2 Clothestime Shareholders Sue Company
Two shareholders of Clothestime Inc. have filed a lawsuit in federal court here alleging that the company’s officers and directors made misleading statements about the company’s financial position in an effort to inflate its stock price.
The suit alleges that between April 17, 1989, and Sept. 19, 1990, the Anaheim-based retailer gave out “materially false and misleading” statements concerning finances, business prospects, results from operations, marketing techniques and merchandise.
The shareholders, Fairmont Financial Corp. and Lepow Equities Corp., filed the suit Nov. 21 and are seeking class-action status. The suit says they are seeking millions of dollars in damages, but do not state a specific amount. Their attorneys were unavailable for comment.
Clothestime officials said they had not yet seen the lawsuit, but denied the broad allegations.
“Clothestime does not feel we have done anything wrong to mislead our shareholders or provide any information that was materially incorrect,” said David Sejpal, the company’s acting chief financial officer.
The suit names as defendants: Michael P. DeAngelo, the former chairman; John Ortega II, chairman; Raymond DeAngelo, vice chairman and chief executive officer; Norman Abramson, president; Peter B. Cumming and Jeffrey R. Dake, vice presidents; John M. Shanklin, former vice president; August DeAngelo, board secretary; and Harvey A. Bookstein and George Foos, directors.
The suit claims that the defendants wanted to “prolong the illusion of Clothestime’s success” to boost the stock price and conceal adverse facts about business at the 384-store chain of discount women’s clothing. They allegedly did so in order to protect their position and pay, enhance the value of the own stock and sell shares at inflated prices and to obtain larger payments under the company’s incentive bonus plan, according to the suit.
During the 18-month period in question, the company’s stock traded as high as $15 a share then fell to $3.75 a share by Jan. 31. Clothestime stock closed Thursday at $2.135, up 12 1/2 cents in trading on the over-the-counter exchange.
Clothestime officials consistently painted a rosy financial outlook for the company, predicting substantially increased revenue and earnings through most of fiscal 1990, the suit states. The suit contains a lengthy list of press releases and statements made during 1988 and 1989. But it concludes that contrary to the statements, “Clothestime was experiencing significant operational problems.”
The problems, the suit states, only started coming to light in late 1989 when the company reported lower monthly sales. The lawsuit alleges that Clothestime executives blundered by switching to more upscale women’s clothing without adequate study or test marketing and putting stores in strip malls instead of regional shopping malls. Three financial statements in 1989 failed to account for inventory markdowns or costs associated with remodeling or closing existing stores, the suit adds.
“Clothestime was suffering from significant management failures and shortcomings (at) the highest levels of its most important operations and had been unable to achieve the levels of earnings and revenue growth which were necessary to achieve ongoing success,” the suit states.
During the period in question, four officers--Dake, Cumming and Michael and August DeAngelo--sold more than 1.1 million shares of stock at a combined total of $8.9 million, the suit said.
