IN THE UNITED STATES DISTRICT COURT FOR THE'
NORTHERN DISTRICT OF ALABAMA
00 JUN
SOUTHERN DIVISIO N
L" F Ci
IS
PM 3: 2 7
STATE OF WISCONSIN INVESTMENT N .D . OF ~~•L a. `AMA
BOARD, KENNETH D . BUSH ,
EDWARD E . EUBANK, JR., JOHN
MICHAEL, et al., suing on behalf of
themselves and all others similarly situated,
JURY TRIAL DEMANDED
Plaintiffs,
vs. CV 99-BU-3097-S
and
HAROLD RUTTENBERG ; CV 99-BU-3129-S
ERIC L . TYRA ;
PETER BERMAN
COOPER EVANS ;
PATRICK LLOYD ;
DON-ALLEN RUTTENBERG ;
MICHAEL LAZARUS ;
HELEN ROCKEY ;
SCOTT C . WYNNE ;
RANDALL L. HAINES ;
ADAM GILBURNE ;
DELOITTE & TOUCHE LLP ;
STEVEN H . BARRY ; and
KAREN BAKER,
Defendants .
CONSOLIDATED CLASS ACTION COMPLAINT
Plaintiffs, by their undersigned counsel, for their Consolidated Class Action Complaint, o n
their own behalf and as representatives of those similarly situated, upon personal knowledge as to
themselves and their own acts, and based upon the investigation by their counsel which has included
review and analysis of public statements, publicly-filed documents, press releases and news articles,
analysts' statements, interviews of persons knowledgeable of the facts stated herein, and relevant
accounting rules and related literature, allege as follows :
NATURE OF THE ACTION
1 . This is a securities class action on behalf of all persons and entities (other than
Defendants and affiliated persons as defined in paragraph 37 below) who purchased common stock
of Just For Feet, Inc . ("Just For Feet" or the "Company") between May 5, 1997 and November 1,
1999 (the "Class Period") and who have suffered a loss .
2 . During the Class Period, defendants Harold Ruttenberg, Eric Tyra, Scott Wynne an d
Deloitte & Touche, L .L.P . ("Deloitte"), with the knowledge, assistance and participation of the other
defendants, orchestrated a scheme to defraud public shareholders and purchasers of Just For Feet
securities . In sum, the scheme entailed publishing fraudulent and false financial statements for Just
For Feet for a minimum of three fiscal years, that materially overstated sales, profits and income ;
understated costs ; overstated accounts receivable, inventories, equipment, fixed assets and
stockholders' equity ; and understated significant liabilities . The scheme also included the
concealment of the material omitted facts described herein .
3 . The fraud concerns at least nine specific areas of accounting gimmicks, including :
(1) creating a fraudulent kickback scheme from its advertising agency in order to increase revenues ;
(2) creating false billings and receivables for booth assets donated by shoe manufacturers ; (3)
creating other false vendor billings and receivables ; (4) failing to write off bad debt ; (5) failing to
book required loss reserves ; (6) understating its cost of sales through the improper use of acquisition
accounting ; (7) improperly capitalizing inventory costs and expenses that should have been reported
as current operating expenses ; (8) overstating ending inventory by not accounting or reserving for
obsolete or missing inventory and by arbitrarily writing up the costs of inventory that was transferred
between stores or divisions ; (9) overstating earnings and understating liabilities by improperly
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accounting for leaseholds . In addition, Just for Feet knowingly maintained woefully inadequate
accounting and inventory control systems .
4 . Through the use of false and fraudulent financial statements, Just For Feet was able
to convey the appearance of a profitable operating company when, in reality, Just For Feet was not
a viable concern . In fact, Just For Feet was principally supported by its credit lines which were only
available to it because of its fraudulently prepared financial statements.
5 . As a result of this fraud, the market prices of Just For Feet common stock (which
ranged from a high of $29 .00 per share during the Class Period to a low of $1 .25 per share) were
materially and artificially inflated throughout the Class Period .
6 . On November 2, 1999, Just For Feet announced its intention of seeking Chapter 1 1
bankruptcy protection . Public statements made by Just For Feet's president, Helen Rockey, indicate
that Just For Feet had intended to file for Chapter 11 protection eight weeks earlier, but decided to
complete a new revolving credit facility first . Nevertheless, the Defendants allowed investors to
continue trading Just For Feet securities, knowing that the common stock would be rendered
worthless in the near term by the Defendants' actions .
7 . At all times relevant to the Class Period, Deloitte served as independent auditors fo r
Just For Feet ' s finan cial statements and issued unqualified opinions stating that they had performed
their duties in accord ance with Generally Accepted Auditing Standards ("GAAS") and that the
financial statements fairly presented the finan cial position and results of operations of Just for Feet
in accord ance with Generally Accepted Accounting P ri nciples ("GAAP") . In failing to recognize
an d/or repo rt Just For Feet ' s false an d fraudulent statements which materially overstated Just For
Feet's sales , profits and income, Deloi tte breached its duty to the shareholders . Deloitte ' s failure to
comply with GAAP and GAAS was knowing, intentional an d fraudulent .
JURISDICTION AND VENU E
8 . This Court has jurisdiction of this action pursuant to Section 27 of the Securities
Exchange Act of 1934 (the "Exchange Act"), 15 U .S .C . § 78aa ; 28 U .S .C . §§ 1331 and 1337 ; and
pursuant to principles of supplemental jurisdiction, 28 U .S .C . § 1367 .
9 . The claims herein arise under Section 10(b) of the Exchange Act, 15 U .S .C . § 78j(b)
and Rule 10b-5, 17 C.F .R . 240 .10b-5, promulgated thereunder by the Securities and Exchange
Commission (the "SEC") ; Section 18 of the Exchange Act, 15 U .S .C . § 78r; Section 20(a) of the
Exchange Act, 15 U .S .C . § 78t(a) ; and state law fraud and professional negligence .
10 . Venue is proper in this District pursuant to Section 27 ofthe Exchange Act, 15 U.S .C .
§ 78aa, and 28 U.S .C . § 1391(b) . Many of the acts comprising the violations of law complained of
herein, including devising and carrying out of the wrongful financial reporting schemes, and the
preparation and dissemination to the investing public of materially false and misleading financial
statements, reports to stockholders, press releases, and other information, occurred in this District .
At all relevant times, the executive offices of Just For Feet were located at 7400 Cahaba Valley
Road, Birmingham, Alabama 35242, and the majority ofits officers and directors who are defendants
herein resided in this District . At all relevant times, Deloitte maintained an office in this District .
In addition, each of the Defendants transacted business in this District .
11 . In connection with the acts, conduct, combination and course of conduct alleged in
this Complaint, the Defendants directly and indirectly used the means and instrumentalities o f
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interstate commerce, including the United States mails and interstate telephone communications, an d
the facilities of the national securities markets .
THE PARTIES
Plaintiffs
12 . Lead Plaintiff STATE OF WISCONSIN INVESTMENT BOARD ("SWIB") acts
in a fiduciary capacity as investment manager for the Wisconsin Public Employee Retirement
System . During the Class Period, SWIB purchased 4,163,000 shares of Just For Feet common stock
for an aggregate amount of $53,353,413 .04 and retained 2,391,000 shares of Just For Feet common
stock through the end of the Class Period .
13 . Lead Plaintiff KENNETH D . BUSH is an individual who purchased 23,200 shares
of Just For Feet common stock during the Class Period for an aggregate amount of $304,382, an d
retained all of those shares through the end of the Class Period.
14 . Lead Plaintiff EDWARD E . EUBANK, JR. is an individual who purchased 15,67 8
shares of Just For Feet common stock during the Class Period for an aggregate amount of $179,719 ,
and retained 8,900 of those shares through the end of the Class Period .
15 . Lead Plaintiff JOHN MICHAEL is an individual who purchased 116,800 shares of
Just For Feet common stock during the Class Period for an aggregate amount of $700,261, and
retained 20,200 shares of Just For Feet common stock through the end of the Class Period .
Defendants
16 . Defendant HAROLD RUTTENBERG ("Ruttenberg"), who resides in this District,
was at all times relevant to the Class Period, Chairman of the Board , President, Chief Executive
Officer, and/or a Director of the Company . According to the Company ' s 1999 proxy statement, as
of April 12, 1999 , Ruttenberg beneficially owned as much as 5,439,730 shares of Just For Feet
stock, or approximately 17 .4% of the total then outstanding shares of the Company . Furthermore,
during the Class Period, while in possession of material, adverse inside information and perpetrating
a fraud, Ruttenberg sold 413,850 shares of Just For Feet common stock on or about May 8, 1998,
and realized proceeds of approximately $5,897,362 .50, as described more fully below . Ruttenberg
signed each of the Company's Reports on Form 10-K and Form 10-Q, Annual Reports, Proxy
Statements and Letters to Shareholders issued during the Class Period, with the exception of the
Report on Form 10-Q that was filed with the SEC on September 27, 1999 . At all relevant times,
Ruttenberg was aware of, and actively and willingly participated in, the fraud at Just For Feet .
17 . Defendant ERIC L. TYRA ("Tyra"), who resides in this District, is a former partner
of Deloitte who, at all times relevant to the Class Period, was the Executive Vice President, Chief
Financial Officer and a director of the Company . According to the Company's 1999 proxy
statement, as of April 12, 1999, Tyra beneficially owned as much as 92,000 shares of Just For Feet
stock . Tyra signed each of the Company's Reports on Form 10-K and the letters to shareholders
issued in connection with the Company's Annual Reports for the fiscal years ended January 1998
and January 1999, as well as each of the Company's Reports on Form 10-Q that were issued during
the Class Period, with the exception of the Report on Form 10-Q that was issued on September 27,
1999 . At all relevant times, Tyra was aware of, and actively and willingly participated in, the fraud
at Just For Feet.
18 . Defendant PETER BERMAN ("Berman"), who resides in this District, was Just For
Feet's Controller and a financial officer of the Company at all times relevant to the Class Period .
Berm an, along with Tyra and Ruttenberg, participated in the fraudulent reporting of Just For Feet's
financial condition . Berm an was responsible for all accounting an d data processing activities by Just
For Feet .
19 . Defendant COOPER EVANS ("Evan s"), who resides in this Dist rict , was Just For
Feet' s Director of Finan cial Reporting at all times relevant to the Class Pe ri od. Evans, along with
Berman, Tyra and Ruttenberg , participated in the fraudulent report ing of Just For Feet ' s financial
condition . Ev an s was responsible for all finan cial data repo rted to third parties .
20 . Defendant PATRICK LLOYD ("Lloyd"), who resides in this Distri ct, was
Accounting M anager of Just For Feet at all times relev ant to the Class Period. Lloyd, along with
Berman, Tyra and Ruttenberg , part icipated in the fraudulent report ing of Just For Feet's fin ancial
condition. Lloyd was responsible for all financial data reported to third part ies.
21 . Defendant MICHAEL LAZARUS ("Lazarus") was a director an d a member of the
Audit Committee of the Board of Directors of Just For Feet during the Class Period . As a director,
Lazarus was responsible for supervision of the entire business and affairs of the Company and the
activities of the individual defendant officers named herein as defendants, and for supervision of the
Company' s financial reporting . Lazarus was a member of the Audit Committee and as such ha d
special responsibilities for recommending the Company' s outside auditors, reviewing with those
auditors the scope and results of Company audits, monitoring the Company's financial and control
procedures, monitoring non-audit services of the auditors, familiarizing himself with the financial
reports and accounting issues facing Just For Feet, and reviewing all conflicts of interest. Lazarus
signed the Reports on Form 10-K filed with the SEC for fiscal years ended January 1998 and Januar y
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1999 . By no later than July 3, 1999, Lazarus was aware of the fraud at Just For Feet but took no
action to remedy it or warn the investing public about the fraud .
22 . Defendant RANDALL L . HAINES ("Haines"), who resides in this District, was a
director and a member of the Audit Committee of the Board of Directors of Just For Feet during the
Class Period . Haines was also the president of Compass Bank-Birmingham, one of Just For Feet's
principal lenders, during the Class Period . As president of Compass Bank, Haines helped to arrange
the loan syndicate which was the major source of Just For Feet's credit ; arranged for Compass to
serve as documentation agent for the syndicate ; and arranged for Compass to serve as an issuing
lender for the Company's letters of credit backed by the loan syndicate . As a director of Just For
Feet, Haines was responsible for supervision of the entire business and affairs of the Company and
the activities of the individual defendant officers named herein as defendants, and for supervision
of the Company' s financial reporting . Haines was a member of the Audit Committee and as suc h
had special responsibilities for recommending the Company ' s outside auditors, reviewing with those
auditors the scope and results of Company audits, monitoring the Company's financial and control
procedures, monitoring non-audit services of the auditors, familiarizing himself with the financial
reports and accounting issues facing Just For Feet, and reviewing all conflicts of interest. Haines
signed the Reports on Form 10-K filed with the SEC for the fiscal years ended January 1998 and
January 1999 . By no later than August 18, 1999, Haines was aware of the fraud at Just For Feet but
took no action to remedy it or warn the investing public about the fraud . Instead, Haines kept quiet
about the fraud, allowing the Company to successfully complete a private offering in the spring of
1999 of approximately $200 million of senior subordinated notes, which directly benefitted Compass
Bank (of which Haines was president) because the proceeds of the offering were used to repay
outstanding loans from Compass Bank to Just For Feet .
23 . Defendant HELEN ROCKEY ("Rockey"), who resides in this District, was
appointed president of Just For Feet in March 1999, and was elected a director of the Company on
June 1, 1999 . She was responsible for supervision of the entire business and affairs of the Company
and the activities of the individual defendant officers named herein as defendants, and fo r
supervision of the Company's financial reporting . By no later than June 1999, Rockey was aware
of the fraud at Just for Feet but took no action to remedy it or to warn the investing public . Instead,
as alleged herein , she took steps to cover up the fraud . Rockey signed the Company's Report on
Form 10-Q filed with the SEC for the three-month period ended July 31, 1999 .
24 . Defendant SCOTT C . WYNNE ("Wynne"), was an officer and employee of th e
Company throughout the Class Period . Since 1990, Wynne has served as Operations Manager of
the Company, and has been responsible for inventory control, distribution, management information
systems, and traffic . Wynne was elected Vice President - Store Operations in 1994, corporate
Secretary in 1995, and Vice President - Operations in February 1997 . At all relevant times, Wynne
knew about and actively directed and participated in the fraud at Just For Feet, including the
improper manipulation and falsification of inventory and accounting data .
25 . Defendant DON-ALLEN RUTTENBERG ("Don-Allen"), an officer and employee
of the Company for the past twelve years, is the son of Defendant Harold Ruttenberg, a member of
the Ruttenberg family controlling group of stockholders, a Vice President of the Company, and the
holder of 129,818 shares of the Company's common stock as of April 12, 1999 . From February
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1997 through February 1999, Don-Allen was the Company's Executive Vice President ofNew Store
Development . At all relevant times, Don-Allen was aware of, and actively participated in, the fraud
at Just For Feet.
26 . Defendant ADAM GILBURNE ("Gilburne") has served as Executive Vice President
of the Company and President-Superstore Division since August 1997 . Gilburne was aware of, and
actively participated in, the inventory accounting frauds that were occurring at Just For Feet .
27 . Defendant DELOITTE is an international accounting firm with offices located in
various cities throughout the world, including a location at 417 Twentieth Street North, Suite 10000 ,
Birmingham, Alabama . At all times relevant to the Class Period, Deloitte's Birmingham office
served as the auditors of Just For Feet . Upon information and belief, Just For Feet was one of the
largest clients of Deloitte's Birmingham office, accounting for a substantial percentage of that
office's revenues in 1998 and 1999 .
28 . As Just For Feet's independent outside auditors, Deloitte assisted in the preparatio n
of Just For Feet's annual an d quarterly finan cial statements, reviewed those fin ancial statements an d
the text that accompanied them in the Company' s SEC filings, an d audited the annual fin ancial
statements and certified that they were prepared in compli an ce with GAAP . Deloitte was also
responsible for, among other things, examining Just For Feet ' s system of inte rnal controls to identify
any materi al weaknesses or reportable conditions which might impact the accuracy or reliability of
the Comp any ' s financial statements . Deloi tt e was required to perform its audit se rvices according
to GAAS, which included Statements on Auditing St andards ("SAS") issued by the American
Institute of Certified Public Account ants ("AICPA"), an d to issue an unquali fi ed opinion only if Just
For Feet's financial statements were fairly presented in accord ance with GAAP .
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29 . Deloitte issued unqualified auditors' opinions on the financial statements of Just For
Feet for the fiscal years ended January 1998 and 1999, which were, with Deloitte's knowledge and
approval, included in Just For Feet's Reports on Form 10-K filed with the SEC and Just For Feet's
Annual Reports, all of which were publicly disseminated to members of the Class . In failing to
recognize and/or report the false and fraudulent misrepresentations in Just For Feet's financial
statements, Deloitte breached its duties to the shareholders, and either recklessly or fraudulently
failed to comply with GAAP and GAAS .
30 . Defendant STEVEN H. BARRY ("Barry"), who resides in this District, was at al l
times relevant to this Class Period the Managing Partner of Deloitte's Birmingham office and the
audit partner on the Deloitte audit of Just For Feet. As such, Barry knew or should have known
(based, inter alia, on his extensive contacts with Company officers and personnel, his responsibility
under GAAS for the audit evaluation of Just For Feet's internal controls and accounting methods,
and his firm's audits of Just For Feet's financial statements, and his review and supervision related
to those audits) of the material fraudulent misrepresentations in Just For Feet's financial statements .
Barry either recklessly or intentionally failed to comply with GAAS in discharging his duties . Had
he complied with his professional responsibilities, he would have : (1) immediately alerted the
Company's Board of Directors and shareholders that Just For Feet's financial statements were
materially false and misleading due to materially overstated sales, profits, income, accounts
receivable, inventories, equipment, fixed assets, and stockholders' equity, and materially understated
costs and liabilities ; (2) refused to issue an unqualified opinion ; and (3) depending upon the Board's
actions, taken appropriate action.
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31 . Defendant, KAREN BAKER ("Baker"), who resides in this District, was Deloitte's
Senior Manager assigned to the audit of Just For Feet from at least June 1997 through the end of the
Class Period . As Senior Manager for the Deloitte audits, Baker knew or should have known (based,
inter alia, on her extensive contacts with Company officers and personnel, her responsibility under
GAAS for the audit evaluation of Just For Feet's internal controls and accounting methods, her
review and supervision related to the audit of Just for Feet's financial statements, and her audit,
examination and testing of Just For Feet's financial statements) of the material fraudulent
misrepresentations in Just For Feet's financial statements . Baker either recklessly or intentionally
failed to comply with GAAS in discharging her duties . Had she complied with her professional
responsibilities, she would have : (1) immediately alerted the Company's Board of Directors and
shareholders that Just For Feet's financial statements were materially false and misleading due to
materially overstated sales, profits, income, accounts receivable, inventories, equipment, fixed assets,
and stockholders' equity, and materially understated costs and liabilities ; (2) refused to issue an
unqualified opinion; and (3) depending on the Board's actions, taken appropriate action .
32 . Defendants Ruttenberg, Tyra, Wynne and Don-Allen, by virtue of their stoc k
ownership and/or positions of knowledge, control and influence, were controlling persons (or
members of a control group) of Just For Feet, within the meaning of Section 20(a) of the Exchange
Act ("Control Person Defendants") . Because of their positions of control and authority, they were
able to review and control the contents and cause the issuance of the various financial reports,
financial statements, press releases and SEC filings of the Company, and had the power and authority
to cause Just for Feet to engage in the conduct herein described . These Control Person Defendants
had a duty to promptly disseminate accurate and truthful information with respect to the Company' s
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operations, fin ancial condition, earnings an d profitability and future business prospects so that the
market related to Just For Feet would be based on timely, truthful and accurate information .
Non-Defendant Co-Conspirator s
33 . DAVID HERSKOVITS ("Herskovits"), is Deloitte's retail partner expert, and wa s
fully aware of the fraud that was taking place at Just For Feet but did nothing to alert the Board o f
Directors or the shareholders of the fraud .
34 . JAY SWARTZ ("Swartz") is a partner in the Atlanta law firm of Smith, Gambrell
& Russell, LLP, who represented Just For Feet in securities matters and was fully aware of the
accounting fraud that was taking place at Just For Feet . He continued to supply legal counsel on
securities matters to Just For Feet, including the drafting of portions of the Company's Reports on
Form 10-K for the fiscal years ended January 31, 1998 and January 30, 1999, even though he knew
of the fraud .
35 . JOHN A . BERG ("Berg") was elected a director of the Company on June 1, 1999 .
As a director, Berg was responsible for supervision ofthe entire business and affairs ofthe Company
and the activities of the individual defend ant officers named herein as defend ants, and for
superv ision of the Company' s financial repo rt ing . Berg took no action to remedy the fr aud at Just
For Feet or to warn the investing public about the fraud . Berg signed the Report on Form 10-Q filed
with the SEC for the three -month period ended July 31, 1999 .
36 . ROBERT WABLER ("Wabler") was the Chief Financial Officer of Just For Feet
until April 1997 . During his employment, Wabler was aware of, and actively participated in, the
fraud at Just For Feet .
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PLAINTIFFS ' CLASS ALLEGATION S
The Clas s
37 . Plaintiffs bring this action as a class action pursuant to Rule 23 of the Federal Rules
of Civil Procedure on behalf of all persons and entities who purchased Just For Feet common stock
during the Class Period and who suffered damages as a result of their purchases (the "Class") .
Excluded fr om the Class are ( 1) Defend ants , ( 2) members of the families of Defend ants , ( 3) the
subsidiari es or affiliates of an y Defendant, (4) any person or entity who is a shareholder , partner,
officer, director, employee or controlling person of any Defendant, (5) any entity in which any
Defendant has a controlling interest, and (6) the legal representatives , heirs, successors or assigns
of any such excluded person .
38 . The members of the Class are so numerous that joinder of all members i s
impracticable . As of September 15, 1999 Just For Feet had approximately 31,210,980 shares of
common stock outstanding . Because of the common practice of publicly traded stock being held in
"street name," it is likely that the number of beneficial owners and purchasers of Just For Feet stock
during the Class Period is in the thousands . Throughout the Class Period, the stock was actively
traded on NASDAQ's National Market System, an efficient and open market, under the symbol
"FEET . "
39 . Plaintiffs' claims are typical of the claims of the members of the Class . Plaintiffs will
fairly and adequately protect the interest of the members of the Class and have retained counsel
competent and experienced in class and securities litigation . Plaintiffs have no interests that are
adverse or antagonistic to the Class .
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40 . A class action is superior to other available methods for the fair and efficien t
adjudication of this controversy. Since the damages suffered by many individual Class members
maybe relatively small, the expense and burden of individual litigation makes it virtually impossibl e
for the Class members individually to seek redress for the wrongful conduct alleged .
41 . Common questions of law and fact exist as to all members of the Class, and
predominate over any questions affecting solely individual members of the Class . Among the
questions of law and fact common to the Class are :
(a) Whether the federal securities laws and/ or state law were violated by Defendants' acts
as alleged herein;
(b) Whether the documents, releases, and statements disseminated to the investing publi c
and the shareholders during the Class Period omitted and/or misrepresented material facts about th e
business affairs, financial condition and future prospects of Just For Feet as particularized herein ;
(c) Whether Defendants acted willfully or recklessly in omitting to state and/o r
misrepresenting material facts about the financial condition, profitability and future prospects ofJust
For Feet;
(d) Whether the market prices of the Just For Feet common stock during the Class Perio d
were artificially inflated due to the nondisclosures an d/or misrepresentations complained of herein;
and
(e) Whether the members of the Class have sustained damages, and, if so, what is th e
proper measure thereof.
42 . Plaintiffs know ofno difficulty which will be encountered in the m an agement of thi s
litigation which would preclude its maintenan ce as a class action.
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43 . The names and addresses of the record owners of the shares of Just For Feet commo n
stock purchased during the Class Period are available from the Company's transfer agent(s) . Notice
can be provided to such record owners by first class mail .
FACTS
44 . In order to materially overstate the Company's financial results and thereby
encourage investors to purchase Just For Feet securities, Defendants employed a number o f
accounting man ipulations , including :
a. creating fraudulent billing and kickback schemes from Just For Feet's advertising
agency in order to increase revenue ;
b . creating false billings and receivables for fixed assets donated by shoe manufacturers ;
c . creating false vendor billings and receivables ;
d . failing to write off bad debt;
C.
failing to book required reserves for sales promotions and barter transactions ;
f. understating its cost of sales through the improper use of acquisition accounting ;
g . improperly capitalizing expenses that should have been reported as current operatin g
expenses ;
h. overstating ending inventory by not accounting or reserving for obsolete or missing
inventory, and by arbitrarily writing up the costs of inventory when it was transferred
between stores and divisions ;
i . improperly accounting for leaseholds in order to increase earnings and decrease
liabilities ; an d
j . knowingly maintaining a woefully inadequate accounting system .
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45 . The Company' s scheme to falsify its financial statements was concocted an d initiated
primarily by Ruttenberg and Wynne, and was implemented and facilitated by the Company's internal
financial and accounting staff, and its outside auditors, Deloitte, Baker and Barry .
46 . The fraud at Just For Feet was well known among the Company 's m an agement even
before the Class Period began . On March 6, 1997, Just For Feet's controller, Anthony Lones
("Lones") met with the Company's outside securities counsel, Swartz, and presented Swartz with
a list of accounting irregularities and problems at Just For Feet which amounted to about $5 million
in improper accounting entries or, as they were referred to internally at Just For Feet, "bads ." Lones
had similar conversations with Barry and Baker of Deloitte in early 1997 . In fact, Lones had a preexisting relationship with Barry because they had worked together at Deloitte for several years, and
Lones repeatedly informed Barry and Deloitte of his concerns about Just For Feet's accounting
methods and internal controls throughout the Class Period .
47 . Tyra joined Just For Feet as its Chief Financial Officer in May 1997, and on June 27,
1997, he met with Lones and Evans for the purpose of being briefed about open accounting and
internal control issues at Just For Feet . During that meeting, Tyra was informed of accounting
irregularities at the Company, including inaccurate and false accounting for Just For Feet's accounts
receivable, inventory capitalization and inventory discount accounting methods . In this meeting,
Tyra was informed, among other things, that Just For Feet overstated its revenue, and/or understate d
its expenses by falsely accruing revenue and accounts receivable for : (a) fictitious rebates from
vendors providing advertising services ; (b) various shoe vendors for sharing of expenses for store
fixtures and opening costs ; (c) cooperative advertising monies from its vendors ; and (d) bulk sales
occurring after the end of fiscal periods which were improperly allocated out to stores for those
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periods to provide the illusion that those stores' sales had increased since the prior year . Rather than
rectifying these improper practices, Tyra (who had been granted numerous options to purchase Just
For Feet stock on May 1, 1997) became an active participant in the fraud at Just For Feet .
48 . Likewise, shortly after Rockey joined Just For Feet as its President in March 1999,
she was specifically informed of a number of fraudulent and improper accounting practices at Just
For Feet . For example on July 7, 1999, Berman wrote a "confidential" memo to Rockey in whic h
he recommended that the Company make a number of accounting adjustments if they had "the
opportunity to clean up our balance sheet at the end of [the quarter ended July 31, 1999] and not
carry forward problems into the future ." Many of those proposed adjustments related directly to
improper accounting practices alleged in this Complaint, including the need to establish reserves for
uncollectible receivables for co-op advertising and CheckCare claims, and the need to accrue an
obsolescence reserve for future special sales . Berman went on to say that the issues identified in his
memo had "in the past . . . been treated rather aggressively at [Just For Feet]" and that "[i]f we are
trying to do the right thing for the business in the future, we need to discuss taking our punishment
today ." Rockey did nothing to correct these problems and, as discussed below, took action to cover
them up instead .
Fraudulent Rebates from Advertising Agency For Sales Promotion s
49 . At the June 27, 1997 meeting among Tyra, Evans and Lones, Tyra was informed that
Just For Feet had engaged in a scheme to inflate its revenues and "pay down" bogus receivables by
having its advertising agency Rogers Advertising ("Rogers") substantially overcharge for production
of commercials . Rogers, where Ruttenberg's daughter is employed, would then kick back or credit
most of the overpayment to Just For Feet, and Just For Feet would book that payment as rebat e
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revenue in order to show growth in revenue , or as a payment on existing receivables from earlier
fraudulent rebate revenue bookings from Rogers .
50 . The fr audulent " rebates " were recorded as receivables and either ( 1) were reversed
during the following fiscal pe ri od by reversing the pri or year ' s entry, or making ent ri es in Just For
Feet ' s books which credited the Rogers receivable while debiting adve rt ising expense or accounts
payable to the advertising comp any, or (2) were not reversed but remained on Just For Feet ' s books
as receivables , accumulating over time, even though Rogers denied an y obligation to pay those
amounts and they could not be collected absent Rogers' overcharging for se rv ices . The adve rtising
rebate scheme w as, at a minimum , a method to inflate revenue growth.
51 . This scheme began in January 1997 . As the pressure to meet an alysts' expectation s
and forecasts for Just For Feet's performance increased, the Company, acting through the Individual
Defendants, increased in each succeeding fiscal period both the amount of its advertising budgets
and the related rebates . Ruttenberg directed this rebate scheme and Evans and Lloyd, knowing that
the rebate bookkeeping entries were false and fraudulent, made them anyway . Lazarus was informed
of this scheme in August 1999, if not earlier, yet took no action to remedy it .
52 . Ruttenberg estimated in advance the sums to be fraudulently rebated to Just For Feet
and reported as income over the Class Period, as follows :
19
BILLINGS
BY
ROGERS
TO JUST
FOR FEET
GROSS
COMMISSIONS
1997
$20,000,000
$3,000,000
$822,000
$2,178,000
$806,000
$1,372,00 0
1998
$30,000,000
$4,500,000
$1,126,000
$3,374,000
$1,104,000
$2,270,00 0
1999
$45,000,000
$6,750,000
$1,543,000
$5,207,000
$1,512,000
$3,695,00 0
2000
$60,000,000
$9,000,000
$2,114,000
$6,886,000
$2,071,000
$4,815,00 0
YEAR
EXPENSES
GROSS
PROFIT
TO
ROGERS
AMOUNT
PURPORTEDLY
RETAINED BY
ROGERS
PURPORTE D
REBATE TO
JUST FOR
FEET
53 . As time passed , however, the actual "rebates" exceeded these estimates . By August
of 1999, the fraudulent " rebates" from Rogers had grown to approximately $ 7 .5 million. In the
quarter ended July 31, 1999 alone , Just For Feet booked $1 . 5 million in "rebates" from Rogers .
54 . This scheme and the repo rting implication of these false an d misleading accounting
entries in Just For Feet ' s books an d records were made known to Tyra, Baker, Barry and Herskovits
by Lones no later th an June 1997, but were allowed to continue throughout the Class Period .
55 . The existence ofthese accounting irregularities was also made known to Swa rtz, Just
For Feet ' s securi ties attorn ey, by Lones in April of 1997 .
56 . On Monday morning, August 16, 1999, when con fronted by Just For Feet employee s
who were unaware of the existence of the rebate scheme, Reed Rogers, the President of Rogers
Advertising, readily admitted that he had been overcharging Just For Feet for advertising . He
admitted that four recent television advertising spots for the first quarter of 1999 should have been
invoiced at about $6,000 per television spot, rather than the $60,000 to $65,000 reflected in the
invoice . He went on to admit that he had been overcharging the company by $250,000 each month
and, when asked why, said that is what Ruttenberg and Gilburne had told him to do . He also added
that the approximately $7.5 million in accounts receivable attributed to it on Just For Feet's book s
20
had no basis and that the overcharging was being done to provide Rogers with the funds to "pay
down" those receivables in the form of "rebates" to Just For Feet .
57 . Lazarus was informed of this rebate scheme, and the fact that Just For Feet was being
overcharged by $250,000 per month in order for Rogers to "repay" fictitious receivables that had
resulted in previous overstatements of earnings, on August 16, 1999, if not earlier . The scheme was
also described in detail and discussed during an August 18, 1999 meeting of the Just For Feet Board
of Directors (excluding Ruttenberg and Rockey) . During that meeting, it was expressly stated to the
Board that the scheme was so far outside the bounds of proper accounting standards as to constitute
cause for serious concern. Upon information and belief, all of the Board members were aware of
this scheme well before August 1999 .
58 . The invoices submitted by Rogers to Just For Feet for payment were so obviousl y
bogus that the Company's Vice President of Advertising, Steve Davis, refused to authorize them .
Instead, all advertising overcharges in invoices from Rogers were submitted to Gilburne and were
approved by Wynne, who was at all times aware of the existence of the rebate scheme . This scheme
to inflate earnings continued throughout the Class Period .
Accounting for Store Fixtures, Fictitious Booth Incom e
59 . Just For Feet entered into agreements with certain vendors and, in some cases,
unilaterally imposed transactions upon vendors, which had the effect of overstating net income for
each period such agreements and/or transactions were entered or imposed . This scheme, in part
orchestrated by Deloitte, utilized fraudulent financial reporting that was in direct violation of APB
No . 29 (Accounting for Non-Monetary Transactions) .
21
60 . When Just For Feet opened a new store, shoe manufacturers desiring to exploit new
markets for sales of their products and to receive the advertising benefits associated with a grand
opening of a new retail outlet would donate creative and expensive displays, or booths, for their
products in an attempt to maximize sales of their products . Some manufacturers treat their booths
as their property which is placed at the retailer's site for the retailer's use in selling the
manufacturer's products, rather than as an outright gift . Some manufacturers' displays, like
Timberland's, cost as much as $30,000.
61 . In 1996, Just For Feet's then CFO, Wabler, with the knowledge of (and acting upon
the advice of) Deloitte, instituted an arrangement with shoe manufacturers by means of which Just
For Feet was to treat these promotional donations as income based upon a series of fictitious and
misleading "exchanges for value," which were nothing more than fraudulent book entries .
62 . Rather than have its vendors donate the fixtures or booths displaying their product s
for use in new stores , which is the st andard industry practice, Just For Feet purpo rted to "buy" the
booths ( shelving, racks , partitions , lighting, displays , etc .) fr om the vendors, capitalize the "purch as e
p ri ce " as an asset, an d then "depreciate " the as set over time . Then , Just For Feet would require that
the vendors remit the purchase pri ce back to Just For Feet in the form of credits for co-op adve rtising
(adve rtising by Just For Feet that also incorporates a vendor's products , and for which the vendor
agrees to share the advert ising cost) . Just For Feet immediately booked these co-op adve rtising
monies or credits as revenue , even though they had not been " earn ed " by the placement of co-op
advert isements .
22
63 . Moreover , with the assist an ce of Rogers, Just For Feet also inflated the cost of the
co-op advertising , to "earn" more co-op dollars and credits from the vendors, separate an d apart from
the booth accounting scheme .
64 . The booth accounting scheme allowed Just For Feet to recognize as income the valu e
of the booths in the current period, but defer the equal amount of cost (since it was a wash sale) to
subsequent periods (because the costs were capitalized rather than expensed), thereby inflating net
income . This allowed the Company to show income in the current quarter, but also caused the
Company to incur unnecessary tax liabilities . No rational business person would use such an
accounting scheme, which caused it to incur unnecessary income tax liability, unless it was trying
to boost reported revenues and deceive the investing public .
65 . In some cases, Just For Feet booked the value of shoe manufacturer' booths as asset s
(including booths the manufacturers had not intended to donate), and booked co-op advertising
income from those manufacturers, without even consulting them . In an after-the-fact attempt to
justify some of these entries, in the summer of 1999, Don-Allen met separately with representatives
of Reebok and Timberland, two of the vendors who had provided booths at Just For Feet's new store
grand openings . Don-Allen told each of them that Just For Feet had accrued booth receivables on
its books and that Just For Feet wanted co-op advertising credits from their respective companies .
Reebok and Timberland refused Don-Allen's request . The representatives of Timberland (whose
auditing firm is Deloitte) replied that they would not be a part of Just For Feet's booth accounting
scheme .
66 . More troubling still, during the course of Just For Feet's bankruptcy case at least one
other shoe manufacturer (Reebok) has disputed Just For Feet's title to the manufacturer's booths ,
23
claiming that the booths were simply on loan to Just For Feet and that Just For Feet had no right to
record them as assets on the Company's books .
67 . As of January 30, 1999, Don-Allen needed more than $40 million in credits from
manufacturers in order to clear-up outstanding accounting issues from the fiscal years ended January
1997, 1998 and 1999, including issues relating to booth accounting and co-op advertising . Although
many of those "receivables" were in dispute, Just For Feet did not book any reserves .
68 . During a telephone conversation initiated by Don-Allen following one of the
meetings described above, Wynne explained the booth accounting scheme and remarked that
Deloitte had suggested that Just For Feet employ it .
69 . Just For Feet opened or converted approximately twenty-five (25) new superstore s
in fiscal year ended January 1998, and approximately fifty (50) new or converted superstores in
fiscal year ended January 1999 . Just For Feet opened or converted approximately twenty (20) new
specialty stores in fiscal year ended January 1998, and approximately fifty (50) new or converted
speciality stores in fiscal year ended January 1999 .
70 . For fiscal year ended January 1998, Just For Feet recognized approximately $20
million in booth income which it never received . Absent this accounting scheme, Just For Feet' s
repo rted pre-tax income of $34 .2 million for that fiscal year would have been reduced by 60% to
about $ 14 .2 million . Absent the rest of Just For Feet's accounting manipulations, if its financial
statements had been prepared in accordance with GAAP , Just For Feet would have report ed a
subst antial loss for the year.
24
71 . For fiscal year ended January 1999, Just For Feet recognized approximately $2 2
million in booth income which it never received . Without the fraudulent booth income, Just Fo r
Feet's reported pre-tax income of $43 .3 million for that fiscal year would have been reduced b y
about 50% to about $21 . 3 million . Absent the rest of Just For Feet' s accounting manipulations, if
its fin ancial statements had been prepared in accordance with GAAP, Just For Feet would have
reported a substantial loss for the year .
72 . For the quarter ended July 31, 1999, Just For Feet recognized approximately $5 . 9
million in fraudulent booth income . Without the fraudulent booth income, Just for Feet's reporte d
pre-tax loss of approximately $42 million for that quarter would have been increased by about 14 %
to a loss of about $48 million .
73 . The fraudulent accounting entries relating to the booth accounting scheme were made
by, or directed by, Tyra, Berman, Lloyd and Evans . Barry, Baker and Deloitte were informed of the
existence of this scheme by members of Just For Feet's finance department, including Lones and
Evans, in January 1997, and they were well aware of the magnitude of the amounts involved . The
scheme continued to operate at levels that materially distorted and misstated operating results
throughout the Class Period .
74 . In June 1999, Rockey was apprised of the nature and magnitude of the boot h
accounting issues and did nothing to remedy the problem .
75 . The Board of Directors of Just For Feet was informed of this booth accountin g
scheme on August 19, 1999, if not earlier, and did nothing to remedy the proble m
25
76 . On or about August 25, 1999, Rockey instructed employees of Just For Feet not to
speak with the Company's Audit Committee any further about the booth accounting problem or the
magnitude of the problem .
False Billings and Receivable s
77 . During the Class Period, Just For Feet's accounts receivable were materially
overstated as a result of billings to vendors that were either wholly fictitious or were not properly
adjusted to provide for uncollectible amounts . In addition to the false advertising rebates and booth
accounting schemes described above, these misleading billings and receivables were, in part, the
result of. (a) bulk sales of outdated inventory to liquidation companies ; (b) cost offsets resulting
from Reebok mis-shipments; (c) the existence of an old uncollectible credit receivable from KPR
Sports which dated back to 1995 but had not been written off ; (d) a $58,736 .73 credit receivable
from GSV, Inc . of Atlanta, Georgia from which Just For Feet had purchased Store # 7 in 1994 ; and
(e) Just For Feet's improper accounting for co-op advertising . These false billings and receivables
were discussed by Lones, Tyra and Cooper on June 27, 1997 .
78 . During the fiscal years ended January 1997 and 1998, Just For Feet shipped out-dated
shoe inventory to ELF, a liquidation company . By agreement, ELF was to pay Just For Feet $6 .00
per pair of shoes . In 1997, however, Just For Feet began to book the sale and receivable from ELF
at $8 .00 per pair instead of $6 .00, even though ELF had not agreed to the price increase . These
arbitrary and uncollectible increases by Just For Feet were made for the sole purpose of increasing
sales and receivables on the Company's books, and resulted in the addition of $65,000 in unfounded
and fraudulent receivables and revenue on Just For Feet's financial statements . In addition, as of
January 31, 1997 and July 31, 1997, Just For Feet had booked receivables for shoes that were no t
26
even shipped to ELF until after those dates, in violation of Financial Accounting Standards ("FAS")
Statement No . 48 (Revenue Recognition) . These issues were discussed among Lones, Cooper and
Tyra on June 26, 1997, and were made known to Deloitte during 1997 .
79. Just for Feet booked false and inflated credits for merchandise that was returned to
vendors ("RTVs") . For example, Just For Feet would accept trade-ins of used shoes from customers,
which it claimed would be donated to charity . Instead of donating all of the used shoes to charity,
Just For Feet would clean some of them up and return them to the vendors in exchange for credits .
This scheme was concocted and directed by Wynne . At times, Just For Feet booked credits for as
much as $10,000 or $100,000 per pair of returned shoes . In all, Just For Feet had over booked about
$900,000 in vendor credits by July 31, 1997 . When Deloitte looked at the issue in June 1999, it
found that for the fourth quarter of 1998 and the first quarter of 1999, approximately $600,000 of
Just For Feet's RTVs (a full one-third to one-half of all its RTVs) were in dispute and lacked
supporting authorization numbers .
80 . Just For Feet improperly recognized sales revenues for merchandise that was give n
away pursuant to the Company's giveaway promotions . For example, Just For Feet offered a
promotion whereby a customer would receive a free tote bag with the purchase of shoes . Just For
Feet accounted for each giveaway as a sale, booking sales revenue equal to the arbitrary sales value
of each tote bag given away in order to show revenue growth, and to fraudulently increase store sales
figures and comparable store sales growth rates .
81 . Just For Feet booked inflated and unrealistic estimates of vendor receivables,
including receivables relating to co-op advertising (whereby Just For Feet and vendors would share
joint advertising costs), at year-end 1997 and throughout the Class Period . These estimates of co-o p
27
receivables, which were supplied to the Company's accounts receivable department by Gilburne,
lacked both economic substance and any supporting documentation, such as any agreements with
the advertising companies or vendors . Moreover, no one at Just For Feet or Deloitte made any effort
then or in subsequent periods to compare the Company's actual receipts with the estimated
receivables, in violation of GAAS (including Statement on Auditing Standards No . 67) .
82 . Any discussions with vendors who were included in the receivables claimed by Just
For Feet were conducted after the making of the accounting entries, if at all, and vendors frequently
rejected Just For Feet's proposed receivables as incorrect and/or improper .
83 . The false entries to Just For Feet's accounting journals were made by Evans and
Lloyd at the direction of Tyra, based upon estimates made by Gilburne and Don-Allen . Upon
information and belief, Deloitte failed to pursue and obtain confirmations for these entries .
84 . These false vendor billings and receivables were known to Defendants throughout
the Class Period .
Failure To Write-Off Bad Debt
85 . Just For Feet also understated operating expenses and overstated accounts receivable
by at least $500,000 relating to uncollectible amounts from CheckCare, its check validation vendor.
86 . In 1997, Ruttenberg, Wynne, Tyra, Gilburne, Barry, Baker, Herskovits and Deloitte
were aware that Just For Feet was faced with the prospect of having to record bad debt expense
approximating $1 .2 million as a result of having failed to follow the procedures mandated by Just
For Feet's agreement with CheckCare Systems when accepting customer checks as payment for
merchandise sold at the Company's stores .
28
87 . CheckCare Systems' guarantee of customer checks could only be invoked if Just For
Feet and its sales personnel followed and documented certain carefully described procedures, such
as customer presentment of a valid state driver's license and telephone number .
88 . As a result of Just For Feet's failure to adhere to the CheckCare procedures, in June
1997, the Company was faced with the prospect of having to book approximately $1 .2 million in
losses for which it had established no reserves, contrary to FAS 5 (Accounting for Contingencies) .
On June 27, 1997, Lones discussed the prospects for having to book these losses with Tyra and
Evans in Tyra's offices at Just For Feet's corporate headquarters in Birmingham, Alabama.
89 . Additionally, Lones discussed the existence of the $1 .2 million in prospective losses
stemming from Just For Feet's failure to follow the CheckCare procedures with the Company's inhouse and outside counsel, including Swartz, as early as March 6, 1997 . Just For Feet's counsel
advised that the Company did not have a likelihood of recovering these amounts from CheckCare .
90 . During the Summer of 1997, prior to the close of Just For Feet's second quarter
ending July 31, 1997, Just For Feet wrote off approximately one-half of the $1 .2 million of
CheckCare losses . However, following a negative newspaper article, Tyra directed Lones and Evans
to cease all write-offs of bad debt losses for the stated reason that Just For Feet's earnings reports
had been negatively impacted . The CheckCare receivables which the Company's management
considered to be uncollectible approximated $600,000 on July 7, 1999 . The failure to take the
balance of the write-offs violated GAAP's requirements with respect to the timing and recognition
of losses . The effect of the write-off of these receivables as bad debt were known to Deloitte,
Ruttenberg, Baker, Tyra, Wynne, Evans and Barry, all of whom acquiesced in Just For Feet's efforts
to protect earnings by continuing to keep the remaining bad debts on the books at full value .
29
91 . During the quarter ended October 31, 1997, Just For Feet reversed a sales tax payment
in the amount of $60,000 relating to the CheckCare bad debt losses, adding $60,000 back to income,
even though the bad debt loss had not yet been written off. This reversal, which violated GAAP, was
made against the express advice of Lones .
Failure To Book Required Reserves For Sales Promotion s
92 . During the last weekend in April 1999, Just For Feet, which was desperately
attempting to increase its revenues through increased sales, embarked upon a special promotion for
the sale of its goods in its Super Stores Division . Under this program, Just For Feet's Super Stores
Division offered a dollar-for-dollar rebate program for purchases of goods at Just For Feet . For
example, if a purchaser of Just For Feet goods spent $50 .00 in a Just For Feet superstore, that
purchaser was entitled to receive a $50 .00 credit on any goods purchased at any Just For Feet store
after June 18, 1999 . The rebate offer was good from June 18, 1999 through December 31, 1999 .
93 . Just For Feet realized approximately $20 million from this sales promotion an d
booked that sum during the first quarter of 1999 . Notwithstanding that for every dollar realized as
a result of this sales promotion Just For Feet also incurred a liability after June 18, 1999, only twenty
percent (20%) of the $20 million received from this sales promotion was reserved as a future
liability, in violation of FAS 5 (Accounting for Loss Contingencies) because the redemption rate of
the coupons from this sales promotion was quantifiably in excess of 80% .
94 . Additionally, the June 18, 1999 effective date for the rebate was intentionally set to
occur after Just For Feet had reported its first quarter results to the SEC . The effect of this scheme
was to inflate first quarter fiscal 1999 results at the expense of the Company's historically strongest
sales season in July and August (the back-to-school season) .
30
95 . On May 25, 1999, the Company's management scheduled telephone conference calls
with securities analysts and other interested parties for the purpose of discussing the financial results
of the Company for the quarter ended April 30, 1999 . The Company was represented in that
conference by Ruttenberg, Tyra and Rockey .
96 . In describing the first quarter 1999 Super Stores Division's "dollar-for-dollar" sales
promotion manipulation, Ruttenberg boasted that :
(a) The Company's core business, its Super Stores Division, continued to excee d
m anagement ' s expectations ;
(b) The Company's Super Stores Division continued to take market share and was the
most differentiated and best formula for winning business in this competitive
business ;
(c) The Company would continue to invest in the Super Stores concept to ensure that
they would be the most dominant retailer of the future ; and
(d) Industry conditions remained difficult and challenging, but the Super Stores Division
again demonstrated the ability to continue to take market share, as well a s
experienced positive same store sales growth for the twenty-second consecutiv e
quarter.
97 . Following Ruttenberg's presentation, Tyra described Just For Feet's financial result s
as follows :
(a) For the first quarter ended May 1, 1999, sales were approximately $221 million, u p
45 .5% versus the first quarter of last year; and
31
(b) Operating income for the first quarter was $12 .7 million, before interest and taxes,
up 26 .2% over the $10 .1 million for the first quarter of last year .
Tyra never disclosed the dollar-for-dollar rebate program or the effect that such a program would
have on Just For Feet's future quarters . Nor did Tyra disclose that, if the Company had established
appropriate reserves of 80% rather than 20% of the potential $20 million liability in connection with
the program, the additional $12 million in reserves would have wiped out virtually all of the
quarter's $12 .7 million in operating income .
98 . In the question and answer session which followed these presentations, Ms . Dana
Cohen, of Donaldson, Lufkin & Jenrette, asked about the first quarter "buy one get one free"
program and its impact on the first quarter results . Ruttenberg responded that the program was part
of the Company's inventory reduction plan, worked very well, was held for one weekend only and,
while business was very good over that period, the program was not significant and did not
materially impact first quarter results . Unbeknownst to the analysts and stockholders on the call,
these representations were false when made, and Ruttenberg, Tyra and Rockey knew of their falsity .
99 . In response to a subsequent question by Mark Freidman of Merrill Lynch, Ruttenber g
stated : (a) Our inventories will be at peak at the end of July for our back-to-school season ; and (b)
We have no plans to be playing around with our back-to-school business . Ruttenberg made these
representations despite his knowledge that the first quarter "dollar-for-dollar," or "buy one get one
free" program would likely hurt the back-to-school season .
100 . The understatement for the Company's first quarter 1999 sales promotion was not the
only instance of failing to properly reserve against income . Just For Feet's hallmark sales promotion
was "Buy at Just For Feet, where the thirteenth pair is free ." In fact, Just For Feet held a registere d
32
trademark for the slogan "Where the 13`h pair is free ." The Company did not, at any time, make any
allowance or reserve for the free thirteenth pair of shoes, despite claiming to have 2 .4 million
families enrolled in the program . Nor did the Company establish reserves for the redemption of gift
certificates or coupons offering discounts to customers in connection with other sales promotions .
This failure to establish reserves violated FAS 5 .
101 . The Company's failure to book appropriate reserves for gift certificates, promotions
and coupons was known to Defendants throughout the Class Period, and at the very least was
disclosed to the Board of Directors in August 1999 .
Failure To Book Required Reserves For Barter Transaction s
102 . Just For Feet also failed to book reserves or impairments relating to its "sales" to
barter exchanges . From time to time during the Class Period, Just For Feet "sold" its aged inventory
to "barter groups" in return for credits for an equivalent value of services to be rendered in the future
by members of the barter group. Just For Feet booked the value of the barter group receivable at the
actual original cost of the merchandise, plus 14% . During the Class Period, Just For Feet booked
barter group receivables of at least $5 million .
103 . Because of the limited ability to use the barter dollars, and because services obtaine d
with barter dollars were at full retail price, the services to be received by Just For Feet were worth
substantially less than the value booked by Just For Feet for the barter receivable or asset . In fact,
Just For Feet used very few of its barter credits, because it found that it could negotiate better prices
and terms by paying for services in cash rather than barter credits . These facts were commonly
known to the Company's senior management, and were specifically disclosed to the Board of
Directors in August 1999, if not earlier .
33
104 . Whenever the Company and its senior management needed to show an increase in
gross profit, they dumped some of the Company' s aged an d essentially worthless inventory off to
the barter groups and booked the original merchandise costs, which included the 14% inventory cos t
capitalization, at full value as a viable receivable .
Misuse of Acquisition Accountin g
105 . In June of 1998, Just For Feet announced its acquisition of Sneaker Stadium .
Ruttenberg , Tyra an d Berm an, with the active assist ance of Wynne, Evans and Lloyd, embarked o n
a scheme to inflate Just For Feet's earnings by the m anipulation of the value of Sneaker Stadium
inventory .
106 . On the date of the acquisition of Sneaker Stadium, Tyra and Berman, with the activ e
assistance of Wynne, Evans and Lloyd, established an inventory reserve of $10,583,897 against an
inventory balance of $46,973,783, thus reducing the net value of the newly acquired Sneake r
Stadium inventory to $36, 389,886, or 77 .5% of cost.
107 . Ruttenberg , Tyra and Berman acted in concert to hide Just For Feet's poor
performance by improper use of acquisition accounting entries relating to the Sneaker Stadiu m
acquisition . These included providing inventory reserves greatly in excess of justifiable amounts ,
then releasing rese rves as needed to allow the Company to continue to inflate ea rn ings .
108 . Per the 10-Q for the quarter ended July 31, 1998 the Defendants caused the Comp any
to show an estimate of inventory value for the inventory acquired from Sneaker Stadium to be $36 . 4
million . In the 10-Q for the quarter ended October 31, 1998, the amount was adjusted downwar d
to $27 .6 million pursuant to an overreaching application of Accounting Principles Board ("APB" )
34
Statement No . 16 and FAS 38, which permit a one-year period of allocation of purchase price . As
a result, the inventory was now valued at 59% of its cost on the Company's books .
109 . Just For Feet was adjusting inventory downward by increasing its acquisition-related
inventory reserve, with an offsetting increase to goodwill (which was being amortized over the
years, which itself was an overreaching application of APB 17) . The Defendants then recognized
profit on the future sale of the undervalued inventory, causing profit margins and net profits to be
overstated . This treatment effectively masked poor operational results by reducing average cost of
sales and increasing operating income by the amount of the excessive inventory reserve .
110 . As Just For Feet was faced with the prospect of failing to meet securities analysts '
expectations for the third quarter ending October 1998, Defendants Tyra and Berman, with the active
assist ance of Defendants Wynne, Evans and Lloyd, added an additional $8,802,522 to the Sneaker
Stadium inventory reserves . The effect of these arbitrary write-downs of Sneaker Stadium's
inventory was to decrease the cost of goods sold and thereby incre ase income and earnings . By
means of this manipulative device, Just For Feet was able to meet or exceed the earnings
expectations of securities analysts and thus maintain or support the market price for the shares of
common stock of Just For Feet .
111 . As January 30, 1999 (the end of the fiscal year) neared, Just For Feet was again face d
with a prospective failure to meet securities analysts' earnings expectations and forecasts . In order
to increase earnings and thereby fulfill market expectations, Just For Feet, acting through Tyra and
Berman, and with the active assistance and participation of Wynne, Evans and Lloyd, added an
additional $2,503,650 to the acquisition inventory reserves for the Sneaker Stadium inventory, whic h
35
had been acquired six months earlier, and thereby were able to decrease the cost of goods sold and
thus increase income and earnings .
112 . The use of this manipulation of the Sneaker Stadium inventory reserves, which was
not disclosed to the investing public, enabled Just For Feet to again meet the securities analysts'
earnings forecasts and expectations with the result that the market price of the Just For Feet shares
of common stock was artificially supported by means of these misleading manipulations .
113 . In all, Just For Feet reserved a total of $21,890,069 as acquisition inventory reserve s
for the Sneaker Stadium transaction, or 46 .6% of its originally booked inventory costs, most or all
of which was unjustified . This scheme to manipulate the inventory costs of the Sneaker Stadium
acquisition had the effect of increasing earnings by as much as $21,890,069, or nearly half of the
Company's reported pre-tax earnings of $43 .3 million .
114 . This scheme was directed by Tyra and Berman, with the active assistance of Wynne,
Evans and Lloyd, and with the knowledge and support of Ruttenberg, Barry, Baker and Deloitte .
Improper Capitalization of Inventory Cost s
115 . By the end of each fiscal year during the Class Period, Just For Feet overstated
inventory by improperly capitalizing operating costs which should have been expensed in the current
period . These costs included operating costs of the corporate headquarters and the stores'
administrative and sales costs in excess of the amounts properly allowable under GAAP . By use of
this device, Just For Feet reduced operating expense by moving tens of millions of dollars into asset
categories such as capitalized inventory costs, thereby overstating inventory and earnings . This
scheme, and its impact upon Just For Feet's reported income and earnings, were discussed among
Lones, Wynne, Barry and Baker in June and July of 1997 .
36
116 . Notwithstanding Lones' adamant insistence that the accounting methods employe d
by Just For Feet were improper and misleading, Wynne and Deloitte, acting through Baker an d
Barry, directed Lones to utilize an accounting methodology which resulted in an even highe r
inventory capitalization.
117 . Just For Feet's improper methods of inventory capitalization, which blatantly violate d
Accounting Research Bulletin ("ARB") 43 (Inventory Pricing), were discussed with Evans and Tyr a
on June 27, 1997 in Tyra's office at the headquarters on 7400 Cahaba Valley Road .
118 . In short, the inventory cost capitalization practices were extraordinary and vastl y
exceeded industry practice . At Just For Feet, the costs of the acquisition of goods was capitalized
at a rate of fourteen percent (14%), which substantially exceeded industry norms . For example, if
Just For Feet purchased a pair of shoes from Nike, it added certain overhead costs to that purchase
price, i.e., cost of personnel in the buying department, freight costs, etc . When Just For Feet
accounted for the purchase of that $30 .00 pair of shoes, it showed the value of that purchase as
$30 .00 x 14%, or $34 .20 .
119 . Because Just For Feet utilized the first-in first-out ("FIFO") method of inventor y
accounting, rather than the more widely utilized dollar-value last-in first-out ("LIFO") retail method ,
these improperly capitalized expenses remained in inventory (and thus offthe income statement) fo r
several reporting periods .
120 . The effect of the use of the 14% figure was to materially decrease operating expense s
and consequently increase the earnings of Just For Feet throughout the Class Period . No disclosure
was made that Just For Feet was using a capitalization rate far in excess of industry norms .
37
Overstatement of Inventory Net Realizable Value
121 . By the end of each fiscal year during the Class Period , Just For Feet overstated
inventory by failing to calculate its invento ry in accordance with ARB 43 (Invento ry Pri cing) . Just
For Feet failed to properly value invento ry using the lower of cost or market as required by GAAP,
and failing to adequately provide for obsolescence and inventory sh ri nkage , also as required by
GAAP .
122 . As of May 1, 1999, Just For Feet maintained invento ry reserves of only $400,000,
ludicrously low for fas hion retail inventories valued at $458 million. Additionally, there existed no
inventory aging policy at Just For Feet because the information in the Just For Feet invento ry
accounting system was totally unreliable .
123 . Just For Feet regularly transferred its invento ry from division to division and store
to store to inflate the value of its inventory assets . When inventory was transferred from one
division or store to another division or store, it was booked on the records of Just For Feet as "new"
inventory . Thus, when the Just For Feet Specialty Stores Division, which catered to a particularized
market, could not sell inventory, it was transferred to the Super Stores Division, which catered to
an altogether different market, and was picked up on the Super Stores Division's books at the
Specialty Stores' carrying cost (including the old 14% add-on), plus an additional 14% of the already
marked-up value . During July and August 1999 alone, Just For Feet transferred $20 million in
inventory from its Specialty Stores to its Super Stores .
38
124 . In fact, the inventory transferred was frequently obsolete , out of date and, given the
differences in the markets served by the two divisions, was likely to be sold out of the Super Stores
at huge discounts, if at all .
125 . In 1998 and 1999, the inventories at the Specialty Stores consisted largely of outdated
materi als, i . e ., 1996 Olympic warm-ups, Houston Oilers jackets, etc ., which had been purchased by
Don-Allen Ruttenberg . In the Just For Feet corporate headquarters, such purchases became known
as "Don Deals . "
126 . The New Jersey warehouse of Just For Feet, which serviced all the northeaster n
United States , was the dumping ground for goods purchased by Just For Feet in "Don Deals ."
Notwithstanding that Just For Feet ' s m anagement knew that the invento ry stored at the New Jersey
warehouse was vi rtually wort hless, Just For Feet valued that invento ry at its "cost," which was
infl ated by a factor of 14% because of Just For Feet' s improper inventory cost capitalization
practices , all in violation of GAAP . Just For Feet carried no reserves with respect to this inventory .
127 . Many of the "Don Deals" were inventory that was purchased at inflated pri ce s
(frequently to compensate vendors for their pa rticipation in prior accounting schemes by Just For
Feet), and then marked for sale at deep discounts . For example , Don-Allen purchased Dr. Martens
s andals for $23 .00 per pair, but when they hit the sales floor they were immediately marked for sale
at only $ 9 .00 per pair . However, Just For Feet continued to carry the invento ry of sandals on its
books at $23 .00, so it could defer recognition of any loss until the sandals were actually sold, thus
enabling it to spread the loss over future periods . This practice of marking down p ri ces on the retail
side (the store shelves ) but not on the inventory side (the warehouse or backrooms of stores), was
a standard practice at Just For Feet , and is in violation of the GAAP requirement that inventories be
39
valued at the lower of cost or market value . This practice had a material impact on Just For Feet's
reported earnings throughout the Class Period .
128 . Just For Feet also did not properly account for market enhancement discounts
provided by vendors . When vendors provided cost reductions or markdowns to Just For Feet, Just
For Feet would nevertheless enter and/or maintain the value of the inventory on its books at the
original cost (which was more than Just For Feet had paid), and would immediately recognize
income equal to the difference between the original cost and the price paid, net of discounts . This
allowed Just For Feet to recognize a portion of the income from this inventory immediately upon
receipt of the inventory from the vendors rather than upon sale to customers, thereby increasing
income immediately rather than deferring that income until the inventory was eventually sold to
customers . Because much ofthis inventory was slow-moving or unattractive, the Company in effect
created phantom income rather than reserving for the loss such inventory would likely entail .
129 . As of June 1999, the inventory overstatement at Just For Feet's Specialty Stores ha d
grown to at least $20 million . On a companywide basis, as of July 1, 1999, Just For Feet was
carrying more than $53 million in aged and impaired goods (including Don Deals) on its books at
full cost . These inventory problems were known to most all senior managers at Just For Feet, as well
as to Deloitte, who had been told of the GAAP violations as early as June 1997 .
Improper Accounting For Leaseholds
130 . Just For Feet treated all of its store leases as operating leases, regardless of whether
circumstan ces existed that would have required them to be capitalized under GAAP . Many of Just
For Feet ' s leaseholds were fitt ed with build- outs an d other costly improvements , yet the costs of
those impro vements were never capitalized .
By failing to capitalize its le as es an d leasehol d
40
improvements, Just For Feet was able to avoid the decrease in earnings in the early years of each
lease that would have resulted from the treatment of lease payments as interest payments . At the
same time, Just For Feet avoided having to create a liability on its balance sheet with respect to the
leases .
131 . In 1998, Just For Feet refurbished its store at Caesar's Palace in Las Vegas . Lones
informed Just For Feet management, as well as Baker, that proper accounting for this refurbishment
would require the Company to write off approximately $800,000 in prior leasehold improvements .
These write-offs were never taken . Upon information and belief, Just For Feet similarly failed to
write-off other leaseholds and improvements for stores that were refurbished or closed during the
Class Period.
Just For Feet's Woefully Inadequate Accounting And Management Information Systems
132 . The accounting and management information systems employed at Just For Feet were
woefully inadequate throughout the Class Period . The inadequate nature of the accounting system
permitted many "after-the-fact" manipulations of reported profits and earnings . The Defendants
could thus "adjust" Just For Feet's financial results, creating the illusion of sales, growth, and
valuable inventory and receivables, as well as the illusion of compliance with the financial covenants
in its loan agreements, thus misleading lenders and investors alike as to the Company's financial
condition. No disclosure to the investing public was ever made about the inadequacy of Just For
Feet's accounting system .
133 . As of July 1, 1999, there existed a 35% error rate on accounting for Just For Feet's
payables . That is, Just For Feet was unable to match invoices with shipments, and could only
account for 65% of the inventory generating its payables actually being delivered into inventory .
41
134, As of October 8,1999, the Company's books reflected $5 .6 million more in inventory
at the Specialty Stores than the physical inventory count had revealed. The Company's general
ledger showed an additional variance of approximately $7 million . Berman informed Rockey of
these facts in a memo dated October 17, 1999, in which he identified a number of inventory control
problems that might have caused the variance .
135 . Just For Feet's accounting system reported yearly same-store sales comparisons for
stores that were open less than one year. When this logical impossibility was brought to the attention
of senior management, the reply was simply that is what same store sales "would have looked like"
if the store had been open more than a year .
136 . Just For Feet's books did not have monthly "hard closes ." This enabled the
Company's management to make many after-the-fact alterations to the Company's books . The
inventory system employed at Just For Feet was particularly vulnerable to alteration, permitting
entries that had the effect of increasing the Company's apparent worth . Wynne (and Wabler before
him) regularly instructed Lloyd to physically and personally alter the Company's inventory figures
during the Class Period . Lloyd (and Wabler before him) effected these alterations of Just For Feet's
inventory numbers through a concealed computer backdoor on the Profits Computer System and its
successor system, the Island Pacific System . At times, the alterations made or directed by Wynne
and Wabler occurred as the original data was being entered .
137 . The existence of this undetectable access to both computerized inventory systems was
made known to Baker of Deloitte by the Company's accounting staff during the course of Deloitte's
annual internal control audit updates during the Class Period .
42
138 . During a telephone conference between Lones and Deloitte representatives Baker and
Barry while Lones was in Florida doing due diligence on the Athletic Attic acquisition, Deloitte was
again informed of the fact that the integrity of the Company's accounting systems was being
compromised by the alterations made through the concealed computer backdoor on the Profits
Computer System and the Island Pacific System . During this conference, Deloitte was asked to
assist Lones in putting an end to the backdoor alterations of the Company's historical inventory data .
Deloitte refused to do as requested . Deloitte was thus on direct notice of probable violations of
GAAP .
139 . Rather than promptly report the inadequacy of Just For Feet's accounting and
inventory systems to Just For Feet's Audit Committee, Deloitte sought to profit from Just For Feet's
inadequate systems by, on June 11, 1999, successfully bidding on a consulting project to cure the
many deficiencies in those systems, including the Company's inventory management problems and
its "accounts payable matching process . "
140 . On July 1, 1999, Deloitte provided Just For Feet with a report of its preliminar y
findings regarding the Company's inventory management and accounts payable matching problems .
Among other things, Deloitte found that during the third and fourth quarters of 1998, purchase orders
were not being entered into the Company's inventory management system, and "MIS lacked
attention to core system issues ." Deloitte found that in the first quarter of 1999, "[p]oor inventory
controls continue[d] to result in increased likelihood of inventory shrinkage ." Deloitte also found
that procedures for the receipt of merchandise at the store level were "not rigorously or consistently
employed," that poor communication and numerous operational issues were causing errors i n
43
entering information into the inventory control system, that comprehensive procedures did not exis t
for the resolution of errors in the accounts payable matching process, and that RTV procedures were
"readily available but inconsistently followed. "
141 . Despite Deloitte's knowledge of significant problems with Just ForFeet's accountin g
and inventory control systems during the Class Period, these deficiencies were not noted in Just For
Feet's annual financial statements for which Deloitte issued unqualified opinions . Deloitte permitted
Just For Feet, in its Reports on Form 10-K (which had been reviewed by Deloitte), to expressly tout
the purported superiority of the Company's "sophisticated information systems," and particularl y
its inventory control systems, in violation of SAS 8, which would require Deloitte to notify th e
Company of the material misstatements and to seek legal advice concerning other steps to be taken .
For example, Just For Feet's Form 10-K for the fiscal year ended January 30, 1999, states :
We believe that we have sophisticated information systems that assist
us in optimizing our superstore operations . Control of our
merchandising activities is currently maintained by a fully integrated
point-of-sale, inventory and management information system which
permits management to monitor inventory and store operations on a
daily or more frequent basis . Bar-coding of merchandise and the use
of scanners at receiving and point-of-sale allows the inventories of all
stores to be automatically adjusted and sales automatically logged as
customers check out. Purchasing, tracking and receiving systems
assist in the efficient and timely distribution of merchandise to each
superstore . Systems are in place to permit review, on a daily or more
frequent basis, of sales information by store, category, vendor or
employee in order to focus on store needs and employee productivity .
In-store information systems are linked in our superstores directly to
the corporate office.
Defendants' Efforts to Conceal Their Misconduc t
142 . In June 1999, Robert Oyster ("Oyster") joined Just For Feet as the President of it s
Superstores Division . Within a short time after his arrival, through discussions with other Just Fo r
44
Feet employees, Oyster discovered a number of the improper accounting treatments being utilized
by Just For Feet's management . In an effort to do the honest and right thing, Oyster informed
management, including Rockey, of his concerns .
143 . Rockey assured Oyster that she would bring in Arthur Andersen to review th e
Company's accounting practices and internal controls and provide an independent opinion as to their
integrity and propriety. Rockey went so far as to request a proposal from Arthur Andersen in June
1999 to review Just For Feet's cash flow procedures and performance reporting . Rockey then
arranged for Oyster to meet with representatives of Arthur Andersen on August 2, 1999, but never
followed up any further.
144 . In an effort to prevent Oyster from digging any further into Just For Feet's accountin g
schemes, Just For Feet management decided to deny Oyster access to any Company books or
financial records . Even when Oyster specifically requested on two occasions that Wynne provide
him with information about the Company's accounts receivable from Rogers, the information was
never supplied .
145 . On July 20, 1999, after Oyster had complained to Rockey about his lack of access t o
accounting information and his concerns about questionable accounting practices, Rockey asked
Oyster for a list of the "funky accounting issues" at Just For Feet. On or about July 26, 1999, Oyster
provided her with a list of his concerns, including the many questionable accounting practices
discussed above with respect to booth accounting, co-op advertising (including the recognition of
income before it is earned), market enhancement funds, insufficient inventory reserves, high
capitalization of inventory costs, lack of a viable inventory aging report, failure to mark down costs
of inventory when the retail price is marked down, possible inflation of inventory unit costs t o
45
provide vendors with the wherewithal to refund credits to Just For Feet on past overaccruals, failure
to accrue reserves for gift certificates and sales promotions ; distortion of accounts payable liability
due to inability to match accounts payable to receivers, gross-up of sales for giveaway promotions
to increase comparable sales growth figures, accounting for leases as operating leases rather than
capitalizing them, inability to use barter credits effectively, and accounts receivable from Rogers .
146 . On August 15, 1999, Rockey sent Lazarus an e-mail identifying a number of
accounting practices for discussion by the Audit Committee, all of which had been brought to her
attention by Oyster . These issues included the timing of recognition of co-op advertising income,
the lack of a sufficient inventory obsolescence reserve, the possible inaccuracy of the Company's
inventory aging, the taking of vendor deductions without vendors' consent, gross-ups of sales for
giveaways and promotions, and the possible need to reserve for unuseable barter trade credits .
Rockey stated that she was sure there were more accounting issues to be addressed, but that these
issues would be a good start . Tyra received a copy of this e-mail .
147 . On August 19, 1999, Oyster attended a meeting of Just For Feet's Board, excludin g
Ruttenberg and Rockey . During that meeting, Oyster provided the Board members with a detailed
description of what he considered to be improper accounting practices at Just For Feet . These
accounting practices included : the rebate scheme involving Rogers Advertising ; the lack of accruals
for gift certificates and promotions ; the large number of unmatched accounts payable ; the gross-up
of sales for giveaways ; the carrying of useless trade credits on the books ; booth accounting ;
overstatement of co-op receivables ; incorrect treatment of market enhancement funds ; and
insufficient inventory reserves . Oyster told the Board that he believed these practices to be so fa r
46
outside the bounds of acceptable accounting standards that they constituted cause for serious
concern.
148 . With respect to the Rogers scheme, Oyster informed the Board that at the end of the
last three fiscal years, Just For Feet had accrued inflated anticipated future rebates . He told them that
in January 1999, when Just For Feet wanted to increase its income for the fiscal year ended January
30, 1999, the Company booked as current income the anticipated rebates which would not be earned
until the next fiscal year, which, when added to the existing overaccrual balance, resulted in an
accounts receivable balance of $5 .3 million . Oyster informed the Board that Gilburne had told
Rogers to overbill Just For Feet by $250,000 per month in order to provide Rogers the cash he
needed to "pay back" Just For Feet for these accounts receivable, which totaled approximately $7 .5
million as of July 1999 . Oyster further informed the Board that, when asked about the collectibility
of these accounts receivable, Rogers had stated that he was not liable for those amounts, and that the
only way he could pay them off was by overbilling Just For Feet .
149 . With respect to the Company's failure to accrue for gift certificates, coupons and sale s
promotions (including the thirteenth pair free program), Oyster informed the Board that the Company
was pumping up its sales figures by recognizing revenues without any related costs or reserves when
coupons and certificates were issued, and would only recognize such costs when the certificates or
coupons were redeemed. Oyster informed the Board that the result was a $10 million overstatement
of income in the first quarter of 1999 .
150 . Oyster also informed the Board that the Company's sales of inventory to barter
exchanges in exchange for trade credits had originally been done to "juice" sales and income, but
that the trade credits received by Just For Feet could not be used effectively and were not worth th e
47
carrying value attributed to them on the Company's books . Oyster described this practice as stealin g
from the future for the benefit of today.
151 . Within a few days after the August 18,1999 Board meeting, Oyster was informed that
he was being transferred to the Chief Operating Officer position, and that he was being sent to Just
For Feet's New Jersey warehouse to review inventory issues there . The reason for this transfer was
to prevent Oyster from discovering any more information about Just For Feet's improper accounting
practices, and to prevent him from blowing any more whistles on the Defendants .
152 . On August 23, 1999, Oyster was invited to participate in a telephonic meeting of the
Audit Committee scheduled for August 25, 1999 . During the morning of August 25th, however,
Rockey informed Oyster that his participation was no longer required .
153 . On or about September 27, 1999, Rockey summoned Oyster to a meeting for the
stated purpose ofdiscussing real estate issues with Berman . During that meeting, Berman attempte d
to silence Oyster about the Company's accounting issues, by threatening him with personal liability
in the event of a lawsuit.
Defendants' False and Misleading Statement s
154 . Prior to and throughout the Class Period, Just For Feet reported consistently positiv e
and growth-oriented results its year-end financial reports, as follows and as discussed more full y
below (amounts are in thousands except per share data, adjusted for stock splits) :
Earnings
Year
Sales
1996
1997
1998
$256,397
$478,638
$774,863
Gross
Profit
$108,871
$198,822
$322,533
48
Net
Income
Per
Share
$13,919
$21,403
$26,648
$ 0 .5 0
$ 0 .72
$ 0 .8 7
Defendants also made a number of false statements, both during conference calls with securities
analysts and in the textual and financial statement portions of Just For Feet's annual and quarterly
reports to shareholders, Forms 10-K and 10-Q, and press releases that were issued during the Class
Period, regarding the Company's supposedly increasing sales, profits, earnings, and growth of
business . As a result of the accounting manipulations described above, however, those statements
were known to be materially false and misleading at the time they were made .
155 . On May 5, 1997, Just For Feet issued a press release announcing its financial result s
for the three-month period ended April 30, 1997 . The press release stated that Just For Feet's
reported sales for the period were approximately $90 million, representing an 83 .2% increase over
the same three-month period in 1996 . The press release further stated that comparable store sales
for the Company's Superstores had increased 5 .0% for the quarter compared to the same quarter in
1996 . The press release quoted Ruttenberg as saying "I am very pleased to announce that Just For
Feet superstores posted a 5 .0% comparable store sales gain in the first quarter on top of the prior
three years' first quarter comparable sales increases of 42 .0%, 10 .0% and 12 .0% for fiscal 1996,
1995 and 1994, respectively ." Ruttenberg also stated that "the Company did not experience any of
the industry sales softness reported by some of its competitors during the quarter . . ." The press
release's reports of Just For Feet's sales results were materially false and misleading because the
above-described accounting practices caused the Company's net sales to be materially overstated .
In addition, the statements regarding the Company's purported growth in comparable store sales
were also materially false and misleading because the press release failed to disclose that those
figures were based, in part, on fictitious prior period sales figures for stores that were not yet open,
and on improper accruals of revenue and accounts receivable for bulk sales occurring after the end
49
of the period which had been allocated out to stores to create the illusion of continuing growth in
comparable store sales . The market, which had not knowledge of the fraud, responded positively
to this press release, with trading volume on May 5, 1997 that was more than twice the volume of
May 2, 1997 (the preceding business day) . The market price of Just For Feet's stock jumped 13 .7%
in response to the press release, from a closing price of $18 1/8 on May 2, 1997, to a closing price
of $20 5/8 on May 5, 1997 .
156 . On June 12,1997, Just For Feet filed its Form 10-Q with the SEC for the three-month
period ended April 30, 1997 . That Form l O-Q, which was signed by Ruttenberg and Tyra, lists Just
For Feet's net income for the quarter as approximately $5 .2 million, or $0 .18 per share, representing
an increase of 62 .5% over reported net income for the quarter ended April 30, 1996. The Form 10-Q
also states that the value of Just For Feet's merchandise inventories was in excess of $140 million,
and that net sales had increased by 88 .7% (to $92 .8 million) as compared to the quarter ended April
30, 1996 . In fact, these sales, income and inventory figures, among other figures in this Form 10-Q,
were materially overstated as a result of the accounting manipulations described above .
157 . On September 15, 1997, Just For Feet filed its Form 10-Q with the SEC for the threemonth period ended July 31, 1997 . That Form 10-Q, which was signed by Ruttenberg and Tyra, lists
Just For Feet's net income for the quarter as approximately $4 .8 million, or $0 .16 per share,
representing an increase of 64% over reported net income for the quarter ended July 31, 1996 . The
Form 10-Q also states that the value of Just For Feet's merchandise inventories was in excess of
$178 million, and that net sales had increased by 92 .5% (to $112 .4 million) as compared to the
quarter ended July 31, 1996 . In fact, these sales, income and inventory figures, among other figures
in this Form 10-Q, were materially overstated as a result of the accounting manipulations describe d
50
above. This Form 10-Q also states that the Company had achieved "positive comparable store sales
growth on an annual basis" in recent years, including growth of 4 .0% and 4 .5%, respectively, for the
three and six month periods ended July 31, 1997 . The 10-Q specifically states that "[t]he specialty
stores will not be included in the comparable store base until such stores have been owned and
operated by the Company for twelve full months ." What is not disclosed is that these positive
comparable store sales growth rates did include new superstores that had been open for less than
twelve months, and that the Company's management had fabricated comparable sales numbers for
those stores . The comparable store sales figures were also materially misstated as a result of
Defendants' false accrual of revenues and accounts receivable for bulk sales occurring after July 31,
1997, which were allocated out to stores to provide the illusion of continuing comparable store sales
increases .
158 . On December 12, 1997, Just For Feet filed its Form 10-Q with the SEC for the threemonth period ended October 31, 1997 . That Form 10-Q, which was signed by Ruttenberg and Tyra,
lists Just For Feet's net income for the quarter as approximately $5 .4 million, or $0 .18 per share,
representing an increase of approximately 7% over reported net income for the quarter ended
October 31, 1996 . The Form 10-Q also states that the value of Just For Feet's merchandise
inventories was in excess of $168 million, and that net sales had increased by 87 .9% (to $131
million) as compared to the quarter ended October 31, 1996 . In fact, these sales, income and
inventory figures, among other figures in this Form 10-Q, were materially overstated as a result of
the accounting manipulations described above . Additionally, like the 10-Q for the previous period,
this 10-Q reported comparable store sales growth without disclosing that these growth figures were
based, in part, upon information fabricated by Just For Feet management (including prior-period
51
sales figures for stores that were not open during those periods), and on falsely accrued revenues and
accounts receivable for bulk sales occurring after the end of the period .
159 . On April 4, 1998, Just For Feet filed its Form 10-K with the SEC for the fiscal year
ended January 31, 1998 . The Form 10-K was signed by Ru ttenberg, Tyra, Lazarus, and Haines,
among other directors of Just For Feet, an d contains a report by Deloitt e stating that Deloi tt e had
conducted an audit in accordance with GAAS, an d had concluded that the fin ancial statements
contained in the 10-K "present fairly, in all material respects , the fin ancial position of Just For Feet,
Inc . and subsidiaries" in accord ance with GAAP . As reported in those audited financial statements,
Just For Feet ' s net income for the fiscal year was approximately $ 21 .4 million, or $ . 72 per share,
compared to approximately $ 14 million, or $ .50 per share, for the prior fiscal year . The 10-K reports
Just For Feet's net sales as approximately $479 million, representing an 86 .7% increas e over the
prior year. Just For Feet ' s merchan dise inventories are valued in excess of $206 million in the 10K's financial statements . These income, sales and inventory figures, among other figures in this
Form 10 - K, were materially overstated as a result of the accounting m anipulations described above .
In addition, the 10-K falsely states that the Comp any's merchandise inventories "are valued at the
lower of cost (first-in, first-out method) or market" when, as desc ri bed above, they were not.
160 . On June 15, 1998, Just For Feet filed its Form 10 -Q with the SEC for the three-month
period ended April 30, 1998 . That Form I0-Q, which was signed by Rutt enberg and Tyra, lists Just
For Feet' s net income for the quarter as approximately $ 5 .8 million, or $ 0 .19 per share , representing
an increase of about 11 .8% over reported net income for the quart er ended April 30,1997 . The Form
10-Q also states that the value of Just For Feet's merch andise inventories was nearly $ 212 million,
and that net sales had increased by approximately 63 .7% (to $151 . 9 million) as compared to th e
52
quarter ended April 30,1997 . In fact, these sales, income and inventory figures, among other figures
in this Form 10-Q, were materially overstated as a result of the accounting manipulations described
above .
161 . On July 2, 1998, Just For Feet filed a Form 8-K with the SEC to announce that it ha d
consummated the acquisition of Sneaker Stadium, Inc . On July 28, 1998, Just For Feet filed an
amended Form 8-K which attached Sneaker Stadium's audited financial statements, and unaudited
pro forma combined financial statements of Just For Feet and Sneaker Stadium . Sneaker Stadium's
balance sheet as of February 1, 1998, valued the company's net inventories using the lower of cost
or market at approximately $49 million - a figure which included approximately $1 .9 million in
capitalized costs associated with purchasing and merchandising activities, and which was net of
reserves in the amount of $1,031,822 .
162 . On August 3, 1998, Just For Feet issued a press release reflecting Ruttenberg' s
announcement that day of "record consolidated net sales of $175,329,000 for the second quarter
ended July 31, 1998, representing a 56% increase over the second quarter consolidated net sales in
the prior year of $112,369,000 ." The press release stated that "[t]his represented the eighteenth
consecutive quarter of record consolidated net sales for the Company ." The press release quotes
Ruttenberg as saying "We are pleased with our sales results for the quarter particularly when
considering the 4%, 30% and 17% increases in comparable store sales for the second quarter of
1997, 1996 and 1995, respectively . Since becoming a public company in 1994, we have now
experienced eighteen consecutive quarters of positive increases in same store sales . . . ." The press
release stated that the superstores acquired from Sneaker Stadium would not be included in the
comparable store sales analysis until they had been operated as Just For Feet superstores for thirtee n
53
months, but failed to disclose that Just For Feet's comparable store sales figures included other stores
that had been open for less than one year, and for which the Company's management has simply
made up sales figures for the prior year . The comparable store sales figures were also materially
misstated as a result of Defendants' false accrual of revenues and accounts receivable for bulk sale s
occurring after July 31, 1998, which were allocated out to stores to create the illusion of continuing
growth in comparable store sales . The press release's glowing reports of Just For Feet's sales results
were also materially false and misleading because the above-described accounting practices caused
the Company's net sales to be materially overstated .
163 . On August 9, 1998, Just For Feet filed its Form 10-Q with the SEC for the threemonth period ended July 31, 1998 . That Form 10-Q, which was signed by Ruttenberg and Tyra, lists
Just For Feet's net income for the quarter as approximately $8 million, or $0 .25 per share on a
diluted basis, representing an increase of about 66% over reported net income for the quarter ended
July 31, 1997 . The Form 10-Q also states that the value of Just For Feet's merchandise inventories
was nearly $323 million, and that net sales had increased by approximately 56% (to $175 .3 million)
as compared to the quarter ended July 31, 1997 . In fact, these sales, income and inventory figures,
among other figures in this Form 10-Q, were materially overstated as a result of the accounting
manipulations described above . In addition, although Sneaker Stadium had valued its merchandise
inventories at $49 million, net of reserves of approximately $1 million, this 10-Q reflects that Just
For Feet had booked that inventory at a value of only about $36 .4 million, with a reserve of about
$10 .6 million .
164 . On November 4, 1998, Just For Feet issued another press release announcing record
consolidated net sales, this time for the third quarter ended October 31, 1998 . The press release
54
states that net sales for the quarter were $226,008,000, which represented a 72 .5% increase over the
third quarter of the prior year . Ruttenberg is quoted as saying "We are pleased with our sales results
for the quarter particularly when considering the 4 .9%, 18 .5% and 16 .4% increases in comparable
store sales for the third quarter of 1997, 1996, and 1995 respectively ." These statements were
materially false and misleading because Defendants' accounting practices had caused the Company's
net sales to be materially overstated, and because Just For Feet failed to disclose that its comparable
store sales growth figures were based, in part, on sales figures fabricated by Just For Feet's
management for stores that had been open less than one year, and on improperly accrued revenues
and accounts receivable for bulk sales occurring after the end of the period .
165 . On November 23, 1998, Just For Feet issued a press release announcing "recor d
consolidated results for the third quarter ended October 31, 1998 ." This press release repeated the
same false and misleading statements that were made in the November 4, 1998 press release
regarding the Company's sales results for the quarter . In addition, it stated that Just For Feet's net
income for the quarter had "increased 86 .8% to a record $10,040,000 compared to net income of
$5,376,000 for the comparable quarter last year ." These statements were materially false and
misleading when made, because the accounting manipulations described above had caused Just For
Feet's net income and sales results to be materially overstated . In addition, the press release quotes
Ruttenberg as saying "Our operating results continue to improve as our margins increased over the
third quarter of last year in both the Just For Feet superstore and specialty store divisions . The
Sneaker Stadium stores acquired in July, which are closing down for remodeling, provided only a
marginal increase to profits for the quarter." During the same time period, all other major footwear
companies were reporting lower earnings during the Class Period due to a soft market for athleti c
55
shoes and clothing . In the summer of 1998, both Venator ("Foot Locker", the number one athletic
shoe retailer) and Finish Line (an athletic shoe retailer of comparable size to Just for Feet) issued
warnings that their sales and earnings would be below expectations due to weakness in the market .
In fact, Ruttenberg's statement was materially false and misleading, because he knew but did not
disclose that the apparent improvements in Just For Feet's operating results were not the result of
improvements in the Company's actual performance, but rather Defendants' creative and fraudulent
accounting .
166 . On December 15, 1998, Just For Feet filed its Form 10-Q with the SEC for the threemonth period ended October 31, 1998 . That Form 10-Q, which was signed by Ruttenberg and Tyra,
lists Just For Feet's net income for the quarter as approximately $10 million, or $0 .32 per share,
representing an increase of about 87% over reported net income for the quarter ended October 31,
1997 . The Form 10-Q also states that the value of Just For Feet's merchandise inventories was in
excess of $342 million, and that net sales had increased by approximately 72 .5% (to $226 million)
as compared to the quarter ended October 31, 1997 . In fact, these sales, income and inventory
figures, among other figures in this Form 10-Q, were materially overstated as a result of the
accounting manipulations described above . In addition, the 10-Q reflects a downward adjustment
of approximately $ 8 .8 million (from $36,390,000 to $27,587,000) in the estimated fair value of
Sneaker Stadium's merchandise inventories . The 10-Q does not disclose that this adjustment was
the result of an arbitrary increase in Just For Feet's acquisition-related inventory reserve, which
allowed Just For Feet to fraudulently reduce its cost of sales and thereby to claim material increases
in earnings and income .
56
167 . On January 21, 1999, Just For Feet issued a press release stating that quarterly
comparable store sales should exceed expectations for the fourth quarter ending January 30, 1999 .
The press release quotes Ruttenberg as stating "Our core business at Just For Feet superstores has
been strong during the current quarter with approximate increases in comparable superstore sales to
date in a range between 6 .0% - 7 .0% despite a very difficult environment in our industry . The
increase in comparable superstore sales shows our continued gain in market share over competitors ."
These statements were materially false and misleading, because Just For Feet knew but did not
disclose that the true reasons for its apparent increases in comparable store sales were Defendants'
accounting manipulations and management's fabrication of prior-year sales figures for stores that
had been open less than a year .
168 . On February 2, 1999, Just For Feet issued a press release announcing "record
consolidated net sales of $221,605,000 for the fourth quarter ended January 30, 1999, representing
a 55 .6% increase over the fourth quarter consolidated net sales in the prior year of $142,433,000 ."
The press release further states that "Just For Feet consolidated comparable store sales for the fourth
quarter increased 3 .9%," and quotes Ruttenberg as saying : "Our core business at the Just For Feet
superstores was well above plan during the current quarter with an increase in comparable superstore
sales of 6 .2% despite a very difficult environment in our industry . The increase in comparable
superstore sales shows our continued gain in market share from competitors . This also marks the
twentieth consecutive quarter of positive consolidated comparable store sales for the Company ."
These statements were materially false and misleading, because Just For Feet knew but did not
disclose that the true reasons for its apparent increases in comparable store sales were Defendants '
57
accounting manipulations and management's fabrication of prior-year sales figures for stores that
had been open less than a year.
169 . On March 23, 1999, Just For Feet issued another press release which repeated most
of the statements in its February 2, 1999 press release . The March 2, 1999 press release also states
that "[for the year ended January 30, 1999, net earnings increased 24 .5% to a record $26,648,000
compared to net earnings of $21,403,000 for the comparable prior year period ." This statement was
materially false and misleading because Just For Feet's net earnings were materially overstated as
a result of the accounting practices described above.
170 . On April 30, 1999, Just For Feet filed its Form 10-K with the SEC for the fiscal year
ended January 30, 1999. The Form 10-K was signed by Ruttenberg, Tyra, Lazarus, and Haines,
among other directors of Just For Feet, and contains a report by Deloitte stating that Deloitte had
conducted an audit in accordance with GAAS, and had concluded that the financial statements
contained in the 10-K "present fairly, in all material respects, the financial position of Just For Feet,
Inc . and subsidiaries" in accordance with GAAP . As reported in those audited financial statements,
Just For Feet's net income for the fiscal year was approximately $26 .6 million, or $ .87 per share on
an undiluted basis, compared to approximately $21 .4 million, or $ .72 per share, for the prior fiscal
year . The 10-K reports Just For Feet's net sales as approximately $775 million, representing a 62%
increase over the prior year . Just For Feet's merchandise inventories are valued at approximately
$400 million in the 10-K's financial statements . These income, sales and inventory figures, among
other figures in this Form 10-K were materially overstated as a result of the accounting
manipulations described above .
58
171 . On May 25, 1999, Just For Feet issued a press release announcing its financial results
for the first quarter ended May 1, 1999 . Ruttenberg is quoted as saying "We are pleased with our
sales results for the quarter particularly when considering the 4%, 30%, and 17% increases in
comparable store sales for the second quarter of 1997, 1996 and 1995, respectively . Since becoming
a public company, we have now experienced eighteen consecutive quarters of positive increases in
same store sales. The positive results in the current quarter were boosted by the strong performance
of the specialty stores division, which continues to perform above our plan . . . ." These statements
were materially false and misleading for the reasons described above.
172 . On June 14, 1999, Just For Feet filed its Form 10-Q with the SEC for the three-mont h
period ended May 1, 1999 . That Form 10-Q, which was signed by Ruttenberg and Tyra, lists Just
For Feet's net income for the quarter as approximately $2 .8 million, or $0 .09 per share . The Form
10-Q also states that the value of Just For Feet's merchandise inventories was approximately $458
million, and that net sales had increased by approximately 45 .5% (to $221 million) as compared to
the quarter ended May 1, 1998 . In fact, these sales, income and inventory figures, among other
figures in this Form 10-Q, were materially overstated as a result of the accounting manipulations
described above .
173 . On September 27, 1999, Just For Feet filed its Form 10-Q with the SEC for the threemonth period ended July 31, 1999 . That Form 10-Q, which was signed by Rockey and Berman,
indicates that Just For Feet sustained a net loss of $25 .9 million, or $0 .83 per diluted share, for the
quarter . The Form 10-Q also states that the value of Just For Feet's merchandise inventories was
in excess of $463 million, and that net sales had increased by approximately 29% (to $225 .8 million)
as compared to the quarter ended July 31, 1998 . In fact, these sales, income (loss) and inventor y
59
figures, among other figures in this Form 10-Q, were materially overstated as a result of the
accounting manipulations described above . For the quarter ended July 31, 1999, the manipulations
relating to booth accounting, co-op advertising and Rogers Advertising alone had caused
overstatements of income of at least $12 million . Therefore, if the true facts had been disclosed, this
Form 10-Q would have reflected a net loss of $38 million or more, rather than $25 .9 million .
174 . On December 7, 1999, after the end of the Class Period, Just For Feet filed a For m
8-K with the SEC, announcing Deloitte's resignation as Just For Feet's auditors . In that Form 8-K,
Just For Feet disclosed, for the first time, that Deloitte had provided Just For Feet's management
with a management letter in or about early June 1999 which identified matters relating to the
Company's accounts payable system and vendor receivables that Deloitte considered to be
"reportable conditions ." As defined by Deloitte, "[r]eportable conditions involve matters coming
to the auditor's attention that, in his judgment, should be communicated to the audit committee
because they represent significant deficiencies in the design or operation of internal control, which
could adversely affect the organization's ability to record, process, summarize, and report financial
data consistent with the assertions of management in the financial statements ." The 8-K states that
management disagreed with Deloitte's characterization of the accounts payable and vendor
receivables matters as reportable conditions, and that the draft management letter was not provided
to Just For Feet's Board of Directors or Audit Committee .
175 . On January 3, 2000, Just For Feet filed an amendment to its December 7, 1999 Form
8-K filing with the SEC, which included a response from Deloitte to the statements in this initial
filing . Deloitte stated that it was never informed of any disagreement by Just For Feet's management
with Deloitte's identification of reportable conditions, and that Deloitte had made a number o f
60
unsuccessful attempts to discuss those matters with the Company's management . Deloitte further
states that, contrary to Just For Feet's statement in its initial December 7, 1999 Form 8-K, Deloitte
met with the Company's Audit Committee and discussed with them the reportable conditions that
were noted during Deloitte's audit of the Company's financial statements for the fiscal year ended
January 30, 1999 .
The Effects of Defendants' Fraudulent Misrepresentations and Accounting Manipulations .
176 . During the Class Period, in response to these positive statements (and because the
marketplace and Class members did not know the material undisclosed facts described herein), the
market prices for Just For Feet common stock were at all relevant times inflated over what they
would have been if truthful, complete and accurate information had been disseminated by or on
behalf of the Defendants .
177 . The inflated profits and earnings of the Company had a commensurate effect on th e
price of Just for Feet common stock, which in turn benefitted many of the Defendants, who owned
substantial amounts of Just for Feet securities, and several Defendants and Co-Conspirators who
actually sold securities at the inflated prices . The following individuals sold shares of the common
stock of Just For Feet in the amounts, at the prices, and on the dates listed below :
Defendant
Sales Date
Shares Sold
Per Share Pric e
Harold Ruttenberg
Adam J . Gilburne
Adam J . Gilburne
Bart Starr, Sr.
05/08/98
05/06/98
05/26/99
07/24/98
413,85 0
100,000
100,00 0
4,833
$14 .25
$15 .5 0
$7 .50
$24 .5 0
61
Defend ants' Misrepresentations And Accounting Schemes Fool Jus t
For Feet ' s Lenders Into Providing The Credit Just For Feet Needed To Surviv e
178 . Duri ng the Class Peri od , Just For Feet had negative cash flow from operations, an d
was totally dependent upon credit lines to make payroll an d meet other operating expenses .
However, the banks that provided these credit lines to Just For Feet did so based on false an d
misleading finan cial information which overstated Just ForFeet ' s income, gross receipts, inventori es
and receivables, and understated its expenses . Had the t rue facts been disclosed to these banks, and
had they been provided financial statements that complied with GAAP, they would have rescinded
or subst antially reduced Just For Feet ' s lines of credit, and the demise of Just For Feet would have
occurred substantially sooner, precluding some or all of the losses incurred by persons who
purchased Just For Feet securities during the Class Period.
179 . For example, from January 26, 1998 until December 10, 1998, Just For Feet had a
$40 million revolving line of credit pursuant to a promissory note to Compass Bank . As a condition
to that line of credit, the note provided that Just For Feet could not allow its Earnings Before Interest,
Tax, Depreciation, Amortization and Rentals ("EBITDAR") Coverage Ratio to fall below 2 :1 as of
the end of any fiscal quarter. By fraudulently overstating its earnings, Just For Feet was able to
increase its EBITDAR Coverage Ratio (of which the numerator is earnings before interest, taxes,
depreciation, amortization and rentals) to keep that ratio above the limit required by the note . When
evaluated in light of the true facts, however, Just For Feet was in violation of this EBITDAR
Coverage Ratio loan covenant from the inception of the loan, and at all subsequent times during the
Class Period . Thus, absent Defendants' fraud, the lending community would have known by the
early Spring of 1998 that Just For Feet was in poor financial shape, and that its prospects fo r
62
recovery were not great . Just For Feet would therefore have lost its access to credit and been forced
to seek bankruptcy protection at least by the Spring of 1998, and the artificially inflated market for
Just For Feet's stock would have collapsed by that time .
180. Even assuming Compass Bank would not have rescinded Just For Feet's line of credi t
earlier, Just For Feet would have lost its access to credit by December 10, 1998 . On that date, Just
For Feet entered into a new Credit Agreement with Compass Bank as Documentation Agent and a
syndicate of other banks which Compass Bank had helped assemble . This Credit Agreement
provided Just For Feet with revolving lines of credit in an aggregate of up to $200 million, without
which Just For Feet would have been unable to continue to fund its operations . Under the terms of
the Credit Agreement, Just For Feet was required to comply with a number of financial covenants,
including covenants with respect to its Consolidated Leverage Ratio, Consolidated Fixed Charge
Coverage Ratio, Consolidated Tangible Net Worth, Consolidated Funded Debt to Capitalization
Ratio, and Capital Expenditures . Defendants' fraudulent accounting practices enabled Just For Feet
to maintain the appearance of compliance with each of these covenants, when in fact, if proper
accounting methods were applied and the true facts were disclosed, the banks would have known
that Just For Feet was in violation of many, if not all, of the covenants at the time the Credit
Agreement was executed . Therefore, even assuming Just For Feet had been able to continue as a
going concern despite its violation of its prior loan covenants, if the true facts had been disclosed,
Just For Feet would have been unable to obtain additional lines of credit and would have been forced
to shut down its operations by December 1998 .
181 . On July 27,1999, Just For Feet's December 10, 1998 Credit Agreement was amended
to provide, among other things, that the lenders would retroactively rescind any covenants unde r
63
which the Company was known (based upon its false reports) to have previously defaulted . While
this amendment may have cured Just For Feet ' s defaults from the lenders' perspective and based
upon their own ignorance of the true facts, it did nothing to cure the fraud that had been visited upon
investors who had purchased Just For Feet's stock in reliance on the market p ri ce of that stock - a
p ri ce that was suppo rted by Just For Feet's access to credit, which was in turn suppo rted by Just For
Feet ' s fraudulent accounting practices .
182 . The July 27 , 1999 amendment to the Credit Agreement fu rther provided that as Just
For Feet's "Eligible Inventory" decreased, so did its "Borrowing Base," or available credit . Just For
Feet's "Eligible Inventory" was defined as a percentage of the lower of the aggregate book value or
fair market value of Just For Feet's raw material and finished goods inventories, excluding (among
other things) inventory that was damaged, obsolete, slated for return to vendors, not saleable in the
ordinary course of business at prices approximating costs, or that was being held for discount and/or
liquidation . Also to be excluded from Eligible Inventory were any capitalized costs in excess of the
manufacturer's invoice cost . Defendants' machinations to create, maintain and conceal material
overstatements of inventories -- which caused Just For Feet's inventories to be inflated by
approximately $20 million as of June 1999 -- therefore enabled Just For Feet to obtain credit after
July 27, 1999, to which it would not have had access absent Defendants' fraud . This allowed Just
For Feet to maintain the illusion of financial well-being through the latter half of 1999, and to
continue to fraudulently induce investors to purchase Just For Feet's artificially inflated stock .
DELOITTE ' S ROLE, CONDUCT AND DUTIE S
183 . Deloitte knew of and approved of most, if not all , of the aforementioned accounting
entries, even though such entries were contrary to GAAP , an d even though Deloitte had been
64
repeatedly warned of problems with Just For Feet's accounting and controls by conscientious Just
For Feet employees. Additionally, Deloitte intentionally did not report to Just For Feet's Board of
Directors significant reportable conditions noted during the 1995 and 1996 audits . Nor were the
numerous deficiencies in the Company's accounting systems, which Deloitte learned about in
discussions with Company employees, ever reported to the Company's Board of Directors or
particularly to the Audit Committee. These reportable conditions related directly to the types of
irregular accounting entries noted above that led to the overstatement of gross sales, inventories, net
income and net worth during the Class Period . Additional weaknesses in the system of internal
controls at Just For Feet identified by Deloitte during the 1995 and 1996 audits showed a pattern of
overstating inventory, investment and receivable values, as well as overstating income and
understating cost of sales and operating expenses .
184 . Deloitte provided independent auditors' reports on Just For Feet's financial statements
for at least the fiscal years ended January 1997, 1998 and 1999, and performed a review of Just For
Feet's quarterly financial statements contained in the Annual Reports and Quarterly Reports to
shareholders, and the Forms 10-K and 10-Q filed with the SEC, during the Class Period .
185 . Deloitte represented that it had audited Just For Feet's annual financial statements in
accordance with GAAS and that the financial statements presented fairly, in all material respects,
the financial position of Just For Feet at each respective year-end and the results of its operations and
cash flows for each of those years in conformity with GAAP .
186 . Deloitte's opinions were publicly disseminated and published in Just For Feet's annual
reports in the Reports on Form 10-K filed with the SEC for the fiscal years ending in January 1997 ,
65
1998 and 1999 . Deloitte expressly consented to the inclusion of its opinions in these Reports on
Form 10-K, and understood that its opinions were to be an integral part of those Reports .
187 . Just For Feet was required by various securities laws to file periodic audited financial
statements with the SEC that were intended to be relied on, and were relied on, by the investing
public . As Just For Feet's independent auditor, Deloitte owed a duty to the investing public to
comply with the auditing standards of the AICPA, of which Deloitte is a member firm, and to use
due diligence to ensure that Just For Feet's financial statements fairly presented, in all material
respects, Just For Feet's financial position, results of operation, and cash flows .
188 . In each Just For Feet audit report prepared by Deloitte, Deloitte presented its opinion
that the financial statements of Just For Feet presented fairly the financial condition of Just For Feet
in accordance with GAAP . Deloitte further represented that its opinion was based on an audit
conducted in accordance with GAAS . GAAS is comprised of auditing standards approved by the
AICPA in effect at the time of the audit as well as the AICPA's Statements on Auditing Standards
("SAS") that interpret those standards . The auditing standards are codified in the AICPA
Codification of Statements on Accounting Standards . (AU Section 100, et §M.) . GAAS and GAAP
represent only minimum standards .
189 . GAAS required, among other things, that Deloitte : (1) devise and implement an audit
plan designed to detect management fraud (also referred to as "irregularities" in the accounting
literature), (2) properly supervise the personnel it assigned to conduct the audit, (3) obtain a
sufficient understanding of Just For Feet, its industry and its internal control structure to enable it
to determine the nature, timing and extent of audit testing required, (4) obtain sufficient evidential
matter through inspection, observation, inquiries and confirmations to afford a reasonable basis fo r
66
its opinions of the financial statements under audit, and (5) to report any material weaknesses or
reportable conditions noted to management and the audit committee of the Board of Directors . As
discussed more fully below, Deloitte not only failed to comply with GAAS, its departures from the
ordinary standards of care were so extreme that its actions were severely reckless and tantamount
to willful .
Deloitte's failure to devise and implement an audit plan to detect management frau d
190 . GAAS requires auditors to design an audit plan for each audit. Deloitte was under
an obligation to design its audit plans to provide reasonable assurance of detecting material
irregularities, including management fraud . (SAS # 82, AU Section 316) . In developing its audit
plan, GAAS required Deloitte to consider the so called "audit risk" that Deloitte might fail to
recognize that Just For Feet's financial statements were materially overstated as a result of
irregularities . (AU Section 312 .02, note 1 .) GAAS sets out a list of red flags that auditors should
look for in determining audit risk relating to misstatements arising from fraudulent financial
reporting (AU Section 316 .16-18), many of which were present here, including :
(1) Risk factors relating to management's characteristics and influence over the control
environment, including :
(a) Motivations for management to engage in fraudulent financial reporting :
(i) A significant portion of management's total compensation was
represented by bonuses, stock options, or other incentives, the value
of which was contingent upon the entity achieving unduly aggressive
targets for operating results, financial position, or cash flow .
(ii) An excessive interest by management in maintaining or increasing the
entity's stock price or earnings trend through the use of unusually
aggressive accounting practices .
67
(iii) A practice by management of committing to analysts, creditors, and
other third parties to achieve what appear to be unduly aggressive or
clearly unrealistic forecasts .
(b) Failures by management to display and communicate an appropriate attitude
regarding internal control and the financial reporting process, including :
(i) Lack of an intern al audit department.
(ii) Domination of management by Ruttenberg without compensating
controls such as effective oversight by the Board of Directors or
Audit Committee .
(iii) Inadequate monitoring of significant controls .
(iv) Management failing to correct known reportable conditions on a
timely basis.
(v) Management setting unduly aggressive financial targets and
expectations for operating personnel .
(vi) Management displaying a significant disregard for regulatory
authorities .
(vii) Management refusing to sign journal entries and auditor's
management representation letter .
(c) High turnover of senior management, counsel, or board members .
(d) Domineering management behavior in dealing with the auditor, especially
involving attempts to influence the scope of the auditor's work .
(e) Just For Feet's known history of securities law violations or claims against
the entity or its senior management alleging fraud or violations of securities laws
with specific reference to Just For Feet's departure from the standards of Generally
Accepted Accounting Principles.
(2) Risk factors relating to industry conditions :
68
(a) High degree of competition or market saturation, accompanied by declining
margins .
(b) Rapid changes in the industry, such as high vulnerability to rapidly changing
technology or rapid product obsolescence
(3) Risk factors relating to operating characteristics and financial stability :
(a) Inability to generate cash flows from operations while reporting earnings and
earnings growth.
(b) Assets, liabilities, revenues, or expenses based on significant estimates that
involve unusually subjective judgments or uncertainties, or that are subject to
potential significant change in the near term in a manner that may have a financially
disruptive effect on the entity-such as ultimate collectibility of receivables, timing
of revenue recognition, realizability of financial instruments based on the highly
subjective valuation of collateral or difficult-to-assess repayment sources, or
significant deferral of costs .
(c) Significant related-party transactions not in the ordinary course of business
or with related entities not audited or audited by another firm .
(d) Unusually rapid growth or profitability, especially compared with that of
other companies in the same industry .
(e) Unusually high dependence on debt or marginal ability to meet debt
repayment requirements ; debt covenants that are difficult to maintain .
(f) Unrealistically aggressive sales or profitability incentive programs .
(g) Threat of imminent bankruptcy or foreclosure, or hostile takeover .
69
191 . Deloitte knew, or was reckless in not knowing, of those red flags . For example, in
August 1995, analysts N . Richard Nelson, Jr . and James 0. Roeder, of Duff & Phelps Equity
Research Company, rendered their opinion (1) that because of the way the Company accounted for
the opening of its superstores and inventory costs, the stock should be selling for 33% less, (2) that
the Company's true profits, adjusted to conform to accounting methods typically used by retailers,
were as much as one-third lower than the Company was reporting, and (3) that, after adjusting the
Company's accounting treatment of pre-opening and inventory handling costs, its 1994 profit was
18 cents a share versus the 27 cents per share as reported by the Company . These allegations by
Duff & Phelps, which concerned accounting matters, were rejected by the Company's management
at that time, allegedly on the basis of advice from Deloitte (showing that Deloitte was fully cognizant
of the issues) . The Company mounted a vigorous counterattack to discredit the Duff & Phelps
comments, enlisting the aid of other analysts and commentators, and even threatening to sue the
analysts, steps which had the effect of reversing a short-term sell off that occurred right after the
analysts' report became known to some investors . Such an episode and the short-term reaction of
the market (before the Company mounted its crisis-management steps and its investor-reassurance
plan) constituted red flags of the sort mentioned in AU Section 316 that should have caused Deloitte
to investigate further, use heightened professional scrutiny, and undertake additional tests to detect
the presence of management fraud and irregularities and to obtain additional evidential matter
supporting the reported financial figures and results before releasing its audit report and allowing
its dissemination to the marketplace for Just For Feet securities .
192 . In March 1997, for the first time, the Company suddenly reversed its position and
adopted the method of accounting which the Duff & Phelps analysts had previously stated was
70
appropriate, but only after its insiders sold more than $50 million of their investment at high prices
before the restatement of the Company's 1996 operating figures, in the June 1996 offering discussed
above . The Defendants knew (and the marketplace did not know) that the Individual Defendants
would be pushing the Company to open such a large volume of new locations and incur such a large
volume of 1996 pre-opening and related costs for which it was intentionally deferring recognition
under the old amortization procedure, that when it was time to report fiscal 1996 results, they would
have to restate the Company's earnings and profits to significantly lower numbers, but they
deliberately postponed such decision until they could effectuate the mid-1996 bailout of $50 million
at the expense of the public investors .
193 . Just For Feet engaged in numerous related party transactions and stock bonus
rearrangements, referred to above . These related party and/or conflict of interest transactions are
the sorts of red flags listed in AU Section 316 .16-18, and should have caused Deloitte to exercise
greater professional scrutiny of Just For Feet's activities and financial reporting .
194 . During the Class Period, Just For Feet generated fictitious comparable store sale s
reports which compared store sales with prior periods during which those stores were not yet open .
Just For Feet fabricated sales figures for those prior periods based upon sheer speculation as to the
sales those stores would have achieved had they been open during those periods . Just For Feet also
bolstered its comparable store sales figures by allocating bulk sales that occurred after the relevant
periods to individual stores and including them in the comparable store sales analysis . Upon
information and belief, Deloitte was aware of these reckless and unfounded financial analyses by
Just For Feet management, which should have raised red flags and caused Deloitte to closely
examine Just For Feet's activities and financial reporting.
71
195 . In May of 1997, Barry and Baker requested that Just For Feet's Controller, Lones,
sign a management representation letter prepared by Deloitte . During telephone conversations with
Barry and Baker, including a taped conversation with Baker, Lones stated that neither he nor Just
For Feet's other controller would execute the management representation letter, because the
information therein was not accurate and the letter did not disclose problems and issues Lones knew
to exist at Just For Feet . Although Deloitte also knew that the management representation letter was
materially false and/or incomplete, Deloitte then presented the management representation letter to
Wabler, who was no longer employed by Just For Feet, for execution . Wabler executed the
management representation letter .
196 . In March of 1999, Cooper and Jerry Bard, Just For Feet's supervisor of account s
receivable, were asked in the presence of representatives of Deloitte to sign certain journal entries,
which request they refused . On other occasions in 1999, Cooper, Bard and Lloyd refused to sign
journal entries themselves, including but not limited to entries relating to co-op receivables and
acquisition accounting, because they believed those entries to be improper. Instead, they made those
entries with the notation that they were being made at the direction of Wynne or Tyra . Deloitte
reviewed these journal entries and accompanying notations .
197 . Refusal by Just For Feet employees to sign management representation letters and/o r
journal entries should have been a screaming signal to Deloitte that there were major problems with
Just For Feet ' s financial records . Independent auditors are required by AU Section 333 to obtain a
man agement representation lett er , and the refusal of m anagement to execute such a lett er constitutes
a scope limitation sufficient to preclude an unqualified opinion . Nevertheless, Deloitte failed to take
any action, an d issued unqualified opinions on Just for Feet ' s annual financial statements .
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198 . Deloitte either: (1) recklessly failed to recognize these numerous red flags and to plan
and implement an adequate audit that took into account those audit risks, or (2) if it had an adequate
audit plan it recklessly failed to follow it, or (3) if it had an adequate plan and followed it, Deloitte
ignored the results of its findings and recklessly issued its report .
Deloitte's failure to properly supervise the personnel it assigned to conduct the audi t
199 . GAAS requires that the audit be performed by persons having adequate technica l
training (SAS # 1, AU 150 .02, General Standard # 1 and AU Section 210) . It also requires that the
auditor adequately supervise employees conducting the fieldwork (SAS # 22, AU Section 311) .
Deloitte failed to follow these required standards in its audits of Just for Feet's financial statements .
Deloitte also violated GAAS by : (1) failing to assign a sufficient number of accountants to perform
the field work required by the Just For Feet audits, (2) budgeting an insufficient amount of time in
which to conduct the audits and (3) assigning a staff accountant or accountants who were too
inexperienced . Barry, who was Deloitte's audit partner responsible for the Just For Feet audits, was
present at Just For Feet for an average of only two days per quarter . As a result, the Just For Feet
audits were recklessly performed .
Deloitte's failure to obtain a sufficient understanding of Just For Feet,
its industry and its internal control structure to enable it to determine
the nature, timing and extent to testing required
200 . As part of its audit procedures, Deloitte was required (but recklessly failed ) to asses s
the risk of management misrepresentation by reviewing information about risk factors, the internal
control structure, and the inventory accounting practices and store opening expense practices ofJust
For Feet . For example, Just For Feet's Board of Directors, and especially its Audit Committee
(which had only a single meeting in fiscal year 1998), was not effective in constraining imprope r
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conduct by senior management . As the size, complexity and ownership characteristics of the
company changed, the company's internal controls or policies did not change to ensure that the
financial records were accurate . Management failed to generate or enforce policies and procedures
that provided reasonable assurances of accounting estimates (SAS # 82, AU Section 316 .23), and
Deloitte failed to design audit tests to obtain sufficient competent evidential matter upon which to
base its audit opinion .
Deloitte's failure to obtain sufficient evidential matter through inspection,
observation, inquiries and confirmations to afford a
reasonable basis for its opinions of the financial statements under audi t
201 . GAAS provides that accounting data alone is insufficient to support an opinion on
financial statements . (SAS #'s 31 and 48, AU Section 326 .16 .) Before rendering an opinion, the
auditor must obtain "evidential matter" to support the financial statements . "Evidential matter"
consists of the underlying accounting data and all corroborating information available to the auditor .
(AU Section 326 .15 .) Corroborating evidential matter includes both documents obtained during the
field work (e .g., checks, invoices, contracts) and information obtained from inquiry, observation,
inspection and physical examination . (AU Section 326 .17) .
202 . Deloitte recklessly failed to examine sufficient corroborating evidential data a s
required by GAAS p rior to rendering its opinions . Had it done so, it would have discovered the
fraud in the comp any' s financial statements . For example , at the direction of Rutt enberg and Tyra,
Berm an recorded receivables from manufacturers relating to cooperative adve rtising funds that were
typically allocated to each new store opened . Although the man ufacturers were not contractually
committed to provide these funds , Just For Feet recorded these amounts , which were typically
several hundred thous and dollars per store, as revenue and receivable when each store opened . I n
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connection with its audits, Deloitte was required to examine the corroborating evidential data for
both the revenue and receivables accounts . On information and belief, Deloitte failed to examine
my corroborating evidential data or obtain confirmations from the manufacturers to support its
opinion regarding the recording of these revenues and receivables prior to receipt of funds . Deloitte
failed to examine Just For Feet's support justifying the recording of these amounts, and failed to
examine support (and thus become aware that none existed) for adjusting journal entries made by
Berman, Tyra and Ruttenberg .
203 . Since the fraud was perpetrated by the use of numerous adjusting journal entries ,
many of which were extremely large, occurred at fiscal year end and/or quarter end, and most of
which were without any support or justification, an examination of those entries (as required by
GAAS) would, by itself, have raised numerous red flags . Deloitte either failed to examine the
adjusting entries or failed to make inquiries or obtain third party confirmation regarding the validity
of those entries . In any event, Deloitte clearly failed to make any effort to obtain sufficient,
competent corroborating data to support the adjusting entries as required by GAAS . (SAS #'s 31,
48, and 80, AU Section 326 .16 .) In fact, Deloitte failed to audit the Company's "miscellaneous
adjusting entries," which reflected many of the fraudulent transactions . Moreover, these entries often
were made only based upon the instructions of Defendants Ruttenberg or Tyra, which constituted
management overrides and a "reportable" violation of internal controls . (SAS # 82, AU Section
316) .
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Deloitte's failure to report noted material weaknesses
and reportable conditions to the Audit Committe e
204 . GAAS requires the auditor to communicate certain matters to the Audit Committee
or equivalent (SAS #61, AU section 380) . These matters include material weaknesses and reportable
conditions in internal controls . (SAS #'s 60 and 78, AU Section 325) .
205 . Although Deloitte prepared a draft of a letter identifying reportable conditions note d
during its audit for the year ended January 1996, including improper inventory capitalization issues,
Deloitte never issued that letter in final form or presented it to the Audit Committee . Nor did
Deloitte otherwise communicate to the Audit Committee the reportable conditions noted during its
audits for the years ended January 1995, 1996 and 1997 . These reportable conditions related to
internal control weaknesses that led to the accounting irregularities previously discussed.
206 . Deloitte also failed to report the existence of these same reportable conditions as par t
of the audits for the years ended January 1998 or 1999 . Deloitte has admitted that it was aware of
reportable conditions during its audit for the fiscal year ended January 30, 1999, but Just For Feet
has informed the SEC that Deloitte never discussed these reportable conditions with the Audit
Committee . The aggregate of the uncorrected reportable conditions amounted to a material
weakness in Just For Feet's system of internal controls . Deloitte's failure to detect and/or
communicate the material weaknesses in Just for Feet's internal controls was a violation of GAAS
that enabled the fraud to continue and intensify .
207 . During the Class Period, Deloitte conducted timely reviews of Just For Feet's
quarterly financial statements . Deloitte failed to follow appropriate professional standards in
conducting these reviews, which, if properly followed, would have uncovered the fraud .
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208 . Deloitte failed to comply with GAAS by, among other things :
(a) failing to maintain independence in mental attitude and failing to approach
the audit with the appropriate degree of "professional skepticism" in violation of SAS
# 1, AU 150 .02, General Standard # 1 and AU Section 220 ;
(b) failing to use "due professional care" in the performance of the audit in
violation of SAS # 1, AU Section 230 ;
(c) failing to prepare an appropriate audit plan in violation of SAS # 22, AU
Section 311 ;
(d) failing to adequately supervise employees conducting the field work in
violation of SAS # 22, AU Section 311 ;
(e) failing to obtain sufficient competent evidential matter through inspection,
observation, inquiries and confirmations to afford a reasonable basis for an opinion
regarding the financial statements under audit in violation of SAS # 1, AU Section
150 and SAS # 31, AU Section 326 ;
(f) failing to devise (or to implement) an audit plan reasonably designed to find
and report on the irregularities described herein in violation of SAS # 53, AU Section
316 ;
(g) failing to withdraw its prior attesting opinions for Just For Feet's financial
statements as required by Section 203 of the American Institute of Certified Public
Accountants Code of Professional Conduct (AICPA Professional Standards ET
203 .01) and AU 508 .14, once it knew or believed such opinions to be suspect and
when it was unable to correct them otherwise ;
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(h) failing to require Just for Feet to disclose its departures from GAAP, and/or
failing to qualify its opinions regarding the financial statements' compliance with
GAAP (SAS #1, AU Section 150), and/or failing to obtain restatements of those
financial statements ;
(i) failing to comply with the requirement to obtain a management representation
letter signed by those members of management whom the auditor believes are most
knowledgeable regarding the matters covered by the representations (AU Section
220 .09) .
CLAIMS FOR RELIEF
COUNT I
AGAINST ALL DEFENDANTS
FOR VIOLATIONS OF SECTION 10(b)
OF THE EXCHANGE ACT AND RULE 10b- 5
209 . Plaintiffs incorporate herein by reference and reallege each and every allegation of
fact contained in the preceding paragraphs of this Complaint as if fully set fo rth in this count .
210 . This Count is asserted by Plaintiffs and the Class against all Defendants and is based
upon Section 10(b) of the Exchange Act, 15 U .S .C . §§ 78j (b), an d Rule IOb-5,17 C .F.R . § 240.1Ob5, promulgated thereunder.
211 . During the Class Peri od, each of the defendants part icipated in some or all of the
fraudulent activity desc ri bed herein .
212 . The fraudulent activity was a manipulative ordeceptive device in violation of Section
10(b) of the Exchange Act .
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213 . The fraudulent activity described above was also a device, scheme, or artifice t o
defraud, prohibited by Rule 1 Ob-5 .
214 . Defendants engaged in the fraudulent activity described above knowingly an d
intentionally, or in such a reckless manner as to constitute a willful deceit and fraud upon Plaintiff s
and the Class . Defendants knowingly caused their reports and statements to contain misstatements
and omissions of material fact as alleged herein .
215 . As a result of Defendants' fraudulent activity, the market price of Just For Fee t
securi ties was artificially inflated during the Class Period .
216 . Were it not for Defendants' fraudulent activity, Just For Feet's lenders and th e
lending community at large would have known by the early Spring of 1998 that the Company's
financial condition was poor and that its prospects for recovery were slim, and Just For Feet would
have lost its ability to borrow the funds it needed to finance its operations . Thus, had the true facts
been disclosed, Just For Feet would have been forced to seek bankruptcy protection or otherwise
cease operations by the Spring of 1998, and there would have been no market for its securities .
217 . In ignorance of the defendants' fraudulent activity or the false and misleading natur e
of the representations described above, Plaintiffs and other members of the Class, relying on the
integrity of the market and/or on the statements and reports of Just For Feet containing th e
misleading information, purchased Just For Feet common stock at artificially inflated prices .
218 . The price of Just For Feet securities has declined materially upon the publi c
disclosure of the true facts which had been misrepresented or concealed as alleged herein.
219 . Plaintiffs and other members of the Class have suffered substantial damages as a
result of their purchases of Just For Feet securities .
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COUNT I I
AGAINST DEFENDANTS RUTTENBERG, TYRA,
ROCKEY, LAZARUS, HAINES, AND WYNNE FOR
VIOLATIONS OF SECTION 10(b) OF THE EXCHANGE ACT AND RULE 10b-5
220 . Plaintiffs incorporate herein by reference and reallege each and every allegation of
fact contained in the preceding paragraphs of this Complaint as if fully set forth in this count .
221 . This Count is assert ed by Plaintiffs and the Class against defendants Ruttenberg,
Tyra, Rockey, Lazarus, Haines, and Wynne (the "Director and Officer Defendants") and is base d
upon Section 10(b) of the Exchan ge Act, 15 U .S .C . § 78j( b), an d Rule lOb-5, 17 C .F .R. § 240.106-5 ,
promulgated thereunder .
222 . As alleged herein, during the Class Period, the Director and Officer Defendant s
caused Just For Feet to disseminate finan cial statements and Forms 10-K and 10-Q to investor s
which the Director and Officer Defend ants knew to contain materially false or misleading statement s
or omissions of fact .
223 . The dissemination of these false and misleading materials was a manipulative o r
deceptive device in violation of Section 10(b) of the Exchange Act .
224. The dissemination of these false and misleading materials was also a device, scheme ,
or artifice to defraud in violation of Rule I Ob-5 .
225 . As a result of the dissemination of these false and misleading materials, the marke t
price of Just For Feet securities was artificially inflated during the Class Period .
226 . Were it not for Defendants' fraudulent activity, Just For Feet's lenders and th e
lending community at large would have known by the early Spri ng of 1998 that the Company' s
financial condition was poor and that its prospects for recovery were slim, and Just For Feet woul d
80
have lost its ability to borrow the funds it needed to finance its operations . Thus, had the true fact s
been disclosed, Just For Feet would have been forced to seek bankruptcy protection or otherwis e
cease operations by the Spring of 1998, and there would have been no market for its securities .
227 . In ignorance of the defendants' fraudulent activity or the false an d misleading nature
of the representations described above, Plaintiffs and other members of the Class, relying on the
integrity of the market and/or on the statements and reports of Just For Feet containing th e
misleading information, purchased Just For Feet common stock at artificially inflated prices .
228 . The price of Just For Feet securi ties has declined materially upon the publi c
disclosure of the true facts which had been misrepresented or concealed as alleged herein.
229 . Plaintiffs and other members of the Class have suffered subst antial damages as a
result of their purchas es of Just For Feet securities .
COUNT III
AGAINST DEFENDANTS RUTTENBERG, TYRA,
WYNNE, AND DON-ALLEN, FOR VIOLATION S
OF SECTION 20(a) OF THE EXCHANGE ACT
230 . Plaintiffs incorporate herein by reference and reallege each and every allegation o f
fact contained in the preceding paragraphs of this Complaint as if fully set forth in this count.
231 . Plaintiffs assert this Count for violations of Section 20(a) of the Exchange Act, 1 5
U.S .C . § 78t(a), on behalf of all members of the Class and against defendants Ruttenberg, Tyra ,
Wynne, and Don-Allen (the "Control Person Defendants") .
232 . During the Class Period, Just For Feet participated in some or all of the fraudulen t
activity described herein .
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233 . The fraudulent activity was amanipulative or deceptive device in violation of Section
10(b) of the Exchange Act.
234 . The fraudulent activity described above was also a device, scheme, or artifice to
defraud, prohibited by Rule I Ob-5 .
235 . Just For Feet engaged in the fraudulent activity described above knowingly an d
intentionally, or in such a reckless manner as to constitute a willful deceit and fraud upon Plaintiffs
and the Class . Just For Feet knowingly caused its reports and statements to contain misstatements
and omissions of material fact as alleged herein .
236 . As a result of Just For Feet ' s fraudulent activity , the market pri ce of Just For Feet
securi ties was artificially inflated during the Class Period .
237 . Were it not for Just For Feet's fraudulent activity, Just For Feet's lenders and th e
lending community at large would have known by the early Spring of 1998 that the Company's
financial condition was poor and that its prospects for recovery were slim, and Just For Feet would
have lost its ability to borrow the funds it needed to finance its operations . Thus, had the true facts
been disclosed, Just For Feet would have been forced to seek bankruptcy protection or otherwise
cease operations by the Spring of 1998, and there would have been no market for its securities .
238 . In ignorance of the defendants' fraudulent activity or the false and misleading natur e
of the representations described above, Plaintiffs and other members of the Class, relying on th e
integrity of the market and/or on the statements and reports of Just For Feet containing th e
misleading information, purchased Just For Feet common stock at artificially inflated prices .
239 . The price of Just For Feet securi ties has declined materially upon the public
disclosure of the true facts which had been misrepresented or concealed as alleged herein .
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240 . Plaintiffs and other members of the Class have suffered substantial damages as a
result of their purchases of Just For Feet securities .
241 . The Control Person Defend ants were controlling persons of Just For Feet within th e
meaning of Section 20 of the Exchange Act by reason of their management positions and/or
directorships and their business and social relationships with each other and their stock ownership
and their access to and holding of vital information and their participation in policymaking and key
decisions . By virtue of their positions and activities, the Control Person Defendants had the power
and influence to control Just For Feet and, exercising such control, did cause Just For Feet to engage
in or suffer the unlawful acts and conduct alleged herein .
242 . Each of the Control Person Defendants was in a position to control or influence th e
contents of, or otherwise cause corrective disclosures to have been made in, Just For Feet's SE C
filings and the Company's other public statements disseminated during the Class Period as detaile d
herein , yet failed to correct statements therein which they knew to be mate ri ally false or misleading.
243 . To the same extent that Just For Feet is or would be liable to Plaintiffs and the Class ,
each of the Control Person Defendants is also equally and jointly and severally liable to Plaintiff s
and the Class .
COUNT IV
AGAINST DELOITTE, BAKER AND BARRY FOR VIOLATIONS
OF SECTION 10(b) OF THE EXCHANGE ACT AND RULE 10b-5
244 . Plaintiffs incorporate herein by reference and reallege each and every allegation of
fact contained in the preceding paragraphs of this Complaint as if fully set forth in this count .
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245 . This Count is asserted against Deloitte, Baker and Barry, and is based upo n
Section 10(b) of the Exchange Act, 15 U .S .C . § 78j(b), and Rule lOb-5 promulgated thereunder .
246 . Because of its position as the auditor of Just For Feet, Deloitte knew of or recklessl y
disregarded the material misrepresentations by Just For Feet in the financial statements of Just For
Feet . Deloitte made direct material misrepresentations to the Class as a result of its issuance of false
and misleading auditors' reports that accompanied Just For Feet's Forms 10-K and Annual Reports
that it knew would be disseminated to the investing community .
247 . Deloitte, Baker and Barry knew or recklessly disregarded that the acts and practices ,
misleading statements , and omissions described above would adversely affect the integrity of th e
market in Just For Feet securities and/or artificially inflate or maintain the price of such securitie s
and/or would be relied upon by the Plaintiffs and Class to their detriment .
248 . The severe recklessness of Deloitte, Baker and Barry is made manifest by thei r
extreme departures from the standards of GAAP and GAAS in connection with their year-end audit s
of the Company covering its fiscal years ended January 1998 and 1999, as described more full y
above .
249 . The dissemination of these false and misleading materials was a manipulative o r
deceptive device in violation of Section 10(b) of the Exchange Act .
250 . The dissemination ofthese false and misleading materials was also a device, scheme,
or artifice to defraud in violation of Rule l Ob-5 .
251 . As a result of the dissemination of these false and misleading materi als, the market
price of Just For Feet secu ri ties was artificially inflated during the Class Period .
84
252 . Were it not for Defendants' fraudulent activity, Just For Feet's lenders and th e
lending community at large would have known by the early Spring of 1998 that the Company's
financial condition was poor and that its prospects for recovery were slim, and Just For Feet would
have lost its ability to borrow the funds it needed to finance its operations . Thus, had the true facts
been disclosed, Just For Feet would have been forced to seek bankruptcy protection or otherwise
cease operations by the Spring of 1998, and there would have been no market for its securities .
253 . In ignorance ofDeloitte's fraudulent activity or the false and misleading nature of th e
representations described above, Plaintiffs and other members of the Class, relying on the integrit y
of the market and/or on the statements and reports of Just For Feet containing the misleadin g
information, purchased Just For Feet common stock at artificially inflated prices .
254 . The price of Just For Feet securities has declined materially upon the publi c
disclosure of the true facts which had been misrepresented or concealed as alleged herein .
255 . Plaintiffs and other members of the Class have suffered substantial damages as a
result of their purchases of Just For Feet securities .
COUNT V
AGAINST DELOITTE . BAKER AND BARRY FOR PROFESSIONAL NEGLIGENC E
256 . Plaintiffs incorporate herein by reference and reallege each and every allegation o f
fact contained in the preceding paragraphs of this Complaint as if fully set forth in this count .
257 . Deloitte, Baker and Barry (the "Deloitte Defendants") are in the business of auditing
financial statements ofpublic companies, issuing opinion letters concerning the financial statements
audited, and providing and certifying such information for the benefit of investors and others to us e
in their dealings with others .
85
258 . As independent auditors of Just For Feet , the Deloitte Defendants had a duty to
examine the Company's financial statements in accordance with GAAS to determine , among other
things , whether they were presented in accord ance with GAAP . The Deloitte Defendants owed
Plaintiffs an d the Class a duty of reasonable care in connection with the provision of information
concern ing the finan cial condition of Just For Feet during the Class Peri od , including Deloitte's
certifications that Just For Feet ' s financial statements fairly and accurately report ed the Comp any's
finan cial condition and were in presented in accordance with GAAP . Further, the Deloitte
Defend ants had a duty to disclose to m anagement, an d part icularly Just For Feet ' s Audit Committee,
any defects in the Company ' s system of inte rnal controls .
259 . The Deloitte Defendants breached these duties knowingly, wantonly, recklessly, o r
at least negligently, by including untrue statements of material facts and/or omitting to state mate ri al
facts necessary in order to make the statements made, in light of the circumstances under which they
were made , not misleading in Just For Feet ' s financial statements , disseminated to Plaintiffs, the
Class and the investing public, throughout the Class Peri od . Among other things, the Deloitte
Defend ants disregarded, in violation of GAAS, glaring irregularities in the Comp any's books and
records an d system ofintemal controls, and falsely represented that they had audited the Company's
finan cial statements in accord ance with GAAS and that those financial statements were presented
in accordan ce with GAAP .
260 . The Deloitte Defend ants knew and intended that Deloitte ' s reports concerning the
Company's fin ancial statements would be distributed to the Company ' s stockholders and that such
stockholders and the investing public would rely, and had a ri ght to rely, upon the information
provided by Deloitte concerning the fin ancial condition of Just For Feet in making their investmen t
86
decisions . The Deloitte Defendants knew and intended that Deloitte's certifications of Just For
Feet's annual financial statements would be included and constituted a material part of Just For
Feet's annual reports on Form 10-K filed with the SEC . In particular, the Deloitte Defendants
understood that a primary intent of Just For Feet was for the Deloitte Defendants' professional
services to benefit or influence Company stockholders, including Plaintiffs and the Class, as well
as the investing public at large, since one of the primary purposes of having an accounting firm
certify financial statements is to provide independent certification of the accuracy thereof to those
who must rely on those financial statements when deciding whether to transact in the company's
securities .
261 . At the very least, the Deloitte Defendants knew and intended that Just For Feet' s
stockholders at the time Deloitte's certifications were disseminated would rely thereon in deciding
whether to sell or hold their shares, or whether to purchase additional shares of Just For Feet . The
Deloitte Defendants made their misrepresentations and omissions with the specific intent to induce
Just For Feet's stockholders to refrain from selling their shares, and/or to purchase additional shares,
and thereby to maintain Just For Feet's artificially inflated stock price.
262 . At the time of such misrepresentations and omissions ofmaterial facts by the Deloitt e
Defendants, Plaintiffs were ignorant of their falsity and believed them to be true . Plaintiffs relied
upon the superior knowledge and expertise of the Deloitte Defendants and justifiably relied to their
detriment on the financial statements audited and certified by Deloitte, and an the unqualified
opinions issued by Deloitte in connection with Just For Feet's annual financial statements . Had
Plaintiffs and the Class been aware of the true facts, they would not have purchased Just For Feet
securities at all, or at the price actually paid .
87
263 . Were it not for the Deloitte Defendants' fraudulent activity, Just For Feet's lenders
and the lending community at large would have known by the early Spring of 1998 that the
Company's financial condition was poor and that its prospects for recovery were slim, and Just For
Feet would have lost its ability to borrow the funds it needed to finance its operations . Thus, had
the true facts been disclosed, Just For Feet would have been forced to seek bankruptcy protection
or otherwise cease operations by the Spring of 1998, and there would have been no market for its
securities .
264 . The Deloitte Defendants had a unique relationship with Just For Feet because Just
For Feet was one of the largest clients of Deloitte's Birmingham office, and because Just For Feet's
CFO was a former Deloitte partner . Deloitte conducted its audit without the independence required
under GAAS .
265 . The Deloitte Defendants' conduct constitutes the making in a uniformly disseminate d
manner of negligent misrepresentation (including negligent omissions to state facts in connection
with statements that were made) under applicable state law . As a direct and proximate result of the
uniformly disseminated negligent misrepresentations (omissions) by the Deloitte Defendants, and
in reliance thereon, Plaintiffs and the Class suffered damages in connection with their purchases of
Just For Feet securities .
COUNT VI
AGAINST ALL DEFENDANTS FOR
COMMON LAW FRAUD AND DECEIT
266 . Plaintiffs incorporate herein by reference and reallege each and every other allegation
of fact contained in the preceding paragraphs of this Complaint as if fully set forth in this count .
88
267 . As alleged herein, Defendants employed a number of m anipulative accounting
practices and made material misrepresentations, or omitted to disclose material facts, to Plaintiffs ,
the Class members, and the investing public regarding Just For Feet's financial condition.
268 . The aforesaid misrepresentations and omissions by Defendants were made uniformly
to the marketplace and the Class members and constitute fraud and deceit under applicable state law .
269. The aforesaid misrepresentations and omissions by Defendants were mad e
intentionally, or at a minimum recklessly, to induce reliance thereon by Plaintiffs and members o f
the Class when making investment decisions .
270 . As a direct and proximate result of the fr aud and deceit of Defendan ts , Plaintiffs and
the Class members, in reasonable reliance on Defendants' representations and in ignorance of th e
material omitted facts, suffered damages in connection with their purchases of Just For Fee t
securities .
271 . Were it not for Defend ants ' fraudulent activity, Just For Feet's lenders and the
lending community at large would have known by the early Spring of 1998 that the Company's
financial condition was poor and that its prospects for recovery were slim, and Just For Feet would
have lost its ability to borrow the funds it needed to finance its operations . Thus, had the true facts
been disclosed, Just For Feet would have been forced to seek bankruptcy protection or otherwise
cease operations by the Spring of 1998, and there would have been no market for its securities .
89
COUNT VII
AGAINST DEFENDANTS RUTTENBERG, TYRA,
HAINES, LAZARUS AND DELOITTE FO R
VIOLATIONS OF SECTION 18 OF THE EXCHANGE AC T
272 . Plaintiffs incorporate herein by reference and reallege each and every allegation of
fact contained in the preceding paragraphs of this Complaint as if fully set forth in this count .
273 . This Count is asserted by Plaintiffs and the Class against defendants Ruttenberg,
Tyra, Haines , Lazarus and Deloitte, and is based upon Section 18 of the Exchan ge Act, 15 U .S .C .
§ 78r .
274. During the Class Period, Just For Feet issued financial statements on Forms 10-K fo r
the fiscal years ended January 1998 and 1999, respectively, that were signed or approved b y
defendants Ruttenberg, Tyra, Haines and Lazarus, and were filed with the SEC .
275 . Those Forms 10-K contained materially false and misleading statements, and i n
particular false financial statements, as described earlier herein .
276 . Those Forms 10-K also contained false and misleading certi fi cations by Deloitte a s
to the financial statements ' compli ance with GAAP, and as to whether the fin ancial statements fairly
and accurately presented Just For Feet's financial condition.
277 . Ruttenberg, Tyra, Haines, Lazarus and Deloitte knew or should have known by
exercising due diligence that the above-referenced Forms 10-K were false and misleading because
those defendants : (a) knew or had access to materially adverse non-public information about Just For
Feet's financial condition which was not disclosed ; (b) participated in drafting, reviewing, and/or
approving the materially misleading SEC filings ; and (c) had an obligation to inform themselves o f
90
the accounting policies and procedure of the Company, as well as the financial statements of th e
Company .
278 . Plaintiffs and the Class members relied on those Forms 10-K, and on the false an d
misleading statements therein, to their detriment .
279 . Were it not for Defendants ' fraudulent activity, Just For Feet ' s lenders and the
lending community at large would have known by the early Spring of 1998 that the Company's
financial condition was poor and that its prospects for recovery were slim, and Just For Feet would
have lost its ability to borrow the funds it needed to finance its operations . Thus, had the true facts
been disclosed, Just For Feet would have been forced to seek bankruptcy protection or otherwise
cease operations by the Spring of 1998, and there would have been no market for its securities .
280 . As a result of the foregoing, Plaintiffs and the Class members purchased Just For Fee t
securities at an artificially inflated price during the Class Period, in ignorance of the false an d
misleading nature of the representations described above, and were damaged thereby.
PRAYER FOR RELIE F
WHEREFORE, Plaintiffs demand judgment on their behalf and on behalf of the Class (an d
any subclasses ) as follows :
A. Determining that the instant action is a proper class action maintainable under Rule
23 of the Federal Rules of Civil Procedure, or, in the alternative, with respect to the common la w
claims and the § 18 claim, certifying all common issues of law and fact;
B . Awarding Plaintiffs and the Class compensatory and/or recessionary damages agains t
each Defendant, jointly and severally, in an amount to be determined at trial, together wit h
prejudgment interest at the maximum rate allowable by law;
91
C . Awarding Plaintiffs and the Class and any subclass on the common law fraud count
asserted above an amount of punitive or exemplary damages in an appropriate amount to accomplish
the purposes and aims of such damages, in an amount to be determined at trial under appropriate
procedures, jointly and severally against the Defendants who are determined at trial to have acted
with the requisite degree of scienter or mental state.
D . Awarding Plaintiffs and the Class the costs of this suit, including reasonabl e
attorneys' and accountants' and experts' fees and other disbursements ; and
E . Awarding Plaintiffs and the Class and any subclass such other and further relief a s
this Court may deem just and proper.
92
JURY DEMAND
Plaintiffs demand a trial by jury .
Dated: June 15, 2000
Thomas L . Krebs
Stuart M. Grant
CO-LEAD COUNSEL FOR PLAINTIFFS
AND MEMBERS OF THE CLASS :
J. Michael Rediker , Esq . [RED 0041
Thomas L. Krebs, Esq . [KRE 001 ]
Patri cia Diak, Esq. [DIA 005]
RTTCHIE & REDIKER , L .L .C .
312 No rth 231 Street
Birmingham, Alabama 35203
Telephone : ( 205) 251-1288
Facsimile : ( 205) 324-738 0
Stuart M . Grant, Esq .
Megan D . McIntyre, Esq .
Denise T. DiPersio, Esq .
GRANT & EISENHoFER, P .A .
1220 N . Market Street, Suite 500
Wilmington, DE 19801
Telephone : (302) 622-7000
Facsimile : (302) 622-7100
M . Clay Ragsdale, Esq .
LAW OFFICES OF M . CLAY RAGSDALE
550 Farley Building
1929 Third Avenue North
Birmingham, AL 35203
Telephone : (205) 251-4775
Facsimile: (205) 251-4777
93
Serve Defendants by Certified Mail, Return Receipt Requested , As Follows :
Harold Ruttenberg
3421 Oak Canyon Drive
Birmingham, AL 35243-4810
Helen Rocke y
c/o Just For Feet, Inc .
7400 Cahaba Valley Road
Birmingham , AL 35242
Eric L . Tyra
4985 Heather Pt .
Birmingham, AL 35242-3951
Scott C . Wynne
151 West Gree n
Birmingham , AL 3524 3
Peter Berm an
1010 Berrington Circle
Birmingham, AL 35242-5874
Cooper Evans
1325 Forest Ridge Court
Birmingham, AL 35226-3201
Patrick Lloyd
2216 Vesthaven Way East
Birmingham, AL 35216-2052
Adam Gilburne
5104 Greystone Way
Birmingham , AL 3524 2
Steven H . Barry
2101 Magnolia Way
Birmingham , AL 35243-202 4
Karen Baker
8064 Castlehill Road
Birmingham , AL 35242-722 6
Don-Allen Ruttenber g
3625 S . Decatur Blvd .
Las Vegas, NV 89103- 5813
Randall L . Haines
5338 Greystone Way
Birmingham, AL 35242-721 7
Michael Lazarus
c/o James W. Gewin, Esq .
Bradley, Arant, Rose & White, LLP
2001 Park Place, Suite 1400
Birmingham, Alabama 35203-2736
Deloitte & Touche, LLP
417 20' Street North #1000
Birmingham , AL 35203-320 6