In Re: Duane Read, Inc. Securities Litigation 02-CV-6478 ...securities.stanford.edu/filings-documents/1025/DRD... · 1. This is a federal class action on behalf of purchasers of the

UNITED STATES DISTRICT COURTSOUTHERN DISTRICT OF NEW YORK

IN RE DUANE READE, INC. ) CIVIL ACTION NO.:SECURITIES LITIGATION ) 1:02cv6478(NRB)

) CONSOLIDATED AMENDED) COMPLAINT

Lead Plaintiff, individually and on behalf of all other persons similarly situated, alleges

upon personal knowledge as to itself and its own acts, and upon information and belief as to all

other matters, based upon, inter alia, the investigation made by and through its attorneys, which

investigation included, without limitation, communications with persons with first hand

knowledge of the allegations herein, including former employees of Duane Reade ("Duane" or

the "Company"), who are knowledgeable about Duane's business, operations, accounting and

business practices and/or about the industry and markets in which Duane operated, and review

and analysis of various accounting literature and public statements, including documents filed by

or on behalf of Duane with the Securities and Exchange Commission ("SEC"), news and media

reports, press releases, and reports by securities analysts. Plaintiff believes that, after a

reasonable opportunity for discovery, further substantial evidentiary support for the allegations

set forth herein will be shown to exist.

NATURE OF THE ACTION

1. This is a federal class action on behalf of purchasers of the common stock of

Duane between April 1, 2002 and July 24, 2002 inclusive (the "Class Period"), seeking to pursue

remedies under the Securities Exchange Act of 1934 (the "Exchange Act"). Defendants are the

Company, Tony Cuti, Duane's President, Chief Executive Officer and Chairman of the Board of

Directors, Gary Charboneau, Duane's Senior Vice President of Sales and Marketing, and John K.

Henry, Senior Vice President and Chief Financial Officer who were responsible for the public

dissemination of materially false and misleading statements made during the Class Period. Cuti,

Charboneau, and Henry will be collectively referred to herein as the "Individual Defendants."

2. As alleged in detail below, during the Class Period, Defendants knowingly issued

to the investing public materially false and misleading financial statements, press releases, and

other information concerning Duane's overall financial condition. Moreover, Defendants' failed

to correct their false and misleading statements throughout the Class Period. Defendants were

motivated to issue materially false and misleading statements and omissions to conceal the true

financial condition of the Company. Having inflated the price of Duane common stock

artificially, Defendants were able to retire certain of the Company's high cost debt and to acquire

assets using far fewer shares of the Company's stock.

3. By 2000, the Company was involved in a campaign to open a Duane Reade

drugstore on virtually every corner in Manhattan. By the end of 2001, the Company was

operating more than 200 stores in the New York City area and the Company was setting its sights

even higher — Duane announced its intention to open 35 new stores in 2002.

4. To effectuate its 2002 expansion plan, Defendants had to rid the Company of its 9

114 % senior convertible notes coming due in 2008 and obtain an infusion of capital. As a result,

between April 10, 2002 and June 21, 2002 the Company commenced and completed a $381

million convertible note offering due in 2022 and corresponding retirement of its 9 1/4 % senior

convertible notes due in 2008. The convertible note offering depended on the issuance of 5.389 .

million shares of Company stock. Additionally, the Company continued its practice of acquiring

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pharmacy assets using common stock as currency and orchestrated at least one such acquisition

during the Class Period.

5. As the 2001 fiscal year came to a close, the Company's business seemed to be

thriving. Despite the "temporary dampening" of revenues caused by the terrorist attacks on

September 11, 2001, the Company on February 19, 2002 announced record sales and earnings for

fiscal year ending December 29, 2001. The Company attributed its ability to meet expectations

in the post-September 11 environment to its self-proclaimed "expertise" as an urban-retailer. On

various occasions throughout the first quarter 2002, The Company's purported expertise led

Company officials to announce that the New York sales trends were improving.

6. The Company's claimed ability to predict sales trends after the September 11th

attacks appeared to be substantiated as the Company, on April 25, 2002, announced that Duane

had achieved "record sales and earnings" for the first quarter 2002. Additionally, the Company

reiterated that sales, both pharmacy and non-pharmacy sales (referred to as "front-end sales")

were continuing to improve post-9/11. Taking advantage of this purported trend to push ahead

with its expansion plan, Company officials again touted their self-proclaimed "urban retailing

knowledge" and assured investors that the Company officials would achieve sales and earnings

estimates of $335 million and $.40 - $.44 for the second quarter 2002, respectively.

7. The improvement in front-end sales was vitally important to Defendants because

the Company carried 33 percent more front-end merchandise than the national average and the

gross margins on the front-end merchandise are two times higher than those on prescription

drugs.

8. Unbeknownst to investors, however, with a month of the second quarter already

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behind the Company, Defendants knew on April 25, 2002, but failed to disclose, that the

Company's front-end sales business was trending downwards and that they would not achieve

the previously announced sales and earnings estimates.

9. In fact, Defendants knew that their April 25, 2002 statements were materially false

and misleading when made as they misrepresented the financial condition of the Company and

failed to disclose the following information, which they monitored on a daily basis:

a. The Company's front-end sales were declining; and

b. Costs associated with already planned new store openings would

contribute to lower earnings.

10. Moreover, despite repeated statements by analysts and members of the press

recommending that investors purchase stock in the Company based on the April 25, 2002 false

and misleading statements, Defendants made no statements during the Class Period to update

and/or correct them.

11. Additionally, within the Class Period, Defendants learned that theft and vendor

errors (referred to as "shrink") were cutting into earnings, but failed to timely disclose such to

investors.

12. As mentioned above, Defendants were motivated to make and conceal the

aforementioned false and misleading statements throughout the second quarter 2002 to

consummate the convertible note offering and corresponding stock issuance and to finalize the

pharmacy asset acquisition using artificially inflated Company stock as currency.

13. Had the Company's true financial condition been disclosed at the outset of the

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second quarter, Duane would not have been able to consummate the aforementioned transactions

on the same favorable terms.

14. On July, 25, 2002, Defendants revealed that they missed earnings by more than 50

percent. The news of Duane's disappointing results caused the price of its common shares to fall

38 percent from a closing price on July 24, 2002 of $23.55 to a closing price on July 25, 2002 of

$14.60 per share on abnormally heavy trading volume of 5.463 million shares compared to a 52

week volume average of nearly 282,000 shares per day. Defendants blamed the earnings

shortfall on slow front-end sales, increased shrink and costs associated with new store openings —

issues Defendants had been monitoring on a daily basis since the inception of the Class Period.

JURISDICTION AND VENUE

15. 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 under Section

10(b) by the SEC [17 C.F.R. § 240.10b-5].

16. This Court has jurisdiction over the subject matter of this action pursuant to 28

U.S.C. §§ 1331 and 1337, and Section 27 of the Exchange Act [IS U.S.C. § 78aa].

17. Venue is proper in this District pursuant to Section 27 of the Exchange Act, and

28 U.S.C. § 1391(b). In addition, Duane maintains its principle executive offices at 440 Ninth

Avenue, New York, New York in this District. Many of the acts and practices complained of

herein occurred in this District.

18. In connection with the acts alleged in this complaint, Defendants, directly or

indirectly, used the means and instrumentalities of interstate commerce, including, but not

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limited to, the mails, interstate telephone communications and the facilities of the national

securities markets.

PARTIES

19. Lead Plaintiff Capstone Asset Management Company purchased the common

stock of Duane at artificially inflated prices during the Class Period and has been damaged

thereby.

20. The Court appointed Capstone Asset Management Company to serve as Lead

Plaintiff on November 26, 2002.

21. Defendant Duane, incorporated in Delaware, is the largest drug store chain in the

metropolitan New York City area which, as of December 28, 2002, operated 228 stores, offering

a wide variety of prescription and over-the-counter drugs, health and beauty care items,

cosmetics, hosiery, greeting cards, photo supplies and photo finishing. Duane maintains its

headquarters and executive offices at 440 Ninth Avenue, New York, NY 10001.

22. Defendant Anthony J. Cuti is and was, at all relevant times, Chairman of the

Board of Directors and Chief Executive Officer of Duane.

23. Defendant Gary Charboneau is and was, at all relevant times, Senior Vice

President of Sales and Marketing of Duane.

24. Defendant John K. Henry is and was, at all relevant times, Senior Vice President

and Chief Financial Officer of Duane. Together, Defendants Cuti, Henry and Charboneau are

referred to as the "Individual Defendants."

25. Because of the Individual Defendants' positions with the Company, their status as

signatories to certain of Duane's filings with the SEC, and as principal spokespersons for the

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Company in its news releases, they had access to adverse undisclosed information about Duane's

business, operations and its financial condition, including its debt obligations and plans to repay

those obligations, as well as its markets and present and future business prospects, via access to

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

daily reports of actual operations, including sales and profit figures, formal weekly sales and

profit reports, as well as conversations with corporate employees. The Individual Defendants

have control over Duane's operations and its public disclosures and has access to all of the

internal material facts concerning Duane and documents generated at Duane.

26. As the most senior officers of a publicly-held company whose common stock was,

and is, registered with the SEC pursuant to the Exchange Act, and was traded on the New York

Stock Exchange ("NYSE"), and governed by the provisions of the federal securities laws, the

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

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

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

prospects, and to correct any previously-issued statements that had become materially misleading

or untrue, so that the market price of the Company's publicly-traded common stock would be

based upon truthful and accurate information. The Individual Defendants' alleged

misrepresentations and omissions during the Class Period violated these specific requirements

and obligations.

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

approval of the various public, shareholder and investor reports, and other communications

complained of herein, signed certain of the Company's filings with the SEC and were quoted in

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the Company's earnings news releases and were aware of, or recklessly disregarded, the

misstatements contained therein and omissions therefrom, and were aware of their materially

misleading nature. Because of their positions with the Company, as signatory to SEC filings, and

spokespersons in news releases, The Individual Defendants had access to the adverse undisclosed

material information about Duane's business prospects, fmancial condition, including dampening

front-end sales, increased "shrink" liabilities, increased generic pharmaceutical sales and the use

of improper accounting techniques to boost Company profit margins, and performance as

particularized herein, and knew or recklessly disregarded, that these adverse facts rendered the

positive representations made by or about Duane and its business materially misleading.

28. Each of the Defendants is liable as a participant in a fraudulent scheme and course

of business that operated as a fraud or deceit on purchasers of Duane common stock by

disseminating materially misleading statements and/or concealing material adverse facts and

failing to correct the misleading statements throughout the Class Period. The scheme: (i)

deceived the investing public regarding Duane's business and operations and the intrinsic value

of its common stock; (ii) enabled Defendants to use the inflated price of Duane common stock as

currency to acquire other businesses and assets and to fulfill its obligations to certain debt holders

to resell the debt to the general public; and (iii) caused Plaintiff and other members of the Class

to purchase Duane common stock at artificially inflated prices.

BACKGROUND

A. Importance of Front-End Sales

29. The Company's financial success is dependent in large part on its front-end, non-

pharmacy sales. On January 21, 2002, the Drug Store News published an article confirming the

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Company's focus on selling front-end merchandise to reap its higher profit margins. The article

quoted Defendant Cuti as stating, "for an urban chain like Duane Reade, the opportunity is to

continue to line extend in convenience items because there's so few competitive alternatives for

those items in our marketplace. So, obviously we are focusing on carrying many items that are

often found in large food/drug combo or mass merchant stores in our market."

30. According to the Company's Annual Report on Form 10-K for the year ending

December 29, 2001 ("2001 10-K"), the Drug Store News ranked Duane as the leading U.S.

Drugstore chain in 2000 in terms of sales per square foot. The March 28, 2002, Form 10-K

stressed the importance of the Company's profitable front-end sales:

In 2001, we believe that we led the New York City market in salesof both pharmacy and front-end product categories. Sales ofhigher-margin front-end items accounted for 60.8% of ourtotal sales in fiscal 2001, the highest of any major conventionaldrugstore chain in the United States.

(Emphasis added).

31. On a February 20, 2002 Fox News interview, Defendants' again confirmed their

focus and reliance on front-end sales to drive higher margins. In response to a question

concerning the purported disappearance of "mom and pop" drug stores in favor of Duane stores

and whether that would lead to higher prices, Cuti answered that Duane does not believe

consumers miss mom and pop drug stores. He continued that:

I think many of the mom-and-pops got overwhelmed with theneeds to provide commodities. You know, most mom-and-popdrug stores get 90 percent of their sales from the pharmacy. Andyou look at New York City, there is [sic] no 7-11s, no Wawas, noconvenience stores, no super drug combination stores at all. So weare New York's convenience store. And mom-and-pops were notdoing a good job at that.

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32. Thus, front-end sales were the key to Duane's maintainability or increasing its

gross margins. Statements from former Duane employees, detailed below, demonstrate that

because front-end sales were the life-blood of the Company, Company management, including

the Individual Defendants, were acutely aware of and reviewed the Company's detailed sales and

earnings figures on a daily basis.

B. Defendants' Knowledge of the Company's Financial Position

33. According to several former employees, Cuti and other management officials

received daily reports of, and attended weekly meetings concerning, the financial condition of the

Company. Additionally, the former employees confirmed that the problems on which

Defendants blamed the Company's second quarter earnings shortfall would have been known by

management, including the Individual Defendants, when the earnings forecast was made on April

25, 2002.

1. Defendants' Daily Monitoring of the Company's Finances

a. Former Employee Statements

34. A former Vice President of Distribution (W-1) who worked in the Company's

Long Island distribution center from late-1997 through mid-2000, made frequent visits to

headquarters, reported to Senior Vice President of Sales and Marketing, Gary Charboneau, and

had a great deal of direct contact with Defendant Cuti, stated that the Company's management

team, including W-1, met every Tuesday for an executive staff meeting wherein weekly sales

reports were gone over in "great detail." The reports included "very specific information" that

was broken down by detailed categories within pharmacy and front-end sales. For example, the

sales categories contained in the reports included, but were not limited to: sales by specific store;

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sales by product group (e.g., cosmetics, snacks and jewelry); sales of generic drugs; and sales of

brand name drugs.

35. According to W-1, the Individual Defendants blew how the Company was

performing, in all areas, on a daily basis. "Tony Cuti had receipts everyday, and he is an

intelligent guy so he knew exactly what was up in each store and product area. He was always on

top of the numbers."

36. A former Inventory Analyst (W-2), who worked for the Company at its

headquarters from early 1998 through early 2002 and who tracked all sales of the Company on

Excel spread sheet reports, confirmed that Defendants closely monitored the Company's

operations and finances. According to W-2, formal sales reports were distributed, on a weekly

basis to, inter alia, Gary Charboneau, who delivered the reports to upper management, including

Defendant Cuti. The formal reports disclosed, inter alia, gross margin data, which management

would review against the backdrop of what promotions and markdowns were active and working.

37. Also according to W-2, the formal weekly reports were detailed and categorized.

The reports detailed weekly sales information on merchandise categories such as aspirin,

depilatory, cosmetics, fragrances, general merchandising (such as holiday merchandise), and

various drug categories. The Company buyers then used this information to determine which

promotions were working, and whether they would go forward within the future planning period.

(The Company scheduled various concurrent "planning periods" ranging in length from a week

to a year.)

38. W-2 also stated that forecasts were constantly being made and adjusted, based on

the weekly formal reports. W-2 said that, "we would redo our numbers ... after we saw what was

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selling," and that sales planning was done on a store-by-store basis, as reports were generated for

each store. In general, "reports were closely analyzed to see where sales and margins were

dropping."

39. A former Executive Administrative Assistant (W-3) for Defendant Cuti from early

2002 through middle 2002, who characterized Cuti as "very hands-on" and very demanding of

executives, stated that Cuti received daily sales reports that were "of the utmost importance to

[him]." W-3 confirmed that sales figures were generated daily, and that "the second I got them,

I had to walk them in to him and they had to be shredded after he looked at them." According to

W-3, Saturday's sales reports were the most important to Cuti, and he looked at them "first thing

every Monday morning." W-3 recalls that sales reports were compiled by district and were

broken down (in dollar amounts) by pharmacy and other categories.

40. A former Senior Accountant and Inventory Analyst (W-4), who worked at

Company headquarters from late 1997 through late 1998 said that the Company operated a real-

time computer system, the POS (Point of Sale) system. According to W-4, the POS system

connected all Company stores to headquarters so that headquarters would have real time access

to, inter alia, store sales, inventory, and margins. According to W-4, the POS system was part of

a more extensive RS 6000 system.

41. A Former Executive Assistant to a Senior Vice President of Merchandising and

Gary Charboneau, Senior Vice President of Sales and Marketing (W-7), who worked for the

Company from mid-1998 through mid-2001, said that she generated sales reports for

Charboneau. According to W-7, the reports were in spreadsheet form and contained considerable

detail on every conceivable aspect of sales. The spreadsheet figures were broken down by, inter

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alia, store, zone (grouping of stores), sales category, specific product, and promotion.

42. W-7 provided further that the sales amounts contained in the spreadsheets were

downloaded from scanned sales at each store through the RS 6000 system. The system thus

contained a download, every day, of information on every product sold in every store. The

information was sorted by category, e.g., "cosmetics, diapers, cigarettes, back to school items,

and candy," or by specific item, e.g., "Luvs, and Scott Toilet Tissue."

43. According to W-7, the RS 6000 spreadsheet reports, were reviewed at weekly

executive meetings to track DR's financial status relating to promotions and targets that had been

previously set. Accordingly, at every meeting sales were analyzed in many different ways, such

as by "store zone" and "price point" (i.e., different zones would have different prices for the

same items, and sales volume vis-à-vis price points within zones and across different zones were

compared). Commenting on the Company's capability, W-7 stated, laThsolutely the main goal

of management was to track sales by category, price and promotions, and we had the supporting

hardware and software to give us this information on a day to day basis."

b. Public statements concerning the Company's realtime analysisof front-end sales

44. The 2001 10-K discussed, in part, the Company's computer system operations.

In 2000, DRD completed development and chain-wideimplementation of new computer assisted ordering system,designed to help minimize out-of-stock situations, but also to allowus to set the required inventory levels for every item at every storeaccording to historic sales patterns. We believe this permits loweroverall investment in inventory while further improving our in-stock conditions.

We use scanning point of sale, or POS, systems in each of ourstores. These systems allow better control of pricing, inventory

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and shrink, while maximizing the benefits derived from the otherparts of our systems application development program. POS alsoprovides sales analysis that allows for improved labor schedulingand helps optimize product shelf space allocation and design byallowing detailed analysis of stock-keeping unit sales.

In 1999, DRD implemented computerized merchandisereplenishment system for the 86% of front-end merchandisedistributed to stores from its warehouse. Fully automated systemuses item-specific and store-specific sales history to producesuggested orders for each store, which can be accepted or modifiedby the store before being released to the distribution center,improving in-stock conditions at reduced inventory levels.

(Emphasis added).

45. Several weeks later, in an April 9, 2002 press release, JDA Software Group, Inc.

("JDA") announced that Duane, a customer since 1994, will significantly enhance its ability to

view sales trends in realtime and assess its capabilities through its use of JDA's host

Merchandise Management System ("MMS") at Duane's corporate headquarters. Duane had

already been using JDA's "Retail IDEAS and "E3TRIM" software, and according to Duane's

Vice President of Management Information Systems Joe Lacko, "The analytic information we

receive from Retail IDEAS enables us to better recognize trends, analyze inventory and

target customers for our loyalty program...." (Emphasis added).

46. According to JDA's website, http://e3corp.com/RetaillDEAS.asp,

[r]etail IDEAS features powerful applications for retailers toanalyze their business, monitor strategic plans and enable tacticalactions. By fully integrating with JDA's merchandising and otherprimary business systems, Retail IDEAS ensures rapid access tocurrent and consistent information for secure decision making.Retail IDEAS' "out-of-the-box" functionality includes over 100pre-configured views that reflect retailers' most critical needsfor quickly identifying problems, uncovering trends andunderstanding the impact of decisions before they're even

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made. Users can also quickly build their own custom viewstailored to their unique requirements."

(Emphasis added).

47. The aforementioned statements from the Company's former employees confirmed

that the Company's computer system provided Defendants with, and the Defendants did in fact

review, daily front-end sales records from the POS/RS 6000 computer system.

2. Costs Associated with Store Openings

a. Former Employee Statements

48. Statements from former employees of the Company confirm that Defendants

knew that the Company was going to open 10 new stores at the outset of the Class Period and, as

such, Defendants also knew any increased costs Duane would have associated with the new store

openings. Additionally, the former employee in charge of opening the new stores during the first

half of 2002 stated that the Company knew that it was behind in new store openings going into

the second quarter and thus, knew it would be incurring higher opening expenses in the quarter.

49. A former pharmacy technician (W-5) who worked for the Company from

February 2001 to October 2002 at Company locations in Staten Island and Brooklyn stated that

the Company takes "far longer" to open a store than it initially forecasts. The former employee,

who assisted in all areas of the pharmacy, e.g. , handling inventory and stock, counting

medications and filling prescriptions, accessing insurance information, and serving customers,

stated that the Company typically needs 6 months to open a store.

50. Similarly, W-4 confirmed that there was usually a large lead time between the

decision to open a new store and its opening. The former employee stated further that

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merchandisers and senior management always knew about the new stores months in advance of

its entry into the Company's computer system, which was at least 60 days before the store was

set to open.

51. A former Director of Advertising (W-6) who worked in the Company's

headquarters from October 2000 through October 2001 and was responsible for signage at each

of the Company's new stores stated that once the Company knew a store was "coming open" they

had a timetable that they followed which was "nearly always on track."

52. A former Merchandising Manager (W-8), who worked for the Company in 2001

through Mid-2002, was in charge of merchandising and "setting up all the new stores, resets,

remodels, and so on." With respect to new store openings, W-8 and his team of approximately

70 people were involved in everything from the construction of new stores to opening the doors

to the public. W-8 went to headquarters approximately two days a week, but was primarily in the

field "trying to get stores up and running."

53. W-8 claims that the Company was "behind" on its new store opening plan at the

outset of second quarter 2002. Accordingly, the Company "pushed" a number of openings from

the first quarter into the second quarter. This alteration caused extra costs to be incurred in the

second quarter. Indeed, W-8 opined that $1.5 million in expenses that the Company claimed to

have incurred in the second quarter seemed like a "very low number."

54. In fact, W-8 claims that the Company's opening expenses should have been

higher because the Company employed a scheme to amortize a portion of its payroll over the life

of the store rather than recognize the payment as an expense against revenue in the second

quarter. W-8 stated that due to the increase in costs associated with the greater number of store

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openings, the Company came up with a scheme to decrease its payroll and thus, its expenses.

The Company created another payroll, "which we amortized into the building of the stores," W-8

said. When W-8 questioned the practice, management told W-8 that it was "legal." The

Company's practice of capitalizing certain pre-opening costs was in violation of generally

accepted accounting principles ("GAAP"). GAAP are those principles recognized by the

accounting profession as being the conventions rules and procedures necessary to define accepted

accounting practices at a particular time. During the Class Period, Statement of Position

("S.O.P") 98-5, "Reporting on Costs of Start-up Activities," was in effect, providing guidance on

financial reporting of start-up costs. This S.O.P. requires Duane to expense the costs of start-up

activities as incurred. Start-up expenses include one time activities related to opening a new

facility including all pre-opening costs. Thus, had defendants caused the Company accurately to

report pre-opening costs, the total pre-opening costs would have exceeded the shockingly high

reported pre-opening costs.

55. Based on the above statements from former employees, which independently

confirmed that new store opening expenses were regimented and predictable and that the

Company knew it was going to incur greater store opening costs at the outset of the second

quarter, any increased costs associated with the second quarter store openings were not a surprise

to Defendants at the outset of the quarter and should have been disclosed as of April 25, 2002, at

latest.

b. Historical New Store Pre-Opening Expenses

56. On November 15, 2001, the Company filed its Form 10-Q for the quarter ended

September 29, 2001 with the SEC. The 10-Q provided, in relevant part:

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[wie incurred store pre-opening expenses of $1.4 million duringthe first nine months of 2001 related to the opening of 24 stores.Pre-opening costs of $1.1 million were incurred during the firstnine months of 2000 for the opening of eighteen stores.

We incurred store pre-opening expenses of $0.5 million during thethird quarter of 2001 related to the opening of nine stores. Duringthe comparable period last year, we incurred pre-opening expensesof $0.3 million related to the opening of seven stores.

57. On March 29, 2002, the Company filed its annual report on Form 10-K for year

ended December 29, 2001 with the SEC. The 10-K provided, in relevant part:

Store pre-opening expenses of $1.7 million related to the openingof 31 stores in 2001 as compared to $1.4 million reflecting 24 storeopenings in 2000.

58. The Note 1, "Organization and Significant Accounting Policies," to Consolidated

Financial Statements contained in the March 29, 2002 10-K provided that "pre-opening

expenses" are "store pre-opening costs, other than capital expenditures, are expensed when

incurred."

59. Notwithstanding their close monitoring of store openings and the exorbitant costs

incurred in the second quarter, at no time prior to or during the Class Period did Defendants

advise the public that it would incur "pre-opening expenses" of $1.5 million to open just 10

stores in the second quarter 2002.

3. Defendants' Close Monitoring of "Shrink"

60. Former Company employees consistently reported that the Company guarded

against and monitored for "shrink," losses caused by theft and vendor errors very closely.

61. W-3 stated that Cuti's corporate policy was to be extremely tough on shoplifters.

According to W-3, "[Cuti] wants to know that people are arrested."

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62. W-5 stated that management took theft very seriously and prosecuted to the fullest

extent of the law. According to W-5, all shoplifters were turned over to police. Indeed, W-5

recalls that a number of employees were fired for infractions as minor as eating out of date candy

bars that were being returned to the manufacturers. W-5 stated that the Company's internal

reputation of dealing very harshly with theft kept such activity to a minimum as compared to

similar stores.

63. W-4, who was involved in monitoring inventory, stated that the Company took

shrink very seriously and tracked it closely. Moreover, W-4 said that the "[Company] wouldn't

stand for errors [and] managers would get fired if their stores had greater than 5% shrink." As

such, shrink rarely had an effect on the Company's earnings. Moreover, W-4 stated that vendor

errors, such as shipping errors, which contributed to shrink figures were disclosed to Defendants

as they occurred. W-4 explained that the Company would check the manifest against the items

actually shipped to the Company, so that if only 7 of 10 items were in the shipment, only 7 would

get booked into inventory.

64. Because Defendant monitored for shrink very closely and remedied any instances

of shrink as they occurred, Defendants knew or were reckless in not knowing that it was

occurring far more than Defendants had led the market to believe throughout the Class Period.

Defendants had a duty to disclose any such material increase in shrink to investors.

DEFENDANTS' MOTIVE AND OPPORTUNITY

65. Defendants were motivated to inflate earnings improperly, in turn to inflate the

Company's stock price artificially. Given the necessity for Defendants to grow Duane Reade's

business through expansion and acquisition, a high stock price was essential. With regard to

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expansion, Duane sought to open stores at a fast pace, requiring that the Company have access to

capital at low rates of interest, lest it be saddled with debt expenses that rendered any accretive

effect of its expansion illusory. With regard to expansion through acquisition, Defendants caused

Duane to use its own common stock as currency to acquire pharmacies. The artificially inflated

stock price enabled Defendants to acquire pharmacies for fewer shares.

66. In the 2001 10-K, the Company described the progress of its expansion. During

fiscal 1999, Duane closed one store and opened 21 stores, an approximately 15.5% expansion in

the number of stores. During fiscal 2000, Duane closed one store and opened 24 stores, an

approximately 16% expansion in the number of stores. During fiscal 2001, Duane closed 1 store,

lost 2 stores in the September 11 terrorist attack, and opened 31 stores, an approximately 14%

expansion in the number of stores. Had it not lost two stores, Duane would have posted a 16.8%

expansion rate for 2001, in line with the previous two years.

67. The Company tied its capital requirements directly to its expansion, stating, in the

2001 10-K:

Our capital requirements primarily result from opening andstocking new stores, remodeling and renovating existing retaillocations and from the continuing development of managementinformation systems. We believe that there are significantopportunities to open additional stores, and currently plan to openapproximately 60 to 70 stores during the next two years. . . .

68. The September 11 terrorist attacks on New York City did nothing to halt Duane

Reade's aggressive expansion plans. A January 7, 2002 article in Grain 's New York Business,

for example stated:

Rather than halting its aggressive growth trajectory, New York'sNo. 1 drug chain, Duane Reade, has quickly adapted to the post-

20

September 11 business environment. CEO Anthony Cuti shiftedhis focus, speeding up construction of stores in areas that are moredensely populated since the attack, such as Times Square. Mr. Cutibelieves so strongly in the city that the Company opened 30 storeslast year, topping its original budget by five units. . . .

69. Indeed, in a February 20, 2002 press release announcing the Company's results for

the fourth quarter and full fiscal year, 2001, Defendant Cuti stated, "[w]ith respect to our

performance for the upcoming year, in view of our ability to maintain our originally scheduled

store opening plan, we believe that our expectations for fiscal 2002 are achievable. . .."

70. In addition to discussing the Company's planned expansion, the 2001 10-K

detailed the effects of the Company's debt obligations:

We believe that, based on current levels of operations andanticipated growth, cash flow from operations, together with otheravailable sources of funds, including additional borrowings underour credit agreement, will be adequate for at least the next twoyears to make required payments of principal and interest on ourindebtedness, to fund anticipated capital expenditures and workingcapital requirements and to comply with the terms of our debtagreements. .. . Our ability to meet our debt service obligationsand reduce our total debt will depend upon our future performancewhich, in turn, will be subject to general economic, financial,business, competitive, legislative, regulatory and other conditions,many of which are beyond our control. In addition, we cannotassure you that our operating results, cash flow and capitalresources will be sufficient for repayment of our indebtedness inthe future. Substantially all of our borrowings under the RestatedCredit Agreement bear interest at floating rates. Therefore, ourfinancial condition will be affected by changes in prevailinginterest rates.

71. In the Notes to the Consolidated Financial Statements in the 2001 10-K, the

Company disclosed its debt structure, including a term loan facility and a revolving credit facility

received pursuant to a 1998 Credit Agreement and 9 1/4 Senior Subordinated notes ("2008

21

Senior Notes"). With respect to the Credit Agreement, due in large part to a June, 2001, follow-

on equity offering, which raised $130.4 million, the company was able to negotiate improved

financing terms, manifest in a Fourth Restated Credit Agreement. The Company stated:

As the financing requirements of the Company increased,reflecting the growth in the Company's acquisition activity andnew store development, the Credit Agreement was amended andrestated commensurately. Each subsequent change provided theCompany with increased availability of revolving and/or term loanborrowing, which were used for capital expenditures, workingcapital needs and general corporate purposes.

72. Importantly, the Restated Credit Agreement permitted the Company to increase its

annual capital expenditures from $30 million to $50 million "and certain restrictive covenants

were modified to provide the Company with additional flexibility." The Company disclosed that

"[a]t December 29, 2001, the weighted average combined interest rate on all borrowings under

the Restated Credit Agreement, including the impact of the interest rate swap transaction which

had an effective date of January 12, 2001, was 7.83%."

73. But the Company had still further high cost debt. In 1998, it issued the 2008

Senior Notes. The aggregate principle amount was $80 million and the interest rate was 9 1/4 %

per annum, payable semi-annually in arrears. The 2008 Senior Notes were to expire on February

15, 2002. Sometime prior to April 10, 2002, the Company determined to eliminate the high cost

of the 2008 Senior Notes. This too would increase the Company's ability to expand, using lower

cost debt.

74. Toward that end, in a press release on April 10, 2002, when the Company

announced its intention to raise approximately $110 million in gross proceeds through an

offering of 20-year convertible notes. According to the announcement, the Company intended to

22

use the net proceeds of the offering to repay amounts outstanding under its senior credit facility

and for general corporate purposes, which may have included the purchase of a portion of the 9

1/4% Senior Subordinated Notes due 2008. The release indicated that the 20-year notes would

be convertible into shares of Duane Reade common stock.

75. On April 11, 2002, the Company announced that it had priced its previously

announced offering of 20-year Senior Convertible Notes due 2022 ("2022 Senior Notes").

The Company anticipates that the transaction will close on April16, 2002. The securities will be senior unsecured notes convertibleinto shares of Duane Reade Inc. common stock under certainconditions. The underwriter also has an option to exercise an overallotment option for up to 15% of the amount of this offering.Each Senior Convertible Note has a yield to maturity of 3.75%and is convertible into 14.1265 shares of Duane Reade'scommon stock. The Company intends to use the net proceeds ofthe offering to repay amounts outstanding under its senior creditfacility and for general corporate purposes, which may include thepurchase of a portion of the 9-1/4% Senior Subordinated Notes due2008."

76. In a Current Report on Form 8-K, filed with the SEC on April 16, 2002, the

Company reported the completion of the note offering announced on April 10, 2002. The

offering was for $381.5 million in convertible notes that netted the Company $210 million in

proceeds. The Company intended to, and did in fact, use the proceeds throughout the second

quarter to pay off certain outstanding debt, including to repay indebtedness under the term A and

term B loans under the Credit Agreement and to purchase a portion of the 2008 Senior Notes.

77. Indeed, in its Earnings Conference Call for the first quarter of fiscal 2002, held on

April 25, 2002, in response to a question regarding Duane's progress in repurchasing the 2008

Senior Notes, CFO John Henry stated:

23

we are actively engaged in that effort. We have not provided forany benefits in the guidance associated with interest savings, thatwe would expect to get on completion of the retirement of some ofthe higher interest forms of debt. We expect to have a clear pictureby the end of 2002. We are moving quickly and may even getbenefit before that. There is going to be a slight negative carry forthe period until we get some more debt back, but that is beingworked on.

78. Similarly, in an interview on CNBC on April 25, 2002, defendant Cuti touted the

recent offering of the 2022 Senior Notes, stating:

We were really pleasantly surprised that most of [the] Streetadvised us that at our capital structure and size, we probably couldonly float $100 million or $125 million. The offering wasextremely well received, another endorsement of the strength of therelationship between the company and the Street. And we haveevery intention to apply the proceeds to reduce debt. It will reduceour debt interest load to as much as half of the rate we were payingfor prior years.

79. Duane Reade's interest expenses during fiscal 2000 and fiscal 2001 were $35.9

million and $27.6 million respectively. Thus, reducing the Company's interest expense by one

half as anticipated by the 2022 Senior Notes offering would add materially to Duane's bottom

line and also make the cost of capital lower, enabling it to fuel its program of growing through

new store openings.

80. In a May 3, 2002 press release, the Company announced that it had commenced a

tender offer for all of the 2008 Senior Notes. The Company also sought "consents to certain

proposed amendments to the Indenture under which the notes were issued. In a May 21, 2002

press release, the Company announced that it had received consent to eliminate "substantially all

of the restrictive covenants of the indenture governing the [2008 Senior] Notes and to make

24

certain other amendments. . .." Finally, in a June 3, 2002 press release, the Company announced

the successful completion of the tender offer for the 2008 Senior Notes.

81. On June 21, 2002, the Company filed a Registration Statement on Form S-3 with

respect to the 2022 Senior Notes ("S-3"). According to the S-3, the purpose of registering the

2022 Senior Notes was to enable holders to sell the notes to the public and to register the 5.389

million shares of common stock into which the 2022 Senior Notes could be converted. The 2022

Senior Notes were issued with a $1,000 principal amount at maturity, but were sold at a

discounted price of $572.76. The conversion rate at which the notes could be converted to

Duane common stock was tied directly to the stock price on or around the time Duane offered the

2022 Senior Notes for sale and subsequently registered them to the public. Accordingly, critical

to the 2022 Senior Notes was the conversion rate. Upon the occurrence of specified triggering

events, holders of the 2022 Senior Notes were entitled to convert those notes into 14.1265 shares

of Duane common stock.

82. The S-3 discussed the note to stock conversion procedure as follows:

Holders may surrender notes for conversion into our shares ofcommon stock in any fiscal quarter commencing after June 29,2002 if, as of the last day of the preceding fiscal quarter, the saleprice of our common stock for at least 20 trading days in a periodof 30 consecutive trading days ending on the last trading day ofsuch preceding fiscal quarter is more than 110% of the accretedconversion price per share of common stock on the last day of suchpreceding fiscal quarter.

*****

The conversion trigger price per share of our common stock inrespect of each of the first 20 fiscal quarters following issuance ofthe notes is $44.60. This conversion trigger price reflects theaccreted conversion price per share of common stock, multiplied

25

by 110%. Thereafter, the accreted conversion price per share of -common stock increases each fiscal quarter by the accreted originalissue discount for the quarter.

83. Thus, for the first five years after issue, if the trading price of Duane was $44.60

during the required period, holders of the 2022 Senior Notes were entitled to convert those notes

to Duane common stock. As the Company noted, "[o]n June 20, 2002, the last reported sale

price of the common stock on the NYSE was $32.50 per share," nearly 73% of the threshold for

conversion.

84. Convertible securities can be considered to include embedded options.

Convertible securities give the holder a right to convert a given security to an alternative security.

Convertible securities can be a way for investors to hedge. They allow them to acquire a debt

instrument, for example, with its rights to interest and principal payments, without sacrificing the

chance to participate in the company's stock price appreciation. When a company does well, the

investor can convert his debenture into stock that is more valuable. When a company is less

successful, the investor can retain his debenture and receive his interest and principal payments.

85. If the price of Duane's common stock at or around the time it offered the 2022

Senior Notes for sale and registered those Notes for public sale had been far lower than the $30

range, Duane would have been forced to increase the conversion ratio to borrow the same

amount. It follows that the greater the risk that an investor will be unable to convert, that is the

greater the conversion ratio, the higher the interest rate would have had to be.

86. Thus, if Duane's stock price in April or June, when it sold 2022 Senior Notes and

registered both those notes and the underlying common stock respectively, had been

approximately $15 per share (the price to which it fell after the July 25, 2002 announcement

26

ending the Class Period) instead of approximately $32 per share, the Company would have been

forced either to increase the conversion ratio or to increase the amount of interest it was to pay or

both if it wanted to borrow the same amount as it ultimately did. This would have rendered the

2022 Notes far more expensive to sell in the first place, disabling Duane from redeeming its high

cost debt or substantially raising the cost of that redemption. Moreover, it also would have had a

deleterious dilutive effect, requiring Duane to register far more shares to cover the conversion.

Thus, Duane was motivated to maintain the price of its common stock at artificially inflated

prices to enable it to complete the sale and registration of its 2022 Senior Notes on its terms.

87. The Company also was motivated to inflate the price of its stock artificially to

reduce the costs of its acquisitions. In 1999, 2000, and 2001, the Company paid $2.1 million,

$24.6 million and $25.3 million respectively to purchase chain and individual drug stores. By

contrast, in 2002, "[d]uring the first six months of fiscal 2002, the Company acquired the

customer files of six pharmacies and the operations.. . of seven pharmacy establishments," for a

total cost, "principally paid for by the issuance of common stock," of $17.3 million.

88. Thus, Defendants were motivated to maintain the price of the Company's

common stock at artificially inflated prices to lower its interest expense and in turn promote both

greater expansion through both new store openings and acquisitions using common stock as

currency.

BACKGROUND STATEMENTS

Fourth Quarter 2001 Results and First Quarter 2002 Projections

89. In a February 19, 2002 press release, Defendants caused the Company to

announce publically its results for the fourth quarter and fiscal year ended December 29, 2001.

27

Despite the tragic events of September 11, 2001, the Company reported "record" sales and

earnings for the year and fourth quarter. According to the Company, net income for 2001 grew

8.8 percent to $24.7 million from $22.7 million in 2000. Additionally, sales during fiscal 2001 (a

52-week period) purportedly increased 14 percent to $1.14 billion from $1 billion in fiscal 2000

(a 53-week period). On a comparable 52-week basis, the Company claimed that sales improved

16.3 percent, with pharmacy sales rising 28.7 percent and front-end sales rising 9.5 percent.

90. As to the fourth quarter 2001, the Company claimed that the September 11, 2001

attacks and their aftermath reduced net profits for the year by an estimated $6.5 million and sales

by $27 million. Notwithstanding the profit reduction, the Company posted a 4.7 percent increase

in net income for the fourth quarter 2001 as compared to the same quarter in 2000 ($10 million v.

$9.55 million).

91. About those results, Defendant Cuti stated:

It is important to note that fourth quarter earnings were adverselyimpacted by the aftermath of the September 11 th disaster andsubsequent anthrax incidents which had the combined effect ofdepressing front-end sales and gross margins. ...

Clearly, our fourth quarter performance was materially impacted bythe business and consumer disruptions that occurred in New YorkCity following the tragic events of September 11 th. Therefore,reported results should not be considered as representative of theCompany's normal performance, nor indicative of the inherentpotential of the business. It is more important to recognize thatour in-depth knowledge of the metro New York market notonly enabled us to accurately project revenues for the quarter,despite the magnitude of the disruptions and the marketrelocations that occurred, but also to operate our business byappropriately controlling costs.

(Emphasis added).

28

92. Cuti stated further:

Despite the difficult conditions of fiscal 2001 and the challengesstemming from the events of September 11th, the Company'sfinancial outlook remains positive. For the first quarter 120021,the Company anticipates sales of $310 million and dilutedearnings per share between $0.21 and $0.23.... For the full 2002fiscal year, the Company anticipates that sales will totalapproximately $1.3 billion and expects to achieve diluted earningsper share between $1.62 and $1.67. ...

As we enter fiscal 2002, we remain confident in the strength ofDuane Reade and are optimistic about the long-term prospects forboth our business and market. Although front-end sales have notyet returned to pre-disaster sales growth levels, we arewitnessing a consistent improvement in general marketconditions as the city and surrounding areas adapt to the manychanges induced by the disaster. In fact, it is likely that the metroNew York area will benefit significantly in the mid-to long-termdue to the expected infusion of rebuilding capital. Based on this,our market could actually become a uniquely positive one relativeto the balance of the U.S. With respect to our performance for theupcoming year, in view of our ability to maintain our originallyscheduled store opening plan, we believe that our expectations forfiscal 2002 are achievable. Additionally, we are also lookingforward to a fair and timely resolution of our business interruptioninsurance claim which, if resolved expeditiously, will contributeadditional capital and income not currently reflected in our 2002guidance.

(Emphasis added).

93. The release qualified the above statements with boilerplate language found in

virtually every Company publication -- "It is important to note that the above expectations are the

Company's current targets and not predictions of actual performance. Actual results may differ

materially from these projections."

29

94. By touting their ability to accurately project revenues and earnings in the face of

an unpredictable disaster, Defendants lent credibility to their representations that would mislead

investors during the Class Period. Defendants' positive assurances continued the very next day.

95. On February 20, 2002, Cuti appeared on CNN's "The Money Gang." Cuti

reaffirmed Defendants' confidence in the Company's ability to project results in the aftermath of

September 11th. He stated,

we took a look at '02 and we released at the end of September thatwe thought the '02 impact was going to be about $65 million inlost volume. We're holding firm on that estimate. Our guidance,that we just released, is still projecting about that level of lostvolume versus where we would have been. That — the fourthquarter we estimated would come in at $300 million at the end ofSeptember and it did. So that sort of fortified the fact that ourlook is, in fact, the way we're trending in this market.

(Emphasis added).

96. Cuti also gave an interview to CNBC on February 20, 2002, wherein Cuti engaged

in the following question and answer session:

CUTI: I think our results are rebounding, but certainly showingthat effect.

Q: What's your overall take on the earnings? And then, if youwould, quantify to what extent because of the heavy New Yorkemphasis you ended up losing, I guess, what, $0.15? You'requantifying that $0.15?

COTT: Correct.

Q: Tell us about that.

Well, the fourth quarter clearly had the impact of 9-11. Theguidance we gave for the quarter was released at about September28. And with the shadow of 9-11 right behind us I think we tookour best stab of where we were going for the quarter. In

30

retrospect, we were virtually spot on our volume estimates. Ourmix was a little bit more toward the pharmacy, a little bit lighter inthe front end, but overall we were satisfied with the performance. Ithink in our conference call this morning we also released thefact that every subsequent month in the fourth quarter,October, November, December, has shown an improving trendin sales and most notably our year to date results through '02current day are even improved since December. So we're verypositive about where the market's going.

Q: Let's take a look, if we can get a two year chart, let's talk shareprice for a minute. You've got a range of $26 to $39 and we're sortof about $2 away from the lows here. Your guidance for next yearis a tad under estimates. So what do shareholders need to knowhere, and potential shareholders, about your stock and why theyshould either hold it or buy it if they don't?

CUT!: Well, I think the shadow of September 11 raised a specter,an aura of whether Duane Reade could survive this blow, and Ithink the fourth quarter and our guidance is saying definitively yes.I think the concern was reflected in the stock. Just prior to 9-11, wewere in the mid to high $30s and then I think the concern of thedisaster dampened the price. Hopefully the fourth quarter and ourguidance for '02 now with the fourth quarter behind us will takethat doubt away.

(Emphasis added).

97. In a March 10, 2002, Cosmetics International article, Defendants again touted

their ability to succeed in the post-9/11 New York market and again relayed their positive

outlook for 2002:

US drug store chain Duane Reade has said that its last quarterresults were seriously affected by the September 11 events, thoughit reported earnings per diluted share for the quarter and fiscal2001, ended 29 December 2001, at $ 0.42 and $ 1.20 respectively.The company also saw net sales for the quarter reach $ 300.1mn up12.2% and fiscal 2001 results reach $ 1.144bn, up 16.3%. Thecompany said that its fourth quarter results were adverselyimpacted by the terrorist events and anthrax incidents which hadthe combined effect of depressing front end sales and gross

31

margins. However, despite these events, during the year, DuaneReade opened or acquired 31 stores, closed three, and remodeled orrelocated seven stores. As of 29 December 2001, it operated 200stores in the US.

The company is optimistic about its future as well. Anthony J.Cuti, Chairman of the Board and CEO of Duane Reade said, "Aswe enter fiscal 2002, we remain confident in the strength of DuaneReade and are optimistic about the long term prospects for both ourbusiness and market." He went on to say that although front endsales have not returned to pre-September 11 levels, there is "aconsistent improvement in general market conditions as thecity [New York, US] and surrounding areas adapt to the manychanges induced by the disaster."

He added that the company believes its expectations for fiscal2002 are achievable. Duane Reade is expecting sales of $ 31Ornnin the first quarter of 2002 with sales to be around $ 1.3bn for theyear as a whole.

98. Thus, by the beginning of the Class Period, Defendants had convinced the market

that they understood the impact of New York's economic downturn, that they had included

provisions for that downturn in the Company's second quarter forecast and that the underlying

economic condition in New York City was improving. Unbeknownst to investors, however,

Duane's second quarter 2002 results revealed that the Company's front-end sales were declining

at the beginning of the Class Period and did not improve until the end of June 2002.

FALSE AND MISLEADING STATEMENTS

99. On April 1, 2002, the start of the Class Period, the Chain Drug Review published

an article entitled "Duane Reade Posts Record Sales, Profits in Fiscal '01." The article provided

that, despite the tragic events of September 11, 2001, "Duane Reade reported record sales and

fully taxed earnings for the year and quarter ended December 29." The article went on to discuss

32

the Company's fourth quarter and fiscal year 2001 results detailed above, and excerpted the

following from Defendant Cuti's February 19, 2002 commentary.

[c]learly our performance was materially impacted by the businessand consumer disruptions that occurred in New York City followingthe tragic events of September 11. Therefore, reported resultsshould not be considered as representative of the company's normalperformance, nor indicative of the inherent potential of the business.

It is more important to recognize that our in-depth knowledgeof the metro New York market not only enabled us toaccurately project revenues for the quarter, despite themagnitude of the disruptions and the market relocations thatoccurred, but also to operate our business by appropriatelycontrolling costs.

(Emphasis added).

100. The April 1, 2002, Chain Drug Review article also provided the following from

Cuti concerning the Company's outlook:

As we enter fiscal 2002 we remain confident in the strength ofDuane Reade and are optimistic about the long-term prospects forboth our business and market. Although front-end sales have notyet returned to predisaster growth levels, we are witnessing aconsistent improvement in general market conditions as thecity and surrounding areas adapt to the many changes inducedby the disaster.

In fact, it is likely that the metro New York area will benefitsignificantly in the mid- to long-term due to the expected infusionof rebuilding capital. Based on this, our market could actuallybecome a uniquely positive one relative to the balance of theUnited States.

(Emphasis added).

101. Defendants statements contained in the April 1, 2002, Chain Drug Review

concerning the Company's front-end sales were false and misleading as of April 1, 2002 because

33

Defendants failed to include the following adverse factors, which were necessary to make the

statements not misleading:

a. the Company's front-end sales were decreasing; and

b. the Company had incurred or was already incurring $1.5 million in

unexpected expenses to open 10 new stores during the quarter.

102. Defendants knew that the statements concerning the trend of the Company's

second quarter 2002 front-end sales were false and misleading because:

a. Defendants second quarter records demonstrate that the Company's front-

end sales were decreasing as of April 1 and did not improve until the end

of the second quarter. Additionally, various former employees

independently confirmed that management, including Defendant Cuti

reviewed one-third of the Company's second quarter sales and earnings

results on a daily and weekly basis, which demonstrated that front-end

sales and earnings were declining by April 1, 2002. Specifically,

management, including the Individual Defendants, (1) received and

reviewed real time daily reports of the Company's sales figures compiled

from the Company's POS computer system and broken down (in dollar

amounts) by district and by pharmacy and front-end sales categories; (2)

received formal weekly reports that were detailed and categorized by

merchandise categories such as aspirin, depilatory, cosmetics, fragrances,

general merchandising (such as holiday merchandise), and various drug

categories, which the Company used to determine what promotions were

34

working and how to revise earnings estimates; and (3) met every Tuesday

for an executive staff meeting wherein weekly sales reports were gone

over in "great detail". W-1 further confirmed that the reports included

"very specific information" that was broken down by detailed categories

within pharmacy and front-end sales all of which advised Defendants that

front-end sales were decreasing in the second quarter.

b. management knew by April 1, 2002 that they were going to incur certain

costs upon opening 10 stores during the Class Period as it typically took

more than 6 months to bring a store on line, and management knew about

the new store openings more than three months in advance of the actual

opening. Moreover, once management knew a store was "coming open"

they had a timetable that they followed which was "nearly always on

track." Additionally, W-8 confirmed that the Company was "behind" on

its new store opening plan at the outset of second quarter 2002 and

"pushed" a number of openings from the first quarter into the second

quarter. This schedule change caused extra costs to be incurred in the

second quarter. Indeed, W-8 opined that the $1.5 million in expenses that

the Company claimed to have incurred in the second quarter seemed like a

"very low number." Additionally, W-8 stated that the number in fact was

higher, but not disclosed to the public, as the Company improperly

characterized certain employee salaries as "capital expenses" and

35

amortized them over the life of certain stores rather than expensing them

in the second quarter.

103. Defendants intentionally and/or recklessly made and failed to update and correct

the April 1, 2002 statements so that:

a. Defendants could effectuate the last in a series of drugstore asset purchases

from Masta Pharmacy using the Company's artificially inflated common

stock as currency during the Class Period. Indeed, on May 24, 2002,

Duane issued Company common stock to Masta Pharmacy as

consideration for drugstore assets. The purchase followed similar stock-

based transactions on January 30, February 6, and February 8, March 4,

and April 8, 2002; and

b. Defendants could consummate the aforementioned April 10, 2002, $381.5

million convertible note offering and 5.389 million share issuance. Had

the truth been disclosed to the market concerning the Company's true

financial condition and Defendants' revenue manipulation schemes, the

stock price would have fallen and Defendants would not have been able to

consummate the offering on the stated terms. Indeed, Defendants would

have had to issue a great deal more shares of stock to effectuate the

transaction and net the Company $210 million in proceeds — money

needed to retire the Company's high-priced debt in furtherance of the

Company's expansion efforts.

36

104. Furthermore, Defendants' statements in the April 1, 2002 article touting their "in-

depth knowledge of the metro New York market" and how that knowledge "enabled [them] to

accurately project revenues" in 2001 added credibility to the Defendants' upcoming earnings

guidance for the second quarter 2002. Accordingly, Defendants' statements assessing the

condition of the New York market, including the impact of September 11, 2001 terrorist attacks,

and how it would affect the Company's financial position, mislead and conditioned investors to

believe that Defendants' future statements properly accounted for the post-9/11 economic

environment.

First Quarter Results and Second Quarter Projections

105. On April 25, 2002, the Company released a statement touting "record sales and

earnings" for the first quarter 2002 ending March 30, 2002. According to the release, the

Company's net sales increased 12.5 percent to $305.8 million and net income increased 100

percent from $2.6 million to $5.3 million, which was in-line with Company estimates. In

breaking down the first quarter earnings, the Company reported that pharmacy same store sales

increased 15.8 percent whereas same store front-end sales declined 1.3 percent. The Company

attributed the decline to "the temporary dampening of front-end sales in the post-September 11

period and also ... to a $0.4 million LIFO provision in the period." However, the Company later

that day claimed that while down from pre-9/11 levels, front-end sales showed an increasing

trend throughout the first quarter that was expected to remain consistent, j, was better

than January, March was better than February, and April through June would remain consistent

with March levels.

37

106. Having witnessed this purported front-end sales trend through his daily review of

the Company's first quarter finances and one-third of the Company's second quarter sales and

earnings information, as detailed above, Defendant Cuti gave a positive outlook for the second

quarter 2002. In fact, as part of the April 25, 2002 press release, Cuti stated that the Company

expected to realize $335 million in net sales and earnings per share in the $.40 - $.44 range.

Commenting on the Company's future, Cuti stated the following in the press release:

We are particularly pleased with the record-breaking improvementin the rate of generic prescriptions filled during the first quarter andwe expect that this will go a long way toward improving pharmacygross margins going forward. Also noteworthy is the fact that werecently completed a $218 million convertible notes offering,which will enable us to significantly improve our capitalstructure and will allow us to more readily achieve — andpotentially surpass — our earnings growth objectives. ...

Looking to the balance of the year, we have a positive outlookand remain confident in our ability to achieve our sales andearnings targets. With respect to the second quarter weanticipate achieving sales of approximately $335 million andexpect diluted earnings per share will range from $0.40 to$0.44. For the full fiscal year, we expect revenue growth in therange of 15% to 18% over fiscal 2001 and net earnings between$1.64 and $1.68 per diluted share, exclusive of the one-time chargefor the accounting change as well as any extraordinary costs relatedto the retirement of debt with the proceeds of the convertible noteoffering.

(Emphasis added).

107. Unbeknownst to investors, Defendants' statements in the April 25 th press release

assuring investors that the Company would recognize income of $.40 - $.44 per share in less than

two months were false and misleading when made as Defendants failed to include the following

adverse factors, which were necessary to make the statements not misleading:

38

a. By April 25, 2002, with one month of the second quarter already complete,

Defendants knew the Company's front-end sales were decreasing; and

b. the Company had incurred or was incurring $1.5 million in unexpected

expenses to open 10 new stores during the quarter.

108. Defendants' statements were false and misleading because:








management, including Cuti, (1) received and reviewed real time daily

reports of the Company's sales figures compiled from the Company's POS

computer system and broken down (in dollar amounts) by district and by

pharmacy and front-end sales categories; (2) received formal weekly

reports that were detailed and categorized by merchandise categories such

as aspirin, depilatory, cosmetics, fragrances, general merchandising (such

as holiday merchandise), and various drug categories, which the Company

used to determine what promotions were working and how to revise

earnings estimates; and (3) met every Tuesday for an executive staff

meeting wherein weekly sales reports were gone over in "great detail". W-

39

1 further confirmed that the reports included "very specific information"

that was broken down by detailed categories within pharmacy and front-

end sales all of which advised Defendants that front-end sales were

decreasing in the second quarter.

b. management knew on April 25 that they were going to incur certain costs

upon opening 10 stores during the Class Period as it typically took more

than 6 months to bring a store on line, and management knew about the

new store openings more than three months in advance of the actual














40

109. Also on April 25, 2002, Defendants Cuti and Henry participated in a conference

call with investors and stock market analysts and provided the following:

a. Henry stated that the New York economy was "coming back" to pre-9/11

levels, and as a result front-end sales trends would remain consistent

with first quarter figures, which showed improvement over fourth

quarter 2001;

b. Cuti confirmed the Company's intent to move ahead with an aggressive

expansion campaign involving the opening of 35 new stores in 2002; 9 in

the second quarter.

c. Henry stated that "shrink" figures were "running about where we

expected." Additionally, he stated that "a lot of the shrink initiatives are

starting to bear fruit in terms of the physical security and apprehension

occurring from the review of data."

d. Cuti reiterated second quarter guidance — same store sales would increase

6.5 percent, and front-end sales and pharmacy sales would remain

consistent with the first quarter figures and increase 16.5 percent,

respectively.

110. A portion of the conference call transcript concerning the Company's positive

second quarter guidance, reads as follows:

Q: Those numbers seems slightly higher than the previousnumbers that you were throwing around. So is your view of NewYork improved from two months ago?

41

A: (John Henry) We have seen some real strength in the pharmacyend of the business. The guidance numbers for Feb. were notdealing with the generic conversion rate. We are still showingpretty healthy same store sales comps. If there is one area in salesthat we are being somewhat conservative on is front-end. We arelooking at the economy and what is going on in the City. It isprudent to continue to be cautious on guidance for front-endcomps.

111. Unbeknownst to investors, Defendants' statements in the April 25, 2002

conference call assuring investors that: (1) the Company was on track to achieve its earnings

growth objectives; (2) the second quarter sales were continuing the sales trend from its "record"

first quarter; (3) the New York market was continuing to improve; (4) Defendants' had

"conservatively" accounted for any negative post-9/11 market factors in its guidance; and (5) the

Company would recognize income of $.40 - $.44 per share in less than two months were false

and misleading when made as Defendants failed to include the following adverse factors, which

were necessary to make the statements not misleading:


Defendants knew that the Company's front-end sales were decreasing; and

b. By April 25, 2002, with one month of the second quarter already complete,

Defendants knew that the Company had incurred or was incurring $1.5

million in unexpected expenses to open 10 new stores during the quarter.

112. Defendants statements were false and misleading because:




42























43














113. The Company's "record" first quarter and positive outlook for the second quarter

were further promoted on an April 25, 2002, interview between Defendant Cuti and Ted David of

CNBC's "Morning Call." The transcript of the interview provides the following, in relevant part:

DAVID: Well, they say Duane Reade loves New York and NewYork loves Duane Reade and I guess investors might also becauseyou've been doing rather well here. Tell us about earnings andwhat you told them about the conference call.

CUTI: Well, we had a very nice quarter. It was along ourpredictions. We see Manhattan and the outer boroughs gettingbetter and better with each passing month. I explained in ourconference call that our front end sales, our non-prescriptionsales were strengthening from January to March in a verypredictable trend. And our pharmacy had a surprise. Our

44

pharmacy was actually stronger than we thought. We were very,very successful in getting generic drugs sold at a higher rate thanwe had anticipated. So overall, it's a very, very healthy and pleasantperformance.

DAVID: What special challenges remain post-9/11? You and Italked immediately after that during that quarter. And specifically,your properties in lower Manhattan several of them damaged, and,if not damaged, you saw less traffic. You estimated the impact ofthese events reduced net earnings by about $3.7 million or $0.15 ashare. Where are things now in terms of resolving that?

CUT!: Well, we believe the $0.15 a share impact for this year,which is built into our guidance, is still prudent to continue toproject at that level. The downtown area around the World TradeCenter is still quite depressed and the traffic levels down thereremain far subdued as compared to pre-9/11. We really don'tbelieve the World Trade Center area is going to be a strong viablemarket for about another three to five years, although there isactivity and there's a slow resurgence in the periphery. We thinkthat market is going to be slow to return.

On the other hand, the rest of New York is coming back quitenicely. Mayor Bloomberg has lifted some of the restrictions on thebridge and tunnel crossings. He's opened the Battery Tunnel. Andthat increased customer traffic and flow and that ease of accessis really showing up in our numbers now....

DAVID: The last time you were here you had announced storenumber 200. What plans do you have to expand further, if any?

CUT!: Well, we've got 10 stores open in the first quarter. We'vegot another nine planned for the second quarter. Our annualobjective is 35 stores. We'll be at 235 by year end.

(Emphasis added).

114. Unbeknownst to investors, Defendants' statements in the CNBC interview

assuring investors that:(1) the Company was on track to achieve its earnings growth objectives;

(2) the second quarter front-end sales were continuing in a "predictable trend" from its "record"

45

first quarter; (3) the New York market was continuing to improve; and (4) the Company would

recognize income of $.40 - $.44 per share in less than two months were false and misleading

when made as Defendants failed to include the following adverse factors, which were necessary

to make the statements not misleading:



b. By April 25, 2002, with one month of the second quarter already complete,

Defendants knew that the Company had incurred or was already incurring

$1.5 million in unexpected expenses to open 10 new stores during the

quarter.

115. Defendants knew that the statements during the April 25, 2002 CNBC interview

were false and misleading because:











46


reports that were detailed and categorized by merchandise categories such .




earnings estimates, above); and (3) met every Tuesday for an executive

staff meeting wherein weekly sales reports were gone over in "great

detail". W-1 further confirmed that the reports included "very specific

information" that was broken down by detailed categories within

pharmacy and front-end sales all of which advised Defendants that front-

end sales were decreasing in the second quarter.












47







116. Defendants' April 25, 2002, false and misleading statements and omissions

swayed stock market analysts.

a. On April 25, 2002, Sun trust Robinson Humphrey released a report

entitled "DRD: Improving Trends/Sector's Lowest Valuation/Reiterate

BUY." The analyst stated the following in response to the April 25th

conference call with investors: (1) "Importantly, front-end business

improved sequentially throughout the [first] quarter, and we expect

that trend to continue;" (2) "Business is improving. Pharmacy comps

are strong and the front-end appears to be rebounding as traffic and

the economy improve;" (3) "Management reiterated earnings guidance."

Additionally, Sun trust stated, "[w]e reiterate our BUY rating on the shares

due to improving visibility on a number of different fronts and the sector's

most attractive valuation."

(Emphasis added).

b. On April 26, 2002, J.P. Morgan Securities, Inc. also gave the Company's

stock a "Buy" rating noting: (1) that management's guidance was "realistic

48

and possibly conservative" as it "factored in assumptions for a 'flattish'

economy;" (2) Defendants "attributed [first quarter] front-end

improvements in part to the easing of access restriction sin to the city and

improving customer traffic, and sequentially improving trends are

expected to continue;" (3) the Company's "expansion strategy is on track

to meet its target for 35 store openings by year-end;" and (4) "the company

believes that metro New York is well-poised to outpace the national

economy." The analyst maintained its second quarter guidance of $.42 per

share, in part, because "[for the upcoming second quarter, the

company expects a slight sequential up-tick from current sales trends

as the front-end continues to recover."

(Emphasis added).

c. On April 29, 2002, analyst Deutsch Bank Securities Inc., in a report

entitled "The Rebound Continues," gave the Company a "Buy" rating

commenting that "[w]hile front-end sales have remained relatively modest,

pharmacy has been comping in the high teens. Though we expect a tough

retail environment in 11102, we believe Duane Reade's strong

positioning in the market cushions it relative t its competitors from a

slowdown."

(Emphasis added).

49

117. Defendants' multitude of false and misleading statements and omissions, and

subsequent analyst support caused Duane's stock price to increase on April 25th from $32.86 to

$33.17 per share.

118. On May 14, 2002, the Company recorded its first quarter results on Form 10-Q

which was signed by Defendant Cuti and filed with the SEC. In violation of 17 C.F.R. §

229.303, with knowledge or reckless disregard of adverse trends, Defendants failed to disclose in

the 10-Q certain trends, including but not limited to a decline in front-end sales, an increase in

shrink figures and an increase in new store opening costs that were having and/or were going to

have a material adverse impact on the Company's second quarter sales and earnings.

119. On April 29, 2002, Defendants positive outlook was reiterated in a Chain Drug

Review article entitled "Duane Reade Is Undaunted in the Wake of September 11." The article

provides, in relevant part:

The tragedy of September 11, while changing Duane Reade'sgrowth strategy, has left the confidence of chairman and chiefexecutive officer Tony Cuti undiminished.

Money for rebuilding that is pouring into the city from public andprivate sources may actually lift New York out of the nationalrecession sooner than other cities, he says.

"We're very, very hopeful that the recession will be temporaryand that the pendulum will swing even more here than else-where," he notes, "and our belief is solidifying with everypassing week."

The drug chain expects to add 35 stores this year, five more than itdid in 2001, says Cuti.

(Emphasis added).

50

120. Defendants, through the April 29` h article, also lent credibility to their second

quarter outlook by touting their "in-depth knowledge" of the New York market,

Duane Reade lost two outlets in the terrorist attacks, one at 5World Trade Center and another at 225 Broadway. Nineteen unitswere closed temporarily, but all were reopened by the fourthquarter, and the losses are covered by business interruptioninsurance. But rather than dwell on the losses, the retailer'sexecutives have focused on how to recoup the business. Theyhave studied changes in Manhattan's pedestrian and bus andsubway traffic, and opened new outlets accordingly. Anestimated 150,000 to 200,000 workers have moved from thefinancial district, according to Cuti.

"The downtown flow has been upset," he says. "We've mappedevery tenant who was in the World Trade Center. We knowwhere they moved and how many people moved and whetherit's permanent or temporary. We've superimposed that overour store configuration to see where there's been a significantincrease in Duane Reade shoppers and no Duane Reade storeor a Duane Reade store that really can't handle the traffic.That's where we've made moves to adjust." ...

Cuti stresses that the competitive picture in Manhattan is thebrightest it has been in years, pointing out that Duane Reade'sbiggest competitors have retrenched or stood pat. Against thatbackdrop Duane Reade will press its advantage — namely itsurban retailing know-how.

(Emphasis added).

121. Unbeknownst to investors, the statements contained in the April 29, 2002, Chain

Drug Review concerning the improvement in the New York sales market and its positive effect

on the Company were false and misleading and should have been updated by Defendants as the

statements did not incorporate certain adverse factors, which were necessary to make the

statements not misleading. Specifically, the following adverse factors, which were eroding the

51

Company's second quarter profits, should have been disclosed by Defendants — the Company's

front-end sales were decreasing.

122. Defendants knew that the statements contained in the April 29, 2002 article were

false and misleading and should have been updated because:


end sales were decreasing as of April 29 th and did not improve until the

end of the second quarter. Additionally, various former employees













earnings estimates, above); and (3) met every Tuesday for an executive

staff meeting wherein weekly sales reports were gone over in "great

detail". W-1 further confirmed that the reports included "very specific

52

information" that was broken down by detailed categories within

pharmacy and front-end sales all of which advised Defendants that front-

end sales were decreasing in the second quarter.

123. Likewise, another April 29, 2002 article, this one from the Drug Store News

entitled "Ramping Up Urban Attack Plan," lent more credibility to the Defendants prior false and

misleading statement as it quoted the following from a recent speech given by Defendant Cuti to

analysts and investors, "[u]rban expertise is clearly one of our most distinguishing features, [as a]

management team and a company. What urban expertise really says is that you really need to be

willing to flex your store model, adapt the way you operate your store [and] violate a number of

fundamental retail rules." The article went on to discuss how Defendants' purported "expertise"

would help them carry out their plan to open more stores and maintain the Company's

entrenched position as New York's most prolific drug store.

124. Defendants statements on April 25 th and those contained in the April 296 article,

were reiterated in a Mary 13, 2002 MMR article entitled "Duane Reade's Unique Market." Like

the Company's multiple statements on April 25 th and the April 29th Chain Drug Review article,

the MMR article stresses that: (1) Defendants "remain confident that their 203-store chain can

continue to grow and flourish;" (2) Duane "expects to open another 35 stores" in 2002; and (3)

Defendants' see the New York economy improving "with every passing week."

125. Unbeknownst to investors, the statements contained in the May 13, 2002, M/vIR

article concerning the improvement in the New York sales market and its positive effect on the

Company were false and misleading and should have been updated by Defendants as the


53


Company's second quarter profits, should have been disclosed by Defendants -- the Company's

front-end sales were decreasing.

126. Defendants knew that the statements contained in the May 13, 2002 article were



end sales were decreasing as of May 13 th and did not improve until the end





sales and earnings were declining by May 13, 2002. Specifically,

management, including Cuti, (1) received and reviewed real time daily ' •







used to determine what promotions were working and how to revise.



54

I further confirmed that the reports included "very specific information"




127. Similarly, on May 20, 2002, the Drug Store News published an article

commenting on the Company's first quarter earnings which quoted Cuti as saying, "the New

York market continues to improve steadily ... which should in turn have a positive impact on

sales trends in our business." The article also confirmed Defendants' April 25, 2002 guidance of

$335 million in sales and $.40 - $.44 per share earnings for the second quarter.

128. Unbeknownst to investors, the statements contained in the May 20, 2002, Drug

Store News article concerning the improvement in the Duane's sales and second quarter earnings

guidance were false and misleading and should have been updated by Defendants as the



Company's second quarter profits, should have been disclosed by Defendants:

a. By May 20, 2002, with one month of the second quarter already complete,


b. By May 20, 2002, with one month of the second quarter already complete,

Defendants knew that the Company had incurred or was already incurring

$1.5 million in unexpected expenses to open 10 new stores during the

quarter that were eroding second quarter profit margins.

55

129. Defendants knew that the statements contained in the May 20, 2002 article were



end sales were decreasing as of May 20 and did not improve until the end





sales and earnings were declining as of May 20• Specifically,













56



b. management knew on May 20 that they were going to incur certain costs

















130. On June 10, 2002, less than three weeks before the end of the second quarter, the

Chain Drug Review published an article concerning Duane's first quarter results. The article

provides select commentary from Cuti on the first quarter and his outlook for the second quarter.

57

The New York market continues to improve steadily eachmonth, as a number of barriers, such as bridge and tunnel carpoolrestrictions, have been relaxed. This has resulted in improvedDuane Reade [sic] falls into the red commuter patterns, whichshould in turn have a positive impact on the sales trends in ourbusiness. ...

He adds that a recently completed $ 218 million convertible noteoffering will enable the company "to significantly improve ourcapital structure and allow us to more readily achieve - andpotentially surpass - our earnings growth objectives."

Looking ahead, Cuti says management remains confident thatsales and profit targets will be met.

(Emphasis added).

131. Unbeknownst to investors, the statements contained in the June 10, 2002, Chain

Drug Review article were false and misleading and should have been updated by Defendants as

the statements did not incorporate certain adverse factors, which were necessary to make the


Company's second quarter profits, should have been disclosed by Defendants:

a. with less than three weeks left in the second quarter, Defendants knew that

the Company's front-end sales for the quarter were decreasing and would

cause them to miss earnings estimates terribly;

b. the Company was experiencing high levels of "shrink"; and

c. the Company had incurred or was incurring an additional $1.5 million in

expenses allegedly not contemplated at the outset of the Class Period to

open 10 new stores during the quarter.

58

132. Defendants knew and/or were reckless in not knowing that the June 10, 2002

statements were false and misleading and should have been updated because:


end sales were decreasing as of June 10 and did not improve until the end

of that month. Additionally, various former employees independently

confirmed that management, including Defendant Cuti reviewed one-third

of the Company's second quarter sales and earnings results on a daily and

weekly basis, which demonstrated that front-end sales and earnings were

declining as of June 10, 2002. Specifically, management, including Cuti,

(1) received and reviewed real time daily reports of the Company's sales

figures compiled from the Company's POS computer system and broken

down (in dollar amounts) by district and by pharmacy and front-end sales

categories; (2) received formal weekly reports that were detailed and

categorized by merchandise categories such as aspirin, depilatory,

cosmetics, fragrances, general merchandising (such as holiday

merchandise), and various drug categories, which the Company used to

determine what promotions were working and how to revise earnings

estimates; and (3) met every Tuesday for an executive staff meeting

wherein weekly sales reports were gone over in "great detail". W-1 further

confirmed that the reports included "very specific information" that was

broken down by detailed categories within pharmacy and front-end sales

59

all of which advised Defendants that front-end sales were decreasing in the

second quarter.

b. management, including Defendant Cuti, guarded against and monitored for

"shrink" so closely that Defendants must have known that it was occurring

with a third of the Class Period already on the books, which Defendants

reviewed on a daily and weekly basis. Indeed, the close monitoring and

policy initiatives regarding "shrink" as told by former employees included:

(1) monitoring of inventory levels at all times through the POS/RS6000

computer system, so any shortage would have been recognized by

management on a daily basis; (2) prosecuting shoplifters to such an extent

that theft was kept to a minimum as compared to other similar stores; (3)

recording and correcting vendor errors when they occurred; and (4) firing

managers "if their stores had greater than 5% shrink".

c. management knew on June 10 th that they were going to incur certain costs






track." Additionally, confirmed that the Company was "behind" on its

new store opening plan at the outset of second quarter 2002 and "pushed"

a number of openings from the first quarter into the second quarter. This

60

schedule change caused extra costs to be incurred in the second quarter.

Indeed, W-8 opined that the $1.5 million in expenses that the Company .

claimed to have incurred in the second quarter seemed like a "very low

number." Additionally, W-8 stated that the number in fact was higher, but

not disclosed to the public, as the Company improperly characterized

certain employee salaries as "capital expenses" and amortized them over

the life of certain stores rather than expensing them in the second quarter.

133. The reiteration throughout the quarter of Defendants' initial positive guidance

outlook, without the benefit of a truthful update from Defendants, caused analysts to continue

recommending the stock thereby deceiving and damaging unsuspecting investors.

a. On May 31, 2002, Sun trust Robinson Humphrey, noting that the May

"business seemed to be solid for ... drug retail," reiterated its "Buy" rating

for the Company calling it the "[blest combination of quality/growth/PEG

valuation."

b. On June 5, 2002, Sun trust Robinson Humphrey published a report entitled

"DRD: Improving Visibility; Reiterate BUY Rating." The analyst stated,

in part:

[w]e reiterate our BUY rating on DuaneReade for the following reasons: we believethat business levels continue to stabilize, inpart given the stronger front-end salesnumbers reported yesterday by the nationalplayers. We estimate the [sic] DRD's front-end comps have recovered to more flattishterritory, versus the significant declines inthe wake of September 11. ... Catalysts

61

include the expected acceleration in salesand well as possible modest upside tonumbers.

(Emphasis added).

c. On June 19, 2002, Sun trust Robinson Humphrey advised investors to

remove Coors stock from their portfolio and replace it with a full position

in Duane as Duane's earnings "[e]stimates appear to have bottomed

recently (two months ago). DRD's earning are expected to grow 38% this

year and 20% next year."

d. On July 11, 2002, Sun trust Robinson Humphrey reiterated its "Buy"

rating for Duane.

134. Like the April 25 and 29, May 13 and 20, and June 10 publications discussed

above, Defendants failed to correct the false and misleading information relied upon by Sun trust

Robinson Humphrey in drafting the May 31, June 5, June 19 and July 11, 2002 reports identified

above, despite Defendants' obligation to do so.

135. At some point during the Class Period, analysts learned of a rumor involving a

possible damping of the Company's front-end sales. Notwithstanding the rumor, analysts

continued their unwavering support for the stock, because Defendants did nothing to update their

prior guidance and disclose the true condition of the Company.

a. On July 2, 2002, Sun trust Robinson Humphrey issued a report wherein

the analyst stated that it was trimming its second quarter estimates by 2

cents from $.43 to $.41 to reflect what it believed were slower front-end

sales. However, the analyst was influenced by the fact "that management

62

has not updated guidance from the previous $.40 to $.44 range for

2Q." The report attributed the 2 cent guidance decrease to the same

factors that the Company cited for their greater than $.20 earnings miss

only three weeks later, i.e. softer front-end sales as a result of, inter alia, a

slower New York economy and a weaker allergy season.

(Emphasis added).

b. Similarly, on July 15, 2002, JP Morgan released a report entitled "DRD-

Attractive Risk/Reward Opportunity: Reiterate Buy." Like Sun trust, JP

Morgan also trimmed its guidance by 2 cents from $.42 to $.40 on the

possibility of softer front-end sales, however, the analyst opined that the

potential risk was "more than reflected in the current valuation of DRD"

and "that if risk to the quarter was material, management would have

pre-announced earnings at an earlier date (the quarter ended June

29')." Additionally, the analyst further comforted investors with Duane's

history of properly advising the market when its earnings guidance was

incorrect — "[w]ith respect to our earnings expectations and management

guidance, recall that DRD has adjusted earnings guidance various times

since September 11th."

(Emphasis added).

136. Even well after the close of Duane's second quarter, fiscal 2002, consistent with

their refusal to update the multitude of earlier false and misleading publications during the Class

Period, Defendants failed to correct the false and misleading information relied upon by the

63

analysts in drafting the July 2 and July 15, 2002 reports identified above, despite Defendants'

obligation to do so.

137. On July 19, 2002, Standard & Poors issued a credit rating of BB-/Stable to Duane

Reade. While the rating was in line with the Company's credit history, the report shed light on

the competitive reality facing the Company in New York, its need to expand and why

Defendants' engaged in the scheme detailed herein to raise funds in furtherance of their

expansion plans. The report provided in relevant part:

New York, N.Y. - based Duane Reade is one of the largest drugchains in the New York City metropolitan area. More than half ofits 200 stores are located in Manhattan. Duane Reade is the marketleader in the New York metropolitan area with a 22% marketshare. ...

Future growth plans should bolster the company's position inits core market. Duane Reade will open 60 to 70 stores over thenext two years in the New York City area, more than half of whichwill be outside Manhattan. Still, the company faces intensecompetition from CVS and Rite Aid Corp., and it is increasingits business risk by expanding outside of its core Manhattanmarket.

Duane Reade's financial profile modestly improved followingthe company's successful secondary stock offering in June2001 and the use of the $130.6 million of proceeds to repay aportion of the amounts outstanding under its senior creditfacility.

(Emphasis added).

138. On July 22, 2002, just 3 days before Defendants were to release the Company's

second quarter results, Sun trust Robinson Humphrey reiterated its "Buy" rating. In do so, the

analyst stated that "we remain comfortable with our recently-revised $0.41 estimate. ... We look

for earnings to come in within the $0.40 to $0.42 range." Additionally, the report provided,

64

Idiespite the still-tough NYC environment, we continue to rate DRD BUY due to improving

sector conditions/investor sentiment, a compelling valuation, and the company's #1 position in a

recovering (albeit slowly) market."

139. Defendants failed to advise the analyst that the information on which it was basing

its July 22, 2002 report, was false and misleading, notwithstanding Defendants' obligation to do

so.

The Truth Emerges With the Release of Second Quarter Results

140. On July 25, 2002, Defendants issued a press release reporting disappointing sales

and earnings for the second quarter 2002. For the quarter, net sales increased 11.1 percent to

$324.8 million, however, low margin pharmacy sales were responsible for the increase, a 20.1

percent jump over the second quarter 2001. Front-end same store sales declined 1.2 percent as

compared to the same quarter in 2001 notwithstanding that the Company was operating 218

stores in 2002 versus only 187 stores in 2001.

141. The decrease in high-margin front-end sales, caused the Company's profit

margins to plummet 59% to $2.3 million, $.09 per share, from $5.7 million, $.28 per share, in

second quarter 2001. The earnings results materially missed the Company's $.40-$.44 earnings

forecast released just two months before the close of the quarter and repeatedly restated and

• relied on by analysts and the press throughout the Class Period. Moreover, Duane's receipt and

recognition of $9.4 million in pre-tax income, related to the partial payment of its September 11th

business interruption insurance claim, was the only reason why Duane was able to report the

profits it did. Had the Company not received the $9.4 million, it would have recorded a loss for

the quarter.

65

142. The Company's press release blamed the drop in front-end same store sales on the

general economic slowdown since September 11 and a weaker than expected allergy season,

despite the Company's prior representation that its "in-depth knowledge" of the market suggested

that front-end sales were trending upwards. Moreover, as alleged herein based on conversations

with former employees, Defendants reviewed the Company's sales figures on a daily basis

throughout the Class Period, knew that front-end sales were decreasing and intentionally and/or

recklessly chose not to correct the numerous statements made by third-parties throughout the

Class Period that were based on Defendants false and misleading April 25, 2002 statements.

143. In addition to the decline in front-end sales, Defendants also blamed the earnings

decline on "higher than anticipated 'shrink' results" and increased expenses from the "higher

number of new store openings" than expected during the quarter. As alleged in detail above,

Defendants knew about these expenses far in advance of the July 25, 2002 revelation and had an

obligation to disclose it sooner.

144. With respect to new store openings, the Company claimed to be opening 9 as of

April 25, 2002. In fact, the Company opened 10 during the second quarter. Information obtained

from various former employees demonstrates that Defendants knew and/or were reckless in not

knowing that 10 stores were being opened during the quarter and the costs associated therewith

long before July 25, 2002.

145. Similarly, as detailed above, any increase in "shrink" during the quarter would

have been known to Defendants as it occurred given the Company's strict theft policy and close

monitoring of vendor errors as detailed by former employee.

66

146. Defendants tried to mask their grim earnings by boosting them with the $9.4

million in insurance proceeds and then touting that earnings were $10.1 million ($.41 per share)

for the quarter before a $7.7 million charge related to its note offerings.

147. Investors responded decisively to the earnings release, selling the Company's

stock and causing its freefall 38% from $23.55 to $14.60 on July 25, 2002 on dramatically high

trading volume of 5.4 million shares, compared to average trading volume of 321,000 shares for

five trading days prior to the release.

148. Analysts responded similarly.

a. On July 26, 2002, JP Morgan downgraded the Company from "Buy" to

"Market Performer" in a report entitled "Duane Reade — Down Grade:

Low Quality, Guidance, Visibility Impaired." JP Morgan noted that "gross

margin contraction was severe," and that while the Company attributed

lower pharmacy sales to the increase in lower priced generic drugs, the

analyst "did not witness the offsetting benefit of higher margins."

Specifically, the report provided, in relevant part, as follows:

Downgrade DRD from Buy to MP — Duane Reade'sdownward earnings revision and low quality quarter(including insurance proceeds) reported yesterday caughtus off guard. Front-end promotional investment wassignificant, while margin contraction was severe (whilea corresponding lift in front-end sales did not occur, withfront-end ss sales of -1.2%). Additionally, higher rates ofgeneric utilization, which increased from 32% to 38% inthis year's second quarter, did not assist in driving higheroverall gross margins. Although Duane Reade cited thatpromotional activity this past quarter was at the expense ofthe company (company-absorbed promotions comparedwith more normalized promotions, which are typically

67

funded by vendor rebates), we find it hard to believe thatthe issues are necessarily behind us, as front-endpromotions going forward may be required to drive traffic,should the New York market remain difficult. This pastquarter's poor performance and downward earningsrevision came out of nowhere, while management hadrecently spoken relatively highly about current trendsand earnings guidance (as recently as April 26th — DRD'sQ102 earnings release). Although DRD appears relativelycheap at 12.8x our revised 2002 earnings and 5.9x 2002EBITDA (compared with 15x EPS for CVS and 7.5x and8.7x EBITDA for CVS and RAD, respectively), webelieve that a move to the sidelines is appropriate until we1) get comfort that yesterday's news is an aberration andnot a flagrant red flag (CVS pre-announced three timesbefore earnings trends started to improve for thatcompany), and 2) until the company demonstrates that ithas a better handle on its financial outlook. We aredowngrading DRD to MP from Buy, accordingly, whilewe will remain attentive to more encouraging data pointsover time in order to revisit our investment thesis. Ourrevised price target is within a range of $16-$17, while weview the company's near term risk profile as high.

Q202 earnings review - DRD reported Q202 EPSyesterday of $0.41 - above $0.39 per share in theprior year (both periods adjusted for goodwill). Atfirst glance, the reported number appears in-linewith management's $0.40-$0.44 guidance (wewere at $0.40 and street was $0.41). However,the quarter included insurance proceeds of $9.4million pretax ($0.23 per share after-tax), whichwere not expected to be received and were notincluded in company guidance, yet are includedin reported results. Without this benefit (andadjusting for $1.5 million in promotional spending-of $5 million-which apparently did not generate asales lift), BPS for the period was about $0.22 pershare-a 43.5% decline and well below our $0.40 pershare expectation. ... Gross margin erosion wassubstantial during the quarter....

68

Higher Occupancy Costs -40 Basis Points.Management highlighted higher occupancy costs(40 bps as a percentage of sales or $1.5 million) dueto a higher number of new store openings (8 storesabove plan in the first half of 2001). However, thecompany's 20 store openings through the firsthalf of 2002 do not appear to reflect substantiallyhigher than expected store openings, based onour expectations ... We believe that these costsshould be viewed as part of ongoing operations.

JP Morgan concluded by stating that:

management credibility is in question, while wehave no confidence in the company's earningsoutlook, as the downward adjustments caught usby surprise. In our opinion, shares of CVS offerbetter prospects at 15.0 x 2002 for that stock.

(Emphasis added).

b. On July 26, 2002, Merrill Lynch downgraded Duane Reade 2 notches from

"Strong Buy" to "Neutral."

c. On July 25, 2002, Sun trust Robinson Humphrey removed DRD from its

portfolios and downgraded the stock from "Buy" to "Outperform."

d. The July 26, 2002 New York Times, citing comments from Richard

Monks senior editor of Chain Drug Review, stated that "Duane Reade's

anemic quarter was a surprise."

149. In Defendants' July 25, 2002 earnings conference call, reported by the Fair

Disclosure Wire. Defendants stated Ifiront-end sales began to improve at [sic] end of June.

As of [third] quarter-to-date, front-end sales have turned positive for first time since 9-11."

(Emphasis added). Since front-end sales were down for the entire three month second quarter

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and did not improve until June, they were worsening in April and May. Moreover, as detailed

above, Defendants knew of that fact in April and May as they reviewed the Company's sales and

profit numbers on a daily basis, yet purposely mislead investors into believing that front-end

sales would remain consistent with March levels.

150. The market for Duane's common stock was open, well-developed and efficient at

all relevant times. As a result of these materially false and misleading statements and failures to

disclose, Duane's common stock traded at artificially inflated prices during the Class Period.

Plaintiff and other members of the Class purchased or otherwise acquired Duane common stock

relying upon the integrity of the market price of Duane's common stock and market information

relating to Duane, and have been damaged thereby.

151. During the Class Period, Defendants materially misled the investing public,

thereby inflating the price of Duane common stock, by publicly issuing false and misleading

statements and omitting to disclose material facts necessary to make Defendants' statements, as

set forth herein, not false and misleading. Said statements and omissions were materially false

and misleading in that they failed to disclose material adverse information and misrepresented

the truth about the Company, its business and operations, as alleged herein.

152. At all relevant times, the material misrepresentations and omissions particularized

in this Complaint directly or proximately caused or were a substantial contributing cause of the

damages sustained by Plaintiff and other members of the Class. As described herein, during the

Class Period, Defendants made or caused to be made a series of materially false or misleading

statements about Duane's business, prospects and operations. These material misstatements and

omissions had the cause and effect of creating in the market an unrealistically positive

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assessment of Duane and its business, prospects and operations, thus causing the Company's

common stock to be overvalued and artificially inflated at all relevant times. Defendants'

materially false and misleading statements during the Class Period resulted in Plaintiff and other

members of the Class purchasing the Company's common stock at artificially inflated prices,

thus causing the damages complained of herein.

PLAINTIFF'S CLASS ACTION ALLEGATIONS

153. Plaintiff brings this action as a class action pursuant to Federal Rule of Civil

Procedure 23(a) and (b)(3) on behalf of a class consisting of all those who purchased or

otherwise acquired the common stock of Duane between April 25, 2002 and July 24, 2002,

inclusive, and who were damaged thereby (the "Class"). 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.

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

impracticable. Throughout the Class Period, Duane common shares were actively traded on the

NYSE. Currently, the Company has over 23 million shares of common stock issued and

outstanding. While the exact number of Class members is unknown to Plaintiff at this time and

can only be ascertained through appropriate discovery, Plaintiff believes that there are hundreds

or thousands of members in the proposed Class. Record owners and other members of the Class

may be identified from records maintained by Duane or its transfer agent and may be notified of

the pendency of this action by mail, using the form of notice similar to that customarily used in

securities class actions.

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155. Plaintiffs' claims are typical of the claims of the members of the Class as all

members of the Class were similarly affected by Defendants' wrongful conduct in violation of

federal law.

156. Plaintiff will fairly and adequately protect the interests of the members of the

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

157. Common questions of law and fact exist as to all Members of the Class and

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

questions of law and fact common to the Class are:

a. whether the federal securities laws were violated by Defendants' acts as

alleged herein;

b. whether statements made by Defendants to the investing public during the

Class Period failed to disclose material facts about the business and

operations of Duane; and

c. to what extent the members of the Class have sustained damages and the

proper measure of damages.

158. 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 Class members may be relatively small, the expense and

burden of individual litigation make it impossible for 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.

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

159. At all relevant times, the market for Duane common stock was an efficient market

for the following reasons, among others:

a. Duane's stock met the requirements for listing, and was listed and actively

traded on the NYSE, a highly efficient and automated market;

b. As a regulated issuer, Duane filed periodic public reports with the SEC;

c. Duane regularly communicated with public investors via established

market communication mechanisms, including through regular

disseminations of press releases on the 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;

d. Duane was followed by at least 3 securities analysts employed by major

brokerage firms who wrote reports that were distributed to the sales force

and certain customers of their respective brokerage firms. Each of these

reports was publicly available and entered the public marketplace;

e. As of April 1, 2002, the Company had 23,806,237 shares outstanding, with

a float of 23.78 million shares. Average weekly volume during the Class

Period was 399,911 shares, 1.7% of the float;

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f. The price of the Company's common stock reacted almost immediately to

news releases by the Company as evidenced by the precipitous decline

caused by Defendants' revelation of their fraud on July 25, 2002; and

g- The Company was eligible to register securities on SEC Form S-3, as

evidenced by its filing such a registration statement during the Class

Period.

161. As a result of the foregoing, the market for Duane's common stock promptly

digested current information regarding Duane from all publicly available sources and reflected

such information in Duane's stock price. Under these circumstances, all purchasers of Duane's

common stock during the Class Period suffered similar injury through their purchases at

artificially inflated prices and a presumption of reliance applies.

FIRST CLAIMViolation Of Section 10(b) Of

The Exchange Act And Rule 10b-5Promulgated Thereunder Against All Defendants

162. Plaintiff repeats and realleges each and every allegation contained above as if fully

set forth herein.

163. During the Class Period, Defendants carried out a plan, scheme and course of

conduct which was intended to and, throughout the Class Period, did: (i) deceive the investing

public, including Plaintiff and other Class members, as alleged herein; and (ii) cause Plaintiff and

other members of the Class to purchase Duane common stock at artificially inflated prices. In

furtherance of this unlawful scheme, plan and course of conduct, Defendants, and each of them,

took the actions set forth herein.

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164. Defendants: (a) employed devices, schemes, and artifices to defraud; (b) made

untrue statements of material fact and/or omitted to state material facts necessary to make the

statements not misleading; and (c) engaged in acts, practices, and a course of business which

operated as a fraud and deceit upon the purchasers of the Company's common stock in an effort

to maintain artificially high market prices for Duane's securities in violation of Section 10(b) of

the Exchange Act and Rule 10b-5. All Defendants are sued either as primary participants in the

wrongful and illegal conduct charged herein or as controlling persons as alleged below.

165. 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,

operations and future prospects of Duane as specified herein.

166. These Defendants employed devices, schemes and artifices to defraud, while in

possession of material adverse non-public information, and engaged in acts, practices, and a

course of conduct as alleged herein in an effort to assure investors of Duane's value and

performance and continued substantial growth, which included the making of, or the

participation in the making of, untrue statements of material facts and omitting to state material

facts necessary in order to make the statements made about Duane and its business operations

and future prospects in the 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 Duane common

stock during the Class Period.

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167. The Individual Defendants' primary liability, and controlling person liability, in

addition to the actions alleged herein above, arises from the following facts: (i) they were the

senior executives at the Company during the Class Period; (ii) they, by virtue of their

responsibilities and activities as the senior executives of the Company were privy to and

participated in the creation, development and reporting of the Company's internal budgets, plans,

projections and/or reports.

168. The 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 they failed to

ascertain and to disclose such facts, even though such facts were available to them. Such

Defendants' material misrepresentations and/or omissions were done knowingly or recklessly

and for the purpose and effect of concealing Duane's operating condition and future business

prospects from the investing public and supporting the artificially inflated price of its common

stock. As demonstrated by Defendants' alleged misstatements during the Class Period,

Defendants, if they did not have actual knowledge of the misrepresentations and omissions

alleged, were reckless in failing to obtain such knowledge by deliberately refraining from taking

those steps necessary to discover whether those statements were misleading.

169. As a result of the dissemination of the materially misleading information and

failure to disclose material facts, as set forth above, the market price of Duane's common stock

was artificially inflated during the Class Period. In ignorance of the fact that market prices of

Duane's publicly-traded common stock were artificially inflated, and relying directly or indirectly

on the 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

76

recklessly disregarded by Defendants but not disclosed in public statements by Defendants during

the Class Period, Plaintiff and the other members of the Class acquired Duane common stock

during the Class Period at artificially high prices and were damaged thereby.

170. At the time of said misrepresentations and omissions, Plaintiff and other members

of the Class had no knowledge that they were misleading, and believed them to be true. Had

Plaintiff and the other members of the Class and the marketplace known the truth regarding the

material problems that Duane was experiencing, which were not disclosed by Defendants,

Plaintiff and other members of the Class would not have purchased or otherwise acquired their

Duane common stock, or, if they had acquired such common stock during the Class Period, they

would not have done so at the artificially inflated prices which they paid.

171. By virtue of the foregoing, Defendants have violated Section 10(b) of the

Exchange Act, and Rule 10b-5 promulgated under Section 10(b).

172. 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 of

the Company's common stock during the Class Period.

SECOND CLAIMViolation Of Section 20(a) Of

The Exchange Act Against the Individual Defendants

173. Plaintiff repeats and realleges each and every allegation contained above as if fully

set forth herein.

174. The Individual Defendants acted as the controlling persons of Duane within the

meaning of Section 20(a) of the Exchange Act as alleged herein. The Individual Defendants had

the power to influence and control and did influence and control, directly or indirectly, the

77

decision-making of the Company, including the content and dissemination of the various

statements that Plaintiff contends are misleading. The Individual Defendants signed certain SEC

filings, were quoted in the news releases, and/or had the ability to prevent the issuance of the

alleged mistatements or to cause the statements to be corrected.

175. As set forth above, the Defendants each violated Section 10(b) and Rule 10b-5 by

their acts and omissions as alleged in this Complaint. By virtue of their being controlling

persons, the Individual Defendants are liable pursuant to Section 20(a) of the Exchange Act. As

a direct and proximate result of the Individual Defendants wrongful conduct, Plaintiff and other

members of the Class suffered damages in connection with their purchases of the Company's

common stock during the Class Period.

WHEREFORE, Plaintiff prays for relief and judgment, as follows:

A. Determining that this action is a proper class action,

B. Awarding compensatory damages in favor of Plaintiff and the other Class

members against all Defendants, 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.

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AIRY TRIAL DEMANDED

Plaintiff hereby demands a trial by jury.

Dated: February 3, 2003

BERNSTEIN LIEBHARD & LIFSHITZ, LLP

By:iA-7 71:( el E. Lifshitz ML-2616)

Gregory M. Egleston (GE-1932)10 East 40th StreetNew York, NY 10016Tel: (212) 779-1414

Liaison Counsel for the Class

Jacob A. Goldberg, Esq.Andrew L. Zivitz, Esq.SCHIFFRIN & BARROWAY, LLP

,Three Bala Plaza East; Suite 400Bala Cynwyd, Pennsylvania 19004Tel: (610) 667-7706Fax: (610) 667-7056

Lead Counsel for the Class

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CERTIFICATE OF SERVICE

The undersigned certifies that a copy of the attached was served upon the following

counsel of record in the consolidated action filed in this Court, First Class Mail prepaid this 31

day of February, 2002:

Counsel for Plaintiffs:

Kenneth Elan, Esq. Mark Gardy, Esq.LAW OFFICE OF KENNETH A. ELAN ABBEY GARDY, LLP217 Broadway 212 East 39th StreetNew York, NY 10007 New York, NY 10016

Deborah Gross, Esq. Charles Piven, Esq.LAW OFFICES OF BERNARD M. LAW OFFICES OF CHARLES J. PIVENGROSS World Trade Center - Baltimore1515 Locust Street 401 East Pratt Street, Suite 2525Philadelphia, PA 19102 Baltimore, MD 21202

Evan Smith, Esq. Paul Geller, Esq.BRODSKY & SMITH, LLC CAULEY GELLER BOWMAN &11 Bala Avenue COATES, LLPBala Cynwyd, PA 19004 One Boca Place

2255 Glades Road, Suite 421-ABoca Raton, FL 33431

Brian Felgoise, Esq. Darren Check, Esq.LAW OFFICES OF BRIAN M. SCHIFFRIN & BARRO WAY, LLPFELGOISE Three Bala Plaza East, Suite 400230 South Broad Street, Suite 404 Bala Cynwyd, PA 19004Philadelphia, PA 19102

Fred Isquith, Esq.WOLF HALDENSTEIN ADLERFREEMAN & HERZ LLP270 Madison AvenueNew York, NY 10016

Counsel for Defendants:

Adam Haldci, Esq. Anthony J. CutiSHEARMAN & STERLING do Duane Reade Inc.599 Lexington Avenue Legal DepartmentNew York, NY 10022-6069 440 Ninth Avenue

New York, NY 10001

Margaret hams

Documents

In Re: Duane Read, Inc. Securities Litigation 02-CV-6478 ...securities.stanford.edu/filings-documents/1025/DRD... · 1. This is a federal class action on behalf of purchasers of the