Pipefitters Local No. 636 Defined Benefit Plan, Et Al. V. Zale

Case 3:06-cv-01470 Document 25 Filed 01/29/2007 Page 1 of 61

UNITED STATES DISTRICT COURT

NORTHERN DISTRICT OF TEXAS

DALLAS DIVISION

In re ZALE CORPORATION SECURITIES § Master File No. 3:06-cv-01470-K LITIGATION § ECF

§ CLASS ACTION

CONSOLIDATED CLASS ACTION COMPLAINT FOR VIOLATION OF THE FEDERAL SECURITIES LAWS Case 3:06-cv-01470 Document 25 Filed 01/29/2007 Page 2 of 61

The Court-appointed Lead Plaintiffs, Pipefitters Local No. 636 Defined Benefit Plan, Iron

Workers Local 16 Pension Fund and Mitchel Agoos, individually and on behalf of all other persons similarly situated (collectively, "Plaintiffs or "Lead Plaintiffs ), by and through their undersigned attorneys, for their complaint against Zale Corporation ("Zale or the "Company ), Sue E. Gove,

Mary L. Fort , Mark R. Lenz, and Cynthia T. Gordon (collectively, the "Individual Defendants or, together with Zale, the "Defendants ), allege the following based upon personal knowledge as to themselves and their own acts, and as to all other matters, based upon, inter alia, an investigation conducted by and through their attorneys, which included, among other things: (i) interviews of persons with knowledge, including former employees and representatives of Zale; (ii) a review of

Defendants' press releases and other public documents; (iii) conference calls and announcements made by Defendants; (iv) United States Securities and Exchange Commission ("SEC ) filings;

(v) wire and press releases published by and regarding Zale; (vi) securities analysts' reports and advisories about the Company; and (vii) information readily obtainable from public sources.

Plaintiffs believe that substantial additional evidentiary support will exist for the allegations set forth herein after a reasonable opportunity for discovery.

NATURE OF THE ACTION

1. This is a federal securities class action brought on behalf of a class (the "Class ) consisting of all persons who purchased or otherwise acquired the publicly traded common stock of

Zale between February 18, 2005 and May 5, 2006, inclusive (the "Class Period ), seeking to recover damages caused by Defendants' violations of § § 10(b) and 20(a) ofthe Securities and Exchange Act of 1934 (the "Exchange Act ), 15 U.S.C. §§78j(b) and 78t(a), respectively, and Rule lOb-5, 17

C.F.R. §240.1 Ob-5, promulgated thereunder.

2. Zale, through its wholly-owned subsidiaries, operates as a specialty retailer of fine jewelry in North America. It offers fine jewelry, watches and diamond products under the name

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"Zales Jewelers in the United States. The Company also offers traditional jewelry under the brand name "Peoples Jewelers in Canada, gold and silver products through mall-based kiosks and carts under the brand names "Piercing Pagoda in the United States and "Peoples II in Canada, and operates "Zales, the Diamond Store outlets in North America and Puerto Rico. In total, as of

July 31, 2005, the Company operated 1,464 specialty retail jewelry stores, 812 kiosks and 69 carts in

North America and Puerto Rico.

3. Prior to the start ofthe Class Period, companies in the retail jewelry industry, such as

Zale, enjoyed a healthy profitability - with net margins reaching as high as 50% in a given financial period, which, according to one ofPlaintiffs' confidential sources, had a 10%-12% impact on such a company's bottom line after costs and expenses. However, entering the Class Period, Defendants could no longer avoid recognizing that the Zales Jewelers division, which accounted for 45% of

Zale's total sales , was continuing to lose market share. Defendant Fort had implemented a plan that steered the Company away from its historical platform aimed at average-income Americans. Fort attempted to push Zales Jewelers into a more up-scale market, de-emphasizing popular diamond fashion and solitaire categories in favor of more expensive gold and silver merchandise. These significant changes disrupted Zale's struggling flagship brand. Fort also tried to transition to the direct importation of diamond jewelry, while dramatically shifting the mix of products Zales

Jewelers offered and canceling historically successful promotional events, which alone cost the

Company $22 million. This unfocused merchandising strategy led to ordering delays and merchandise shortages during the critical 2005 holiday season.

4. While Zales Jewelers' market share rapidly eroded, Zale's competitors posted excellent sales results. Undeterred by the worsening business picture at Zale, the Individual

Defendants provided unrealistic and unreasonable guidance to Wall Street that the Company just could not meet, so as to try to compare more favorably with the Company' s competitors. Indeed, the

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Company's earnings guidance was so unrealistic that, during the fourth quarter of fiscal year 2005,

Zale faced an earnings miss ofnearly $30 million. Further, payroll expenses - which were typically an area where the Company could cut expenses to meet forecasts - were already cut to "bare bones for the quarter, forcing the Company to look elsewhere to meet quarterly and year-end forecasts.

5. Faced with the threat of disappointing Wall Street, and in order to maintain the price ofZale common stock, Defendants engaged in a scheme and course offraudulent conduct during the

Class Period to artificially inflate revenues by improperly accounting for extended service agreements ("ESAs ) with its customers . An ESA is a service warranty sold to customers to cover jewelry sizing and breakage issues over a period of two years.

6. Specifically, Zale engaged in "cookie jar accounting by improperly manipulating the amount and timing of revenue that it initially recognized upon the sale of ESAs in order to smooth its earnings . Whenever the Company was going to miss earnings targets, Defendants would increase the percentage of revenue the Company initially recognized upon the sale of ESAs, or change the timing over which it recognized revenues from ESAs. This practice violated not only Generally

Accepted Accounting Principles ("GAAP ), but Zale's own publicly-stated revenue recognition policy with respect to ESAs.

7. In addition to manipulating the Company's financials through the improper accounting for ESAs, Defendants also manipulated the Company's free cash flow during the Class

Period. Specifically, during 4Q04, at the direction of defendant Fort , defendants Gove and Gordon instructed the Zale "buyers to contact all of the Company' s vendors and change the terms of the buys to postpone receivables and payments. Thus, a letter was forwarded to these vendors explaining that vendors would not be paid until after July 31, 2005, because the Company's

"inventory system and the "merchandising system did not match and, as a result, that Zale could not pay vendors. In reality, delaying vendor payments allowed Zale to reverse cost of goods sold

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and accounts payable accounts, thus removing expenses that would otherwise impact the Company's free cash flow figures that were reported to Wall Street and investors.

8. As a result of these fraudulent practices which were unknown to investors,

Defendants issued a series of materially false and misleading statements and omissions during the

Class Period concerning: (i) Zale's quarterly and year-end financial results; (ii) Zale's policy for recognizing revenue from ESAs; and (iii) free cash flow figures.

9. Defendants were only able to carry on their scheme for so long, as they finally attracted the attention of the SEC. In particular, on April 10, 2006, the Company issued a press release announcing that the SEC had initiated a nonpublic investigation into various accounting and other matters related to the Company, including, among other things, the Company's accounting for

ESAs and the timing of certain vendor payments.' This partial disclosure caused the price of Zale common stock to plummet $2.64, or 9.5%. Zale stock closed at $27.80 on April 7, 2006, and $25.16 on April 10, 2006, on unusually heavy trading volume of 1,599,700 shares.

10. Disclosure ofthe SEC investigation into Zale's accounting practices was just the tip of the iceberg. The true state of Zale's financial condition was further revealed on May 5, 2006, when the Company announced, after the close of market, that defendant Lenz had been placed on

"administrative leave as a result of his failure to timely disclose to Zale's auditors that vendor payments scheduled to be made during the last two weeks of 4Q05 had been delayed into the first week of 1 Q06. This news also negatively impacted Zale's financial results, causing the price ofZale common stock to fall another $1 .73, or 7 .03%, the following week, from a closing price of $24.62 on

May 5, 2006, to a close of $22.89 on May 12, 2006.

1 By letter dated September 21, 2006, the SEC notified Zale that its investigation had been terminated. The conclusions and recommendations of the SEC, if any, were not disclosed.

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11. As detailed herein, the Individual Defendants engaged in this scheme to defraud in order to sell $15.8 million of inflated Zale stock and to obtain significant bonuses which were tied to the false financial results the Company was reporting.

JURISDICTION AND VENUE

12. The claims asserted herein arise under and pursuant to §§10(b) and 20(a) of the

Exchange Act, 15 U.S.C. §§78j(b) and 78t(a), and Rule lOb-5 promulgated thereunder by the SEC,

17 C.F.R. §240. 1Ob-5.

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

U.S.C. §§1331 and 1337, and §27 of the Exchange Act.

14. Venue is proper in this District pursuant to §27 of the Exchange Act and 28 U.S.C.

§ 1391(b). Many of the acts and transactions giving rise to the violations of law complained of herein, including the preparation and dissemination of materially false and misleading statements, occurred in substantial part in this District. In addition, Zale's principal executive offices are located at 901 West Walnut Hill Lane, Irving, Texas, and the Individual Defendants conducted the day-today operations of the Company in this District.

THE PARTIES

15. By Order dated October 16, 2006, Pipefitters Local No. 636 Defined Benefit Plan,

Iron Workers Local 16 Pension Fund, and Mitchel Agoos were appointed Lead Plaintiffs in this action. As reflected in their certifications submitted with their motions for lead plaintiff appointment, the Lead Plaintiffs purchased Zale common stock during the Class Period and were damaged thereby.

16. Defendant Zale, through its wholly-owned subsidiaries, operates as a specialty retailer of fine jewelry in North America. It offers fine jewelry, watches, and diamond products under the name "Zales Jewelers in the United States . The Company also offers traditional jewelry

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under the brand name "Peoples Jewelers in Canada. It operates "Zales, the Diamond Store outlets in North America and Puerto Rico. In addition, the Company offers gold and silver products through mall-based kiosks and carts under the brand names "Piercing Pagoda in the U.S. and

"Peoples II in Canada. These stores offer bracelets, earrings, charms, rings, and 14-karat and 10- karat gold chains, as well as silver and diamond jewelry. As of July 31, 2005, the Company operated 1,464 specialty retail jewelry stores , 812 kiosks, and 69 carts in North America and Puerto

Rico.

17. Defendant Mary L. Fort ("Fort ) was, until her resignation, effective January 31,

2006, President, Chief Executive Officer and a director of the Company. During the Class Period,

Fort sold $6.3 million worth of Zale stock at artificially inflated prices.

18. Defendant Mark R. Lenz ("Lenz ) was, until he was placed on administrative leave on May 4, 2006, the Group Senior Vice President and Chief Financial Officer of Zale. During the

Class Period, Lenz sold $755,000 worth of Zale stock at artificially inflated prices.

19. Defendant Sue E. Gove ("Gove ) was, until her resignation on March 23, 2006,

Executive Vice President, ChiefOperating Officer and a director ofthe Company. During the Class

Period, Gove sold $8.7 million worth of Zale stock at artificially inflated prices.

20. Defendant Cynthia T. Gordon ("Gordon ) was at all relevant time the Senior Vice

President and Controller of the Company. During the Class Period, Gordon was the principal accounting officer of Zale and sold $55,620 worth of Zale stock at artificially inflated prices.

21. As part of their duties at Zale, the Individual Defendants were responsible for directing the Company's finances and business affairs, including revenue and growth figures.

Throughout the Class Period, the Individual Defendants participated in the issuance of false and misleading statements and failed to disclose material information about Zale's business, accounting and financial status and outlook. The Individual Defendants participated in the preparation of the

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Company's SEC filings and press releases, and participated in the Company's conference calls with analysts and investors, representing themselves as the primary persons with knowledge about Zale's business and financial affairs.

22. The Individual Defendants, because oftheir positions with the Company, possessed the power and authority to control the contents of Zale's quarterly reports, press releases and presentations to securities analysts, money and portfolio managers and institutional investors, i.e., the market. They were provided with copies of the Company's reports and press releases alleged herein to be misleading prior to or shortly after their issuance, and had the ability and opportunity to prevent their issuance or cause them to be corrected. Because of their positions with the Company and their access to material information available to them but not to the public, the Individual

Defendants knew that the adverse facts specified herein had not been disclosed to and were being concealed from the public and that the positive representations being made were then materially false and misleading. The Individual Defendants are liable for the false statements pleaded herein at

1128-33, 37-43, 47-52, 55-60, 64-67, 69-71, and 75-76.

DEFENDANTS' FRAUDULENT SCHEME AND COURSE OF BUSINESS DURING THE CLASS PERIOD

23. Defendants are liable for making false statements and failing to disclose adverse facts known to them about Zale. Defendants' fraudulent scheme and course ofbusiness operated as a fraud or deceit on purchasers of Zale common stock and was a success , as it: (i) deceived the investing public regarding Zale's prospects and business; (ii) artificially inflated the price of Zale common stock; (iii) allowed defendants Fort , Lenz, Gove and Gordon to obtain larger bonuses that were directly tied to the performance ofZale; (iv) allowed defendants Fort , Lenz, Gove and Gordon to sell some $15.8 million worth of their personally held Zale stock; and (v) caused Lead Plaintiffs and other members of the Class to purchase Zale common stock at artificially inflated prices.

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24. During the Class Period, Defendants embarked on a scheme to manipulate the financial results of the Company by accounting for ESAs improperly and by improperly delaying vendor payments.

25. Specifically, the Individual Defendants intentionally misled investors by manipulating the amount of revenue initially recognized under ESA agreements during the Class

Period. Instead of recognizing 40% of ESA revenue in the first month of a two-year ESA contract, as was the Company's policy, the Individual Defendants caused Zale to increase the amount of revenue it recognized during the initial month from 40% to 50%. In December 2004, the Individual

Defendants caused Zale to recognize 50% ofthe first month revenue on $12.0 million of ESA sales, which led to an overstatement ofrevenue and pre-tax earnings of $1.2 million and an overstatement of its net income of $760,000 and EPS of $0.01 for 2Q05. In February 2005, the Individual

Defendants again caused Zale to manipulate its internal accounting policies for the recognition of

ESA revenue, which led to an overstatement of $429,000 in revenue and pre-tax earnings, net income of $264,000, and EPS of approximately $0.01 for 3Q05.

26. Additionally, the Individual Defendants caused Zale to delay making certain vendor payments scheduled to be made the last two weeks of July 2005 until the first week ofAugust 2005.

The payments were due the last two weeks of FY05 and the Company had an internal policy of paying invoices as they became due. However, the Individual Defendants intentionally caused Zale to delay making the payments in order to present a misleading picture of its cash position and, especially, its net cash flow from operating activities. Net cash flow was a financial metric closely watched and scrutinized by analysts and the market because it gave an indication ofthe Company's financial health and viability. By deferring the vendor payments, Zale was able to increase its FY05 cash position by $9.7 million.

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27. This scheme to manipulate the Company's financial results is demonstrated by former Zale employees' (identified herein as Confidential Witnesses ("CW )) first-hand accounts of the alleged fraud:

(a) CW 1, a former Director of Finance at Zale's largest operating segment, was employed by the Company from the beginning of the Class Period through June 2005. CW1 has first-hand personal knowledge of the facts concerning Defendants' intentional manipulation of the

Company's internal accounting policies with regard to ESA revenues. CW 1 also has first-hand knowledge ofthe facts concerning Defendants' intentional manipulation ofvendor payments. CW 1 regularly participated in meetings with the Individual Defendants during which the manipulation of vendor payments and acceleration of ESA revenue was discussed:

(i) CW 1 explained in detail the scheme Defendants employed during the

Class Period to manage improperly the Company's earnings by intentionally manipulating the accounting for ESAs. CW 1 described Defendants' intentional manipulation ofESAs as being one of various "kitties used to improperly manage the Company' s earnings . Prior to CW1' s resignation from Zale in June 2005, CW1 was responsible for managing a portfolio of approximately $42 million in ESA contracts . According to CW1, Zale's revenue recognition policy for ESAs required the Company to recognize 40% ofESA revenue in the first month. Thereafter, Zale would recognize gradually smaller percentages of revenue over the remaining 23 months of the life of the ESA contract. CW 1 stated that during the Class Period, Defendants intentionally manipulated the amount of ESA revenue recognized in the first month to fill earnings shortfalls. By way of example, in

December 2004, Defendants increased the amount of "first month ESA revenue recognized on

$12.0 million of December 2004 ESA contracts, from 40% to 50%, for the purpose of producing approximately $760,000 in additional net income. CW 1 stated that Defendants did the same thing in

February 2005, on $8.6 million of February 2005 ESA contracts, for the purpose of producing

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approximately $264,000 in extra net income. CW 1 stated that there was no business reason behind the increases in ESA revenue recognition during December 2004 and February 2005, other than to artificially inflate revenues to meet analysts and investors' earnings expectations;

(ii) CW 1 added that the Defendants' manipulation of ESA revenue was clearly in violation of accounting standards. By way of example, in January 2005, CW 1 attended a meeting with defendant Lenz and the Senior V.P. of Operations, Steve Strong ("Strong ), during which Strong objected to Zale's moving the ESA "fixed month revenue in March 2005 back to

40%, from 50%. Strong complained that the adjustment back to 40% in March 2005 would adversely affect his bonus compensation, because it was directly tied to ESA revenue. According to

CW1, Lenz acceded to Strong' s objections and moved the percentage down to 45% instead; and

(iii) On or about May 10, 2005, CW 1 attended a Sarbanes-Oxley ("SOX ) compliance meeting, which defendants Fort , Gove, Lenz, and Gordon attended and actively participated in. In addition to discussing SOX compliance, defendant Fort expressed her concern that Wall Street analysts would issue unfavorable reports regarding Zale if the Company reported

FY05 earnings below analysts ' expectations . According to CW1, not only did defendant Fort pressure management to find additional earnings opportunities, but immediately after the meeting, defendant Fort instructed defendants Gove, Gordon, and a senior director of accounts payable, to print out a list ofvendors to whom Zale owed money. Thereafter, Fort instructed Zale merchandise buyers to inform the vendors by letter that they would not be paid until after July 31, 2005 (i.e., after the close of Zale's FY05). CW1 noted that the letter, however, falsely represented to the vendors that the Company was unable to pay the invoices because of a temporary reconciliation problem between inventory and merchandising accounting systems.

(b) CW2, a former Director ofPlanning at Zale's largest operating segment, was employed by the Company from the beginning ofthe Class Period through February 2005. CW2 has

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first-hand knowledge ofthe facts concerning Defendants ' intentional manipulation ofthe Company's internal accounting policies with regard to ESA revenues. CW2 learned ofthe manipulation of ESA revenue recognition though regular communications with defendant Gordon during the Class Period:

(i) CW2 stated that defendants Gove, Lenz and Gordon were responsible for making the decision to increase "first-month revenue recognition from 40% to 50%;

(ii) CW2 stated that ESA revenue recognition acceleration was typically done twice a year to correspond with the Company's second and third fiscal quarter (i.e., between

Christmas and Mother's Day);

(iii) CW2 stated that it appeared Zale accelerated ESA revenue during the

Class Period to intentionally manipulate earnings because the manipulations came when there were earnings shortfalls; and

(iv) CW2 noted that the Individual Defendants not only would accelerate

ESA revenue by increasing the "first-month percentage from 40% to 50%, but also would accelerate recognition of 2-year contracts over an 18-month period.

(c) CW3, a former Senior Financial Analyst at Zale's largest operating segment, was employed by the Company between approximately December 1997 and August 2004. Although not employed by Zale during the Class Period, CW3 has first-hand knowledge of the facts concerning Defendants' same practice of intentionally manipulating the Company's internal accounting policies with regard to ESA revenue that carried on throughout the Class Period. CW3 stated that, of all Zale's accounting improprieties, the Company's most egregious concerned its management of earnings , including earnings derived from ESAs:

(i) During CW3's employment at Zale, CW3 was responsible for maintaining, and had access to, detailed financial worksheets for all Zale brands, including spreadsheets, the analysis of which would show what revenue was "pushed forward in a given 12-

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month period. CW3 also attended budget meetings with each Zale brand president, defendants

Fort , Gove and Lenz, the heads of corporate finance and sales, and the two-person financial team for each brand, during which Gove and Fort would reiterate their axiom of "do whatever it takes

(e.g., charge more, cut payroll) to reach sales goals;

(ii) CW3 stated that if a decision was made to accelerate ESA income, it would have come from the Corporate Finance department, as earnings management occurred at the topside/corporate level, not at the brand level. According to CW3, the accounting manipulations originated at the Corporate Finance level, and the decisions to accelerate ESA revenues were made by defendants Fort and Gove;

(iii) CW3 also stated that defendant Lenz did exactly what he was told by defendants Fort and Gove and that Lenz probably got into trouble because he did not stand up to

Fort and Gove;

(iv) CW3 explained that ESA revenue dramatically improved when the

Company changed its ESA pricing to incorporate different price points after a 2002-2003 study of

Zale's ESAs was conducted by NEW, a company that had also handled ESA-related issues for Wal-

Mart and Sears. According to CW3, the NEW study reviewed Zale's and its competitors' conversion rates and success in selling warranties and revealed how much more money the Company could make by changing its ESA system from a two-level system to one which incorporated different

ESA/warranty price points, such as Kay Jewelers, whose warranty system incorporated six or seven levels. According to CW3, as a result of the changes made to Zale's warranty system following the

NEW study, ESAs became a significant earnings management "kitty for the Company. Indeed, by incorporating different price points into its warranty system, CW3 recalled that Zale greatly improved its sales performance. During CW3's tenure, the Zales Jewelers brand was responsible for

60% of the Company's total sales, and that brand's ESAs accounted for approximately 80% of the

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Company's total ESA sales. Thus, CW3 explained that when the Company was in trouble or needed to boost its revenue, it was easy for Defendants to dip into future periods of ESA revenues and pull some of it forward into the current period;

(v) CW3 believed that ESA revenue was accelerated because the

Company's sales expectations were not meeting analysts and investors' earning expectations.

Further, CW3 explained that Zale's sales expectations fell short ofcompetitors such as Kay Jewelers and Jared Jewelers (both of Sterling Jewelers, Inc.), and the Company may have accelerated ESA revenues to appear more competitive with its peers; and

(vi) CW3 explained that there was always an incentive for Zale to pull forward ESA revenue to keep pace with the Company's competitors. CW3 recalled Zale's accelerating ESA revenue a few times during his employment, and stated the practice was common knowledge. CW3 further surmised that company-wide, accelerated ESA revenue resulted in approximately $500,000-$1,000,000 of additional quarterly revenue twice a year for a year or two during CW3' s tenure. CW3 added that the Company might have received as much as $2-$3 million in one year as a result of accelerating ESA revenue.

DEFENDANTS' FALSE AND MISLEADING STATEMENTS ISSUED DURING THE CLASS PERIOD

2Q05 False and Misleading Statements

28. False Statement : On February 18, 2005, Zale issued a press release entitled "Zale

Announces Increase in Second Quarter EPS to $1.91. The press release stated in part:

Zale Corporation .... North America's largest specialty retailer of fine jewelry, today announced net earnings of $99 million, or $1.91 per diluted share, for the Company's second quarter ended January 31, 2005. For the same period last year, the Company reported net earnings of $97 million, or $1.83 per diluted share. This represents an increase of 4.4% on a per share basis over the prior year.

Total revenues for the second quarter ended January 31, 2005 were $972 million, compared to $949 million for the same period last year, an increase of2.5%. Comparable store sales decreased 0.6% for the same period.

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Revenues for the year-to-date totaled $1.395 billion, compared to $1.366 billion for the same period last year, an increase of 2.2%. On a comparable store basis, year-to-date sales decreased 0.7%. Year-to-date net earnings totaled $88 million or $1.69 per diluted share. For the same period last year, net earnings were $88 million, or $1.63 per diluted share. This represents a 3.7% increase on a per share basis for the year-to-date over last year.

29. False Statement: The February 18, 2005 press release further reported as follows

(in thousands):

THREE MONTHS ENDED JANUARY 31 2005 2004 Total Revenues $972,332 $949,023 Operating Earnings $159,707 $156,477 Net Earnings $99,197 $97,295 Diluted Earnings Per Share $1.91 $1.83

30. False Statement : The same day, on February 18, 2005, Defendants hosted a

conference call with analysts and investors to discuss Zale's business operations and prospects and

2Q05 financial results. The call repeated and addressed information previously made public in

Zale's February 18, 2005 press release. Defendants Fort , Lenz and Gove participated on the call

and had an opportunity to address analysts and investors' questions and concerns, and correct

misinformation and misstatements. During that call, defendant Lenz stated that "[g]ross margin as

a percentage of revenues for the quarter was 50.6 percent versus 50. 5 percent last year, a 10

basis point increase. Defendants attributed the increase, in part, to a "higher mix of extended

service agreement revenues that quarter.

31. False Statement : On March 11, 2005, Defendants filed the Company's quarterly report with the SEC on Form 10-Q, for the period ending January 31, 2005 ("2Q05 Form 10-Q )

The Company's 2Q05 Form 10-Q was signed by defendant Gordon and reaffirmed the previously announced financial results. The 2Q05 Form 10-Q reported results as follows:

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SECOND QUARTER 2005 n 000s except for EPS) January 31, 2005 January 31, 2004 Total Revenues $972,332 $949,023 Net Eamin s/Loss $99,197 $97,295 EPS (diluted) $1.91 $1.83 Cash and Cash Equivalents $55,541 $63,124 Net Cash Provided by Operating Activities (6 mos.) $143,406 $161,954

32. False Statement: Additionally, concerning the Company's accounting for HAS, the

2Q05 Form 10-Q reported that:

The Company sells extended service agreements ("ESAs ) to customers to cover sizing and breakage for a two year period on certain products purchased from the Company. The revenue from these agreements is recognized over the two year period in proportion to the costs expected to be incurred in performing services under the ESAs. In addition to increased sales of ESAS over the past year, the proportion of expenses incurred earlier in the two year period has increased resulting in higher revenues of approximately $1 million for the three and six month periods ended January 31, 2005.

33. False Statement: Defendants further represented the following "changes in the

Company's product warranty liability for the reporting periods :

Three Months Ended Six Months Ended January 31, January 31, 2005 2004 2005 2004 (amounts in thousands) Beginning Balance $ 30,703 $ 31,225 $ 31,794 $ 32,160 Extended Service Agreements Sold 25,184 19,392 36,238 27,953 Extended Service Agreement Revenue Recognized (21,040) (15,994) (33,185) (25,490) Ending Balance $ 34,847 $ 34,623 $ 34,847 $ 34,623

34. Defendants' statements regarding the Company's 2Q fiscal year 2005 financial

results were materially false and misleading when made. Defendants knew or recklessly

disregarded, but failed to disclose, the following:

(a) As detailed in ¶125, 27(a)(i)-(ii), 27(b)(i)-(iv), 27(c)(i)-(vi), and 83-92, Zale had improperly "managed its earnings by manipulating the amount and timing ofthe revenue that it initially recognized upon the sale of its ESAS such that its reported earnings did not accurately reflect its operating results. The improper manipulation of ESAs in 2Q05 allowed Zale to overstate its revenue by $1.2 million, its pre-tax earnings by $1.2 million, and its net income by $760,000.

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(b) As detailed in 1125, 27(a)(i)-(ii), 27(b)(i)-(iv), 27(c)(i)-(vi), and 102-106, Zale failed to disclose known trends and uncertainties by not reporting the Company's practice of managing its earnings in violation of SEC regulations.

35. Defendants' statements between February 18, 2005 and March 11, 2005, which were false and misleading when made, had a direct effect on Zale's stock price, which continued to trade at artificially inflated levels above $29.00 per share.

36. Notwithstanding their knowledge that the statements regarding 2Q05 financial results were false and misleading, within weeks of the statements being made, defendants Fort ,

Gove and Lenz sold 426,082 shares of Zale stock for insider trading proceeds exceeding $12.6 million.

3Q05 False and Misleading Statements

37. False Statement : On May 5, 2005, Zale issued a press release entitled "Zale

Announces Comparable Store Sales Increase of 3.5%. The press release stated in part:

Zale Corporation .... North America's largest specialty retailer of fine jewelry, today reported that for the third quarter ended April 30, 2005, comparable store sales increased 3.5%. Total revenues for the period were $516 million compared to last year's third quarter revenues of $483 million, an increase of 6.7%.

For the fiscal year-to-date, total revenues increased 3.3% to $1.911 billion, compared to $1.849 billion for the same period last year. On a year-to-date basis, comparable store sales increased 0.4%.

"These sales results reflect the momentum in the business as we position our brands appropriately to capture their share ofthe market, commented Mary L. Forte, President and Chief Executive Officer.

38. False Statement : On May 17, 2005, Zale issued a press release entitled "Zale

Announces 27 Percent Increase in Third Quarter EPS. The press release stated in part:

Zale Corporation .... the largest specialty retailer of fine jewelry in North America, announced today net earnings of $14.5 million, or $0.28 per diluted share, for the Company's third quarter ended April 30, 2005. This represents an increase of 27% on a per share basis over the same period last year when the Company reported net earnings of $11.5 million, or $0.22 per diluted share.

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Total revenues for the third quarter ended April 30, 2005 were $516 million, compared to $483 million for the same period last year, an increase of 6.7%. Comparable store sales increased 3.5% for the same period.

Total revenues for the year-to-date totaled $1.911 billion compared to $1.849 billion for the same period last year, an increase of 3.3%. On a comparable store basis, year-to-date sales increased 0.4%. Year-to-date net earnings totaled $102.7 million or $1.98 per diluted share. For the same period last year, net earnings were $99.6 million, or $1.85 per diluted share.

"We are very pleased with these earnings results as they reflect the ongoing execution of our strategy, commented Mary L. Forte, President and ChiefExecutive Officer.

39. False Statement: The May 17, 2005 press release further reported as follows (in thousands):

THREE MONTHS ENDED APRIL 30 2005 2004 Total Revenues $515,618 $483,175 Operating Earnings $25,051 $19,602 Net Earnings $14,456 $11,528 Diluted Earnings Per Share $0.28 $0.22

40. False Statement : The same day, on May 17, 2005, Defendants hosted a conference

call with analysts and investors, to discuss Zale's business operations and prospects and 3Q05

financial results. The call repeated and addressed information previously made public in Zale's

May 17, 2005 press release. Defendants Fort , Lenz and Gove participated on the call and had an

opportunity to address analysts and investors' questions and concerns. During that call, defendant

Lenz stated that "[g]ross margin as a percentage ofrevenues for the quarter was 52.3% versus

51.8% last year, [a] 45 basis point increase. Defendants attributed the increase, in part, to a

"higher mix ofextended service agreement revenues that quarter.

41. False Statement: On June 9, 2005, Defendants filed the Company's quarterly report with the SEC on Form 10-Q, for the period ending April 30, 2005 ("3Q05 Form 10-Q ). The

Company's 3Q05 Form 10-Q was signed by defendant Gordon and reaffirmed the previously announced financial results. The 3Q05 Form 10-Q reported results as follows:

-17- Case 3:06-cv-01470 Document 25 Filed 01/29/2007 Page 19 of 61

THIRD OUARTER 2005 n 000s except for EPS) A ri130, 2005 April 30, 2004 Total Revenues $515,618 $483,175 Net Eamin s/Loss $14,456 $11,528 EPS (diluted) $0.28 $0.22 Cash and Cash Equivalents $66,782 $43,869 Net Cash Provided by Operating Activities (9 mos.) $129,790 $169,643

42. False Statement: Additionally, concerning the Company's accounting for ESAs, the

3Q05 Form 10-Q reported:

Product Warranty Programs. The Company sells extended service agreements ("ESAs ) to customers to cover sizing and breakage for a two-year period on certain products purchased from the Company. The revenuefrom these agreements is recognized over the two-year period in proportion to the costs expected to be incurred in performing services under the ESAs.

43. False Statement : Further, Defendants represented the following "changes in the

Company's product warranty liability for the reporting periods :

Three Months Ended Nine Months Ended April 30, April 30, 2005 2004 2005 2004 (amounts in thousands) Beginning Balance $ 29,669 $ 34,623 $ 31,794 $ 32,160 Extended Service Agreements Sold 14,404 11,115 45,464 39,068 Extended Service Agreement Revenue Recognized ( 15,170) 12,978) 48,355) (38,468) Ending Balance $ 28,903 $ 32,760 $ 28,903 $ 32,760

44. The Defendants' statements regarding the Company's 3Q fiscal year 2005 financial results were materially false and misleading when made. Defendants knew or recklessly disregarded, but failed to disclose, the following:

(a) As detailed in ¶125, 27(a)(i)-(ii), 27(b)(i)-(iv), 27(c)(i)-(vi), and 83-92, Zale had improperly "managed its earnings by manipulating the amount and timing ofthe revenue that it initially recognized upon the sale of its ESAs such that its reported earnings did not accurately reflect its operating results. The improper manipulation of ESAs in 3Q05 allowed Zale to overstate its revenue by $429, 000, its pre-tax earnings by $429,000, and its net income by $264,000.

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45. Defendants' statements between May 5, 2006 and June 9, 2005, which were false and misleading when made, had a direct effect on Zale's stock price, which continued to trade at artificially inflated levels above $32.00 per share.

46. Notwithstanding her knowledge that the statements regarding 3Q05 financial results were false and misleading, within weeks of the statements being made, defendant Fort sold an additional 10,756 shares of Zale stock for insider trading proceeds exceeding $350,000.

FY05 and 4Q05 False and Misleading Statements

47. False Statement: On August 4, 2005, Defendants issued a press release and filed a current report on Form 8-K with the SEC pre-announcing the Company' s sales results for the fourth quarter of fiscal 2005. Specifically, Defendants stated that:

Zale ... reported today that for the fourth quarter ended July 31, 2005, comparable store sales decreased 0.1%. Total revenues for the period were $472 million compared to last year's total revenues of $456 million, an increase of 3.5%.

For the fiscal year, total revenues increased 3.4% to $2.3 83 billion, compared to $2.304 billion for the prior fiscal year. On a comparable store basis, sales increased 0.3% for the year.

The Company further stated that based on its sales results, it now expects diluted earnings per share for the fourth quarter ending July 31, 2005, to range between $0.07 and $0.09.

48. False Statement : On August 30, 2005, Zale issued a press release entitled "Zale

Announces Fourth Quarter and Full Year Financial Results; Also Announces $100 Million Stock

Repurchase Program. The press release stated in part:

Zale Corporation .... North America' s largest specialty retailer of fine jewelry, reported today net earnings of $4.1 million, or $0.08 per diluted share, for the

-19- Case 3:06-cv-01470 Document 25 Filed 01/29/2007 Page 21 of 61

Company's fourth quarter ended July 31, 2005. For the same period last year, the Company reported net earnings of $6.9 million, or $0.13 per diluted share.

Net earnings for fiscal year 2005 were $106.8 million, or $2.05 per diluted share. For the prior fiscal year, net earnings were $106.5 million, or $1.99 per diluted share.

For the fiscal year, total revenues increased 3.4% to $2.3 83 billion, compared to $2.304 billion for the prior fiscal year. On a comparable store basis, sales increased 0.3% for the year.

"During the year we made progress in the execution of our business plan, although the year proved challenging with the repositioning of the Zales brand, commented Mary L. Forte, President and Chief Executive Officer.... From a financial perspective, we generated $89 million in free operating cash flow after capital expenditures. The balance sheet wasfurther strengthened by the reduction of $68 million in long-term debt, creating substantial flexibility as we move forward. Additionally, we repurchased 1.8 million shares of common stock for $50 million, demonstrating our continued commitment to increasing shareholder value.

The Company announced as part of its strategy to improve brand performance and profitability at Bailey Banks & Biddle, it will be closing after the upcoming Holiday season 30 to 35 stores that do not fit with its long-term positioning in the luxury goods market.

The Company also provided its forecast for its fiscal year ending July 31, 2006. For the full year, it currently expects revenue growth of 5.0% to 7.0%.... Free operating cash flow is expected to reach $100 million forfiscal year 2006.

49. False Statement : The August 30, 2005 press release further reported as follows (in thousands):

THREE MONTHS ENDED JULY 31 2005 2004 Total Revenues $472,342 $455,598 Operating Earnings $8,222 $12,608 Net Earnings $4,054 $6,895 Diluted Earnings Per Share $0.08 $0.13

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FOR THE FISCAL YEAR ENDED JULY 31 2005 2004 Total Revenues $2,383,066 $2,304,440 Operating Earnings $177,803 $176,354 Net Earnings $106,775 $106,473 Diluted Earnings Per Share $2.05 $1.99 Net Cash Provided by Operating Activities $168,278 $178,078 Cash and Cash Equivalents at End of Period $55,446 $63,124 Free Operating Cash Flow $89,125 $117,290

50. False Statement : On October 3, 2005, Defendants filed the Company' s annual report with the SEC on Form 10-K, for the period ending July 31, 2005 ("FY 2005 Form 10-K )

The Company's FY 2005 Form 10-Q was signed by the Individual Defendants and reaffirmed the previously announced financial results. The FY 2005 Form 10-K reported results as follows:

FISCAL YEAR 2005 n 000s except for EPS) July 31, 2005 July 31, 2004 Total Revenues $2,383,066 $2,304,440 Net Earnings/(Loss) $106,775 $106,473 EPS (diluted) $2.05 $1.99 Cash and Cash Equivalents $55,446 $63,124

Net Cash Provided by Operating Activities $168,278 $178,078

51. False Statement: Additionally, concerning the Company's accounting for ESAs, the

FY 2005 Form 10-K reported:

Revenue Recognition. The Company recognizes revenue in accordance with the Securities and Exchange Commission's Staff Accounting Bulletin No. 104, "Revenue Recognition ["SAB 104 ]. Revenue related to merchandise sales, which is approximately 94 percent of total revenues, is recognized at the time of the sale, reduced by a provision for returns. The provision for sales returns is based on historical evidence of the Company's return rate. Repair revenues are recognized when the service is complete and the merchandise is delivered to the customers. Total revenues include extended service agreements ["ESAs"J that are recognized over the two year period in proportion to the costs expected to be incurred in performing services under the agreements . Any significant change in the proportion of costs expected to be incurred in performing services under the agreements could result in a change in the amount of revenue recognized. For instance, a 5 percent change on an annual basis in the timing ofservices under these agreements could result in a 5percent change in the revenue recognized. Revenues also include premiums from the Company' s insurance business, principally related to credit insurance policies sold to customers who purchase the Company's merchandise under the proprietary credit program. Insurance premiums are recognized over the coverage period. -21- Case 3:06-cv-01470 Document 25 Filed 01/29/2007 Page 23 of 61

52. False Statement: Defendants further revealed the following "changes in the

Company's product warranty liability for the reporting periods :

Vaar Ended July 31, 2005 July 31, 2004 July 31, 2003 (amounts in thousands) Beginning Balance $ 31,794 $ 32,160 $ 32,541 Extended Service Agreements Sold 59,415 50,183 38,866 Extended Service Agreements Revenue Recognized (62,945) (50,549) (39,247)

Ending Balance $ 28,264 $ 31,794 $ 32,160

53. The Defendants' statements regarding the Company's 4Q and fiscal year 2005 financial results were materially false and misleading when made. Defendants knew or recklessly disregarded, but failed to disclose, the following:

(a) As detailed in ¶125, 27(a)(i)-(ii), 27(b)(i)-(iv), 27(c)(i)-(vi), and 83-92, Zale had been improperly "managing its earnings by manipulating the amount and timing ofthe revenue that it initially recognized upon the sale of its ESAs such that its reported earnings did not accurately reflect its operating results.

(c) As detailed in ¶126, 27(a)(iii), and 93-101, Zale failed to disclose that it had purposely manipulated the timing of certain vendor payments in order to improperly shift cash outflows from fiscal year 2005 to fiscal year 2006 such that it presented a misleading picture of the

Company's cash position. The intentional manipulation of vendor payments allowed Zale to represent that its cash account was $9.7 million higher than it should have been.

54. Defendants' statements between August 4, 2005 and October 3, 2005, which were false and misleading when made, had a direct effect on Zale's stock price, which continued to trade at artificially inflated levels above $27.00 per share.

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1Q06 False and Misleading Statements

55. False Statement: On November 3, 2005, Defendants issued a press release and filed a current report on Form 8-K with the SEC pre-announcing the Company' s sales results for the first quarter of fiscal 2006. Specifically, Defendants stated that:

Zale ... reported today that for the first quarter ended October 31, 2005, comparable store sales decreased 1.2%. Total revenues for the period were $427 million compared to last year's first quarter revenues of $423 million, an increase of 0.9%.

Based on the sales performance, the impact ofthe hurricanes, the impairment and markdown charges, the Company expects a net loss for the first quarter ended October 31, 2005, ranging between $0.46 and $0.49 per share.

56. False Statement: On November 16, 2005, Zale issued a press release entitled "Zale

Corporation Announces First Quarter Earnings Results. The press release stated in part:

Zale Corporation .... North America's largest specialty retailer of fine jewelry, today announced a net loss, of $23.7 million, or $0.47 per share, for the Company's first quarter ended October 31, 2005. This loss includes an after-tax non-cash impairment charge related to the closing of approximately 30 Bailey Banks & Biddle locations of $5.3 million, or $0.10 per share. Excluding the non-cash impairment charge, the Company reported a net loss of $18.4 million, or $0.36 per share. For the same period last year, the Company reported a net loss of $10.9 million, or $0.21 per share.

Total revenues for the quarter ended October 31, 2005 were $428 million compared to $423 million last year, an increase of 1.2%. Comparable store sales for the first quarter decreased 1.2%.

57. False Statement: The November 16, 2005 press release reported as follows (in thousands):

THREE MONTHS ENDED OCTOBER 31 2005 2004 Total Revenues $427,639 $422,773 Operating Earnings $(35,547) $( 15,178) Net Earnings $(23,661 ) $( 10,933) Diluted Earnings Per Share $(0.47) $(0.21)

58. False Statement: On December 9, 2005, Defendants filed the Company's quarterly report with the SEC on Form 10-Q, for the period ending October 31, 2005 ("1Q06 Form 10-Q )

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The Company's 1 Q06 Form 10-Q was signed by defendant Gordon and reaffirmed the previously announced financial results. The 1 Q06 Form 10-Q reported results as follows:

FIRST QUARTER 2006 n 000s except for EPS) October 31, 2005 October 31, 2004 Total Revenues $427,639 $422,773 Net Earnings/(Loss) $(35,547) $( 15,178) EPS (diluted) $(0.47) $(0.21 ) Cash and Cash Equivalents $40,361 $41,953 Net Cash Provided by Operating Activities (3 mos.) $(87,275) $(58,149)

59. False Statement: Additionally, concerning the Company's accounting for ESAs, the

1 Q06 Form 10-Q reported:

Product Warranty Programs. The Company sells extended service agreements ("ESAs ) to customers to cover sizing and breakage for a two-year period on certain products purchased from the Company. The revenuefrom these agreements is recognized over the two year period in proportion to the costs expected to be incurred in performing services under the ESAs.

60. False Statement : Further, Defendants represented the following "changes in the

Company's product warranty liability for the reporting periods :

Three Months Ended October 31, 2005 2004 (amounts in thousands) Beginning Balance $ 28,264 $ 31,794 Extended Service Agreements Sold 13,119 11,054 Extended Service Agreements Revenue Recognized (13,998) (12,145) Ending Balance $ 27,385 $ 30,703

61. The Defendants' statements regarding the Company's IQ and fiscal year 2006 financial results were materially false and misleading when made. Defendants knew or recklessly disregarded, but failed to disclose, the following:

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Company's cash position.

62. Defendants' statements between November 4, 2005 and December 9, 2005, which were false and misleading when made, had a direct effect on Zale's stock price, which continued to trade at artificially inflated levels above $27. 00 per share.

63. Notwithstanding her knowledge that the statements regarding 1 Q06 financial results were false and misleading, within weeks ofthe statements being made, defendant Gordon sold 2,000 shares of Zale stock for insider trading proceeds exceeding $55,000.

2Q06 False and Misleading Statements

64. False Statement : On January 5, 2006, Zale issued a press release entitled "Zale

Corporation Announces Results for the Holiday Selling Season. The press release stated in part:

Zale Corporation .... North America's largest specialty retailer of fine jewelry, today reported that comparable store sales increased 0.9% for the combined months of November and December 2005, encompassing the entire holiday selling period. Comparable store sales exclude the results of the 29 Bailey Banks & Biddle stores previously announced as designated for closure that were managed by an independent liquidator during the period. Total revenues for the two-month period, also excluding the store closures, were $861 million compared to $844 million last year, an increase of 2.0%. Total revenues for the two-month period, including the store closures, were $873 million compared to last year's revenues of $861 million for the period, an increase of 1.4%.

65. False Statement : On February 2, 2006, Zale issued a press release entitled "Zale

Corporation Announces Second Quarter Sales Results. The press release stated in part:

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Zale Corporation .... North America's largest specialty retailer of fine jewelry, today reported that for the second quarter ended January 31, 2006, comparable store sales increased 1.4%. Comparable store sales exclude the results of the 29 Bailey Banks & Biddle stores previously announced as designated for closure that were managed by an independent liquidator during the period. Total revenues for the period, also excluding the store closures, were $978 million compared to $952 million last year, an increase of 2.7%. Total revenues for the period, including the store closures, were $993 million compared to last year's revenues of $972 million for the period, an increase of 2.2%.

Year-to-date total revenues, excluding the store closures, increased 2.2% to $1.397 billion, compared to $1.366 billion for the same period last year. Including the store closures, year-to-date total revenues increased 1.9% to $1.421 billion, compared to $1.395 billion for the same period last year. Year-to-date comparable store sales, which exclude the store closures, increased 0.6%.

66. False Statement : On February 17, 2006, Zale issued a press release entitled "Zale

Announces Second Quarter Earnings Results and Executive Management Change. The press release stated in part:

Zale Corporation .... North America's largest specialty retailer of fine jewelry, today announced net earnings of $88 million, or $1.78 per diluted share, for the Company's second quarter ended January 31, 2006. These earnings include: a write- down ofinventory and lease settlement costs related to the closing ofBailey Banks & Biddle locations of $24 million, or $0.30 per diluted share; a tax benefit of $11.5 million, or $0.23 per diluted share, related to qualifying earnings from the Company's Canadian subsidiary repatriated under the American Jobs Creation Act; and a charge related to severance and other benefit payments in conjunction with an executive management change of $8.5 million, or $0.11 per diluted share. Excluding these items, the Company reported second quarter earnings of $97 million, or $1.96 per diluted share. For the same period last year, the Company reported net earnings of $99 million, or $1.91 per diluted share.

"Our earnings performance did not reach our expectations for the second quarter due primarily to a sales shortfall at Zales Jewelers, commented Betsy Burton, Interim Chief Executive Officer. "Upon review of Zales' business, we concluded that the new strategy negatively impacted our brand positioning because it deemphasized the value component and key diamond categories of the brand's assortment.

Ms. Burton concluded, "Even with the challenges at Zales and Piercing Pagoda, the strength of our other brands helped drive a 1.4% increase in comparable store sales for the quarter. We had a 100 basis points improvement in gross margins -26- Case 3:06-cv-01470 Document 25 Filed 01/29/2007 Page 28 of 61

due to continued adoption of direct sourcing and supply chain management, excluding the impact of the Bailey Banks & Biddle closures. So in our critical quarter we delivered strong cash flow, which enabled us to complete our $100 million share repurchase. The net effect was earnings per share growth for the quarter above last year before the store closures, repatriation and management change items.

67. False Statement: The February 17, 2006 press release reported as follows (in thousands):

THREE MONTHS ENDED JANUARY 31 2006 2005 Total Revenues $993,749 $972,332 Operating Earnings $125 ,340 $159,707 Net Earnings $87,815 $99,197 Diluted Earnings Per Share $1.78 $1.91

68. On February 17, 2006, analysts at SG Cowen & Co. confirmed the importance of cash flow to Zale investors: "we continue to view ZLC's solid cashflow... as attractive.

69. False Statement : On March 10, 2006, Defendants filed the Company's quarterly report with the SEC on Form 10-Q, for the period ending January 31, 2006 ("2Q06 Form 10-Q )

The Company's 2Q06 Form 10-Q was signed by defendant Gordon and reaffirmed the previously announced financial results. The 2Q06 Form 10-Q reported results as follows:

SECOND QUARTER 2006 n 000s except for EPS) January 31, 2006 January 31, 2005 Total Revenues $993,749 $972,332 Net Earnings/(Loss) $87,815 $99,197 EPS (diluted) $1.78 $1.91 Cash and Cash Equivalents $37,465 $55,541 Net Cash Provided by Operating Activities (6 mos.) $135,415 $143,406

70. False Statement: Additionally, concerning the Company's accounting for ESAs, the

2Q06 Form 10-Q reported:

Product Warranty Programs. The Company sells extended service agreements ("ESAs ) to customers to cover sizing and breakage for a two-year period on certain products purchased from the Company. The revenuefrom these agreements is recognized over the two year period in proportion to the costs expected to be incurred in performing services under the ESAs.

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71. False Statement : Further, Defendants represented the following "changes in the

Company's product warranty liability for the reporting periods :

Three Months Ended Six Months Ended January 31, January 31, 2006 2005 2006 2005 (amounts in thousands) Beginning Balance $ 27,385 $ 30,703 $ 28,264 $ 31,794 Extended Service Agreements Sold 30,173 25,184 43,563 36,238 Extended Service Agreements Revenue Recognized (24,540) (21,040) (38,809) (33,185) Ending Balance $ 33,018 $ 34,847 $ 33,018 $ 34,847

72. The Defendants' statements regarding the Company's 2Q fiscal year 2006 financial

results were materially false and misleading when made. Defendants knew or recklessly

disregarded, but failed to disclose, the following:

(a) As detailed in ¶125, 27(a)(i)-(ii), 27(b)(i)-(iv), 27(c)(i)-(vi), and 83-92, Zale had been improperly "managing its earnings by manipulating the amount and timing ofthe revenue that it initially recognized upon the sale of its ESAS such that its reported earnings did not accurately reflect its operating results.

Company's cash position.

73. Defendants' statements between January 5, 2006 and March 10, 2006, which were false and misleading when made, had a direct effect on Zale's stock price, which continued to trade at artificially inflated levels above $25.00 per share.

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74. Notwithstanding her knowledge that the statements regarding 2Q06 financial results were false and misleading, within weeks ofthe statements being made, defendant Gove sold 110,000 shares of Zale stock for insider trading proceeds exceeding $2.7 million.

DEFENDANTS' FALSE AND MISLEADING SARBANES-OXLEY CERTIFICATIONS

75. During the Class Period, the Company's SEC filings (Forms 10-Q and 10-K) also contained certifications executed and submitted by defendants Fort and Lenz pursuant to §§302 and

906 of the Sarbanes-Oxley Act, purporting to confirm the veracity of Zale's financial statements, which stated substantively as follows:

1. I have reviewed this ... report ... of Zale Corporation;

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

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

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

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

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

d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most

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recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

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

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

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

76. Similarly, pursuant to §906 of the Sarbanes-Oxley Act, defendants Fort and Lenz represented substantively as follows:

The undersigned ... certifies, to the best of [his/her] knowledge, that [this] [Quarterly/Annual] Report ... which accompanies this certification fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 and the information contained in the periodic report fairly presents, in all material respects, the financial condition and results of operations of Zale Corporation at the dates and for the periods indicated. The foregoing certification is made pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. § 1350) and shall not be relied upon for any other purpose.

77. Defendant Lenz submitted and executed such certifications in connection with the filing ofZale's 2Q05, 3Q05,1 Q06 and 2Q06 Form 10-Qs and the Company's FY 2005 Form 10-K.

Defendant Fort submitted and executed such certifications in connection with the filing of Zale's

2Q05, 3Q05 and 1Q06 Form 10-Qs and the Company's FY 2005 Form 10-K.

78. The foregoing certifications were materially false and misleading because, as set forth herein, the financial results presented by Defendants in the Company's SEC filings were materially false and misleading and, thus, did not fairly represent the financial condition and results of the operations of Zale.

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ZALE'S FALSE FINANCIAL REPORTING DURING THE CLASS PERIOD

79. During the Class Period, Defendants caused Zale to violate GAAP and SEC rules by failing to disclose that it had been improperly "managing its earnings (i.e., manipulating the recognition ofrevenue ofits ESAs in order to meet earnings targets) and improperly manipulating its reported cash flows by intentionally deferring vendor payments.

80. Defendants included Zale's false financial statements and results in Company press releases and SEC filings. The SEC filings represented that the financial information presented therein was a fair statement of Zale's financial results and that the results were prepared in accordance with GAAP.

81. These representations were false and misleading as to the financial information reported, because such financial information was not prepared in conformity with GAAP, nor was the financial information a "fair representation ofZale's financial condition and operations, causing the financial results to be presented in violation of GAAP and SEC rules.

82. GAAP are those principles recognized by the accounting profession as the conventions, rules, and procedures necessary to define accepted accounting practices at a particular time. Regulation S-X (17 C.F.R. §210.4-01(a)( 1)) states that financial statements filed with the SEC which are not prepared in compliance with GAAP are presumed to be misleading and inaccurate.

Regulation S-X requires that interim financial statements must also comply with GAAP, with the exception that interim financial statements need not include disclosure that would be duplicative of disclosures accompanying annual financial statements.

Improper Recognition of Revenue on Zale's ESAs to "Manage" Earnings

83. Both before and during the Class Period, Zale engaged in "cookie jar accounting by improperly manipulating the amount and timing of revenue that it initially recognized upon sale of its ESAs in order to smooth its earnings. It would decrease the percentage of revenue it initially

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recognized upon the sale of its ESAs in months and quarters when Zale was on track to meet or exceed its targeted earnings and then it would increase the amount of revenue it initially recognized or change the timing over which it recognized revenue when it was on track to miss targets.

84. GAAP, as described by FASB Statement ofConcepts ("FASCON ) No. 5 ¶¶83-84, requires that revenue be both earned and realizable (collectible) prior to recognition. Per SEC Staff

Accounting Bulletin ("SAB ) No. 104, Revenue Recognition, revenue is generally realized or realizable and earned when all of the following criteria are met:

• Persuasive evidence of an arrangement exists,

• Delivery has occurred or services have been rendered,

• The seller's price to the buyer is fixed or determinable, and

• Collectibility is reasonably assured.

Furthermore, SAB No. 104 provides that:

[P]rovided all other revenue recognition criteria are met, service revenue should be recognized on a straight-line basis, unless evidence suggests that the revenue is earned or obligations are fulfilled in a different pattern, over the contractual term of the arrangement or the expected period during which those specified services will be performed, whichever is longer.

85. Reasonable estimates are a fundamental concept of GAAP. Accounting for revenue in many cases requires estimates similar to accounting for reserves . In accrual accounting, GAAP requires that accruals be made only when it is probable that a loss has been incurred and the amount can be reasonably estimated. See FASB Statement of Financial Accounting Standards ("SFAS )

No. 5 ¶8. In certain instances, companies improperly account for reserves not based upon reasonable estimates , but rather by engaging in earnings management in order to smooth earnings . As former

SEC chairman Arthur Levitt stated in a speech given on September 28, 1998:

Problems arise, however, when we see large charges associated with companies restructuring. These charges help companies "clean up their balance sheet - giving them a so-called "big bath.

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Why are companies tempted to overstate these charges? When earnings take a major hit, the theory goes Wall Street will look beyond a one-time loss and focus only on future earnings.

And if these charges are conservatively estimated with a little extra cushioning, that so-called conservative estimate is miraculously reborn as income when estimates or future earnings fall short.

When a company decides to restructure, management and employees, investors and creditors, customers and suppliers all want to understand the expected effects. We need, of course, to ensure that financial reporting provides this information. But this should not lead to flushing all the associated costs - and maybe a little extra - through the financial statements.

86. In a manner similar to reserve manipulation, Zale made a practice of manipulating its revenue accounts. Zale would increase and decrease the amount and timing of revenue that it initially recognized on the sale of its ESAs not based upon reasonable estimates, but rather in order to meet earnings estimates.

87. In addition to its merchandise sales, Zale sells ESAs to its merchandise customers to cover sizing and breakage for a period of two years. Instead of recognizing revenue under these

ESAs on a straight line basis, Zale recognized revenue in proportion to the costs expected to be incurred in performing services under the agreements. Based upon its historical practice, Zale would recognize a large part of its revenue, 40%, in the month it first sold an ESA. Thereafter, the amount would dramatically decrease with 11% being recognized in the second month and 5% being recognized in the third and fourth months, with the remaining balance being recognized over the remaining 20 months of the contract.

88. Zale violated GAAP related to its accounting for its ESAs by manipulating the amount of revenue that it initially recognized under these agreements. During the Class Period, when Zale was on track to miss earnings targets, Zale would increase the amount of revenue it recognized in the month ofthe initial sale of an ESA. Thereafter, when Zale was on track to meet its earnings targets, Zale would decrease the percentage of revenue it immediately recognized. This

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manipulation was a violation of GAAP because Zale did not change the percentage ofrevenue that it recognized based upon evidence of a change in the amount of costs expected to be incurred in performing services under the agreements, but rather only as a method of smoothing its earnings.

SAB No. 104.

89. For example, in December 2004 (i.e., 2Q05), as the Company was facing a disappointing holiday sales season, Zale raised the percentage of revenue that it immediately recognized upon the sale ofits ESAs from 40% to 50%. Given that December 2004 ESA sales were approximately $ 12 million, this led to overstatements in Zale's financial results for 2Q05 of the following: revenue by $1.2 million, pre-tax earnings by $1.2 million, net income by $760,000, and earnings per share by $0.01. Thereafter, in January 2005, when Zale realized it had met its numbers, the Company initially decided to decrease the percentage of revenue that it recognized back to the

40% level. Nonetheless, after some discussion among Zale's executives it was ultimately decided to lower the percentage ofrevenue to 45% instead of40%. This decision was not based upon a change in evidence that indicated that 45% was a more reasonable estimate.

90. Zale again decided to manipulate its ESA percentage in February 2005 (i.e., 3Q05) as February was also a critical month for the Company due to the Valentine's Day holiday.

Accordingly, Zale raised the percentage of revenue that it immediately recognized upon the sale of its ESAs from 45% back to 50%. Given that February 2005 ESA sales were approximately $8.6 million, this led to overstatements of Zale's financial results for 2Q05 of the following: revenue by

$429,000, pre-tax earnings by $429,000, net income by $264,000 and earnings per share by approximately $0.01. Once again, in March 2005, as Zale had met its numbers, the Company decreased the percentage it recognized back to 45%.

91. Zale further violated GAAP related to its ESA accounting by accelerating the timing of its recognition of revenue under these agreements. During the Class Period, when Zale was on

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target to miss earnings estimates, Zale would accelerate its recognition of revenue on its ESAs by recognizing revenue over a period of 18 months rather than 24 months. The Company would recognize the extra six months ofrevenue at the time ofthe initial sale of an ESA. Given that ESAs specifically covered a contractual period oftwo years, Zale was required to recognize revenue for its

ESAs over a period of not less than two years. SAB No. 104. By recognizing revenue under these agreements over a period of only 18 months, Zale directly violated GAAP. Moreover, Zale's actions were in direct conflict with Zale's public statements during the Class Period, which represented that the Company recognized revenue for its ESAs over a period of two years.

92. By engaging in earnings management due to its improper manipulation of the amount and timing of revenue that it initially recognized upon sale of its ESAs, Zale misstated its revenue and earnings during the Class Period in violation of GAAP.

Cash Flows

93. During the Class Period, Zale failed to disclose that it had purposely manipulated the timing of certain vendor payments in order to improperly shift cash outflows from fiscal year 2005 to fiscal year 2006 in order to approve the appearance of its cash position.

94. Under both GAAP and SEC regulations, a statement of cash flows is considered to be an integral part of a full set of financial statements and is required to be disclosed on a periodic basis along with a company' s balance sheet, income statement and statement of changes in stockholder ' s equity. SFAS No. 95, Statement ofCash Flows, ¶1; FASCON No. 5, Recognition and

Measurement in Financial Statements ofBusiness Enterprises, ¶ 13; and Article 3 and Article 10 of

Regulation S-X (17 C.F.R. §210.3-02 & §210.10-01(c)(3)).

95. The primary purpose of a statement of cash flows is to present information concerning a company's cash inflows and outflows during a given period. It shows the amount of cash generated and used by a company in a specified period. SFAS No. 95 ¶4. Cash inflows or cash

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receipts relate to the cash received by a company from its ongoing operations and from external investment sources. Cash outflows or cash disbursements relate to business expenses or investments made by a company. In its statement of cash flows, a company is required to classify cash inflows and cash outflows as resulting from (i) its investing transactions, (ii) its financing transactions, or

(iii) its operating activities based upon the nature of the activity. SFAS No. 95 ¶16, 14.

96. The statement of cash flows, along with the related footnote disclosures, should provide investors with information to assess the following:

• "the enterprise's ability to generate positive future net cash flows ;

• "the enterprise's ability to meet its obligations, its ability to pay dividends, and its needs for external financing ;

• "the reasons for differences between net income and associated cash receipts and payments ; and

• "the effects on an enterprise's financial position ofboth its cash and noncash investing and financing transactions during the period.

SFAS No. 95 116,45-47.

97. Operating cash flow is the cash that a company generates through running its business (i.e., from its normal ongoing business operations). Cash flow and especially operating cash flow is an important metric scrutinized by investors and analysts in order to gauge a company's financial performance as it provides useful information in assessing a company's liquidity, financial flexibility, profitability and risk. SFAS No. 95 ¶47. Operating cash flow is an integral measure of a company's liquidity, which is necessary for a company's survival. While a company may be profitable from an earnings perspective, it may not be managing its cash properly and, accordingly, be having trouble paying its debts. Operating cash flow is also an integral measure of a company's profitability as it provides an important check on the quality ofa company's earnings . SFAS No. 95

¶¶21-24.

98. Here, the Company provided a misleading statement concerning its cash position by failing to disclose that it had improperly shifted $9.7 million in cash outflows from fiscal year 2005 -36- Case 3:06-cv-01470 Document 25 Filed 01/29/2007 Page 38 of 61

to fiscal year 2006. Zale intentionally delayed making certain vendor payments scheduled to be made the last two weeks of July 2005 until the first week ofAugust 2005. These payments were due the last two weeks of FY05, and it was the Company's policy to pay all of the invoices as they became due. Nonetheless, Zale intentionally delayed making these payments in order to mislead investors regarding its cash position, and especially regarding its net cash from operating activities.

It further presented a distorted picture of Zale's year-over-year change in its cash position.

99. By deferring these payments, Zale was able to increase its FY05 cash position by

$9.7 million. The chart below demonstrates the impact this improper manipulation of vendor payments had on Zale's financial results during the Class Period:

(in thousands) Fiscal Year-End Fiscal Year-End Year-Over- 2005 2004 Year Decrease Net Cash Provided by Operating Activities as Reported $168,275 $178,078 5.50% Net Cash Provided by Operating Activities without $158,575 $178,078 10.95% vendor payment manipulation % Decrease in Reported Net Cash Provided by 5.76/ Operating Activities

Free Operating Cash Flow as R orted $89,125 $117,290 24.01% Free Operating Cash Flow without vendor payment $79,425 $117,290 32.28/ manipulation % Decrease in Reported Free Operating Cash Flow 10.88%

Cash and Cash Equivalents at End of Period as $55,446 $63,124 12.16% Reported Cash and Cash Equivalents at End of Period without $45,746 $63,124 27.53% vendor payment manipulation % Decrease in Reported Cash and Cash E uivalents 17.49%

100. The Company has admitted that it improperly shifted cash outflows from FY05 to

FY06. The Company's 3Q05 Form 10-Q, filed on June 9, 2006, admitted the effect of the

Defendants' intentional manipulation of vendor payments on its cash flow:

2 This is a non-GAAP financial measure reported in the Company's August 30, 2005 earnings press release. It is defined by the Company as cash provided by operating activities less net capital expenditures.

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In July 2005 , the Company deferred vendorpayments ofapproximately $8.2 million related to domestic operations and approximately $1.5 million related to international operations that it normally would have made during the month into August 2005, effectively shifting net cash outflows ofthis amountfromfiscal 2005 to fiscal 2006, and increasing net cash flows provided by operating activities in fiscal year 2005.

101. By failing to disclose that the Company had purposely delayed vendor payments,

Zale presented a misleading picture of its cash position in violation of GAAP.

Failure to Disclose Known Trends and Uncertainties

102. During the Class Period, Zale failed to disclose known trends and uncertainties concerning the Company's intentional deferral of its vendor payments in order to manipulate its reported cash position and its practice of managing its earnings in violation of SEC regulations.

103. Under SEC Regulations, Item 7 of Form 10-K and Item 2 of Form 10-Q,

Management's Discussion and Analysis of Financial Condition and Results of Operations

("MD&A ), require the issuer to furnish information required by Item 303 of Regulation S-K (17

C.F.R. §229.303). In discussing results of operations, Item 303 of Regulation S-K requires the registrant to:

Describe any known trends or uncertainties that have had or that the registrant reasonably expects will have a material favorable or unfavorable impact on net sales or revenues or income from continuing operations.

The instructions to Item 303(a) further state:

The discussion and analysis shall focus specifically on material events and uncertainties known to management that would cause reported financial information not to be necessarily indicative of future operating results.

104. In addition, the SEC, in its May 18, 1989 Interpretive Release No. 34-2683 1, has indicated that registrants should employ the following two-step analysis in determining when a known trend or uncertainty is required to be included in the MD&A disclosure pursuant to Item 303 of Regulation S-K:

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A disclosure duty exists where a trend, demand, commitment, event or uncertainty is both presently known to management and reasonably likely to have material effects on the registrant's financial condition or results of operation.

105. The MD&A requirements are intended to provide, in one section ofa filing, material historical and prospective textual disclosure enabling investors and other users to assess the financial condition and results of operations of the registrant, with particular emphasis on the registrant's prospects for the future. As Securities Act Release No. 33-6711 states:

The Commission has long recognized the need for a narrative explanation of the financial statements, because a numerical presentation and brief accompanying footnotes alone may be insufficient for an investor to judge the quality of earnings and the likelihood that past performance is indicative of future performance. MD&A is intended to give the investor an opportunity to look at the company through the eyes ofmanagement by providing both a short and long-term analysis ofthe business of the company.

Section 229.303 (Item 303), Management's Discussion and Analysis ofFinancial Condition and Results of Operations, states:

To the extent that the financial statements disclose material increases in net sales or revenues, provide a narrative discussion of the extent to which such increases are attributable to increases in prices or to increases in the volume or amount ofgoods or services being sold or to the introduction of new products or services.

And further states:

Where the consolidated financial statements reveal material changes from year to year in one or more line items, the causes for the changes shall be described to the extent necessary to an understanding of the registrant's businesses as a whole ....

According to Securities Act Release No. 33-6349:

It is the responsibility ofmanagement to identify and address those key variables and other qualitative and quantitative factors which are peculiar to and necessary for an understanding and evaluation of the individual company.

106. Nonetheless, in violation ofboth GAAP and SEC rules, Zale's Class Period Forms

10-K and 10-Q failed to disclose known trends and uncertainties related to Zale's operations.

Specifically, Defendants failed to disclose that they had improperly managed Zale's earnings

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through the manipulation of its accounting for ESAs and that Zale had improperly manipulated the

Company's reported cash flows by intentionally deferring its vendor payments.

Zale's Financial Statements Violated Fundamental Concepts of GAAP

107. Due to these accounting improprieties , the Company presented its financial results and statements in a manner which violated GAAP, including violation ofthe following fundamental accounting principles:

(a) The principle that interim financial reporting should be based upon the same accounting principles and practices used to prepare annual financial statements. (Accounting

Principles Board Opinion No. 28 ¶10);

(b) The principle that financial reporting should provide information that is useful to present and potential investors and creditors and other users in making rational investment, credit and similar decisions . (FASCON No. 1 ¶34);

(c) The principle that financial reporting should provide information about the economic resources ofan enterprise, the claims to those resources, and effects oftransactions, events and circumstances that change resources and claims to those resources . (FASCON No. 1 ¶40);

(d) The principle that financial reporting should provide information about how management of an enterprise has discharged its stewardship responsibility to owners (stockholders) for the use of enterprise resources entrusted to it. To the extent that management offers securities of the enterprise to the public, it voluntarily accepts wider responsibilities for accountability to prospective investors and to the public in general . (FASCON No. 1 ¶50);

(e) The principle that financial reporting should provide information about an enterprise's financial performance during a period. Investors and creditors often use information about the past to help in assessing the prospects of an enterprise. Thus, although investment and credit decisions reflect investors' expectations about future enterprise performance, those

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expectations are commonly based at least partly on evaluations of past enterprise performance.

(FASCON No. 1 ¶42);

(f) The principle that financial reporting should be reliable in that it represents what it purports to represent. That information should be reliable, as well as relevant, is a notion that is central to accounting . (FASCON No. 2 ¶158-59);

(g) The principle of completeness, which means that nothing is left out of the information that may be necessary to insure that it validly represents underlying events and conditions . (FASCON No. 2 ¶79); and

(h) The principle that conservatism be used as a prudent reaction to uncertainty to try to ensure that uncertainties and risks inherent in business situations are adequately considered.

The best way to avoid injury to investors is to try to ensure that what is reported represents what it purports to represent . (FASCON No. 2 ¶195, 97).

108. Further, the undisclosed adverse information concealed by Defendants during the

Class Period is the type of information which, under SEC regulations, regulations of the national stock exchanges and customary business practice, is expected by investors and securities analysts to be disclosed and is known by corporate officials and their legal and financial advisors to be the type of information which is expected to be and must be disclosed.

MATERIALITY

109. Defendants' false and misleading statements and omissions during the Class Period were material, particularly in light of SEC guidance on materiality. The SEC released SAB No. 99,

Materiality, during August 1999. SAB No. 99 provides in pertinent part:

The omission or misstatement of an item in a financial report is material if, in the light of surrounding circumstances, the magnitude of the item is such that it is probable that the judgment of a reasonable person relying upon the report would have been changed or influenced by the inclusion or correction of the item.

See also FASCON No. 2.

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110. Qualitative as well as quantitative factors are used in determining materiality.

"Qualitative factors may cause misstatements of quantitatively small amounts to be material ....

SAB No. 99. Among the factors that may render a quantitatively small misstatement of a financial statement item material include the following:

• whether the misstatement arises from an item capable ofprecise measurement or whether it arises from an estimate and, if so, the degree of imprecision inherent in the estimate;

• whether the misstatement masks a change in earnings or other trends;

• whether the misstatement hides a failure to meet analysts' consensus expectations for the enterprise

• whether the misstatement has the effect of increasing management's compensation - for example, by satisfying requirements for the award ofbonuses or other forms of incentive compensation.

See SAB No. 99.

111. This is important in relation to Zale because Defendants' manipulation of the

Company's recognition of revenue from ESAs permitted Zale to mask a change in earnings which enabled Zale executives to obtain additional compensation.

112. Moreover, the SEC has made clear that a company's intentional misstatements are material . SAB No. 99 specifically addresses intentional misstatements stating that in certain circumstances intentional immaterial misstatements are unlawful and that registrants must comply with SEC regulations:

[Registrants] must make and keep books, records, and accounts, which, in reasonable detail, accurately and fairly reflect the transactions and dispositions of assets of the registrant and must maintain internal accounting controls that are sufficient to provide reasonable assurances that, among other things, transactions are recorded as necessary to permit the preparation of financial statements in conformity with GAAP.... Accordingly, failure to record accurately immaterial items, in some instances, may result in violations ofthe securities laws.

See SAB No. 99.

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113. Here, many ofDefendants' actions involved intentional conduct. First, Defendants intentionally "managed Zale's earnings by purposely changing the timing and amount of the

Company's recognition of revenue from ESAs. Second, Defendants intentionally deferred making normally scheduled vendor payments in order to shift $9.7 million ofnet cash outflows from the end of fiscal year 2005 to the beginning of fiscal year 2006.

114. Furthermore, Defendants' improper conduct concerned false and misleading statements or omissions involving material but non-quantitative items. Defendants intentionally failed to disclose certain known trends and uncertainties required under SEC regulations that the

Company reasonably expected to have a material unfavorable impact on the Company's operations.

THE EMERGING TRUTH ABOUT ZALE

115. On April 10, 2006, Defendants issued a press release and filed a current report on

Form 8-K with the SEC announcing that the SEC had begun an informal investigation into the

Company's accounting policies and practices. Specifically, Defendants stated that:

Zale Corporation (NYSE: ZLC) announced today that the Securities and Exchange Commission has initiated a non-public investigation relating to various accounting and other matters related to the Company, including accounting for extended service agreements , leases, and accrued payroll. Subpoenas issued in connection with the investigation request materials relating to these accounting matters as well as to executive compensation and severance , earnings guidance , stock trading, and the timing of certain vendor payments.

The Company believes that its accounting complied with generally accepted accounting principles and is reviewing the matter. The Company will cooperate fully with the SEC's investigation.

116. The April 10, 2006 press release and Form 8-K revealed, for the first time, that the

Company's accounting policies may not be in accordance with GAAP. However, the April 10, 2006 press release and Form 8-K continued to misrepresent Defendants' conviction that the Company's accounting complied with GAAP. In response to this news, the price of Zale common stock plummeted from $27.80 per share on April 7, 2006 (the last trading day prior to the announcement)

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to $25.16 per share on April 10, 2006, or 11.5%, on unusually heavy trading volume of more than

1.5 million shares.

117. Defendants continued their misrepresentations on May 4, 2006. On that date

Defendants issued a press release and filed a current report on Form 8-K with the SEC, pre- announcing its sales results for the third quarter of fiscal 2006. Specifically, Defendants stated that:

Zale ... today reported that for the third quarter ended April 30, 2006, comparable store sales increased 2.5%. Total revenues for the period were $527 million compared to last year's third quarter revenues of $516 million, an increase of 2.1 %. Last year's total revenues include the results ofthe Bailey Banks & Biddle stores that were closed in the second fiscal quarter, which accounted for $11 million of the Company's revenues. Excluding these store closures, total revenues increased 4.4% over last year's $505 million.

Year-to-date total revenues increased 1.9% to $1.948 billion, compared to $1.911 billion for the same period last year. Year-to-date total revenues include $24 million this year and $40 million last year from the closed Bailey Banks & Biddle stores. Excluding the store closures, total revenues were $1.924 billion, compared to $1.871 billion for the same period last year, an increase of 2.8%. Comparable store sales, which exclude the store closures, increased 1.1% for the same period.

118. Then, on May 5, 2006, Defendants filed a current report on Form 8-K with the SEC, announcing that defendant Lenz was being placed on administrative leave. As a result of this announcement, the price ofZale common stock dropped $0.44 per share to close on $24.18 per share on May 8, 2006 (the date the Form 8-K was received by the SEC), and another $0.40 between May 8 and May 9, as the market continued to digest this information.

119. Similarly, the Company's quarterly report on Form 10-Q for the period ended

April 30, 2006 ("3Q06 Form 10-Q ) reiterated that the decision to place defendant Lenz on administrative leave "was made after discussions with the Company's outside auditors concerning

Mr. Lenz's failure to timely disclose in conversations with the auditors that vendor payments scheduled to be made during the last two weeks of the Company's fiscal year ended July 31, 2005 were delayed until the first week of August 2005.

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ADDITIONAL SCIENTER ALLEGATIONS

Individual Defendants' Insider Trading

120. Defendants were motivated to commit the wrongdoing alleged herein so that Zale insiders, including defendants Fort , Gove, Lenz and Gordon, could sell their personally held Zale common stock at artificially inflated prices. During the Class Period, insiders sold a total of 548,838 shares, for total proceeds exceeding $15.8 million, as set out in the following charts:

ZALE CORPORATION - ZLC Insider Sales : 2/18/05 - 5/5/06 Form 4 ' s Verified

Last Name First Date Shares Price Proceeds FORT MARY L. 3/2/2005 6,036 $30.00 $181,080 3/21/2005 100,000 $29.69 $2,969,000 3/22/2005 94,246 $29.76 $2,804,761 6/7/2005 6,110 $32.77 $200,225 6/7/2005 4,646 $32.77 $152,249 211,038 $6,307,315

GOVE SUE E. 3/1/2005 144,900 $29.72 $4,306,428 3/2/2005 55,100 $29.82 $1,643,082 1/19/2006 70,000 $25.34 $1,773,800 1/20/2006 40,000 $24.99 $999,600 310,000 $8,722,910

LENZ MARK R. 3/9/2005 10,700 $29.40 $314,580 3/10/2005 15,100 $29.19 $440,769 25,800 $755,349

GORDON CYNTHIA T. 11/14/2005 2,000 $27.81 $55,620

Totals: 548,838 $15,841,194

ZALE CORPORATION - ZLC % of Holdings Sold Summar : 2/18/05 - 5/5/06

Last Name Shares Sold Shares Retained* % Sold FORT 211,038 310,694 40.04% GOVE 310,000 307,715 50.18% LENZ 25,800 85,112 23.26% GORDON 2,000 32,900 5.70% * Includes shares beneficially owned, plus derivative securities that may be acquired within 60 days as of September 12, 2005.

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121. During the Class Period, defendants Fort , Gove, Lenz and Gordon timed well their selling spree of 548,838 shares of Zale common stock for proceeds of over $15.8 million. The overwhelming majority of these trades occurred within weeks of defendants making false and misleading statements regarding Zale's 2Q05 financial results - and after the Company's stock price was inflated by the fraud alleged herein. The timing of these sales distinguishes them from stock sales that occurred in the 15 months prior to the Class Period.

Executive Compensation

122. In addition to the strong motivation provided by lucrative insider selling, the

Individual Defendants were highly motivated by the terms of their employment with Zale. The

Individual Defendants' compensation was directly tied to, among other metrics, Zale's earningsper share, operating cash flow, cash available, working capital, and the performance of the

Company's stock, the very measures improperly manipulated during the Class Period. The personal wealth of each of the Individual Defendants was dramatically enhanced by the reported business performance of Zale, as well as the Company's stock price and market capitalization, all of which were inflated by the financial misstatements and material omissions alleged herein. Defendant Fort alone pocketed more than $6.0 million in annual compensation tied to Zale's performance during

FY05 and FY06. During the same time, defendants Gove and Lenz pocketed over $6.0 million and

$1.1 million, respectively. In total, defendants Fort , Gove and Lenz took in more than $13.1 million in salary and incentive-based annual compensation during FY05 and FY06, while deceiving the investing public about the very performance measures on which they were being rewarded.

123. Defendants Fort , Gove and Lenz's executive compensation provided them with a concrete and personal benefit, which was a direct consequence of the alleged fraud. Pursuant to the

Zale 2003 Stock Incentive Plan, certain Zale executives were awarded tens of thousands of

Restricted Stock Units ("RSU ) as compensation in FY05 based upon a number of factors,

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including, but not limited to, the Company's reported: (a) earnings per share andlor growth in earnings per share in relation to target objectives; (b) operating cash flow andlor growth in operating cash flow in relation to target objectives; (c) cash available in relation to target objectives; and (d) working capital in relation to target objectives.

124. According to Zale's FY05 Form DEF 14A Proxy Statement, as part of defendant

Fort 's FY05 compensation, she received 50,000 RSUs, initially valued at $850,000. Defendant

Fort had the option of exchanging 25,000 ofthe RSUs awarded in FY05 for up to 50,000 shares of

Zale common stock between FY06 and FY08. As part ofdefendant Gove's FY05 compensation, she received 30,000 RSUs, initially valued at $510,000. Defendant Gove had the option of exchanging

15,000 of the RSUs awarded in FY05 for up to 30,000 shares of Zale common stock between FY06 and FY08. As part of defendant Lenz's FY05 compensation, he received 5,000 RSUs, initially valued at $170,000. Defendant Lenz had the option of exchanging 2,500 of the RSUs awarded in

FY05 for up to 5,000 shares of Zale common stock between FY06 and FY08.

125. As alleged herein at ¶125-27, defendants Fort , Gove and Lenz caused the Company to delay vendor payments and accelerate the recognition of revenue and earnings for ESAs. As disclosed by the Company on June 9, 2006, in its 3Q06 Form 10-Q, the effect of delaying vendor payments at the end ofFY05 improved Zale's FY05 and 4Q05 operating cash flow by approximately

$10.0 million. Moreover, had Zale paid its domestic and international vendors on a timely basis at the end of FY05, the Company would have reported approximately $10.0 million less cash and working capital on its balance sheet filed with the SEC in its FY05 Form 10-K. As alleged herein at

¶189-90, the effect of accelerating ESA revenue, in violation of GAAP, had the effect ofoverstating

Zale's EPS by material amounts in 2Q05 and 3Q05.

126. The improper acceleration ofESA revenue and delayed vendor payments improved the financial metrics used in the determination of defendants Fort , Gove and Lenz's FY05 annual

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compensation - i.e., the number of RSUs awarded by the Company to these defendants for FY05.

Defendants' improper acceleration of ESA revenue and delayed vendor payments directly affected the amount ofRSUs awarded to them during the Class Period and, thus, directly affected the amount of compensation that defendants Fort , Gove and Lenz received during the Class Period.

127. Accordingly, the Individual Defendants were motivated to maintain and increase their total compensation by engaging in the financial misstatements and omissions alleged herein and, in fact, obtained concrete and personal benefits as a result of their fraud. The following tables illustrate such compensation for defendants Fort , Gove and Lenz:

Mary L. Fort Bonus Options Other Year Salary Awarded (Value Realized RSUs $s Compensation Total FY06 $428,459 $1,144,160 $132,115 $1,704,734 FY05 $700,000 $37,450 $2,720,200 $850,000 $83,170 $4,390,820 Total $1,128,459 $37,450 $3,864,360 $850,000 $215,285 $6,095,554

Sue E. Gove Bonus Options Other Year Salary Awarded (Value Realized RSUs $s Compensation Total FY06 $439,296 $2,007,127 $113,165 $2,559,588 FY05 $575,000 $25,645 $2,353,644 $510,000 $71,180 $3,535,469 Total $1,014,296 $25,645 $4,360,771 $510,000 $184,345 $6,095,057

Mark R. Lenz Bonus Options Other Year Salary Awarded (Value Realized RSUs $s Compensation Total FY06 $274,375 $29,889 $304,264 FY05 $260,000 $8,356 $386,851 $170,000 $20,211 $845,418 Total $534,375 $8,356 $386,851 $170,000 $50,100 $1,149,682

128. On January 31, 2006, as a result ofthe fraudulent conduct alleged herein, defendant

Fort resigned as CEO of Zale. As of October 13, 2006, the Company was in negotiations with

Fort regarding her severance compensation. In connection with those negotiations, defendant Fort demanded immediate vesting of the 50,000 RSUs awarded as part of her FY05 compensation.

129. On March 23, 2006, as a result of the fraudulent conduct alleged herein, defendant

Gove resigned as COO of Zale. As of October 13, 2006, the Company was in negotiations with

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Gove regarding her severance compensation. In connection with those negotiations, defendant Gove demanded immediate vesting of the 30,000 RSUs awarded as part of her FY05 compensation.

130. As demonstrated above, the Individual Defendants were motivated to and succeeded in maximizing their executive compensation during the Class Period by engaging in the financial misstatements and omissions alleged herein.

LOSS CAUSATION AND ECONOMIC LOSS

131. During the Class Period, as detailed herein, Defendants engaged in a scheme to deceive the market and a course of conduct that artificially inflated the price of Zale's common stock. This scheme operated as a fraud or deceit on Class Period purchasers of Zale common stock by misrepresenting the Company's financial results and business operations.

132. Later, however, when Defendants' prior misrepresentations and fraudulent conduct were disclosed and became apparent to the market, the price ofZale common stock fell precipitously as the artificial inflation came out of the Company's stock price. As a result of their purchases of

Zale's publicly traded securities during the Class Period, Lead Plaintiffs and other members of the

Class suffered economic loss, i.e., damages, under the federal securities laws.

133. Instead of truthfully disclosing during the Class Period that Zale's finances and business were not as healthy as represented, the Individual Defendants caused the Company to falsely represent its revenues, earnings, and operating cash flow. These false claims of strong results and healthy business condition caused and maintained the artificial inflation in Zale's stock price throughout the Class Period - i.e., until the truth was revealed to the market.

134. Defendants' false and misleading statements had the intended effect and caused

Zale's stock to trade at artificially inflated levels, reaching as high as $34.42 per share, throughout the Class Period.

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135. On April 10, 2006, the Company announced that that the SEC had initiated an informal inquiry into accounting matters , including the accounting for ESAs. The Company also announced that the SEC's investigation sought information concerning executive compensation and severance, earnings guidance, and trading in Zale common stock. On the same day, immediately after Zale announced that its accounting practices and financial reporting were under scrutiny, Zale's stock price plummeted to $24.79 per share on heavy volume, falling 10.8% below the previous day's close of $27.80.

136. Also on April 10, 2006, analysts were highly critical of Zale in light ofthe scrutiny ofthe Company' s financial reporting conduct, and Marc Bettinger ofthe Stanford Group Company noted:

In the last few months, the company has seen a string of events that do not reflect well on the story. First was the firing of the CEO, then the President of Zales, then the COO and now an SEC investigation .... The SEC investigation now only compounds the uncertainty ....

137. As a result of the April 10, 2006 disclosures made by Zale and analysts, part of the artificial inflation caused by Defendants' Class Period misrepresentations came out of the

Company's stock price, thereby causing real economic losses to investors.

138. Then, on May 5, 2006, the Company disclosed that defendant Lenz had been placed on "administrative leave until further notice as a result of the failure to timely disclose to Zale's auditors that vendor payments scheduled to be made during the last two weeks of 4Q05 had been delayed into the first week of I Q06. Zale initially disclosed that the amount of the deferred payments were approximately $8.2 million, indicating that its FY05 net cash flows from operating activities and free cash flow were overstated.3 By May 11, 2006, Zale's common stock plummeted

3 In the Company's 3Q06 Form 10-Q (filed with the SEC on June 9, 2006), Zale admitted that it had materially overstated operating cash flows by approximately $10.0 million during FY05. "In

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to a close of $23.02, 6.6% below the closing price on May 5, 2006. As a result of Zale's May 5,

2006 disclosure, the artificial inflation caused by Defendants' Class Period misrepresentations dissipated from the Company' s stock price, thereby causing real economic losses to investors.

Moreover, the timing and magnitude ofZale's stock price decline sharply negates the inference that the loss Lead Plaintiffs and other class members suffered was caused by changed market conditions, macroeconomic or industry factors, or even Company-specific facts unrelated to Defendants' misconduct.

139. In sum, as the truth about Defendants' fraud and Zale's financial status and business performance were revealed, the Company's stock price fell, the artificial inflation came out of the stock, and Lead Plaintiffs and other members of the Class were damaged, suffering significant economic losses. Moreover, these economic losses were a direct result of Defendants' fraudulent scheme to artificially inflate Zale's stock price and the subsequent significant decline in the value of

Zale stock when Defendants' prior misrepresentations and other fraudulent conduct were revealed.

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

140. At all relevant times, the market for Zale's securities was an efficient market for the following reasons, among others:

(a) Zale's stock met the requirements for listing, and was listed and actively traded on the New York Stock Exchange ("NYSE ), a highly efficient and automated market;

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

NYSE;

July 2005, the Company deferred vendor payments of approximately $8.2 million related to domestic operations and approximately $1.5 million related to international operations that it normally would have made during the month into August 2005, effectively ... increasing net cash flows provided by operating activities in fiscal year 2005.

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(c) Zale regularly communicated with public investors via established market communication mechanisms, including through regular disseminations of press releases on the national circuits ofmaj or newswire services and through other wide-ranging public disclosures, such as communications with the financial press and other similar reporting services; and

(d) Zale was followed by numerous securities analysts employed by major brokerage firms who wrote reports, which were distributed to the sales force and certain customers of their respective brokerage firms. Each of those reports was publicly available and entered the public marketplace.

141. As a result of the foregoing, the market for Zale's securities promptly digested current information regarding Zale from all publicly available sources and reflected such information in Zale's stock price. Under these circumstances, all purchasers ofZale's securities during the Class

Period suffered similar injury through their purchase of Zale securities at artificially inflated prices and a presumption of reliance applies.

NO SAFE HARBOR EXISTS FOR DEFENDANTS' STATEMENTS

142. The statutory safe harbor provided for forward-looking statements under certain circumstances does not apply to any ofthe allegedly false statements pleaded in this Complaint. The specific statements pleaded herein either were not identified as "forward-looking statements when made or were not accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those in the purportedly forward-looking statements. Alternatively, to the extent that the statutory safe harbor does apply to any forward- looking statements pleaded herein, Defendants are liable for those false forward-looking statements because at the time each ofthose forward-looking statements was made, the particular speaker knew that the particular forward-looking statement was false, and/or the forward-looking statement was

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authorized and/or approved by an executive officer of Zale who knew that those statements were false when made.

CLASS ACTION ALLEGATIONS

143. Lead Plaintiffs bring this action as a class action pursuant to Fed. R. Civ. P. 23(a) and (b)(3) on behalf ofa class consisting ofpurchasers ofZale's publicly traded securities during the

Class Period who were damaged by Defendants' fraud. Excluded from the Class are Defendants, the officers and directors of the Company, members of their immediate families and their legal representatives, heirs, successors or assigns and any entity in which Defendants have or had a controlling interest.

144. The members of the Class are so numerous that joinder of all members is impracticable. Throughout the Class Period, Zale's common stock was actively traded on the

NYSE. While the exact number of class members is unknown to Lead Plaintiffs at this time and can only be ascertained through appropriate discovery, Lead Plaintiffs believe that there are thousands of members in the proposed Class. Record owners and other members of the Class may be identified from records maintained by Zale or its transfer agent and may be notified of the pendency of this action by mail, using the form of notice similar to that customarily used in securities class actions.

145. Lead Plaintiffs' claims are typical of the claims of the members of the Class as all members of the Class were similarly affected by Defendants' wrongful conduct in violation of federal law that is complained of herein.

146. Lead Plaintiffs will fairly and adequately protect the interests ofthe members ofthe

Class and have retained counsel competent and experienced in class action and securities litigation.

147. Common questions of law and fact exist as to all members of the Class and predominate over any questions solely affecting individual members of the Class. Among the questions of law and fact common to the Class are:

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(a) Whether the federal securities laws were violated by Defendants' acts as alleged herein;

(b) Whether statements made by Defendants to the investing public during the

Class Period misrepresented and omitted material facts about the business, operations and financial results of Zale; and

148. A class action is superior to all other available methods for the fair and efficient adjudication of this controversy since joinder of all members is impracticable. Furthermore, as the damages suffered by individual Class members may be relatively small, the expense and burden of individual litigation make it impossible for members ofthe Class to individually redress the wrongs done to them. There will be no difficulty in the management of this action as a class action.

COUNT I

For Violation of §10(b) of the Exchange Act and Rule lOb-5 Against All Defendants

149. Lead Plaintiffs incorporate ¶¶1-148 by reference.

150. During the Class Period, Defendants disseminated or approved the false statements specified above, which they knew or deliberately disregarded were misleading in that they contained misrepresentations and failed to disclose material facts necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading.

151. Defendants violated § 10(b) of the Exchange Act and SEC Rule I Ob-5 in that they:

(a) employed devices, schemes and artifices to defraud;

(b) made untrue statements of material facts or omitted to state material facts necessary in order to make the statements made, in light ofthe circumstances under which they were made, not misleading; or

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(c) engaged in acts, practices and a course ofbusiness that operated as a fraud or deceit upon Lead Plaintiffs and others similarly situated in connection with their purchases of Zale securities during the Class Period.

152. Lead Plaintiffs and the Class have suffered damages in that, in reliance on the integrity of the market, they paid artificially inflated prices for Zale securities. Lead Plaintiffs and the Class would not have purchased Zale securities at the prices they paid, or at all, if they had been aware that the market prices had been artificially and falsely inflated by Defendants' misleading statements.

153. As a direct and proximate result of Defendants' wrongful conduct, Lead Plaintiffs and the other members of the Class suffered damages in connection with their purchases of Zale securities during the Class Period.

COUNT II

For Violation of §20(a) of the Exchange Act Against the Individual Defendants

154. Lead Plaintiffs incorporate ¶¶1-153 by reference.

155. The Individual Defendants acted as controlling persons ofZale within the meaning of §20(a) of the Exchange Act. By reason of their positions at the Company and their ownership of

Zale stock, the Individual Defendants had the power and authority to cause Zale to engage in the wrongful conduct complained of herein. By reason of such conduct, the Individual Defendants are liable pursuant to §20(a) of the Exchange Act.

PRAYER FOR RELIEF

WHEREFORE, Lead Plaintiffs pray for judgment as follows:

A. Declaring this action to be a proper class action pursuant to Fed. R. Civ. P. 23;

B. Awarding Lead Plaintiffs and the members of the Class all damages caused by

Defendants' wrongdoing, including interest;

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C. Awarding Lead Plaintiffs reasonable costs and attorneys' fees; and

D. Awarding such equitable/injunctive or other relief as the Court may deem just and proper.

JURY DEMAND

Lead Plaintiffs demand a trial by jury.

DATED: January 29, 2007 LERACH COUGHLIN STOIA GELLER RUDMAN & ROBBINS LLP DARREN J. ROBBINS JAMES A. CAPUTO TRIG R. SMITH SUZANNE H. STEVENS

s/ James A. Caputo JAMES A. CAPUTO

655 West Broadway, Suite 1900 San Diego, CA 92101 Telephone : 619/231-1058 619/231-7423 (fax)

SCHIFFRIN, BARROWAY, TOPAZ & KESSLER, LLP DAVID KESSLER MICHAEL K. YARNOFF MICHELLE M. BACKES 280 King of Prussia Road Radnor, PA 19087 Telephone : 610/667-7706 610/667-7056 (fax)

LABATON SUCHAROW & RUDOFF LLP LYNDA J. GRANT CHRISTOPHER J. KELLER DAVID J. GOLDSMITH ANDREI V. RADO ALAN I. ELLMAN 100 Park Avenue, 12th Floor New York, NY 10017-5563 Telephone : 212/907-0700 212/818-0477 (fax)

Co-Lead Counsel for Lead Plaintiffs and the Class

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PROVOST & UMPHREY LAW FIRM, LLP JOE KENDALL State Bar No. 11260700 WILLIE C. BRISCOE State Bar No. 24001788 3232 McKinney Avenue , Suite 700 Dallas , TX 75204 Telephone : 214/744-3000 214/744-3015 (fax)

Liaison Counsel for Lead Plaintiffs and the Class

SULLIVAN, WARD, ASHER & PATTON, P.C. CYNTHIA J. BILLINGS 25800 Northwestern Highway 1000 Maccabees Center Southfield, MI 48075-1000 Telephone: 248/746-0700 248/746-2760 (fax)

Additional Counsel for Plaintiffs

S:\CasesSD\Zale 06\CPT -- Consolidated Class Action.doc

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CERTIFICATE OF SERVICE

I hereby certify that on January 29, 2007, I electronically filed the foregoing with the Clerk of the Court using the CM/ECF system which will send notification of such filing to the e-mail addresses denoted on the attached Electronic Mail Notice List, and I hereby certify that I have mailed the foregoing document or paper via the United States Postal Service to the non-CM/ECF participants indicated on the attached Manual Notice List.

s/ James A. Caputo JAMES A. CAPUTO

LERACH COUGHLIN STOIA GELLER RUDMAN & ROBBINS LLP 655 West Broadway, Suite 1900 San Diego, CA 92101-3301 Telephone : 619/231-1058 619/231-7423 (fax)

[email protected] Case 3:06-cv-01470 Document 25 Filed 01/29/2007 Page 60 of 61

Mailing Information for a Case 3:06-cv-01470

Electronic Mail Notice List

The following are those who are currently on the list to receive e-mail notices for this case.

• Michelle M Backes [email protected],[email protected] • Willie Briscoe Provost [email protected],[email protected],bgribble@provostumphrey .com • James A Caputo [email protected] • Roger F Claxton [email protected] • Joe Kendall [email protected]@provostumphrey.com • William S Lerach e_file_sd@lerachlaw. com,kirstenb@lerachlaw. com • Hamilton Lindley [email protected],[email protected] • Joel R Sharp [email protected] • Evan J Smith [email protected],[email protected] • M Byron Wilder [email protected],[email protected] • Michael K Yarnoff [email protected],[email protected]

Manual Notice List

The following is the list of attorneys who are not on the list to receive e-mail notices for this case (who therefore require manual noticing). You may wish to use your mouse to select and copy this list into your word processing program in order to create notices or labels for these recipients.

Alan Ian Ellman Labaton Sucharow & Rudoff 100 Park Ave 12th Floor New York, NY 10017-5563

Christopher J Keller Labaton Sucharow & Rudoff 100 Park Ave 12th Floor New York, NY 10017-5563 Case 3:06-cv-01470 Document 25 Filed 01/29/2007 Page 61 of 61

Catherine A Torell Cohen Milstein Hausfeld & Toll 150 E 52nd St New York, NY 10022