Newman, Et Al. V. Warnaco Group, Inc., Et Al. 00-CV-6266-Second Amended Consolidated Class Action Complaint

UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK

IN RE THE WARNACO GROUP, INC. SECURITIES LITIGATION No. 00-C1V-6266 (LMM)

THIS DOCUMENT RELATES TO: ALL ACTIONS •

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SECOND AMENDED CONSOLIDATED CLASS ACTION COMPLAINT

Plaintiffs, individually and on behalf of all other persons similarly situated, by their undersigned attorneys, for their Second Amended Consolidated Class Action

Complaint, allege upon personal knowledge as to themselves and their own acts, and upon information and belief as to all other matters, based upon, inter alia, the investigation, as detailed in paragraph 16 below, made by and through their attomeys:

1. NATURE OF THE ACTION

1. Plaintiffs bring this action as a class action on behalf of themselves and all other persons who purchased the common stock of defendant The Warnaco Group, Inc.

("Wamaco" or the "Company") on the open market during the period of September 17,

1997 through and including July 19, 2000 (the "Class Period"), to recover damages caused by Defendants' violations of the federal securities laws. During the Class Period,

Defendants caused Warnaco to issue false and misleading statements in press releases and public filings concerning Warnaco's financial results for the fiscal years 1997, 1998 and

1999, and the interim periods of 1997 and 1998. Defendants overstated Warnaco's inventory, reported artificially inflated net income and earnings per share and overstated the value of Warnaco's accounts receivable.

9 . Warnaco manufactured significant amounts of merchandise each month _ . which it carried on its balance sheet as inventory. The amount of inventory Warnaco produced depended upon the amount of sales Warnaco had forecasted for each month.

Warnaco's Forecasting and Planning Division, which included the heads of the various divisions within Warnaco, regularly met along with Defendants to forecast sales numbers for the upcoming quarters. The Forecasting and Planning Division based its forecasts on orders received from the various department stores to which Warnaco sold its goods.

3. During the Class Period, however, Warnaco's Chief Executive Officer, defendant Linda J. Wachner ("Wachner") forced the Forecasting and Planning Division to increase its sales projections far beyond the Forecasting and Planning Division's attainable sales projections. Unlike the Forecast and Planning Division's sales forecasts which were based upon actual demand, Wacluier's sales forecasts were based on nothing more than sales numbers she had previously provided to analysts. Warnaco's manufacturing plants would operate around-the-clock in an effort to manufacture the amount of product that Wachner had publicly forecasted would be sold. Defendants were aware or recklessly disregarded various fraudulent practices that employees of the

Company were undertaking to meet such unrealistic sales goals, including the following:

(i) At the end of each quarter, sales representatives, as directed by Defendants, would engage in the practice Defendants dubbed "dialing for dollars." This practice entailed calling customers and persuading them to accept new merchandise in the current quarter and permitting the customer to return in the next quarter older goods that the customers had difficulty selling;

2 (ii) Some goods were simply "pulled, packed and held" at Warnaco distribution centers and gradually shipped over time althou gh booked as a sale in the quarter the product was "pulled, packed and held";

(iii) Sales representatives, as directed by Defendants, routinely asked department stores to accept a new shipment of goods, to hold the shipment at the department store and either to return the product or to pay for it in the next quarter; and

(iv) Sales representatives, as directed by Defendants, deliberately shipped to department stores excess inventory during the quarter. By the time the department stores returned the unwanted inventory, a new quarter had begun.

4. Defendants were also aware or recklessly disregarded the fact that the

failure to meet such unrealistic sales goals would inevitably lead to an excessive build-up

of inventory. Indeed, the amount of merchandise being returned coupled with the surplus

being produced resulted in an enormous excess of inventory which soon became obsolete

or "distressed," and, thus, should have been written down in value or written off entirely

in accordance with Generally Accepted Accounting Principles ("GAAP") and the

Company's own publicly stated accounting policy. During 1998, Warnaco leased

additional warehouses to store excess inventory. Likewise, during 1998 two Warnaco

facilities leased a total of twelve warehouses to store excess material. Similarly, in 1999

Warnaco's Duncansville, Pennsylvania warehouse leased four or five additional warehouses to store merchandise. By December 1999, the amount of inventory offered by Warnaco to department stores resulted in so much merchandise being returned to

Warnaco's Murfreesboro, Tennessee warehouse that trucks sat outside the building packed with intimate apparel merchandise returns.

5. In addition to knowingly or recklessly disregarding the build-up of excess inventory, during the Class Period, Wachner and the other Defendants ignored repeated

3 warnings from Warnaco senior management that Wacluier's manipulated and

unreasonable forecasts were causing this massive build-up of excess inventory.

Defendants even went so far as to terminate members of Senior Management who

complained about Wachner's unreasonable forecasting practices.

6. Rather than properly account for the excess inventory in accordance with

GAAP and the Company's own publicly stated accounting policy, Defendants knowingly

or recklessly overstated Warnaco's inventory throughout the Class Period. As a result,

the Company was able to report "record" earnings for the third quarter of 1997, fiscal year

1997 and the first and second quarters of 1998. As a result of the fraud, Warnaco was

able to announce that the Company had either met or exceeded earnings analysts'

expectations for the third quarter of 1997 and the first three quarters of 1998.

7. On April 2, 1999, the Company disclosed that it had to "revise" its

previously reported financial results for fiscal years 1996, 1997 and the first three quarters

of 1998. The Company attributed the need to "revise" its financial results to the

Company's early adoption of a change in accounting principle. The "revisions" resulted

in significant reductions to the value of Warnaco's inventory and, consequently, reductions in the Company's net income and earnings. In "revising" its results, Warnaco reduced its net income by 154%, 263%, 49.3% and 38.9% for fiscal year 1997 and the

first, second and third quarters of 1998, respectively. Further, unlike its previously reported financial results, Warnaco's "revised" earnings per share fell significantly below the earnings expectations of analysts which the Company had previously appeared to meet or exceed.

4 8. On May 16, 2000, only six months after retaining new independent

auditors, the Company filed amended financial results for fiscal years 1998 and 1999 and

the interim periods of 1998 and 1999. In addition, the Company's amended financial

filings detailed the true nature of the restatements and a sizeable write-down of inventory

for fiscal years 1996, 1997 and 1998. In these amended filings, the Company admitted

that it actually "restated" its financial results for fiscal years 1996, 1997 and the first three

quarters of 1998. Wamaco no longer claimed that its April 1999 "revisions" (which the

Company now deemed "restatements") resulted from the Company's early adoption of a

new accounting principle. Indeed, the accounting principle upon which the Company

claimed to have caused the April 1999 "revision" specifically prohibits a Company from

restating its financial results due to its adoption. Contrary to Defendants' earlier, and

seemingly benign, explanation for the April 1999 "revisions," the Company's May 2000

disclosure attributed the restatement to "flaws in the Company's Intimate Apparel

Division inventory costing control system" and claimed that the Company had since rectified such "flaws."

9. As a result of the Company's disclosure on May 16, 2000, Warnaco's stock fell from a closing price of $8.56 on May 16, 2000 to $8.00 on May 18, 2000, a drop of 6.5%.

10. Despite this new information relative to fiscal years 1996 and 1997 and the first three quarters of 1998, Warnaco still kept hidden the true state of affairs at the

Company. Indeed, the Company blithely and falsely claimed in the 1998 10-IQA that the

"restatement resulted from flaws in the Company's Intimate Apparel Division inventory costing control system that have since been addressed." (Emphasis added.)

5 11. On July 20, 2000, before the opening of the market, Warnaco revealed

that, despite its recent public assurances in May 2000 of having addressed and resolved

all inventory issues, Warnaco anticipated taking an afier-tax charge in the second quarter

of fiscal year 2000 of approximately $60 million to $70 million due in part to further

inventory reductions. Consequently, the Company revealed that the so-called "flaws" in

its inventory costing system had not been fixed. hi truth, the Company's restatement and

further reduction in inventory resulted from Defendants': (i) knowing or reckless

disregard for a tremendous build-up of excess, obsolete and distressed inventory; and (ii)

improper accounting for inventory.

12. As a result of the Company's July 20, 2000 disclosure, the Company's stock dropped from a closing price of $6.75 on July 19, 2000 per share to a low of $4.94 per share on July 20, 2000, a decrease of 26.8% on volume of 2.8 million shares, over six times the average trading volume.

13. Further details concerning the nature of Defendants' fraud came to light, on March 29, 2001, as Defendants disclosed that Warnaco would restate its financial results for 1997 for the second time. Defendants further admitted that its "1998, 1999 and 2000 accounts have been revised to be consistent with the accounting for matters that resulted in the adjustment to retained earnings and other issues." In particular, despite

Warnaco's earlier restatement for 1997, the Company still overvalued its net worth by

$26 million in 1997. The second restatement of Warnaco's 1997 financials also included a further write down of inventory. As of the filing of this Complaint, the Company has not revealed the amount of the restatement for fiscal year 1998. The "revision" to the

6 1999 financial results included a devaluation of the Company's inventory and an increase

of $12.4 million in cost of goods sold.

14. On April 17, 2001, Warriaco disclosed that the United States Securities

and Exchange Commission (the "SEC") was "conducting an investigation to determine whether there have been any violations of the Securities Exchange Act of 1934 in connection with the preparation and publication of various financial statements and reports."

15. During the Class Period, Defendants took advantage of the artificially inflated price of Warnaco common stock, collectively selling more than 5 million shares of Warnaco common stock and pocketing proceeds of between $139 million and $161.9 million during the Class Period.

PLAINTIFFS' INVESTIGATION

16. Plaintiffs' allegations set forth herein are based on a thorough investigation, conducted by and through their attorneys, of all reasonably available sources of information so as to permit them to plead the claims alleged herein with particularity.

The nature and scope of Plaintiffs' efforts to obtain the information needed to plead with particularity included:

a. Reviewing Warnaco's filings with the SEC during the relevant time period, including but not limited to, the Company's Annual Reports on Forms 10-K for fiscal years 1996 through 2000; the Company's Amended Annual Report on Forms

10-K/A for the fiscal years 1998 and 1999; the Company's Quarterly Reports on Forms

10-Q for the first, second, and third quarters of 1997, 1998, 1999 and 2000; the

7 Company's Amended Quarterly Reports on Forms 10-Q/A for the first, second and third quarters of 1998 and 1999 and the third quarter of 2000; the Company's current and amended current reports on Forms 8-K and 8-KJA and the Company's Registration

Statement on Form DEF 14A filed on April 10, 2000;

b. Reviewing the Company's press releases and other publicly disseminated statements made by the Defendants during the relevant time period;

c. Reviewing reports, articles, and discussions concerning the

Company and the subject matter of this Complaint contained in the print and electronic media and computer databases;

d. Reviewing reports of securities analysts and investor advisory services concerning the Company and the industry;

e. Reviewing pleadings filed with the United States District Court for the Southern District of New York in the action entitled Calvin Klein Trademark Trust v.

Wachner, Civil Action No. 00-C1V-4052; and

1. Interviewing former employees of the Company.

17. Except as alleged in this Complaint, the underlying information relating to

Defendants' misconduct and the particulars thereof is not currently available to Plaintiffs and the public, and lies exclusively within the possession and control of Defendants and insiders of Warnaco, thus preventing Plaintiffs from further detailing Defendants' misconduct at this time.

8 JURISDICTION AND VENUE

18. The claims alleged herein arise under Sections 10(b) and 20(a) of the

Securities Exchange Act of 1934 (the "Exchange Act"), 15 U.S.C. §§ 78j(b) and 78t(a), and

Rule 10b-5, 17 C.F.R. § 240.10b-5 promulgated thereunder by the SEC.

19. The jurisdiction of this Court is based on Section 27 of the Exchange Act,

15 U.S.C. § 78aa and 28 U.S.C. § 1333.

20. Venue is proper in this District pursuant to Section 27 of the Exchange Act

and 28 U.S.C. 1391(b). Many of the acts alleged herein, including the dissemination to the

investing public of the misleading statements at issue, occurred in substantial part in this

District, where Wamaco has its principal place of business.

21. In connection with the acts, transactions and conduct alleged herein,

Defendants used the means and instrumentalities of interstate commerce, including the

United States mails, interstate telephone communications and the facilities of national

securities exchanges and markets.

IV. PARTIES

22. By Order of the Court dated November 17, 2000, Fresno County

Employees' Retirement Association, The Reams Asset Management Company and the

Barbara Wildertnan 1n-evocable Trust were appointed Lead Plaintiffs for the Class. Each

of the Lead Plaintiffs purchased shares of Warnaco common stock at artificially inflated prices on the open market during the Class Period and was damaged thereby as reflected

on the Certifications previously submitted to this Court.

9 23. Additional Plaintiffs in this action include: Steven Asher Asoulin; Michael

Cesar; Patricia McMullan; Mark Naeyaert; Anthony K. Newman; Thomas M. O'Hara;

David Simms and Merrill Balaban. These additional Plaintiffs purchased shares of

Warnaco common stock at artificially inflated prices on the open market during the Class

Period and were damaged thereby, as set forth on the Certifications annexed to their individual complaints on file with this Court.

24. Defendant Wamaco maintains its headquarters at 90 Park Avenue, New

York, New York. Warnaco is a manufacturer of intimate apparel, menswear, jeanswear, swimwear, men's and women's sportswear, fragrances and accessories sold under such brands as Warneris®, Olga, Fruit of the Loom®, Chaps by Ralph Lauren®, and Calvin

Klein. Warnaco's common stock trades on the New York Stock Exchange ("NYSE") under the symbol "WAC."

25. a. Defendant Linda J. Wachner ("Wachner") was President,

Chief Executive Officer ("CEO") and Chairman of Warnaco at all relevant times herein.

Wachner has served as Director and President since March 1986, CEO of the Company since August 1987, and the Chairman of the Board since August 1991. During the Class

Period, Wachner signed the Company's Annual Report on Form 10-K405 for 1997 filed with the SEC on April 3, 1998 and the Annual Report on Form 10-K405 for fiscal year

1998 filed on April 2, 1999; the Annual Report for the period ended January 1, 2000, filed with the SEC on March 30, 2000; the Amended Annual Report on Form 10-K for the period ended January 1, 2000, filed with the SEC on April 3, 2000; and the Amended

Annual Report on Form 10-K, filed with the SEC on May 16, 2000. Wachner was listed as a contact on the Company's press releases during the Class Period. During the Class

10 Period Wachner sold 4,910,501 shares of Warnaco common stock while in possession of material, non-public information, pocketing as much as $153 million in illegal insider trading proceeds. These stock sales were unusual in timing and amount as detailed in paragraph 178 (a), (d) and (e), thereby further supporting her motive to commit the fraud detailed herein.

b. Defendant William S. Finkelstein ("Finkelstein") was Chief

Financial Officer ("CFO") of Warnaco from May 1995 until his demotion on or about

February 13, 2001 when he became chief operating officer of Warnaco's Calvin Klein jeanswear and underwear units. Finkelstein became Senior Vice President of the

Company in May 1992 and CFO and a Director of the Company in May 1995.

Finkelstein served as Vice President and Controller of the Company from November

1988 until his appointment as Senior Vice President. Finkelstein also served as Vice

President of Finance of the Company's Activewear and Olga divisions. During the Class

Period, Finkelstein reported directly to Wachner. Finkelstein signed the Company's filings with the SEC during the Class Period including: the Company's Annual Report on

Form 10-K405 for 1997, filed with the SEC on April 3, 1998; the Quarterly Report on

Form 10-Q for the period ended October 4, 1997, filed with the SEC on November 14,

1997; the Quarterly Report on Form 10-Q for the period ended April 4, 1998, filed with the SEC on May 19, 1998; the Quarterly Report on Form 10-Q for the period ended July

4, 1998, filed with the SEC on August 18, 1998; the Quarterly Report on Form 10-Q for the period ended October 3, 1998, filed with the SEC on November 17, 1998; the Annual

Report on Form 10-K405 for the period ended January 2, 1999, filed with the SEC on

April 2, 1999; the Annual Report for the period ended January 1, 2000, filed with the

11 SEC on March 30, 2000; the Amended Annual Report on Form 10-K for the period ended

January 1, 2000, filed with the SEC on April 3, 2000; and the Amended Annual Report on Form 10-K, filed with the SEC on May 16, 2000. Additionally, Finkelstein was listed on the Company's press releases as a contact. During the Class Period, Finkelstein sold

164,737 shares of Wamaco common stock while in possession of material, nonpublic information, reaping as much as $5 million in illegal insider trading proceeds. These stock sales were unusual in timing and amount as detailed in paragraph 178 (c) and (d), thereby further supporting his motive to commit the fraud detailed herein.

c. Defendant Sidney P. Silverstein ("Silverstein") was, at all relevant times, Vice President and General Counsel of Warnaco. Silverstein has been Vice

President, General Counsel and Secretary of the Company since December 1990. He served as Assistant Secretary of the Company from June 1986 until his appointment as

Secretary in January 1987. During the Class Period, Silverstein reported directly to

Wachner. Silverstein signed the Quarterly Report on Form 10-Q for the period ended

October 4, 1997, filed with the SEC on November 17, 1997; the Company's quarterly reports for fiscal year 1998 including: the Company's Quarterly Report on Form 10-Q for the period ended April 4, 1998, filed with the SEC on May 19, 1998; the Quarterly Report on Form 10-Q for the period ended July 4, 1998, filed with the SEC on August 18, 1998; and the Quarterly Report on Form 10-Q for the period ended October 3, 1998, filed with the SEC on November 17, 1998. Silverstein sold 103,041 shares of Warnaco common stock during the Class Period while in possession of material, non-public information, collecting as much as $3.6 million in illegal insider trading proceeds. These stock sales

12 were unusual in timing and amount as detailed below in paragraph 178, thereby further supporting his motive to commit the fraud detailed herein.

26. The individuals named as Defendants in paragraph 25 (a)-(c) are referred to collectively herein as the "Individual Defendants." The Individual Defendants, because of their positions with the Company, possessed the power and authority to control the contents of Warnaco's quarterly reports, press releases and presentations to securities analysts, money and portfolio managers and institutional investors, i.e., the market. Each of the Individual Defendants was provided with copies of the Company's SEC filings, 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 and access to material non-public information available to them, but not to the public, each of these Defendants knew or recklessly disregarded that the adverse facts specified herein had not been disclosed to, and were being concealed from the public, and that the positive representations which were being made were then materially false and misleading. The Individual Defendants are liable for the false statements pleaded herein at paragraphs 111, 113, 117, 118, 123, 125, 130, 132,

137, 140, 145, 147-150, 155 —157 as those statements represent "group-published" information, disseminated to the public as a result of the collective actions of the

Individual Defendants.

27. Because of the Individual Defendants' positions within the Company, they had access to the adverse, non-public information about its business, finances, products, and markets and present and future business prospects via access to internal corporate documents including the Company's sales forecasts, forecasts received from customers,

13 operating plans, budgets and forecasts, reports of actual operations compared thereto, its revenue and expense recognition procedures and its communications, negotiations and agreements with the Company's significant customers, via conversations with other corporate officers and employees, attendance at management and Board of Directors meetings and committees thereof and via reports and other information regularly provided to them in connection therewith in their capacity as the officers and directors of Warnaco.

Control Person Liability

28. Each of the Individual Defendants had the duty to exercise due care and diligence and the duty of full and candid disclosure of all material facts relating to the business, operations and prospects of Warnaco. To discharge their duties, the Individual

Defendants were required to exercise reasonable and prudent supervision over the dissemination of information concerning the business, operations and financial reporting of Warnaco. By virtue of such duties, these officers and directors were required, inter alia:

a. To conduct and supervise the business of Warnaco in accordance with federal laws;

b. To supervise the preparation of the Company's SEC filings and to approve any reports concerning the financial condition of Warnaco;

c. To create and enforce a corporate policy prohibiting misuse of proprietary corporate information by corporate officers and directors by trading in

Wamaco stock based on material non-public information; and

14 d. To refrain from obtaining personal benefit, at the expense

of the public purchasers of Warnaco common stock, by misusing proprietary non-public

information.

29. It is appropriate to treat the Individual Defendants as a group and to presume that the false and misleading information conveyed in the Company's public

filings, press releases and other publications as alleged herein are the collective actions of the narrowly defined group of Individual Defendants identified above. The Individual

Defendants, by virtue of their high level positions within the Company, directly participated in the management of the Company, were directly involved with the day-to- day operations of the Company at the highest levels and were privy to confidential proprietary information concerning the Company and its operations, finances, financial condition, products and business prospects as alleged herein. The Individual Defendants were involved in drafting, producing, reviewing and/or disseminating the false and misleading statements which were being issued regarding the Company, approved or ratified these statements, and therefore adopted them as their own statements, in violation of the federal securities laws.

30. As officers, directors, and/or controlling persons of a publicly-held company which is registered with the SEC under the federal securities laws, whose common stock is traded on the New York Stock Exchange, and governed by the provisions of the federal securities laws, the Individual Defendants each had a duty to disseminate promptly accurate and truthful information with respect to the Company's operations, business products, markets, management, earnings, and present and future business prospects, to correct any previously issued statements from any source that had

15 become materially misleading or untrue, and to disclose any trends that would materially

affect earnings and the present and future operating results of Warnaco, so that the market

price of the Company's publicly traded securities would be based upon truthful and

accurate information.

31. Under the rules and regulations promulgated by the SEC under the

Exchange Act, specifically Item 303 of the Regulation S-K, the Individual Defendants

also had a duty to report all trends, demands or uncertainties that were reasonably likely to impact the Company's: (1) net sales; (2) revenues and/or income; (3) inventory; and (4) previously reported financial information such that it would not be indicative of future operating results. The Individual Defendants' representations during the Class Period violated these specific requirements and obligations.

v. CLASS ACTION ALLEGATIONS

32. Plaintiffs bring this action as a class action pursuant to Federal Rules of

Civil Procedure 23(a) and (b)(3) on behalf of a class consisting of all persons who purchased Warnaco common stock during the period of September 17, 1997 through and including July 19, 2000, and who suffered damages thereby (the "Class"). Excluded from the Class are the Defendants, members of the Individual Defendants' families, any entity in which any defendant has a controlling interest or is a parent or subsidiary of or is controlled by the Company, and the officers, directors, affiliates, legal representatives, heirs, predecessors, successors and assigns of any of the Defendants.

33. The members of the Class are so numerous that joinder of all members is impracticable. While the exact number of Class members is unknown to the Plaintiffs at

16

this time and can only be ascertained through appropriate discovery, Plaintiffs believe

there are, at a minimum, thousands of members of the Class who traded during the Class

Period. The Company had in excess of 52 million shares of its common stock

outstanding as of August 11, 2000.

34. Common questions of law and fact exist as to all members of the Class

and predominate over any questions affecting solely individual members of the Class.

Among the questions of law and fact common to the Class are:

a. whether Defendants' acts as alleged herein violated the federal

securities laws;

b. whether Defendants issued materially false and misleading

statements during the Class Period;

c. whether the Individual Defendants controlled Warnaco during the

Class Period;

d. whether Defendants acted with scienter in issuing false and

misleading statements;

e. whether the market price of Warnaco common stock during the

Class Period was artificially inflated because of the Defendants' conduct complained of

herein; and

f. whether the members of the Class have sustained damages and, if

so, what is the proper measure of damages.

35. Plaintiffs' claims are typical of the claims of the members of the Class as

Plaintiffs and members of the Class sustained damages arising out of Defendants'

wrongful conduct in violation of federal law as complained of herein.

17 36. Plaintiffs will fairly and adequately protect the interests of the members of

the Class and have retained counsel competent and experienced in class actions and

securities litigation. Plaintiffs have no interests antagonistic to or in conflict with those of

the Class.

37. A class action is superior to other available methods for the fair and

efficient adjudication of the controversy since joinder of all members of the Class is

impracticable. Furthermore, because the damages suffered by the individual Class

members may be relatively small, the expense and burden of individual litigation make it

impossible for the Class members individually to redress the wrongs done to them. There will be no difficulty in the management of this action as a class action.

VI. FRAUD ON THE MARKET PRESUMPTION

38. Plaintiffs will rely, in part, upon the presumption of reliance established by the fraud-on-the-market doctrine, in that:

a. Defendants made public misrepresentations or failed to disclose material facts regarding Warnaco's business capabilities during the Class Period;

b. The omissions and misrepresentations were material;

c. The common stock of the Company traded on the NYSE, an efficient and open market;

d. The misrepresentations and omissions alleged would tend to induce a reasonable investor to misjudge the value of the Company's common stock;

18 e. Plaintiffs and the members of the Class purchased their Wamaco stock between the time Defendants failed to disclose or misrepresented material facts and the time the true facts were disclosed, without knowledge of the misrepresented facts; and

f. Wamaco was followed by various analysts such as Morgan Stanley

Dean Witter and Salomon Smith Barney. At all relevant times, the price of Warnaco stock reflected the effect of news disseminated in the market.

39. Based on the foregoing, Plaintiffs and the members of the Class are entitled to the presumption of reliance upon the integrity of the market.

VII. THE SAFE HARBOR PROVISION IS INAPPLICABLE

40. The statutory safe harbor under the Private Securities Law Reform Act of

1995, which applies to forward-looking statements under certain circumstances, does not apply to any of the allegedly false statements pleaded in this Complaint. The statements alleged to be false and misleading herein all relate to then-existing facts and conditions.

In addition, to the extent certain of the statements alleged to be false may be characterized as forward-looking, they were not adequately identified as "forward-looking statements" when made and there were no meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those in the purportedly forward-looking statements. Alternatively, to the extent that the statutory safe harbor is intended to apply to any forward-looking statements pleaded herein, Defendants are liable for those false forward-looking statements because, at the time each of those forward- looking statements was made, the particular speaker had actual knowledge that the particular forward-looking statement was materially false or misleading, and/or the

19 forward-looking statement was authorized and/or approved by an executive officer of

Warnaco who knew that those statements were false when they were made.

VIII. SUBSTANTIVE ALLEGATIONS

Background

41. The Warnaco Group, Inc. was organized in 1986 for the purpose of

acquiring the outstanding shares of Warnaco Inc. As a result of the Company's

acquisition of Warnaco Inc., Warnaco Inc. became a wholly-owned subsidiary of the

Company.

42. The Company and its subsidiaries design, manufacture and market a broad

line of women's intimate apparel, such as bras, panties, sleepwear, shapewear and

daywear, and men's apparel. During fiscal year 1997, the Company acquired Designer

Holdings Ltd., which holds a 40-year extendable license from Calvin Klein, Inc. ("Calvin

Klein") to develop, manufacture and market designer jeanswear and jeans under the

Calvin Klein brand names.

43. Warnaco operates in three business segments: (1) Intimate Apparel; (2)

Sportswear and Accessories (formerly, "Menswear"); and (3) Retail Outlet Stores.

During the Class Period, the Intimate Apparel Division was a significant part of

Warnaco's operations, accounting for as much as 65.6%, 48.4%, 44.6% and 35.9% of the

Company's net revenues in 1997, 1998, 1999 and 2000, respectively.

44. The Intimate Apparel Division designs, manufactures and markets moderate to medium price intimate apparel for women under such brand names as

Warner's, Ogla and Calvin Klein. The Intimate Apparel Division also manufactures and

20 markets men's underwear under the Calvin Klein name. Warnaco's Intimate Apparel

Division purports to be the leading marketer of women's bras to department and specialty

stores in the United States, accounting for 34% of such women's bra sales in 1997 and

37.5% in 1998. Warner's, Olga, Calvin Klein, and other brand names such as Lejaby,

Bodyslimmers and Van Raalte accounted for 80%, 86%, 84%, and 86.4% of the

Company's Intimate Apparel net revenues in 1997, 1998, 1999 and 2000, respectively.

Between 1991 and 2000, the Intimate Apparel Division's net revenues increased at a

compound annual growth rate of 10.1%.

45. The Sports and Accessories Division designs, manufactures, imports and

markets moderate to premium priced men's apparel and accessories under brand names

such as Chaps by Ralph Lauren and Calvin Klein. Between 1991 and 2000, Warnaco's

Chaps by Ralph Lauren division had increased its net revenues by approximately 553% from $39.0 million to $254.5 million.

46. Warnaco distributes its products to over 16,000 retail stores operating more than 26,000 department, specialty and mass merchandise stores, including such retailers as Dayton-Hudson, Macy's, Federated Department stores and the May Company.

Wachner's "Iron-Clad" Control Over Warnaco

47. As CEO, Wachner maintained complete control over the Company's operations. According to one former Warnaco international sales executive during the

Class Period, "nothing happens in that Company without [Wachner] knowing." In a Wall

Street Journal ("WSJ") article dated January 10, 2001, a reporter from the WSJ asked

Wachner how involved she was in the day-to-day operations of the Company. In

21 response Wachner stated: "I am extremely involved. There is no question. I am a hands- on manager."

48. According to a TheStreet.com article dated July 23, 1998, Wachner had developed a reputation for maintaining "ironclad control" over Wamaco:

[Wachner is] known for working seven days a week — employees have been summoned at a moment's notice to weekend meetings at her Bridgehampton, N.Y. home. . . Some people familiar with the company (including two former employees) say Wachner's reputation as a Jekyll-and-Hyde boss scares potential candidates away. She treats managers who perform up to her standards like heroes, but denigrates them when they disappoint.

49. According to an article dated February 10, 1998 in Women's Wear Daily

("WWD"):

Some observers say [Wachner] is a ruthless negotiator. They note she is fond of making veteran male executives sweat as they report sales results by the day, week, month, and year. She is a stickler for the bottom line and has been known to mentally compute figures before employees can round off results on a calculator. Somebody misses something —they're out . . . .

Wachner, simply put, is consumed by her work. . . Crossing numerous time zones each month on her corporate jet, she gets updates by telephone no matter the time of day or night. She is typically at her office by 8:30 a.m., often works on Sundays and holidays, and as she puts it, "I work until the job is done."

50. On October 12, 1998, Fortune published a list of the 50 Most Powerful

Women in American Business. In ranking the women, Fortune collected more than 400 resumes and biographies, and interviewed numerous industry experts, Wall Street analysts and executive recruiters over a four-month period. In addition, Fortune interviewed the candidates, their bosses and their peers. Fortune ranked Wachner as the

34th Most Powerful Woman in American Business.

22 51. As a result of Wachner's admitted "hands-on" approach to her business,

she was fully aware of the Company's actual financial results and the variation with

reported results, as detailed herein.

Inventory and Forecasting At Waranco

52. As a clothing manufacturer, Warnaco generated significant amounts of

merchandise each month which it then carried on its balance sheet as an asset under

"inventory." In its accounting for inventory, Warnaco separated its inventory into three

categories: raw materials, work in progress and finished goods.

53. Analysts and the investing community scrutinized Warnaco's ability to

manage its inventory effectively and the speed in which Warnaco reportedly "turned" its

inventory (how often inventory is sold). Frequently, analysts commented positively on

Warnaco's ability to manage its inventory effectively and specifically noted Warnaco's

turn rate in their reports.

54. For instance, in a report dated February 23, 1998, Credit Suisse First

Boston Corporation analyst D. Rosenberg ("Rosenberg") rated Warnaco's stock a

"BUY." In his report, Rosenberg noted that "Nnventory turns improved to 2.8 from 2.3 in last year's fourth quarter." Similarly, in a report dated February 19, 1998, CMC

Oppenheimer analyst L. McCall noted:

Inventories increased 22% year-over-year excluding $60 million added by the DSH acquisition, a significant improvement over the third-quarter inventory levels as turns improved slightly. Management has intensified the focus on inventory management as well as on MIS investments, and we expect to see continued improvements. Management expects to reduce inventories by $20 million by the end of 1998.

23 55. Warnaco's inventory levels depended on Warnaco's sales forecasts prepared for each quarter. According to one former senior Vice President of Sales in the

Intimate Apparel Division, sales forecasting was the "blood" of the Company.

56. Responsibility for sales forecasting fell on the Company's Forecasting and

Planning Division, which included the heads of each of the Intimate, Sportswear and

Retail divisions. In 1997 and 1998, other staff present at forecasting meetings included:

Bill McRaith, Senior Vice President of Intimate Apparel; Peter Brink, Vice President of

Operations for Warnaco; and Gene Ostravslcy, Vice President of Strategic Planning. On multiple occasions, Wachner would personally attend these meetings. The Forecasting and Planning Division would meet every Monday at Warnaco's offices in Milford,

Connecticut to decide the sales numbers for the upcoming quarters by color, size and

SKU. Sales representatives had very little input in determining the forecasted sales numbers. The Forecasting and Planning Division undertook to forecast production and sales numbers based on the number of orders received from the department stores.

57. Each division's controller would draft the sales projections and, if each division's president approved the forecasts, then the forecasts were sent to senior financial analysts at Warnaco's corporate financial offices in New York. Warnaco collected the inventory forecasts from the various division presidents monthly.

Warnaco's Deliberate Over-Forecasting

58. Despite the positive picture painted by Warnaco's representations to analysts, the Company was not, in fact, properly managing its inventory. Rather,

Defendants deliberately manipulated inventory and concealed the fact that excess,

24 obsolete and slow-moving inventory was building-up quarter after quarter throughout the

Class Period. While inventory was building up, Defendants knowingly or recklessly

failed to properly devalue such inventory, thereby allowing Warnaco to report materially

false and misleading financial results throughout the Class Period.

59. Since at least 1996, Wachner would "over-forecast" by compelling the

Forecasting and Planning Division to continually increase the sales forecasts for the

upcoming quarters. Unlike the projections provided by the Company's Forecasting and

Planning Division, which were based on actual demand figures, Wachner's forecasts were

"fictitious" in that her forecasts were not based on inventory counts or retailer demand.

Instead, Wachner inflated sales projections to meet the numbers that she had previously provided to analysts or the "Street."

60. In calling for baseless increases in sales forecasts during the Class Period,

Wachner disregarded realistic sales estimates based on actual data from members of the

Forecasting and Planning Division, including the President (and head) of the Intimate

Apparel Division during the Class Period, the head of Inventory Control for the Intimate

Apparel Division, and Warnaco's Vice President of Operations. For example, according to one former President of the Intimate Apparel Division during the Class Period, if the

Forecasting and Planning Division informed Wachner that they could sell approximately

$20 million worth of goods to retail stores, Wachner would summarily reject the $20 million figure and order the Forecasting and Planning Division to project sales of $50 million. According to the former President of Intimate Apparel during the Class Period,

Wachner told him and other division presidents to meet the numbers any way they could.

25 61. According to one former Warner's Intimate Apparel account executive,

Wachner's sales forecasts were "humongous." Nonetheless, Wachner's sales numbers continuously spiraled upward each year. In May and November of each fiscal year, sales representatives were "locked into" outdoing the previous year's sales figures provided by

Wachner. In order to achieve Wachner's unrealistic sales goals, sales representatives were forced to offer generous incentives to the various department stores in order to induce them to purchase Warnaco merchandise. According to one former Warner's intimate apparel executive, Wachner's over-forecasting was "like a cancer."

62. According to one former Vice President of Purchasing for Warnaco's

Intimate Apparel Division, "forecasting was constantly being massaged and driven by the sales side." Throughout the Class Period, Wachner called sales representatives and inventory forecasters at the end of each half year (May/June and November/December) and insisted that they increase their production and sales goals by as much as ten times the amount reasonably achievable.

63. The various divisions never met Wachner's unrealistic forecasts.

Warnaco's Menswear division had a particularly difficult time meeting Wachner's forecasts. According to one former President of Intimate Apparel, this upset many division presidents and sales representatives because Warnaco denied bonuses to employees based on their inability to meet Wachner's unrealistic forecasts. Wachner admitted as much in her interview with WWD dated February 10, 1998, during which she stated: "All managers have to re-project their businesses month by month. If you don't make the plan, you don't make the bonus . . . ."

26 64. Wachner's repeated over-forecasting forced Warnaco's inventory managers to increase the production numbers reflected in the Company's inventory computer system known as "HOPS." By increasing the sales forecasts, Wachner necessarily and knowingly increased the amount of goods Warnaco needed to manufacture to meet such goals. Thus, in addition to placing enormous pressure on her sales force, the increased forecasts placed inordinate strain on the Company's manufacturing plants. According to one former Vice President of Purchasing, he was forced to have his production plants work twenty-four hours a day, seven days a week in an effort to meet Wachner's unreasonable forecasts.

Warnaco Builds Up Inventory

65. Wachner's scheme to increase reported sales by increasing the amount of goods available resulted in excess inventory building up at the Company at an astonishing rate during the Class Period. During the Class Period, the sales representatives' inability to sell all the inventory being produced and the manufacturing plants' attempts to meet

Wachner's production numbers, resulted in Warnaco's cutting facilities and distribution centers becoming backlogged with slow-moving and obsolete inventory. Consequently, according to one former high-level Intimate Apparel Division executive during the Class

Period, Warnaco leased warehouses partly to store excess inventory. For example, in

1998, a Warnaco cutting facility in Thomasville, Georgia Was leasing seven warehouses in the area to store $20 million of excess raw material. At the same time, a Warnaco distribution center in Murfeesboro, Tennessee, was leasing five warehouses in the area to store excess merchandise. According to one former President of Intimate Apparel, by

27 1998, Wachner's unrealistic forecasting created a build-up of "tens of millions of dollars"

of what became excess "obsolete and distressed" fabrics and finished goods. Excess

fabric and finished goods were stored in the warehouses in the Murfreesboro, Tennessee

and four or five Duncansville, Pennsylvania facilities. According to a former senior

accountant in the Company's Calvin Klein finance department from 1997 to the Fall of

2000, the Duncansville distribution center had "a lot of obsolete inventory" in 1998, 1999

and 2000.

66. One former Vice President of Purchasing complained at weekly

forecasting tracking meetings about the excessive merchandise and the change in

production mix. His complaints were ignored. Attendees at these weekly forecasting

meetings included the Chief Operating Officer of the Intimate Apparel Division,

forecasters, purchasers, as well as sales and marketing staff.

67. The former Vice President of Purchasing was not alone in his complaints

about Wachner's inflated forecasts. One former Intimate Apparel account executive who

worked at Warnaco during the Class Period also complained of the improper forecasting

to Ed Snyder ("Snyder"), the divisional Vice President of Warner's. According to this

former account executive, Snyder complained of the inflated forecasting directly to

Finkelstein.

68. Wachner responded to the complaints regarding her unrealistic forecasts by "routinely" terminating members from the Forecasting and Planning Division as well as presidents of the Intimate Apparel Division. From 1993 until 1999, the Intimate

Apparel division had seven different presidents: Larry Carp, Jerry Tadlock, Maurice

28 Resnick, Joe Duponte, Bill McRaith and Tom Wyatt. During each transition, Warner's president Bob Mulrennan stepped in as acting president.

69. Similarly, between 1993 and 1999, the Intimate Apparel Division also functioned under three different chief operating officers ("COO"): Arthur Malkarney,

Jerry Tadlock, and Ed Turner. Malkarney returned as COO after Ed Turner. Between

1993 and 1998, the Division also had four different Vice Presidents of Procurement:

David Bell, Jim Lawrence, David Andres, and Diana [last name unknown]. Andres returned to the position after Diana left.

70. According to a WWD article dated April 3, 2000:

"A lack in management depth and extremely high turnover has been a longer concern of analysts. Besides Wachner, the only long-term senior management comprises William S. Finkelstein, chief financial officer and senior vice president of Warnaco for 14 years, and Stanley P. Silverstein, Warnaco's vice president, general counsel and secretary since 1987.

71. According to one former COO of Waimea, he complained many times to

Finkelstein about Warnaco's "unreal" inventory costs. Specifically, Defendants would cause Warnaco to transfer expenses from other areas into the cost of producing its inventory in order to decrease expenses, thereby increasing income and earnings. In particular, in March 1998, two senior Warnaco management employees complained to

Finkelstein about the unreal costs. In March 1998, approximately 25% of the costs included in inventory were inappropriately booked as inventory costs and they should have been expensed during the period in which they were incurred. Finkelstein ignored the senior management employees' complaints.

72. Between July 1998 and September 1998, two top Intimate Apparel

Division executives discussed with Wachner the need to write-off $10 million of obsolete

29 merchandise. This obsolete merchandise resulted from the unrealistic forecasting projections employed by Wachner.

Defendants Knew or Recklessly Disregarded Warnaco's Lack of Control Over Its Inventory

73. According to a former Vice President of Purchasing, in 1998,

PricewaterhouseCoopers ("PWC"), Warnaco's outside auditors, compelled Warnaco to conduct physical inventory counts twice a year, before the books were closed at the end of each half (May/June and November/December). Prior to 1998, Warnaco was requested to conduct a physical inventory count only once a year. According to a former Warner's intimate apparel account executive during the Class Period, in order to conduct a physical inventory count, Warnaco had to shut down and halt shipping for 10 to 14 days.

74. According to one former President of Intimate Apparel during the Class

Period, Warnaco included in its inventory counts excess and obsolete or "distressed" inventory, therefore overstating its inventory value.

75. On November 26, 1999, Wamaco filed a current report on Form 8-K for th the period ended November 18, 1999 (the "November 26 8-K"). In the November 26th

8-K, Warnaco revealed that PWC, in connection with its 1998 audit, warned management that a material weakness existed in its Intimate Apparel Division's manufacturing cost system. Specifically, PWC informed Warnaco that its "intimate apparel division manufacturing cost system may not function to reduce to a relatively low level the risk that errors may occur and not be detected within a timely period." In other words, PWC warned Warnaco that a "material weakness" existed in its intimate apparel division manufacturing cost system.

30 76. According to "Communication of Internal Control Related Matters Noted

in an Audit Statement," Statement Auditing Standards No. 60, a "material weakness" is

defined as:

[A] reportable condition in which the design or operation of one or more of the internal control components does not reduce to a relatively low level of risk that misstatements caused by error or fraud in amounts that would be material in relation to the financial statements being audited may occur and not be detected within a timely period by employees in the normal course of performing their assigned functions. (AU 325.15).

A material weakness is always a reportable condition.

77. Warnaco deliberately concealed the existence of the above-described

material weakness from the investing public.

Warnaco Contracted with Manufacturing Plants to Overoroduce Merchandise

78. Warnaco's agreements with various manufacturing plants that required the

manufacturing plants to overproduce Warnaco merchandise also contributed to the

knowing or reckless build-up of excess, obsolete and slow-moving inventory. For

example, Warnaco had an agreement with Invase, a Mexican manufacturing plant, to produce plain, white and blue button down shirts for men. The agreement called for the plant to overproduce such shirts by 30%. The burden fell on Warnaco sales representatives to sell the excess merchandise. The sales representatives could not sustain this burden and additional inventory built-up was the result.

79. According to one former President of Intimate Apparel, Wachner prevented Warnaco's plants in Mexico from operating efficiently by demanding that the plants produce an enormous amount of merchandise in a short period of time and then

31 shut down entirely at other times. Due to Wachner's unpredictable and last minute

forecasting manipulations, the manufacturing plants "had incredible spikes and valleys" in production output. According to one former President of Intimate Apparel, unlike

Wachner's bizarre approach, an efficient manner in which to operate a plant is to "smooth out the load of the plant and keep the [output numbers] level." For instance, one competing manufacturing plant maintained a production efficiency level of 90%. By comparison, Warnaco never achieved an efficiency rate of over 50% at its manufacturing plants.

Sales Representatives Allow For Substantial Returns Contributing to the Further Build-Up of Inventory

80. Defendants were also aware or recklessly disregarded the fact that in order to try and meet the unrealistic expectations created by Wachner's unrealistic forecasts and to otherwise keep pace with Warnaco's overproduction of goods, sales representatives were forced to offer generous incentives to the large department stores that were purchasing Warnaco's merchandise. For the most part, sales representatives did little more than simply "move" inventory out of the warehouse one quarter only to have the goods returned by the customer in the following quarter. According to one former COO and one former President of Intimate Apparel, such methods by which Defendants were able to simply move inventory out of Warnaco's warehouses during the Class Period included:

a. At the end of each quarter, sales representatives, at the direction of the Defendants, engaged in what Warnaco management dubbed "dialing for dollars."

Specifically, sales representatives induced customers such as Macy's East, Dayton-

32 Hudson's, Kohl's, Federated, Mervins and Upton's in Atlanta to "accept" new merchandise in exchange for returning in the next quarter older goods they had trouble selling;

b. Some merchandise was "pulled, packed and held" at Warnaco distribution centers. The goods were gradually shipped over time, but Warnaco improperly booked the sales for these goods in the quarter or quarters preceding the quarter in which the goods were shipped;

c. Sales representatives, at the direction of the Defendants, routinely asked department stores to accept shipments of goods and hold the shipments at the department stores' distribution centers just to make the sale for that quarter. The sales representatives assured the department stores that they could return the merchandise or pay for the shipment in the next quarter; and

d. The Company deliberately "over shipped" to customers. For instance, if a customer ordered $10 million worth of merchandise, the Company would send $15 million worth of merchandise in order to move out an extra $5 million of product. The process of returning the excess unwanted goods to Warnaco would take approximately two months, and usually ran into the following quarter, thereby having the effect of improperly inflating profits in the current quarter.

81. According to one former COO at Warnaco during the Class Period,

Wachner "implemented and instituted" every decision at the Company during the Class

Period. The accounting office at corporate headquarters knew how revenue was being booked with respect to the fraudulent practices described above. Indeed, the substantial returns and massive discounts did not concern Defendants because according to one

33 former division president who left Warnaco in the Fall of 1999 during the Class Period, division presidents were praised on the basis of whether their divisions met their sales numbers and not on whether the divisions increased their profits.

82. According to a former Warnaco sales representative, by December 1999, the amount of returns offered by Warnaco to the department stores resulted in so much merchandise coming back to one Warnaco warehouse in Murfreesboro, Tennessee, that trucks sat outside the warehouse packed with intimate apparel merchandise returns.

Despite her knowledge or reckless disregard of the substantial amounts of returns,

Wachner did nothing to halt the flood of returns until approximately February 2000.

According to a former sales representative, at that time, Wachner conducted a conference call and announced that all product returns be halted immediately.

83. In some cases, department stores were willing participants in Warnaco's scheme to simply move inventory out so Warnaco could book the transactions as sales because sales representatives offered these department stores huge discounts, in some cases 30% to 40% off the goods' wholesale price and 10% off advertising costs, if they accepted new inventory.

84. According to one former President of the Chaps division, when he reviewed Warnaco's inventory and stock reports in 1999, they showed that approximately

S75 million to $80 million of Ralph Lauren Chaps merchandise or hundreds of thousands of units of excess or outdated merchandise was stored at a Warnaco distribution center in

Duncansville during the Class Period. The inventory and stock reports showed that approximately $45 million of that merchandise was over three-years-old.

34 85. A Chaps sales representative met with Warnaco's Chaps division

President Hal Hollcraft ("Holleran and expressed her concerns regarding the excess inventory. Hollcraft, in turn, raised the sales representative's serious concerns with

Finkelstein. The Chaps sales representative was ordered to sell this excess inventory through secondary markets at substantial discounts. In June 1999, Wachner authorized the Chaps sales representative to fly on the Company's corporate jet to meet with buyers from Costco, a discount store, in order to sell the outdated merchandise. As a consequence of this excess inventory, in the third quarter of 1999, Warnaco pushed its sales force to make up dollars lost because of the inventory problems. Chaps alone had to make up a $10 million net loss. According to one former Chaps sales representative, the

Chaps division never performed a physical inventory count between late Fall of 1998 and late Fall of 1999.

Warnaco's "Book Cooker"

86. Another manner in which Defendants made the Company appear more profitable throughout the Class Period was by manipulating the accounting of certain expenses which was in direct conflict with the Uniform Capitalization ("UNICAP") rules of Section 263A of the Internal Revenue Code.

87. UNICAP permits certain taxpayers to capitalize rather than expense the direct costs and some portion of indirect costs associated with producing real or tangible personal property.

88. Warnaco improperly used UNICAP to transfer fixed costs (costs that would otherwise be expensed) into inventory costs (costs that could be capitalized).

35 Financial analysts at Warnaco's corporate-level were required to calculate how much time corporate executives spent dealing with Warnaco's inventory, and add that cost to the value of inventory on the Company's balance sheet. For instance, Warnaco would add the time Finkelstein or the legal department spent on dealing with inventory issues to inventory rather than expense that time to administrative costs.

89. When used properly, a company's LTNICAP balance fluctuates to reflect the economy or other variables. According to one former Warnaco financial analyst during the Class Period, Warnaco's UNICAP balance, however, never went down,

"[Warnaco's] always went up." By using and manipulating UNICAP improperly,

Warnaco was able to increase its reported profit each quarter throughout the Class Period.

90. A former financial analyst for the Calvin Klein underwear division from

1997 until the Fall of 1999 said that Finkelstein specifically pushed for the capitalization under Unicap.

91. By June 1998, Warnaco had transferred expenses of approximately $40 million to $60 million into inventory costs.

92. Top management and internal financial analysts at Warnaco described

Warnaco's use of UN1CAP as Wachner's "book cooker" because, by adding improper costs to the cost of inventory, Defendants caused Warnaco to overstate the value of its inventory, and understate its expenses, thereby increasing its net income and earnings throughout the Class Period.

36 Warnaco Lacked A "Distressed Inventory" Reserve

93. According to one former President of Intimate Apparel, during the Class

Period, Warnaco failed to establish a "distressed inventory reserve." This former divisional president defined distressed inventory to be a finished good or material that the

Company has difficulty selling because it is outdated or undesirable. A typical distressed inventory reserve for Warnaco would have been approximately $8 million to $10 million, but that figure would vary from year to year depending on the Company's inventory numbers for that year. In not establishing any reserve for distressed inventory, the

Company was able to avoid taking a charge to earnings for those periods, thus allowing the Company to inflate net income and earnings.

Warnaco Extended Quarters and Created A "375 Dav Year"

94. According to one former senior Vice President in the Intimate Apparel

Division, Warnaco engaged in a method of financial record-keeping called "extending the month" at the end of each quarter. Warnaco consistently extended the quarters and year- ends by carrying over a week's worth of sales from a subsequent quarter into the preceding quarter. Thus, if the quarter ended March 31, Warnaco extended the quarter by one week and improperly booked sales from April into March. Similarly, with respect to year-end results, Warnaco booked January sales as December sales.

95. According to a senior accountant in Warnaco's Calvin Klein finance department from 1997 until the Fall of 2000, Warnaco extended the quarters from approximately three to seven days in 1999 and 2000 in an effort to increase sales numbers.

37 96. By extending quarters and creating a 375-day year, Defendants gained

extra time in which to push obsolete, excess, slow-moving inventory.

Warnaco Executives Hide Financials Statements to Protect Themselves

97. The corporate culture created by Defendants' machinations resulted in top

Wamaco executives taking steps to protect themselves from any potential backlash.

According to one former senior vice president in the Intimate Apparel Division, any attempt to disagree with Wachner resulted in the dissenter losing his or her job.

98. According to one former high-level Intimate Apparel Division executive, two other high-level executives, one from Intimate Apparel, placed copies of the

Company's true financial statements in a safe deposit box in the event Wachner tried to terminate them, while another former Wamaco employee in purchasing maintained accurate records at home in the event he was ever questioned about his work and amounts contained in the Company's books and records.

PWC Lacked "Independence" As Warnaco's Auditor

99. In 1998, Warnaco hired a chief information officer and senior vice president to install a new computer system designed by SAP, AG, an enterprise software company, located in Waldorf, Germany. The SAP system ("SAP") was an enterprise resource software system that, according to one former Warnaco computer technician, was purported to be the hottest technology in 1997 and 1998.

100. Typically, a project of implementing a new computer system, like

Warnaco's installation of SAP would take four to five years. Warnaco had only one year

38 in which to switch computer systems because the Company's current computer system

was not Y2K compliant and the Y2K deadline was looming.

101. In an attempt to meet its deadline for implementing the SAP system,

Warnaco hired "hundreds" of consultants from PWC and another consulting firm. In

order to accommodate all these consultants, Warnaco leased a building near its own

headquarters on Lafayette Street in Bridgeport, Connecticut,

102. According to a computer technician at Wamaco in 1998, Warnaco had an

estimated budget of $50 million for implementing SAP.

103. By November 1999, Warnaco abandoned its attempt to implement the

system and in November 1999, abruptly fired its SAP consultants from PWC. PWC and

Wamaco terminated their auditing relationship in the same month. On November 18,

1999, Warnaco hired Deloitte & Touche LLP to serve as the Company's independent auditors. By the time Warnaco fired PWC as consultants to the Company, PWC had received tens of millions of dollars in consulting fees, and Warnaco had exceeded its budget for installing the SAP system by approximately S100 million, the majority of which was paid to PWC.

IX. PRE-CLASS PERIOD STATEMENTS

104. On April 4, 1997, Defendants filed with the SEC Warnaco's Annual

Report on Form 10-K405 for the period ended January 4, 1997 (the "1996 10-K").

Defendants falsely represented in the 1996 10-K that Wamaco suffered a loss of only $8.2 million and the cost of goods sold (the sum of all the direct and indirect expenditures incurred in producing the products that were sold) was 5736.1 million.

39 105. On May 20, 1997, the Company filed with the SEC Warnaco's

Quarterly Report on Form 10-Q for the period ended April 5, 1997 (the "First Quarter

1997 10-Q") wherein Defendants reported so-called "record" net income for the

Company of $18.1 million or $0.34 per share, a 19.1% increase over the comparable period in 1996. In addition, Defendants falsely represented in the First Quarter 1997 10-

Q that gross profit was $92.7 million and cost of goods sold was $158.8 million.

106. On August 18, 1997, the Company filed with the SEC Warnaco's

Quarterly Report on Form 10-Q for the period ended July 5, 1997 (the "Second Quarter

1997 10-Q") wherein Defendants reported so-called "record" net income for the

Company of $17.2 million or $0.32 per share, a 19.8% increase over the comparable period in 1996. In addition, Defendants falsely represented in the Second Quarter 1997

10-Q that gross profit was $99.3 million and cost of goods sold was $191 million.

107. The statements identified above in the 1996 10-K, the First Quarter 1997

10-Q and the Second Quarter 1997 10-Q were all materially false and misleading. On

April 2, 1999, Warnaco filed its 1998 10-K in which it revealed the need to "revise" its results for these periods. In particular Defendants revealed:

(i) The Company's 1996 net income, as "revised," revealed that the

Company suffered a loss of $31.4 million for the year, not a loss of

$8.2 million. Thus, the Company had overstated its 1996 net

income by over $23.2 million or 281%. Accordingly, as "revised,"

the Company reported a loss per share of ($0.61) for 1996 rather

than a loss of only ($0.16) per share;

40 (ii) The Company increased the cost of goods sold by $38 million in

1996. Thus, the Company previously understated the cost of

goods sold by 5.2% for the year;

(iii) The Company's 1997 first quarter net income, as "revised,"

revealed that the Company earned only $11.3 million for the

quarter, not $18.1 million. Thus, the Company had overstated its

net income by over $6.8 million or 37%. Accordingly, the

Company's "revised" reported earnings per share was $0.21 for the

1997 first quarter rather than $0.34 per share as previously

reported;

(iv) The Company also increased cost of goods sold by $10.9 million

for the 1997 first quarter. Thus, the Company previously

understated cost of goods sold by approximately 6.9%;

(v) The Company's net income, as "revised," revealed that the

Company earned only S7.8 million for the 1997 second quarter, not

$17.2 million. Thus, the Company had overstated its net income

by over $9.3 million or 54% for the period. Accordingly, as

"revised," the Company reported earnings per share of $0.15 for

the 1997 second quarter rather than $0.32 per share, a percentage

change of 53%; and

(vi) The Company also increased cost of goods sold by $15

million for the 1997 second quarter. Thus, the Company

understated cost of goods sold by approximately 7.8%.

41 108. Later in the Class Period, as described in detail below, Defendants recharacterized the "revisions" of the 1996 and first two quarters of 1997 financial results as "restatements."

109. The statements identified in paragraphs 104-106 were also materially false and misleading at the time they were made for the reasons identified below in paragraphs

159 (a)-(g), 160 and 163.

110. Due to the statute of limitations, Plaintiffs are precluded from alleging that the materially false and misleading statements set forth in paragraphs 104 through 106 above are actionable under the federal securities laws.

X. FALSE AND MISLEADING STATEMENTS DURING THE CLASS PERIOD

111. On November 3, 1997, Defendants issued a press release announcing

Warnaco's financial results for the third quarter of 1997, the period ended October 4,

1997 (the "November 3rd Press Release"). In the November 3 rd Press Release,

Defendants reported so-called "record" net income for the Company of $32.1 million or

$0.59 per share. Wachner and Finkelstein were listed as contact persons on the

November 3`d Press Release.

112. For the third quarter of 1997, Warnaco's reported earnings per share of

$0.59 appeared to exactly meet the consensus estimates of $0.59.

113. On November 14, 1997, the Company filed with the SEC Warnaco's

Quarterly Report on Form 10-Q for the period ended October 4, 1997 (the "Third Quarter

1997 10-Q"). The Third Quarter 1997 10-Q repeated the same materially false and

42 misleading financial information that was contained in the November 3 rd Press Release.

In addition, Defendants falsely represented in the Third Quarter 1997 10-Q that gross

profit was $124 million and cost of goods sold was $209 million. Further, the Company represented that:

The accompanying unaudited consolidated condensed financial statements have been prepared in accordance with generally accepted accounting principles and Securities and Exchange Commission rules and regulations for interim financial information. . . . In the opinion of the Company, the accompanying consolidated condensed financial statements contain all the adjustments (all of which were of a normal recurring nature, . . .) necessary to present fairly the financial position of the Company as of October 4, 1997 . . . .

Finkelstein and Silverstein signed the Third Quarter 1997 10-Q.

114. The statements identified above in the November 3 rd Press Release and the

Third Quarter 1997 10-Q were materially false and misleading. On April 2, 1999,

Warnaco filed its 1998 10-K in which it revealed the need to "revise" its financial results for the third quarter of 1997. Warnaco's "revised" results for the third quarter of 1997 dramatically reversed what the Company previously claimed was a "record" quarter. In particular:

(1) Contrary to the Company's representations, Warnaco's

financial results were not prepared in accordance with

GAAP;

(ii) The Company's net income, as "revised," revealed that the

Company earned only $23.4 million for the third quarter,

and not $32.1 million. Thus, the Company had overstated

its net income by $8.7 million or 27%. Accordingly, as

43 "revised," the Company reported earnings per share of

S0.44 for the quarter rather than S0.59 per share;

(iii) The Company also increased cost of goods sold by $14

million. Thus, the Company previously understated the

cost of goods sold by 6.7%; and

(iv) Ultimately, as described in more detail below, Defendants

acknowledged that these figures would have to be

"restated" as opposed to their prior characterization that

only a "revision" was necessary.

115. Warnaco's earnings per share for the third quarter of 1997, as reflected in the "revision" of $0.44 per share, fell $0.15 below Warnaco's previously reported earnings per share and the consensus estimate. Thus, without the fraudulent reporting,

Wamaco would have missed earnings expectations by a staggering 25%.

116. The statements identified in paragraphs 111 and 113 were also materially false and misleading at the time they were made for the reasons identified below in paragraphs 159 (a)-(g), 160 and 163.

117. On February 19, 1998, Defendants issued a press release announcing

Warnaco's financial results for fiscal year 1997, ended January 3, 1998 (the "February

19th Press Release"). In the February 19 th Press Release, Defendants reported so-called

"record" net income for the Company before special charges of $104.1 million for fiscal year 1997. Including the special charges, Warnaco reported net income for fiscal year

1997 of $24.6 million or $0.44 per diluted share, compared to a net loss of $8.2 million, or a loss of ($0.16) per diluted share, for fiscal year 1996.

44 118. On April 3, 1998, the Company filed with the SEC Warnaco's Annual

Report on Form 10-K405 for fiscal year 1997 (the "1997 10-K"). The 1997 10-K repeated substantially the same materially false and misleading financial information that was contained in the February 19 th Press Release. In addition, Defendants falsely represented in the 1997 10-K that inventory was valued at $526.2 million'. The Company also reported that its cost of goods sold was $1.004 billion (or 69.9% of net revenues).

Further, the Company claimed that its inventories "are stated at the lower of cost, determined on a first-in-first-out basis, or market." Wachner and Finkelstein signed the

1997 10-K.

119. The statements identified above in the February 19 th Press Release and the

1997 10-K were materially false and misleading. In Warnaco's 1998 10-K filed on

April 2, 1999, the Company included "revised" financial results for fiscal year 1997. The

1997 revised financial results dramatically reversed what Warnaco claimed was a

"record" year. As excerpted from The Warnaco Group, Inc. Financial Summary attached hereto as Exhibit 1, Warnaco's 1998 10-K revealed that:

(i) the Company's net income, as revised, revealed that the Company

actually suffered a loss of $12.3 million for fiscal year 1997, not a

profit of $23 million as previously reported. Thus, the Company

had overstated its net income by over $35 million or 153.49%.

Accordingly, as revised, the Company reported a loss of ($0.23)

per share for the year rather than a profit per share of $0.44 per

share as previously reported, a percentage change of 152.3%; and

45 (ii) The Company's cost of goods sold, as revised, increased by $57

million to 73.87% of net revenues.

120. On May 16, 2000, Defendants filed with the SEC Warnaco's Amended

Annual Report on Form 10-K405/A for the period ended January 2, 1999 (the "1998 10-

K/A") and revealed that Warnaco's financial results for fiscal years 1996 and 1997 were

actually "restated." Further, the Company disclosed a significant write-down to its

inventory components of work in progress and finished goods. Specifically, the

Company had overstated the value of its inventory for fiscal year 1997 by $95 million or

18.05%. Thus, Warnaco's inventory, as restated, was valued at $431.2 million rather than

$526.2 million as previously reported. The following chart illustrates the differences

between Warnaco's reported and actual inventory balances for fiscal year 1997.

Excerpts From Attached Exhibit 1 - Warnaco Balance Sheet Contained In Its Financial Statements (000's omitted)

(000s) (000s) Reported Restated Year End Year End (000s) Inventories 113/98 113/98 Miff. % Diff.

Finished Goods 5340,246 5298,161 542,085 12.37%

Work in Progress 5107,495 554,580 552,915 49.23%

Raw Materials $78,444 $78,444 -

Total Inventories $526,185 $431,185 $95,000 18.05%

121. The statements identified in paragraphs 117 and 118 were also materially

false and misleading at the time they were made for the reasons identified below in paragraphs 159 (a)-(g), 160, 163, 169, 171 and 174.

46 122. Despite the Company's restatement on May 16, 2000, however, the

Company had yet to accurately report its results for fiscal year 1997. On April 17, 2001, the Company filed its Annual Report for the period ended December 30, 2000 (the "2000

10-K"). In the 2000 10-K, Wamaco disclosed that it would restate its financial results for fiscal year 1997 for the second time and that:

(i) the Company's 1997 accounts receivable, as restated, were actually

$244.6 million, and not S296.4 million, as previously reported.

Thus, the Company had overstated its 1997 accounts receivable

balance by $51.8 million, or 17.5%;

(ii) the Company further decreased the value of its 1997 inventory by

$7.4 million. Thus, Warnaco's 1997 inventory as restated for the

second time was valued at S423.8 million rather $526.2 million as

originally reported, a 19.5% decrease;

(iii) the Company's 1997 net income, as restated for the second time,

was a loss of $38.3 million and not a profit of $23 million, as

originally reported, or even the $12.3 million loss as restated in

May 2000. Accordingly, as restated for the second time, the

Company reported a net loss of ($0.73) per share for the year 1997

rather than a loss of ($0.23) per share, as restated in May 2000, or

the $0.44 per share profit as originally reported, a percentage

change of 266.4%; and

(iv) the Company's 1997 net worth, prior to the second restatement,

was overstated by $26 million.

47 B. The 1998 Financial Statement Restatements

123. On April 30, 1998, Defendants issued a press release announcing

Warnaco's financial results for the first quarter of fiscal year 1998, ended April 4, 1998 th (the "April 30th Press Release"). In the April 30 Press Release, Defendants again reported so-called "record" net income of $24.7 million, or $0.39 per diluted share, a

36.4% increase over the comparable period in 1997. Wachner and Finkelstein were listed as contact persons on the April 30th Press Release.

124. Warnaco's first quarter 1998 earnings per share of $0.39 appeared to exceed the consensus estimate of $0.37.

125. On May 19, 1998, the Company filed with the SEC Warnaco's Quarterly

Report on Form 10-Q for the period ended April 4, 1998 (the "First Quarter 1998 10-Q").

The First Quarter 1998 10-Q repeated the same materially false and misleading financial information that was contained in the April 30th Press Release. In addition, Defendants falsely represented in the First Quarter 1998 10-Q that inventory was valued at $606.3 million. The Company also reported that its cost of goods sold was $270.9 million.

Further the Company represented that:

The accompanying unaudited consolidated condensed financial statements have been prepared in accordance with generally accepted accounting principles and Securities and Exchange Commission rules and regulations for interim financial information. . . . In the opinion of the Company, the accompanying consolidated condensed financial statements contain all adjustments (all of which were of a normal recurring nature) necessary to present fairly the financial position of the Company as of April 4, 1998. . . .

Finkelstein and Silverstein signed the First Quarter 1998 10-Q.

48 126. The statements identified above in the April 30th Press Release and the

First Quarter 1998 10-Q were materially false and misleading. In Warnaco's 1998 10-K filed on April 2, 1999, the Company included "revised" financial results for the first quarter of 1998. As excerpted from The Wamaco Group, Inc. Financial Summary attached hereto as Exhibit 1, the "revised" financial results dramatically reversed what

Warnaco claimed was a "record" quarter, in particular:

(i) contrary to the Company's representations, Warnaco's financial

results were not prepared in accordance with GAAP;

(ii) the Company's net income, as revised, revealed that the Company

actually suffered a loss of $40.2 million for the first quarter 1998,

and not a profit of $24.7 million as previously reported. Thus, the

Company had overstated its net income by $65 million or 262%.

Accordingly, as revised, the Company reported a loss of ($0.63)

per share for the year rather than a profit per share of $0.39 per

share; and

(iii) the Company's cost of goods sold, as revised, increased by $28.8

million or 10.6%.

127. Warnaco's "revised" loss per share of ($0.63) fell drastically below the previously reported profit per share of $0.39 and the consensus estimate of $0.37.

128. On May 16, 2000, Warnaco filed with the SEC Warnaco's Amended

Quarterly Report on Form 10-Q/A for the period ended April 4, 1998 (the "Amended

First Quarter 1998 10 Q/A"). In the Amended First Quarter 1998 10-Q/A, Warnaco revealed that its financial results described above were actually "restated." Further, the

49 Company disclosed the explanation for the substantial write-downs to its inventory components of work in progress and finished goods. Specifically, the Company had overstated the value of its inventory for the first quarter 1998 by $109.5 million or

18.06%. Thus, Warnaco's inventory, as restated, was valued at $496.8 million rather than

$606.3 million as previously reported. The following chart illustrates the differences between Warnaco's reported and actual inventory balances for the first quarter of 1998:

Excerpts From Attached Exhibit 1 - Warnaco's Financial Statements (000's omitted)

(000s) (000s) Reported Restated Quarter Quarter (000s) End End Inventories 4/4/98 4/4/98 $ Diff. % Diff.

Finished Goods $412,757 $363,366 $49,391 11.97%

Work in Progress $115,433 $55,343 $60,090 52.06%

Raw Materials $78,091 $78,091

Total Inventories $606,281 $496,800 $109,481 18.06%

129. The statements identified in paragraphs 123 and 125 were also materially false and misleading at the time they were made for the reasons identified below in paragraphs 159 (a)-(g), 160, 162, 170 and 171.

130. On July 29, 1998, Defendants issued a press release announcing

Warnaco's financial results for the second quarter of fiscal year 1998, ended July 4, 1998

(the "July 29th Press Release"). In the July 291h Press Release, Defendants reported so- called "record" net income of $25.5 million, or $0.40 per diluted share, a 48.7% increase

50 over the comparable period in 1997. Wachner and Finkelstein were listed as contact persons on the July 29th Press Release.

131. For the second quarter of 1998, Warnaco's reported earnings per share of

$0.40 appeared to beat the Street consensus of $0.39.

132. On August 18, 1998, the Company filed with the SEC Warnaco's

Quarterly Report on Form 10-Q for the period ended July 4, 1998 (the "Second Quarter

1998 10-Q"). The Second Quarter 1998 10-Q repeated the same materially false and misleading financial information that was contained in the July 29 9' Press Release. In addition, Defendants falsely represented in the Second Quarter 1998 10-Q that inventory was valued at $624.1 million. The Company also reported that its cost of goods sold was

$287.9 million. Further, the Company represented that:

The accompanying unaudited consolidated condensed financial statements have been prepared in accordance with generally accepted accounting principles and Securities and Exchange Commission rules and regulations for interim financial information. . . . In the opinion of the Company, the accompanying consolidated condensed financial statements contain all adjustments (all of which were of a normal recurring nature) necessary to present fairly the financial position of the Company as ofJuly 4, 1998 . . . .

Finkelstein and Silverstein signed the Second Quarter 1998 10-Q.

133. The statements identified above in the July 29 th Press Release and the

Second Quarter 1998 10-Q were materially false and misleading. In Warnaco's 1998 10-

K filed on April 2, 1999, the Company included "revised" financial results for the second quarter of 1998. As excerpted from The Warnaco Group, Inc. Financial Summary attached hereto as Exhibit 1, the revised financial results again dramatically reversed what

Warnaco previously claimed was a "record" quarter. In particular:

51 (i) contrary to the Company's representations, Warnaco's financial

results were not prepared in accordance with GAAF';

(ii) the Company's net income, as revised, revealed that the Company

earned only $12.9 million for the second quarter, not $25.5 million.

Thus, the Company had overstated its net income by over $12.5

million or 49%, Accordingly, as revised, the Company reported

earnings per share of $0.20 for the year rather than a profit of $0.40

per share, a percentage change of 50%; and

(iii) the Company also increased cost of goods sold by $19.4 million or

6.8%.

134. Warnaco's "revised" earnings per share of $0.20 were only half of the previously reported $0.40 per share and fell significantly below the Street consensus of

$0.39 per share.

135. On May 16, 2000, Warnaco filed with the SEC Warnaco's Amended

Quarterly Report on Form 10-Q/A for the period ended July 4, 1998 (the "Amended

Second Quarter 1998 10-Q/A"). In the Amended Second Quarter 1998 10-Q/A, Warnaco revealed that its financial results described above were actually "restated." Further, the

Company disclosed the explanation for the substantial write-downs to its inventory components of work in progress and finished goods. Specifically, the Company had overstated the value of its inventory for the second quarter by $120.7 million or 19.3%.

Thus, Warnaco's inventory, as restated, was truly valued at $503.4 million rather than

$624.1 million as previously reported. The following chart illustrates the differences

52 between Warnaco's reported and actual inventory balances for the second quarter of

1998:

Excerpts From Exhibit 1 — Warnaco's Financial Statements (000's omitted)

(000s) (000s) Reported Restated Quarter Quarter (000s) End End Inventories 7/4/98 7/4/98 S Diff. % Diff.

Finished Goods $422,579 5367,552 555.027 13.02%

Work in Progress 5131,882 566,257 565,625 49.76%

Raw Materials $69,612 $69,612- -

Total Inventories $624,073 $503,421 $120,652 19.33%

136. The statements identified in paragraphs 130 and 132 were also materially

false and misleading at the time they were made for the reasons identified below in

paragraphs 159 (a)-(g), 160, 162, 170 and 171.

137. On October 26, 1998, Defendants issued a press release announcing

Warnaco's financial results for the third quarter of fiscal year 1998, ended October 3,

1998 (the "October 26th Press Release"). In the October 26th Press Release, Defendants

reported net income of $44.1 million, or $0.70 per diluted share, a 37.5% increase over

the comparable period in 1997. Wachner and Finkelstein were listed as contact persons on the October 26th Press Release.

138. Warnaco's reported earnings per share of $0.70 appeared to exactly meet the consensus estimate of $0.70.

53 139. In an analyst report dated October 26, 1998, M. Whitfield of Tucker

Anthony & R.L. Day deemed Warnaco's well-controlled inventories as one of the key points of the third quarter 1998.

140. On November 17, 1998, the Company filed with the SEC Warnaco's

Quarterly Report on Form 10-Q for the period ended October 3, 1998 (the "Third Quarter

1998 10-Q"). The Third Quarter 1998 10-Q repeated the same materially false and misleading financial information that was contained in the October 261h Press Release. In addition, Defendants falsely represented in the Third Quarter 1998 10-Q that inventory was valued at $625.5 million. The Company also reported that its cost of goods sold was

$357.2 million. Further, the Company represented that:

The accompanying unaudited consolidated condensed financial statements have been prepared in accordance with generally accepted accounting principles and Securities and Exchange Commission rules and regulations for interim financial information. . . . In the opinion of the Company, the accompanying consolidated condensed financial statements contain all adjustments (all of which were of a normal recurring nature) necessary to present fairly the financial position of the Company as of October 3, 1998 . . . .

Finkelstein and Silverstein signed the Third Quarter 1998 10-Q.

141. The statements identified above in the October 26 th Press Release and the

Third Quarter 1998 10-Q were materially false and misleading. In Warnaco's 1998 10-K filed on April 2, 1999, the Company included revised financial results for the third quarter of 1998. As excerpted from The Warnaco Group, Inc. Financial Summary attached hereto as Exhibit 1, the "revised" financial results again dramatically reversed

Warnaco's previously reported results. In particular:

(i) contrary to the Company's representations, Warnaco's financial

results were not prepared in accordance with GAAP;

54 (ii) the Company's third quarter 1998 net income, as revised, revealed

that the Company had only earned $26.9 million, not $44.1 million.

Thus, the Company had overstated its net income by over $17.2

million or 39%. Accordingly, as restated, the Company had

earnings per share of $0.43 for the quarter rather than $0.70 per

share as previously reported; and

(iii) The Company's cost of goods sold, as revised, also increased by

$26.5 million or 7.4 %.

142. Warnaco's "revised" third quarter 1998 earnings per share of $0.43 fell significantly below the previously reported $0.70 per share and the Street consensus.

Thus, Defendants would have missed earnings expectations by 38%, but for the accounting fraud.

143. On May 16, 2000, the Company filed with the SEC Warnaco's Amended

Quarterly Report on Form 10-Q/A for the period ended October 3, 1998 (the "Amended

Third Quarter 1998 10-Q/A"). In the Amended Third Quarter 1998 10-Q/A, Warnaco finally revealed that its financial results described above were actually "restated".

Further, the Company disclosed for the first time the substantial write-downs to its inventory components of work in progress and finished goods. Specifically, the

Company had previously overstated the value of its inventory for the third quarter by

$132.7 million or 21%. Thus, Warnaco's inventory, as restated, was truly valued at

$492.8 million rather than $625.5 million as previously reported. The following chart illustrates the differences between Warnaco's reported and actual inventory balances for the third quarter of 1998:

55 Excerpts From Attached Exhibit 1 — Warnaco's Financial Statements (000's omitted)

(000s) (000s) Reported Restated Quarter Quarter (000s) End End Inventories 10/3/98 10/3/98 $ Diff. % Diff.

Finished Goods $415,514 $354,400 $61,114 14.71%

Work in Progress $151,638 $80,034 $71,604 47.22%

Raw Materials $58,393 $58,393

Total Inventories $625,545 $492,827 $132,718 21.22%

• 144. The statements identified in paragraphs 137 and 140 were also materially false and misleading at the time they were made for the reasons identified below in paragraphs 159 (a)-(g), 160, 162, 170 and 171.

145. On March 2, 1999, Defendants caused Warnaco to issue a press release announcing Warnaco's financial results for the fourth quarter and fiscal year 1998, ended

January 2, 1999 (the "March 2nd Press Release"). Defendants stated:

Included in the fiscal year is the early adoption of the change in accounting for start-up costs that writes-off non-cash accumulated costs previously deferred, relating to the start-up of new and expanded manufacturing operations. The amount of this charge in fiscal year 1998 is $104.8 million, net of tax. In connection with the inventory costs related to start-up activities and write-offs, $35.3 million, net of tax, and $23.2 million, net of tax, have been reflected in the statement of operations for fiscal years 1997 and 1996, respectively.

Wachner and Finkelstein were listed as contacts on the March 2 nd Press Release.

146. The March 2nd Press Release was materially misleading at the time it was made because the Company failed to disclose:

56 (1) the inventory costs related to start-up activities "reflected" in the

statement of operations for fiscal years 1997 and 1996 actually

resulted in a restatement of the Company's financials for fiscal

years 1997, 1996 and the quarterly periods during fiscal year 1997

and 1998; and

(ii) the "inventory costs" were not costs related to start-up activities,

but costs resulting from an overvaluation of the Company's

inventory and its failure to write down inflated or impaired

inventory during the appropriate period.

147. On April 2, 1999, Defendants filed with the SEC Warnaco's Annual

Report on Form 10-K405 for the period ended January 2, 1999 (the "1998 10-K"). In the

1998 10-K, Warnaco revealed that it needed to "revise" its year-end results for fiscal years 1997 and 1996. In particular, the Company reported that (dollars in thousands, excluding share data):

As noted above, the Company early adopted SOP 98-5 in fiscal 1998. In connection with the adoption of the new accounting standard, an extensive effort was undertaken to identify all start-up related production and inefficiency costs that had previously been deferred. Over the last six years, the Company has opened or expanded 10 manufacturing facilities. In addition, to support anticipated future growth, the Company opened 2 new manufacturing facilities during 1998 for a total of 12 new facilities. This resulted in the Company's incurring plant inefficiencies and other start-up related costs resulting from high turnover and related training and other costs. Such start-up related production and inefficiency costs have been classified in other assets and inventories. Because certain such costs identified in this process related to fiscal 1997 and 1996 activities, such prior year consolidated financial statements have been revised to reflect additional costs of goods sold of $57,017 in fiscal 1997 ($35,351 after tax or $0.65 per diluted share and $0.67 per basic share) and $37,983 in fiscal 1996 ($23,170 after tax or $0.45 per diluted and basic share). In fiscal 1997, income (loss) before income taxes, net income (loss), basic earnings

57 per share and diluted earnings per share were $(20,100), $(12,319), $(0.23) and $(0.23), respectively. Before the revision, these amounts were $36,917, $23,032, $0.44 and S0.42, respectively. In fiscal 1996, income (loss) before income taxes, net income (loss), basic earnings per share and diluted earnings per share were $(44,443), $(31,409), $(0.61) and $(0.61), respectively. Before the revision, these amounts were $(6,460), $(8,239), $(0.16) and $(0.16), respectively. In addition, fiscal 1998 results have been similarly adjusted to recognize such current year costs in cost of goods sold ($49,668 or $32,135 after tax) (see Note 18).

148. In Note 18 to the Company's 1998 10-K, the Company stated that it needed to "revise" its results for the first three quarters of 1998. Specifically, the

Company stated (dollars in thousands, excluding share data):

The Companys fiscal 1998 quarterly results of operations have been revised with respect to the effects of the early adoption of SOP 98-5 and the accounting for other start-up related inventory production and inefficiency costs, as described in Note 1. Gross profit, before revisions for the first, second, third and fourth quarters was $148,353, $150,930, $186,931 and $141,425, respectively. The revisions decreased gross profit by $28,803, $19,434, $26,539 and $15,648 and resulted in revised gross profit of $119,550, $131,496, 5160,392 and $125,777 for the first, second, third and fourth quarters, respectively. Income (loss) before cumulative effect of a change in accounting before revisions for the first, second, third and fourth quarters was $24,723 ($0.39 per diluted share), $25,514 ($0.40 per diluted share), $44,115 (S0.70 per diluted share), and $(21,751) ($0.37 per diluted share), respectively. The revisions decreased income before the cumulative effect of a change in accounting by $18,635 ($0.29 per diluted share), $12,574 ($0.20 per diluted share), $17,171 ($0.27 per diluted share) and $10,124 ($0.17 per diluted share) and resulted in revised income (loss) before the cumulative effect of a change in accounting of $6,088 ($0.10 per diluted share), $12,940 ($0.20 per diluted share), $26,944 ($0.43 per diluted share) and $(31,875) ($0.54 per diluted share) for the first, second, third and fourth quarters, respectively. Net income (loss) before revisions for the first, second, third and fourth quarters was $24,723 ($0.39 per diluted share), $25,514 ($0.40 per diluted share), $44,115 ($0.70 per diluted share) and $(21,751) ($0.37 per diluted share), respectively. The revisions changed net income (loss) by $64,885 ($1.02 per diluted share), $12,574 (50.20 per diluted share), $17,171 ($0.27 per diluted share) and $10,124 (S0.17 per diluted share) and resulted in a net loss of $40,162 ($0.63 per diluted share) for the first quarter and net income of $12,940 ($0.20 per diluted share) and $26,944 ($0.43 per

58 diluted share) for the second and third quarters and a net loss of $31,875 ($0.54 per diluted share) for the fourth quarter, respectively.

149. The Company also included in Note 18 of the 1998 10-K that it had to

"revise" its 1997 quarterly financial results. In particular, the Company stated (dollars in

thousands, excluding share data):

The Company's fiscal 1997 quarterly results of operations have been revised with respect to accounting for other start-up related production and inefficiency costs as described in Note 1. Gross profit, before revisions for the first, second, third and fourth quarters was $92,742, $99,305, $124,003 and $116,171, respectively. The revisions decreased gross profit by $10,951, $15,009, $13,980 and $17,077, respectively and resulted in revised gross profit of $81,791, $84,296, $110,023 and $99,094 for the first, second, third and fourth quarters, respectively. Net income (loss) before revisions for the first, second, third and fourth quarters was $18,126, ($0.34 per diluted share), $17,155 ($0.32 per diluted share), $32,081 ($0.60 per diluted share) and ($44,330) ($0.77 per diluted share), respectively. The revisions decreased net income (loss) by $6,790 ($0.13 per diluted share), $9,306 ($0.17 per diluted share), $8,668 ($0.16 per diluted share) and $10,587 ($0.19 per diluted share) and resulted in net income (loss) of $11,336 ($0.21 per diluted share), $7,849 ($0.15 per diluted share), $23,413 ($0.44 per diluted share) and ($54,917) ($0.96 per diluted share), for the first, second, third and fourth quarters, respectively.

150. Further, the Company stated in its 1998 10-K that its inventories "are stated at the lower of cost or market, cost being determined on a first-in, first-out basis."

Wachner and Finkelstein signed the 1998 10-K.

151. The Company's statements in the 1998 10-K set forth above were materially false and misleading when made because:

(i) the inventory costs related to start-up activities which resulted in a

revision of fiscal years 1997 and 1996 and the interim periods of

fiscal years 1997 and 1998 actually resulted in a restatement for

those periods;

59 (ii) the "inventory costs" were not costs related to start-up activities,

but costs resulting from an overvaluation of its inventory and its

failure to write down inflated/impaired inventory during the

appropriate period; and

(iii) the restatements resulted from the known but undisclosed material

weakness or reckless disregard of such a material weakness in the

Company's Intimate Apparel Division inventory costing control

system.

152. Even in announcing the need for a revision, Defendants continued to conceal material information in the March 2nd Press Release and the 1998 10-K.

Nowhere in the March 2' Press Release or the 1998 10-K did the Company admit that it actually had to "restate" financial results for its failure to comply with GAAP during fiscal years 1996, 1997 and 1998. Further, the Company's March 2nd Press Release and the 1998 10-K failed to reveal the real reason behind the revisions, which were later characterized as restatements, which was Warnaco's failure to properly control and value its inventory. Rather the March 2" Press Release and the 1998 10-K misled the investing public by attributing the "revisions" entirely to its early adoption of a change in accounting principle.

153. However, contrary to Defendants' representations, Statement of Position

98-5 ("SOP 98-5"), Reporting on the Costs of Start-Up Activities would not have allowed for the Company's restatements. SOP 98-5 provides guidance on the financial reporting of start-up costs and organization costs and requires such costs to be expensed as incurred. SOP 98-5 became effective for financial statements for fiscal years beginning

60 after December 15, 1998, but earlier application was encouraged in fiscal years for which annual financial statements had previously not been issued (i.e., it would have been acceptable for Wamaco to apply it in fiscal 1998 but not in prior years). However, SOP

98-5 at 21 expressly states, "Restatement of previously issued financial statements is not permitted." (Emphasis added.) Therefore, Warnaco was not permitted to restate its

1996 and 1997 results as a result of SOP 98-5. The need for the restatement in fiscal years 1996 and 1997 stemmed from inventory problems at Warnaco's Intimate Apparel

Division and was not due to SOP 98-5, as Wamaco originally reported. Similarly, with respect to the quarterly periods in fiscal year 1998 the restatement was not entirely due to

SOP 98-5 as previously reported.

154. The statements identified in paragraphs 145, 147-150 were also materially false and misleading at the time they were made for the reasons identified below in paragraphs 159 (a)-(g), 160, 162, 163, 169, 170, 171 and 174.

C. The 1999 Financial Statement Restatement

155. On March 31, 2000, Defendants filed with the SEC Warnaco's Annual

Report on Form 10-K for the fiscal year ended January 1, 2000 (the "1999 10-K"). In the

1999 10-K, Defendants falsely represented that Warnaco had accounts receivable of

8314.9 million and that its cost of goods sold was $1.41 million. In addition, the

Company reported that its inventory was valued at $734.4 million. Wachner and

Finkelstein signed the 1999 10-K.

61 156. In the 1999 10-K, the Company further stated that "inventories are stated

at the lower of cost or market, cost being determined principally on a first-in, first-out

basis."

157. The Company maintained its false and misleading portrayal of its

financials in its amended filings for fiscal year 1999, specifically, its Amended Annual

Report on Form 10-K/A for the period ended January 1, 2000 filed on April 3, 2000 and

the Amended Annual Report filed on Form 10-K/A for the period ended January 1, 2000

filed with the SEC on May 16, 2000. Wachner and Finkelstein signed both amended 10-

Ks.

158. The statements identified above in the 1999 10-K and the amended 1999

10-Ks were materially false and misleading. On April 20, 2001, Wamaco filed with the

SEC its Amended Quarterly Report on Form 10-Q for the period ended September 30,

2000 (the "Amended Third Quarter 2000 10-Q/A"). In the Amended Third Quarter 2000

10-Q/A, the Company dramatically reversed its previously reported results for fiscal year

1999 (despite having previously amended these results on two separate occasions, i.e.,

April 3, 2000 and May 16, 2000). In particular:

(i) the Company had accounts receivable of only $250.9 million and

not the $314.9 million as previously reported. Thus, the Company

had overstated the value of its accounts receivable by over $64

million, or 20.4%.

(ii) the Company had overstated its inventory by $11.9 million or

2.1%. Thus Warnaco's inventory as restated was truly valued at

$722.5 million and not the $734.4 million as previously reported;

62 and

(iii) the Company increased cost of goods sold by $12.5 million.

159. The statements identified above in paragraphs 111, 113, 117, 118, 123, 125,

130, 132, 137, 140, 145, 147-150, 155-157 were materially false and misleading because:

a. Defendants knowingly or recklessly authorized the overproduction

of inventory in order to meet numbers Wachner provided to the Street and entered into

agreements with various manufacturing plants to over-produce merchandise. The excess

inventory built up and quickly became obsolete as sales representatives were unable to

sell all the merchandise being produced. As detailed herein, Defendants resorted to using

various methods such as "dialing for dollars" in order to simply move inventory out of

Warnaco warehouses to department stores;

b. Defendants knowingly or recklessly improperly capitalized

administrative expenses to inventory under the UNICAP provisions of the Internal

Revenue Code instead of currently expensing such costs, which improperly increased the

value of inventory and materially understated the Company's expenses for each quarter

during the Class Period;

c. Defendants knowingly or recklessly overstated the value of its

distressed, excess, slow-moving or obsolete inventory by: 1) failing to conduct physical

inventory counts twice a year; 2) failing to write-down its distressed, excess, obsolete and

slow-moving inventory; and 3) leasing hundreds of thousands of square feet in numerous

warehouses in order to store excess and obsolete inventory in such warehouses;

d. Defendants knowingly or recklessly improperly accounted for excess or obsolete or distressed inventory by engaging in the "pull, pack and hold"

63 practice of pulling an order from inventory shelves, packing the order for shipment and holding the order in a Warnaco warehouse all the while booking the order as revenue in violation of GAAP;

e. Defendants knowingly or recklessly allowed for the build-up of excess, obsolete and distressed inventory by ignoring the clear, but undisclosed, warnings of Warnaco's senior management;

f. Defendants knowingly or recklessly failed to establish a distressed inventory reserve and thus avoided taking charges to earnings during the Class Period and inflated gross profit and net income during that time; and

g. Defendants knew or recklessly disregarded that the Company's financial statements were materially false and misleading because defendants failed to report financial results pursuant to SEC rules and regulations and the financial statements did not contain all adjustments necessary to present fairly the financial position of the

Company given the defendants' knowing or reckless disregard of the build-up of distressed, excess and obsolete inventory.

The Truth Begins to Emerge

160. On May 16, 2000, Defendants filed amended financial reports for fiscal years 1998 and 1999 and the first, second and third quarters of fiscal years 1998 and

1999. Defendants also admitted that Warnaco had actually "restated" its financial results for fiscal years 1996 and 1997 as opposed to merely "revised" said financial results.

Defendants not only notified investors and the market for the first time that Warnaco's financial results were restated, but also changed its reasons for the restatements. The

64 Company no longer attributed the restatement of fiscal years 1996 and 1997 years and the

1997 quarterly results to its early adoption of SOP 98-5. Further, the Company no longer attributed the adoption of SOP 98-5 as the sole reason for the 1998 quarterly restatement.

The Company's "revised" reason appeared in Note 1 in the 1998 10-K/A where

Defendants stated (dollars in thousands, excluding share data):

* * *

In connection with the fiscal 1998 year-end closing, the Company determined that in fiscal 1996, 1997 and the first three quarters of 1998, as merchandise was sold, inventories were relieved at less than actual cost per unit, leaving an accumulation of inventory costs. As a result, costs related to fiscal 1997 and 1996 activities have been restated to reflect additional or $0.65 per diluted share and $0.67 per basic share) and $37,983 in fiscal 1996 ($23,170 after tax or $0.45 per diluted and basic share). In fiscal 1997, restated income (loss) before income taxes, net income (loss), basic earnings per share and diluted earnings per share were $(20,100), $(12,319), $(0.23) and S(0.23), respectively. Before the restatement, these amounts were $36,917, $23,032, $0.44 and $0.42, respectively. In fiscal 1996, restated income (loss) before income taxes, net income (loss), basic earnings per share and diluted earnings per share were $(44,443), $(31,409), $(0.61) and $(0.61), respectively. Before the restatement, these amounts were $(6,460), $(8,239), $(0.16) and $(0.16), respectively. In addition, fiscal 1998 interim results have been similarly restated to recognize an adjustment for such current year costs in cost of goods sold ($49,668 or $32,135 after tax) (see Note 18). This restatement resulted from flaws in the Company's Intimate Apparel Division inventory costing control system that have since been addressed. Actions taken and procedures implemented by the Company to address these issues included the development of a new inventory costing process to supplement the manufacturing costing process and effecting improvements in inventory costing monitoring systems and controls, including increasing the frequency of physical inventory counts and the verification of actual costs.

161. The Company further admitted in its 1998 10-K/A:

The restatement described in Note 1 resulted from flaws in the Company's Intimate Apparel Division inventory costing control system that have since been corrected. As discussed in Note 1, the Company had rapidly expanded its manufacturing capacity over a period prior to fiscal 1998, hiring and training over 15,000 people in Mexico and the Caribbean Basin.

65 The Companys infrastructure, personnel and systems were overburdened by the size and scope of this rapid expansion and by the increased manufacturing volume to meet consumer demand. At the same time, as reported in the Companys fiscal 1996 Form 10-K, commencing in fiscal 1996, the Company determined to consolidate and integrate its two intimate apparel divisions -- Warner's and Olga. These two intimate apparel units had separate manufacturing facilities, separate financial and administrative personnel and separate cost systems. The integration of these two independent operations and systems further burdened already extended personnel and systems. The Company anticipated that it would address any shortcomings in its inventory costing system as part of the implementation of new and enhanced hardware and software applications in connection with the Company's year 2000 compliance program. During the relevant period, substantially all of the Company's financial and information systems personnel were committed to the Company's SAP implementation and Year 2000 compliance efforts, which consumed a significant portion of their time. When the Company's SAP implementation was delayed in 1998 and ultimately replaced with the ACS system, the Company developed a new inventory costing process as an interim measure pending the selection and implementation of the Companys new software which incorporated an integrated cost accounting package. The Company now has a new inventory costing system and new monitoring procedures for its Intimate Apparel Division that are designed to ensure that the problems that led to the restatement of inventory accounts will not be repeated and will function to reduce to a low level the risk that errors may occur and not be detected within a timely period.

162. In Note 18 of the1998 10-K/A, the Company further admitted with respect to its 1998 quarterly results (dollars in thousands, excluding share data):

The Company's fiscal 1998 quarterly results of operations have been restated with respect to the effects of the early adoption of SOP 98-5 and for a charge related to an inventory adjustment, as described in Note 1. Gross profit, before restatements for the first, second, third and fourth quarters was $148,353, $150,930, $186,931 and $141,425, respectively. The restatements decreased gross profit by $28,803, $19,434, $26,539 and $15,648 and resulted in restated gross profit of $119,550, $131,496, $160,392 and $125,777 for the first, second, third and fourth quarters, respectively. Income (loss) before cumulative effect of a change in accounting before restatements for the first, second, third and fourth quarters was $24,723 ($0.39 per diluted share), $25,514 ($0.40 per diluted share), $44,115 ($0.70 per diluted share), and $(21,751) ($0.37 per diluted share), respectively. The restatements decreased income before the cumulative effect of a change in accounting by $18,635 ($0.29 per diluted

66 share), 312,574 (30.20 per diluted share), 317,171 (30.27 per diluted share) and $10,124 (30.17 per diluted share) and resulted in restated income (loss) before the cumulative effect of a change in accounting of $6,088 (30.10 per diluted share), 312,940 ($0.20 per diluted share), $26,944 (30.43 per diluted share) and 3(31,875) (30.54 per diluted share) for the first, second, third and fourth quarters, respectively. Net income (loss) before restatements for the first, second, third and fourth quarters was 324,723 ($0.39 per diluted share), $25,514 (30.40 per diluted share), $44,115 ($0.70 per diluted share) and $(21,751) (30.37 per diluted share), respectively. The restatements changed net income (loss) by 364,885 (31.02 per diluted share), S12,574 ($0.20 per diluted share), 317,171 ($0.27 per diluted share) and $10,124 (30.17 per diluted share) and resulted in a restated net loss of $40,162 ($0.63 per diluted share) for the first quarter and restated net income of $12,940 ($0.20 per diluted share) and $26,944 ($0.43 per diluted share) for the second and third quarters and a restated net loss of 331,875 ($0.54 per diluted share) for the fourth quarter, respectively.

163. Additionally, in Note 18 of the 1998 10-K/A, the Company further admitted with respect to its 1997 quarterly results (dollars in thousands, excluding share data):

The Company's fiscal 1997 quarterly results of operations have been restated with respect to a charge related to an inventory adjustment as described in Note 1. Gross profit, before restatements for the first, second, third and fourth quarters was $92,742, 399,305, $124,003 and 3116,171, respectively. The restatements decreased gross profit by $10,951, $15,009, 313,980 and $17,077, respectively and resulted in restated gross profit of $81,791, $84,296, $110,023 and $99,094 for the first, second, third and fourth quarters, respectively. Net income (loss) before restatements for the first, second, third and fourth quarters was $18,126, ($0.34 per diluted share), $17,155 (30.32 per diluted share), $32,081 ($0.60 per diluted share) and (344,330) ($0.77 per diluted share), respectively. The restatements decreased net income (loss) by $6,790 ($0.13 per diluted share), 39,306 ($0.17 per diluted share), $8,668 (30.16 per diluted share) and $10,587 ($0.19 per diluted share) and resulted in restated net income (loss) of $11,336 ($0.21 per diluted share), 37,849 (30.15 per diluted share), $23,413 ($0.44 per diluted share) and ($54,917) ($0.96 per diluted share), for the first, second, third and fourth quarters, respectively.

67 164. As a result of the Company's disclosure on May 16, 2000, Warnaco's stock fell from a closing price of $8.56 on May 16, 2000 to $8.00 on May 18, 2000, a drop of 6.5%.

165. Despite this new information relative to fiscal years 1996 and 1997 and the first three quarters of 1998, Warnaco still kept hidden the true state of affairs at the

Company. Indeed, the Company blithely and falsely claimed in the 1998 10-KJA that the

"restatement resulted from flaws in the Company's Intimate Apparel Division inventory costing control system that have since been addressed." (Emphasis added.)

166. On July 20, 2000, before the opening of the market, despite the

Company's assurances in its SEC filings only two months before regarding the inventory problems being addressed, the Company announced that it anticipated taking an after-tax charge in the second quarter of 2000 of approximately $60 million to $70 million.

Specifically, the Company stated:

The Company said it anticipates taking an after-tax charge in the second quarter of 2000 of approximately $60 to $70 million in connection with the global operating initiatives recently launched. . . . Commenting on the outlook for Warnaco's 2000 fiscal year, the Company said that it expects to report operating earnings for the 2000 fiscal year, before charges and investment gains, in the range of $0.26 to $0.36 per diluted share with a commensurate reduction in anticipated earnings for the second quarter of 2000. The revised outlook anticipates increased interest expense and the amortization of transaction fees relating to the new financing agreements when completed, additional markdowns in connection with further inventory reductions... . (Emphasis added.)

167. As a result of the Company's July 20, 2000 disclosure, the Company's stock dropped from a closing price of $6.75 on July 19, 2000 per share to a low of $4.94 per share on July 20, 2000, a decrease of 26.8% on volume of 2.8 million shares, over six times the average trading volume.

68 Further Details are Revealed

168. On August 4, 2000, Credit Suisse First Boston Corporation issued an

analyst report revealing further details provided by the Company concerning its write-

down of excess and obsolete inventory when it announced its results for the second

quarter of fiscal year 2000 (the "August 4 th Statement"). The August 4th Statement

• disclosed:

(i) Second quarter earnings from operations fell to $0.14 from $0.49. • The Company attributed the decline to heavy markdowns and off price sales in most of the company's businesses, particularly Calvin Klein intimate apparel, Calvin Klein Jeans, and Chaps;

(ii) The intimate apparel EBITDA margin dropped to 13.0% from 22.3% owing to the continued liquidation of excess inventory; and

(iii) The Company had to write off $60 million in excess, obsolete or slow-moving inventory.

169. On March 29, 2001, the Company revealed that despite having restated its

results for fiscal years 1997 approximately eight months earlier, it would once again have

to restate its financials for fiscal years 1997. In particular, the Company stated:

[']t would restate its January 3, 1998 balance sheet reducing equity by $26 million. This restatement reflects adjustments to accounts receivable reserves and other items — net that the Company has determined to be appropriate at that date . . . .

170. In addition, the Company reported that its "1998, 1999 and 2000 accounts

have been revised to be consistent with the accounting for matters that resulted in the

adjustment to retained earnings and other issues."

69 171. On April 17, 2001, Warnaco filed with the SEC its Annual Report on

Form 10-K for the year-ended December 30, 2000 (the "2000 10-K"). In the 2000 10-K, the Company revealed (dollars in thousands, excluding share data):

The Company restated January 3, 1998 stockholders' equity [net worth] by $26,000. The restatement reflects adjustments to increase accounts receivable reserves by $51,800 to provide for discounts, returns and allowances not previously reserved, to increase accrued liabilities by $6,300, to decrease inventory by $7,400, to decrease other assets by $9,500 . . . The 1998 and 1999 accounts have been revised to be consistent with the accounting for the matters that resulted in the adjustments to retained earnings, including in 1999, an increase of $12,400 in cost of goods sold, an increase of $5,300 in selling, general and administrative expenses and a decrease of $17,700 in income tax expense.

172. In the 2000 10-K, Warnaco further revealed that the SEC was "conducting an investigation to determine whether there have been any violations of the Securities

Exchange Act of 1934 in connection with the preparation and publication of various financial statements and reports."

173. In connection with Warnaco's 2000 10-K, the Company's independent auditors Deloitte & Touche LLP expressed "substantial doubt about its ability to continue as a going concern."

174. On April 20, 2001, the Company disclosed in its Amended Third Quarter

2000 10-Q/A that (dollars in thousands, excluding share data):

In connection with the issuance of its fiscal 2000 consolidated financial statements the Company restated January 3, 1998 stockholders' equity reducing the balance by $26,000. The effect of the restatement on the January 1, 2000 balance sheet was as follows: to increase accounts receivable reserves by $64.100 (sic) to provide for discounts, returns and allowances not previously reserved, to decrease inventory by $11,900, to decrease other assets by $8,600 to increase accrued liabilities by $8,100, partially offset by an increase to non-current deferred tax assets of $66,700 to provide for the tax effects of such adjustments and to eliminate tax accruals not required. The 1999 and 2000 accounts have been

70 revised to be consistent with the accounting for the matters that resulted in the adjustments to retained earnings.

XI. ADDITIONAL ALLEGATIONS OF SCIENTER

175. In addition to the allegations of actual knowledge and/or reckless disregard set forth above, each of the Individual Defendants had the opportunity to commit fraud and were highly motivated to participate in the scheme. Wachner, Finkelstein and

Silverstein had access to many of the internal reports including inventory tracking reports and stock reports. The inventory stock reports were issued from Warnaco headquarters to all sales representatives, distribution center managers and account executives. Further,

Defendants had access to the so-called "Warnaco bible." According to an article in

WWD dated February 10, 1998, Wachner had at her fingertips the so-called" 'Warnaco bible.'" Warnaco's "bible" is several hundred pages in length and outlines all layers of the business, including sales, market share, inventory and cash flow on a projected 12- month basis. The "bible" maps Warnaco's results of the past 12 years. In addition,

Wachner and Finkelstein were kept informed by top management of the various divisions, including its Forecasting and Planning Division, that Warnaco had problems with forecasting and the build-up of distressed, excess and obsolete inventory. Finkelstein, as the Company's CFO, was responsible for financial reporting and communications with the market. As CFO, many of the internal reports were prepared by the finance department under Finkelstein's direction. Wachner as CEO and President and Silverstein as General Counsel were responsible for the financial results and press releases issued by the Company.

71 176. Both Wachner and Finkelstein were listed as contact persons on the

Company's press releases. All three Individual Defendants signed Warnaco's filings with the SEC during the Class Period which contained Warnaco's materially false and misleading financial statements. Further, each Individual Defendant knowingly engaged in the scheme to defraud by increasing sales forecasts and production which defendant knew or were reckless in not knowing had resulted in distressed, excess, obsolete and slow-moving inventory which was not being written down or off in accordance with

GAAP and the Company's own publicly stated accounting policies.

177. Defendants were motivated to engage in the fraudulent practices alleged herein in order to, among other things, sell their holdings of Warnaco shares at inflated prices. Indeed, these Defendants collectively sold more than 5 million shares of Warnaco common stock during the Class Period at prices as high as $37 per share for total proceeds of as much as $161.9 million.

72 DEFENDANT TRANSACTION SHARES TRANSACTION PROCEEDS FROM DATE SOLD PRICE SALE Linda 5/9/00 13,799 58.31 5114,670 Wachner*** Wachner*** 5/8/00 19,241 $8.25 $158,738 Wachner*** 5/6/00 39,137 $8.88 $347,537 Wachner 12/31/99 475,500 511.875 55,646,563 Wachner 12/31/99 85,000 512.00 $1,020,000' Wachner 12/31/99 25,000 $12.25 5306,250 Wachner 12/31/99 9,000 $12.563 5113,063 Wachner 12/30/99 5,000 512.563 562,813 Wachner 12/30/99 80,500 $12.50 $1,006,250 Wachner 12/30/99 2,500 512.625 531,563 , Wachner 12/30/99 5,000 512.688 563,438 Wachner 12/30/99 12,500 512.75 $159,375 Wachner 12/30/99 50,000 512.875 5643,750 Wachner 12/30/99 55,000 513.00 5715,000 Wachner 12/30/99 14,500 513.125 5190,313 Wachner 12/30/99 40,000 513.313 5532,500 Wachner 12/29/99 71,000 513.313 5945,188 Wachner 12/29/99 45,074 $13.25 5597,231 Wachner* 5/6/99-5/9/99 52,313 528.56-529.25 51,494,059-51,530,155 Wachner* 8/10/98 33,997 536.22 51,231,371 Wachner* 3/6/98 13,400 $37.69-$37.813(a) 5505,013-5506,688 Wachner* 2/25/98 3,758,490 $30.38-$36.44 5114,182,926- 5136,959,376 Wachner*/** 1/28/98 4,550 $33.50-$33.875(a) $152,425-$154,131 TOTAL 4,910,501 5130,220,032- 5153,053,959 (a) Transaction price and proceeds based on market price per share for that date.

Stanley 5/18/99 6,962 528.81-528.88 5200,575-5201,063 Silverstein Silverstein* 5/6/99- 5/17/99 20,898 528.56-529.44 $596,847-$615,237 Silverstein* 8/10/98 652 $36.22 $23,615 Silverstein 8/6/98 10,000 $35.50 $355,000 Silverstein* 5/6/98-5/9/98 1,146 $42.06-$42.91 $48,201-$49,175 Silverstein 2/27/98 14,400 $36.64 $527,616 Silverstein* 2/25/98 48,983 $36.44 $1,784,941 TOTAL 103,041 53,536,795-53,556,647

William 12/30/99 29,956 512.74 5381,639 Finkelstein Finkelstein* 5/6/99-5/9/99 3,248 $28.56-$29.25 $92,763-$95,004 Finkelstein* 8/9/98 1,304 $36.22 $47,231 Finkelstein* 5/6/98-5/9/98 1,600 $42.06-$42.91 $67,296-$68,656 Finkelstein 3/3/98 30,000 $37.01 $1,110,000 Finkelstein* 2/25/98 98,629 $36.44 $3,594,041 TOTAL 164,737 $5,292,97045,296,571 'Non Open Market Sale; **indirect holding; ***Private Sale

73 178. The Individual Defendants' stock sales during the Class Period were unusual and suspicious in timing and amount because:

a. Prior to the Class Period, for the period between January 1996 through September 17, 1997, Wachner sold shares of Warnaco common stock only once, and just prior to the start of the Class Period, on August 9, 1997 at $33.19. At that time,

Wachner sold 28,518 shares, while retaining approximately 3.5 million shares. Thus,

Wachner sold less than 1% of her holdings. During fiscal year 1995 Wachner twice sold shares of her Warnaco common stock. On October 2, 1995 she sold 83,000 shares or

1.3% of her holdings at a price of $23.10 per share. Afler the October 2, 1995 sale,

Wachner retained 6,119,000 shares of Warnaco common stock. On March 2, 1995,

Wachner sold 300,000 shares or 7.3% of her holdings at $15.50 per share. After the

March 2, 1995 sale, Wachner retained 3,827,000 shares of Warnaco common stock.

During fiscal year 1994 Wachner engaged in only one sale of her Warnaco common stock. On May 4, 1994 Wachner sold 9,500 shares or 0.5% of her holdings at $35.00 per share. After the May 4, 1994 sale, Wachner retained 2,063,500 shares. During the Class

Period, however, Wachner sold 4,910,501 shares or 56% of her holdings for proceeds totaling approximately $130,220,032 to $153,053,959.

b. Prior to the Class Period, for the period between January 1996 through September 17, 1997, Silverstein had sold 9,147 shares at $33.19 on the open market on August 13, 1997. Silverstein's other trades between January 1996 through

September 17, 1997 involved either his indirect holdings of Warnaco stock or sales on the non open market. Silverstein sold 21,505 of his direct shares in non open market sales and 76,000 of his indirect shares prior to the Class Period. Silverstein sold no stock in

74 1995. On May 6, 1994, Silverstein sold 1,000 shares at $34.50 per share. After the May

6, 1994 sale, Silverstein retained 14,200 shares. On November 28, 1994, Silverstein sold

2,000 shares at $16.38 per share. After the November 28, 1994 sale, Silverstein retained

26,400 shares. During the Class Period, Silverstein sold 103,041 Warnaco shares or 60% of his holdings for proceeds totaling between $3,536,795 to $3,556,647. At the end of the

Class Period, Silverstein retained only 68,491 shares of his Warnaco common stock.

c. Prior to the Class Period, for the period between January 1996 through September 17, 1997, Finkelstein engaged in only two sales of his Warnaco stock holdings. Specifically, on March 3, 1997, Finkelstein sold 50,000 shares at a price of

$32.10 per share and on August 9, 1997 he sold 1,304 shares. Finkelstein sold no stock in 1995. On May 6 and May 13, 1994, Finkelstein sold a total of 13,000 shares at prices ranging from S34.00 to $34.38 per share. After the May 1994 sales, Finkelstein retained

64,000 shares of Warnaco common stock. During the Class Period, Finkelstein sold over

164,000 shares of Warnaco stock or approximately 49.3% of his holdings for proceeds of approximately $1.7 million. At the end of the Class Period, Finkelstein retained only

117,465 shares of Warnaco common stock.

d. Both Wachner and Finkelstein sold 1,130,020 shares for proceeds totaling between $14,529,936 and $14,584,032, respectively in the months after retaining new independent auditors but before the revelation of the real reasons for the massive inventory and earnings restatements.

e. Wachner sold 72,177 shares for proceeds of $620,945 over a period of four days just prior to Warnaco's release of its amended SEC filings in May

75 2000. Wachner's last trade during the Class Period occurred just seven days before

Warnaco's May 16, 2000 filings.

179. The Individual Defendants' positions with the Company made them privy

to confidential, propriety information concerning the Company's business, services,

markets, financial conditions and future business prospects.

180. Notwithstanding their duty to refrain from trading Warnaco stock under these circumstances, or to disclose the insider information prior to selling such stock,

Defendants sold, prior to disclosure of the material adverse facts described above, shares of Warnaco stock at prices that had been artificially inflated by Defendants' materially false representations.

181. The Individual Defendants engaged in a scheme to inflate the price of

Warnaco common stock to enhance the value of their holdings in Warnaco common stock.

182. The Individual Defendants were further motivated to engage in the fraudulent practices alleged herein in order to garner enormous bonuses and stock options during the ClassPeriod. The following chart illustrates the Individual Defendants' compensation:

76 Long Term Annual Compensation Compensation Year Salary Bonus Other Annual Restricted Securities Underlying All Other Compensation Stock Options/SARS Awards (shares)

Wachner 1999 2,721,326 $-- $361,886 $4,579, 380 (1) 3,250,000 $2,041 1998 2,677,700 6,000,000 356,964 6,537,006 (g) 5,058,490 1,440 1997 2,624,695 5,000,000 364,155 3,488,125 (h) 1,000,000 690

Finkelstein . 1999 400,000 -- 456,000 (f) 350,000 1,300 1998 400,000 293,000 499,968 (g) 248,629 960 1997 398,862 829,200 130,375 (h) 150,000 960

Silverstein 1999 350,000 -- 399,000 (f) 268,038 998 350,000 450,000 544,992 (g) 98,983 1997 348,766 777,127 65,875 (h) 225,056 ---

(f) Represents the dollar value of restricted stock awarded pursuant to the Supplemental Incentive Compensation Plan based on the Company's financial results and achievement of a return on equity that exceeded the Company's Peer Group median in fiscal 1998. Twenty-five percent of such shares vest on May 6, 2000, the remaining 75% of such shares vest 25% per year until fully vested on May 6, 2003. Participants are entitled to receive dividends attributable to the restricted shares.

(g) Represents the dollar value of restricted stock awarded pursuant to the Supplemental Incentive Compensation Plan based on the Company's financial results and achievement of a return on equity that exceeded the Company's Peer Group median in fiscal 1997. Twenty-five percent of such shares were vested on May 8, 1999, the remaining 75% of such shares vest 25% per year until fully vested on May 8, 2002. Participants are entitled to receive dividends attributable to the restricted shares.

(h) Represents the dollar value of restricted stock awarded pursuant to the Supplemental Incentive Compensation Plan based on the Company's financial results and achievement of a retum on equity that exceeded the Company's Peer Group median in fiscal 1996. Fifty percent of such shares were vested on May 9, 1999, the remaining 50% of such shares vest 25% per year until fully vested on May 9, 2001. Participants are entitled to receive dividends attributable to the restricted shares.

GAAP/SEC Regulations Violations

183. The Company's financial statements identified above were materially misleading when made by virtue of the Company's need to restate its financial results for fiscal years 1996, 1997, 1998 and 1999 and the first three quarters of 1997 and 1998.

77 Throughout the Class Period, Warnaco lacked and/or ignored proper financial controls in violation of GAAP.

184. The SEC requires that publicly-traded companies present their financial statements in accordance with GAAP. 17 C.F.R. § 210.4-01(a)(1). Financial statements filed with the SEC which are not prepared in accordance with GAAP "will be presumed to be misleading or inaccurate, despite footnote or other disclosures, unless the

Commission has otherwise provided." 17 C.F.R. § 210.4-01(a)(1).

185. Due to accounting improprieties described above, the Company presented its financial results and statements in a manner which violated GAAP, including the following fundamental accounting principles:

a. The principle that financial reporting should provide information that is useful to present and potential investors and creditors and others used in making rational investment, credit and similar decisions (FASB Statement of Concepts No. 1, 1134);

b. The principle that financial reporting should provide information about the economic resources of an enterprise, the claims to those resources, and effects of transactions, events and circumstances that change resources and claims to those resources (FASB Statement of Concepts No. 1, 40);

c. The principle that financial reporting should be reliable in that it represents what it purports to represent (FASB Statement of Concepts No. 2, In 58-59);

d. 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 (FASB Statement of Concepts No. 2,1] 79);

e. 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 (FASB Statement of Concepts No. 2,11195, 97);

• 78 f. The principle that revenues and related earnings should not be recognized until earned and that expenses should be recognized in the period incurred (FASB Statement of Concepts No. 5 and FASB Statement No. 5 — Accounting for Contingencies); and

g. The principle that accounts receivable must be reported in the financial statements at net realizable value (ARE3-43, Chapter 3A; FASB No. 5, Accounting for Contingencies).

186. GAAP also requires that inventories should be priced at lower of cost or

market and a loss representing the decline in the utility of the goods should be recognized

in the period in which the impairment occurs. (See ARB 43, Chapter 4 Statement 5).

Indeed, a "major objective of accounting for inventories is the proper determination of

•income through the process of matching appropriate costs against revenues." ($ee ARB

43, Chapter 4 Statement 2). "As used in the phrase lower of cost or market the term

market means current replacement cost (by purchase or by reproduction, as the case may be) except that: (1) Market should not exceed the net realizable value (i.e., estimated

selling price in the ordinary course of business less reasonably predictable costs of completion and disposal); and (2) Market should not be less than net realizable value reduced by an allowance for an approximately normal profit margin." (ARB 43, Chapter

4 Statement 6).

187. Warnaco even warranted in its SEC filings during the Class Period that it complied with GAAP in valuing its inventory. Specifically, in the 1997 10-K, 1998 10-K and the 1999 10-K, the Company stated that its Iiinventories are stated at the lower of cost, determined on a first-in-first-out basis, or market."

188. Wamaco had a responsibility to maintain sufficient accounting controls to accurately report its financial results. It is well settled that the representations made by a

79 company in its financial statements and in other financial disclosures to the public are the representations of that company's management. Indeed, even when a company issues audited financial statements together with the report of that company's independent auditors, that report always expressly provides that "the financial statements are the responsibility of [the company's] management."

189. According to SEC rules, to accomplish the objectives of accurately recording, processing, summarizing and reporting financial data, a company must establish an internal control structure. Section 13(b)(2) of the Exchange Act requires that

Warnaco:

(A) make and keep books, records, and accounts, which, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the issuer; and

(B) devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that -

(i) transactions are executed in accordance with management's general or specific authorization;

(ii) transactions are recorded as necessary (I) to permit preparation of financial statements in conformity with generally accepted accounting principles . . . and (II) to maintain accountability for assets.

190. Contrary to the requirements of GAAP and SEC rules, Warnaco failed to implement and maintain an adequate internal accounting control system. Since at least

1997, Warnaco knowingly or recklessly tolerated the existence of inadequate internal controls and knowingly or recklessly disregarded their obligation to implement adequate controls to ensure that the Company's inventory was accounted for in compliance with

80 GAAP. Warnaco failed to maintain its books and records in a manner which accurately reflected the true operations and financial position of the Company.

FIRST CLAIM FOR RELIEF (Violations of Section 10(b) of The Exchange Act and Rule 10b-5 Promulgated Thereunder Against All Defendants)

191. Plaintiffs repeat and reallege each and every allegation contained above as if fully set forth herein.

192. During the Class Period, Defendants, carried out a plan, scheme and course of conduct throughout the Class Period, which was intended to and did, (i) deceive the investing public, including Plaintiffs and other Class members as alleged herein, by making various false statements of material facts and omitting to state material facts to make the statements made not misleading to Plaintiffs and the other members of the

Class; (ii) artificially inflate and maintain the market price of Warnaco common stock; and (iii) cause Plaintiffs and other members of the Class to purchase Warnaco stock at inflated prices by employing manipulative or deceptive devices and contrivances.

193. In furtherance of this unlawful scheme, plan and course of conduct,

Warnaco and the Individual Defendants took the actions set forth herein.

194. In engaging in the conduct and in connection with the sale of Warnaco stock, as such is further set forth in this Complaint, Defendants (a) employed devices, schemes, and artifices to defraud; (b) made untrue statements of material fact and/or omitted to state material facts necessary to make the statements made not misleading; and

(c) engaged in acts, practices, and a course of business which operated as a fraud and deceit upon the purchasers of the Company's stock in an effort to inflate and maintain the

81 artificially high market prices for the Company's stock in violation of Section 10(b) of the

Exchange Act and Rule 10b-5 promulgated thereunder by the SEC. Defendants are sued as primary participants in the wrongful and illegal conduct charged herein, and the

Individual Defendants are being sued as well in their capacity as controlling persons of

Warnaco as alleged.

195. In addition to the duties of full disclosure imposed on Defendants as a result of their making of affirmative statements and reports to the investing public,

Defendants had a duty to promptly disseminate truthful information that would be material to investors in compliance with the integrated disclosure provision for the SEC as embodied in SEC Regulation S-X (17 C.F.R. Sections 210.10 et m.) and Regulation

S-K (17 C.F.R. Sections 229.10 et IN.) and other SEC regulations, including accurate and truthful information with respect to the Company's business, operations and financial condition and performance, so that the market price of the Company's common stock would be based upon truthful, complete and accurate information.

196. The Individual Defendants, as officers and directors of Warnaco, had actual knowledge of or recklessly disregarded the material omissions arid/or the falsity of the material statements set forth above, and intended to deceive Plaintiffs and the other members of the Class, or, acted with reckless disregard for the truth when they failed to ascertain and disclose the true facts in the statements made by themselves or other

Wamaco personnel to the SEC, Plaintiffs, and other members if the Class. Defendants also had the motive and opportunity to commit securities fraud as set forth above.

197. The facts alleged herein provide a strong inference that the Defendants made material false and misleading statements to the investing public with scienter, in

82 that the Defendants knew or recklessly disregarded that the public statements issued or disseminated in the name of the Company were materially false and misleading; knew or recklessly disregarded that such statements would be issued or disseminated to the investing public; and knowingly and substantially participated or acquiesced in the issuance or dissemination of such statements as primary violators of the federal securities laws.

198. Insider selling is highly probative of the Defendants scienter in their scheme, artifice to defraud, or acts, practices or course of conduct in violation of Section

10(b) and SEC Rule 10b-5. While the Defendants were issuing false favorable statements about the Company's business and concealing or obscuring negative information, the

Individual Defendants, with access to confidential information and awareness of the truth about the Company and its financial condition, were benefiting from the illegal course of business or course of conduct described herein by selling their own holdings of the

Company's stock at artificially inflated prices.

199. As a result of the dissemination of the materially false and misleading information and failure to disclose material facts, as set forth above, the market prices of

Warnaco stock were artificially inflated during the Class Period. In ignorance of this fact, and relying directly or indirectly on the false and misleading statements made by the

Defendants, or upon the integrity of the market in which the securities trade, and/or on the absence of material adverse information that was known to or recklessly disregarded by

Defendants but not disclosed by Defendants during the Class Period, Plaintiffs and members of the Class acquired their Wamaco stock during the Class Period at artificially high prices and were damaged thereby. Plaintiffs and other members of the Class were

83 ignorant of the misrepresentations, omissions and deceptions and believed Defendants' representations to be true. Had Plaintiffs and members of the Class and the marketplace known of the true financial condition, operations, performance and business prospects of

Warnaco, which was concealed by the Defendants, Plaintiffs and members of the Class would not have purchased their Wamaco common stock during the Class Period, or, if they had, they would not have done so at the artificially inflated prices which they paid.

200. As a result of Defendants' conduct, Plaintiffs and the other members of the

Class purchased Warnaco stock during the Class Period and were damaged thereby.

SECOND CLAIM FOR RELIEF (Violations of Section 20(a) of the Exchange Act Against The Individual Defendants)

201. Plaintiffs repeat and reallege each and every allegation contained above as if fully set forth herein.

202. This claim is asserted against the Individual Defendants who each acted as controlling persons of Warnaco and each other within the meaning of Section 20(a) of the

Exchange Act as alleged herein. By virtue of their high-level positions, their substantial stock ownership, participation in and/or awareness of the Company's operations and/or intimate knowledge of the Company's financial condition, products and the actual progress of its development efforts, the Individual Defendants had the power to influence and control, and did influence and control, directly or indirectly, the decision-making of the Company and each other, including the content and dissemination of the various statements which Plaintiffs contend are false and misleading. The Individual Defendants were provided with or had unlimited access to copies of the Company's internal reports,

84 press releases, public filings and other statements alleged by Plaintiffs to be misleading prior to and/or shortly after these statements were issued and had the ability to prevent the

issuance of the statements or cause the statements to be corrected.

203. The Individual Defendants had direct and supervisory involvement in the day-to-day operations of the Company and had the power to control or influence the public statements being made by or on behalf of the Company as a result of their positions in the Company, their stockholdings and the fact that their signatures were required on the Company's SEC filings. This serves as further indicia of the Individual

Defendant's control over Warnaco and each other within the meaning of Section 20(a) of the Exchange Act.

204. As set forth above, all Defendants violated Section 10(b) and SEC Rule

10b-5 by their acts and omissions as alleged in this Complaint. By virtue of their position as controlling persons of Warnaco and each other, the Individual Defendants are also liable pursuant to Section 20(a) of the Exchange Act. As a direct and proximate result of the Individual Defendant's wrongful conduct, Plaintiffs and other members of the Class suffered damages in connection with their purchases of the Company's common stock during the Class Period.

WHEREFORE, Plaintiffs, on their own behalf and on behalf of the Class, pray for judgment as follows:

A. Declaring this action to be a proper class action and certifying Plaintiffs as class representatives under Rule 23 of the Federal Rules of Civil Procedure;

85 B. Awarding compensatory damages in favor of Plaintiffs and the other

members of the Class against all Defendants, jointly and severally, for the damages

sustained as a result of the wrongdoings of Defendants, together with interest thereon;

C. Awarding Plaintiffs the fees and expenses incurred in this action,

including reasonable allowance of fees for Plaintiffs' attorneys, and experts;

D. Granting extraordinary equitable and/or injunctive relief as permitted by

law, equity and federal and state statutory provisions sued on hereunder, including

attaching, impounding, imposing a constructive trust upon or otherwise restricting the

proceeds of Defendants' trading activities or their other assets so as to assure that

Plaintiffs have an effective remedy; and

E. Granting such other and further relief as the Court may deem just and proper.

JURY TRIAL DEMANDED

Plaintiffs demand a jury trial of all issues so triable.

DATED: May 31, 2001 POMERANTZ HAUDEK BLOCK G SM & OSS, LLP

/ Etyi Marc I. ro TT " :96) D. Brian Huffori DH-8171) 100 Park Avenue New York, NY 10017 Telephone: 212/661-1100

86 KAPLAN, KELSHEIMER & FOX LLP Robert S. Kaplan Frederic S. Fox Joel B. Strauss 805 Third Avenue, 22 nd Floor New York, NY 10022 Telephone: 212/687-1980

Plaintiffs' Executive Committee Connsel

BERMAN, DEVALERIO, PEASE & TABACCO, P.C. Joseph J. Tabacco (JT-1994) Christopher T. Heffelfinger (Pro Hac Vice) 425 California Street, Suite 2025 San Francisco, CA 94104 Telephone: 415/433-3200

BERMAN, DEVALERIO & PEASE LLP Glen DeValerio (Pro Hac Vice) Kathleen M. Donovan-Maher (Pro Hac Vice) Michael T. Matraia (MM 7532) Alicia M. Duff One Liberty Square Boston, MA 02109 Telephone: 617/542-8300

SCHIFFRIN & BARROWAY, LLP Andrew L. Barroway David Kessler (Pro Hac Vice) Stuart L. Berman (Pro Hac Vice) Three Bala Plaza East, Suite Bala Cynwyd, PA 19004 Telephone: 610/667-7706

Plaintiffs' Co-Lead Counsel

STULL, STULL & BRODY Jules Brody Aaron Lee Brody Tzivia Brody 6 East 451h New York, NY 10017

87 WEISS & YOURMAN Joseph H. Weiss 551 5th Avenue, Suite 1600 New York, NY 10176

LAW OFFICES OF ALFRED YATES Alfred G. Yates 519 Allegheny Building 429 Forbes Avenue Pittsburgh, PA 15219 LAW OFFICES OF CURTIS V. TRINKO Curtis V. Trinko th 16 West 46 Street, 7th Floor New York, NY 10036

Roy L. Jacobs 305 5th Avenue New York, NY 10118

Jeffrey S. Abraham Laurence D. Paskowitz ABRAHAM & PASKOWITZ 60 East 42nd Street, Suite 4700 New York, NY 10165

RABIN & PECKEL Brian Philip Murray 275 Madison Avenue New York, NY 10016

CAULEY & GELLER Paul G. Geller 11311 Arcade Drive, Suite 201 Little Rock, AR 72212

LAW OFFICES OF CHARLES J. PIVEN, P.A. Charles 3. Piven The World Trade Center-Baltimore Suite 2525 401 East Pratt Street Baltimore, Maryland 21202

Plaintiffs' Counsel

88