Berkovitz ("Berkovitz") sold 10,000 shares of Sunglass Hut stock.

76. According to the June 10, 1996 Fort Lauderdale Sun-Sentinel , "the four

[Petersen, Pita, Grund and Mooar] hold little to no [Sunglass Hut] common shares , choosing to keep

most of their holdings in the form of options." The exercise of stock options, followed by the

immediate sales ofthe acquired shares reflected senior management's desire to make quick profits on

the inflated price of the Company's common stock, rather than make a long-term investment in the

Company's future growth.

77. On April 12, 1996, a Smith Barney report by analyst M.M. McGrath, which

included a "buy" recommendation, noted that the Company was on track to have at least 250

Sunscriptions prescription sunglass departments" by the end ofMay and that "sales are now running

ahead of plan in the stores where prescriptions are available."

78. On April 16, 1996, the Company announced a new department store retail

venture in Canada and Central Europe, with defendant Chadsey again touting that "[t]he potential for

expansion of this strategy on a global basis could total 1,000 stores." (This quote was reprinted in

an article in The Wall Street Journal on April 17, 1996.)

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Case 1 : 97-cv-00191-KMM Document 22 Entered on FLSD Docket 06/19/1997 of 91 q

79. On April 24, 1996, Sunglass Hut's management stated at a Montgomery

Securities Growth Stock Conference that it expected earnings to grow to $0.75 per share in fiscal

1996 (ending February 3, 1997), mainly through new store openings. According to defendant

Chadsey, the growth in sales and earnings will come from "the aggressive expansion program we have

underway." At the end of 1995, Sunglass Hut had approximately 1800 stores. Sunglass Hut stated

that it expected to open 350 new stores in 1996, 200 of them in the United States and the rest in

Southeast Asia, Australia and Europe.

80. In an April 24, 1996 interview reported over the Bloomberg Business News

network, defendant Chadsey reiterated the Company's purported growth trajectory. The dialog

between defendant Chadsey and Vidya Root of Bloomberg Business News included:

Root: You were here at the Montgomery Securities conference and you presentedthe outlook for your company going forward into fiscal 96 which ends, Iguess January 31 st. One ofthe analysts here said that you can expect growthof about 75% for 1996 are you comfortable with that kind of growth rate?

Chadsey: Yes, we are comfortable with the growth rate. Basically with the newbusiness strategies that we've developed plus the continued increases weexpect on our comparable store base, we're very comfortable with theanalyst's estimate on the street today.

Root: Where is the growth gonna come from? You have about 1800 storesright now. Where do you suppose the growth's gonna come from?

Chadsey: Well, on the comparable store side, which is our existing store base, wecontinue to see growth with some ofthe emphasis we've had on the sport andfashion categories in sunglasses. We have our, we've increased our direct mailpieces which is a major driver of comparable store business, be up 55% thisyear. We expect that to continue to drive business. One of the acquisitionswe made last year which is 350 stores of Sunsations, we have enhanced thosestores through new merchandise assortments, management changes,refixturization, we would expect those stores to increase. And we've addedthe Sunscriptions program which will be in probably 300 stores by the end ofthe year. All those factors will continue to drive comp business. On the newstore side were gonna add 350 locations this year. Roughly 200 of them willbe in still domestic markets, 150 of them in international markets betweenEurope, Australia and Southeast Asia with maybe an entre into Latin America.

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Case 1:97-cv-00191-KMM ocument 22 Entered on FLSD Docket 06/19/1997 of 91 q

And we've also, in the genesis of opening two new business strategies, one ofthem which is IX, which is an optical store kind of positioned like the BananaRepublic of optical stores and the new watch strategy, First Door, which willopen in May of this year.

Root: For the first two months ofthis fiscal year, you're comparable store sales havebeen about 8% or 8.9%, that's lower than the 10% you had in fiscal 95. Doyou suppose that's gonna change in the months to come and were thoseparticularly slow months?

Chadsey: Most ofthe analysts' estimates for 1996 have a 7-8% comp built into the base.Clearly, our expectations are to exceed those numbers, however, as acompany does mature, your comps, even last year we had a budget of 7-8%and we hit 10% because of some favorable market conditions, so we wouldnot be at all unhappy nor, I think, would the street be unhappy with a 7-8%comp for 1996 on top of the additional growth that we have planned.

Root: Does the retail sector particularly in the U. S., didn't have a very good year in1995, but you had an EPS growth of 53%. How do you account for that andwhat do you see your outlook for 96 and say, 97 on the EPS end?

Chadsey: Well, clearly, we recognize we traded at a high PE multiple and if you'regonna trade at a high PE multiple, at the end of the day, you have to deliverperformance over and above. We continue to be able to see store growthcontinued in the 30 plus percent range and EPS growth to exceed that numbersignificantly over the next few years again, because of the new businessstrategy, our continued growth in international markets and our building ofour, our comp store base business.

Root: The $1 a share that Montgomery is looking for in 97, is that something you'recomfortable with?

Chadsey: Yes. We're very comfortable with those numbers and I think, again, if someofthese new business strategies really start to take off, we also see potentialfor obviously exceeding that in the future.

81. Just after the price of Sunglass Hut's stock had risen in response to his bullish

statements, defendant Chadsey sold 100,000 shares from April 25, 1996 to April 30, 1996 at

artificially inflated prices ranging from $32 to $32.70 per share , netting him over $3,200,000.

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Case 1:97-cv-00191-KM M

82

Dpcument 22 Entered on FLSD Docket 06/19/1997 of 91 q

On or about May 3, 1996, the Company filed a copy of its Annual Report for

fiscal year 1995 with the SEC. At or about that same time, the Company disseminated its Annual

Report to shareholders and other members of the investment community. The 1995 Annual Report

included a letter to shareholders over the signatures of defendant Chadsey as well as James N.

Hauslein, the Chairman ofthe Company's Board ofDirectors . This letter, which spoke glowingly of

the Company's past performance and present financial condition stated , in pertinent part, that:

Our financial performance in fiscal 1995 was impressive, settingrecords for both sales and earnings ...

Our direct mail catalog program also registered tremendous growth... which we estimate contributed roughly 2-3% in comparable storesales growth for the year.

We anticipate that in 1996 we will mail 14 million catalogs furtherdriving comparable store sales . [Emphasis added.]

83. In addition , the text of the 1995 Annual Report characterized the Company

as currently experiencing dynamic growth in a continuing setting of expanding worldwide acceptance

of its products. Thus, the Annual Report declared at page 6:

The domestic sunglass market continues to trend upward ...

With more than 1,700 locations worldwide, Sunglass Hut is clearly thecategory killer. Sunglass Hut expects to remain the dominant force inthe premium sunglass market as heightened health concerns, morespecialized uses for sunglasses, evolving fashion trends, and constantproduct replacement increase the demand for our product , [Emphasisadded.]

84. Moreover, the Company's 1995 Annual Report represented that its purportedly

state ofthe art distribution system provided a further basis for continuing its present growth, stating

at page 10:

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int-of-sale computer system enables us topinpoint sales trends both by location and by merchandise category.This allows us to keep ahead of the competition by identifying what'shot, ensuring that stores have adequate stock on hand and workingwith vendors to develop new products . [Emphasis added.]

85. The Company also hyped its "Key Vendor Partnerships" in the 1995 Annual

Report (at page 8), suggesting that these existing relationships gave the Company specialized

expertise and improved distribution, declaring:

Our dominant position in the premium sunglass industry affordsunique opportunities with our key vendors to offer the best prices,launch new products, arrange for exclusive product lines, and ensuredistribution efficiencies . [Emphasis added.]

86. On May 5, 1996, Sunglass Hut filed with the SEC its Annual Report on Form

10-K for the fiscal year ending February 3, 1996 and again reported the same financial information

the Company had set forth in its March 21, 1996 announcement. Again boasting of its current ability

to maintain its aggressive expansive plans, the following statement was included in the Form 10-K,

at page 2:

The Company believes that the flexibility of its Sunglass Hut storeformat and its attractive unit level economics provided with access toa wide range of leasing opportunities which will facilitate its continuedexpansion. The Company is pursuing opportunities to continue toexpand Sunglass Hut locations both domestically and internationally.

up to 150 international locations in fiscal 1996 . [Emphasis added.]

87. On May 9, 1996, Sunglass Hut announced that sales for the four weeks ended

May 4, 1996 were $40.4 million, an increase of 31.7% above the $30.6 million reported for the same

period last year and that comparable store sales for the four-week period increased 5%. Sales in the

first quarter increased 35.6% to $122.8 million, compared to $90.5 million for the first quarter of

1995 and comparable store sales increased 7.6% for the three-month period . Defendant Chadsey

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Case 1:97-cv-00191-KMM [?ocument 22 Entered on FLSD Docket 06/19/1997 of 91 q

once again downplayed the effects of poor weather and slow mall traffic on Sunglass Hut's results.

He stated:

Despite difficult weather conditions- as well as slower than normalmall traffic from mid-March to mid-April , we are encouraged that thebusiness trend for the last two weeks of April was back to the samelevels we achieved during February. This recent performance gives usstrong momentum moving into the second quarter. [Emphasis added.]

88. The foregoing statements between April 12, 1996 and May 9, 1996,

concerning continued aggressive growth in the number of retail stores, strong sales in all business

areas, increases in earnings per share through new store openings and increased comparable sales

figures, upward trends in the domestic market, sophisticated inventory control systems and the

Company's healthy relationships with its vendors, were materially false and misleading at the time they

were made because:

(a) The Company again misleadingly implied that the consolidation of its

distribution operations into one facility in Atlanta had already occurred, that the facility was opened

and was operating at or near full capacity, and that the Company's inventory and distribution systems

were technologically superior, allowing Sunglass Hut to "keep ahead of the competition", when in

fact the facility had only opened for developmental purposes and would not be fully operational until

August 1996. Accordingly, defendants materially overstated the impact the new facility was having

and could in the near future have on the Company's physical inventory and distribution facilities, its

control over the Company's inventory and distribution functions and the Company's continued "strong

momentum moving into the second quarter" and continued sales strength and store growth.

(b) The new distribution facility in Atlanta was not only far from being fully

operational, it was grossly understaffed, the existing staff was inadequately trained, and the facility

was poorly equipped to perform any of its intended functions. The Company actually maintained

-38-


fewer employees at its single consolidated facility than it had in the past, undermining the ability of

the Company to process orders as quickly as it had been able to in the past . The Company also

maintained far fewer incoming telephone lines (apparently only two lines) for the receipt of incoming

orders, causing significant delays in the placement of orders, and, on the catalog side of the

Company's business , causing tremendous delays in processing consumer orders, ultimately leading

to numerous caller hang-ups on telephone orders, as well as fewer telephone call orders. An



processed orders (an estimated 20% of orders was affected by these errors).

(c) Far from the sophisticated point-of-sale computer system touted by the

Company, the automated distribution system continued to be materially delayed and the Company's

distribution system remained manual, and thus significantly less efficient than represented to the

investing public. The Company's purportedly highly automated conveyor belt picking systems would

not be operable until at least June 1996, if not considerably later, resulting in considerable delays.

(d) Serious processing problems continued to cause significant shipping

delays of purchase orders placed through the Company's catalog business, despite the Company's

purportedly planned 14 million catalog mailing for 1996 . Catalog customers continued to increasingly

cancel orders in response to processing delays.

(e) The Company's inventory levels were growing at an alarming rate and

were simply not being contained or controlled. Inventory levels were accumulating so fast that after

swelling to approximately $150 million from approximately $129 from the end of the first quarter to

the end of the second quarter, the Company's ending inventory from the second quarter of 1996 to

-39-

Case 1:97-cv-00191-KMM Rocument 22 Entered on FLSD Doc}et 06/19/1997 of 91 F1

the third quarter would grow from $150 million (already over $75 million above the prior year

numbers) to $180 million by the end of the Class Period.

(f) The Company continued to experience serious problems with inventory

shrinkage at many of its newly acquired retail stores, such as the Sunsations stores, which were

purportedly part of the Company's continued aggressive store expansion, as well as in the catalog

facility at the new distribution center. Packages were being sent out to fill catalog orders, but orders

would either never arrive or arrive with partial or empty containers. Returns and other losses on

revenue were steadily increasing.

(g) Although the Company sought to capture significant sales and unload

its growing excess inventory in the calendar 1996 "back-to-school market," which is traditionally a

strong selling period running from approximately the middle of August to the middle of September,

the Company was having severe difficulties in capitalizing on this important selling season as a result

ofundisclosed problems relating to its catalog marketing efforts. The Company was having serious

difficulties in putting together its "back-to-school" catalog, which materially threatened to delay the

commencement of a massive and expensive catalog campaign purportedly designed to capture this

vital market.

(h) The Company's internal distribution and inventory problems continued

to either result in, cause and/or contribute to a downward sales and growth trend for Sunglass Hut,

which the Company knew would require it to publicly scale back its planned expansion of 350 new

stores in 1996, despite its representations to the investing public of continued aggressive growth and

the rapid expansion of the number of Sunglass Hut stores. The Company simply did not have the

strong sales momentum going into the second quarter as it disclosed to investors.

-40-


(i) In its continued attempt to maintain sales figures despite the reality of

downward sales and growth trends, the Company continued to allow excessive amounts of store

credit for customer returns, without any meaningful inquiry into whether the returned products were

even purchased at a Sunglass Hut store, or the price paid for the returned product . The Company

was also accepting the return ofnon-warrantied products, primarily involving scratched lenses. This

additional inventory control problem added to increasing losses on purported revenue.



their positions of control and authority as officers and directors of the Company, by reason of their


inventory and distribution systems and sales growth and expansion plans , and because the problems

outlined above were so severe.

90. On May 22 , 1996, Sunglass Hut announced with great fanfare , the opening

of its 2000th store . The store was located next to Macy' s at Herald Square in New York City.

According to Chadsey, "the opening of our Herald Square store is very exciting for a number of

reasons . We believe that because of its high-profile , highly trafficked location , it will serve as a

flagship store for Sunglass Hut. In addition, this is our 2000th store -- which is an important

milestone in the tremendous growth of our company. Just last year at this time we were celebrating

our 1000th store opening." What Chadsey failed to disclose was that the Company's problems were

being masked by the feverish opening of new stores and that only six months later, Chadsey would

have to retrench and close approximately 100 stores due to lackluster sales.

91. On or about May 23, 1996, the Company purported to announce financial

results for the first quarter of fiscal 1996, ended May 4, 1996. For the three months ended May 4,

-41-


1996, the Company reported that earnings per share increased 44.4% to $0.13 per share, or $7.2

million, compared to $0.09 per share, or $5.0 million , reported in the first quarter of the prior year.

For the three months ended May 4, 1996, the Company reported that sales increased 40.2% to $122.8

million, compared to $87.6 million reported for the first quarter of 1995. For the three months ended

May 4, 1996, the Company reported that comparable store sales increased 7.6%.

92. Commenting on these results, defendant Chadsey stated:

Despite less than favorable weather conditions throughout most of the firstquarter, we enjoyed strong sales in regions not impacted by weather. Thisgives us confidence that as sunny, summer weather begins to break across thecountry, our sales will return to the levels which we have enjoyed in the past .[Emphasis added.]

93. Based on the Company' s closing stock price on May 23, 1996 ($27.125 per

share), and using the foregoing quarterly earnings on an annualized basis, Sunglass Hut's P/E ratio

was approximately 52.15, reflecting the market's premium valuation. The market ascribed this high

P/E ratio to Sunglass Hut stock based on defendants' then-present statements concerning the

Company's continued growth through 1996 and 1997.

94. On May 31, 1996, Alex. Brown & Sons issued a report by analyst Aaron, with

a "Strong Buy" on Sunglass Hut's stock. The brokerage house quoted Sunglass Hut insiders as

stating that the Company's fashion-oriented products were selling well. According to the Alex.

Brown report:

Sunglass Hut indicated that product trends remain intact, with sales of sportand fashion sunglasses leading the way . The Company did note thattraditional sunglasses from Ray-Ban were also showing some signs ofimprovement as well. Sunglass Hut's management just returned from MIDO-- the largest eyewear show in the word -- where it found that plastic framesare in style and will likely be stronger than metal frames. In addition, the"Jackie 0" look is back in style, with larger plastic frames faring well. wig

[Emphasis added.]

-42-


The same report, based on information provided by the Company, also commented on the Company's

current ability to control its existing inventory levels:

Inventories in line with management's plan.... The Company stronglybelieves that it must have significant inventory to meet demand duringthe key sunglass selling seasons, which are F2Q, and Christmas.Management indicates that it does have about $5 million in excessinventories related to additional back stock due to operating morethan one warehouse facility. The Company expects that this inventorywill work its way through the system during F2O. and F30 (Oct.).[Emphasis added.]

95. On or about June 1, 1996, CNN, the Cable News Network, reported that the

sunglass market "is hotter than ever" based in substantial part on information from and statements

made by representatives of Sunglass Hut. CNN quoted Sunglass Hut's Manhattan Manager, who

emphasized, among other things, that:

There's absolutely no price resistance at all, especially here in New York. Allthey're interested in is do I look hot, do I look fashionable, does this accessorygo with what I'm wearing . So price isn't a factor.

The report also stated that "Sunglass Hut says many people are repeat investors" in expensive

sunglasses, implying exceptional growth prospects for the Company's markets. These remarks were

repeated in subsequent CNN programs, including the June 29, 1996 "Managing With Lou Dobbs"

program.

96. On or about June 3, 1996, Sunglass Hut filed a Registration Statement with

the SEC. In this disclosure, at page 4, the Company again noted that "[m]anagement plans to open

approximately 200 domestic locations and up to 150 international locations in fiscal 1996."

Concerning Sunglass Hut's current growth strategy, the disclosure further stated: "The Company has

grown significantly in the past several years and intends to continue to pursue an aggressive growth

strategy."

-43-


97. On or about June 6, 1996, the Company reported its store sales results for the

four week period ended June 1 , 1996. The Company reported sales in that period of $48.7 million,

an increase of 29.2% over the $37.7 million reported for the same period in the prior year. The

Company also reported that comparable store sales increased 7.4%. Commenting on these results

and the Company's existing inventory and sales position, defendant Chadsey stated:

We continue to experience strong sales in both the fashion and sport segmentsof our business. We believe our excellent in-stock position on both basics andtrending sunglasses, coupled with our four million catalog mailings duringMay and June, position us to maximize sales during the important June andJuly sales period . [Emphasis added.]

98. The foregoing statements between May 10, 1996 and June 6, 1996, concerning

the Company's confidence in returning to prior year comparable sales in the second quarter,

continuing upward sales trends, continuing comfort with inventory levels and controls, continuing

aggressive store expansion and strong outlook for June-July sales, were materially false and

misleading at the time they were made because:

(a) The new distribution facility in Atlanta, still not fully operational,

remained grossly understaffed, the existing staff remained inadequately trained, and the facility

remained poorly equipped to perform any of its intended functions . The Company actually

maintained fewer employees at its single consolidated facility than it had in the past, undermining the

ability of the Company to process orders as quickly as it had been able to in the past. The Company

also maintained substantially fewer incoming telephone lines (apparently only two lines) for the

receipt of incoming orders, causing significant delays in the placement of orders, and, on the catalog

side ofthe Company's business , causing tremendous delays in processing consumer orders, ultimately

leading to numerous caller hang-ups on telephone orders, as well as fewer telephone call orders. An


-44-



processed orders (an estimated 20% of orders were affected by these errors). These inefficiencies

undermined the Company's purportedly continuing strong sales trend.

(b) The Company's automated distribution system was still materially

delayed and its distribution system remained manual, leading to further inefficiencies in distribution

control. The Company's purportedly highly automated conveyor belt picking systems were not

operable until at least June 1996, if not considerably later, resulting in considerable delays.

(c) Serious processing problems were causing significant shipping delays

at the new distribution facility, causing lost packages and erratic shipments to stores and to the

market. Physical flaws in the facility's inventory system were undermining the accuracy of the

Company's purported control over its inventory. For example, the entire warehouse department was

dependent on a single receiving clerk, making impossible the separation of store-ordered and catalog

ordered inventory; lost and returned packages were dumped back into the main receiving area with

no accounting ; the order center and customer service areas were at opposite ends of the facility,

requiring the hand-carrying of individual orders back and forth. These problems and others were

materially impairing the reliability of the Company's purported inventories and the ability of the

Company to control and compare current inventories to comparable prior year periods, and to

provide any meaningful accounting of orders and the flow of inventory. Inventory records could not

be rectified with purchase orders.

(d) The Company' s excessive inventory kept growing and was still not

being contained or controlled. The Company did not have the "excelling in-stock position" it

disclosed to the investing public. Rather, inventory levels were accumulating so fast that the

Company's ending inventory from the second quarter of 1996 to the third quarter would skyrocket

-45-


from $150 million (already over $75 million above the prior year numbers) to $181 million, after

swelling from $129 million to $150 million from the first quarter to the second quarter.

(e) The Company continued to experience serious problems with inventory

shrinkage at many of its newly acquired retail stores as well as in the catalog facility at the new

distribution center. Packages continued to be sent out to fill catalog orders, but orders were still

either not arriving or arriving with partial or empty containers. An investigation by Federal Express

revealed that the Company did not even have a basic parcel tracking system or scanner to control the

flow of inventory. The Company's existing inventory control systems could not adequately manage

these and other inventory problems.

(f) The Company experienced continued delays in putting together its

catalog geared toward the 1996 "back-to-school market," which is traditionally a strong selling period

running from approximately the middle of August to the middle of September. The Company had

serious trouble capitalizing on this important selling season as a result of undisclosed problems

relating to its catalog marketing efforts.

(g) The Company's internal distribution and inventory problems continued

to reflect , cause and/or contribute to a downward sales and growth trend for Sunglass Hut. The

Company's repeatedly disclosed plan to open 350 new stores in 1996 was materially misleading, false

and lacking in any reasonable basis . The Company knew it would have to publicly scale back its

planned expansion of 350 new stores in 1996, despite its representations to the investing public of

continued aggressive growth and the rapid expansion of the number of Sunglass Hut stores to such

levels and at such a rapid rate.

(h) The declining trend in sales, swelling inventories, diminished growth

prospects and the escalating lack of inventory and distribution control were so severe that the

-46-


Company began canceling purchase orders placed with vendors, even though the Company did not

enjoy unlimited rights of return with its vendors.

(i) Continuing its attempt to maintain sales figures despite the reality of

sales and growth declines, the Company continued to allow excessive amounts of store credit for

customer returns, without any meaningful inquiry into whether the returned products were even

purchased at a Sunglass Hut store, or the price paid for the returned product . The Company was also

accepting the return ofnon-warrantied products, primarily involving scratched lenses. This additional

inventory control problem added to increasing losses on purported revenue.



their positions of control and authority as officers and/or directors of the Company, by reason of their



outlined above were so severe.

100. Also on or about June 6, 1996, the securities firm of Robertson Stephens &

Co. issued a report on the Company by Patrick Snell, based on information and guidance provided

by the Company. Among other things, the report highlighted the Company's May same store sales

results and emphasized a resumed growth trajectory in subsequent quarters, rating the Company

"Long Term Attractive" (a positive rating) and stating, in pertinent part, that:

Business trends throughout the month were fairly stable ... Also ofnote, the company's new distribution center in Atlanta is up andrunning, servicing all stores .

2Q expectations:Accelerated Same-Store Sales Growth Anticipated for 2Q. While thecomps came in 7.0%, we believe there are strong signs to suggestcomps momentum will accelerate in the second quarter and beyond:

-47-


(1) In the 1Q, the company did not really benefit from significant

incremental gains in catalog mailings. While Sunglass Hut expects tomail 14 million catalogs in 1996 versus 9 million last year.

(2) In 1Q, Sunglass Hut did not benefit materially from the roll-outof the Sunscriptions program (i.e. the selling of prescriptionsunglasses within existing stores). Sunglass Hut has recentlycompleted rolling out the training for Sunscriptions to 200 of itsstores. If Sunglass Hut sells one pair of prescription sunglasses everyother day in each participating store, we believe this could add 1%-2%in comps for the remainder of the year.

As a result, we continue to project an 8.5% comp-store sales increasefor 2Q and an 8 . 2% same- store sales increase for the entire year.

This report, like the other reports of securities analysts issued during the Class Period, was based on

Company guidance and information uniquely within the control of the Company. By such reports

caused by defendants, the market was additionally misled by defendants' deceptive conduct.

101. On or about June 20, 1996, the Company sold in a private offering

approximately $100 million of convertible debentures to institutional investors. The Company stated

that the proceeds were to be used for refinancing outstanding indebtedness and to finance the

Company's expansion plans.

102. On or about June 27, 1996, the securities firm of Alex. Brown issued a report

by analysts M.L. Aaron and Joseph Grillo, based on Company guidance, highlighting Sunglass Hut

as a "Strong Buy" because, among other things:

30-35% growth projected. We believe that RAYS will enjoy strongsales and earnings growth driven by both its new and existingconcepts . RAYS is one of the fastest growing retailers in ourcoverage.

"Strong buy" rated. Our price target is $35, which is based on 35x

our 1997 EPS estimate of $1.00.

103. Similarly, on or about July 1, 1996, the firm of William Blair & Co. issued a

report by analyst M. Corrigan, based on information and guidance provided by the Company, which

-48-


declared that "[w]e spent some time with management after their conference presentation last week"

and concluded based on these conversations with the Company that " Sunglass Hut continues to have

strong growth prospects both through its core business and two new concepts We remain

comfortable with our long-term earnings growth rate of 25%-30% and note that our 1996 and 1997

earnings estimates represent 46% and 36% increases, respectively." [Emphasis added.] Although

the report mentioned that Sunglass Hut's new distribution center had "some to or^glitch^glitches that

resulted in missed shipments and product shortages ", the report , which was expressly based on

communications with Sunglass Hut officials, also noted that:

Management believes that the issue of limited product supply fromkey vendors should be resolved by August, and the distribution centershould be running smoothly. So this likely will help to support third-quarter sales ... .

The report also noted that the Company reported shortages of supply from "key vendors" which

affected sales and that the report's sales estimates were "more conservative than management's

guidance". [Emphasis added .] Moreover, the report pointed out that Sunglass Hut was "working

more closely with vendors [such as Oakley] to understand their production capacity and constraints

and to share forecasting assumptions ...." This report, like several other reports making vague and

minimizing reference to problems at the Company's distribution center, were materially false and

misleading because they failed to disclose adequately the nature and magnitude of the problems that

the Company was experiencing at the distribution center and because they misled investors to believe

that the Company's problems at the distribution facility were minor and transitory and had been fully

resolved.

104. In an article in the San Francisco Chronicle on July 3, 1996, defendant Chadsey

was quoted as assuring the investing public that the existing fundamentals of the sunglass business

generally and Sunglass Hut in particular had not changed:

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Case 1:97-cv-00191-KMM Dpcument 22 Entered on FLSD Docket 06/19/1997 of 91 q

Shortsellers say the stock's slide, from a high earlier this year of 36, isthe comeuppance for several years of acquisitions and aggressiveaccounting. [Defendant] Chadsey insists that's not the case, and saysthat "what happened in the last few weeks" isn't an indication that thefundamentals of the sun¢lass business have changed . [Emphasisadded.]

105. Also on July 2, 1996, a Morgan Stanley report by analyst S. Pearson noted that

the Company's "conversion to its new distribution center in Atlanta is for the most part on course;

however, there have been some timing issues related to when product is shipped to the stores, which

may have affected comps very slightly." Reflecting the Company's ability to misleadingly keep the

analysts and the investing public bullish on their growth projections, a July 2, 1996 Alex. Brown &

Sons report by analyst Aaron, noting a "strong buy," stated:

30-35% GROWTH PROJECTED. We still believe that RAYS willenjoy strong sales and earnings growth driven by both its new andexisting concepts ...

... We believe Sunglass Hut's long term growth story remains intact .[Emphasis added.]

106. Likewise, on or about July 5, 1996, William Blair & Co. issued a report by

analyst M. Corrigan, based on information and guidance provided by the Company, recommending

that investors "buy" the stock at a then-recent price of $17.50 per share, emphasizing the Company's

purported strong catalog selling efforts and near-term growth prospects and concluding that:

In our view, the catalyst that would drive this stock higher is astrengthening in core business sales trends. Could it take a month ortwo or three? That is the uncertainty. But we do believe that thereare several factors that should help in the back half of the year.

1) Sunscriptions will be in more stores (about 300), and employeeswill have become more comfortable with the program.

2) The company will have higher quantities of Oakley square jackets,as well as new product introductions by Oakley ... late in the third....

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Case 1:97-cv-00191-KMM Dpcument 22 Entered on FLSD Docket 06/19/1997 of 91 F1

3) This is the first year the company will be testing new product (forspring rollout) during Christmas, and management expects someexciting fashion styles at that time.

4) There should be a higher number of catalog mailings, with an extraOakley catalog in August and 3 million more catalogs in the fourthquarter versus last year.

107. Analyst reports concerning Oakley similarly carried the message from Sunglass

Hut management that sunglass sales were currently strong. For example, reports issued by Merrill

Lynch on July 2, 1996 and July 9, 1996, reported that:

Indications are that growth of the sunglass market remains strongdespite recent concern about Sunglass Hut's weaker comp store salesgrowth in June. 00's [Oakley's] products continue to sell well atSunglass Hut and are gaining market share. Sung ass Hut

[Emphasis added.]

108. According to the July 8, 1996 issue ofBarron's , "several convertible investors

[L,g. purchasers of Sunglass Hut debentures] said company officials, when asked about June sales

immediately prior to the convert offering, gave no inkling of any problems."

109. On or about July 11, 1996, the Company reported sales results for the five

weeks ended July 6, 1996. The Company reported that sales for the five weeks ended July 6, 1996

were $68 . 6 million , an increase of 29.3% above the $53.0 million reported for the same period the

prior year. Year-to-date sales for the 22 weeks ended July 6, 1996 reportedly increased 32.4% to

$240.0 million . This compared to sales of $181.2 million for the same period in 1995. Year-to-date

comparable store sales increased 6.8%. Commenting on these results, defendant Chadsey stated in

language suggesting that the Company's current sales position had enabled it to achieve good

comparable results:

Despite slow mall traffic and sluggish overall retail sales activity, we were ableto generate a 5.3% comparable store increase at full profit margins. Ofparticular note, we were pleased with the performance of both the Sunsations

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Case 1:97-cv-00191-KMM Dpcument 22 Entered on FLSD Docket 06/19/1997 of 91 q

and Sunscriptions stores, as they significantly outperformed the Sunglass Hutaverage. We continue to be pleased with the performance of both EyeX andWatch Station and remain on schedule to open 50 and 75 stores respectivelyby year end.

110. On or about August 8, 1996, the Company reported sales results for the four

weeks ended August 3, 1996. The Company reported that sales for the four weeks ended August

3, 1996 were $49.3 million, an increase of 27.3% above the $38.7 million reported for the same

period the prior year. Sales in the second quarter reportedly increased 28.7% to $166.5 million,

compared to $129.4 million for the second quarter of 1995. Comparable store sales reportedly

increased 4.9% for the three month period . Year-to-date sales for the 26 weeks ended August 3,

1996 reportedly increased 31.5% to $289.3 million. This compared to sales of $219.9 million

reported for the same period in 1995 . Year-to-date comparable store sales reportedly increased

6.0%. Commenting on these results, defendant Chadsey stated:

Despite slower than expected mall traffic coupled with strong comparablestore sales comparisons of 15.15 in July of 1995, we delivered positive compsat full merchandise margins.

In light of slower mall traffic and the August 1995 comparable store salescomparison of 18.8%, we would expect August comparable sales to continueat the same general trend as experienced in July.

We would expect this sales trend to improve later in the third and fourthquarters for the following reasons : an anticipated increase in mall traffic asthe holiday season nears ; lower comparable store sales comparisons from1995; the introduction and the increased flow of new products from keysuppliers ; and the expansion and refinement of our catalog and Sunscriptionsprograms . [Emphasis added.]

(A Reuters report of the same date also printed the above quotations of defendant Chadsey.)

111. On or about August 22, 1996, the Company reported financial results for the

second quarter and first six months of fiscal 1996, ended August 3, 1996. For the three months

ended August 3, 1996, earnings per share reportedly increased 24% to $0.36 per share , or $20.0

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million, compared to reported earnings per share (exclusive of $10.1 million of non-recurring

expenses related to acquisitions) of $0.29 per share, or $15.9 million, for the second quarter of the

prior year. Inclusive of these expenses , net income was reported to be $8 .4 million, or $0.15 per

share, for the second quarter of the prior year. For the three months ended August 3, 1996, sales

reportedly increased 30.6% to $166.5 million, compared to the $127.5 million reported for the second

quarter of fiscal year 1995. For the three months ended August 3, 1996, comparable store sales

increased 4.9%. For the six months ended August 3, 1996, earnings per share reportedly increased

29% to $0.49 per share, or $27.2 million, compared to reported earnings per share of $0.38 per share

or $420.9 million for the similar period the prior year (exclusive of acquisition costs). Inclusive of

these expenses, net income was reported to be $13.4 million, or $0.25 per share , for the first half of

the prior year. For the six months ended August 3 , 1996, total sales reportedly increased 34.5%, to

$289.3 million, over comparable store sales results for the same period in the prior year. Commenting

on these positive results, defendant Chadsey, touting the Company's then-current sales position and

existing new products, stated:

Despite slower than expected mall traffic, coupled with strong comparablestore sales of 10.9% for the second quarter of 1995, we delivered secondquarter comps of 4.9% at full merchandise margins which results in a 24%improvement in EPS over 1995. "We are excited by the increased flow ofnew products from key suppliers: and the expansion and refinement of ourcatalog and Sunscriptions programs, as well as the growth of new businessstrategies." [Emphasis added.]

112. The foregoing statements between June 6, 1996 and August 22, 1996,

concerning continuing industry sales trends , the operational status of the new Atlanta facility,

continued store growth, enthusiasm over the flow of new products, the expanding catalog program,

the purportedly short-term nature of Sunglass Hut's inventory situation and management 's continuing

-53-


"comfort" with acknowledged increases in inventory levels, were materially false and misleading at

the time they were made because:

(a) Despite the fact that the Company first announced that the new Atlanta

facility was "fully operational" in August 1986, the debilitating problems continued. The new

distribution facility was still grossly understaffed, the existing staff was still inadequately trained, and

the facility was still poorly equipped to adequately perform any of its intended functions. The

Company continued to maintain fewer employees at its single consolidated facility than it had

employed in similar functions in the past, undermining the ability of the Company to process orders

as quickly and successfully as it had been able to in the past. The Company also continued to

maintain substantially fewer incoming telephone lines (apparently only two lines) for the receipt of

incoming orders, causing significant and harmful delays in the placement of orders, and, on the

catalog side of the Company's business, causing tremendous delays in processing consumer orders,

ultimately leading to numerous caller hang-ups on telephone orders, as well as fewer telephone call

orders. The overextended, inadequately trained and unreasonably small staff at the new distribution

center in Atlanta continued to result in delivery delays and an exceptional number of improperly

and/or erroneously processed orders (an estimated 20% of orders were still affected by these errors).

(b) Serious processing problems were still causing significant shipping

delays at the new distribution facility, causing lost packages and erratic shipments to stores and to

the market. In fact, in addition to the undisclosed material delays in the installation of the Company's

highly touted, state-of-the-art automated distribution system from March through June of 1996, in

late June of 1996 a severe undisclosed breakdown in the Company's distribution software meant

Sunglass Hut had to fill orders manually for 500 of its busiest stores . Moreover, the Company's entire

-54-


warehouse department was dependent on a single receiving clerk, making impossible the separation

of store-ordered and catalog-ordered inventory; lost and returned packages were dumped back into

the main receiving area with no accounting; the order center and customer service areas were at

opposite ends ofthe facility, requiring the hand-carrying of individual orders back and forth. These

problems and others continued to materially impair the reliability of the Company's purported

inventories and the ability ofthe Company to control and compare current inventories to comparable

prior year periods, and to provide any meaningful accounting of orders and the flow of inventory.

Inventory records still could not be rectified with purchase orders.

(c) The Company's inventory levels continued to grow at an alarming rate

and were still not being contained or controlled; and the Company was not containing its excessive

inventory growth let alone reducing its inventories . Despite management's position that it could "not

get enough ofthe new Oakley product," the Company was experiencing a rapid build-up of Oakley

sunglasses which the Company could not and could not reasonably expect to work off amid declining

demand for such products, nor could the Company reasonably expect to dispose of its bloated

inventory by returning unsold products to suppliers with whom it enjoyed no such rights of return.

(d) The Company continued to experience serious problems with inventory

shrinkage at many of its newly acquired Sunsations retail stores, as well as in the catalog facility at

the new distribution center. Packages were still being sent out to fill catalog orders, with orders

never arriving or arriving with partial or empty containers. The Company's existing inventory control

systems were not adequately managing these and other inventory problems.

(e) The Company's marketing efforts in putting together its catalog for the

1996 "back-to-school market" were failing . The Company hoped to beef up sales and unload some

ofits huge overstock with the middle of August to the middle of September push, but the Company

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Case 1 :97-cv-00191 -KMM ?0met22 Entered on FLSD Docket 06/19/1997 of 91 q

was unable to capitalize on this important selling season . The Company knew delays would cause

the distribution of the catalog to substantially miss the "back-to-school" market.

(f) The Company continued to experience a downward sales and growth

trend, despite the Company's purported excitement with "the increased flow of new products from

key suppliers" such as Oakley. There were no such new products. In fact, the Company had been

informed by Oakley, one of its largest suppliers , that Oakley 's next generation of sunglasses, which

were under development, were experiencing significant developmental delays which would materially

delay their introduction into the market. The Company knew it would have to publicly scale back its

planned expansion of 350 new stores in 1996, despite its repeated representations to the investing

public of continued aggressive growth and the rapid expansion of the number of Sunglass Hut stores

to such levels at such a rapid rate . Defendants knew of these trends long before the disclosure later

in August of 1996 that Sunglass Hut would have to scale back its 1996 expansion to 300 stores, and

to 250-275 stores as reported in October of 1996, despite defendants' representations to the investing

public of continued aggressive growth and rapid expansion plans;

(g) The declining trend in sales , swelling inventories, diminished growth

prospects and inadequate and inefficient inventory and distribution controls were so severe that the

Company was now unilaterally and routinely canceling purchase orders placed with vendors, even

though the Company did not enjoy unlimited rights of return with its vendors. This problem kept

increasing until by July and August of 1996, the Company was canceling or had canceled most of its

existing purchase orders with its vendors, including major vendors such as Oakley;

(h) In its now desperate attempt to maintain sales figures despite the reality

of sales and growth declines , the Company was allowing excessive amounts of store credit for

customer returns, still without any meaningful inquiry into whether the returned products were even

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purchased at a Sunglass Hut store, or the price paid for the returned product. The Company was also

accepting the return of non-warrantied products, primarily involving scratched lenses. This additional

inventory control problem added further financial pressure.



their positions of control and authority as officers and/or directors of the Company, by reason of their


inventory and distribution systems and sales growth and expansion plans, and because of the

pronounced, ongoing nature of the problems outlined above.

114. Based on the Company's closing stock price on August 22, 1996 ($16.00 per

share), and using the foregoing quarterly earnings data on an annualized basis, Sunglass Hut's P/E

ratio had declined to approximately 22.22, reflecting a still relatively high premium valuation for this

specialty retailer's stock. The market ascribed this high P/E to Sunglass Hut stock based on

defendants' then-present statements concerning the Company's growth through 1996 and 1997.

115. Following the Company's earnings announcement, several securities analysts

issued positive reports about Sunglass Hut based on Company guidance and encouragement:

(a) On or about August 22, 1996, William Blair & Co. issued a report by analyst

M. Corrigan emphasizing the Company's near-term growth prospects, in part based on catalog selling

efforts, stating in pertinent part, expressly based on guidance from management of Sunglass Hut, that:

The company ended the quarter with $150 million in inventory, up68% from last year and up 25% store-for-store. Recall that inventorylevels were also high at the end of the first quarter, and managementhad hoped to work through them during the second quarter.However, with lower-than-planned sales as well as management'sdecision not to distract the distribution center or sales associates withreturns during these important months, the company did not reduceinventory levels as it had hoped. We fully expect inventory levels to

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decline over the balance of the year and expect that by year end theincrease in per-store inventory should be in line with projected samestore sales gains. Given that there is little obsolescence risk withsunglasses and most can be returned or exchanegd, there is littlemarkdown risk. Additionally. management is working with vendorsto extend payment terms on some of the more traditional product,which it might not return. Consequently. we are not too concerned .

OutlookThis has been a difficult quarter for Sunglass Hut ... lack of excitingnew product, particularly Oakley, which was in high demand, but notenough quantity; slow mall traffic, particularly in June and July; coldrainy weather in certain regions of the country (May); distributioncenter glitches (June), which slowed shipment of products to thestores; and less-than-planned benefit from catalog mailings....

Looking forward, we believe that our comp assumptions are realisticand we reaffirm our EPS estimates of $0.06 and $0.13 (including$0.01 for new business) for the third and fourth quarters, respectively,and $0.95 for fiscal 1997 (including $0.05 for new businesses). ...The company will mail 750-000Oakleycatalogs this week, and withstrong in-stock position of Oakley (and especially the new straightjacket and square e-wires), this could help to drive sales in the last

quantities in stock and at most stores in the chain (note that thesewere two lessons that the company learned with the spring mailings).[Emphasis added.]

(b) Also on August 22, 1996, a report by Robertson Stephens & Co. analyst P.

Snell raised the inventory concerns but tempered those concerns with management's assurance that

the problems were insignificant:

Inventory remains on the high side at $145 million in the Hut Storesand an additional $5 million in new concepts. Inventory remains highby about $10-15 million by our estimates and is the result of slowersales in the Hut Stores, build up at the distribution center coupled withsome now resolved processing delays, and the delay of normalseasonal product returns to vendors. The Company has beenreturning some slow moving product to certain vendors as it does soaround this time of year.

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Case 1 :97-cv-00191 -KMM Document 22 Entered on FLSD Docket 06/19/1997

ACTION NOW: We continue to rate the stock as a Long-TermAttractive as the Company struggles through this period of slowerthan anticipated sales.

INVESTMENT THESIS : We believe there remains significant roomfor Sunglass Hut to expand its store base on the domestic andinternational front . Annual square footage growth of 20%-25% istargeted over the next three years as the Company builds on its 30%estimated market share in the US and accelerates store growth on theinternational front.

of 91 q

(c) Alex. Brown issued a report on or about August 23, 1996 by analysts M.L.

Aaron and J. Grillo, summarizing a Company conference call with analysts and investors, in which

defendants downplayed and otherwise offered excuses for the Company's recent increase in

inventories, and which only barely hinted at any significant or continuing problems at the distribution

center, as follows:

HIGHLIGHTS OF THE CONFERENCE CALLINVENTORY ABOVE PLAN, NO UNUSUAL MARKDOWNSEXPECTED. Sunglass Hut 's inventory levels increased 77% in F2Qto $150 million . Management indicated that $5 million of theadditional inventory was related to new concepts . Excludinginventory related to the new concepts , inventory per sunglass storeincreased approximately 37%. Management indicated that inventorylevels were above plan in the quarter for several reasons:

THE COMPANY DID NOT PROCESS ALL OF ITS NORMALSEASONAL RETURNS. Sunglass Hut typically returns slow movingmerchandise in July; however, this year returns will be handled inSeptember. The delay was the result of earlier issues at thedistribution center coupled with management's desire that storepersonnel focus on selling product rather than on processing returns.We believe that Sunglass Hut will return inventory in excess of $5million to its vendors this quarter.

EXCESS INVENTORY FROM THE WAREHOUSECONSOLIDATION. ...

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SLOWER SALES. Sunglass Hut's sales were below our originalestimate in F2Q. The Company generally carries higher than normalinventory levels during the seasonally strong selling period in an effortto maintain its in stock position. However, sales were somewhatsluggish leading the Company to an over-inventoried position.

STRONG FLOW OF NEW OAKLEY MERCHANDISE. This is apositive for Sunglass Hut . The Company's in stock position hasimproved significantly over the last month . The Company has workedclosely with its leading supplier to increase its inventory position inanticipation of a planned mailing of Oakley catalogs that will be in-home next week.

THE COMPANY PLANS TO REDUCE INVENTORY LEVELSBY RETURNING EXCESS PRODUCT TO VENDORS AND BYREDUCING FUTURE ORDERS ON MARGINAL GOODS. Wealso believe that the growth in the store base will help ease inventorypressures . Management anticipates that inventory will be closer toplan by the end of the year if results remain on track....

The same report also noted that following:

The Company wants to ensure that its locations are very high qualityand will not forsake quality for quantity. Sunglass Hut plans to open300-325 sunelass stores this year ... our original estimate calls for theCompany to open 350 sunglass stores this year . (Emphasis added.)

Thus, the Company publicly announced, for the first time, a lowered expectation for its 350 store

expansion plan, long past any reasonable time to lower this expectation.

(d) Adding to the flurry of late August analyst reports that remained falsely

optimistic based on information provided by the Company, an August 23, 1996 Needham & Co.

report by analyst Carole Cranmer indicated a "buy" rating. Noting the inventory problems, the report

stated that "the [Company's] goal is to have inventories in line with sales by year-end." Additionally,

an August 23, 1996 UBS Securities report by Kenneth Kulju on Bausch & Lomb noted "weaker-

than-expected Sunglass Hut order trends" and "changing distribution requirements by Sunglass Hut."

No such trends were ever previously disclosed by the Company despite the fact that they existed

throughout the Class Period.

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Case 1:97-cv-00191-KM M

116.

Document 22 Entered on FLSD Docket 06/19/1997 of 91 q

On or about September 4, 1996, the Company reported sales results for the

four weeks ended August 31, 1996. The Company reported that sales in that period were $44.1

million, a reported increase of 31.2% above the $33.7 million reported for the same period the

previous year. Comparable store sales for the four-week period reportedly increased 2.5%. Year-to-

date sales for the 30 weeks ended August 31, 1996 reportedly increased 31.5% to $333.4 million.

This compares to reported sales of $253.6 million for the same period in 1995. Year-to-date

comparable store sales reportedly increased 5.5%. Commenting on these results, defendant Chadsey

stated:

In the face of continued slow mall traffic and 18.8% comparable store salesduring August of 1995, we generated 2.5% comps at full merchandisemargins. We are pleased by the improved flow of new merchandise from oursuppliers and look forward to lower comparable store sales comparisons inthe coming months.

117. This announcement was followed by several analyst reports highlighting the

seeming success of the Company in "working o$" excess inventories and returning to its purported

growth trajectory. A Bear Stearns report by analysts Dana Telsey and Donna Leong issued on or

about September 4, 1996 stated pertinently:

August is RAYS most difficult comparison of the year. A mailing of750K Oakley catalogs last week is intended to generate both highervolumes of traffic and sales . RAYS does have enough Oakleyinventory in order to be able to meet demand . RAYS inventory levelswere higher at the end of Q2, and are in the process of being reducedover the next two quarters.

A report that same date from Alex. Brown analysts Aaron and Grillo stated that:

Same store sales expected to improve in September. The Companynoted that it expects same-store sales to improve beginning inSeptember when comparisons ease, in-stock levels improve in keyproducts and programs to drive sales -- catalog, Sunscriptions, etc. --more fully materialize.

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Case 1:97-cv-00191-KM M

118

Document 22 Entered on FLSD Docket 06/19/1997 of 91 q

Another report ofthe same date from Robertson Stephens & Co. CFA Patrick

Snell noted that " Sunglass Hut International reported [that] same-stores-sales in August rose 2.5%,

versus a difficult 18. 8 comparison last August." The report further noted that "[t]he Company cited

better product flow from key vendors such as Oakley in August."

119. Similarly, a September 6, 1996 Smith Barney report by analyst McGrath noted

the following:

Comparisons were toughest of the year, vs. an 18.8% increase in Aug.'95. Product flow both from the vendors and through the Company'snew distribution center seems to have improved. Oakley is shippingmore new product, availability for fashion designers has increasedsomewhat, and kinks in distribution center have been worked out.

The report further stated that: " [m]anagement [is1 also aggressively working down inventory. Turn

around could be slowly underway. Limited downside ." [Emphasis added.]

120. Finally, a September 6, 1996 William Blair & Co. report by analyst M.

Corrigan noted the following:

With the last of the extremely difficult comparisons behind us,Sunglass Hut sales trends should begin to strengthen. On the basis ofthe current trendline, we believe that our comp expectations of4% forthe third quarter and 7% for the fourth are achievable, and that ourearnings estimates of $0.06 and $0.13 per share for those respectivequarters are solid.

Lack of exciting product, particularly from Oakley, was a key factorin below-planned sales during the recently reported second quarter.However, the Company is currently fully positioned in Oakley as wellas several key fashion vendors ... that had been in limited supplyduring May through July. Over the next several months, the Companyanticipates a strong flow of new, traditional styles that should fill avoid in the assortment ... These traditional styles should broaden theappeal of the assortment and help drive sales . [Emphasis added.]

121. On September 12, 1996, only four weeks before the end of the Class Period,

Sunglass Hut continued its "growth as panacea" scheme by telling investors that the Company was

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Case 1 :97-cv-00191-KMM Document 22 Entered on FLSD Docket 06/19/1997 of 91 q

then in a position to add a total of 600 to 675 new stores in 1997. Of the new stores , 400 would be

Sunglass Hut Stores, 50 to 75 would be EyeX stores and 150 to 200 would be Watch Station stores.

In a September 25, 1996 Alex. Brown & Sons report by analysts Aaron and Grillo, a "buy"

recommendation included the following:

ESTIMATE SEPTEMBER SAME-STORE SALES ARE UP 3-5%

At this point, management indicates that it sees nothing to indicatethat the forecast of mid-single-digit same-store sales for Septembershould be changed . [Emphasis added.]

122. In its Form 10-Q filed on September 17, 1996 with the SEC for the period

ending August 3, 1996, the Company made the following statement concerning its existing ability to

maintain its aggressive expansion plan for 1996, at page 9:

The Company has expanded rapidly since opening its first store in1971, and continued its expansion in the first six months of 1996 byopening 244 sunglass stores, 10 EyeX optical and 10 Watch Stationstores.

Regarding the Company's existing inventory and the current status of its recently consolidated Atlanta

distribution plant, the following disclosure was included, also on page 9:

Inventory levels have increased $41.6 million since 1995 year-end toprovide for seasonal demand, store growth and higher levels of safetystock during the Company's consolidation of warehouses to a singlelocation in Atlanta. The Atlanta warehouse became fully operationalin August, 1996.

On page 10, the Company returned again to its aggressive expansion plans, noting "the Company's

planned opening of approximately 280 more stores in fiscal 1996... "

123. Notwithstanding the succession of problems outlined above, the foregoing

statements between August 22, 1996 and September 25, 1996, concerning the Company's ability to

work off its excess inventory, promising catalog program, continued aggressive store growth

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projections for 1997 and continued comfort with sales comparisons and new merchandise flow, were

materially false and misleading at the time they were made because:

(a) The systemic flaws in the Company's systems of inventory and

distribution control had entirely compromised the Company's ability to maintain any meaningful

accounting of its inventories . The physical and logistical problems at the Atlanta facility, including

severe ongoing computer software problems as well as inventory shrinkage problems at both the

catalog and retail store level and the Company's continued policy of allowing excessive amounts of

store credit for customer returns and its acceptance of returns of non-warrantied products, rendered

its purported ability to aggressively work down inventory meaningless. Inventory levels had

accumulated so quickly that after the jump in ending inventory from $129 million in the first quarter

to $150 million in the second quarter, the Company's ending inventory for the second quarter of 1996

of $150 million (up over $75 million from the prior year quarter) grew to in excess of $181 million

in the third quarter of 1996. The Company's inventory controls were not functioning, resulting in the

circulation of false and inaccurate information to investors regarding the Company' s financial

condition, the value of its assets and the need for and risk that heavy discounting would be required.

(b) The Company was not enjoying an "improved flow of new

merchandise " from its suppliers . The Company's build-up of Oakley product, for example, was so

bad that the Company could not reasonably expect to work off the inventory amid declining demand;

nor could the company reasonably expect to dispose of its bloated inventory by returning unsold

products to suppliers with whom it enjoyed no such rights of return. In fact, the Company continued

its unilateral cancellation ofpurchase orders placed with key vendors, even though the Company did

not enjoy unlimited rights of return with its vendors . The problem had kept increasing until by July

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and August of 1996, the Company was canceling or had canceled most of its existing purchase orders

with its major vendors such as Oakley.

(c) The purportedly promising catalog program failed to reach the

significant "back-to-school" market because of substantial delays of bringing the catalog to market

in time . The ongoing problems with the Company's catalog marketing efforts proceeded from bad

to worse. The enormous mid-August to mid-September market went untapped by Sunglass Hut.

(d) The Company's downward sales and growth trends required the

Company, for the first time, to publicly admit to material reduction in its planned expansion of 350

stores in 1996, despite its repeated representations to the investing public of continued aggressive

growth and rapid expansion of new stores to such levels. Defendants knew of the downward trend,

and that the Company would never hit 350 new stores -- the actual number was approximately 100

fewer stores -- throughout the Class Period.

124. The Company's continued positive statements about its growth and sales

trends, and its refusal to disclose these debilitating problems even at this late period, when the

problems were about to culminate in the October 10, 1996 announcement (described below), reveals

the intent and recklessness of the defendants in deceiving the investing public. The Individual

Defendants either had actual knowledge of the existence of the above-described problems, or

recklessly disregarded the existence of those problems, as a result of their positions of control and

authority as officers and/or directors of the Company, by reason of their management positions and

involvement in the day-to-day operations of the Company, including its inventory and distribution

systems and sales growth and expansion plans, and because of the ongoing and pronounced nature

of the problems outlined above.

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Case 1:97-cv-00191-KMM Document 22

The October 10. 1996 Announcement

Entered on FLSD Docket 06/19/1997 of 91 q

125. The Class Period ends on October 10, 1996, the date on which the Company

first acknowledged that comparable store sales were weak and that the Company expected future

financial results to be poor. In a press release issued that day, the Company reported that sales for

the five weeks ended October 5, 1996 were $40.0 million, and that comparable store sales increased

a meager 2.1% in relation to the same period in the prior year. Commenting on these results,

defendant Chadsey stated:

The following factors are continuing to have a negative impact upon

overall sunglass sales: a slowdown in mall traffic, which affects

impulse sales; cooler weather globally as contrasted to much hotter

weather during this same period in 1995; and a general lack of

exciting new product in the market, which is impacting the destination

shopper.

Despite easier comparable store comparisons in the fourth quarter, we

expect these general business trends to remain unchanged.

Furthermore unless sales materially exceed our budget for the month

of October, we would expect third quarter earnings per share to fall

below 1995's $0.05 per share. [Emphasis added.]

126. The market reaction to this devastating reversal was swift and sharp. As a

direct and immediate result of this surprising revelation concerning the weak sales and poor financial

performance of the Company, as reported in an article in The Wall Street Journal on October 11,

1996, the trading price ofthe Company's common stock fell from $13.50 per share, its closing price

on October 9, 1996, to close at $9.19 per share on October 10, 1996, a one-day decline of more than

$4 per share or approximately 32% on unusually high volume of over 16 million shares. The closing

price on October 10, 1996, represented a decline in value of approximately 73% from the Class

Period high of $33.125 per share (on March 29, 1996). Upon further adverse revelations from the

Company, the price of Sunglass Hut stock has continued to deteriorate. Numerous analyst

downgrades also followed the Company's October 10 news.

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Post-Class Period Events Confirm theExistence of Fraud During the Class Period

127. On or about October 10, 1996, Alex. Brown reduced its rating ofthe Company

to "Neutral" in a report that declared , among other things , "SEPTEMBER SAME-STORE SALES

BELOW EXPECTATIONS"; "NEW STORE PERFORMANCE BELOW EXPECTATIONS";

"MASSIVE INVENTORY REDUCTION PROGRAM IN PLACE"; and "NEW STORE

EXPANSION REDUCED SOMEWHAT."

128. A critical report from Morgan Stanley that date explained further that:

RAYS has a number of issues to contend with. First, store traffic andcomps are likely to remain somewhat lackluster until 1Q97, when anumber ofmanufacturers plan to launch new sunglass lines. Second,it is experiencing an unanticipated slowdown in sales productivity.Third, inventory levels are now forecast to end 3Q96 at $170 million,up 78% from last year and $30 million above where we believe theyshould be. Fourth, interest expense should be higher to reflect thecarrying costs of inventory. Finally, the rate of new-store growthcould be hurt if RAYS discovers that certain areas of expansion maynot make economic sense. The outcome is a lack of good sales andearnings visibility for 1997.

The same report further commented on the Company's inventory problem:

INVENTORY LEVELS HAVE DETERIORATED FURTHER.Inventory is sharply higher, now likely to finish 3Q96 at $165-$170million, up 74-79% in total, and 37-41% on a per-store basis. In lightof the (just) $9 million shortfall in our 1996 forecast, we believeinventory controls are not close to where they need to be. Beyondthe unexpected slowdown in sales, RAYS' high inventory levelsreflect: ( 1) a more ambitious internal sales plan; (2) roughly 100 newstores in 3Q96; and (3 ) increased purchasing of back-up stock duringRAYS' warehouse consolidation in Atlanta. [Emphasis added.]

129. Further, on October 10, 1996, the Bloomberg News wire service reported in

a story about Sunglass Hut's stunning disclosures reported on the same day that Alan Mill stein, editor

of Fashion Network Report said of Sunglass Hut: "They're not selling value, they're selling sizzle,

and the sizzle is running out as far as consumers are concerned. The whole enterprise is filled with

-67-


a lot of helium with no end to the promises made to the investment community. To bl ame the

weather is a limp excuse for overexpansion and underdemand. " (Emphasis added.)

130. An October 10, 1996 Alex. Brown & Sons report noted that "Sunglass Hut

is having a difficult time getting new stores opened on time. The problem is chiefly related to

international stores and stores in non-traditional retail locations . Unfortunately, these stores generate

higher initial revenues."

131. Similarly, an October 11, 1996 report from Bear Stearns summarized Sunglass

Hut's deteriorating situation as follows:

Sunglass Hut International : Same-store sales were Below Plan.RAY's same store sales for September were up 2 . 1 % vs. up 9 . 6% lastyear. Big disappointment in sales trends -- earnings expectationsdramatically reduced ! Double digit same store sales declines wereexperienced in new stores that have only recently been included in thecomparable base -- still searching for reasons besides lack of trafficand new products . Inventory levels expected to increase in the rangeof60%-65% in Q3. We estimate Oct. same store sales to be flat to up2% vs. 4.2%LY. [Emphasis added.)

132. Thereafter, the Company reported additional facts relating to the continuing

decline ofthe Company's business, which decline had set in prior to and continued during the Class

Period.

(a) On November 7, 1996, the Company reported that comparable store

sales results for the four week period ending November 2, 1996 had declined 1.7% in relation to sales

in the same period ofthe prior year. Commenting on these disappointing results, and responding to

the criticism of Sunglass Hut, defendant Chadsey stated, in pertinent part, that:

As the sunglass indust continues to transition, we have initiatedactions which will give Sunglass Hut greater control over its business.... we are evaluating the productivity of our merchandise assortment,store location types and our vendors to ensure we can support ourgrowth needs as well as meet the new product demands of our

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customers. That said, we are focused on getting back to the basics ofour business .... [Emphasis added.]

(b) On November 21, 1996, the Company reported its financial results for

the third quarter of fiscal 1996, the quarterly period ended November 2, 1996. For that period, the

Company reported that per share results had decreased to a net loss of $0.05 per share, or a reported

loss of $2. 9 million, compared to earnings of $0.05 per share, or $2.5 million, for the third quarter

of fiscal 1995. The Company reported significantly higher selling, general and administrative

expenses (SG&A), primarily as a result of higher costs associated with the Company's expansion.

According to the Company:

Third quarter results were negatively impacted by $0.03 per share dueto charges to reflect higher than anticipated inventory shrinkage ... andchanges in manufacturers ' return policies which resulted in defectiveproduct write-offs.

The Company's press release also noted that sunglass sales had weakened and attributed the weakness

to cooler weather and "a general lack of exciting, new product ...". Commenting on the Company's

disappointing results, defendant Chadsey stated:

While we are navigating our way through this industry transition, weare repositioning the organization to attract new customers to ourlocations and to give greater control of future new product flow. Inaddition, we are re-focusing the organization on the execution of thebasics of our business ... we expect general business trends to remainunchanged during the fourth quarter and we anticipate fourth quarterearnings per share to fall below 1995's levels. Additionally, we areevaluating the profitability of our existing 2,000 stores in order toeliminate marginal or unprofitable sites through closure. While thisprocess is not yet complete, we expect that this evaluation will identifysites for closure. We anticipate completing our review in the next 90days and recording the cost associated with anticipated closuresduring the fourth quarter of fiscal 1996.

(c) An article in The San Francisco Chronicle on November 22, 1996

referred to an earlier May 1994 article that was cynical of the Company's explosive growth:

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Case 1:97-cv-00191-KMM 9ocument 22 Entered on FLSD Docket 06/19/1997 of 9111

"Where the Sun Don't Shine" was the headline over an item here inMay of 1994. It suggested that aggressive accounting helped brightenSunglass Hut's future. The Miami chain's stock proceeded toskyrocket, zooming to a high [in April of) this year of around $36 --making its critics look pretty silly.

But just because a stock skyrockets doesn't necessarily mean itsunderlying business is really solid or that it will be able to keep themomentum.

In the case of Sung ass Hut, it turns out, the critics were merely early

It looks like Sunglass Hut grew faster than its internal controls. Lastyear, for example, it acquired a chain called Sunsations, whichapparently had a number of employees with sticky fingers. Lastquarter's loss for ,glass Hut included a charge for "inventoryshrinkage" -- a retail euphemism for employee theft -- at the formerSunsations locations.

To counter the slide, the company is rolling out a new concept calledWatch Station ...

(d) On December 5, 1996, the Company again announced extremely

disappointing comparable store sales results, reporting that comparable store sales for the four-week

period ended November 30, 1996, had decreased 9.9% . The Company also held a conference call

with investment analysts and other members ofthe investment community, during which the Company

commented on its poor performance, explaining that the Company had taken a charge to reflect

approximately $1 million in shrinkage relating to its Sunsations store locations, and also attributable

to higher inventory positions, as well as a $1.5 million charge reflecting a negotiated settlement with

a sunglass manufacturer, in which Sunglass Hut and the manufacturer split the warranty costs

associated with defective glasses.

(e) Also on December 5, 1996, Oakley, one of the Company's largest

vendors, announced that Sunglass Hut had previously "requested that Oakley delay shipment of its

November orders " and that "Based on discussions with the Sunglass Hut and Oakley's own

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Case 1:97-cv-00191-KMM 4ocument 22 Entered on FLSD Docket 06/19/1997 of 91 q

assessment of the Sunglass Hut inventory levels, the company [Oakley] believes Sunglass Hut will

also delay or cancel all other orders pending this quarter." A Bloomberg report of the same date

noted that Oakley stock fell 24% after "slumping orders from its largest customer [Sunglass Hut]

would slice fourth-quarter earnings to half of analysts' expectations ." According to the report,

"Sunglass Hut International, Inc., had delayed or canceled orders for the rest of the year because of

slack demand."

(f) Similarly, on December 19, 1996, Bausch & Lomb, another of Sunglass

Hut's key vendors, announced that Sunglass Hut had reduced orders in August and October, and that

since that time, Sunglass Hut had canceled all of its fourth quarter 1996 orders from Bausch & Lomb.

133. As alleged herein, defendants acted with scienter in that defendants knew or

recklessly disregarded that the public documents and statements issued or disseminated in the name

of the Company were materially false and misleading ; knew or recklessly disregarded that such

statements or documents would be issued or disseminated to the investing public; and knowingly or

recklessly and substantially participated or acquiesced in the issuance or dissemination of such

statements or documents as primary violations of the federal securities laws. As set forth elsewhere

herein in detail, defendants , by virtue of their receipt or reckless disregard of information reflecting

the true facts regarding Sunglass Hut, their control over, and/or receipt and/or modification of

Sunglass Hut's allegedly materially misleading misstatements and/or their associations with the

Company which made them privy to confidential proprietary information concerning Sunglass Hut,

participated in the fraudulent scheme alleged herein. In particular, among other things:

(a) Defendants are each sophisticated, experienced individuals holding

senior executive , managerial or other relationships and positions with the Company which provided

-71-


(

to each of them the access and ability to receive and obtain information concerning the numerous

material problems outlined above which adversely impacted the Company's operations at all relevant

times.

(b) As detailed below, the exceptional amount of "well-timed" insider sales

of Company stock gives rise to a strong inference of scienter.

(c) Defendants had access to a purportedly state of the art distribution

system which supposedly kept them apprised of precise trends, stock positions and sales. As the

Company's 1995 Annual Report states at page 10:

Our sophisticated point-of-sale computer system enables us to

pinpoint sales trends both by location and by merchandise category.This allows us to keep ahead of the competition by identifying what's

hot, ensuring that stores have adequate stock on hand and working

with vendors to develop new products.

(d) The Company enjoyed substantial relationships with key vendors,

characterized by the Company as "partnerships" (Annual Report at 8), which placed defendants in a

unique position to know and remain abreast of prevailing product and selling trends and market

conditions, and resulted in a sharing of forecasting assumptions and other vital market information

which indicated that the Company's markets had substantially weakened.

134. A key management tool for Sunglass Hut's Board and top executives was

Sunglass Hut's business plan, budget, forecast and/or yearly projection, by which Sunglass Hut's top

executives set performance goals for Sunglass Hut and its various divisions and then closely

monitored the Company's actual performance, Le, results of operations, compared to the planned,

budgeted and/or forecasted results on a continuing basis. These plans, forecasts and budgets were

prepared at least annually, and were updated during the year. All of the Individual Defendants were

aware of Sunglass Hut's internal plan, forecast and budget during the fiscal year and of the internal

-72-


reports prepared and circulated monthly and quarterly comparing Sunglass Hut's actual results to

those previously planned , budgeted and/or forecasted . Sunglass Hut ' s senior executives used

Sunglass Hut's internal plan, budget and forecast as the basis for the statements they made publicly

about Sunglass Hut's performance during the Class Period . Based on the negative internal reports

of Sunglass Hut's actual business performance compared to that planned , budgeted and forecasted,

defendants knew or recklessly disregarded at all relevant times that those public statements, and those

of securities analysts for which Sunglass Hut is responsible, were Use and misleading when made and

were inflating the market price of Sunglass Hut common stock.

135. Throughout the Class Period, by virtue of their status as senior executives

and/or directors of Sunglass Hut, the Individual Defendants , and certain other key management

personnel of the Company, held periodic meetings to discuss material aspects of the Company's

continuing operations . At or prior to such meetings, defendants were able to and did receive the

Company' s internal plans, projections , budgets and forecasts as well as information and data

conveying the Company's actual performance, i&, results of operations, compared to the planned,

budgeted and/or forecasted results on a continuing basis. Based on the negative internal reports of

Sunglass Hut's actual business performance compared to that planned, budgeted and forecasted,

defendants knew or recklessly disregarded that the Company's public statements, and those of

securities analysts for which Sunglass Hut assumed responsibility by its actions, were materially false,

misleading and lacking in reasonable basis when made and were inflating the market price of Sunglass

Hut stock at all relevant times.

-73-

Case 1:97-cv-00191 -KMM Document 22 Entered on FLSD Docket 06/19/1997 of 91 q

C

136. Defendants engaged in such schemes to facilitate the Company's own sale of

approximately $100 million of convertible debentures, on or about June 20, 1996, in order to raise

needed capital on favorable terms, as well as to pursue their own lucrative insider sales.

137. Because oftheir positions as described above, defendants knew of or recklessly

disregarded, inter Wia, the following material, undisclosed adverse facts regarding Sunglass Hut's

business operations and financial condition, most (if not all) of which were statements of current or

historical facts, j,g,., not projections, and which refuted or undermined the public statements about

Sunglass Hut which they made, caused , permitted or endorsed during the Class Period:

(a) That between March 21 and August of 1996, the Company's highly

touted new consolidated inventory and distribution center in Atlanta was not fully operational and

was not providing any of the advances and efficiencies in inventory and distribution control that

defendants were publicly promoting;

(b) That the Company's actual existing condition with respect to its

inventory and distribution controls before and after the new facility became fully operational was

materially undermined by systemic problems, including a breakdown of key computer software,

problems in automation, inadequate and poorly trained staff, physical plant problems and an overall

inability to track and provide a meaningful accounting of purchase orders, sales and inventory;

(c) That the inventory and distribution control problems had resulted in

a growing material amount of lost or missed orders or shipments erroneously placed or filled,

inventory shrinkage at the catalog and retail store level and the Company's overall inability to provide

a meaningful accounting of its purchase orders and inventory at both the consolidated inventory and

distribution center and the retail stores, and thus that the Company's disclosed sales and growth

-74-


figures and purported high-growth trends were demonstrably unrepresentative of the Company's

operating strength and commercial appeal and opportunities at all relevant times;

(d) That the Company's current in-stock position and inventories were

excessively bloated, resulting in excessive carrying costs, and the Company could not reasonably

expect either to sell off or to return excess inventories to vendors with whom the Company enjoyed

no such rights of return (notwithstanding defendants' remarks to the contrary);

(e) That Sunglass Hut's existing markets for its product lines were not

expanding and demand was not increasing for the Company's products and its future sales growth and

earnings prospects were in decline;

(f) That the Company's Oakley product lines were not and would not be

competing favorably in the market because (i) the Company was not providing adequate promotional

support for the product line which was extremely sensitive to catalog and promotional efforts, and

(ii) Oakley sunglasses are niche products which have limited markets and limited potential for

providing sustained revenue growth, especially when there was inadequate promotional and/or

catalog support for these niche products;

(g) That the Company's current in-store position and inventories were so

excessive that the Company was engaged in the unilateral cancellation of most, if not all, of its

existing purchase orders with its vendors, including large suppliers such as Oakley, even though the

Company did not enjoy unlimited rights of return with its vendors, and was increasingly forced to

engage in costly discounting and promotional efforts;

(h) That the Company's important catalog marketing efforts were failing

and that the material delays precluded the Company from reaching the important "back-to-school"

market from mid-August to mid-September;

-75-


(i) That the Company was desperately trying to maintain its purported

sales figures by allowing excessive amounts of store credit for customer returns, without any

meaningful inquiry into whether the returned products were even purchased at a Sunglass Hut store,

or the price paid for the returned product, and that the Company was also accepting the return of

non-warrantied products without a meaningful warranty inspection process;

(j) That the Company's "growth strategy" of rapidly opening new stores

was failing and that the Company was not in a position to grow its way out of its problems and would

have to retrench and close (or fail to open) as many as 100 stores;

(k) That the premium sunglass market was saturated and the demand for

its products had peaked;

(1) That a slowdown in mall traffic was having a substantial negative

impact on the Company's sales;

(m) That a lack of "exciting, new product" offerings was severely impacting

the Company's sales;

(n) That the Company's prescription eyewear (EyeX) and watch niche

(Watch Station) store concepts were inadequate to support Sunglass Hut's purported growth

trajectory in the absence of growth in its more established , core business;

(o) That Sunglass Hut was not experiencing successful expansion in its

markets and that continued profitable growth was unlikely to occur;

(p) That inadequate promotional support provided to Sunglass Hut's

products, serious problems with the Company's distribution facilities, and negative sales trends which

were severely short of planned levels severely undermined or invalidated all estimates and projections

-76-

Case 1:97-cv-00191-KMM [?ocument 22 Entered on FLSD Docket 06/19/1997 of 91 q

by defendants relating to Sunglass Hut and its operations and results, such that they were lacking in

reasonable basis at all relevant times; and

(q) That the Company's strategy of rapid expansion was failing and the

Company was experiencing marketing and distribution problems which seriously undermined the

ability of the Company to achieve earnings in keeping with what defendants had previously

conditioned the market to expect, particularly in light of its inadequate advertising and promotional

support and its distribution problems.

138. The Individual Defendants engaged in their scheme to, among other things,

inflate the price of Sunglass Hut securities in order to facilitate substantial and extremely profitable

insider sales of Sunglass Hut stock during the Class Period, as set forth below:

CHADSEY, JACK B.

DATE SHARES

4/25/96 50,000$ 1,635,000

4/30/96 50,000$ 1,600,000

GRUND, EDWARD L.

PRICE PROCEEDS

32.70

32.00

TOTAL $ 3,235,000

DATE SHARES PRICE PROCEEDS

4/16/96 8,250 27. 94 $ 230,505

4/16/96 8,000 27 . 94 $ 223,520

4/16/96 5,000 28 . 19 $ 140,950

-77-

Case 1 : 97-cv-00191 -KMM [document 22 Entered on FLSD Docket 06/19/1997 of 91 q

4/16/96 15,000$ 419,100

PETERSEN, LARRY G.

DATE SHARES

4/18/96 7,000

4/18/96 2,500

4/18/96 10,000$ 277,500

4/18/96 15,000$ 418,200

PITA, GEORGE L.

DATE SHARES

4/19/96 10,000$ 282,500

4/19/96 2,500

4/19/96 500

4/19/96 14,500$ 408,755

27.94

TOTAL $ 1,014,075

PRICE PROCEEDS

28.00 $ 196,000

27.75 $ 69,375

27.75

27.88

TOTAL $ 961,075

PRICE PROCEEDS

28.25

28.69 $ 71,725

28.69 $ 14,345

28.19

TOTAL $ 777,325

Total for All Individual Defendants:$5,987,475

139. The market for Sunglass Hut's common stock was open, well-developed and

efficient at all relevant times. As a result of the above-described false and misleading statements and

failures to disclose the full truth about Sunglass Hut and its business and future prospects, the

-78-

Case 1:97-cv-00191-KMM Document 22 Entered on FLSD Docket 06/19/1997 of 91 q{ (*

Company's common stock traded at artificially inflated prices during the entire Class Period until the

time the adverse information described above was finally provided to and digested by the securities

market. Plaintiffs and other members of the Class purchased or otherwise acquired Sunglass Hut

common stock relying upon the integrity of the market price of Sunglass Hut stock and market

information related to the Company, or in the alternative, upon defendants' false and misleading

statements, and in ignorance ofthe adverse, undisclosed information known to defendants, and have

been damaged thereby. Upon disclosure of the true facts regarding the Company, the market

valuation of the Company's stock declined precipitously. Had plaintiffs and other members of the

Class known ofthe materially adverse information not disclosed by defendants, they would not have

purchased or acquired Sunglass Hut's common stock at the artificially inflated prices that they did.

140. At all relevant times, the misrepresentations and omissions particularized in

this Complaint directly or proximately caused or were a substantial contributing cause of the damages

sustained by plaintiffs and other members ofthe Class. As described herein, during the Class Period,

defendants made or caused to be made a series of false statements about Sunglass Hut's revenues and

earnings. These misstatements and omissions had the cause and effect of creating in the market an

unrealistically positive assessment of Sunglass Hut, the value of its inventories, its profitability and

its business trends and prospects, thus causing the Company's common stock to be substantially

overvalued and artificially inflated at all relevant times. Defendants' false portrayal of Sunglass Hut,

its business, operations and future prospects during the Class Period resulted in plaintiffs and other

members ofthe Class purchasing the Company's common shares at a disparity between their market

price and their actual value, thus causing the damages complained of herein. The undisclosed and

omitted facts alleged herein touched upon and precipitated the sharp decline in the market value of

the Company's securities upon ultimate disclosure at the end of the Class Period. Untimely and

-79-


inadequate disclosure allowed the stock to trade at excessive and undue multiples, assuming high,

protracted growth, throughout the Class Period.

[Against All Defendants For Violations OfSection 10(b) Of The Exchange Actl

141. Plaintiffs repeat and reallege each and every allegation set forth above.

142. This claim is brought against the defendants with respect to the entire Class

Period and on behalf of plaintiffs and the Class.

143. The defendants individually and in concert , directly and indirectly, by the use

of means or instrumentalities of interstate commerce and/or of the mails, engaged and participated

in a continuous course of conduct to conceal adverse material information about the business,

operations and prospects of Sunglass Hut as specified herein. The defendants employed devices,

schemes and artifices to defraud, while in possession of material adverse non-public information and

engaged in acts, practices, and a course of conduct as alleged herein in an effort to assure investors

of Sunglass Hut's value and performance and continued substantial growth, which included the

making of, or the participation in the making of, untrue statements of material facts and omitting to

state material facts necessary in order to make the statements made about Sunglass Hut and its

business operations and prospects in the light of the circumstances under which they were made, not

misleading, at least to the extent set forth more particularly herein, and engaged in transactions,

practices and course of business which operated as a fraud and deceit upon the purchasers of

Sunglass Hut securities during the Class Period.

144. The defendants had actual knowledge ofthe misrepresentations and omissions

of material facts set forth herein, or acted with reckless disregard for the truth in that they failed to

-80-

Case 1:97-cv-00191-KMM [iocument 22 Entered on FLSD Docket 06/19/1997 of 91 F1

ascertain and to disclose such facts, even though such facts were available to them, or willfully

blinded themselves to such facts. Such defendants' material misrepresentations and/or omissions were

done knowingly or recklessly and for the purpose and effect of concealing Sunglass Hut's operating

condition and business prospects from the investing public and supporting the artificially inflated price

of its stock. As demonstrated by defendants' misstatements of the Company's business, operations

and financial condition throughout the Class Period, defendants, ifthey did not have actual knowledge

of the misrepresentations and omissions alleged, were reckless in failing to obtain such knowledge

by deliberately refraining from taking those steps necessary to discover whether those statements

were false or misleading and/or consciously and culpably disregarding negative and contradictory

information in their possession or control and/or to which they had access.

145. As a result of the dissemination of the materially false and misleading

information and failure to disclose material facts, as set forth above, the market prices of Sunglass

Hut securities were artificially inflated during the Class Period. In ignorance of the materially false

and misleading nature of the reports and statements described above, plaintiffs and other members

of the Class relied, to their damage, on the reports and statements described above and/or on the

integrity of the market prices of Sunglass Hut securities and the completeness and accuracy of the

information disseminated to Sunglass Hut investors in connection with their purchases of the

Company's securities.

146. At the times of said misrepresentations and omissions , plaintiffs and other

members ofthe Class were ignorant of their falsity, and believed them to be true . Plaintiffs and other

class members could not in the exercise of reasonable diligence have known the actual facts. In

reliance on said misrepresentations and in reliance upon the superior knowledge and expertise of

defendants and on the integrity ofthe market, plaintiffs and other members of the Class were induced

-81-


to and did purchase Sunglass Hut securities at artificially inflated prices. Had plaintiffs and other

members of the Class known the truth, they would not have taken such action.

147. By virtue of the foregoing, defendants have violated Section 10(b) of the

Exchange Act and Rule I Ob-5 promulgated thereunder of the Exchange Act.

148. Plaintiffs and other members of the Class have been damaged by defendants'

violations as described in this Count and seek recovery for the damages caused thereby.

[Against The Individual Defendants ForViolations Of Section 20(a) Of The Exchange Act]

149. Plaintiffs repeat and reallege each and every allegation made above.

150. This Count is brought by plaintiffs against the Individual Defendants with

respect to the entire Class Period and on behalf of plaintiffs and the Class.

151. By reason oftheir control over the operations of Sunglass Hut, the Individual

Defendants are "controlling persons" ofthe Company within the meaning of § 20(a) of the Exchange

Act and had the power and influence (which they exercised) to cause Sunglass Hut to engage in the

unlawful conduct complained of herein, and could have prevented such violations from taking place

but failed to do so.

152. By reason of these Individual Defendants each being a "controlling person,"

as that term is defined in Section 20(a) of the Exchange Act, of other persons primarily liable to

plaintiffs and the Class pursuant to the claims arising under Section 10(b) of the Exchange Act alleged

above, the defendants named in this Count are secondarily liable for those primary violations pursuant

to Section 20(a) of the Exchange Act.

-82-

Case 1:97-cv-00191-KMM I?ocument 22 Entered on FLSD Do?ket 06/19/1997 of 91 q

Plaintiffs hereby demand a trial by jury.

WHEREFORE, plaintiffs, on their own behalf and on behalf of the Class, pray for

judgment as follows:

A. Declaring this action to be a plaintiff class action properly maintained pursuant to

Rules 23(a) and (b)(3) of the Federal Rules of Civil Procedure;

B. Awarding plaintiffs and other members of the Class damages together with interest

thereon;

C. Awarding plaintiffs and other members of the Class their costs and expenses of this

litigation, including reasonable attorneys' fees and experts' fees and other costs and

disbursements; and

D. Awarding plaintiffs and other members of the Class such other and further relief as

may be just and proper under the circumstances.

Dated : June , 1997

BURT PUCILLO

Byi'ael J. Pucillo

Florida Bar No . 261033Wendy ZobermanFlorida Bar No. 434670

222 Lakeview AvenueSuite 300 EastWest Palm Beach, FL 33401(561) 835-9400

-83-

Case 1:97-cv-00191-KMM Document 22 Entered on FLSD Docket 06/19/1997

MJLBERG WEISS BERSHADHYNES & LERACH LLP

^ 1 n /J

Steven G. SchulmanRalph M. Stone

One Pennsylvania PlazaNew York, New York 10119-0165(212) 594-5300

STULL, STULL & BRODY

By:jy ' 2 , / 1)Jules BrodMark LevineMelissa R. Emert

6 East 45th StreetNew York, New York 10017

(212) 687-7230

Jack G. FruchterFRUCHTER & TWERSKY275 Madison AvenueSuite 1000New York, New York 10016(212) 889-9351

Richard S. SchiffrinAndrew L. BarrowaySCHIFFRIN & CRAIG, LTD.Three Bala Plaza EastSuite 400Bala Cynwyd, Pennsylvania 19004

(610) 667-7706

Joseph WeissJack ZwickWEISS & YOURMAN551 Fifth AvenueNew York, New York 10176(212) 682-3025

of 91 q

-84-


C

Robert C. SusserROBERT C. SUSSER, P.C.6 East 43rd StreetSuite 1900New York, NY 100 17-4609(212) 808-0298

Arthur T. SusmanSUSMAN BUEHLER & WATKINS

Two First National PlazaChicago , IL 60603

(312) 346-3466Steven TollMatthew IdeCOHEN MILSTEIN HAUSFELD

& TOLL LLC1301 Fifth Avenue, Suite 2905

Seattle , WA 98101(206) 521-0080

Fred Taylor IsquithMichael JaffeIra P. Lustbader

WOLF HALDENSTEIN ADLERFREEMAN & HERZ LLP

270 Madison Avenue

New York, NY 10016

(212) 545-4600

Leo W. DesmondFlorida Bar No. 0041920

LAW OFFICE OF LEO W. DESMOND

2161 Palm Beach Lakes Blvd.

Suite 204West Palm Beach Lakes, FL 33409

Attorneys for Plaintiffs

-85-


CERTIFICATE OF SERVICE

I HEREBY CERTIFY that a true and correct copy of the foregoing has been furnished to

counsel on the attached service list this 121 day of June, 1997, via U. S. Mail.

AEL P CIIL.LO

f:\Eadie\63132\ amended.com

-86-


Transacti ons in Sung lass Hut Securities

Albert Biagas :

By Named Plaintiffs*

Date

9/13/96

Action

Purchase

Amount

300

Price

$18.00

I+O-q---

10/10 /96 Purchase 1,000 $9.625

10/11/ 96 Sale 1,300 $8.50 $3,533.00

Stephen C

7/18/96

olanero :

Purchase 1,000 $ 14.70 $6,876.00

Gina Florens :

5/21/96 Purchase 500 $28.00

7/2/96 Purchase 500 $18 .00 $15,176.00

John F. C

7/30/96

urry, Jr. :

Purchase 400 $12.00 $1 , 670.00

Alan Anderson :

4/3/96 Purchase 100 $30.25

4/11/96 Purchase 100 $27.125

7/2/96 Purchase 200 $19.50 $6,508.00

Jame J. Smith :

9/18/96 Purchase 150 $17.984

9/9/96 Purchase 250 $16.125

9/5/96 Purchase 250 $15.75 $5, 580.00

*This information is based on certifications and affidavits filed

with the Court.Schedule A


Gene Willner :

5/24/96 Purchase 300 $28.625

7/16/96 Sale 300 $16.25 $3,720.00

George RU

6/10/96

dolph:

Purchase 100 $27.875

12/31/96 Sale 100 $7.00 $2,005.00

A. Garfin

3/19/96

kel :

Purchase

tot

1,000

al purchase price

$36,317.50

3/21/96 Purchase 1,000 $29,442.50

7/1/96 Purchase 1,000 $21,067.50

7/1/96 Purchase 1,000 $23,688.00

7/2/96 Purchase 1,000 $18,692.00

8/19/96 Option exercise 1,000 $20,060.00

8/19/96 Option exercise 2,000 $17,567.00

5/20/96 Option exercise 2,000 $30,057.50

9/25/96 Purchase 1,000 $14,317.50

10/8/96 Purchase 1,000 $14,067.50

10/10/96 Purchase 2,000 $19,067.50

12/31/96 Purchase 1,000 $6,932.00

3/25/96 Sale $31,240.00

9/26/96 Sale $15,432.50

12/31/96 Sale $6,932.50

$113,093.00

Schedule A (continued)


Andrew Ruttenberg :

5/10/96 Purchase

7/16/96 Purchase

10/10/96 Purchase

12/6/96 Purchase

1/14/97 Sale

1/14/97 Sale

500

500

500

500

500

500

Schedule A (continued)


Steven G. Schulman, Esq.Ralph M. Stone, Esq.MILBERG WEISS BERSHAD HYNES& LERACH LLPOne Pennsylvania AvenueNew York, NY 10119-0165

Melissa Emert, Esq.STULL STULL & BRODY4933 Chardonnay DriveCoral Springs, FL 33067

Hilarie Bass, Esq.Gary D. Weinfeld, Esq.BROBECK PHLEGER & HARRISON1221 Brickell AvenueMiami, FL 33131

Fred T. IsquithWOLF HALDENSTEIN ADLERFREEMAN & HERZ LLP270 Madison AvenueNew York, NY 10016

Richard S . SchiffrinAndrew L. BarrowaySCHIFFRIN & CRAIG, LTD.Three Bala Plaza EastSuite 400Bala Cynwyd, Pennsylvania 19004

Jules Brody, Esq.STULL STULL & BRODY6 East 45th StreetNew York, NY 10017

-87-

Jack G. Fruchter, Esq.FRUCHTER & TWERSKY275 Madison AvenueSuite 1000New York, NY 10016

-89-

Michael D. Torpey, Esq.Patrick T. Murphy, Esq.BROBECK PHLEGER & HARRISONSpear Street TowerOne MarketSan Francisco , CA 94105

-91-

Leo W. Desmond, Esq.LAW OFFICE OF LEO W. DESMOND2161 Palm Beach Lakes Blvd.Suite 204West Palm Beach, FL 33409

-93-

Joseph WeissJack ZwickWEISS & YOURMAN551 Fifth AvenueNew York, NY 10176

-95-

Case 1:97-cv-00191-KMM Document 22 Entered on FLSD Docket 06/19/1997

Robert C. Susser Steven J. Toll

ROBERT C. SUSSER, P.C. COHEN, MILSTEIN,

6 East 43rd Street HAUSFELD & TOLL, P.L.L.C.

Suite 1900 1100 New York Ave,. N.W.

New York, NY 10017-4609 West Tower, Suite 500

Washington, DC 20005

-97-

Arthur T. Susman, Esq.SUSMAN, BUEHLER & WATKINS

Two First National Plaza

Chicago, Illinois 60603

of 91 q

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albert biagas, et al. v. sunglass hut international, inc...

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