Case 1:11-cv-10186-NMG Document 53 Filed …securities.stanford.edu/.../2012815_f01c_11CV10186.pdfCase 1:11-cv-10186-NMG Document 53 Filed 08/15/12 Page 4 of 73 began pulling Talbots’

Case 1:11-cv-10186-NMG Document 53 Filed 08/15/12 Page 1 of 73

UNITED STATES DISTRICT COURT

DISTRICT OF MASSACHUSETTS

WASHTENAW COUNTY EMPLOYEES’ : Case No. 1:11-cv-10186-NMG RETIREMENT SYSTEM, Individually and on : Behalf of All Others Similarly Situated, : CLASS ACTION

Plaintiff, : : JURY TRIAL DEMANDED

vs.

THE TALBOTS, INC., TRUDY F. : LEAVE TO FILE GRANTED PER ORDER SULLIVAN, and MICHAEL SCARPA, : DATED AUGUST 15, 2012 [DKT. NO. 52]

: Defendants.

: :

SECOND AMENDED CLASS ACTION COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS


TABLE OF CONTENTS

Page

I. INTRODUCTION AND NATURE OF THE ACTION .....................................................1

II. JURISDICTION AND VENUE..........................................................................................3

III. PARTIES .............................................................................................................................4

IV. CLASS ACTION ALLEGATIONS ....................................................................................4

V. CONFIDENTIAL WITNESSES .........................................................................................6

VI. SUBSTANTIVE ALLEGATIONS ...................................................................................14

A. Background............................................................................................................14

B. Low on Cash, Talbots Cannot Afford to Pay Its Vendors.....................................15

C. As a Result of Talbots’ Failure to Timely Pay Its Vendors, Substantial Amounts of Merchandise for the Company’s Fall/Winter 2010 Product Line Did Not Arrive in the Company’s Stores in Time to Be Sold.......................22

D. The Individual Defendants Knew About Talbots’ Inability to Pay Its Vendors and the Resulting Impact It Would Have on the Company’s Sales in the Second Half of 2010 ....................................................................................28

VII. DEFENDANTS’ MATERIALLY FALSE AND MISLEADING STATEMENTS ISSUED DURING THE CLASS PERIOD .......................................................................37

VIII. APPLICABILITY OF PRESUMPTION OF RELIANCE: FRAUD ON THE MARKETDOCTRINE .....................................................................................................58

IX. LOSS CAUSATION..........................................................................................................59

X. NO SAFE HARBOR .........................................................................................................63

COUNT I: FOR VIOLATIONS OF SECTION 10(b) OF THE EXCHANGE ACT AND RULE 10b-5 PROMULGATED THEREUNDER AGAINST ALL DEFENDANTS.................................................................................................................63

COUNT II: FOR VIOLATIONS OF SECTION 20(a) OF THE EXCHANGE ACT AGAINST THE INDIVIDUAL DEFENDANTS.............................................................67

XI. JURY TRIAL DEMANDED.............................................................................................69

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I. INTRODUCTION AND NATURE OF THE ACTION

1. Lead Plaintiff Macomb County Employees’ Retirement System (“Macomb County”

or “Plaintiff”), individually and on behalf of a proposed class (the “Class”) of all purchasers of the

publicly traded stock of The Talbots, Inc. (“Talbots” or the “Company”) between December 8, 2009

and January 11, 2011, inclusive (the “Class Period”), by and through its undersigned counsel, alleges

the following against Talbots, Trudy Sullivan (“Sullivan”) and Michael Scarpa (“Scarpa”)

(collectively, “Defendants”) (Sullivan and Scarpa are sometimes hereinafter referred to as the

“Individual Defendants), seeking remedies under the Securities Exchange Act of 1934 (the

“Exchange Act”). The claims asserted herein arise under and pursuant to Sections 10(b) and 20(a) of

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

§240.10b-5.

2. Talbots is a specialty retailer and direct marketer of women’s apparel, accessories and

shoes with stores in the United States and Canada. In addition to selling its products in retail stores,

Talbots also utilizes mail order catalogs and online/internet operations. The Company’s common

stock is traded on the New York Stock Exchange (NYSE: TLB).

3. This case was brought because Defendants, throughout the Class Period,

misrepresented the Company’s ability to bring its products to market in a timely fashion, as well as

the resulting impact that the Company’s lack of inventory control and deteriorating relationship with

its clothing vendors was having on Talbots’ sales. In furtherance of their fraud, Defendants made

false and misleading statements regarding Talbots’ financial condition and future business prospects

that artificially inflated the price of the Company’s common stock.

4. Prior to the Class Period, Talbots was in a cash crunch. As a result, and unbeknownst

to investors, the Company was unable to meet its obligations to pay the manufacturers of many of

the Company’s lines of clothing as those obligations came due. As a result, the Company’s vendors

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began pulling Talbots’ orders from their production schedule, refusing to take new orders from the

Company, and otherwise refusing to ship orders until paid in full. While the Company ultimately

received a cash infusion near the beginning of the Class Period (as a result of the completion of a

merger and exchange offer and related financing), Defendants never revealed to the market that

much of its fall and winter 2010 product lines were not going to reach stores in a timely manner due

to the Company’s failure to pay many of the vendors who were contracted to manufacture the

merchandise for those clothing lines, thus driving sales down.

5. Instead, Defendants insisted that with the new cash infusion and the Company’s

purportedly new sourcing initiatives and inventory management techniques, Talbots was turning a

corner, and was well-positioned for the 2010 fall and winter seasons. Indeed, throughout the Class

Period, Defendants issued a series of materially false and misleading statements which

misrepresented and omitted material facts concerning the financial condition, future business

prospects and inventory position of the Company. For example:

. December 9, 2009, Sullivan – “ We’ve managed our inventories very, very carefully. ” 1

January 14, 2010, Scarpa – “ We have maintained an acute focus on improved inventory management. ”

April 13, 2010, Scarpa – “ The disciplined execution in inventory management, supply chain and expense control has been very strong and while the transformation of our Company and brand has been a huge undertaking, especially when moving as quickly as we did in this economic climate, the benefits are many. ”

September 8, 2010, Sullivan – “ We are entering the fall season with a strong inventory position ... ”

1 All emphasis herein is added and citations and footnotes are omitted unless otherwise noted.

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December 7, 2010, Scarpa – “ Our point of view is that we’re well-positioned from an inventory perspective ... ”

6. Through a series of partial disclosure events beginning on September 8, 2010, the true

state of affairs at the Company was ultimately revealed to investors, the market’s expectations about

the Company were corrected, and the artificial inflation in the price of Talbots’ stock created by

Defendants’ fraud was ultimately released, causing substantial damages to Plaintiff and the Class.

By the time Defendants’ fraud was finally completely revealed to the market on January 10, 2011,

the Company’s stock had fallen to $6.25 – down approximately 61% from a Class Period high of

$16.00 per share on April 19, 2010.

7. Defendants’ failure to disclose Talbots’ inability to bring much of its fall and winter

2010 product line to market on time due to the Company’s failure to timely pay its vendors (as well

as their misrepresentations to the market that the Company was tightly managing inventory,

controlling expenses and using disciplined execution in its supply chain to turn its business around)

and the revelation of the true financial condition and future business prospects of the Company, were

the direct and proximate cause of Plaintiff’s and other Class members’ losses. Indeed, the revelation

of Talbots’ true financial condition and future business prospects, which had been concealed by

Defendants’ fraud, was beyond dire for Plaintiff and the other Class members, who lost hundreds of

millions of dollars when the revelation of the truth drove the artificial inflation out of the price of

Talbots’ stock.

II. JURISDICTION AND VENUE

8. This Court has jurisdiction over the subject matter of this action pursuant to §27 of

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

9. Venue is proper in the Judicial District pursuant to §27 of the Exchange Act, 15

U.S.C. §78aa, and 28 U.S.C. §1391(b). In addition, the causes of action asserted herein occurred

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and/or accrued, among other places, in this District. At all times relevant to this action, Talbots was

headquartered in this District, and many of the acts and transactions alleged herein, occurred in

substantial part in this District.

10. In connection with the acts, conduct, and other wrongs alleged in this Complaint,

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

including, but not limited to, the United States mails, interstate telephone communications, and the

facilities of the national securities markets.

III. PARTIES

11. Court appointed Lead Plaintiff Macomb County purchased Talbots common stock on

the open market as set forth in its certification previously filed with the Court and suffered an

economic loss when the true facts described herein were disclosed to the market and the artificial

inflation was removed from the price of Talbots’ stock.

12. Talbots is a Delaware corporation with its principal place of business located at One

Talbots Drive, Hingham, Massachusetts 02043.

13. Defendant Sullivan is, and at all relevant times was, Chief Executive Officer

(“CEO”), and President of Talbots.

14. Defendant Scarpa is, and at all relevant times was, Chief Operating Officer (“COO”)

of Talbots and Chief Financial Officer (“CFO”) for the Company.

IV. CLASS ACTION ALLEGATIONS

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

Procedure 23(a) and (b)(3) on behalf of a Class, consisting of all those who purchased the common

stock of Talbots during the Class Period. 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.

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16. Because Talbots has millions of shares outstanding, and because the Company’s

shares were actively traded on the NYSE, members of the Class are so numerous that joinder of all

members is impracticable. According to Talbots’ SEC filings, as of December 1, 2010 (shortly

before the close of the Class Period), Talbots had approximately 70.4 million shares of common

stock outstanding. While the exact number of Class members can only be determined by appropriate

discovery, Plaintiff believes that Class members number at least in the thousands and that they are

geographically dispersed.

17. Plaintiff’s claims are typical of the claims of the members of the Class because

Plaintiff and all of the Class members sustained damages arising out of Defendants’ wrongful

conduct complained herein.

18. Plaintiff will fairly and adequately protect the interests of the Class members and has

retained counsel experienced and competent in class actions and securities fraud litigation. Plaintiff

has no interests that are contrary to or in conflict with the members of the Class it seeks to represent.

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

adjudication of this controversy, since joinder of all members is impracticable. Furthermore, as the

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

burden of individual litigation make it impossible for the members of the Class to individually

redress the wrongs done to them. There will be no difficulty in the management of this action as a

class action.

20. Questions of law and fact common to the members of the Class predominate over any

questions that may affect only individual members, in that Defendants have acted on grounds

generally applicable to the entire Class. Among the questions of law and fact common to the Class

are:

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(a) Whether Defendants violated the federal securities laws as alleged herein;

(b) Whether Defendants’ publicly disseminated press releases and statements

during the Class Period omitted and/or misrepresented material facts;

(c) Whether Defendants breached any duty to convey material facts or to correct

material facts previously disseminated;

(d) Whether Defendants participated in and pursued the fraudulent scheme or

course of business complained of;

(e) Whether Defendants acted willfully, with knowledge or recklessness, in

omitting and/or misrepresenting material facts;

(f) Whether the market prices of Talbots common stock during the Class Period

were artificially inflated due to the material nondisclosures and/or misrepresentations complained of

herein; and

(g) Whether the members of the Class have sustained damages as a result of the

decline in value of Talbots’ stock when the truth was revealed and the artificial inflation came out

and, if so, what is the appropriate measure of damages.

V. CONFIDENTIAL WITNESSES

21. Plaintiff makes the allegations herein, concerning the falsity of Defendants’

statements and the scienter of the Individual Defendants, based upon the investigation undertaken by

Plaintiff’s counsel, which investigation included analysis of publicly available news articles and

reports, public filings, securities analysts’ reports and advisories about Talbots, interviews of former

employees of Talbots, press releases and other public statements issued by the Company, and media

reports about the Company. Plaintiff believes that substantial additional evidentiary support will

exist for the allegations set forth herein after a reasonable opportunity for discovery.

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22. Moreover, the allegations made herein are supported by the first-hand knowledge of

twenty (20) confidential witnesses (“CWs”). These informants include former employees of Talbots

who were employed during the Class Period and provided facts from various departments within the

Company. As detailed below, the CWs each served in positions at Talbots that provided them with

access to the information they are alleged to possess.

23. Confidential Witness 1 (“CW 1”) was employed with Talbots for nearly 14 years until

February 2009, most recently as an Assistant Supervisor in Inventory Control for the Company’s

Retail Stores business segment. As an Assistant Supervisor for Inventory Control, CW 1 was

responsible for reconciling orders with the invoices and the information in the Company’s software

tracking system known as “Midas.” CW 1 reported to Inventory Control Supervisor Glen Gronroos

(“Gronroos”), who reported to Manager Scott Campbell (“Campbell”). Campbell reported to

Director Vin DiSciullo (“DiSciullo”), who reported to Senior Vice President of Operations Bruce

Soderholm (“Soderholm”). CW 1 has knowledge regarding how the Company began selling product

to discount retailers as a result of Talbots’ cash flow problems.

24. Confidential Witness 2 (“CW 2”) was employed by Talbots for 12 years, most

recently as a District Manager from 2005 through 2008. CW 2 reported to Regional Manager Joan

Cedrone (“Cedrone”), who reported to Vice President of U.S. and Canadian Stores Jane Inman

(“Inman”). Inman reported to Executive Vice President of Retail Michele Mandell (“Mandell”) who

reported to Defendant, CEO and President Sullivan. Beginning in 2010, CW 2 was employed as a

consultant to a New York City financial advisor whose clients held stock in Talbots. The Financial

Advisor tasked CW 2 with periodically visiting Talbots’ stores in North Carolina to observe the level

of customer foot traffic in the stores, the quality of the merchandise and to listen to what customers

were saying as they shopped and tried on Talbots’ clothing. CW 2 has knowledge regarding how

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virtually none of the merchandise in Talbots’ fall catalog was available in the Company’s North

Carolina stores or available on the Company’s website.

25. Confidential Witness 3 (“CW 3”) was employed by Talbots from January 2010 until

January 2011 as the Store Manager at the Talbots at Eden Prairie Center in Eden Prairie, Minnesota.

CW 3 reported to District Manager Cheryl Snider (“Snider”), who was responsible for 15 stores in

the Minneapolis metro area, North Dakota, Iowa and Wisconsin. Snider reported to a Regional

Director who was based in the Colorado area and reported to Executive Vice President and Chief

Stores Officer John Fiske (“Fiske”). CW 3 has knowledge regarding merchandise arriving late to

Talbots’ stores in 2010.

26. Confidential Witness 4 (“CW 4”) was employed by Talbots as the General Manager

of the Talbots retail store located in the Valley Fair shopping center in Santa Clara, California from

February 15, 2010 to January 6, 2011. CW 4 reported to four different District Managers during

her/his tenure with the Company. The District Managers reported to Regional Director Judy Holmes

(“Holmes”), who reported to Vice President of U.S. and Canadian Stores Inman. CW 4 has

knowledge regarding merchandise arriving late to Talbots’ stores in 2010.

27. Confidential Witness 5 (“CW 5”) was employed with Talbots in its Sourcing

Department located in the Company’s corporate headquarters in Hingham, Massachusetts from

January 2007 to January 2010. She/he joined the Company as a “Sample Tracker” – which involved

coordinating and tracking the delivery of merchandise samples – and was promoted to Assistant

Sourcing Manager in or around Summer 2008. Though CW 5 did not have a direct supervisor when

working as an Associate Sourcing Manager, she/he typically consulted with Sourcing Director

Jonathan Palmer (“Palmer”). Additionally, CW 5 forwarded emails to the Vice Presidents

overseeing the department, including Donna Perri (“Perri”), a Vice President for Sourcing. CW 5

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has knowledge regarding the Company’s issues with paying vendors and the resulting impact that

these problems had on clothing deliveries to the Company’s stores.

28. Confidential Witness 6 (“CW 6”) was employed at Talbots for roughly two years

until October 2009 as a Sourcing Manager in the Sourcing Department at the Company’s

headquarters in Hingham, Massachusetts. As a Sourcing Manager, CW 6 was responsible for

negotiating costs with the Company’s overseas vendors through Talbots’ overseas sourcing agents

and placing orders. CW 6 reported to Vice President of Sourcing Sui Cheng-Khoo (“Cheng-Khoo”),

who was responsible for knits and sweaters. Perri was also a Vice President in the Sourcing

Department and she was responsible for wovens and denim. Cheng-Khoo and Perri reported to

Senior Vice President Jeff Frye (“Frye”) for a short period of time until he left the Company. When

Frye was employed at Talbots, he reported to Executive Vice President and Chief Supply Chain

Officer Gregory Poole (“Poole”), who reported directly to Sullivan. CW 6 has knowledge regarding

the Company’s issues with not paying vendors and the resulting impact that these problems had on

clothing deliveries to the Company’s stores.

29. Confidential Witness 7 (“CW 7”) was employed by Talbots from 1987 until April

2010. In 1999, CW 7 was promoted to Regional Director, overseeing 120 retail stores in the south-

central part of the nation, which was bordered by Arizona to the west and Georgia to the east and

included Kansas City and St. Louis, in Missouri. CW 7 reported directly to Inman, Vice President of

U.S. and Canadian Stores. Inman reported to Executive Vice President and Chief Stores Officer

Fiske, who reported to Sullivan. CW 7 has knowledge regarding Talbots’ merchandise arriving late

to stores as well as the Company’s decision to sell merchandise to discount retailers.

30. Confidential Witness 8 (“CW 8”) worked for Talbots from August 2009 until

November 2010 as a District Manager overseeing 11 retail stores in North Carolina and one store in

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South Carolina. CW 8 reported to Regional Director Joan Cedrone (“Cedrone”), who reported to

Vice President of U.S. and Canadian Stores Inman . Inman reported to Executive Vice President and

Chief Stores Officer Fiske who reported directly to Sullivan. CW 8 has knowledge regarding items

featured in the Company’s catalogs that were delivered to stores late, causing the merchandise to

arrive after catalogs were mailed to customers or later in the season then planned (and ultimately

resulting in the product not being in stores when catalog customers came in to purchase it).

31. Confidential Witness 9 (“CW 9”) was employed by Talbots as a Sourcing Manager in

the Sourcing department in Hingham, Massachusetts from October 2000 until November 2009. In

2009, CW 9 reported to Vice President of Sourcing Perri. CW 9 has knowledge regarding the

Company’s issues with not paying vendors and the resulting impact that these problems had on

clothing deliveries to the Company’s stores.

32. Confidential Witness 10 (“CW 10”) was employed with Talbots for nearly 22 years

through July 2010, most recently as a Vice President. CW 10 oversaw all customer service functions

for the Direct Marketing business, which included all customer contact, via letter, email and phone,

related to catalog, Internet and red-line phone sales. CW 10 reported to Senior Vice President of

Direct Marketing Bruce Prescott (“Prescott”), who was based at the Company’s headquarters in

Hingham. Prescott reported to Executive Vice President and Chief Marketing Officer Lori Wagner

(“Wagner”) who was based in New York City. CW 10 has knowledge regarding the “record-

breaking” amount of merchandise advertised by Talbots, but not available to customers in the

Company’s stores in 2010.

33. Confidential Witness 11 (“CW 11”) was employed by Talbots from January 1999 to

late April 2010. From September 2008 until April 2010, CW 11 worked as the Manager of Store

Finance providing support to the Retail Stores business segment. This role initially fell under “store

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operations,” but after the Company hired Defendant Scarpa, CW 11’s job as well as many of the

positions in store operations began reporting to the finance organization. Throughout her/his tenure,

CW 11 had two to four Financial Analysts reporting to her/him directly. From September 2008 to

April 2009, CW 11 reported to Director of Store Operations Cindy Dale (“Dale”) who reported to

Executive Vice President of Retail Michele Mandell (“Mandell”). In or around April 2009, CW 11

began reporting to Vice President of Financial Planning and Analysis Gary Yunker (“Yunker”). CW

11 has knowledge regarding the monthly profit and loss meetings held by Scarpa, as well as sales

reports that were sent to the Company’s Executive Committee on a weekly basis.

34. Confidential Witness 12 (“CW 12”) was employed at Talbots from October 28, 2007

to November 2010 as a General Manager overseeing two Talbots retail stores at Charleston Town

Center in Charleston, West Virginia. CW 12 reported to District Manager Margi Ceh (“Ceh”), who

reported to Regional Director Barbara Parker (“Parker”). Parker reported to Vice President of U.S.

and Canadian Stores Inman who reported to Executive Vice President and Chief Stores Officer

Fiske. Fiske reported to Sullivan. CW 12 has knowledge regarding merchandise arriving late to

Talbots’ stores in 2010 and the inability to locate that merchandise at the Company’s other stores.

35. Confidential Witness 13 (“CW 13”) joined J. Jill in 1998 and eventually became the

Director of Import Compliance. Talbots acquired J. Jill in 2006, and in late 2008, CW 13 was

brought over to work at Talbots’ headquarters in Hingham, Massachusetts. From February 2009 to

September 2009, CW 13 handled the vendor due diligence and social compliance for both Talbots

and J. Jill. At that time, Leslie Kingetter (“Kingetter”) was the Talbots employee responsible for

vendor due diligence and social compliance. CW 13 and Kingetter reported to Chief Supply Chain

Officer Poole, who reported to Sullivan. CW 13 has knowledge regarding the Company’s issues

with not paying vendors in a timely manner.

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36. Confidential Witness 14 (“CW 14”) worked for Talbots as a Sourcing Director for

knits and sweaters from June 2010 through June 2011. Initially, CW 14 reported to Vice President

of Sourcing Vickie Nellor (“Nellor”), who left Talbots in March 2011. When Nellor left Talbots,

CW 14 began reporting to Chief Supply Chain Officer Poole. CW 14 was familiar with Talbots’

entire production process and has information regarding, among other things, quality issues with the

products the Company ordered as well as late deliveries from vendors and the Company’s precise

tracking of inventory and deliveries.

37. Confidential Witness 15 (“CW 15”) was employed with Talbots for 26 years, until

April 2011. During CW 15’s employment, she/he was a Store Manager for one year and a District

Manager for 25 years, assigned to a district that included stores in Dallas, Texas, East Texas, and

North Louisiana. CW 15 reported to Regional Director Kerri Monroe Bishop (“Bishop”) who was

replaced by Pam Huerta (“Huerta”). Bishop and Huerta reported to Vice President of U.S. and

Canadian Stores Inman who reported to Executive Vice President of Retail Mandell. CW 15 has

information regarding the Company’s late arrival of inventory and general lack of inventory in 2010.

38. Confidential Witness 16 (“CW 16”) was first employed by Talbots from 1993 until

2000 in several positions including Assistant Buyer, Planner, Direct Marketing Analyst, and Senior

Marketing Analyst. CW 16 returned to work for Talbots in January 2010 as a temporary employee,

but became employed with the Company on a full-time basis from April 2010 until March 2012 as

an Assistant Global Sourcing Manager. She/he was let go in March 2012 when Talbots moved the

Sourcing group from Hingham, Massachusetts to offices in New York. CW 16 reported to Director

of Global Sourcing Rebecca Duval (“Duval”) until 2011, and thereafter reported to Sourcing

Manager Mark Jones (“Jones”). Duval reported to Vice President of Sourcing Nellor, who in turn

reported to Executive Vice President and Chief Supply Chain Officer Poole, who reported to

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Sullivan. CW 16 has information regarding the late delivery of merchandise to Talbots’ stores as

well as Talbots’ failure to timely pay its vendors.

39. Confidential Witness 17 (“CW 17”) was employed with Talbots from March 2001

until March 30, 2012, when the Sourcing group relocated from Hingham, Massachusetts to offices in

New York. CW 17 was originally employed as a Sourcing Manager until approximately 2008. In

2008, CW 17 chose to become an Assistant Sourcing Manager in order to reduce the extensive

amount of international travel she/he had as a Sourcing Manager responsible for meeting and

working with vendors to “negotiate the pricing of apparel programs.” CW 17 reported to Global

Sourcing Manager Alice Woo (“Woo”) and later to Global Sourcing Manager Sharon Cain (“Cain”),

after Woo departed from Talbots in approximately 2011. Woo and Cain reported to Director of

Global Sourcing Duval, who reported to Executive Vice President and Chief Supply Chain Officer

Poole, who reported to Sullivan. CW 17 has information regarding Talbots’ failure to pay vendors

on time and the late delivery of inventory to Talbots’ stores during the Class Period.

40. Confidential Witness 18 (“CW 18”) worked for Talbots from August 2004 until April

2011 as a merchant in the Merchandising department. CW 18 was assigned to “cut and sew”

products and from approximately April 2009 until she/he left the Company. CW 18 also participated

in “special projects,” including the implementation of information systems. CW 18 reported to

Merchandising Manager Laurie Turner (“Turner”) who reported to Merchandising Director Deirdre

Fitzgerald (“Fitzgerald”). In turn, Fitzgerald reported to Executive Vice President and Chief

Merchandising Officer Basha Cohen (“Cohen”) until approximately April or May 2009, at which

time Fitzgerald began reporting to Executive Vice President and General Merchandising Manager

Lizanne Kindler. Kindler reported to Sullivan. CW 18 has information about Talbots’ failure to

timely pay vendors and the resulting refusal of vendors to ship merchandise to Talbots.

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41. Confidential Witness 19 (“CW 19”) was employed by Talbots for 12 years until

August 2011. CW 19 held a number of positions during her/his employment with Talbots, but was a

Buyer for accessories from 2005 through the end of her/his employment. CW 19 has information

regarding Talbots’ failure to timely pay vendors, which resulted in vendor delivery delays, and

Defendants’ attendance at “townhall” meetings where the failure to pay vendors and the resulting

impact upon Talbots’ sales were openly discussed.

42. Confidential Witness 20 (“CW 20”) was employed with Talbots as a Manager of

Outlet Operations from January 2009 to November 2011 at the corporate office in Hingham,

Massachusetts. CW 20 reported to Manager of Clearance Outlets Jen Lloyd (“Lloyd”), who, in turn,

reported to Vice President of Outlets Pat Walsh (“Walsh”). CW 20 recalled that Walsh reported to

Scarpa. CW 20 has information regarding Talbots’ failure to pay vendors and the resulting delay in

receiving inventory, as well as Sullivan and Scarpa’s attendance at a “townhall” meeting where the

failure to pay vendors was openly discussed.

VI. SUBSTANTIVE ALLEGATIONS

A. Background

43. Talbots, together with its subsidiaries, operates as a specialty retailer and direct

marketer of women’s apparel, accessories, and shoes in the United States and Canada. The Company

offers its merchandise under misses, petites, woman, and woman petite sizes, and provides

accessories, such as fashion jewelry, scarves, handbags, and footwear. As of January 29, 2011, the

Company operated 568 stores under the Talbots name, including retail stores, upscale outlets, and

surplus outlets. The Company also markets its products online through its website,

www.talbots.com, as well as through catalogs.

44. By late 2008, due to heavy competition, declining sales and significant debt, the

Company was experiencing severe cash flow problems. As a result, in early 2009, Talbots retained

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Perella Weinberg to evaluate various alternatives for refinancing the outstanding indebtedness that

Talbots had coming due in December 2009, January 2010 and April 2010 (ultimately resulting in a

merger with BPW Acquisition Corp. in January 2010, and related third-party financing).

45. Due to the Company’s severe cash shortage, Talbots began taking extraordinary

measures in an attempt to preserve capital. For instance, according to CW 11, the Company stopped

providing Talbots-branded shopping bags in late 2009 and even got rid of the water coolers in stores

located in states where a water cooler was not mandated by state law. Further, according to CW 1,

CW 7 and CW 11, the Company began selling surplus merchandise to discount retailers such as

Marshalls and T.J. Maxx in 2009. According to CW 1, it was the first time in her/his 14 years with

Talbots that excess merchandise was sold to a discount retailer.

B. Low on Cash, Talbots Cannot Afford to Pay Its Vendors

46. At the same time, Talbots began running into problems because the Company could

no longer afford to pay its clothing vendors in a timely manner. According to CW 5, Talbots had

trouble paying its vendors beginning in summer 2008, with the problem getting particularly worse in

2009. According to CW 6, payments to vendors were late “across the board” for the vendors she/he

dealt with. As a result of the late payments, some vendors were only completing portions of the

Company’s orders, while others were rejecting the Company’s orders altogether. For example,

according to CW 6, a Chinese sweater vendor named Great Brilliance suspended production of

Talbots’ merchandise and asked to see Talbots’ books.

47. The problems with late payments to vendors became significantly worse in mid-2009.

CW 13 was “knee deep as of May 2009” in terms of dealing with unpaid vendors. CW 13 stated that

all payments to overseas vendors were late during summer 2009. Talbots owed money to vendors in

various stages of fulfilling orders: vendors who had not yet started production, vendors who had

already started production, vendors who had finished production and were holding the shipment and

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vendors who had consigned merchandise to a bank, meaning the merchandise was shipped to the

U.S. but was held by a bank until Talbots paid what was owed.

48. In May 2009, CW 6 traveled with her/his supervisor Cheng-Khoo to China to meet

with a sweater vendor named SSHY – a vendor for high volume sweater orders for Talbots. In May

2009, SSHY had more than one million units of sweaters in production for Talbots’ fall 2009 season

and was considered Talbots’ number one sweater vendor. According to CW 6, during this time,

Talbots owed SSHY $1 million or more for sweaters that were in production and SSHY was very

concerned that Talbots owed the company so much money.

49. As a result, SSHY raised the price on a new garment order that Talbots was trying to

place by 60 cents per garment – resulting in a 10 percent increase in price from the previous order,

even though the other was identical to a prior order Talbots had placed with SSHY. CW 6 stated

that the new order would have been for one million units of sweaters for delivery in spring 2010, but

Talbots declined to place the new order with SSHY because the cost was too high.

50. By July and August 2009, CW 9 was having conference calls with overseas vendors

almost every day to try and mollify them. According to CW 5, the problems escalated to the point

that vendors were pulling Talbots’ orders from their production schedules and giving the spots to

other companies, resulting in merchandise deliveries to Talbots being delayed by weeks and/or

months.

51. CW 9 recalled a vendor in India called Ambator that was delaying “hundreds of

thousands of units” of cotton button-up shirts in the August 2009 timeframe due to not being paid by

the Company. CW 9 noted this style of shirt is one of the main staples for Talbots and was supposed

to be a “go-to” piece that was always available. The shirts were supposed to ship in August 2009

and were already months late, and had still not been shipped when CW 9 left the Company in

- 16 -


November 2009. CW 5 stated that she/he had locked in orders for the 2010 fall line in January 2010,

but the Company’s relationship with vendors was in such chaos that CW 5 did not know if any of the

products that she/he ordered would be delivered. CW 5 forwarded vendor complaints to Talbots’

Finance Department, headed by Scarpa. The response from the Finance Department was always that

they were “working on it,” or that the Company could not pay the vendors for three or four more

weeks.

52. CW 6 stated that some vendors who had shipped merchandise to the U.S. were

consigning the merchandise to banks when it arrived at the docks in Southern California. The

vendors paid the banks to store the merchandise, but Talbots would have to pay the banks what was

due to the vendors as well as storage fees before the banks would release the merchandise to Talbots.

53. Shortly after April 2009, CW 18 became aware that Talbots’ was not paying vendors

and, as a result, vendors were refusing to ship orders. According to CW 18, vendors were “holding

orders hostage” because of Talbots’ non-payment. CW 18 first learned that orders were missing and

had not been shipped to Talbots based on Talbots’ order tracking systems. According to CW 18,

order delivery followed the receipt of “advanced shipment notices” – or “ASNs” – which signified

that the orders left the vendors for delivery to Talbots. Thereafter, the Import personnel tracked the

orders after an ASN was posted in the “old mainframe system.” CW 18 stated that Talbots “stopped

getting goods” within months of April 2009. Orders were “not showing up” as delivered by the

scheduled date in the mainframe system used to track the status of orders. CW 18 explained that

each order had an “in-house delivery date,” but the dates were being missed, and the number of

orders for which delivery surpassed the “in-house delivery date” began to “increase fairly quickly”

in 2009.

- 17 -


54. CW 18 learned that vendors were not being paid through discussions with Talbots’

Sourcing Managers, as well as direct communications with Executive Vice President and General

Merchandising Manager Kindler, who told CW 18 that vendors were “not getting paid” and orders

were not shipped as a result. CW 18 stated that Kindler got these facts directly from Sullivan and

that Kindler “shared facts” from Sullivan with CW 18 and others prior to August 2010 about the

vendors “not getting paid,” and that the failure to pay vendors was the reason why Talbots was “not

getting orders.”

55. CW 19 learned that Talbots was not timely paying vendors and that deliveries of

inventory were being held back by vendors because she/he received calls from representatives of two

accessories vendors, Echo and Fashions by Gary, who told CW 19 they had not been paid and

inquired about when payment could be expected. According to CW 19, these vendors were not

timely paid in the second or third quarter 2010 timeframe, and both vendors held back shipments of

inventory as a result.

56. Though CW 5 only communicated with the vendors she/he worked with, based on

her/his conversations with other Sourcing Managers at Talbots, the vendor payment problem was

pervasive. CW 5 recalled seeing outstanding balances to vendors for anywhere from $100,000 to $3

million. CW 5’s best estimate was that Talbots owed vendors a total of about $30 million for

merchandise during the Class Period. This was corroborated by CW 6, who stated that she/he

believed that Talbots owed “millions” to vendors. CW 6 estimated that in her/his vendor base alone,

approximately 10 vendors were owed money ranging from six figures to more than $1 million, and

that payments were anywhere from 30 days to 120 days late or more. CW 5 and her/his co-workers

always wondered if the Company was “cooking the books.” They could not figure out how the

Company was supposedly doing well and turning a corner financially, as represented to the market

- 18 -


by the Individual Defendants, when the Sourcing Managers could not even order fabric because the

Company had not paid its vendors. 2

57. CW 18 stated that vendors “across the board’ were not paid for orders, including

vendors that produced denim, pants, and sportswear, and that the failure to timely pay vendors

happened to “big vendors,” which negatively impacted Talbots’ sales because orders arrived as

much as two months late.

58. The timing and length of these delays of vendor payments were crucial to the

Company because it typically took approximately six to nine months from the time a product was

ordered until the time it reached Talbots’ stores (assuming that the vendors were being paid on time).

For instance, according to CW 6, it typically took nine months to one year from concept to the time

sweaters were available for customers to purchase online, from a catalog or in the Company’s stores.

So delays in vendor payments meant delays in delivery of merchandise and, ultimately, missed sales.

59. CW 6 was working on the fall 2010 sweater order when she left Talbots in October

2009. According to CW 6, an order that was to be available to customers in August/September 2010

would most likely have to have been locked in with vendors by fall 2009 to allow for shipping in

June 2010. CW 6 explained that she/he sourced sweaters for spring 2010, for example, in February

through April 2009; summer 2010 in May through July 2009; fall 2010 in August through

2 CW 7 and CW 11 believed that the Company featured merchandise in promotions rather than permanently marking it down so it could keep the merchandise on its books valued at full price instead of a lower sale price. CW 11 noted that the Company takes the markdown on its books only when it permanently marks down merchandise. If merchandise is temporarily marked down during a promotion, however, only the merchandise sold during the promotion is recorded at a lower value. The promoted merchandise that was not sold at a discount remains valued at full price until the Company lowers the price permanently or sells it during a promotion.

- 19 -


September 2009 and holiday 2010 (winter, but referred to as “holiday” in the industry) from

November 2009 through January 2010.

60. Given this historically well-known timeline for the production of Talbots’ clothing,

Defendants knew that the failure to timely pay vendors in mid-to-late 2009 would result in delays

and order cancellations that would have a significant impact on the Company’s sales in the second

half of 2010 because the Company would not have in stores much of the merchandise it was

advertising in its catalogs and elsewhere.

61. CW 17 stated that Talbots experienced so many problems paying vendors the

Company had to “prioritize orders,” so that payments could be made on the most important orders

and certain products would be received. CW 16 confirmed that Talbots was experiencing financial

woes during her/his employment in 2010 and 2011 and was not timely paying vendors. According

to CW 17, Talbots Sourcing personnel held weekly team meetings, attended by approximately 8-10

Sourcing personnel for woven products and led by Director of Global Sourcing Duval, during which

they discussed that “money was tight” and orders had to be “prioritized for payment.” CW 17

confirmed that she/he and other Sourcing personnel had discussions about there not being enough

money to “pay the bills,” including payments on purchase orders. CW 17 often questioned other

Sourcing personnel about why Talbots could not pay its current obligations and was not timely

paying vendors.

62. According to CW 17, beginning in 2010, the orders were prioritized by Sourcing

personnel including CW 17, who assisted Global Sourcing Manager Woo and later Global Sourcing

Manager Cain in prioritizing the orders. CW 17 recalled the orders were prioritized by identifying

the items that were ‘key” for the season and to a particular “program.” The Talbots’ Merchants

provided a list of the “top ten” items for the “programs,” which was used as the basis for prioritizing

- 20 -


orders and determining which vendors should be paid. The “top ten list” was sent to CW 17 by the

Merchants when sourcing for the “programs” was underway. CW 17 typically received the “list” in

hard copy from Woo and later Cain. Purchase orders in conjunction with the “top ten list” were

reviewed as part of the prioritization process to identify which orders were more important than

others. The prioritized orders were then presented to Finance Manager for Sourcing Kim Parks

(“Parks”), who used the prioritized orders to determine which vendors should be paid and which

payments could be withheld. According to CW 17, Parks met with Director of Global Sourcing

Duval to discuss the prioritization and which orders should be paid and which ones Talbots could

avoid paying given financial constraints. CW 17 understood that Chief Supply Chain Officer Poole

directed the orders to be prioritized.

63. Talbots’ contracts with vendors stipulated charges for late payments. As explained by

CW 17, vendors might be charged “one percent” per day or “five percent” per week for late

shipments. But, in 2009 and 2010, Talbots was not imposing these late fees because the shipments

were late as a result of Talbots’ failure to pay vendors. CW 16 stated that during her/his first term of

employment with Talbots prior to 2000, vendors were penalized for late shipments and late

shipments were infrequent. But CW 16 stated that during the time covered by the Class Period and

into 2012, it was “complete chaos” at Talbots, and Talbots did not penalize the vendors. This was an

indication that the late shipments were likely not caused by problems at the factories or by other

means that could be attributed to the vendors. According to CW 16, instead of penalizing vendors,

Talbots “extended” the dates of orders.

- 21 -


C. As a Result of Talbots’ Failure to Timely Pay Its Vendors, Substantial Amounts of Merchandise for the Company’s Fall/Winter 2010 Product Line Did Not Arrive in the Company’s Stores in Time to Be Sold

64. CW 17 stated that Talbots failed to timely pay vendors, and shipments of inventory

were delayed as a result. According to CW 17, the late shipments “definitely” occurred in 2009, but

increased in 2010 and 2011, and there were more late shipments in the fourth quarter of 2010 in

particular. In fact, CW 17 stated there were a particularly “high number of lates” (i.e., late

shipments from the vendors) during the fourth quarter of 2009 and 2010, and more so in 2010,

including for inventory ordered specifically for the Christmas “big season.” Similarly, CW 16

stated there was an “exorbitant” amount of late shipments in 2010 and 2011, and business was “not

good” in 2010.

65. According to CW 3, new merchandise was supposed to start arriving at the

Company’s stores several weeks prior to the line being introduced in the Company’s catalog. This

was so the stores could plan the displays to coincide with the arrival of the catalog. Yet, throughout

2010, CW 3’s Talbots store often received merchandise days or weeks after it had debuted in a

catalog. This was corroborated by CW 4, who stated that it was rare during 2010 for the Company’s

Valley Center store to receive merchandise featured in a Talbots catalog on time, and CW 7, who

stated that it was not uncommon for pieces of a line to arrive in stores late during this timeframe.

66. CW 3 further explained that stores would receive “visuals” from the corporate office

that described how new merchandise should be displayed in stores, but that virtually every visual

plan she/he received in 2010 included merchandise that she/he did not have in her/his store. This

was corroborated by CW 7, who stated that there were always items missing from planned floor

displays in 2010.

- 22 -


67. CW 8 stated that “key pieces” or items featured in the catalogs were one or two

weeks late, resulting in the merchandise arriving after catalogs were mailed to customers or later in

the season than planned. According to CW 12, merchandise featured in the Company’s catalogs was

often days or weeks late to arrive in her/his stores, and sometimes certain merchandise did not arrive

at all. CW 10 noted that the amount of merchandise advertised, but not immediately available to

customers when she/he left in July 2010, was “record breaking.”

68. CW 12 stated that because there were always key pieces missing, her/his store would

have to substitute other merchandise from the sales floor, leading to “holes” on the sales floor as

inventory was already lean. Taking merchandise from one display to augment another display also

led to problems with the integrity of the store. According to CW 12, certain merchandise was meant

to be paired together on the sales floor, and when it was late or did not arrive at all in stores, the

collection on the sales floor was not cohesive compared to the merchandise featured in the Talbots

catalog. When CW 12 would express concerns to her District Manager Ceh, CW 12 was always told

that all of the Company’s stores “were in the same situation.”

69. CW 15 confirmed there were issues with inventory for “floor presentations” arriving

increasingly late. According to CW 15, each store was mapped out to have the same “floor

presentation,” including the location for inventory in the store and the types of inventory to be

displayed in specific locations. The stores received inventory for the “floor presentations” every

three weeks but, beginning in late 2009 and continuing into 2010, the inventory for the “floor

presentations” began arriving the day the “floor presentations” had to be set up, instead of on

schedules that allowed the store personnel to sort through the inventory to prepare for setting up the

“floor presentations.” CW 15 also stated that while some of the inventory for the “floor

presentations” arrived in time to sort through the inventory in preparation for display, the “main

- 23 -


attraction” and inventory items that were central to the “floor presentation” frequently arrived late

and the frequency of late arrivals increased into 2010.

70. CW 18 stated that Talbots was negatively impacted when vendors were not paid and

refused to ship orders because the Company was forced to “scramble” to redesign “floor sets” at the

store level to adjust for short shipments and late delivery dates. According to CW 18, the missed

delivery dates and late orders occurred during the “biggest season”, particularly in fall 2010 and

holiday 2010, and related to the “biggest” product categories. More specifically, CW 18 recalled

Talbots did not receive critical orders for a scheduled “denim fit relaunch” in August 2010. CW 18

attended a number of meetings that Executive Vice President and General Merchandising Manager

Kindler led leading up to the scheduled August 2010 launch. The meetings were held after Talbots

learned that the orders would not be shipped in full because of Talbots’ failure to pay the vendor.

CW 18 stated the meetings were held on “A35” in the layout room of Talbots’ offices. Attendees

included Kindler, Merchandising Director Fiztgerald, and approximately six merchants in total,

including CW 18. The meetings were held to “regroup” because of the missing inventory and the

fact that Talbots was heavily promoting the August 2010 “denim fit relaunch.” CW 18 stated that

the missing inventory planned for the August 2010 launch did not arrive until approximately October

2010.

71. The late deliveries impacted Talbots’ ability to display and sell merchandise at full

price. For example, CW 18 explained that “very heavy” sweaters that were held back by vendors

and shipped late due to Talbots’ failure to pay the vendors often could not be displayed for long and

prices had to be “marked down.” As another example, CW 18 stated that although Talbots was able

to display and sell some of the denim that was received after August 2010, the Company missed out

on the planned sales that could have been achieved if the denim had arrived on schedule. CW 19

- 24 -


also recalled Talbots’ denim launch in August 2010 was hampered by the late arrival of inventory

from the vendor.

72. According to CW 19 Talbots was negatively impacted by late payments to vendors

and consequential late delivery of orders because Talbots missed out on planned sales of accessories.

Simply stated, shipments of accessories arrived late due to failure to pay the vendors. CW 20

explained that when deliveries from vendors were delayed, the products could not be sold in stores

for full price and that she/he received an “excess” amount of inventory at the clearance outlets that

had already been marked down from the original sales prices and another “50 percent off the mark

down.” As an example, CW 20 stated that at one point there were “20,000 units of sweaters”

distributed to the clearance outlets.

73. As an example of the lack of inventory in stores, CW 15 stated that in fall 2010 there

was a “full length holiday skirt” that was supposed to be included in the “floor presentation,” but the

skirt arrived late to the high-end stores and the “depth” of the inventory of the skirt was lacking in

such a way that inventory of the skirt sold out in two hours after it was put on the floor.

74. According to CW 15, the issues with inventory availability and allocation were

undeniable and systemic in the region in which she/he operated. CW 15 also stated that in addition

to the lack of inventory in stores, the catalogue inventory was “always sold out” beginning in 2010.

CW 15 often experienced customers who had become frustrated during the 2010 timeframe because

catalogue inventory was often out of stock.

75. CW 15 stated that ultimately, changes in the allocation of inventory had a severe

negative impact on sales beginning in 2010. Sales at the store in Preston Park, Texas dropped by

“$1 million” in 2010 compared to results from 2009, and the store in Frisco, Texas was ultimately

closed in 2011 because of poor performance resulting from inventory changes.

- 25 -


76. The lack of inventory in stores and through the catalogue was corroborated by CW 2,

who, in or around August 2010, visited several of Talbots’ stores in North Carolina to view the

Company’s fall 2010 merchandise from its August 2010 catalog. CW 2 learned that virtually none

of the merchandise featured in the catalog was available in North Carolina stores, nor was it stocked

at some other stores she/he randomly checked. The merchandise was also unavailable online.

77. CW 2 first visited the Talbots store in Triangle Town Center Mall, located in north

Raleigh, North Carolina. She/he brought the August 2010 catalog with her/him and saw that none of

the new styles featured in the catalog were available in the store. During her/his visit to the Triangle

Town Center store, CW 2 spoke with a Sales Associate who checked the computer and determined

the styles were not available in other North Carolina stores either.

78. CW 2 also visited Talbots’ stores at the Southpoint Mall and the Cary Town Center

Mall in North Carolina, and neither had the merchandise featured in the Company’s catalog. CW 2

then called a handful of stores in various locations in New England, the Midwest, on the west coast,

and in Florida, but none of the stores had the merchandise. Each time, the Company’s Sales

Associates were apologetic, but did not know when the merchandise would arrive. This was

confirmed by CW 12, who stated that in Fall 2010, when she/he and her/his fellow Sales Associates

tried to find pieces for customers at other Talbots’ stores that were unavailable in her/his store, they

were never available.

79. CW 2 eventually went to Talbots’ website and attempted to buy the fall merchandise

featured in the August 2010 catalog online. She/he recalled that she had about $38,000 worth of

merchandise in her online shopping cart, but that none of it was available for at least another two to

three weeks. According to CW 2, the failure to have the fall line in stores on time was a “big faux

pas” for Talbots, as retail companies typically have a very short time window from the time

- 26 -


customers receive a catalog to sell the bulk of the merchandise featured in that catalog. If the

merchandise is not available in stores or online, the Company will lose that business to another

retailer. This was corroborated by CW 12 – a 28 year veteran of the retail industry – who stated that

late deliveries had to impact sales because it “happened so consistently.”

80. CW 14 also confirmed that merchandise was not delivered to stores on time. On

her/his second day of employment, Monday, June 14, 2010, CW 14 received an email at 5:39 p.m.

from Vice President of Sourcing Nellor, which forwarded an email from Executive Vice President

and General Merchandising Manager Kindler to Chief Supply Chain Officer Poole, detailing late

deliveries. The subject line of the email was “Q4 sweaters” and discussed how late deliveries could

impact a “make or break” department for the fourth quarter of 2010. The text of the email provided:

Just received the following email from the sweater team based on their open issues meeting. It looks like there are a lot of delivery issues for various reasons. Sweaters is obviously a make or break department for Q4 so can we TB to discuss issues?” 10 late delivery styles listed – marina boyfriend cardi style 282; diamonte button cardi style 328; country side argyle cardi 265; feraisle yolk t neck 213; silk cotton gala roses cardi 441; marino striped boyfriend cardi 284; cashmere striped boyfriend cardi 278; chuncky cashmere betto pullover 267; cashmere fantasy pullover 279; audry pullover 252. Marino liability; vintage lambs wool liab; Lexington paisley pullover; not sure what the issue was; lurex seamless t neck – ny still evaluating techniques and yarn, and delivery recommending we cancel.

81. On the same day, at 8:44 p.m., CW 14 responded by email to Nellor recapping all of

the styles listed in the Kindler email that were late to the Brand Moment. As explained by CW 14, a

Brand Moment was a “floor change,” or when the Company put new clothes in the store. CW 14

stated the goal at Talbots was to have Brand Moments on a monthly basis. CW 16 further explained

that the Brand Moments included particular dates scheduled twice a month reflecting the time at

which inventory was supposed to arrive and be set up at the store level for display. The “exorbitant”

number of late orders was causing Talbots to miss Brand Moments, meaning that the inventory was

not arriving at the store level in time to be set up for the scheduled launch of the product.

- 27 -


82. Despite the late deliveries, CW 18 stated that in or around the holiday 2010

timeframe, Talbots had received small “windfalls” of cash that were used to make “partial

payments” to vendors. According to CW 18, Scarpa was involved in the small influxes of cash

generated by “refinancing” and then used to make partial payments to vendors. CW 18 recalled the

partial payments to vendors were made in order to “calm everyone down.” As a result, Talbots was

able to obtain, display, and sell some inventory received late for the holiday season, but not all items

could be sold at full price. As an example, CW 18 stated the “very heavy” sweaters that were held

back by vendors and shipped late due to the Company failing to pay vendors often could not be

displayed for long and had to be “marked down.”

D. The Individual Defendants Knew About Talbots’ Inability to Pay Its Vendors and the Resulting Impact It Would Have on the Company’s Sales in the Second Half of 2010

83. The Individual Defendants were privy to confidential and proprietary information

concerning Talbots, its operations, finances, financial condition, and present and future business

prospects. Because of their positions with Talbots, the Individual Defendants had access to non-

public information about its 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 were reckless in

disregarding the fact that adverse facts specified herein had not been disclosed to, and were being

concealed from (in order to mislead), the investing public.

84. For example, Sullivan and Scarpa attended quarterly “townhall” meetings where the

failure to pay vendors was openly discussed. According to CW 20, the “townhall” meetings took

place at the “Churchill” building across from Talbots’ main headquarters facility in Hingham,

- 28 -


Massachusetts, as well as in “one of the expansive spaces created in the main building” prior to CW

20’s departure from Talbots in November 2011. CW 20 explained that it would have been abnormal

for Sullivan and Scarpa not to attend the “townhall” meetings, and that during the meetings there

was an opportunity to ask questions, which were “always” addressed to Sullivan. According to CW

20, when Sullivan was unable to answer the questions posed, she “passed off” the question to a

member of the executive management team who was best positioned to answer the question.

85. CW 19 attended the “townhall” meetings in the second and third quarter 2010 time-

frame with the rest of the employees from the Hingham, Massachusetts corporate headquarters. CW

19 confirmed the “townhall” meetings were held in various locations in the “main building” at the

Hingham corporate headquarters and “across the street in the Churchill building.” CW 19 stated

that, in addition to Sullivan and Scarpa, Executive Vice President and Chief Supply Chain Officer

Poole attended the meetings. During one “townhall” meeting in the second or third quarter 2010,

CW 19 asked a direct question about the late payments to vendors and specifically stated that

business was “being jeopardized” and that vendors were withholding orders. CW 19 inquired when

the vendors could “expect to be paid?” According to CW 19, Sullivan and Scarpa were present

when she/he asked the question and the question was “deferred” to Poole for a response. Poole,

however, provided a very “indirect, round about answer,” confirming that vendors had not been

timely paid. But, Poole did not provide insight into resolution of the issue. CW 19 stated that the

response from Poole was “insufficient.”

86. According to CW 20, there was typically “not a lot of transparency” at the quarterly

“townhall” meetings, but she/he attended a “townhall” meeting that took place in approximately

August 2010, where there were approximately 500 employees in attendance, and a “brave” employee

asked a question that was on the minds of most of the attendees about the failure to pay vendors and

- 29 -


the consequential refusal by vendors to ship orders until they were paid by Talbots. CW 20

explained that the employee asked executive management, which included Sullivan and Scarpa, to

respond to the issue of “not paying vendors” and not timely receiving shipments. CW 20 stated that

the environment was “uncomfortable” when the employee asked the question about not paying

vendors and Sullivan was forced to make a decision about how to respond. As explained by CW 20,

the response indicated Talbots’ was paying the vendors “as needed,” and tacitly confirmed that

Talbots was not timely paying vendors.

87. In addition to “townhall” meetings, in the summer 2009, Scarpa began holding

monthly profit and loss meetings (the “P&L Meetings”). CW 11 was among the Company’s

employees required to attend the P&L Meetings, along with approximately 20 employees from the

manager level to the executive level. The meetings usually occurred during the second full week of

each month, typically on the Tuesday following the prior month’s close.

88. According to CW 11, the purpose of the meetings was to look at profit and loss by

department for the previous month and for future months. Scarpa brought with him to each meeting

a spreadsheet of all the profit and loss figures for the entire Company. At the meetings, CW 11

typically presented information related to retail stores and Scarpa usually asked CW 11 about

expenses related to retail stores.

89. Further, CW 11 was responsible for publishing a weekly “dashboard report” referred

to internally as “the Timeline.” The Timeline showed the traffic counts for all retail stores (the

number of customers coming into the stores), the conversion rate for each retail store (the number of

customers who came into the store and made a purchase), the average number of units purchased per

customer, the average dollar amount spent per customer and virtually all store-related sales data for

the previous week. The Timeline also compared the week’s numbers to the same week a year prior.

- 30 -


The report was in an Excel spreadsheet and the information was gathered from the Company’s

“mainframe” and “data warehouse” computer systems.

90. The Timeline consisted of a narrative and “high-level graphics” that broke down the

previously mentioned data by region. The Timeline “told the story of the last week.” CW 11

described the narrative as providing a big-picture look at the data. The Timeline was created by

Financial Analyst Joseph Desrosiers (“Desrosiers”) who reported to CW 11. Desrosiers came into

the office early on Mondays to create the report so it could be sent out by 8 a.m. to the entire

Executive Committee, including Sullivan and Scarpa, Executive Vice President of Finance

Benedetta Casamento, Executive Vice President and Chief Stores Officer Fiske, Executive Vice

President and Chief Supply Chain Officer Poole, Chief Creative Officer Michael Smaldone,

Executive Vice President and Chief Marketing Officer Wagner, Senior Vice President and Chief

Information Officer John Kovac and Executive Vice President and General Merchandise Manager

Kindler. Sullivan was “the ultimate customer for that report.” CW 11 knew that Sullivan looked at

the Timeline Report closely because she sometimes asked questions prior to the executive team

meeting on Monday mornings.

91. According to CW 11, beginning in the mid-2009, the Company’s internal sales targets

began constantly being revised downward. The downward revisions continued at least until CW 11

left the Company in April 2010. CW 11 stated that the sales forecasts were being changed weekly,

and sometimes even twice weekly. According to CW 11, Scarpa was “very, very plugged in” to the

Company’s sales figures and its finances in general. Indeed, CW 11 stated that Scarpa was more

attuned to the details of the Company’s finances than were the CFOs at other companies she/he had

worked for. CW 11 stated that Scarpa wanted “complete control over anything going on in finance.”

- 31 -


CW 11 strongly believed that Scarpa was so involved in the Company’s finances that there was “no

way anyone can say they [Scarpa and Sullivan] didn’t know what was going on” with sales.

92. In addition, Talbots kept written records documenting shipments that were late to

stores. According to CW 14, the Talbots Merchants kept spreadsheets that detailed the dollar impact

of late deliveries on sales: “They knew exactly what it was.” CW 14 stated that the entire Company

would be aware of the impact of the late deliveries on sales: “Of course they knew.”

93. Similarly, CW 16 stated that the number of late orders was so extensive that Sourcing

personnel were required to maintain a “chart of late orders.” The “chart of late orders” was an Excel

spreadsheet maintained on a shared drive and updated by the Sourcing personnel. The spreadsheet

was commonly referred to as the “missed brand moments” chart. CW 16 explained that the “missed

brand moments” chart was maintained by the Sourcing personnel as a “justification that this brand

was late for this reason.” CW 16 recalled the chart was intended for use by “senior management” at

“senior management meetings” to explain the “missed brand moments.” CW 16 stated there was a

“tab” for each “category” in the spreadsheet, such as a tab for dresses, a tab for blouses, and a tab for

bottoms. There was a column in the spreadsheet where CW 16 and other personnel input data about

the late orders and the reasons they were late.

94. CW 18 confirmed the Merchants and Sourcing personnel each kept separate Excel-

based reports to “recap what was late.” The “recaps” detailed the vendor name, the product, and

indicated that the expected delivery was late and had not been received because of the failure to pay

the vendor. The Excel-based “recaps,” which were approximately four pages in length, included a

page for each of the “missy,” “petite,” and “women’s” categories, were maintained on a drive at

Talbots and were accessible to “anyone in the Company.” CW 18 stated that the Merchants printed

the Excel-based reports at the direction of Merchandising Director Fitzgerald for use by Executive

- 32 -


Vice President and General Merchandise Manager Kindler in meetings with Scarpa, which were held

at least weekly, and sometimes as often as once per day, in order to keep Scarpa fully informed on

late orders. According to CW 18, other attendees at the meetings with Kindler and Scarpa included

Director of Global Sourcing Duval.

95. CW 14 also confirmed the use of Excel-based reports. According to CW 14, the

logistics department, and more specifically, the Director of Global Logistics and Customers

Compliance Christine Lanoue (“Lanoue”), prepared a monthly Brand Moment Report in Excel

showing a “snapshot” of what percentage of merchandise was “on time, what specifically is late,”

and where the merchandise was scheduled to be delivered, i.e., to stores, catalog, or outlet stores.

Lanoue sent the Monthly Brand Moment Report to several Talbots’ executives, including Vice

President of Warehousing Barry Krane, Merchandising Director Fitzgerald, Executive Vice

President and Chief Supply Chain Officer Poole, Vice President of Merchandise Planning Greg

Powell, Vice President of Merchandising Janet Archer, General Merchandise Manager Kindler,

Senior Vice President of Sourcing and Development Sharon Sweeney, Vice President of Quality

Chris Grayer, Senior Vice President of Merchandising and Allocation Randi Nolan, Merchandise

Manager Turner, and Merchant Beth Campbell.

96. By way of example, CW 14 recalled a Brand Update Report distributed at 5:35 p.m.

on November 30, 2010, which provided a summary of the late merchandise for December 2010. The

Brand Update Report demonstrated that as of December 2010, Talbots had shipments from

September that were still not in Talbots’ stores. According to CW 14, late delivery of key items was

“huge, its make or break.” CW 14 further stated, late items will “kill your sales.”

97. According to CW 16, Lanoue also sent an email to the Sourcing personnel “every

couple of days” titled “brand moment statistics,” in which Lanoue indicated which “brand moments”

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were missed. This information was updated in the “missed brand moments” chart, along with the

reason why the orders that caused the “missed brand moments” were late. CW 16 stated the “missed

brand moments” occurred fairly frequently following the “exorbitant” number of late orders that

continued throughout 2010 and into 2011.

98. CW 19 also stated that there was an extensive email trail at Talbots regarding late

orders. According to CW 19, the Sourcing Managers typically emailed the Buyers regarding late

orders and the reason why orders were being shipped late, including instances wherein the vendors

had not been timely paid. CW 19 explained this information was used by the Assistant Buyers to

update an Excel spreadsheet about the status of orders, and the spreadsheet was maintained on a

shared drive at Talbots. In fact, CW 19 explained that a new Excel spreadsheet was created every

month, indicating the “dollar amount of carryover” from the last month, or the dollar value of

inventory that did not arrive on time and was pending delivery from the previous month. The

Assistant Buyers or Buyers then emailed the Allocation personnel, who were responsible for

allocating inventory to the store sites, about the status of orders. According to CW 19, “Everyone

knew” when orders were late and why they were late based on the emails being exchanged and

because late deliveries had an impact on the distribution of inventory. CW 19 also stated the

Talbots’ Planning team maintained an Excel spreadsheet regarding order arrival for use in planning

inventory distribution, as well as displays.

99. As Talbots specializes in retail clothing sales, the Company’s relationships with its

vendors, and the ability of the Company to get its clothing from its vendors to Talbots’ stores in a

timely manner, are a critical component to its business. Because of this relationship to Talbots’ core

business, there is a reasonable inference that can be drawn that the Individual Defendants knew or

recklessly disregarded the facts alleged herein concerning Talbots’ failure to pay its vendors in a

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timely manner and resulting inability of much of the Company’s fall and winter 2010 clothing lines

to arrive in stores on time.

100. Additionally, throughout the Class Period, the Individual Defendants were able to,

and did, control the contents of the Company’s SEC filings, reports, press releases, and other public

statements. The Individual Defendants were provided with copies of, reviewed and approved, and/or

signed such filings, reports, releases, and other statements prior to or shortly after their issuance and

had the ability and opportunity to prevent their issuance or to cause them to be corrected. The

Individual Defendants were also able to, and did, directly or indirectly, control the conduct of

Talbots’ business, the information contained in its filings with the SEC, and its public statements.

For example, during the Class Period, and accompanying the Company’s quarterly SEC filings and

annual report, specifically on December 10, 2009, April 15, 2010, June 8, 2010, September 8, 2010,

Sullivan and Scarpa each signed the following certification attesting to their review of the

information contained in the Company’s filings and the accuracy of that information:

I have reviewed this quarterly report on Form 10-Q [10-K] of The Talbots, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made

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known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

101. As a result, each of the Individual Defendants is responsible for the accuracy of

Talbots’ corporate releases detailed herein and is, therefore, responsible and liable for the

misrepresentations and omissions contained therein. Each of the Individual Defendants knew that

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

public, and that the positive representations that were being made were then false and misleading.

These adverse facts and the misrepresentations made by Defendants related to the Company’s core

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operations, and thus could not have been unknown to Defendants at the time their false statements

and misrepresentations were made.

VII. DEFENDANTS’ MATERIALLY FALSE AND MISLEADING STATEMENTS ISSUED DURING THE CLASS PERIOD 3

102. The Class Period begins on December 8, 2009. On that date, Talbots issued a press

release reporting financial results for the third quarter of 2009. The press release contained

Sullivan’s comments on the Company’s financial results, in which she stated, in pertinent part:

Our third quarter results demonstrate tremendous operational discipline and solid execution of our strategic initiatives to drive improved performance of the business and restore profitability. The efforts over the past several quarters – particularly in the areas of strengthening our merchandise offering and tightly managing inventory and expense – have created a much stronger, leaner and profitable organization.

103. Following the issuance of the press release on December 8, 2009, Talbots hosted a

conference call to discuss its third quarter 2009 financial results. Defendants Sullivan and Scarpa

participated on the call on behalf of the Company, during which they misled investors concerning

the Company’s purported disciplined inventory management. For example, Sullivan stated, in

pertinent part:

These results demonstrate our tremendous operational discipline and solid execution of our strategic initiatives to restore profitability . As planned, we were less promotional in the third quarter compared to last year , and we effectively managed our inventory .

*

We believe that our full-priced business and our focused promotional activity will benefit fourth quarter gross margin. We will continue our conservative posture, staying the course with our efforts and discipline around inventory and costs, driving improvement and efficiencies throughout the organization .

3 In order to provide the Court with the context of Defendants’ statements, Plaintiff has bolded and italicized the statements Plaintiff contends were false and misleading when made by Defendants.

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104. Commenting on the Company’s financial performance, Scarpa stated, in pertinent

part:

[O]ur business model is clearly improving. . . we are making excellent progress in reshaping our operations to return to consistent profitable growth as a dynamic specialty retailer.

*

Our posture remains conservative given the uncertain environment with a focus on expense management, inventory control , liquidity, and cash flow. And we expect that our transition with BPW to substantially enhance our balance sheet and our future competitiveness.

105. Sullivan completed her comments by stating, in pertinent part:

We have worked hard over the past two years retooling our internal processes and orchestrating a turnaround of our Talbots brand. I could not be more pleased with where we are at this particular juncture. We have made great progress in modernizing our merchandise and we are operating with much leaner inventory , a leaner corporate staff and a dramatically reduced capital spending plan.

And as I stated earlier, looking at our third quarter results and our outlook for holiday season in Q4, the Company has begun to realize a significant benefit from all of these changes for the benefit of all of our shareholders.

106. During the question and answer portion of the December 8, 2009 conference call,

Sullivan further discussed the Company’s inventory, stating in pertinent part:

[I]t’s important to realize strategically we’ve put a real emphasis on the ratio of full-price to markdown inventory. We’ve managed our inventories very, very carefully . We’ve managed our flow carefully. We’ve also really reengineered our merchandise mix to have a very compelling offer of key items, which as I said in my remarks are over 50% of our sales in the quarter. So all of these things combined have come to fruition to really enable us to have a much higher percentage of full-price sales to markdown sales, and that is our strategy for fourth quarter and going into 2010.

107. Scarpa also commented on the Company’s full price sales and inventory trends and

stated, in pertinent part:

That being said, as we get into Q2 and Q3 of next year, we think that all the excess inventory that was purchased for the spring 2009 six-month season we will anniversary, and thus we think that we should start to see a much more positive comp as we end up Q2 and as we move into Q3 of next year.

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108. As the call continued, Sullivan responded to a question from a Wedbush Morgan

analyst regarding the way the Company was going to manage its inventories, and stated, in pertinent

part, “we are being incredibly disciplined when it comes to inventory.”

109. Scarpa further commented on the Company’s stance concerning inventory and stated,

in pertinent part:

We want her sale, regardless of what channel she chooses, to engage with us and we will continue to be -- we’re not ever going to go back to the over inventory days of our past. We’re going to continue to be extremely focused.

110. As a result Defendants’ positive statements about the Company’s business, the price

of Talbots’ stock soared, rising from $7.21 per share on December 7, 2010, to a closing price of

$8.23 per share on December 8, 2010, an increase of 14.1%, on heavy trading volume. The stock

continued to rise to a closing price of $8.47 per share on December 9, 2010.

111. The statements referenced in ¶¶102-110 were each materially false and misleading

when made as they represented and/or omitted adverse facts which then existed and disclosure of

which was necessary to make the statements not false and/or misleading. At the time the above-

referenced statements were made, Defendants knew that the Company had not tightly managed

inventory or controlled expenses. Rather, throughout 2009, the Company had been tardy in making

payments to many of its clothing vendors, resulting in disputes with those vendors, delayed and

cancelled orders, and increased cost for Talbots to place orders to compensate the vendors for the

risk that they would not be paid. As a result of the historical lead-times necessary to get goods in

stores on time, Defendants knew that these issues would result in merchandise not arriving in the

Company’s stores on time for the fall and winter 2010 seasons. Further, as confirmed by

confidential witnesses, including CW 14, CW 16, and CW 18, Talbots kept written records of late

shipments and monitored the impact of late deliveries on sales through the use of Excel-based

reports. Therefore, Defendants had no reasonable basis to represent to the market that the Company

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was being extremely disciplined in managing its inventory, or that the Company expected more

positive sales comparables as it moved into the second half of 2010.

112. In response to Defendants’ positive statements, on January 11, 2010, UBS upgraded

Talbots’ stock from a rating of “Neutral” to “Buy.”

113. On January 14, 2010, Talbots hosted a conference call at the 12th Annual ICR

XChange Conference. Defendants Sullivan and Scarpa participated in the call on behalf of the

Company. During the conference call, Scarpa commented on the Company’s discipline and

execution, stating in pertinent part:

Our performance demonstrates tremendous operational discipline and solid execution of our strategic initiatives to restore this great company to profitability. After five consecutive quarters of operating losses, we achieved profitability in the third quarter, reporting $24 million in adjusted operating income, which excludes restructuring and impairment charges.

*

We have maintained an acute focus on improved inventory management. We are doing a much better job of delivering a monthly flow of fresh new merchandise across all channels, and we are marking down our goods optimally. We remain conservative in our posture, and at the end of the third quarter we were operating with inventories down approximately 27% compared to last year and down approximately 40% on a two-year roll.

114. Scarpa spun Talbots’ third quarter sales decline as being caused by the Company

tightly managing its inventory:

We anticipated a decline in sales in the third quarter due to very lean inventories compared to last year. We did slightly better than our expectations, due in part to improved regular price selling, which increased 10% in the month of October. This is very encouraging and not only reflects a positive customer response, but drove significantly improved merchandise margins given our strong discipline on inventory management.

* * *

In closing, we have accomplished a great deal in a very short period of time. We have revitalized our brand, dramatically improved the fundamentals of our

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business, and restored profitability. Our investment thesis is strong and getting stronger.


when made for the reasons set forth in ¶111 and the factual detail contained throughout this

Complaint. In addition, the statements referenced in ¶¶113-114 were materially false and misleading

when made because they represented and/or omitted adverse facts which then existed and disclosure

of which was necessary to make the statements not false and/or misleading. Defendants knew that

the Company was “knee deep as of May 2009” in terms of dealing with unpaid vendors. Indeed by

summer 2009, all payments to overseas vendors were late, vendors were cancelling and delaying

products of merchandise that Talbots had ordered, and the Company was forced to “prioritize

orders” to get products into Talbots’ stores. Defendants knew that these cancellations and delays

would result in the Company’s merchandise not arriving in its stores on time for the fall and winter

2010 seasons. Thus, Defendants’ statements that the Company had strong discipline in inventory

management omitted material information that a reasonable investor would have wanted to know in

making her/his investment decisions.

116. On April 13, 2010, Talbots issued a press release reporting the Company’s financial

results for the fourth quarter and fiscal year ended January 30, 2010. The press release touted the

Company’s gross margin improvement of 2,070 basis points, a significant increase in fourth quarter

operating income, continued strong cost savings as well as completion of its comprehensive

financing transactions.

117. The press release included Sullivan’s comments on Talbots’ fourth quarter results

wherein she stated in pertinent part:

We delivered a strong fourth quarter, capping off a successful year of tremendous change and innovation. Our strategic transformation – re-energizing our brand, modernizing our merchandise, streamlining our organization and improving our business processes – firmly positions us for future growth and profitability.

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*

Outlook

For the full year 2010, the Company anticipates a top-line sales increase in the range of approximately 3% to 5% compared to the prior year period. Adjusted operating income, excluding restructuring, impairment and merger costs, is anticipated to be in the range of approximately 5% to 6% of sales. These anticipated results compared to fiscal 2009 sales of $1,235.6 million and adjusted operating income of $11.2 million, or 0.9% of sales.

118. On the same day, Talbots hosted a conference call with analysts and investors to

discuss the Company’s full year and fourth quarter earnings and operations. Defendants Sullivan

and Scarpa participated on the call on behalf of the Company. During the call, Defendants continued

to hide from the market the Company’s inability to timely pay its vendors, and the impact that this

would have on the Company’s 2010 sales. Discussing the Company’s performance, Scarpa stated,

in part:

What a difference a year makes. It’s very gratifying to look back at the operational changes we successfully implemented. The disciplined execution in inventory management, supply chain and expense control has been very strong and while the transformation of our Company and brand has been a huge undertaking, especially when moving as quickly as we did in this economic climate, the benefits are many.

*

Turning now to our 2010 outlook, for the full year, we are planning for top line sales growth in the range of approximately 3% to 5% compared to last year. Adjusted operating profit excluding restructuring, impairment and merger cost is planned to be at approximately 5% to 6% of sales.

119. During the question and answer portion of the call, Scarpa commented on Talbots’

inventory going forward and stated, in pertinent part:

We’ve done a remarkable job in terms of some of the sourcing initiatives we’ve put into place to lower our costs , and that’s a big contributor to the overall decrease. In fact in our retail stores right now, we’re really only down about 5% on a unit basis, so a lot of the decline is really reflected on the cost progress that we’ve made but I think as we look out into next year, I think we can look for inventories to continue to be down in the first half of the year, again driven by some of the sourcing

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improvements that we’ll see, and then in the second half, I think they level off and potentially have the opportunity to have a low single digit increase, and that’s cost again offset by some of the more aggressive buying that will take place in the second half of the year. Obviously we’re focusing on key categories when we go out we buy it, and there’s a huge initiative around the non-apparel end of the business, particularly around jewelry and scarves and the like so you can see I think inventory start to be up low single digits at the end of the year next year.

120. In response to Defendants’ contrived positive statements, later that day, FBR Capital

Markets reiterated its Outperform rating on the Company’s stock and raised its priced target from

$18 to $20.

121. On April 15, 2010, Talbots filed its year-end results for the fiscal year January 31,

2009 with the SEC on Form 10-K, which confirmed the Company’s financial results and was signed

by Sullivan and Scarpa. The 10-K provided, in relevant part:

Further, we re-engineered our business practices in 2009, particularly in the areas of inventory management, sourcing and supply chain, and store operations. We benchmarked against industry best-in-class practices and developed more modern, efficient and flexible methods of conducting business in a dynamic retail environment. We made adjustments to our initiatives throughout the year in response to the weak economic environment, including actions designed to further streamline our organization, further reduce our cost structure and better optimize gross margin performance through stronger inventory management and improved initial mark-ups resulting from changes to our supply chain practices.

*

Results of Operations

Reflected in Talbots store sales was a $218.3 million, or 19.3%, decline in comparable store sales for 2009, which was generally in line with our expectations due to the lackluster customer shopping behaviors we experienced throughout the first half of the year. We believe this was a carryover from the latter part of 2008 as the difficult economic environment significantly influenced consumers discretionary spending. When our customer was shopping, key fashion items at entry level price points were the main driver of sales. We remained steadfast in managing on lean inventory while improving our flow of merchandise, optimizing our markdowns and presenting our customer with a stronger mix of full-price to markdown merchandise.

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*


122. In response to the false statements made in the Company’s press release, conference

call and filing of its Form 10-K, the price of Talbots’ stock rose $1.27 per share or 8.8 %, from a

closing price of $14.39 on April 12, 2010 to $15.66 per share on April 15, 2010.

123. The statements referenced in ¶¶117-119 and ¶121 were each materially false and

misleading when made for the reasons set forth in ¶111 and the factual detail contained throughout

this Complaint. In addition, the statements referenced in ¶¶117-119 were materially false and

misleading when made because they represented and/or omitted adverse facts which then existed and

disclosure of which was necessary to make the statements not false and/or misleading. At the time

the above-referenced statements were made, Defendants knew that the Company’s inventory

management, expense control, and sourcing practices were not leading a turnaround of the

Company. Instead, the Company had been late in making payments to many of its clothing vendors,

resulting in disputes with those vendors, delayed and cancelled orders, and increased cost for Talbots

to place orders to compensate the vendors for the risk that they would not be paid. These issues

were already beginning to manifest themselves in the form of Talbots’ merchandise not arriving in

the Company’s stores on time. Further, the Company had been rapidly revising downward its

internal sales targets for some time. As a result, Defendants knew the statements above to be false

when made, and further, Defendants had no reasonable basis for giving the 2010 sales guidance

numbers that they provided.

124. Thereafter, like the rest of the market, unknowingly relying on Defendants’

continuing false and misleading statements, Jesup & Lamont initiated coverage of Talbots with a

Buy and a $21 price target. Similarly, on May 11, 2010, Barclays Capital initiated coverage of

Talbots’ stock with an Overweight rating and a target price of $23.

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125. On June 8, 2010, Talbots issued a press release reporting financial results for the first

quarter ended May 1, 2010, and commenting on its outlook for second quarter and fiscal year 2010.

With regard to the Company’s outlook, the press release provided, in pertinent part:

For the full year 2010, the Company updated its previously announced guidance. The Company continues to anticipate top-line sales increase in the range of approximately 3% to 5% compared to the prior year period. Full year adjusted earnings per share from continuing operations are anticipated to be in the range of approximately $0.75 to $0.83 per share, excluding merger-related costs, restructuring and impairment. This compares to an adjusted loss per share from continuing operations of $0.10 reported last year.

For the second quarter 2010, the Company anticipates top line sales increase of approximately low single digits. Adjusted earnings per share from continuing operations are anticipated to be in the range of approximately $0.00 to $0.05 per share, excluding merger-related costs, restructuring and impairment compared to last year’s adjusted loss per share from continuing operations of $0.33.

126. Also on June 8, 2010, Talbots hosted a conference call to discuss its results for the

quarter ended May 1, 2010. Defendants Sullivan and Scarpa participated on the call on behalf of the

Company. Scarpa commented on the Company’s financial results and stated, in pertinent part:

Total sales from continuing operations were $320.7 million, compared to $306.2 million last year in line with Company expectations. As a result of improvement in our inventory management, full price selling increased 21% and markdown sales declined 31% in the quarter. Store sales were $257.6 million compared to $256.4 million last year. Comp store sales increased 2.4% for the 13 week period.

*

Merchandise inventories at the end of the quarter were $157 million, down 17.9% to last year’s $191 million and down 19% on a selling square foot basis. This decrease is due to lower levels of markdown merchandise and our continued focus on inventory management. Total debt outstanding at the end of the quarter was $94.1 million down $420.6 million to last year’s balance of $514.7 million.

127. Sullivan commented on Talbots’ inventory position, stating, “ we actually are in good

shape on full price inventory and later:

I think the only other thing I would add is we’ve been very strategic where we’ve gone back and added inventory to categories that we have increasing confidence,

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being as productive as we want them to be, so we’re quite pleased with the inventory strategies as we go through the balance of the year.






inventory for the fall and winter product lines were not going to make it to the Company’s stores on

time, and therefore, their statements that the Company was in good shape on full price inventory

omitted information that was material to a reasonable investor.

129. On September 8, 2010, Talbots issued a press release reporting results for the second

quarter and year-to-date ended July 31, 2010. In the press release, Talbots partially revealed its true

financial condition and future business prospects by revising its previously announced outlook

downward , from a 3% to 5% top-line increase to a top-line sales increase of low-single digits.

130. Despite this revelation that something unusual was impacting Talbots’ sales, Sullivan

tried to calm the market by stating in the press release:

Our second quarter and year-to-date results demonstrate the steady progress we are making as a result of our strategic initiatives. In the second quarter, we again generated significant gross margin expansion, successfully managed expenses and achieved better than expected improvement in adjusted earnings per share.

Our top-line sales performance reflects our decision to remain on plan with respect to our promotional event calendar within what proved to be an aggressively promotional environment. Nevertheless, we are pleased to have continued to see double-digit increases in our full-priced selling, which is in line with our focus on improving margins through strong inventory management and which we believe demonstrates that our merchandise is resonating with customers. Overall, we are pleased with our team’s continued sound execution, which enabled us to maintain the momentum that began in the third quarter of last year when we returned to profitability.

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131. The press release also included Talbots’ Second Quarter 2010 Operating Results,

which stated, in pertinent part:

Cost of sales, buying and occupancy as a percent of net sales improved 720 basis points to 65.1% compared to 72.3% in the same period last year. This improvement was due primarily to a 620 basis point increase in merchandise margin, resulting from strong IMU, improved full-price selling and disciplined inventory management. Buying and occupancy costs as a percent of net sales improved 100 basis points primarily due to lower depreciation costs.

* * *

132. Sullivan concluded her comments to the press release, stating in pertinent part:

While we are mindful of the current macroeconomic conditions , we continue to be confident in our strategy. We are entering the fall season with a strong inventory position and initiatives already in place that we believe will help drive continued improvement across our business and long-term sustainable growth and profitability.

133. Following issuance of the press release, on September 8, 2010, Talbots hosted a

conference call with analysts and investors to discuss the Company’s second quarter earnings and

operations. Defendants Sullivan and Scarpa participated in the call and made additional false and

misleading statements when discussing the Company’s financial results and lowered guidance,

attempting to negate the impact of the partial disclosure. For example, Sullivan stated, in pertinent

part:

Overall, we’re pleased with our second quarter and year to date performance. We have maintained the momentum that began last September and again achieved strong operating results as we continue to implement our strategic initiatives aimed at continuous improvement and profitability.

Throughout the quarter, we remained focus on achieving our goal of maximizing margins, with an emphasis on full price sales. We successfully managed expenses and inventory and achieved better than expected year-over-year adjusted earnings per share. Our performance for the quarter and year to date demonstrate the steady progress we are making and we are pleased with our team’s continued sound execution.

* * *

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We are entering the fall season with a strong inventory position, a compelling merchandise assortment, and key initiatives already in place, and we are encouraged as the first marketing event of the season, our denim launch, is off to a great start. We believe we will drive continued improvement across our business and long-term sustainable growth and profitability.

134. Sullivan continued by attempting to mislead the market about the basis for the

Company’s lowered sales forecast:

We’ve also made a change to how we flow product this fall compared to last. Rather than deliver heavy fall merchandise in early August, we opted to flow the heavier fall products in early September . That way, our customer can enjoy fresh and inviting deliveries post-Labor Day, where she is most likely to engage in buying. This has resulted in lower quarter-to-date sales versus a year ago. But we’re confident that with the new fall products becoming available this week in stores and in the rest that we can quickly reverse that trend .

135. Scarpa then commented on the Company’s outlook and stated, in pertinent part:

Turning now to our 2010 outlook, for the full year we anticipate top line sales growth in the range of approximately low single digits compared to last year, below our previously announced guidance for a 3% to 5% increase. This reflects our current year to date results and our conservative posture going forward given the uncertain macro environment and cautious consumer mindset. Full year adjusted earnings per share, excluding special items, are now anticipated to be in the range of approximately $0.84 to $0.92 per share, an increase over our previously announced guidance of $0.75 to $0.83 per share, reflecting our improved second quarter results. Our gross margin rate is expected to increase by approximately 550 basis points versus a year ago, as a result of stronger full price selling, increased initial markups, and continued discipline, inventory management .

136. Sullivan further stated, in pertinent part:

In closing, we are pleased with how we are positioned going into the back half of the year and remain confident in our ability to execute as we look forward. While we are continuing to implement our turnaround initiative, we have made significant improvements to our brand, products, and marketing and believe we are moving into a new stage, focusing on those initiatives that will drive both top and bottom line growth. We are also operating with a substantially improved capital structure, which will enable us to continue to invest in these initiatives. We recognize that we are in a challenging environment and are planning conservatively, but we remain committed to ongoing operational improvement and steady progress in our initiatives to deliver long-term shareholder value.

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137. In response to an analyst question about why the Company’s inventory levels seemed

low, Sullivan continued to mislead the market about the cause of the Company’s lack of store

inventory, stating, in pertinent part:

I think the right way to look at the third quarter, Janet, is to really look at the guidance. We're guiding to low single-digit increases in the quarter. We made a conscious decision not to bring in heavy products early . And we started the quarter very clean from a markdown perspective. So we’re actually – we’re pleased with where we are. We’re pleased with the decision. I think it’s timed right to the consumer’s interest in buying that kind of product .

And from what I can see in the world at large, there’re not a lot of people selling a lot of heavy fall early in August. So we have the benefit of putting in a floor set, actually, this week this year that is totally fresh to last year’s. So we’re actually are quite pleased with how the quarter is developing. And of course, the denim launch was and will continue to be a very important addition to the third quarter business. So we’re feeling – I think the best way to evaluate our third quarter because of this shift, is to really rely on the guidance that we've provided.

138. Sullivan closed her comments to the conference call presentation by stating, in

pertinent part:

We’re guiding to single-digit increases in the quarter. We made a conscious decision not to bring in heavy product early. And we started the quarter very clean from a markdown perspective. So, we’re actually -- we’re pleased with where we are. We’re pleased with the decision.

* * *

So, we actually are quite pleased with how the quarter is developing. And of course the denim launch was and will continue to be very important addition to the third quarter business. So, we’re feeling -- I think the best way to evaluate our third quarter because of these shifts is to really rely on the guidance that we’ve provided.

139. As a result of the press release and conference call, the price of Talbots’ stock

dropped from a closing price of $11.11 per share on September 7, 2010, to a closing price of $10.97

per share on September 8, 2010. Had Defendants not continued to make false and misleading

statements, the true impact of the Company’s inability to timely pay its vendors would have become

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known, and more of the artificial inflation in the price of Talbots’ stock created by Defendants’ fraud

would have been released.


when made for reasons set forth in ¶111 and the factual detail contained throughout this Complaint.

In addition, the statements referenced in ¶¶129-138 were materially false and misleading when made

because they represented and/or omitted adverse facts which then existed and disclosure of which

was necessary to make the statements not false and/or misleading. Defendants knew that the

Company was not entering the fall season with a strong inventory position. Rather, numerous

confidential witnesses, including CW 2, CW 3, CW 4, CW 7, CW 8, CW 10, CW 12, CW 14, CW

15, CW 16, CW 17, and CW 18, advised that beginning in 2009 and continuing through 2011,

merchandise was consistently arriving late to stores. In addition, numerous confidential witnesses,

including CW 2, CW 15, CW 17, and CW 18, specifically confirmed almost none of the Company’s

fall product line was in stores on time, resulting in customers being unable to make purchases from

the Company’s catalogs and other marketing materials. Indeed, according to CW 2, in August 2010,

she/he went to the Talbots’ website and placed about $38,000 worth of merchandise in her/his online

shopping cart from the Company’s fall catalog, but none of it was available for at least another two-

to-three weeks. Further, during the “townhall” meeting in approximately August 2010, Sullivan and

Scarpa, as well as other senior Company management, were directly questioned regarding the

Company’s failure to timely pay vendors and the negative impact such failure was having on the

sales. Despite their undeniable, actual knowledge of the vendor payment problem and its negative

consequences on Talbots’ sales, financial performance, and future business prospects, Defendants

continued to mislead the market.

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141. On October 5, 2010, Talbots issued a press release providing an update on its third

quarter and full year fiscal 2010 outlook in which the Company once again lowered its guidance,

which acted as an additional partial disclosure of the Company’s true financial condition and future

business prospects. The Company reported expecting a top-line sales increase of approximately 1%

compared to the prior year period, which was below the Company’s previous expectation of an

increase of approximately low single digits. The Company also lowered its outlook for top-line sales

from low-single digits to a decrease of approximately low-single digits.

142. Despite these negative partial disclosures, the press release quoted Sullivan as stating:

We are pleased with our overall first half performance and the successful launch in the third quarter of key initiatives, including an enhanced marketing campaign, segmentation strategy and store-reimage program. While customer traffic in our stores in the third quarter has been inconsistent, which is a reversal of the improving trends we saw in the first half of the year, sales in our direct business continue to trend positive quarter-to-date. That said, we do believe we are solidly positioned for the remainder of the fall as well as the upcoming holiday season. Further, we continue to have confidence that we have the right strategies in place to achieve long-term sustainable growth and profitability.

143. Later the same day, on October 5, 2010, the Company hosted Talbots’ Investors’

Meeting to discuss the Company’s business operations. Defendants Sullivan and Scarpa, along with

several other Talbots’ officers, participated on the call on behalf of the Company. Commenting on

the Company’s financial performance, Sullivan stated, in pertinent part as follows:

At this moment in time, Talbots has embarked on the next phase of the strategic plan that was set in motion when I joined the Company in September 2007. Today, Talbots continues to realize benefits from our turnaround initiative with significant improvements in brands, products, marketing as well as our capital structure and overall business processes and systems. Our updated strategy plan begins with the Company’s target consumer, builds mechanisms to achieve growth, insure Talbot has the right infrastructure and people to execute and is designed to provide enhanced return to investors.

We are transforming this Company .

* * *

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Today we are investing in strategic initiatives that we believe will create long term growth, continuous improvement and enhanced profitability, initiatives that will drive future business momentum. These include continuing our store segmentation strategy, rolling out our store reimage program, investing in marketing, a renewed focus on key concepts, furthering the growth in our upscale outlets, capitalizing on direct to consumer channels and leveraging our beneficial Li & Fung partnership. And as always, focusing on disciplined inventory management.

*

As I noted in our release, so far this quarter we are encouraged by the early response to marketing and store productivity initiatives, but we have seen inconsistent customer traffic during the quarter, which has led us to revising our top line outlook. With that said, we believe we are solidly positioned for the remainder of the fall season, as well as the upcoming holidays .

* * *

Further, we continue to have confidence that we have the right strategies in place to achieve long term sustainable growth and profitability, and we’ll be talking with you about these today. Overall, as we look at our recent financial performance and our long term outlook, we are gaining ground with sales of full price merchandise, decreased occupancy expenses, increased productivity and our commitment to disciplined inventory and expense management.

Turning to our current strategic framework, Talbots has embarked on the next phase of the strategic plan. We continue to implement our turnaround initiatives. However, we are ready to take new important steps and our updated strategic plan begins with our target consumer and builds on mechanisms to achieve growth. Today I can assure you that Talbots is focused on the right initiatives and has the right team to provide enhanced returns to investors.

144. During the conference, Scarpa also commented on the Company’s business and

financial operations, stating in pertinent part:

To that end, 2009 brought forth considerable change. A focus on improved sourcing, inventory management and a strong presentation of full priced merchandise across all channels drove significant gross margin improvement.

*

All these metrics point to a stable and steadily improving business.

*

As a result of the lower sales expectation for the current quarter, we have adjusted our full year outlook for top line sales to be up approximately 1% versus the prior

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outlook for positive low single digits. Even so, we are reconfirming full year adjusted earnings per share to be in the range of $0.84 to $0.92, again, pointing to the strength of the underlying business and the platform we have created .

* * *

In summary, I would like to leave you with a few key financial takeaways. We have made huge progress to-date and have put our company on extremely solid footing. This cannot be overstated. Our balance sheet is strong and we are well positioned for growth, we are taking a prudent approach to investing in and managing our business given the current environment.

145. As a result of the press release and conference call, which partially revealed Talbots’

true financial condition and future business prospects, the price of Talbots’ stock dropped $1.83 per

share or 14.6% from a closing price of $12.54 on October 4, 2010 to a closing price of $10.71 on

October 5, 2010. But for Defendants’ false and misleading statements, the price of Talbots’ stock

would have fallen further.






the Company was not solidly positioned for the remainder of the fall and the upcoming holiday

season. Given the “record-breaking” amount of merchandise that the Company advertised was for

sale, but was not actually available in stores, Defendants knew that they had no reasonable basis to

confirm the sales and earnings per share guidance for 2010 that the Company had previously

announced.

147. On December 7, 2010, Talbots issued a press release announcing results for the third

quarter and year-to-date period ended October 30, 2010, further decreasing the Company’s

previously announced outlook for the fourth quarter and fiscal year 2010 from an approximate 1%

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increase, to flat to down 1%, and acting as an additional partial disclosure of the Company’s true

financial condition and future business prospects. The press release also revealed Talbots’ total

inventory increased 11.3% to $184.7 million, compared to $165.9 million at the end of the third

quarter 2009.

148. Sullivan continued to mislead the market in the press release accompanying the

Company’s third quarter earnings:

Our customer traffic and sales demand from Thanksgiving through Cyber Monday improved greatly, however, we believe the challenging and promotional environment will continue. To that end, we will stay nimble and have appropriately enhanced our promotional activity to best position ourselves for the remainder of this holiday season, effectively managing our inventory , while preserving the integrity and health of our brand. As we look forward, we believe it is prudent to be conservative in our near-term outlook, but we remain confident in our overall strategy and our ability to achieve our long-term objectives.

149. On the same day, December 7, 2010, the Company hosted a conference call to discuss

its third quarter financial results. Defendants Sullivan and Scarpa participated in the conference call

on behalf of the Company, during which Sullivan stated, in pertinent part:

As stated earlier, in light of the increasingly aggressive promotional environment, we began to introduce new promotional activities towards the end of the third quarter to better position ourselves with our customers. We are offering additional new innovative promotions in the fourth quarter, with pre-planned weekly events, including limited time web events, secret sales, and sweepstakes that have all proven to be successful. We enhanced our Best Customer Event in November and our holiday gift rewards, re-engaging with this critical segment of customers to demonstrate that loyalty has its perks. With an overall enhanced promotional strategy, we believe we are appropriately positioned to manage our inventory and capture our share of her holiday spending for gifts and for herself. We remain focused on continuing to drive improvements across our business, both in the short and long-term.

150. Scarpa misrepresented the basis for the Company’s significant increase in inventory

by stating:

Merchandised inventories at the end of the quarter were $184.7 million, up 11.3% to last year’s $165.9 million. This increase is due to a planned increase in receipts for the fall season, the timing of holiday receipts, as we front loaded deliveries ahead

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of the holiday season compared to last year, as well as lower than anticipated sales volume .

* * *

For the fourth quarter, we anticipate top line sales to be in the range of approximately flat to down, low single digits, compared to last year. We anticipate adjusted earnings per share to be in the range of a loss of $0.05 per share to earnings of $0.03 per share versus last year’s adjusted earnings per share of $0.13. Our gross margin rate is expected to decrease by approximately 330 to 430 basis points versus a year ago, reflecting a stepped up promotional cadence and higher level of markdowns due to lower than anticipated sales volume.

Turning now to our full year 2010 outlook, based on our year-to-date results and our current sales trends, we now expect top line sales for the full year to be approximately flat to down 1% compared to last year. Full year adjusted earnings per share, excluding special items, are now anticipated to be in the range of approximately $0.70 to $0.78 per share, a decrease from our previously announced expectations of $0.84 to $0.92 per share. Capital expenditures for 2010 are planned to be approximately $38 million, with Q3 spending to date of approximately $19 million, reflecting continued investments in refreshing and renovating our stores, as well as ongoing IT initiatives. In closing, in Q4, we will focus on strategic promotional activity to stay competitive and to clear inventory to position us appropriately for the spring season. In addition, we will continue to deploy investment dollars into initiatives critical to the long-term success of the business.

151. During the question and answer portion of the call, Scarpa spoke positively about

improved sales trends and stated, in pertinent part:

So when I look at Q4 sales and I look at the trend that we’ve been on for the first six weeks, it’s very similar to the trends that we saw in October and we continue to improve off of what was a very disappointing first half of the Q3. The guidance around flat to low single digits reflects a comp that is anywhere probably in the 2 to 350 basis points, negative.

152. Scarpa also discussed the Company’s inventory position going into the holiday

season, stating, in pertinent part:

Our point of view is that we’re well-positioned from an inventory perspective and we’re well-positioned from a promotional perspective to drive the sales that we gave you on the guidance.

153. Thereafter, Sullivan responded to an analysts question concerning her comfort with

the pricing and quality of product, stating, in pertinent part:

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I think we feel very well-positioned for the holiday. It was the right move for us to front load the season. It gave us a very strong Thanksgiving through Cyber Monday . We were in much better position than we were a year ago and had much better results, so we feel that that was the right thing to do.

154. When questioned concerning Talbots’ inventory increase, Scarpa falsely stated that

“approximately two-thirds of the $19 million increase ” in inventory was due to front loading the

inventory. Scarpa elaborated on the Company’s inventory, in response to a question from a Miller

Tabak analyst, stating, in pertinent part:

Our overall inventories when we look at our surplus area are in excellent shape, relatively flattish overall, but the aging of it is much more current . I look at the inventory increase for the quarter of $19 million and basically two-thirds of it is related to receipt flow from holiday and one-third is really from the sales miss in the third quarter in terms of our initial expectations around sales. Roughly $6 million of inventory was being carried over into 4Q from 3Q that we hadn’t originally anticipated that that would have been gone.

155. Sullivan closed the conference call by confirming the Company’s confidence and

strong position going into the holiday, stating, in pertinent part:

I would just like to reiterate that we feel like we are well-positioned for holiday. This guidance does reflect and give us -- allows us to be a bit more nimble in the promotional environment that we are currently navigating. That said, we’re proud of how the product looks. We’re excited by the learnings, the early learnings of segmentation and marketing and customer acquisition. So there’s a tremendous amount to look forward to as these strategies continue to get executed in the brand. We’re very confident in our future and we’re confident in your patience as we get to that future.

156. In response to the partial revelation of the truth regarding Talbots’ financial condition

and future business prospects contained in the press release and conference call, the price of Talbots’

common stock dropped 22.6% from a closing price of $11.39 on December 6, 2010 to close at $8.81

on December 7, 2010, on almost six times the stock’s average daily trading volume.




- 56 -



of which was necessary to make the statements not false and/or misleading. The reported increase in

inventory was not due to a planned increase in receipts for the fall season, or front loaded deliveries

ahead of the holiday season, as Defendants stated. Rather, having failed to timely pay many of its

clothing vendors in 2009, the Company received inventory late for the second half of 2010, resulting

in the Company’s stores not having merchandise on time to correspond with the marketing of the

particular season’s products. As a result, the Company was unable to sell much of the inventory and

ended up with excess inventory that Defendants knew the Company was never going to be able to

sell at full price. In essence, the Company had missed the boat on the inventory for the second half

of 2010.

THE TRUTH IS REVEALED

158. On January 11, 2011, Talbots provided a Business Update which finally revealed the

Company’s true state of affairs, financials and future business prospects. The Company revealed that

quarter-to-date top line sales were down approximately 7% versus the fourth quarter of the prior

year, and versus the Company’s previously announced expectation for fourth quarter top-line sales in

the range of flat to down low-single digits. Additionally, quarter-to-date comparable store sales were

down approximately 6% .

159. The Company also lowered its earnings guidance, expecting fourth quarter adjusted

loss per share to be in the range of $0.15 to $0.19 per share, compared to the prior year’s adjusted

earnings per share of $0.13, and a decrease from the Company’s previously announced range of an

adjusted loss of $0.05 per share to adjusted earnings from continuing operations of $0.03 per share.

Further, the Company announced that full year adjusted earnings per share were now expected to be

in the range of $0.56 to $0.60 per share – a substantial departure from its previously announced

range of $0.70 to $0.78 per share.

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160. The revelations concerning the true financial condition and future business prospects

of the Company significantly impacted the price of Talbots’ stock and caused the remaining artificial

inflation to come out of the price of the stock. The price of Talbots’ stock dropped another 17.4%,

from a closing price $7.57 on January 10, 2011 to close at $6.25 on January 11, 2011, on almost six

times the stock’s average daily trading volume.

161. The next day, analyst Sterne Agee pointed out that “conversion levels [were] the key

driver behind [Talbots’] less-than expected top line performance.” In other words, customers were

coming into the Company’s stores in the second half of 2010, but once in the stores, were buying the

Company’s merchandise at a lower rate than Talbots had seen in the past. This lower conversion

rate – and the lowered sales and earnings guidance – was the result of the Company failing to have

inventory to its stores on time for the fall and winter seasons. These disclosures were an indication

to the market that Defendants were not speaking truthfully and fully about the Company’s financial

condition and future business prospects during the Class Period, as indicated by the market reaction

to these revelations – the stock drops on September 8, 2010, October 5, 2010, December 7, 2010 and

January 11, 2011.

VIII. APPLICABILITY OF PRESUMPTION OF RELIANCE: FRAUD ON THE MARKET DOCTRINE

162. At all relevant times, the market for Talbots’ common stock was an efficient market

for the following reasons, among other things:

(a) Talbots’ stock met the requirements for listing, and were listed and actively

traded on the NYSE, a highly efficient and automated market;

(b) As a regulated issuer, Talbots filed periodic public reports with the SEC; and

(c) Talbots regularly communicated with public investors via established market

communication mechanisms, including through regular disseminations of press releases on the

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national circuits of major newswire services and through other wide-ranging public disclosures, such

as communications with the financial press and other similar reporting services.

163. As a result, the market for Talbots’ common stock promptly digested current

information regarding Talbots from all publicly-available sources and reflected such information in

the price of Talbots’ stock. Under these circumstances, all purchasers of Talbots’ common stock

during the Class Period suffered similar injury through their purchase of Talbots’ common stock at

artificially inflated prices and a presumption of reliance applies.

IX. LOSS CAUSATION

164. During the Class Period, as detailed herein, Defendants engaged in a scheme to

deceive the market and a course of conduct that artificially inflated the value of Talbots’ common

stock and operated as a fraud or deceit on Class Period purchasers of the Company’s common stock

by misrepresenting the Company’s business success and future business prospects.

165. As a result of Defendants’ fraudulent conduct as alleged herein, the prices at which

Talbots’ common stock traded were artificially inflated, at varying levels, throughout the Class

Period. When Plaintiff and other members of the Class purchased their Talbots common stock, the

true value of such stock was substantially lower than the prices actually paid by Plaintiff and the

other members of the Class.

166. During the Class Period, Defendants improperly concealed the true reasons behind

Talbots’ outlook and future business prospects. Consequently, the price of its common stock was

artificially inflated throughout the Class Period. Defendants also misrepresented the reasons behind

Talbots’ reported results and made numerous false and misleading statements regarding aspects of its

business, especially with respect to the Company’s purported tight inventory controls. Later,

however, when the truth regarding Talbots’ true financial circumstances leaked out through a series

of partial disclosures, and Defendants’ prior misrepresentations and fraudulent conduct became

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apparent to the market, the prices of Talbots’ common stock fell as the prior artificial inflation was

removed from its share price. As a result of their purchases of Talbots common stock during the

Class Period at artificially inflated prices, Plaintiff and other members of the Class suffered

economic loss, i.e. , damages under federal securities laws, when such artificial inflation dissipated.

167. By misrepresenting the success of the Company’s business and concealing its

improprieties, Defendants presented a misleading picture of Talbots’ business and prospects. As a

result of Defendants’ materially false and misleading statements and documents, as well as the

adverse, undisclosed information known to the Defendants, Plaintiff and other members of the Class

relied, to their detriment on such statements and documents, and/or the integrity of the market, in

purchasing their Talbots common stock at artificially inflated prices during the Class Period. Had

Plaintiff and the other members of the Class known the truth, they would not have taken such

actions.

168. As explained herein, these false statements directly or proximately caused, or were a

substantial contributing cause, of the damages and economic loss suffered by Plaintiff and other

members of the Class, and maintained the artificial inflation in the prices of Talbots’ common stock

throughout the Class Period, until the truth leaked into and was partially revealed to the market, at

which time the prior inflation came out of the stock.

169. Through a series of partial disclosure events regarding the Company’s financial

outlook and future business prospects, the artificial inflation came out of the prices of Talbots’

common stock.

170. For instance, on September 8, 2010, Talbots revised downward its previously

announced outlook from a 3% to 5% top-line increase to a top-line sales increase of low-single

digits. Though this disclosure partially revealed the truth behind Talbots’ business and financial

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prospects, Defendants mitigated the impact of this disclosure by, among other things, falsely stating

that the lowered guidance was the result of the Company intentionally lightening the flow of product

to its stores in August 2010, so that it could flow heavier fall products in early September for the

post-Labor day crowd.

171. Then, on October 5, 2010, Talbots issued a press release providing an update on its

third quarter and full year fiscal 2010 outlook in which the Company once again lowered its

guidance, which acted as an additional partial disclosure of the Company’s true financial condition

and future business prospects. The Company reported expecting a top-line sales increase of

approximately 1% compared to the prior year period, which was below the Company’s previous

expectation of an increase of approximately low single digits. The Company also lowered its

outlook for top-line sales from low-single digits to a decrease of approximately low-single digits. As

a result of these revelations, the price of Talbots’ common stock dropped 14.6% . In an attempt to

mitigate these revelations, and spin the disclosures in such a way as to attempt to mute their impact

to the market, Defendants again tried to refocus the market on the purported fact that the Company

was well positioned from an inventory perspective heading into the holiday season and had a strong

underlying business.

172. On December 7, 2010, Defendants issued a press release further partially revealing an

undisclosed risk associated with Defendants’ fraud. The press release reported that net sales for the

third quarter of 2010 had decreased 3.2%, that comparable store sales were down 7.1%, and that

inventory at the Company increased 11.3%. As a result of these revelations, the price of Talbots’

common stock dropped 22.6% . Yet, Defendants again went on the offensive, attempting to mitigate

the impact of the partial revelation of Defendants’ fraud, asserting that the Company was well-

positioned from an inventory perspective to drive sales in the upcoming holiday season.

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173. Then, only one month later, on January 11, 2011, the Company issued a “Business

Update” announcing that quarter-to-date top line sales were down approximately 7% versus the

fourth quarter of 2009, and quarter-to-date comparable store sales were down approximately 6%.

The Company also lowered its fourth quarter guidance to a loss of $0.15 to $0.19 per share from its

previously announced range of an adjusted loss of $0.05 to $0.03 per share, and lowered full year

adjusted earnings guidance to a range of $0.56 to $0.60 per share from its previously announced

range of $0.70 to $0.78 per share. On this news, the remaining artificial inflation in the price of

Talbots’ common stock caused by Defendants’ fraud was released, and the market’s expectations for

the Company were finally and fully corrected, resulting in an additional 17.4% stock drop .

174. As a result of Defendants’ false statements and omissions, Talbots’ common stock

traded at artificially inflated prices during the Class Period. However, after the above revelations

seeped into the market, the Company’s shares were hammered by massive sales, sending them down

approximately 61% from their Class Period high.

175. The timing and magnitude of the declines in Talbots’ common stock negates any

inference that the losses suffered by Plaintiff and other Class members were caused by changed

market conditions, macroeconomic or industry factors, or Company-specific facts unrelated to

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 the

price of Talbots’ common stock and their subsequent decline in value as Defendants’ prior

misrepresentations and other ongoing fraudulent conduct were revealed, market expectations were

corrected, and the artificial inflation came out of Talbots’ common stock.

176. In addition, the price of Talbots’ common stock was a natural and probable

consequence of Defendants’ fraud and should have been foreseen by Defendants in light of the

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attending circumstances. The market reactions to the partial disclosure of Talbots’ true financial

condition and future business prospects were foreseeable to Defendants and well within the “zone of

risk” concealed by Defendants’ fraudulent conduct.

X. NO SAFE HARBOR

177. The federal statutory safe harbor provision, which provides for forward-looking

statements under certain circumstances, does not apply to any of the allegedly false statements

pleaded in this complaint. Many of the specific statements pleaded herein were not identified as

“forward-looking statements” when made. To the extent there were any forward-looking statements,

there were no meaningful cautionary statements identifying important factors that could cause actual

results to differ materially from those in the purportedly forward-looking statements. Alternatively,

to the extent that the statutory safe harbor does apply to any forward-looking statements pleaded

herein, Defendants are liable for those false forward-looking statements because at the time each of

those forward-looking statements was made, the particular speaker knew that the particular forward-

looking statement was false, and/or the forward-looking statement was authorized and/or approved

by an executive officer of Talbots who knew that those statements were false when made.

Moreover, to the extent that Defendants issued any disclosures designed to “warn” or “caution”

investors of certain “risks,” those disclosures were also false and misleading since they did not

disclose that Defendants were actually engaging in the very actions about which they purportedly

warned and/or had actual knowledge of material adverse facts undermining such disclosures.

COUNT I: FOR VIOLATIONS OF SECTION 10(b) OF THE EXCHANGE ACT AND RULE 10b-5 PROMULGATED THEREUNDER AGAINST ALL

DEFENDANTS

178. Plaintiff repeats and realleges the allegations set forth above as though fully set forth

herein. This claim is asserted against all Defendants.

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179. During the Class Period, Talbots and the Individual Defendants, and each of them,

carried out a plan, scheme and course of conduct which was intended to and, throughout the Class

Period, did: (i) deceive the investing public, Plaintiff and other Class members, as alleged herein; (ii)

artificially inflate and maintain the market price of Talbots’ common stock; and (iii) cause Plaintiff

and other members of the Class to purchase Talbots’ stock at artificially inflated prices. In

furtherance of this unlawful scheme, plan and course of conduct, Talbots and the Individual

Defendants, and each of them, took actions set forth herein.

180. These Defendants: (i) employed devices, schemes, and artifices to defraud; (ii) made

untrue statements of material fact and/or omitted to state material facts necessary to make the

statements not misleading; and (iii) engaged in acts, practices, and a course of business which

operate as a fraud and deceit upon the purchasers of the Company’s securities in an effort to

maintain artificially high market prices for Talbots’ common stock in violation of §10(b) of the

Exchange Act and Rule 10b-5. These Defendants are sued as primary participants in the wrongful

and illegal conduct charged herein. The Individual Defendants are also sued as controlling persons

of Talbots, as alleged below.

181. In addition to the duties of full disclosure imposed on Defendants as a result of their

making affirmative statements and reports, or participating in the making of affirmative statements

and reports, or participating in the making of affirmative statements and reports to the investing

public, they each had a duty to promptly disseminate truthful information that would be material to

investors in compliance with the integrated disclosure provisions of the SEC as embodied in SEC

Regulation S-X (17 C.F.R. §210.01 et seq .) and S-K (17 C.F.R. §229.10 et seq .) and other SEC

regulations, including accurate and truthful information with respect to the Company’s operations,

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surveillance, financial condition and operational performance, so that the market prices of the

Company’s common stock would be based on truthful, complete and accurate information.

182. Talbots and each of the Individual Defendants, individually and in concert, directly

and indirectly, by the use, means or instrumentalities of interstate commerce and/or of the mails,

engaged and participated in a continuous course of conduct to conceal adverse material information

about the business, business practices, performance, operations and future prospects of Talbots as

specified herein.

183. These Defendants each employed devices, schemes and artifices to defraud, while in

possession of material adverse non-public information and engaged in acts, practices, and a course of

conduct as alleged herein in an effort to assure investors of Talbots’ value and performance,

financial and operational growth, which included the making of, or the participation in the making

of, untrue statements of material facts and omitting to state necessary facts in order to make the

statements made about Talbots and its business operations and future prospects in light of the

circumstances under which they were made, not misleading, as set forth more particularly herein,

and engaged in transactions, practices and a course of business which operated as a fraud and deceit

upon the purchasers of Talbots’ common stock during the Class Period.

184. Each of the Individual Defendants’ primary liability, and controlling person liability,

arises from the following facts: a) each of the Individual Defendants was a high-level executive

and/or director at the Company during the Class Period; b) each of the Individual Defendants, by

virtue of her/his responsibilities and activities as a senior executive officer and/or director of the

Company, was privy to and participated in the creation, development and reporting of the

Company’s financial performance, projections and/or reports; and c) each of the Individual

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Defendants was aware of the Company’s dissemination of information to the investing public which

each knew or disregarded with recklessness was materially false and misleading.

185. Each of these Defendants had actual knowledge of the misrepresentations and

omissions of material facts set forth herein, or acted with reckless disregard for the truth in that each

failed to ascertain and to disclose such facts, even though such facts were available to each of them.

Such Defendants’ material misrepresentations and/or omissions were done knowingly or with

recklessness and for the purpose and effect of concealing Talbots’ operating condition and future

business prospects from the investing public and supporting the artificially inflated price of its

securities. As demonstrated by Defendants’ misstatements of the Company’s financial condition and

performance throughout the Class Period, each of the Individual Defendants, if she/he did not have

actual knowledge of the misrepresentations and omissions alleged, was reckless in failing to obtain

such knowledge by deliberately refraining from taking those steps necessary to discover whether

those statements were false and misleading.

186. As a result of the dissemination of the materially false and misleading information

and failure to disclose material facts, as set forth above, the market prices of Talbots’ common stock

were artificially inflated during the Class Period. In ignorance of the fact that market prices of

Talbots’ common stock were artificially inflated, and relying directly or indirectly on the false and

misleading statements made by Defendants, or upon the integrity of the market in which the

securities trade, and/or on the absence of material adverse information that was known to or

disregarded with recklessness by Defendants, but not disclosed in public statements by Defendants

during the Class Period, Plaintiff and the other members of the Class acquired Talbots’ stock during

the Class Period at artificially high prices and were damaged thereby, as evidenced by, among

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others, the stock price declines on September 8, 2010, October 5, 2010, December 7, 2010 and

January 11, 2011, when the artificial inflation was released from Talbots’ stock.

187. At the time of said misrepresentations and omissions, Plaintiff and other members of

the Class were ignorant of their falsity, and believed them to be true. Had Plaintiff and the other

members of the Class and the marketplace known of the true performance, future prospects and

intrinsic value of Talbots, which were not disclosed by Defendants, Plaintiff and other members of

the Class would not have purchased or otherwise acquired their Talbots’ common stock during the

Class Period, or they would not have done so at the artificially inflated prices which they paid.

188. By virtue of the foregoing, Talbots and the Individual Defendants have each violated

§10(b) of the Exchange Act, and Rule 10b-5 promulgated thereunder.

189. As a direct and proximate result of Defendants’ wrongful conduct, Plaintiff and the

other members of the Class suffered damages in connection with their respective purchases and sales

of the Company’s securities during the Class Period, as evidenced by, among others, the stock price

declines on September 8, 2010, October 5, 2010, December 7, 2010 and January 11, 2011, when the

artificial inflation was released from Talbots’ stock.

COUNT II: FOR VIOLATIONS OF SECTION 20(a) OF THE EXCHANGE ACT AGAINST THE INDIVIDUAL DEFENDANTS

190. Plaintiff repeats and realleges the allegations set forth above as though fully set forth

herein. This claim is asserted against the Individual Defendants.

191. Each of the Individual Defendants acted as a controlling person of Talbots within the

meaning of §20(a) of the Exchange Act as alleged herein. By virtue of their high-level positions

with the Company, participation in and/or awareness of the Company’s operations and/or intimate

knowledge of the Company’s fraudulent marketing and promotions and actual performance, each of

the Individual Defendants had the power to influence and control and did influence and control,

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directly or indirectly, the decision-making of the Company, including the content and dissemination

of the various statements which Plaintiff contends are false and misleading. Each of the Individual

Defendants was 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.

192. In addition, each of the Individual Defendants had direct involvement in the day-to-

day operations of the Company and, therefore, is presumed to have had the power to control or

influence the particular transactions giving rise to the securities violations alleged herein, and

exercised the same.

193. As set forth above, Talbots and the Individual Defendants each violated §10(b) and

Rule 10b-5 by their acts and omissions as alleged in this Complaint. By virtue of their controlling

positions, each of the Individual Defendants is liable pursuant to §20(a) of the Exchange Act. As a

direct and proximate result of Defendants’ 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, as evidenced by, among others, the stock price declines on September 8, 2010, October 5,

2010, December 7, 2010 and January 11, 2011, when the artificial inflation was released from

Talbots’ stock.

WHEREFORE, Plaintiff prays for relief and judgment, as follows:

(a) Determining that this action is a proper class action and designating Lead

Plaintiff as a class representative under Rule 23 of the Federal Rules of Civil Procedure;

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(b) 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 interest thereon;

(c) Awarding Plaintiff and the Class their reasonable costs and expenses incurred

in this action, including counsel fees and expert fees; and

(d) Such other and further relief as the Court may deem just and proper.

XI. JURY TRIAL DEMANDED

Plaintiff hereby demands a trial by jury.

DATED: August 15, 2012 PASTOR LAW OFFICE, LLP

/s/ David Pastor DAVID PASTOR (BBO #391000)

David Pastor 63 Atlantic Avenue, 3rd Floor Boston, MA 02110 Telephone: 617/742-9700 617/742-9701 (fax) [email protected]

ROBBINS GELLER RUDMAN & DOWD LLP David J. George, admitted pro hac vice Robert J. Robbins, admitted pro hac vice Holly Kimmel, admitted pro hac vice 120 E. Palmetto Park Road, Suite 500 Boca Raton, FL 33432 Telephone: 561/750-3000 561/750-3364 (fax) [email protected] [email protected] [email protected]

GREENWALD DAVIDSON PLLC James L. Davidson 5550 Glades Road, Suite 500 Boca Raton, FL 33431 Telephone: 561/826-5477 561/869-1919 (fax) [email protected]

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VANOVERBEKE MICIIAUD & TIMMONY, P.C. Thomas C. Michaud 79 Alfred Street Detroit, MI 48201 Telephone: 313/578-1200 313/578-1201 (fax) [email protected]

Attorneys for Plaintiff

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CERTIFICATE OF SERVICE

I HEREBY CERTIFY that on August 15, 2012, I electronically filed the foregoing with the

Clerk of the Court using the CM/ECF system. The electronic case filing system sent a “Notice of

Electronic Filing” to the attorneys of record who have consented in writing to accept this notice as

service of this document by electronic means.

/s/ David Pastor David Pastor

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Documents

Case 1:11-cv-10186-NMG Document 53 Filed …securities.stanford.edu/.../2012815_f01c_11CV10186.pdfCase 1:11-cv-10186-NMG Document 53 Filed 08/15/12 Page 4 of 73 began pulling Talbots’