united states district court robert ross, individually...

UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF OHIO

EASTERN DIVISION

ROBERT ROSS, Individually and On Behalf of All Others Similarly Situated

Plaintiff,

vs.

ABERCROMBIE & FITCH COMPANY, et al.,

Defendants.

) ) ) ) ) ) ) ) ) ) ) )

No. 2:05-cv-00819-EAS-TPK (Consolidated)

CLASS ACTION

DEMAND FOR JURY TRIAL

AMENDED COMPLAINT FOR VIOLATION OF THE FEDERAL SECURITIES LAWS

MURRAY MURPHY MOUL + BASIL LLP GEOFFREY J. MOUL BRIAN K. MURPHY 1533 Lake Shore Drive Columbus, OH 43204 Telephone: 614/488-0400 614/488-0401 (fax)

Liaison Counsel

LERACH COUGHLIN STOIA GELLER RUDMAN & ROBBINS LLP DARREN J. ROBBINS LAURA M. ANDRACCHIO TED MINAHAN 655 West Broadway, Suite 1900 San Diego, CA 92101-4297 Telephone: 619/231-1058 619/231-7423 (fax)

Lead Counsel for Plaintiff

Case 2:05-cv-00819-EAS-TPK Document 68-1 Filed 08/14/2006 of 57

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INTRODUCTION AND SUMMARY OF THE ALLEGATIONS

1. Lead Plaintiff, City of Dearborn Heights Act of 345 Police and Fire Retirement

System, brings this action on behalf of itself and all persons who purchased the publicly-traded

securities of Abercrombie & Fitch Co. (“Abercrombie” or the “Company”) from June 2, 2005

through August 16, 2005 (the “Class Period”). The action is brought against Abercrombie and the

Company’s senior officers, Michael S. Jeffries, Robert S. Singer, David L. Leino, Diane Chang and

Leslee K. O’Neill, for violations of §§10(b), 20(a) and 20A of the Securities Exchange Act of 1934

(“Exchange Act”).

2. Throughout the Class Period, defendants misrepresented Abercrombie’s financial

performance by reporting very strong sales on a monthly basis from May through July 2005

(Abercrombie’s second fiscal quarter), while concealing the fact that Abercrombie’s gross margin, a

key indicator of profitability and earnings, was declining materially compared to the prior year.

Among other things, defendants falsely assured the investment community that sales of one of

Abercrombie’s most important and expensive product lines, denim, were strong and increasing

dramatically, indicating that the Company’s profitability was tracking its impressive overall sales

results. In reality, by May 2005 and continuing through July, Abercrombie was accumulating excess

inventories of denim and other products, causing defendants to take extraordinary measures to sell

them, such as drastic markdowns, employee giveaways and discounted sales to low-end retailers, all

of which reduced Abercrombie’s gross margins. As a result of defendants’ misrepresentations,

Abercrombie’s stock price rose from under $58 to an all-time high of over $74 during the Class

Period. While the stock traded at these artificially high levels, and while knowing that

Abercrombie’s profitability was declining, defendants unloaded 1.9 million of their own

Abercrombie shares within a matter of days in June and July for total proceeds of a staggering $137

million. Then, on August 16, 2005, defendants reported to the dismay of investors that


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Abercrombie’s gross margin had declined 180 basis points in the second quarter (“2Q”) of fiscal

2005 (“FY05”) from 2Q FY04. Abercrombie’s inventory had also increased by over 60% in one

quarter, three-fourths of which was excess denim. As a result of lower profitability, Abercrombie’s

2Q earnings were 8.7% below consensus estimates. Abercrombie’s stock price fell precipitously the

next day to a low of $56.65, below its price at the beginning of the Class Period and 23.5% below its

Class Period high of $74.10.

3. On January 5, 2006, Abercrombie disclosed that the Securities and Exchange

Commission (“SEC”) had commenced a formal investigation centering on whether certain former

and current officers improperly traded Abercrombie securities.

4. The events leading up to defendants’ fraud commenced several months prior to the

Class Period. In early 2005, defendants began to increase Abercrombie’s inventories, particularly in

Abercrombie’s denim line, which was popular and had performed well in 2004. Investors and

analysts were concerned that such a large build-up in inventory would create markdown and

earnings risks if Abercrombie’s sales did not increase proportionally. Unbeknownst to the

investment community, several high level Abercrombie executives shared these concerns, and

advised certain Individual Defendants, including Jeffries and Leino, that the increase in denim

inventories was likely to exceed market demand for that line and could be very disadvantageous to

the Company. Defendants nevertheless assured investors that the inventory increase was primarily

in denim, a “basic” or non-seasonal line which defendants said carried no markdown risk and

reliably commanded among the highest prices of all of Abercrombie’s products.

5. Before and during the Class Period, defendants also repeatedly stressed

Abercrombie’s unique business strategy of eliminating all promotional activity, taking fewer and less

significant markdowns, and focusing on higher prices per transaction versus more transactions at

lower prices. Abercrombie customers were being “trained” to pay top dollar for its high quality


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merchandise. Defendants assured investors that this strategy would translate into more sales at

higher gross margins. In May 2005, defendants reported that Abercrombie’s gross margin had

increased by 30 basis points in 1Q FY05 from 1Q FY04, indicating that its strategy was succeeding.

6. On June 2, 2005, before the market opened, defendants reported Abercrombie’s May

sales numbers, which were above analysts’ expectations. Abercrombie’s comparable store sales

increased 29% and its net sales had increased by 43% over May 2004. Defendants also

unexpectedly reported that Abercrombie’s May denim sales had increased 166% from May 2004.

The Company had never included denim sales in any of its previous monthly sales reports, but did so

in June 2005 to convince investors that sales of that line were robust.

7. The June 2, 2005 report included a pre-recorded conference call, in which defendants

also announced that Abercrombie had initiated its Spring promotional clearance sale in the last week

of May, two weeks earlier than prior Spring promotions. Abercrombie reported that the Spring sale

“was planned earlier to prepare for an expanded preview of our back to school assortment.”

8. Abercrombie’s May sales report placated analysts that Abercrombie’s Spring

clearance and increase in denim inventory would not have an adverse effect on Abercrombie’s

earnings or gross margin. Defendants’ month-end report did not include data on Abercrombie’s

gross margin, which they reported quarterly. As one analyst reported: “We believe the strength in

denim, which was up 166%, suggests that the company is not going to be the victim of a denim

glut.” Another analyst reported: “ANF continues to benefit from its improved inventory position,

higher pricing, increased store level service and a positive denim cycle.” Due to Abercrombie’s May

sales numbers, securities analysts increased their 2Q FY05 earnings per share (“EPS”) estimates for

the Company. Analysts also anticipated that 2Q FY05 margins would meet or exceed 2Q FY04

margins of 70%, since 1Q margins had improved significantly and sales were increasing

dramatically, particularly in denim.


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9. Based on Abercrombie’s June 2, 2005 May sales numbers, its share price jumped

from $57.99, its previous day’s close, to $65, a one-day increase of 11%. Between June 2 and 14,

Individual Defendants Jeffries, Singer, Chang, Leino and O’Neill all began unloading their

Abercrombie holdings, reaping total proceeds of over $19 million. Singer sold 37,500 shares for

$2.3 million on June 2. Jeffries sold 150,000 shares between June 2 and 14 for $10 million in

proceeds. Leino, Chang and O’Neill reaped proceeds of over $7 million between June 2 and June 6.

10. Defendants’ staggering insider sales on the heels of their June 2 report were not

coincidental. Defendants realized by May 2005 that they had overestimated potential denim sales

for 2005, that they were accumulating excess inventories of denim and other product lines and that

they had taken and would continue to take drastic measures to try to clear the inventories throughout

2Q FY05. Defendants also knew that their forecasted denim sales could not be met at current price

points, and that Abercrombie’s margins were consequently declining from the prior year and would

continue to do so.

11. In order to boost Abercrombie’s revenue and comparable store sales and unload the

excess denim, defendants began systematically marking down denim in stores throughout the

country in May 2005 and continuing through July, a material event as any markdown of this line

would negatively impact the profitability and gross margin of the Company. All defendants knew

about the markdowns based on their receipt of “Price Point Sheets,” internal reports circulated to

Abercrombie executives. Moreover, Jeffries and Leino specifically approved the markdowns before

they were disseminated to Abercrombie’s retail stores.

12. Defendants also took several other measures to clear excess denim. For example,

defendants unloaded new denim to third party retail stores such as TJ Maxx and Marshall’s during

2Q FY05. These stores were selling Abercrombie jeans for less than $30, while Abercrombie sold

the same jeans at its stores for nearly $70. In May and June 2005, defendants also artificially


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increased Abercrombie’s denim sales by giving away one pair of jeans to every Abercrombie store

employee throughout the country. While the giveaways were not legitimate sales, defendants

recorded them as denim sales. Defendants also initiated Abercrombie’s Spring promotional

clearance two weeks earlier than planned to try to clear bloating inventories. The clearance had a

positive impact on top-line sales and comparable store sales, but had a severely negative impact on

Abercrombie’s ultimate profitability and gross margin. During this promotion, defendants marked

down more items, including non-clearance items such as denim, and took more significant discounts

(18% deeper than the prior year) to move the excess inventory.

13. On July 7, 2005, before the market opened, Abercrombie reported its June sales

numbers. Its monthly sales were extraordinary, with comparable store sales increases of 38%,

shattering consensus estimates of 23%, and net sales increases of 52% over June 2004. Defendants

represented that Abercrombie’s strong sales numbers were driven by sales in denim. Again,

defendants did nothing to alert investors that Abercrombie’s gross margins were declining as it was

achieving increased sales at discounted prices.

14. As a direct result of Abercrombie’s positive June sales report, its share price opened

at $70 on July 7, 2005 and traded as high as $74.10 (Abercrombie’s all-time high) that day.

15. Knowing that Abercrombie’s sales were being driven by marked down items and that

its margins were declining, Jeffries sold over 1.6 million of his own shares between July 7 and 15,

2005 for $117.9 million in proceeds.

16. Based on Abercrombie’s June sales numbers, securities analysts again increased their

2Q FY05 EPS estimates significantly, reiterating defendants’ claims that Abercrombie’s denim sales

were not falling and “[d]enim strength should translate into continued business momentum at least

through back-to-school.” Analysts also continued to anticipate 2Q FY05 margins of over 70%.


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17. On August 4, 2005, before the market opened, Abercrombie reported July’s

comparable store sales of 22%, below analysts’ consensus of 28%. On this news, Abercrombie’s

shares fell from $70.24 on August 3 to $65.56 on August 4. While Abercrombie’s comparable store

sales numbers were lower than expected, defendants said its overall sales, including denim sales,

were strong. Abercrombie’s stock continued to trade at artificially inflated levels as high as $67.80

for the next twelve days, as investors and analysts still anticipated 2Q FY05 margins to beat 2Q

FY04 and consensus earnings of $0.69 per share.

18. On August 16, 2005, after the market closed, defendants announced Abercrombie’s

2Q FY05 results, which were a great disappointment to the unsuspecting investment community.

Abercrombie’s 2Q FY05 EPS was only $0.63, $0.06 short of consensus estimates, and its gross

margin was 1.8% lower than 2Q FY04 at 68.2%. Inventories had increased by over 60% from 1Q to

2Q FY05, more than 75% of which was attributed to denim. On this news, Abercrombie’s shares

fell from a high of $63.40 on August 16 to as low as $56.65 on August 17 – below where it was

trading in the beginning of the Class Period – a one day decline of 10.65% on heavy volume of

9,695,200 traded shares and a 23.5% decline from its Class Period high of $74.10. Abercrombie’s

stock price continued to fall precipitously into the mid-$40 range in the weeks that followed.

19. Defendants had known throughout 2Q FY05 that Abercrombie’s margins were

declining because they reviewed this very important indicator regularly and were aware of and

approved the measures that were being taken to unload excessive inventories at low prices. They

also knew that earnings were consequently being negatively impacted and that Abercrombie could

not meet consensus EPS estimates. Rather than disclose this negative material data with

Abercrombie’s regular monthly reports to provide investors with a meaningful view of the

Company’s profitability, defendants withheld it and traded their own shares while the stock was

artificially inflated.


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20. On an August 16, 2005 conference call with investors, Jeffries and Singer attributed

the fall in gross margins “to increased markdowns of spring fashion merchandise” at all of its stores

and poor sales at its six RUEHL stores. Analysts asked to what extent the Spring promotion and

RUEHL, on an individual basis, affected the gross margin. Attempting to mask the drastic measures

defendants had taken to report impressive sales, Jeffries and Singer refused to give any specifics.

21. Two weeks later, on August 29, 2005, The Wall Street Journal ran an article

discussing Jeffries’ June and July 2005 insider sales. The article noted:

And some investors also are questioning whether Abercrombie provided investors with good news about certain apparel, helping to push the stock price higher, while withholding more downbeat information in the weeks leading up to the financial report and subsequent selloff.

* * *

But some investors now ask why Abercrombie provided a new figure that helped comfort investors [denim sales], easing the way for the stock to rise, but did nothing to alert investors to the fact that the company’s margin would be lower than some expected in comparison to last year’s second quarter, or address any other issues that came as surprises for some investors when earnings were unveiled.

22. That same day, Abercrombie announced Singer, the Company’s Chief Operating

Officer for only 15 months, was leaving the Company effective in two days.

23. One month later, Brian Sozzi of Wall Street Strategies, reported as follows on

Abercrombie: “When covering Abercrombie, analysis of two items, product offerings and corporate

malfeasance, is generally needed. . . . It is our stance that management clearly acted improperly by

pumping up its business when profitability was waning, and will subsequently have to pay some

form of material damages to settle the cases. . . . Along with those issues, there is a credibility

problem with Abercrombie.”

24. The impact of defendants’ misrepresentations on Abercrombie’s stock price and how

defendants took advantage of the stock’s artificially high prices is illustrated in the chart below:


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JURISDICTION AND VENUE

25. The claims asserted herein arise under §§10(b), 20(a), and 20A of the Exchange Act,

15 U.S.C. §§78j(b), 78t(a) and 78t-1 and Rule 10b-5 promulgated by the SEC thereunder (17 C.F.R.

§240.10b-5).

26. This Court has jurisdiction over the subject matter of this action under §27 of the

Exchange Act, 15 U.S.C. §78aa, and 28 U.S.C. §§1331, 1337 and 1367.

27. Venue is proper pursuant to §27 of the Exchange Act as defendant Abercrombie

and/or the Individual Defendants conduct business in and the wrongful conduct took place in this

district, and the Company’s principal executive offices are in New Albany, Ohio, where the day-to-

day operations of the Company are directed and managed.


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THE PARTIES

28. Lead Plaintiff, City of Dearborn Heights Act of 345 Police and Fire Retirement

System, as set forth in the attached certification, purchased Abercrombie securities at artificially

inflated prices during the Class Period and was damaged thereby. See Ex. 1.

29. Defendant Abercrombie is a specialty retailer of casual luxury goods and apparel,

operating retail stores throughout the United States and selling through catalogs and the Internet.

The Company’s headquarters are located at 6301 Fitch Path, New Albany, Ohio. As of September 2,

2005, the Company had over 87.5 million shares issued and outstanding which trade on the New

York Stock Exchange under the ticker symbol “ANF.”

30. Defendant Michael S. Jeffries (“Jeffries”) has been the Chairman and Chief Executive

Officer (“CEO”) of Abercrombie since May 1998 to the present and has been a director of

Abercrombie since 1996. Jeffries is also Chairman of Abercrombie’s Executive Committee.

Between June 2, 2005 and July 15, 2005, Jeffries sold over 1.78 million shares of Abercrombie stock

at an average price of $71.67 per share receiving proceeds exceeding $127.8 million.

31. Defendant Robert S. Singer (“Singer”) was President and Chief Operating Officer

(“COO”) of Abercrombie from June 18, 2004 until he resigned on August 31, 2005. On June 2,

2005, Singer sold 37,500 shares of Abercrombie stock at an average of $62 per share receiving over

$2.33 million in proceeds.

32. Defendant David L. Leino (“Leino”) is, and was at all times relevant hereto, Senior

Vice President-Director of Stores of Abercrombie. On June 2, 2005, Leino sold 92,347 shares of

Abercrombie stock at an average price of $64.56 per share, receiving proceeds of approximately $5.9

million.

33. Defendant Diane Chang (“Chang”) has been the Executive Vice President-Sourcing

of Abercrombie since May 2004. She has been employed with the Company since at least 1998.


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Between June 3, 2005 and June 6, 2005, Chang sold 10,161 shares of Abercrombie stock at an

average price of $65.15 per shares receiving proceeds of over $661,339.

34. Defendant Leslee K. O’Neill (“O’Neill”) has been the Executive Vice President-

Planning and Allocation of Abercrombie since May 2004. She has been employed with the

Company since at least 1994. On June 6, 2005, O’Neill sold 6,298 shares of Abercrombie stock for

$64.80 per share receiving $408,110 in proceeds.

35. The individuals named as defendants in ¶¶30-34 are referred to herein as the

“Individual Defendants.” They are liable for the false and misleading statements set forth at ¶¶59-

89.

36. During the Class Period, each of the Individual Defendants, as senior executive

officers and/or directors of Abercrombie, were privy to non-public information concerning the

Company’s business, finances, products, markets and present and future business prospects via

access to internal corporate documents, 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 them in connection therewith. Because of their

possession of such information, the Individual Defendants knew or recklessly disregarded the fact

that adverse facts specified herein had not been disclosed to, and were being concealed from, the

investing public.

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

and to presume that the false, misleading and incomplete information conveyed in the Company’s

public filings, press releases and other publications as alleged herein is the collective action of the

narrowly defined group of executive officer and director defendants described above. Each of the

Individual Defendants, by virtue of their high-level positions with the Company, directly participated

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


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Company at the highest levels and was privy to confidential proprietary information concerning the

Company and its business, operations, growth, financial statements and financial condition as

alleged herein. Said defendants were involved in drafting, producing, reviewing and/or

disseminating the false and misleading statements and information 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.

38. As officers and controlling persons of a publicly-held company whose securities

were, and are, registered with the SEC pursuant to the Exchange Act, and were traded on the New

York Stock Exchange and governed by the provisions of the federal securities laws, the Individual

Defendants each had a duty to disseminate prompt, accurate and truthful material information with

respect to the Company’s financial condition and performance, growth, operations, financial

statements, business, markets, management, earnings and present and future business prospects, and

to correct any previously-issued statements that had become materially misleading or untrue, so that

the market price of the Company’s common stock would be based upon truthful and accurate

information. The Individual Defendants’ misrepresentations and omissions during the Class Period

violated these specific requirements and obligations.

39. The Individual Defendants participated in the drafting, preparation and/or approval of

the various public, shareholder and investor reports, and other communications complained of herein

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 and managerial positions with Abercrombie, each of the Individual

Defendants had access to the adverse undisclosed information about Abercrombie’s financial

condition and performance as set forth herein and knew (or recklessly disregarded) that these


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adverse facts rendered the Company’s representations about its business materially false and

misleading.

40. Each of the Individual Defendants is liable as a participant in a fraudulent scheme and

course of business that operated as a fraud or deceit on purchasers of Abercrombie securities by

disseminating materially false and misleading statements and/or concealing material facts. The

scheme: (a) deceived the investing public regarding Abercrombie’s business, operations,

management and the intrinsic value of Abercrombie common stock; and (b) caused plaintiff and

other members of the Class to suffer damages thereby.

BACKGROUND TO THE CLASS PERIOD

41. Abercrombie is a retailer of “casual luxury” goods and apparel. Abercrombie

merchandise is sold in retail stores throughout the United States, through catalogs and on Company-

owned websites and is targeted at specific age demographics through its four brands: Abercrombie &

Fitch, abercrombie, Hollister Co. and RUEHL. At the end of fiscal 2005, the Company operated 851

stores: (1) 361 Abercrombie & Fitch stores; (2) 318 Hollister stores; (3) 164 abercrombie stores; and

(4) eight RUEHL stores.

42. Abercrombie reports on a fiscal year basis. Its fiscal year is February 1–January 31,

so that its 1Q FY05 was February 1–April 30, 2005, and its 2Q FY05 was May 1–July 30, 2005.

43. In the months leading up to the Class Period, defendants promoted Abercrombie’s

unique business strategy of maintaining higher product margins by continuously increasing its top-

line sales. Defendants said that the Company had eliminated all promotional activity, took fewer

markdowns on its items, and generated more sales dollars for every item sold. Unlike its

competition, Abercrombie was primarily focused on increasing the sales dollars per transaction

versus increasing the number of customer transactions. Therefore, Abercrombie was less dependent

on increased customer traffic while maintaining higher gross margins on its store items.


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44. The gross margin is the difference between revenue and cost of goods sold. This is,

in essence, the mark-up a retailer takes on the goods it sells. Gross margin is generally calculated as

a percentage: the higher the gross margin, the more profit or mark-up the retailer is generating on the

goods. Conversely, the lesser the gross margin, the retailer is taking a lesser mark-up or taking a

more significant markdown. Gross margin is a very important business indicator as it demonstrates

how profitable a company is at its most fundamental level, which in turn impacts its earnings. As

disclosed in Abercrombie’s 2005 Form 10-K, management, i.e., the Individual Defendants, reviewed

the Company’s gross profit (margin) “regularly to gauge the Company’s results.”

45. On February 15, 2005, Jeffries, Singer, Thomas Lennox (Director of Investor

Relations at Abercrombie (“Lennox”)) and Susan Riley (former CFO), hosted an investor conference

call reporting 4Q FY04 financial results. On the call, Jeffries stated:

We will not be promotional businesses. We will clear on an ongoing basis. There will be 2 larger sales each year, one the day after Christmas, and one the day after Father’s Day or the day before Father’s Day, but there will be constant clearing in terms of the end of a style, just marked down and put to the back of the store.

This is a really critical strategy for us to separate ourselves from the competition, to have better-looking stores, and to train a customer to buy goods at regular price. . . .

46. On March 17, 2005, Singer spoke at a Banc of America Securities Consumer

Conference and stressed Abercrombie’s strategy for maintaining high margins and profitability.

Singer reiterated that Abercrombie’s fundamental business strategy was intact:

We have adopted a policy to be absolutely non-promotional in our stores. We put our best merchandise front and forward and we have eliminated basically all promotions from our stores and this absolutely distinguishes us from most of the competitors operating in the American mall environment right now.

* * *

[B]y being much less promotional we’ve had fewer markdowns and, therefore, we were able to achieve a better maintain margin, and finally with the level of growth of sales we actually, also, had leverage on our occupancy costs.

* * *


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[I]t’s absolutely critical, we can charge a higher price, but we have to give a greater value. And the customer has to be able to perceive that value. It’s absolutely essential.

47. Another key business indicator was Abercrombie’s comparable store sales.

Comparable store sales measure top-line sales growth at stores that have been open for over a year.

This business indicator is important to investors as it demonstrates how well a company is increasing

(or decreasing) sales in a given period from a year before. Comparable store sales financial

reporting is strictly a top-line business indicator. It does not account for the costs of goods sold, the

gross margin on a product(s) or other expenses, all of which impact the ultimate profitability of a

business.

48. From 2000 to September of 2004, Abercrombie had reported negative or nominal

comparable store sales for 57 consecutive months. In October 2004, just one quarter after Singer

became COO, the Company reported healthy comparable store sales with an 11% increase. As

Abercrombie entered 2005, it began reporting comparable store sales in the high double digits, a

number that had not been seen in the Company since 1998 and 1999. As a result, Abercrombie’s

share price, which had traded in the $20 to $30 range before October 2004, began to steadily

increase into the $40 range in November and December of 2004. In January 2005, the stock price

climbed into the $50 range.

49. In February 2005, defendants announced that they were increasing Abercrombie’s

denim inventories because it was a popular, well-performing product line. Denim is a “basic” item,

meaning that it is not seasonal, and was historically one of Abercrombie’s most profitable and

popular product lines. While investors expected that Abercrombie could continue to post

phenomenal top-line sales growth month after month, investors were worried that other aspects of

Abercrombie’s business would suffer, namely its profitability as reflected by high gross margins.

Defendants reassured investors that Abercrombie’s strategy for maintaining high gross margins was


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intact and would continue well into 2005, and that increasing the Company’s denim inventories

posed no risk to profitability.

50. In March or April 2005, Jeffries hosted a meeting at Abercrombie’s headquarters to

discuss the Company’s strategy of increasing denim inventories with employees who would be

directly involved in distributing the denim to the retail stores, including Abercrombie Senior

Allocators assigned to denim, Distribution Center managers, Leino and other Abercrombie

executives. Many high-ranking employees expressed concerns about the strategy to Jeffries.

Specifically, all of the attending Senior Allocators told Jeffries that such an increase in inventory

could be very disadvantageous to the Company. They also voiced concerns that the denim increase

would distort Abercrombie’s “stock-to-sales” metric, a measurement that allowed Senior Allocators

to determine the appropriate levels of denim to be supplied to any given store in order to achieve

monthly sales projections. In particular, the Senior Allocators were in accord that sending

significantly more denim to stores would materially skew the stock-to-sales ratio and could be

problematic in that, based on sales history, the individual stores would not be able to sell items at the

same rate that they were receiving the denim inventory from the Distribution Center. They

expressed fears that an incremental build-up of inventory at the retail stores would result, and that

this inventory would exceed the market demand for denim products. Distribution Center managers

attending the meeting also expressed concerns that the Distribution Center did not have the capacity

to handle such an excessive amount of increased inventory. Jeffries summarily dismissed all of these

forewarnings and concerns and responded to “just go with it.”

51. On April 13, 2005, Abercrombie announced that CFO Susan Riley, had abruptly quit

without a successor, effective two days later, April 15, 2005.

52. Just two weeks before the beginning of the Class Period, on May 17, 2005, Jeffries,

Singer and Lennox hosted an investor conference call reporting 1Q FY05 financial results. The


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Company reported EPS of $0.45 and gross margin of 65.3%, an increase of 30 basis points from Q1

FY04, which indicated to the investment community that defendants’ strategy of increasing gross

margins was succeeding. Jeffries and Singer again stressed Abercrombie’s gross margins and

profitability. Singer stated:

A key driver of our increased sales was the significant increase in average unit retail of 23% over last year’s first quarter. This increase derived from the ever higher quality level of our product and the elimination of promotional activity, as well as increased unit sales of higher priced items, in particular denim.

* * *

I think that basically what you see is that we have more transactions in product with higher unit prices, particularly in the denim. And the other thing is that, I think, by having the lower promotional expense, we have more sales dollars for fewer transactions. So I don’t – and we’re not concerned about – all the businesses have shown remarkable growth, and that’s in dollars that we’re doing and I think that’s what we’re totally focused on, the dollars rather than the number of transactions. The traffic in the stores has continued to be extraordinary, and I don’t think we’re concerned at all.

Jeffries stated:

In our stores we have improved service presentation standards, and by eliminating promotion activity, we have both enhanced our brand’s image as the premium casual brand in each target age category while also improving sales margins. These characteristics clearly differentiate us from the competition.

* * *

Results at Abercrombie & Fitch were truly outstanding as we generated exceptional growth, notwithstanding our relatively constant store count. Net sales for the quarter exceeded 300 million, with comp store sales increasing 16%. I believe this is an amazing accomplishment given the size, maturity, and historical margin structure of this business. It is particularly extraordinary given that we have achieved this growth by moving completely away from any promotional activity. . . . We continue to seek improved quality and fashion while maintaining our high gross margins. . . .

53. Defendants also reported that Abercrombie had been increasing its inventory. At the

end of 1Q FY05, Abercrombie’s inventory was up 56% on a per square foot basis versus 1Q FY04.

As a result of this significant increase in inventory, analysts were concerned that Abercrombie would


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be subject to markdown risk due to excess inventory, which in turn would put gross margins,

profitability and earnings at risk. For example, analysts had the following concerns:

• “While it is healthy for the business to feed inventory considering the strong demand . . . building inventory levels always creates some level of incremental earnings risk if sufficient demand does not materialize.”

• “Management seems to be on an inventory build mission, as they noted inventory per square foot in the quarter was up 56% versus the prior year. In a retail analyst’s mind, this is alarming due to potential reduced margins as unsold items are marked down.”

54. Defendants again reassured investors that the majority of the inventory increase was

in basic items, i.e., denim, Abercrombie’s leading clothing line, which did not carry markdown risks

and would not impact the profitability and gross margins of the Company. For example, Jeffries

stated on the May 17, 2005 conference call:

I want to talk a minute about that. Clearly we’re going to give a little more flavor, we are going to intensify the denim inventories.

* * *

That is a significant increase in inventory. But, we’re making a significant increase in inventory in what we would classify as non-risk classifications. We are continuing to be very conservative in our fashion classifications which carry markdown risks. . . .

55. Jeffries’ comments comforted investors that the inventory increase was not in items

that carried a markdown risk and thus would not affect Abercrombie’s gross margins. Based on

Jeffries’ comments, on May 18, 2005, Barbara Wyckoff and Jim Chartier, analysts with Buckingham

Research Group, issued a report stating: “ANF’s inventory is clean and current and we expect that its

markdowns will continue to be below last year, driving strong margins at regular price through the

2nd quarter.”

56. On May 20, 2005, Stacy Pak, an analyst with Prudential Equity Group, LLC, issued a

report speculating that there would be an excess of denim inventory in the retail industry, including

at Abercrombie. Due to Abercrombie’s heavy reliance on denim sales, the report downgraded


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Abercrombie, stating: “We recently learned from our sources that ANF has been trying to cancel

denim orders with their vendors. ANF confirmed that the company has in fact ‘looked to have some

deliveries pushed off to future periods.”’

57. Defendants expressly denied that denim sales were waning and informed Pak that the

inventory increase “was just a question of timing; management views the inventory as basics that

will not be subject to markdown risk.”

58. As alleged in the following paragraphs, throughout the ten-week Class Period,

defendants reported impressive monthly top-line sales while knowing, but concealing, that

Abercrombie’s gross margins were in fact suffering due to its inability to sell an overabundance of

denim at regular prices and excessive markdowns on all of Abercrombie’s product lines.

DEFENDANTS’ CLASS PERIOD MISREPRESENTATIONS

59. On June 2, 2005, the Company issued a press release entitled: “Abercrombie & Fitch

Reports May Sales Increase of 43%; Comparable Store Sales Increase 29%.” The press release

stated in part:

Abercrombie & Fitch Co. today reported net sales of $159.0 million for the four-week period ended May 28, 2005, a 43% increase over last year’s net sales of $111.5 million for the four-week period ended May 29, 2004. May comparable store sales increased 29% over the same period last year.

Year-to-date, the Company reported a net sales increase of 35% to $705.8 million from $523.4 million last year. Comparable store sales increased 21% for the year-to-date period.

MAY 2005 HIGHLIGHTS

• Total Company net sales increased 43%

• Total Company comparable store sales increased 29%

• Abercrombie & Fitch comparable store sales increased 28%

• Hollister Co. comparable store sales increased 48%

• abercrombie comparable store sales increased 48%


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• Total Company denim sales increased 166%

60. Defendants had never before reported specifics on denim sales, but did so for May

2005 to negate the validity of Pak’s report that denim sales were suffering and to assure investors

that denim sales were ramping up to match increased inventory levels.

61. The June 2, 2005 press release was followed by a pre-recorded Sales Conference Call

hosted by Lennox. Lennox stated in part:

Year-to-date sales were $705.8 million versus $523.4 million last year, an increase of 35%. Comparable store sales increased 21% for the year-to-date period compared to last year. May’s sales reflected continuation of strong comparable store increases in each of our businesses. Comps increased by 25% on a month to date basis through the third week of May before increasing by the low 40’s in the fourth week of May with implementation of our summer clearance event. Summer clearance, which began during the final week of May versus the second week of June last year, was planned earlier to prepare for an expanded preview of our back to school assortment. We are scheduled to fully implement the back to school assortment during the fifth week of June, which is similar in timing to last year.

62. As a result of Abercrombie’s positive report for May 2005, its share price jumped

11% from $57.99 on June 1 to $65.00 on June 2, 2005. On or shortly after June 2, 2005, Jeffries,

Singer, Chang, Leino and O’Neill all began unloading their Abercrombie holdings. Singer

immediately sold 37,500 shares at an average of $62.00 per share for $2.3 million. Jeffries sold

150,000 shares at prices of $64.53 to $67.66 per share between June 2 and 14, 2005 for $10 million

in proceeds. Leino, Chang and O’Neill also executed trades on June 2, 2005 or within days after this

positive announcement for proceeds of over $7 million.

63. Based on Abercrombie’s June 2, 2005 press release and conference call and on

communications with defendants regarding May results, analysts issued a number of reports

repeating defendants’ statements and raising EPS estimates as a result of the Company’s impressive

sales increases and, in particular, defendants’ report on denim sales. Analysts and investors also

reasonably anticipated that Abercrombie’s 2Q FY05 margins would meet or exceed 2Q FY04 gross


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margin of 70%, since 1Q FY05 margins improved from 1Q FY04 and May denim sales had

increased dramatically. Abercrombie disclosed gross margin quarterly but not monthly.

64. On June 2, 2005, Joseph Teklits, an analyst with Wachovia Securities, issued a report

raising 2Q FY05 EPS estimates and stating: “A&F up 28%, Hollister up 24%, and Abercrombie kids

up 48%. All had sales driven by significant traffic and average unit value increases, and all cleared

out denim.”

65. On June 2, 2005, Mitch Kummetz, an analyst with D.A. Davidson & Co., issued a

report raising 2Q 2005 EPS estimates and estimating 2Q gross margin of over 70%.

66. On June 2, 2005, Liz Pearce, an analyst with Sanders Morris Harris, issued a report

entitled: “ANF: Stellar May Comps; Raising Price Target.” The report rated Abercrombie as a

“BUY” and stated the following about ANF’s denim sales:

May proved to be an exceptional month for all divisions. We believe the strength in denim, which was up 166%, suggests that the company is not going to be the victim of a denim glut, as the ANF concepts continue to update and differentiate their styles of denim. The strength in denim sales reinforces our belief that customers have an appetite for denim as long as it is new and differentiated. We therefore continue to believe that denim sales will remain strong for all ANF concepts, as they continue to be ahead of the curve in terms of product differentiation via embellishment, in particular, via embroidery and the level of product destruction. We further believe that Abercrombie & Fitch and Hollister have some of the best selections of denim in terms of depth and breadth of embellishment, and that the denim is offered at price points that are materially lower than various boutique brands. Moreover, as we have stated, our vendor sources continue to believe that denim will remain the “must have” pant bottom for Fall and that currently no other bottom category is as powerful as denim.

67. On June 2, 2005, Thomas Filandro, an analyst with Susquehanna Financial Group,

issued a report stating in part:

Denim was once again noted as a key driver to the performance, increasing 166% in total. The average unit retail selling price remained the primary comp driver increasing 20% plus, while transactions per average store and the average dollar sale also rose. ANF continues to benefit from its improved inventory position, higher pricing, increased store level service and a positive denim cycle. When comparing to last year’s out-of-stock position in the fast turning denim classification, ANF remains well positioned to continue to deliver strong comp growth throughout 2005.


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* * *

Raising EPS estimates. Reflecting the very strong initial start to the second quarter and the underlying strength in the business, we are raising our 2Q05 EPS estimate by $0.17 to $0.69 (vs. $0.44), Y/Y growth of 57%. Based on the continued solid trend in denim we are also adding $0.02 to our 3Q05 EPS forecast to $0.76 (vs. $0.42), Y/Y growth of 81%. . . .

68. On June 2, 2005, Adrienne Tennant, an analyst with Wedbush Morgan Securities,

issued a report entitled: “ANF – Rumors Of Denim’s Demise Greatly Exaggerated; Raising

Estimates and Price Target.” The report stated in part: “Denim sales were up 166% over May 2004

compared to total sales up 43% over last year. We expect the company’s strong business momentum

to continue and estimate that same store sales will rise 18% in June.”

69. On June 3, 2005, Gabrielle Kivitz, an analyst with Deutsche Bank-North America,

issued a report raising its 2Q FY05 EPS estimate and stating in part: “Denim fetish feeds strong

performance near-term, and increased inventory investment could serve as a positive; We expect

continued robust performance in Q2; Q3, helped partly by denim. Denim is one of the few robust

comp-driving categories in the apparel segment currently, and ANF has been one of the largest

beneficiaries. We believe demand for denim is NOT waning.”

70. On June 13, 2005, Robin Murchison, an analyst with SunTrust Robinson Humprey,

issued a report entitled: “ANF: Raising Estimates but Maintaining Neutral Rating” which stated in

part:

ANF, like some others in the teen space, is benefiting from strong denim demand, both premium and basic. Current trends continue to support this demand; we do not see this changing anytime soon. Moreover, we believe the brand is strong enough to avoid what some view as a denim glut; think all denim is not created equal.

71. Throughout June, analysts with PiperJaffray Co., CIBC World Markets, Pacific

Growth Equities, Buckingham Research Group, Inc., and S.G. Cowen & Co. estimated

Abercrombie’s 2Q FY05 gross margin would exceed its 70% level from 2Q FY04 based on

defendants’ positive sales reports and communications with defendants.


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72. On July 7, 2005, the Company issued a press release entitled: “Abercrombie & Fitch

Reports June Sales Increase of 52%; Comparable Store Sales Increase 38%.” The press release

stated in part:

Abercrombie & Fitch Co. today reported net sales of $221.6 million for the five-week period ended July 2, 2005, a 52% increase over last year’s net sales of $146.1 million for the five-week period ended July 3, 2004. June comparable store sales increased 38% over the same period last year.

Year-to-date, the Company reported a net sales increase of 39% to $927.4 million from $669.5 million last year. Comparable store sales increased 25% for the year-to-date period. . . .

− Total Company net sales increased 52% − Total Company comparable store sales increased 38% − Abercrombie & Fitch comparable store sales increased 34% − abercrombie comparable store sales increased 68% − Hollister Co. comparable store sales increased 35%

73. The July 7, 2005 press release was followed by a July 7, 2005 pre-recorded Sales

Conference Call hosted by Lennox. Lennox stated in part:

June results reflect strong selling from both summer clearance as well as initial selling from our back-to-school assortment. Summer clearance, which began during the final week of May versus the second week of June last year, was planned earlier to prepare for an expanded preview of our back-to-school assortment. Back-to-school was fully implemented during the fifth week of June, which is similar in timing to last year.

In the Abercrombie & Fitch business, comparable-store sales increased 34%. Men’s comps increased by high 30’s. Women’s comps increased by low 30’s. In Men’s, strength in polos, graphic t-shirts and denim was partially offset by negative comps in the shorts business. In Women’s, strong comps in denim, jackets and knit tops were partially offset by negative comps in shorts.

Hollister comp-store sales increased 35%, with Guys’ comps increasing by low 20’s, Girls; increasing by low 40’s. In Guys’, strength in polos, denim and graphic t-shirts was partially offset by negative comps in shorts. In Girls’, strong comps in denim, knit tops and accessories were partially offset by negative comps in swimwear and skirts.

In the Kids’ business, Abercrombie comparable-store sales increased 68% versus last year. Boys’ comps increased by low 40’s, with Girls’ increasing by low 80’s. In Boys’, polos, graphic t-shirts and denim were strongest, and in Girls’, knit tops, denim and accessories were strongest.


- 23 -

74. Based on Abercrombie’s June sales numbers, its share price opened at $70 on July 7,

2005 and traded as high as $74.10 (Abercrombie’s all-time high), as investors anticipated strong

quarterly results due to defendants’ positive reports for May through June. Between July 7 and 15,

Jeffries sold over 1.6 million shares of his Abercrombie stock at prices as high as $73.80 for

$117.9 million in proceeds.

75. Based on Abercrombie’s July 7, 2005 press release and conference call and

communications with defendants, analysts issued a number of positive reports repeating defendants’

statements, significantly increasing their earnings estimates for 2Q FY05 and estimating 2Q FY05

gross margin above 70% due to Abercrombie’s impressive sales and defendants’ representations that

denim sales remained strong.

76. On July 7, 2005, Lauren Cooks Levitan, et al., analysts with SG Cowen & Co., issued

a report entitled: “Another Month of Outperformance; Raising Estimates.” The report raised 2Q

FY05 EPS estimates from $0.60 to $0.68 and stated, “we believe ongoing sales and earnings

momentum could continue to drive shares higher. . . .”

77. On July 7, 2005, Mitch Kummetz, an analyst with D.A. Davidson & Co., issued a

report entitled: “ANF: Another Monster Month Across All ANF Concepts; Raising Estimates and

Price Target; Reiterating BUY Rating.” The report raised 2Q FY05 EPS estimates from $0.66 to

$0.72 and estimated 2Q FY05 gross margin of 70.2%, stating:

• June sales rose 52% to $221.6 million. Consolidated same store sales were up 38%. This is above our estimate of 23.0% and consensus of 23.5%.

• Comps were driven by the summer clearance event (which was moved up about two weeks from last year), as well as the initial selling of B2S [Back to School] merchandise (which was fully implemented in the fifth week of the month, same as last year).


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78. On July 7, 2005, Robin Murchison, an analyst with SunTrust Robinson Humphrey,

issued a report entitled: “ANF: June Comps Rise 38%; Raising 2Q Estimates.” The report stated in

part:

ANF’s June comps rose 38%, with strong gains in all three divisions. The company entered the month already in clearance mode having started it in late May, two weeks earlier than usual, to allow acceleration of the positioning of back-to-school merchandise in late June. The strategy worked quite well, and overall sales performance was driven by clearance and new items. . . .

ANF continues to bet strongly on denim. Walk by a store front, and denim is lined up on tables perpendicular to the glass; it is a strong presentation given the length of the store front. Various denim treatments are strong with destroyed and embellished looks. . . .

79. On July 8, 2005, Adrienne Tennant, an analyst with Wedbush Morgan Securities,

issued a report entitled: “ANF – Don’t Get Off the Denim Bandwagon Just Yet; Expect a Rock Solid

BTS [Back to School]; Raising Estimates And Price Target.” The report raised 2Q 2005 EPS

estimates from $0.57 to $0.70. The report further stated:

Denim strength should translate into continued business momentum at least through back-to-school. We believe that recent fears of a “denim glut” will not be realized before the end of the back-to-school selling season, and we expect Abercrombie’s business momentum to remain strong as it provides a compelling denim destination. In addition, unlike some of its competitors, Abercrombie’s monthly comp comparisons are easy for the next several months and manageable through December, which suggests strong comp potential through the remainder of the year . . . .

80. Throughout July, analysts at Wedbush Morgan Securities, Inc., PiperJaffray Co.,

CIBC World Markets, and Pacific Growth Equities estimated that Abercrombie’s 2Q FY05 gross

margin would exceed 70% and could be as high as 71.2% based on defendants’ July 7 report and

communications with defendants.

81. On August 4, 2005, the Company issued a press release entitled: “Abercrombie &

Fitch Reports July Sales Increase of 33%; Comparable Store Sales Increase 22%.” The press release

stated in part:


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Abercrombie & Fitch Co. today reported net sales of $191.0 million for the four-week period ended July 30, 2005, a 33% increase over last year’s July sales of $143.7 million. July comparable store sales increased 22% compared with the four-week period ended July 31, 2004.

Year-to-date, the Company reported a net sales increase of 38% to $1.118 billion from $813.3 million last year. Comparable store sales increased 24% for the year-to-date period.

July 2005 Highlights

• Total Company net sales increased 33% • Total Company comparable store sales increased 22% • Abercrombie & Fitch comparable store sales increased 15% • abercrombie comparable store sales increased 53% • Hollister Co. comparable store sales increased 24%

82. The August 4, 2005 press release was followed by an August 4, 2005 pre-recorded

Sales Conference Call hosted by Lennox. Lennox stated in part:

July results reflect strong back-to-school selling at each of our brands. At the Abercrombie & Fitch business, comparable store sales increased 15% with similar men’s and women’s comps for the months. In men’s, strength in polos, graphic T-shirts and denim was partially offset by negative comps in shorts and woven tops. In women’s, strong comps at knit tops, jeans and accessories were partially offset by substantially flat comps in non-denim bottoms.

Hollister comp store sales increased 24% with guys comps increasing by mid-teens, girls increasing by high 20s. In guy’s, strength and polos, denim and graphic T-shirts was partially offset by negative comps in woven tops. In girl’s, jeans, knit tops and graphic T-shirts performed best.

In the kid’s business Abercrombie, comparable store sales increased 53% versus last year. Boy’s comps increased by mid 30’s with girl’s increasing by low 60’s. In boy’s polos, graphic T-shirts and denim were strongest; in girl’s, jeans, knit tops and graphic T-shirts were strongest.

83. While Abercrombie’s comparable store sales were below analysts’ consensus of 28%,

analysts believed and repeated Abercrombie’s statements that denim sales and comparable store

sales were strong, issuing favorable reports and reaching a consensus EPS estimate of $0.69 for 2Q

FY05.

84. From August 4 through 15, analysts continued to estimate 2Q FY05 would be at least

70% and as high as 71.5% based on defendants’ reports and communications with them.


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85. On August 4, 2005, Stacy Pak, an analyst with Prudential Equity Group, LLC, issued

a report stating: “We believe the denim comp was above the overall comp in each division, so

clearly ANF is selling denim and we believe their denim looks better than that of any other retailer.”

86. On August 4, 2005, Wall Street Strategies issued a report stating:

Although we do not base our rating on insider selling, we do observe trends in that category when applicable, and this time it is applicable. Since June 2, insiders have sold 4,184,052 shares of the company’s common stock, with most of those sales coming from CEO Michael S. Jefferies. It goes to show that at the end of the day, management always seems to know something that John Q public doesn’t.

Taken as a whole, the company’s July results were solid, and we continue to believe Abercrombie is a Buy and the premier play on teen retail. We are expecting second quarter financial results to be impressive when they are released on August 16, 2005. . . .

87. On August 4, 2005, Robin Murchison, an analyst with SunTrust Robinson Humphrey,

issued a report stating: “We believe second quarter same-store sales strength and merchandise sell-

through with fuller margins will benefit the bottom line. . . . July’s metrics were solid with all

divisions posting meaningful gains in transaction count and transaction values.”

88. While Abercrombie’s stock price fell from $70.24 on August 3 to $65.56 on August 4

due to lower than consensus sales, it continued to trade as high as $67.80 over the next twelve days

as investors anticipated very profitable 2Q FY05 results to be reported in mid-August.

89. Defendants’ foregoing statements in ¶¶59-88 above were materially false and

misleading when made because of the following undisclosed facts:

(a) In March or April 2005, Jeffries hosted a meeting at Abercrombie’s

headquarters to discuss the Company’s strategy of significantly increasing denim inventories with

employees who would be directly involved in distributing the denim to the retail stores, including

Abercrombie Senior Allocators assigned to denim, Distribution Center managers, Leino and other

Abercrombie executives. Many high-ranking employees expressed concerns about the strategy to

Jeffries. Specifically, all of the attending Senior Allocators told Jeffries that such an increase in


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inventory could be very disadvantageous to the Company. They also voiced concerns that the denim

increase would distort Abercrombie’s “stock-to-sales” metric, a measurement that allowed Senior

Allocators to determine the appropriate levels of denim to be supplied to any given store in order to

achieve monthly sales projections. In particular, the Senior Allocators were in accord that sending









(b) By May 2005, following Abercrombie’s Spring season, Abercrombie’s

inventories of denim and other product lines began to bloat. Abercrombie was not selling enough

denim and other products at its regular retail prices to clear out its inventories, and it continued to

accumulate inventories of denim and other product lines faster than it could sell them throughout 2Q

FY05. Defendants therefore took several drastic measures during 2Q FY05 in an effort to sell excess

denim and other products. For example:

(i) Defendants commenced Abercrombie’s Spring clearance sale two

weeks earlier in its 2Q than it had historically in an effort to clear bloating inventories of basic

products like denim, not just Spring seasonal items. During the Spring promotional clearance,

defendants marked down more items at discounts 18% higher than in prior years in order to boost

top-line sales, and markdowns were not limited to seasonal items, but included denim, which

defendants repeatedly represented carried no markdown risk. By way of example, approximately


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80% of all merchandise, not just older items, for stores in Abercrombie’s Arkansas, Tennessee and

Texas regions was marked down during the 2005 Spring sale.

(ii) In May 2005, Jeffries, Singer and Leino held a conference call with the

District Managers in an effort to motivate them to sell more denim. During the call, these defendants

announced that they would award District Managers cash bonuses for hitting denim sales targets,

which included receiving a free Jeep automobile. This incentive plan was reflected in a denim-

specific scorecard which tracked actual denim sales to forecasted sales. During May through July

2005, the scorecards indicated that actual denim sales were still not meeting defendants’ forecasts.

Due to the poor denim sales, many denim items were recalled from the stores.

(iii) During May, June and July 2005, Abercrombie marked down more

items than in prior years. Many types of denim were significantly marked down throughout those

months. For example, one of Abercrombie’s highest priced jean styles (jeans that carried the largest

margins) was marked down from $99 to as low as $19 during this period. Abercrombie’s women’s

jean Cali Flare was another one of the many denim items marked down in Abercrombie’s stores.

(iv) Throughout Abercrombie’s 2Q FY05, defendants unloaded large

volumes of Abercrombie’s denim on discount retailers such as TJ Maxx and Marshall’s at highly

discounted prices. For example, these stores were selling for as low as $30 the same Abercrombie

jeans that sold at the Company’s stores for $70.

(v) As a result of excessive inventory being shipped to Abercrombie

stores, there was a significant increase in the number of items returned to Abercrombie’s

Distribution Center in New Albany throughout 2005 due to the fact they could not be sold.

Generally, items had a shelf life of three to five weeks. If they could not be sold in five weeks, a

recall directive would be implemented and these items would be shipped back to the Distribution

Center. Based on the excessive amount of inventory being returned to the Distribution Center, a


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directive was issued to Distribution Center employees in early 2005 to coordinate the returns with

incoming Federal Express drivers. Federal Express delivered trailers filled with returned

merchandise to the Distribution Center every day from May through July 2005.

(vi) From May to June 2005, Abercrombie gave every employee working

at the store level one pair of Abercrombie denim jeans at no charge except the sales tax, and

recorded these transactions as full sales. There were an average of 70 employees per store.

(c) As a result of the measures defendants took to clear excess denim and other

product lines, Abercrombie’s gross margin was declining materially during 2Q FY05 from its 2Q

FY04 level. Abercrombie’s high gross margin had long been supported largely by denim, which

Abercrombie historically sold at full retail prices. The markdown of denim during 2Q FY05

consequently impacted Abercrombie’s gross margins materially. Defendants reviewed the

Company’s gross margins on at least a monthly basis, as gross margin was Abercrombie’s key

profitability indicator, and they therefore knew gross margins were declining in May-July 2005.

They, however, concealed this information from investors while reporting more and more impressive

monthly sales figures.

(d) Defendants’ reports of impressive sales figures were consequently misleading,

because they presented a false, positive view of Abercrombie’s financial performance. Despite

rising sales figures, sales were being made at lower than historical prices, so that the Company’s

overall profitability was declining. Defendants’ representation that May 2005 denim sales had

increased by 166% was particularly misleading because Abercrombie had discounted denim to clear

excessive inventories of it, so that the purported increase in sales had not been accomplished at retail

prices and was largely achieved through markdowns. In fact, even at discounted prices,

Abercrombie’s denim sales were not meeting its internal budget for 2Q FY05. As alleged in

subparagraph (b)(ii), Abercrombie prepared and distributed to its District Managers scorecards that


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tabulated actual denim sales to forecasted denim sales. During May through July 2005, the

scorecards indicated that actual denim sales were not meeting defendants’ forecasts.

(e) Based on the above facts and additional facts alleged in ¶¶108-129, defendants

knew that Abercrombie could not meet forecasted EPS consensus of $0.69 for 2Q FY05.

THE TRUTH EMERGES

90. On August 16, 2005, Abercrombie reported its 2Q FY05 financial results.

Abercrombie reported EPS of $0.63, missing consensus estimates by $0.06 due to lower

profitability than investors had been led to expect. Rather than meeting or exceeding 2Q FY04 gross

margin of 70% as investors anticipated, Abercrombie’s 2Q FY05 gross margin dropped by 1.8%

from 2Q FY04 to 68.2%, and its inventory had increased by 67% per square foot from 2Q FY04.

Abercrombie’s inventory had also increased by over 60% during 2Q FY05 from the end of 1Q

FY05. The press release stated in part:

Inventories increased to $364 million from $227 million at the end of the first quarter of 2005 and $199 million at the end of the second quarter last year. Most of this increase is represented by denim and other basic merchandise categories which are not subject to significant markdown risk while fall fashion merchandise categories have been increased in line with the growth in sales. Remaining spring and summer merchandise levels are virtually unchanged from last year.

91. The August 16, 2005 press release was followed by an August 16, 2005 investor

conference call hosted by Jeffries, Michael Kramer (newly-hired CFO) and Singer. Singer said that

“[m]ore than three-quarters of the increased inventory value is concentrated in denim and other basic

merchandise categories.” In regards to lower than expected gross margin, Singer stated:

The difference between this quarter’s rate and last year’s second quarter gross margin of 70% was primarily due to increased markdowns of spring fashion merchandise this year which we took in order to be able to enter the back half of the year positioned with less transitional merchandise.

In addition, the overall gross margin was affected by the lower gross margins of “Ruehl” in its start-up phase.


- 31 -

92. The following question and answer session ensued regarding RUEHL’s impact on

Abercrombie’s gross margin:

Paul Edgeway – Credit Suisse First Boston – Analyst

. . . If you exclude the Ruehl impact on gross margin, where, where would gross margin have been? You know, in other words, what was the basis point impact? And also if you could share the – whether or not that was a planned decline and also what the impact might be going forward . . . .

Bob Singer – Abercrombie & Fitch Co. – President, COO

. . . We, we don’t want to get into the specifics of the Ruehl impact, but we can say that the impact was, was, was – was fairly significant in this period, and it’s likely going to be similar next quarter as well. We definitely are very highly focused on improving the initial margins in Ruehl. . . .

93. As a result of this news, Abercrombie’s stock price fell from a high of $63.40 on

August 16 to as low as $56.65 on August 17, a 10.65% drop on 9,695,200 traded shares.

Abercrombie’s stock continued to fall precipitously in the weeks that followed, reaching a low of

$44.17 in September.

94. Following the August 16, 2005 press release and conference call, analysts throughout

the industry were puzzled that Abercrombie had missed EPS consensus and about Jeffries’ and

Singer’s reasoning on why gross margins took a significant fall.

95. On August 17, 2005, Stacy Pak, an analyst with Prudential Equity Group, LLC,

issued a report entitled: “ANF: Missed on EPS and Margin, Inventories Look High, and Outlook For

Earnings is Unimpressive.” The report stated in part:

We thought there would be five key things investors would focus on in the ANF Q2 results – the bottom line number, the gross margin, leverage on expenses, inventory levels, and EPS guidance – and we believe ANF disappointed on all five. The bottom line number of $0.63 missed consensus by $0.06 and had the tax rate been equivalent to Q1/05, EPS would have been $0.59 and ANF would have missed consensus by $0.10. The gross margin was down in the quarter, and we expect there will be lots of questions surrounding the gross margin for a while to come – how is it that Ruehl, a 6 store organization on a base of 805, can possibly bring the total company gross margin down that much? Despite a 30% comp, store and distribution expenses increased 60 basis points as a percent of sales due to a huge 320 basis point increase in payroll as a percent of sales.


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* * *

GROSS MARGIN WAS DOWN FOR THE QUARTER. The gross margin decreased 180 basis points to 68.2% versus 70.0% last year. The year-over-year decrease resulted from increased markdowns of spring fashion merchandise as well as a lower gross margin at RUEHL. Despite any confusion on the call, markdowns were higher than last year and clearance inventory is equal to last year. The IMU was up slightly. It sounds as though the 6 store Ruehl organization may have negatively impacted the gross margin by about 30 basis points due to clearance markdowns on little or no IMU.

* * *

Although ANF did not repurchase any shares during Q2, and CEO Mike Jeffries made lots of nice sales at or near the high share price for the quarter, the board authorized the repurchase of 6 million additional shares. . . .

96. On August 16, 2005, Kimberly Greenberger, et al., analysts with Citigroup, issued a

report entitled: “ANF: 2Q Results – Merchandise Margins Down; Lowering EPS and Target.” The

report stated in part:

The shortfall versus our estimates was due to a 182 bps decline in merchandise margins as an increased inventory position and an accelerated clearance event contributed to the decline. However, management offered little details on the composition of merchandise margin decline but did indicate a slight improvement in IMU (initial mark-up) implying an increase in the markdown rate was likely responsible for the deterioration and was compounded by significant deterioration at the nascent Ruehl division. . . . Inventory per square foot was up a surprising +67% at the end of the third quarter versus last year primarily due to planned increases in denim and other basics (representing ~75% of the increase) as well as other higher cost items. Management indicated that on a unit basis, the inventory increase was up +29%.

97. On August 16, 2005, Gabrielle Kivitz, an analyst with Deutsche Bank-North

America, issued a report entitled: “Abercrombie & Fitch: Margin Pressure Dampens Outlook;

Reduce Price Target.” The report stated in part:

Quarter misses expectation on gross margin shortfall ANF’s Q2 EPS of $0.63 was below our $0.68 estimate and consensus of $0.69. The shortfall came from lower than expected gross margin, which was the result of higher markdowns and gross margin pressure from the nascent Ruehl business.

98. On August 16, 2005, Adrienne Tennant, et al., analysts with Wedbush Morgan

Securities, issued a report stating:


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Although Abercrombie had a strong second quarter, its results were disappointing on surprisingly weak gross margins, which were attributed to higher markdown and, quite surprisingly, negative impact from the 5 RUEHL stores.

* * *

Management stated that it took a great deal of markdowns in the second quarter this year and inventory is extremely clean heading into Q3. . . .

99. On August 17, 2005, Robin Murchison, an analyst with SunTrust Robinson

Humphrey, issued a report stating:

Merchandise margin was 68.2% versus 70.0% last year and down from our forecasted 72.0%. Fledgling concept Ruehl contributed a “significant” margin decline, though management declined to quantify; they also indicated that the markdown rate in the general spring/summer business was greater than it was last year. This would have occurred in the month of June when comps were up 38%. In our review of July comp activity, management indicated very little in terms of carry over clearance merchandise.

* * *

Balance sheet issues are confined to inventory which was up 67% on a square footage basis, the first increase in YoY since 1999. . . .

100. Moreover, it was hard to believe that RUEHL could have a significant negative

impact on the gross margin given that Jeffries had stated on May 17, 2005 that RUEHL was

“constantly improving gross margin.”

101. Two weeks later, on August 29, 2005, The Wall Street Journal published an article

relating to Jeffries’ substantial sales in June and July. The article stated in part:

But just ahead of the quarterly report came a surge of stock sales by the company’s chairman and chief executive, Michael Jeffries. And some investors also are questioning whether Abercrombie provided investors with good news about certain apparel, helping to push the stock price higher, while withholding more downbeat information in the weeks leading up to the financial report and subsequent selloff.

Certainly, the timing of Mr. Jeffries’s selling is eye-catching. On July 7, Abercrombie reported better-than-expected sales for the five-week period ended July 2. The day of the sales announcement, the stock traded as high as $74.10, before closing at a 52-week high of $73.14.


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On the same day, Mr. Jeffries, 60 years old, began selling large chunks of shares. During the next week, Mr. Jeffries sold more than 1.5 million shares at prices between $70 and $73.80 a share, bringing in about $110 million, according to Thomson Financial. He sold an additional 111,100 shares in the following week at almost $70 a share, reaping almost $8 million. . . .

The selling turned out to be quite fortuitous for Mr. Jeffries. In early August, Abercrombie shares began to move lower. Then, on Aug. 16, the New Albany, Ohio, retailer surprised Wall Street with a second-quarter profit of 63 cents a share, 43% higher than last year’s second quarter, but below the 69 cents a share that analysts had expected. Even though the company boosted its full-year earnings guidance, the stock has since fallen to $57.39. That is down about 20% from when Mr. Jeffries did his big selling.

As a result, Mr. Jeffries avoided about $22 million of paper losses by selling 1.62 million shares in July. The sales came from exercising about 1.8 million stock options with strike prices of $8 and $23.41. Overall, Mr. Jeffries has sold two million shares this year, netting $133 million, compared with sales of 600,000 shares last year, 950,000 shares in 2003, and 50,000 shares in 2002.

* * *

But the stock sales stand out because Mr. Jeffries hadn’t sold more than 250,000 shares during any week in the past nine years, according to Thomson Financial. His weekly sales have generally been about 100,000 shares, according to securities filings. Indeed, in the week ended Aug. 19, Mr. Jeffries resumed his previous pattern by selling 100,000 shares at $58.50 each.

“This is substantial selling,” says Mark LoPresti, senior quantitative analyst at Thomson Financial, who focuses on trading by corporate insiders. “The stock had risen for about a year but his selling wasn’t very heavy” until this summer.

* * *

Meanwhile, in February, Abercrombie adopted a policy of no longer providing quarterly guidance for investors. It will continue to provide monthly sales for its retail chains, which include Abercrombie & Fitch and Hollister Co., as well as annual earnings guidance.

But in its June 2 release, the company added a figure to its monthly statement, telling investors that “Total Company denim sales” had jumped 166% in May. That metric – which hadn’t been included in previous releases and wasn’t in subsequent statements – came amid investor worries at the time about a glut of high-priced denim at stores like Abercrombie. Analysts say they were told by company officials that the figure was provided as part of an effort to comfort investors, after an analyst raised concerns about the issue.

But some investors now ask why Abercrombie provided a new figure that helped comfort investors, easing the way for the stock to rise, but did nothing to


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alert investors to the fact that the company’s margin would be lower than some expected in comparison to last year’s second quarter, or address any other issues that came as surprises for some investors when earnings were unveiled.

“They didn’t give a full picture to investors,” says Vick Khoboyan, a vice president at hedge fund Willowbrook Asset Management in Los Angeles, whose firm manages about $20 million and has bet against Abercrombie shares. “They implied that denim sales were going well but they didn’t say that margins were lower than some investors expected.”

102. That same day, Abercrombie issued a press release announcing Singer would be

leaving the Company effective two days later, August 31, 2005. Jeffries cited a difference in the

timing and extent of Abercrombie’s international expansion as the reason for Singer’s departure.

Abercrombie stated it would cost the Company about $13.5 million to fulfill all of Singer’s

incentives in his separation agreement, which included payment of his salary through 2007, vesting

of his options, first-class round trip airline tickets to Milan, Italy, use of the Company jet, a personal

assistant, and purchase of his Ohio home.

103. Analysts questioned Abercrombie’s reasoning for Singer’s abrupt departure. Stacy

Pak, et al., analysts with Prudential Equity Group, LLC, stated in their August 30, 2005 report:

What happened between Bob Singer and Mike Jeffries? None of us know for sure. However in our view, given that ANF just recently established a Japanese and a European subsidiary, it must have been fairly recently that Mike Jeffries decided he was uncomfortable with the pace of international expansion. Perhaps the Wall Street Journal article yesterday (8/29/05) and Q2/05 earnings miss had something to do with it. . . .

104. On August 30, 2005, Brian Sozzi with Wall Street Strategies, stated:

Questionable occurrences always seem to follow this company. The departure of Mr. Singer due to managerial differences comes pretty quickly after former COO, Seth Johnson, left Abercrombie in 2004 (after 12 years on the job) to head Pacific Sunwear. Although the move could actually be viewed as a slight positive, as the company will be taking an expense controlled approach to international growth, it raises questions regarding the character of Mr. Jeffries.

In an August 4 update of the company, we highlighted aggressive insider selling by Mr. Jeffries in July, which took place right before a major FY05 earnings warning in mid-August. On August 29, Barron’s delivered a front page story on Abercrombie’s insider selling activity, highlighting that Mr. Jeffries has sold 2.0 million shares in the year (1.5 million before the earnings warning) for a cool $133.0


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million. Insider selling by him has continued this month, with two blocks of 100,000 shares being dumped on August 18. Again, character has to come into play here.

105. A month later, Brian Sozzi of Wall Street Strategies issued a report regarding

Abercrombie, stating: “When covering Abercrombie, analysis of two items, product offerings and

corporate malfeasance, is generally needed. . . . It is our stance that management clearly acted

improperly by pumping up its business when profitability was waning, and will subsequently have

to pay some form of material damages to settle the cases. . . . Along with those issues, there is a

credibility problem with Abercrombie.”

106. On December 8, 2005, Abercrombie announced that the SEC had opened an informal

investigation “concerning trading in shares of A&F’s Class A Common Stock.” About a month

later, on January 5, 2006, Abercrombie disclosed that the SEC had issued a formal order of

investigation.

107. On June 14, 2006, Abercrombie’s Board of Directors met to amend the Company’s

Code of Ethics. The amended Code of Ethics adopted a newly-enacted Insider Trading Policy

(February 13, 2006) which required all Abercrombie employees to follow specific guidelines before

trading Company stock.

ADDITIONAL SCIENTER ALLEGATIONS

Defendants’ Knowledge or Recklessness

108. Defendants knew that each of their misrepresentations alleged at ¶¶59-88 were false

or misleading when made, or made them with reckless disregard of their misleading nature, based on

facts alleged throughout this Amended Complaint and on the following facts.

109. During the Class Period, defendants held themselves out to investors and the market

as the persons most knowledgeable about Abercrombie’s sales, finances, inventory, promotions,

markdown strategy and business operations. Each of the Individual Defendants occupied senior, or


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the most senior, positions at Abercrombie with responsibility for directing and managing

Abercrombie’s finances, inventory and financial reporting.

110. Jeffries and Singer routinely communicated with analysts and investors during the

Class Period and represented that they were informed of and knowledgeable about Abercrombie’s

business and finances, specifically Abercrombie’s increase in inventory, its markdown strategy, its

Spring promotional clearance, and its gross margin. Jeffries and Singer participated in

Abercrombie’s quarterly conference calls with analysts and investors during the Class Period. ¶91.

During these conference calls, Jeffries and Singer presented and responded to questions regarding

Abercrombie’s sales, gross margin, inventory, markdown strategy and Spring promotional clearance.

111. Due to defendants’ constant communications with analysts, and their own review of

analyst reports on Abercrombie, defendants knew everything analysts were representing concerning

the Company. Further, defendants were aware of analysts’ EPS and gross margin estimates for 2Q

FY05 after the June 2, July 7 and August 4 reports. Based on internal reports and forecasts

defendants were receiving throughout Abercrombie’s 2Q FY05 results, they were aware or had

reason to believe that Abercrombie would fall far short of EPS and gross margin estimates.

112. Defendants also regularly received internal reports regarding current sales, forecasted

sales, and current and future markdowns, including “Recap” or “Flash” reports, “Price Point Sheets,”

and “markdown sheets.” Recap or Flash reports provided financial/sales information for all of

Abercrombie’s retail stores and were consolidated into weekly and monthly reports. “Price Point

Sheets” were one-page documents that contained the markdown strategy for different items sold at

Abercrombie’s retail stores and through the Company’s website. All markdowns were first

approved by both Jeffries and O’Neill before they were distributed to the rest of the Company.

Every week Abercrombie retail stores would receive from the Company’s headquarters in Ohio

“markdown sheets” specifying which items were to be marked down and at what prices they were to


- 38 -

be reduced. Abercrombie stores would also receive “recap sheets” which were disseminated from

corporate headquarters and distributed on a weekly basis to all stores. The recap sheets were used to

monitor all markdowns of Abercrombie items and provided daily information on sales figures for

each district and each individual store. The recap reports that were provided to the District

Managers on Tuesday and Thursday identified specific products that were to be marked down in

price for that given week.

113. Jeffries and Singer and other senior executives also received “Weekly Operating

Summary Reports” prepared by Abercrombie’s Finance Group every Monday via e-mail and hard

copy. These reports included several metrics relating to the Company’s overall sales on a weekly

basis and compared the previous weeks’ sales with the sales performance from the previous year-to-

date. The Weekly Operating Summary Reports included: (a) Average Dollar Sale, which indicated

the average amount of money spent by a customer per transaction; (b) the total “selling margins” by

department; (c) information on anticipated and existing inventory levels, which were again broken

down by department; and (d) all markups and markdowns that had been initiated in the week prior,

again by department.

114. Defendants also attended regular sales meetings, in which current and future sales of

Abercrombie were discussed, as well as future strategies and Abercrombie’s denim sales. Jeffries

attended quarterly meetings with other Sales and Planning employees in which the group discussed

sales projections for the upcoming season. The seasons were back-to-school, Christmas, Spring and

Summer.

115. Jeffries, Leino, and other director-level employees also attended conference calls with

all District Managers and Regional Managers. During these calls, Jeffries would inform the District

and Regional Managers on the progress of the Company and future strategies. Jeffries knew


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everything about, and inserted himself into, every aspect of Abercrombie’s business and regularly

visited stores.

116. In or about March or April 2005, Jeffries hosted a meeting at Abercrombie’s

headquarters to discuss the Company’s strategy of significantly increasing denim inventories with

employees who would be directly involved in distributing the denim to the retail stores, including

Abercrombie Senior Allocators assigned to denim, Distribution Center managers, Leino and other

Abercrombie executives. Many high-ranking employees expressed concerns about the strategy to

Jeffries. Specifically, all of the attending Senior Allocators told Jeffries that such an increase in

inventory could be very disadvantageous to the Company. They also voiced concerns that the denim

increase would distort Abercrombie’s “stock-to-sales” metric, a measurement that allowed Senior

Allocators to determine the appropriate levels of denim to be supplied to any given store in order to

achieve monthly sales projections. In particular, the Senior Allocators were in accord that sending









117. In May 2005, Jeffries, Singer and Leino held a conference call with the District

Managers in an effort to motivate them to sell more denim. These defendants tried to motivate

District Managers to increase denim sales by promising cash and other bonuses for hitting denim

sales targets. This incentive plan was reflected in a denim-specific scorecard which tracked actual


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denim sales to forecasted sales. From May through July 2005, the scorecards reflected that

Abercrombie was missing internal forecasts for denim sales.

Insider Selling

118. While defendants were concealing material facts and issuing false and misleading

statements to the public, the Individual Defendants sold in rapid succession over 1.9 million shares

of their own Abercrombie stock. Nearly all of the sales occurred on the day, or within a few days,

after Abercrombie issued favorable – albeit misleading – statements about the Company for insider

trading proceeds of $137 million.

119. Notwithstanding the Individual Defendants’ knowledge about Abercrombie’s

deteriorating profitability and gross margins and their duties as officers and directors of the

Company to disclose adverse material facts before trading in Abercrombie stock, the Individual

Defendants personally profited from the artificial inflation in Abercrombie’s stock price which their

fraudulent scheme created.

120. The Individual Defendants were quite successful in timing their trades, capturing

peak prices when selling. The average trading price for Abercrombie stock in the 90 days after

defendants’ fraud was revealed was only $52.60 per share. In sharp contrast, the Individual

Defendants unloaded their stock at prices as high as $73.80 - $.030 less than its all-time high – on

July 7, 2005. Both the timing and volume of their trades were suspicious.

121. During the Class Period, Jeffries sold 1,784,564 shares for over $127 million in

proceeds. These sales occurred when Abercrombie was trading at or near its all-time high.

122. Defendant Jeffries’ Class Period sales are as follows:

Date Shares Price Proceeds

6/2/2005 20,000 $64.53 - $64.82 $1,292,263 6/3/2005 10,000 $65.20 - $65.40 $652,916 6/7/2005 30,000 $67.25 - $67.40 $2,020,051 6/8/2005 20,000 $65.75 - $65.93 $1,316,532

6/10/2005 20,000 $66.43 - $66.70 $1,330,590


- 41 -

Date Shares Price Proceeds 6/13/2005 20,000 $67.00 - $67.01 $1,340,012 6/14/2005 30,000 $67.00 - $67.66 $2,015,978 7/7/2005 450,000 $72.40 - $73.80 $32,966,121 7/8/2005 298,500 $72.00 - $72.96 $21,574,519

7/11/2005 246,500 $72.00 - $73.48 $17,902,752 7/12/2005 308,664 $71.50 - $72.97 $22,159,871 7/13/2005 94,900 $70.75 - $72.42 $6,792,952 7/14/2005 124,900 $70.00 - $71.00 $8,773,601 7/15/2005 111,100 $69.75 - $69.91 $7,753,522

1,784,564 $127,891,680

123. Jeffries’ sales were particularly well-timed. Jeffries sold 450,000 shares for nearly

$33 million in proceeds on July 7, 2005, the same day Abercrombie reported comparable store sales

of 38% and sent the stock to its all-time high. Jeffries sold at an average share price of $71.67,

36.2% higher than the average trading price after Abercrombie disclosed its 2Q FY05 financial

results. Jeffries sold 56.8% of his holdings during the Class Period (nearly 20% with vested

options). In the 76 days prior to the Class Period, Jeffries did not make any sales. In fact, for the

entire year preceding the Class Period, Jeffries had only sold 400,00 shares, a significant difference

from the 1.78 million shares he sold over 44 days during the Class Period. Since the end of the Class

Period to July 25, 2006, Jeffries has sold only 100,000 shares.

124. On August 29, 2005, The Wall Street Journal discussed Jeffries’ fortuitous Class

Period sales:

But just ahead of the quarterly report came a surge of stock sales by the company’s chairman and chief executive, Michael Jeffries. And some investors also are questioning whether Abercrombie provided investors with good news about certain apparel, helping to push the stock price higher, while withholding more downbeat information in the weeks leading up to the financial report and subsequent selloff.

* * *

But the stock sales stand out because Mr. Jeffries hadn’t sold more than 250,000 shares during any week in the past nine years, according to Thomson Financial. His weekly sales have generally been about 100,000 shares, according to securities filings. Indeed, in the week ended Aug. 19, Mr. Jeffries resumed his previous pattern by selling 100,000 shares at $58.50 each.


- 42 -

“This is substantial selling,” says Mark LoPresti, senior quantitative analyst at Thomson Financial, who focuses on trading by corporate insiders. “The stock has risen for about a year but his selling wasn’t very heavy” until this summer. . . .

125. Singer sold 37,500 shares on June 2, 2005 (22,500 shares at $62.10 and 15,000 shares

at $62.20) representing 27.41% of his holdings (19.45% with vested options). This sale was quite

well-timed as it followed Abercrombie’s release of Abercrombie’s May sales results. Singer reaped

over $2.3 million in this one-day sell-off. Singer did not sell any Abercrombie shares before the

Class Period.

126. Defendants Chang, Leino and O’Neill also made stock trades at suspicious times and

amounts. They made the following Class Period sales:

Defendant Date Shares Average Price Proceeds Percentage of Holdings

Chang 6/3/2005–6/6/2005

10,161 $65.15 $661,339 9.85% (7.12% with vested options)

Leino 6/2/2005 92,347 $64.56 $5,954,069 71.49% (64.49% with vested options)

O’Neill 6/6/2005 6,298 $64.80 $408,110 41.49% (41.49% with vested options)

127. Chang, Leino and O’Neill had not made any sales in the 76 days preceding the Class

Period.

128. On August 4, 2005, Wall Street Strategies reported:

Although we do not base our ratings on insider selling, we do observe trends in that category when applicable, and this time it is applicable. Since June 2, insiders have sold 4,184,052 shares of the company’s common stock, with most of those sales coming from CEO Michael S. Jefferies. It goes to show that at the end of the day, management always seems to know something that John Q public doesn’t.

129. After a preliminary investigation by the SEC, it has now opened a formal

investigation against the Company as well as certain of its current and former officers and directors.

The SEC’s investigation is focused on whether these individuals traded Abercrombie shares on

material, undisclosed information.


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LOSS CAUSATION/ECONOMIC LOSS

130. During the Class Period, as detailed herein, the Individual Defendants engaged in a

scheme to deceive the market and a course of conduct that artificially inflated Abercrombie’s stock

price and operated as a fraud or deceit on Class Period purchasers of Abercrombie stock by

misrepresenting the Company’s financial performance. Later, however, when the truth concerning

Abercrombie’s financial performance entered the market and became apparent to investors,

Abercrombie’s stock fell precipitously as the prior artificial inflation came out of Abercrombie’s

stock price. As a result of their purchases of Abercrombie stock during the Class Period, plaintiff

and other members of the Class suffered economic loss, i.e., damages under the federal securities

laws.

131. By reporting material increases in sales while concealing the fact that the gross

margins of those sales were declining materially, the Individual Defendants presented a misleading

picture of Abercrombie’s financial position. Defendants’ omissions and misleading statements

caused Abercrombie stock to trade at artificially inflated levels – reaching as high as $74.10 per

share – throughout the Class Period.

132. On August 4, 2006, the Company reported comparable store sales for July 2005

increased by 22% over July 2004. This was below analysts’ estimates of 28%. As a result of this

news, Abercrombie’s stock price fell from $70.24, its previous day’s close, to $65.56 on 6,784,200

traded shares. The stock continued to trade at artificially inflated prices, however, for the next

twelve days until Abercrombie reported disappointing gross margins and earnings.

133. After the market closed on August 16, 2005, the Company reported that 2Q FY05

EPS was $0.63, $0.06 below consensus estimates of $0.69, Abercrombie’s gross margin fell 1.8%

from Abercrombie’s 2Q FY04 gross margin of 70%, and its inventories increased to $364 million

from $227 million at the end of 1Q FY05.


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134. As a result of this news, Abercrombie’s stock price fell from a high of $63.40 on

August 16 to as low as $56.65 on August 17, a 10.65% drop on high volume of 9,695,200 traded

shares. The average daily trading volume during the Class Period was 1,804,232. The average daily

trading volume in the 76 days preceding the Class Period was 1,584,760.

135. timing and magnitude of Abercrombie’s stock price decline negates any inference that

the loss suffered by plaintiff and other Class members was caused by changed market conditions,

macroeconomic or industry factors or Company-specific facts unrelated to the defendants’ fraudulent

conduct. The economic loss, i.e., damages, suffered by plaintiff and other members of the Class was

a direct result of defendants’ fraudulent scheme to artificially inflate Abercrombie’s stock price and

the subsequent significant decline in the value of Abercrombie’s stock when the truth was gradually

revealed to the market.

APPLICABILITY OF FRAUD-ON-THE-MARKET DOCTRINE AND THE PRESUMPTION OF RELIANCE

136. The presumption of reliance established by the fraud-on-the-market doctrine applies

to these allegations because:

(a) Abercrombie’s common stock met the requirements for listing, and were

listed, on the New York Stock Exchange, a highly efficient market;

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

and regularly communicated with public investors via established market communication

mechanisms, including through regular disseminations of press releases;

(c) The daily trading volume of the Company’s stock was substantial, with

hundreds of thousands of shares traded each day;

(d) Abercrombie was followed by securities analysts employed by several major

brokerage firms, who wrote reports that were distributed to the sales force and certain customers of

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


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(e) The misrepresentations and omissions alleged herein were material and would

tend to induce a reasonable investor to misjudge the value of Abercrombie securities; and

(f) Plaintiff and the members of the Class purchased common stock during the

Class Period without knowledge of the omitted or misrepresented facts.

137. Based upon the foregoing, plaintiff and the other members of the Class are entitled to

a presumption of reliance upon the integrity of the market for Abercrombie securities for the purpose

of class certification as well as for ultimate proof of their claims on the merits.

CLASS ALLEGATIONS

138. Plaintiff brings this action as a class action pursuant to Federal Rules of Civil

Procedure 23 on behalf of a class, consisting of all those who purchased or otherwise acquired the

common stock of Abercrombie during the Class Period and who were damaged thereby. Excluded

from the Class are defendants, the officers and directors of the Company, members of their

immediate families and their legal representatives, heirs, successors or assigns and any entity in

which defendants have or had a controlling interest.

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

impracticable. Throughout the Class Period, the Company’s common stock was actively traded on

the New York Stock Exchange. While the exact number of Class members is unknown to plaintiff at

this time and can only be ascertained through appropriate discovery, plaintiff believes that there are

hundreds of thousands of members in the proposed Class. The disposition of their claims in a class

action will provide substantial benefits to the parties and the Court.

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

predominate over questions solely affecting individual Class members. The questions of law and

fact common to the Class include:


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

omissions alleged herein;

(b) Whether defendants omitted and/or misrepresented material facts;

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

to the public by defendants during the Class Period omitted and/or misrepresented material facts

about the business, performance and financial condition of Abercrombie;

(d) Whether defendants acted knowingly or reckless in misrepresenting or

omitting material facts;

(e) Whether the market price of Abercrombie common stock during the Class

Period was artificially inflated due to the omissions and misrepresentations complained of herein;

and

(f) Whether plaintiff and other members of the Class have sustained damages

and, if so, the appropriate measure thereof.

141. Plaintiff will fairly and adequately represent and protect the interests of the members

of the Class. Plaintiff has retained competent counsel experienced in class and securities litigation.

Plaintiff does not have interests antagonistic to, or in conflict with, the interests of the other members

of the Class.

142. Plaintiff’s claims are typical of the claims of the members of the Class. Plaintiff and

all members of the Class purchased Abercrombie common stock during the Class Period at

artificially inflated prices and have sustained damages arising out of defendants’ wrongful conduct in

violation of the securities laws.

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

adjudication of this controversy since joinder of all class members is not practical. Because the

damages suffered by individual Class members may be relatively small, the expense and burden of


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individual litigation make it virtually impossible for the Class members individually to seek redress

for the wrongful conduct alleged. Plaintiff knows of no difficulty that will be encountered in the

management of this litigation that would preclude its maintenance as a class action.

FIRST CLAIM FOR RELIEF

For Violations of §10(b) of the Exchange Act and Rule 10b-5 Against Defendants Abercrombie, Jeffries, Singer, Chang, Leino and O’Neill

144. Plaintiff repeats and realleges each and every allegation contained above.

145. This Count is asserted against defendants Abercrombie, Jeffries, Singer, Chang,

Leino and O’Neill and is based upon violations of §10(b) of the Exchange Act, 15 U.S.C. §78j(b),

and Rule 10b-5 promulgated thereunder.

146. These defendants are liable for making false and misleading statements, failing to

disclose material adverse facts and/or acting directly or indirectly as a participant in a scheme and/or

course of business which: (i) deceived the investing public regarding Abercrombie, its business,

finances and prospects; (ii) artificially inflated the price of Abercrombie common stock during the

Class Period; (iii) caused class members to purchase Abercrombie stock at inflated prices; and (iv)

permitted defendants to sell shares of Abercrombie stock at inflated prices.

147. These defendants’ direct participation included preparing and/or reviewing

Abercrombie’s false or misleading press releases and other public statements, and knowingly or

recklessly giving false or misleading information to securities analysts, money and portfolio

managers and institutional investors in conference calls and other presentations.

148. Despite their knowledge or reckless disregard of Abercrombie’s false and misleading

statements, these defendants failed, throughout the Class Period, to disclose material adverse facts

about the financial condition of Abercrombie, which caused the press releases and other public

statements issued during the Class Period to be materially false or misleading for the reasons set

forth herein. These defendants, directly and indirectly, knowingly or recklessly engaged and


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participated in a fraudulent scheme and course of conduct to conceal adverse material information

about the business, finances, financial condition and operations of Abercrombie.

149. As a result of the above described acts, these defendants have violated §10(b) of the

Exchange Act and Rule 10b-5 promulgated thereunder in that they: (a) employed devices, schemes

and artifices to defraud; (b) made untrue statements of material facts or omitted to state material

facts necessary in order to make the statements made in light of the circumstances under which they

were made not misleading; or (c) engaged in acts, practices and a course of business which operated

as a fraud or deceit upon plaintiff and the other members of the Class in connection with their

purchases of Abercrombie stock.

150. Plaintiff and the other members of the Class, at the time of the misrepresentations and

omissions, did not know that these statements were false or misleading and believed them to be true.

In reliance upon the integrity of the market, plaintiff and the other Class members were damaged as

they paid artificially inflated prices for Abercrombie common stock. Had plaintiff and the other

members of the Class known the truth, they would not have bought their shares at the prices they

paid.

151. Defendants’ misrepresentations and misleading omissions were the reason for the loss

suffered by plaintiff and the other Class members.

SECOND CLAIM FOR RELIEF

For Violations of §20(a) of the Exchange Act Against Jeffries, Singer, Chang, Leino and O’Neill

152. Plaintiff repeats and realleges each and every allegation contained above.

153. This Count is asserted against Jeffries, Singer, Chang, Leino and O’Neill and each of

them (the “§20(a) Defendants”).

154. The §20(a) Defendants acted as controlling persons of Abercrombie within the

meaning of §20(a) of the Exchange Act, 15 U.S.C. §78t(a), as alleged herein. By virtue of their


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positions as officers, directors or controlling shareholders of Abercrombie, their high-level positions,

and participation in and/or awareness of the Company’s operations, the §20(a) Defendants had the

power to influence and control and did influence and control, directly or indirectly, the decision-

making of the Company, including the content and dissemination of the various statements that

plaintiff contends are false and misleading. The §20(a) Defendants were provided with or had

unlimited access to copies of the Company’s reports, press releases, public filings and other

statements alleged by plaintiff to be misleading prior to and/or shortly after these statements were

issued and had the ability to prevent the issuance of the statements or cause the statements to be

corrected.

155. In particular, each of the §20(a) Defendants had direct involvement or intimate

knowledge of the day-to-day operations of the Company during the Class Period. Therefore, each is

presumed to have had the power to control or influence the particular transactions giving rise to the

securities violations as alleged herein, and exercised the same.

156. By reason of such wrongful conduct, the §20(a) Defendants are liable pursuant to

§20(a) of the Exchange Act. As a direct and proximate result of the wrongful conduct, plaintiff and

other members of the Class suffered damages in connection with their purchases of the Company’s

stock during the Class Period.

THIRD CLAIM FOR RELIEF

Insider Trading Under §20A of the Exchange Act Against Jeffries, Singer, Chang, Leino and O’Neill

157. Plaintiff repeats and realleges each of the allegations set forth in the foregoing

paragraphs.

158. This claim is asserted by plaintiff under §20A of the Exchange Act against defendants

Jeffries, Singer, Chang, Leino and O’Neill on behalf of all persons who purchased Abercrombie

common stock contemporaneously with the sale of Abercrombie common stock by these defendants.


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159. During the Class Period, Jeffries, Singer, Chang, Leino and O’Neill occupied a

position with Abercrombie that allowed access to confidential information concerning the Company,

its operations, finances, financial condition and future business prospects. Jeffries’ and Singer’s

public representations on these subjects set forth herein were materially false or misleading.

160. Notwithstanding their duty to refrain from trading in Abercrombie common stock

unless they disclosed the material adverse facts alleged herein, and in violation of their fiduciary

duties to plaintiff and other members of the Class, Jeffries, Singer, Chang, Leino and O’Neill sold in

the aggregate hundreds of millions of dollars worth of Abercrombie common stock during the Class

Period contemporaneously with plaintiff and other Class members’ purchases of Abercrombie

common stock.

161. Defendants Jeffries, Singer, Chang, Leino and O’Neill sold their shares of

Abercrombie common stock, as alleged above, at market prices artificially inflated by the

nondisclosure and misrepresentations of material adverse facts in the public statements released

during the Class Period.

162. The following chart details sales of Abercrombie common stock by defendants

Jeffries, Singer, Chang, Leino and O’Neill made contemporaneously with City of Dearborn Heights

Act of 345 Police and Fire Retirement System purchases of Abercrombie common stock:

Date Sold Shares Lead Plaintiff Purchase Date Shares

6/2/05 149,847 City of Dearborn Heights Act of 345 Police and Fire Retirement System

6/2/05 1,131

7/7/05 450,000 City of Dearborn Heights Act of 345 Police and Fire Retirement System

7/5/05 200

163. Jeffries, Singer, Chang, Leino and O’Neill knew that they were in possession of

material adverse information which was not known to the investing public, including plaintiff and

other members of the Class. Before selling their stock to the public, they were obligated to disclose

that information to plaintiff and other members of the Class.


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164. By reason of the foregoing, Jeffries, Singer, Chang, Leino and O’Neill, directly and

indirectly, by use of the means and instrumentalities of interstate commerce, the mails, and the

facilities of the national securities exchanges, employed devices, schemes, and artifices to defraud,

and engaged in acts and transactions and a course of business which operated as a fraud or deceit

upon members of the investing public who purchased Abercrombie common stock

contemporaneously with the sale of such stock by Jeffries, Singer, Chang, Leino and O’Neill.

165. Plaintiff and other members of the Class who purchased shares of Abercrombie

common stock contemporaneously with Jeffries’ and Singer’s sales of Abercrombie common stock:

(1) have suffered substantial damages because they relied upon the integrity of the market and paid

artificially inflated prices for Abercrombie common stock as a result of the violations of §10(b) and

Rule 10b-5 alleged herein; and (2) would not have purchased Abercrombie common stock at the

prices they paid, or at all, if they had been aware that the market prices had been artificially and

falsely inflated by defendants’ misleading statements and concealment. At the time of the purchases

by plaintiff and members of the Class, the fair and true value of Abercrombie common stock was

substantially less than the prices paid by them.

166. This action was commenced within five years after the sales by the Jeffries, Singer,

Chang, Leino and O’Neill while in possession of material, non-public information.

167. As a result of the foregoing, plaintiff and the other members of the Class have

suffered substantial damages.

PRAYER

WHEREFORE, plaintiff and other members of the Class pray for relief and judgment, as

follows:

Declaring this action to be a class action properly maintained pursuant to Rule 23 of the

Federal Rules of Civil Procedure, certifying plaintiff as a class representative under Rule 23 of the


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Federal Rules of Civil Procedure and designating this Complaint as the operable complaint for class

purposes;

Awarding compensatory damages in favor of plaintiff and the other Class members against

all defendants, jointly and severally, for all damages sustained as a result of defendants’ wrongdoing,

in an amount to be proven at trial, including pre-judgment and post-judgment interest thereon;

Awarding extraordinary, equitable and/or injunctive relief as permitted by law, equity and the

federal statutory provisions sued hereunder, pursuant to Rules 64 and 65 and any appropriate state

law remedies to assure that the Class has an effective remedy;

Ordering defendants to disgorge their insider trading proceeds, including an accounting and

constructive trust over those proceeds;

Awarding plaintiff and the Class their reasonable costs and expenses incurred in this action,

including counsel fees and expert fees and other costs and disbursements; and

Awarding such other and further relief as the Court may deem just and proper.

JURY DEMAND

Plaintiff hereby demands a trial by jury.

DATED: August 14, 2006 LERACH COUGHLIN STOIA GELLER RUDMAN & ROBBINS LLP DARREN J. ROBBINS LAURA M. ANDRACCHIO TED MINAHAN

s/ Laura M. Andracchio LAURA M. ANDRACCHIO

655 West Broadway, Suite 1900 San Diego, CA 92101-4297 Telephone: 619/231-1058 619/231-7423 (fax)

Lead Counsel for Plaintiffs


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MURRAY MURPHY MOUL + BASIL LLP GEOFFREY J. MOUL (0070663) BRIAN K. MURPHY (0070654) 1533 Lake Shore Drive Columbus, OH 43204 Telephone: 614/488-0400 614/488-0401 (fax)

Liaison Counsel

VANOVERBEKE MICHAUD & TIMMONY, P.C. MICHAEL E. MOCO 79 Alfred Street Detroit, MI 48201 Telephone: 313/578-1200 313/578-1202 (fax)

Additional Counsel for Plaintiffs S:\CasesSD\Abercrombie 05\cpt.doc


CERTIFICATE OF SERVICE

I hereby certify that on August 14, 2006, I electronically filed the foregoing with the Clerk of

the Court using the CM/ECF system which will send notification of such filing to the e-mail

addresses denoted on the attached Electronic Mail Notice List, and I hereby certify that I have

mailed the foregoing document or paper via the United States Postal Service to the non-CM/ECF

participants indicated on the attached Manual Notice List.

s/ Laura M. Andracchio LAURA M. ANDRACCHIO

LERACH COUGHLIN STOIA GELLER

RUDMAN & ROBBINS LLP 655 West Broadway, Suite 1900 San Diego, CA 92101 Telephone: 619/231-1058 619/231-7423 (fax) E-mail:[email protected]


Mailing Information for a Case 2:05-cv-00819-EAS-TPK

Electronic Mail Notice List

The following are those who are currently on the list to receive e-mail notices for this case.

Ramzi Abadou [email protected] [email protected];[email protected];[email protected]

Laura M Andracchio [email protected]

Philip Albert Brown [email protected] [email protected];[email protected]

David Stewart Cupps [email protected] [email protected];[email protected]

Dana E Deering [email protected] [email protected]

Stuart Gerson [email protected]

Julianna Gonen [email protected]

Jay B Kasner [email protected]

Mark Mathew Kitrick [email protected] [email protected]

Albert Grant Lin [email protected]

Ted Minahan [email protected]

Geoffrey J Moul [email protected] [email protected];[email protected]

William J Pohlman [email protected]

Keith W Schneider [email protected] [email protected];[email protected];[email protected]

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Roger Philip Sugarman [email protected]

Michael Roy Szolosi, Sr [email protected]

Manual Notice List

The following is the list of attorneys who are not on the list to receive e-mail notices for this case (who therefore require manual noticing). You may wish to use your mouse to select and copy this list into your word processing program in order to create notices or labels for these recipients.

(No manual recipients)

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EXHIBIT 1

united states district court robert ross, individually...

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