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UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF FLORIDA
CASE NO. 06-61250-HUCK/SIMONTON __________________________________________
) THOMAS HAUGH, on behalf of himself ) and all others similarly situated, )
) Plaintiff, ) ) v. ) ) PARLUX FRAGRANCES INC., ILIA LEKACH ) and FRANK A. BUTTACAVOLI, ) Defendants. ) _________________________________________ )
CONSOLIDATED AMENDED CLASS ACTION COMPLAINT
Lead Plaintiffs make the following allegations, except as to allegations
specifically pertaining to plaintiffS and plaintiffs’ counsel, based upon the investigation
undertaken by plaintiffs’ counsel, which investigation included analysis of publicly
available news articles and reports, public filings, press releases, and other matters of
public record, and interviews of former employees and third parties.
NATURE OF THE ACTION 1. This is a class action on behalf of all purchasers of the common stock of
Parlux Fragrances Incorporated ("Parlux" or the "Company") between November 15,
2005 and August 10, 2006, inclusive, (the "Class Period"), seeking to pursue remedies
under the Securities Exchange Act of 1934 (the "Exchange Act"). During the Class
Period, defendants manipulated the Company’s revenue and earnings in order to meet
Wall Street goals. According to former employees and as detailed below, defendants
falsely inflated revenue and earnings by: (1) invoicing products before they were shipped,
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in violation of Generally Accepted Accounting Principles and the Company’s own stated
accounting policy; (2) invoicing products shipped to a warehouse for later delivery to
customers; and (3) invoicing products shipped to related parties to be “parked” with these
related parties for later delivery to customers. This accounting fraud was facilitated by
the Company’s admitted and material weakness in internal controls.
2. As a result of defendants’ fraudulent practice of prematurely recognizing
revenues, sales in future quarters were negatively impacted because certain related parties
who had been flooded with Parlux products reduced future orders, and certain
international related parties shipped products back into the United States as “grey market
products.” Because Parlux fragrances would appear on the grey market at substantial
discounts, orders from department stores dropped materially during the Class Period,
since these retailers did not want to stock products which were being sold for less
elsewhere.
3. Throughout the Class Period, defendants issued highly positive statements
in an effort to create the impression that Parlux's revenues were growing and the
Company was well positioned to generate strong profits. In response, Parlux stock traded
at over $37 per share (prior to a stock split) during the Class Period. Starting in June
2006, the truth about the Company’s declining sales and accounting issues were revealed
in a series of disclosures indicating that: (1) contrary to prior public statements, Parlux’s
sales were declining materially, including sales to related parties; and (2) the Company
suffered from internal control issues with respect to its financial reporting, causing Parlux
to delay the filing of its Annual Report on Form 10-K for the year ended March 31, 2006,
and its quarterly report on Form 10-Q for the quarter ending June 30, 2006. Prior to
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revealing this information, the defendants and other Company insiders sold over $16
million of their personally held Parlux stock.
4. On August 10, 2006, the Company issued yet another shocking
announcement, revealing that Parlux’s profit for the quarter ended June 30, 2006, would
be far less than the investing public had been led to believe, due mainly to lower sales to
U.S. department stores and related parties. On this news, the price of Parlux stock
plunged from $8.16 a share to $4.78 (representing a drop of over 40%), on unusually high
volumes of over 5 million shares traded (vastly higher than the Company’s average
trading volume of around 1.1 million shares traded a day).
JURISDICTION AND VENUE 5. This Court has jurisdiction over the subject matter of this action pursuant
to 28 U.S.C. §§1331, 1337 and 1367 and Section 27 of the Exchange Act (15 U.S.C. §
78aa).
6. This action arises under Sections 10(b) and 20(a) of the Exchange Act (15
U.S.C. §§ 78j(b) and 78t(a)) and Rule 10b 5 promulgated thereunder (17 C.F.R. §
240.10b 5).
7. Venue is proper in this District pursuant to Section 27 of the Exchange
Act (15 U.S.C. § 78aa) and 28 U.S.C. § 1391(b) and (c). Substantial acts in furtherance
of the alleged fraud and/or its effects have occurred within this District and Parlux
maintains its corporate headquarters in this District at 3725 S.W. 30th Avenue, Ft.
Lauderdale, FL 33312.
8. In connection with the acts and omissions alleged in this complaint,
defendants, directly or indirectly, used the means and instrumentalities of interstate
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commerce, including, but not limited to, the mails, interstate telephone communications,
and the facilities of the national securities markets.
PARTIES 9. Plaintiffs Marvin Braun, Thomas Haugh, Arthur Weill, Robert Law and
the Ingleside Select Fund LP purchased Parlux common stock during the Class Period,
and were appointed as lead plaintiffs by the Court on November 1, 2006. (DE#18).
10. Defendant Parlux by its own description:
. . . engages in the creation, design, manufacture, distribution, and sale of fragrances and beauty-related products through specialty stores, department stores, and perfumeries worldwide. The company holds licenses to manufacture and distribute watches, cosmetics and handbags, purses and other small leather goods, and sunglasses, as well as to manufacture and sell fragrances and grooming items of PERRY ELLIS, PARIS HILTON, OCEAN PACIFIC, XOXO, GUESS?, and MARIA SHARAPOVA. It also has license agreements with GUND, Inc. to develop, manufacture, and distribute children’s fragrances and related products on a worldwide basis under the babyGund trademark. In addition, Parlux’s beauty-related products include body lotions, creams, shower gels, deodorants, soaps, and dusting powders. The company was incorporated in 1984 and is headquartered in Fort Lauderdale, Florida.
Name Position
ILIA LEKACH Chairman, CEO and President
FRANK BUTTACAVOLI CFO, COO, Executive Vice President
11. Defendant Lekach also served as Chairman and CEO of Perfumania, a
specialty retailer of fragrances until Perfumania became a wholly owned subsidiary of E
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Com Ventures Inc. (“ECMV”). Perfumania is Parlux’s largest customer. After February
2000, Lekach served as CEO of both Parlux and ECMV.
12. In addition to his base salary and options, Lekach received lavish personal
loans from Parlux. These loans were regularly renegotiated to progressively more
favorable rates. In fact, between 1999 and 2003, Parlux “loaned” Lekach money which
amounted to over $742,884. At the time, these personal loans amounted to over 2.5% of
the value of the Company.
13. Lekach’s rampant borrowings came to an end in 2002 with the passage of
the Sarbanes-Oxley Act. According to the Company’s March 31, 2003 Form 10-K:
[Lekach’s] loans, which were consolidated into one note agreement on April 1, 2002, became due on March 31, 2003 in accordance with the note’s terms. On March 31, 2003, Mr. Lekach repaid $46,854 in principal and $71,364 of accrued interest, through that date. The repayment was affected via an offset of amounts due Mr. Lekach under his regular compensation arrangement. Sarbanes-Oxley prohibits the Company from renewing or amending the loan, as well as issuing new loans to Company officers and directors.
14. Defendant Buttacavoli is a Certified Public Accountant, and served as
CFO since 1993.
15. Under the terms of their compensation agreements, the Individual
defendants were entitled to bonuses up to 50% of their base salaries, based upon specific
goals such as sales or pretax income. In addition, in the event of a change of control, the
agreements provide for all remaining monies due, plus the doubling of unexercised
warrants.
16. The Individual Defendants, as senior officers and/or directors of Parlux
were controlling persons of the Company and were aware of the Company’s actual and
projected sales figures, and closely monitored the Company’s operations. According to a
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former Order Entry Clerk, Buttacavoli and Lekach paid close attention to detail and
reviewed and approved orders themselves. A former Account Executive confirmed that
Buttacavoli and Lekach were “very active managers” and received weekly sales numbers.
These sales numbers were tracked by an auditing service called “Cognos.” According to
a former Operations Department employee, Parlux executives were also privy to actual
and forecasted sales numbers by attendance at quarterly Forecast Meetings in which they
reviewed reports of sales versus last year’s sales and compared them to forecasts for each
department. The attendees always included Lekach and Buttacavoli, and included a
review of each brand and sku number. Each exercised his power and influence to cause
Parlux to engage in the fraudulent practices complained of herein.
17. Each of the defendants is liable as a participant in a fraudulent scheme and
course of business that operated as a fraud or deceit on purchasers of Parlux common
stock, by disseminating materially false and misleading statements and/or concealing
material adverse facts.
DEFENDANTS’ FRAUDULENT SCHEME
18. During the Class Period, as detailed below, defendants used certain related
party relationships to generate fictitious revenues. Defendants accomplished this by
invoicing for products before they were shipped in violation of GAAP, shipping products
to a warehouse before they were ordered or scheduled for delivery, and “parking”
products with related parties for later delivery to customers. The defendants used related
parties Grupo Tulin, Sarpres, and Perfumes Frances to facilitate this fraud through a
series of prearranged transactions. Grupo Tulin is an international distributor for Parlux
in Puerto Rico, owned by Lekach’s brother, Zalman Lekach. Sarpres distributes Parlux
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products in Mexico and is owned by another Lekach brother, Rachmil Lekach. Perfumes
Frances is a Venezuelan distributor which is not described as a related party in Parlux’s
SEC filings, but is controlled by former Parlux Vice President of Sales, Ruben Lisman.
19. According to a former Order Entry Clerk employed at Parlux during the
Class Period, one day at the end of September 2005, this former employee was directed
by among others, defendant Buttacavoli, to generate a huge amount of invoices to certain
related parties for the sole purpose of meeting Parlux’s month-end goals. The former
employee was asked to generate invoices to Grupo Tulin, Sarpres, and Perfumes Frances
that were not scheduled to ship until a much later date if at all. The former employee was
directed to prepare millions of dollars worth of invoices for related parties when the
merchandise was not going to be shipped until the next quarter, or was not going to be
shipped at all. The amount of these invoices was significant and the former Order Entry
Clerk estimates, based on firsthand knowledge, that they could have reached $3 million
on that one day alone in September 2005.
20. A former Traffic Department Employee confirmed that there was a “big
push in September 2005 to get sales out” with many sales going to a warehouse in New
Jersey owned by a Company called “Genco,” rather than being shipped to customers.
This employee asked a supervisor why there was such a sudden spike in sales in
September 2005, but did not receive an answer and “decided not to push it.” This former
employee also asked why product was being shipped to the Genco warehouse, but again
did not receive an answer.
21. According to the former Order Entry Clerk, on this particular date in
September 2005, Buvel (a former Vice President of Operations) Buttacavoli and Roner
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(Worldwide Director of Sales) all approached the former employee and told the employee
that Parlux “had to have a certain amount invoiced for their accounting.” The former
employee was pressured to prepare an enormous dollar value of invoices to meet the
Company’s “accounting” needs. “They were extremely stressed,” were pressuring the
former employee and were very “pushy, pushy.” They were pressing the former
employee to invoice several million dollars on that one day. Buvel told the former
employee that “our goal is this many million dollars, we’re at such and such, so bill this,
bill that, drop ship this, drop ship that.” This level of orders dwarfed any prior day. The
former employee had the CFO [Buttacavoli] and Operations Manager [Buvel] “on top of
me until 5:00 p.m. when the [month-end] report posts.” Buttacavoli, Buvel and Roner
had the former employee invoice orders that were not going to ship until the middle of
the following month, when typical Parlux procedures required that the Company “ship
products within a couple days of preparing the invoice.”
22. At the end of the day, Buttacavoli came up to the former employee, shook
the employee’s hand and said “I appreciate your hard work today.” That was the first and
only time in three years at Parlux that the CFO thanked this former employee or
addressed the employee in this way. According to the former employee, “that day was
the craziest day in three years.” Buttacavoli and Buvel said “they had a goal.” “This is
the number we have to hit.”
23. The orders that Buttacavoli, Buvel and Roner instructed the former
employee to enter on this occasion were almost exclusively from Grupo Tulin, Sarpres
and Perfumes Franceses. The unusually large number of orders that the former employee
was told to invoice on this day were almost exclusively “Drop Shipments.” A Drop
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Shipment or “Drop Ship” was the term Parlux used to describe orders for products that
Parlux did not have in their Florida distribution center, but supposedly had instead in a
New Jersey distribution center or possibly another distribution center elsewhere. The
former employee found the orders “suspicious” and had no way to verify that the
products were actually in stock in any other distribution center.
24. On this day the former employee was only presented with “Pro Forma”
orders from Buvel, Buttacavoli and Roner to enter into the JD Edwards accounting
system that Parlux used. Pro Forma orders include just the customer name, billing
address, shipping address, invoice number, customer number, date, customer purchase
order number, the quantities and descriptions of items being purchased and the price for
those items. Since the Pro Forma orders are preliminary orders, they lack the supporting
signatures and paperwork that the former employee normally had when preparing
legitimate invoices. The usual non-Pro Forma orders were signed and approved then sent
to the Warehouse and more paperwork was generated when the order was packed. On
this day, Buvel and Butacavoli presented the former employee with Pro Forma orders that
made it seem like there were orders to support all the invoices the former employee was
told to create. Even though the orders were only Pro Forma, the Company recognized
revenue on these contrived related party transactions.
Defendants Fail to Reveal a Known Material Adverse Trend
25. While the generation of these fictitious invoices enabled the Company to
falsely and prematurely recognize revenue, defendants sacrificed earnings in future
quarters in order to receive this short-term boost. Specifically, sales in future quarters
were adversely impacted because: (1) products sold to related parties reentered the United
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States and were sold at discounts which devalued the brands, resulting in materially lower
sales to domestic department stores; and (2) because of the second quarter 2005 flood of
products to these related parties, legitimate orders from these parties were reduced going
forward.
26. According to a former Account Executive, department stores such as
Dillards began discontinuing their orders from Parlux because they were upset about the
grey market for Parlux products impacting their profits. According to this former
employee, the impact of the “grey market” on Parlux products amounted to several
million dollars per year. Because of what the former employee described as “under the
table dealings” with related parties who would ship the product right back to the United
States, which would cause the fragrances to appear “everywhere” including “swap meets
and grocery stores” and significantly devalued the products. According to this former
employee, it was clear that a significant portion of international sales to related parties
“go right back in to the United States.” The fact that sales to these related parties was
causing a decline in sales to department stores, a high margin portion of the Company’s
business, was a material adverse trend which was required to be disclosed under SEC
rules.
Defendants’ Financial Statements Violated GAAP
27. Generally accepted accounting principles ("GAAP") defines related party
transactions (Statement Of Financial Accounting Standards No. 57, Related Party
Disclosures -- "FASB No. 57"), as "transactions between (a) a parent company and its
subsidiaries; (b) subsidiaries of a common parent; (c) an enterprise and trusts for the
benefit of employees, such as pension and profit sharing trusts that are managed by or
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under the trusteeship of the enterprise's management; (d) an enterprise and its principal
owners, management, or members of their immediate families; and (e) affiliates."
(Emphasis Added). During the Class Period, related parties Sarpres and Grupo Tulin
were two of Parlux's largest international customers.
28. As defined by GAAP, Grupo Tulin, and Sarpres were Parlux related
parties.
29. Further, as stated in paragraph 15 of FASB No. 57:
Reliability of financial information involves "assurance that accounting measures represent what they purport to represent." Without disclosure to the contrary, there is a general presumption that transactions reflected in financial statements have been consummated on an arms-length basis between independent parties. However, that presumption is not justified when related party transactions exist because the requisite conditions of competitive, free-market dealings may not exist. Because it is possible for related party transactions to be arranged to obtain certain results desired by the related parties, the resulting accounting measures may not represent what they usually would be expected to represent
30. Accordingly, FASB No. 57 requires full disclosure of relevant aspects of
related party transactions and GAAP requires accounting for substance over form. In this
regard, Statement of Financial Accounting Concepts No. 2 states (in paragraph 160) that:
The principle that the quality of reliability and, in particular, of representational faithfulness leaves no room for accounting representations that subordinate substance to form.
31. Elaborating on the issue of accounting for substance over form, the SEC
(in the introductory portion of Accounting Series Release 173) made the following
comments pertaining to economic substance:
Another problem. . .is the need for emphasizing the importance of substance over form in determining accounting principles to be applied to particular transactions and situations. In addition to considering substance over form in particular transactions, it is important that the overall
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impression created by the financial statements be consistent with the business realities of the company's financial position and operations.
32. As noted by the SEC in its Accounting And Auditing Enforcement
Release No. 817 (September 19, 1996 -- In the Matter of Cypress Bioscience Inc. and
Alex P. De Soto, CPA):
It is a well established tenet of GAAP that transactions must be accounted for in accordance with their substance rather than their form.
33. Transactions between Parlux and Grupo Tulin, and Sarpres (hereinafter
"The Related Parties") were arranged to obtain the financial reporting results which were
desired by Parlux. As discussed above, when Parlux needed additional sales revenue in
order to meet analysts' expectations, it would invoice The Related Parties irrespective of
whether The Related Parties needed or wanted additional products and irrespective of
whether or not products were actually shipped to The Related Parties.
34. In accounting for these transactions, the accounting measures did not
represent what they usually would be expected to represent because the economic
substance of the transactions (either the non-shipment of products or the "parking" of
products at a related party's warehouse) were ignored for financial accounting purposes.
Consequently, the overall impression created by the financial statements were
inconsistent with the business realities of the Company's financial position and operations
and the financial statements of the Company were not presented fairly in conformity with
GAAP because:
a) The accounting principles selected and applied did not have general acceptance.
b) The accounting principles were not appropriate in the circumstances.
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c) The financial statements, including the related notes, were not informative of matters
that affected their use, understanding, and interpretation.
d) The financial statements did not reflect the underlying events and transactions in a
manner that presented the financial position and the results of operations within a range
of acceptable limits that were reasonable and practicable to attain in financial statements.
35. Furthermore, as confirmed by the former employees detailed above,
Parlux systematically recorded material amounts of "sales" to non-related parties
although products had either not been shipped or had been shipped to a warehouse; not to
a customer. These recordations were contrived, wholly fictitious sales transactions,
intended to artificially inflate revenue and earnings.
36. The existence of the wholly fictitious sales transactions between Parlux
and The Related Parties were knowingly or recklessly concealed from the investing
public through a failure to comply with GAAP (FASB No. 57) which states that:
Information about transactions with related parties is useful to users of financial statements in attempting to compare an enterprise's results of operations and financial position with those of prior periods and with those of other enterprises. It helps them to detect and explain possible differences. Therefore, information about transactions with related parties that would make a difference in decision making should be disclosed so that users of the financial statements can evaluate their significance. 37. In addition to causing the above violations of GAAP, Defendants also
caused the Company's financial statements to ignore the FASB No. 57 mandate that:
"financial statements shall include disclosures of material related party transactions" and
that disclosures "shall" include:
a) The nature of the relationship(s) involved.
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b) A description of the transactions, including transactions in which no amounts or
nominal amounts were ascribed, for each of the periods for which income statements
are presented, and such other information deemed necessary to an understanding of
the effects of the transactions on the financial statements. (Emphasis Added)
c) The dollar amounts of transactions for each of the periods for which income
statements are presented and the effects of any change in the method of establishing
the terms from that used in the preceding period.
d) Amounts due from or to related parties as of the date of each balance sheet presented
and, if not otherwise apparent, the terms and the manner of settlement.
38. The financial statements of the Company, which were disseminated to the
investing public during the Class Period, were not in compliance with GAAP, at least in
part, because they failed to disclose the foregoing.
39. By failing to provide the GAAP-required disclosures concerning Parlux's
relationship with Grupo Tulin and Sarpres and its improper recognition of revenue on
transactions with these business entities, Defendants also violated the disclosure rules of
the SEC (including S-X Rule 4-08). Moreover, defendants violated GAAP (APB
Opinion No. 28) which provides that, "management should provide commentary relating
to the effects of significant events upon the interim financial results."
Defendants’ Improper Revenue Recognition
40. As stated in the Company's fiscal 2005 and fiscal 2006 year end financial
statements under the caption, Summary of Significant Accounting Policies, "Revenue is
recognized when the product is shipped to a customer, or in the limited circumstances, at
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destination, when terms provide that title passes at destination." This representation was
also incorporated by reference in the Company's interim financial statements, which were
disseminated to the investing public, via inclusion of the following representation in
notes to these financial statements:
The financial information presented herein. . . , which is not necessarily indicative of results to be expected for the current fiscal year, reflects all adjustments (consisting only of normal recurring accruals), which, in the opinion of management, are necessary for a fair presentation of the interim unaudited condensed consolidated financial statements. It is suggested that these condensed consolidated financial statements be read in conjunction with the financial statements and notes thereto included in the Company's Annual Report on Form 10 K. . .
41. By recognizing revenue and a related receivable on the date of invoicing
when no product shipments occurred or when products were shipped to a warehouse,
each of the Company's financial statements which were included in the Company's filings
with the SEC and which were disseminated to the investing public during the Class
Period violated the following GAAP, among others. The principle that:
a) Profit is deemed to be realized when a sale in the ordinary course of business is
effected. (Chapter 1A of Accounting Research Bulletin No. 43, Paragraph 1)
b) Revenues should ordinarily be accounted for at the time a transaction is completed.
(Accounting Principles Board Opinion No. 10, Paragraph 12)
c) Revenues and gains generally are not recognized until realized or realizable, and
revenues are considered to have been earned when the entity has substantially
accomplished what it must do to be entitled to the benefits represented by the
revenues. (Statement Of Financial Accounting Concepts No. 5, Paragraph 83)
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d) The quality of reliability and, in particular, of representational faithfulness leaves no
room for accounting representations that subordinate substance to form. (Statement
Of Financial Accounting Concepts No. 2, Paragraph 160)
e) Contingencies that might result in gains usually are not reflected in the accounts since
to do so might recognize revenue prior to its realization. (Statement of Financial
Accounting Standards No. 5, Paragraph 17)
f) Revenue generally is realized or realizable and earned when delivery has occurred.
(SEC Staff Accounting Bulletin No. 104)
42. The doctrine that revenues is to be accounted for at the time that the
earnings process is complete is a well established principle of GAAP and it has been
reaffirmed by the SEC on numerous occasions. For example, it was reaffirmed by the
SEC in:
a) Accounting And Auditing Enforcement Release No. 817 (September 19, 1996) which
states: "Under APB Statement No. 4, which was rescinded in March 1993, revenue
was generally recognized when (1) the earnings process was complete or virtually
complete, and (2) an exchange had taken place. This revenue recognition concept has
been carried forward in FASB Statement of Financial Accounting Concepts No. 5,
para. 83 84, and in other authoritative literature and continues to provide the
foundation for revenue recognition in accordance with GAAP."
b) Accounting And Auditing Enforcement Release No. 812 (September 5, 1996) which
states: "Generally Accepted Accounting Principles ("GAAP") provide that revenue
should not be recognized until an exchange has occurred, the earnings process is
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complete, and the collection of the sales price is reasonably assured. These
conditions ordinarily are met when products are exchanged for cash or claims to cash,
and when the entity has substantially performed the obligations which entitle it to the
benefits represented by the revenue."
43. Each of the Company's financial statements which were disseminated to
the investing public during the Class Period, were not presented in accordance with
GAAP in that neither the financial statements nor the notes thereto contained any
disclosure of the fact that:
a) The Company falsely and misleadingly recognized revenue on shipments of product
to The Related Parties when such shipments were, in fact, transfers of inventory to be
"parked" by The Related Parties.
b) The Company falsely and misleadingly recognized revenue on shipments of product
to The Related Parties and third parties when, in fact, no products had been shipped.
c) The Company falsely and misleadingly recognized revenue on shipments of product
to a warehouse, not to a customer.
44. Parlux's September 30, 2005 financial statements, as presented in the
September 30, 2005 Form 10-Q, improperly reflected millions of dollars of sales that had
not occurred either because no products had been shipped; because products had been
shipped to a warehouse for storage and not to a customer; because products had been
shipped to The Related Parties for storage (i.e. "parked" with affiliates).
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45. Parlux's December 31, 2005 financial statements, as presented in the
December 31, 2005 Form 10-Q, improperly reflected millions of dollars of sales that had
not occurred either because no products had been shipped, because products had been
shipped to a warehouse for storage and not to a customer, or because products had been
shipped to The Related Parties for storage (i.e. "parked" with affiliates).
46. Parlux's March 31, 2006 financial statements, as presented in the fiscal
2006 Form 10-K, improperly reflected millions of dollars of sales that had not occurred
either because no products had been shipped, because products had been shipped to a
warehouse for storage and not to a customer, or because products had been shipped to
The Related Parties for storage (i.e. "parked" with affiliates).
47. Due to the pervasiveness of the Company's fraudulent accounting
activities and the magnitude of the amounts involved, the director and officer defendants
could not avoid knowing of them, as well as the fact that they were concealed. Indeed, as
stated by the witnesses detailed above,, Buttacavoli knew of and/or participated in the
Company's fraudulent accounting activities.
Defendants’ Failed to Comply With SEC Rules
48. SEC Staff Accounting Bulletin No. 104, Revenue Recognition in
Financial Statements, states:
MD&A requires a discussion of liquidity, capital resources, results of operations and other information necessary to an understanding of a registrant's financial condition, changes in financial condition and results of operations This includes unusual or infrequent transactions, known trends or uncertainties that have had, or might reasonably be expected to have, a favorable or unfavorable material effect on revenue, operating income or net income and the relationship between revenue and the costs of the revenue. Changes in revenue should not be evaluated solely in terms of volume and price changes, but should also include an analysis of the
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reasons and factors contributing to the increase or decrease. The Commission stated in FRR 36 that MD&A should "give investors an opportunity to look at the registrant through the eyes of management by providing a historical and prospective analysis of the registrant's financial condition and results of operations, with a particular emphasis on the registrant's prospects for the future." (Emphasis Added) 49. Item 7 of Form 10-K and Item 2 of Form 10-Q, requires the issuer to
furnish information required by Item 303 of Regulation S-K [17 C.F.R. § 229.303]. In
discussing results of operations, Item 303 of Regulation S-K requires the registrant to
"[d]escribe any known trends or uncertainties that have had or that the registrant
reasonably expects will have a material favorable or unfavorable or unfavorable impact
on net sales or revenues or income from continuing operations."
50. The Instructions to Paragraph 303(a) further state, "[t]he discussion and
analysis shall focus specifically on material events and uncertainties known to
management that would cause reported financial information not to be necessarily
indicative of future operating results."
51. Thus, under these standards, the management of a public corporation must
disclose in its periodic reports filed with the SEC, "known trends or any known demands,
commitments, events or uncertainties" that are reasonably likely to have a material
impact on a company's sales revenues, income or liquidity, or cause previously reported
financial information not to be indicative of future operating results. 17 C.F.R. §
229.303(a)(l)-(3) and Instruction 3.
52. On May 18, 1989, the SEC issued an interpretive release (Securities Act
Release No. 6835) which stated, in relevant part:
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The MD&A requirements are intended to provide, in one section of a filing, material historical and prospective textual disclosure enabling investors and other users to assess the financial condition and results of operations of the registrant, with particular emphasis on the registrant's prospects for the future. 53. The Commission has long recognized the need for a narrative explanation
of the financial statements, because a numerical presentation and brief accompanying
footnotes alone may be insufficient for an investor to judge the quality of earnings and
the likelihood that past performance is indicative of future performance. MD&A is
intended to give the investor an opportunity to look at the company through the eyes of
management by providing both a short and long term analysis of the business of the
company. The Item asks management to discuss the dynamics of the business and to
analyze the financials.
54. As the Commission has stated, "[i]t is the responsibility of management to
identify and address those key variables and other qualitative and quantitative factors
which are peculiar to and necessary for an understanding and evaluation of the individual
company."
55. For the reasons described above, Parlux's periodic filings with the SEC
during the Class Period failed to comply with MD&A disclosure requirements.
56. Defendants were required to cause Parlux's SEC filings and the financials
statements contained therein to disclose the existence of the material facts described
herein and to appropriately recognize and report revenues and expenses in conformity
with GAAP. Defendants failed to cause the Company to make such disclosures and to
account for and to report revenue and expenses in conformity with GAAP.
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57. Due to the pervasive mosaic of non-disclosures, deceptive disclosures, and
non-GAAP accounting, the Forms 10-K and 10-Q (and the financial statements contained
therein) which defendants caused the Company to file with the SEC during the Class
Period were materially false and misleading.
58. Defendants knew and ignored, or were severely reckless in not knowing,
the facts which indicated that the above specified Parlux filings with the SEC, financial
statements, press releases, and public statements were materially false and misleading for
the reasons set forth above.
FALSE AND MISLEADING STATEMENTS DURING THE CLASS PERIOD
Defendants Issue False Financial Results for 2Q05
59. The Class Period begins on November 14, 2005. On that date, defendants
announced financial results for the second quarter of 2005, the three months ended
September 30, 2005. The press release stated:
Parlux Fragrances, Inc. (NASDAQ:PARL) announced today its results for the three months ended September 30, 2005. Net sales were $39,328,298 compared to $22,723,357 in the same period of the prior year, an increase of 73%. Net income was $4,439,870 compared to $2,375,971 in the same period of the prior year, an increase of 87%. Earnings per share on a diluted basis were $0.42 compared to prior-year earnings of $0.23 per share, an increase of 83%. For the six-month period ended September 30, 2005, net sales were $73,145,627 compared to $45,684,560 in the prior period, an increase of 60%. Net income was $8,251,493 ($0.78 per share on a diluted basis) compared to $4,565,813 ($0.43 per share on a diluted basis) in the same period of the prior year, an increase of 81%. 60. Commenting on the results, Ilia Lekach, Chairman and CEO said, “We
have again achieved record results and are on track to achieve our full year estimates as
long as the economy remains stable. We have recently commenced shipments of our
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second Paris Hilton fragrance “Just Me”, and our Limited Edition Paris Hilton watches
are being launched this month through Tourneau, the preeminent fine watch retailer.”
Mr. Lekach continued, “The successful launch of GUESS? women’s fragrance earlier
this year continues to fuel our growth. We are grateful to our Perry Ellis licensor for their
continued marketing efforts, and look forward to the launch of Perry Ellis 18 in 2006.”
61. On November 15, 2005, defendants filed a quarterly report on Form 10-Q
for the period ended September 30, 2005. The 10-Q was signed by Buttacavoli and
Lekach. The 10-Q included certifications signed by Lekach and Buttacavoli certifying
that Parlux had no internal control issues with respect to its financial reporting. The
certifications stated:
I, Ilia Lekach, certify that: 1. I have reviewed this report on Form 10-Q of Parlux Fragrances, Inc. 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. Registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) for the registrant, and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
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b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Defendants Statements Regarding 2Q05 Results Were False
62. The statements detailed above regarding second quarter 2005 results were
materially false and misleading because (a) Parlux suffered from material weaknesses in
its internal controls; and (b) the reported financial results included millions of dollars
generated from fictitious invoices to related parties Grupo Tulin, Sarpres and to Pefumes
Frances.
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Defendants Issue False Statements During Q305
63. On January 9, 2006, defendants issued a press release reporting
preliminary results for the third quarter of 2005. The press release stated:
Parlux Fragrances, Inc. (Nasdaq: PARL) announced today that based upon preliminary information, Parlux anticipates reporting record total revenues and record fully diluted earnings per share for the quarter ended December 31, 2005, exceeding analysts’ estimates. Revenues for the third quarter are expected to be in the range of $56 to $57 million, compared to $28.7 million in the prior year, an increase of over 95%. Fully diluted earnings per share for the quarter are expected to be in the range of $0.55 to $0.57 compared to $0.27, an increase of over 100%. Commenting upon the results, Mr. Ilia Lekach, Chairman and Chief Executive Officer, said: “We experienced an outstanding quarter despite the obstacles created early-on by Hurricane Wilma. Paris Hilton fragrances achieved another stellar holiday season and our Guess fragrance sales helped to fuel top line growth. Perry Ellis fragrance products remain an important part of our business and we will be introducing a new Perry Ellis 18 fragrance in summer 2006. It is important to note that our Guess, Paris Hilton and Maria Sharapova fragrances continue to be launched in a number of international markets and, that new offerings for our other product lines are planned for the near future.” Mr. Lekach added, “I am especially pleased that our earnings growth has increased at an even faster pace and continue to be optimistic that, assuming the continued acceptance of our products and stable economic conditions, our previous earnings guidance of $2.00 to $2.20 per share for the fiscal year ending March 31, 2006 will be achieved.” 64. On February 6, 2006, Defendants announced financial results for the third
quarter ended December 31, 2005. The press release stated:
Net sales were $56,412,315 compared to $28,748,499 in the same period of the prior year, an increase of 96%. Net income more than doubled to $5,996,089 compared to $2,867,746 in the same period of the prior year. Earnings per share on a diluted basis were $0.57 compared to prior-year earnings of $0.27 per share, an increase of 111%. For the nine-month period ended December 31, 2005, net sales were $129,557,942 compared to $74,433,059 in the prior period, an increase of 74%. Net income was $14,247,582 ($1.35 per share on a diluted basis)
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compared to $7,433,559 ($0.70 per share on a diluted basis) in the same period of the prior year, an increase of 92%. Commenting upon the results, Mr. Ilia Lekach, Chairman and Chief Executive Officer, said: “Paris Hilton fragrances continued to achieve strong consumer demand. Our GUESS? women’s fragrance established a strong sales base in its first holiday season, which will be expanded with the launch of the GUESS? men’s fragrance this spring. Perry Ellis fragrance products retain their strength. Perry Ellis remains our largest brand, representing almost half of our total business and we will be introducing a new “Perry Ellis 18”fragrance in summer 2006. It is important to note that our GUESS?, Paris Hilton and Maria Sharapova fragrances continue to be launched in a number of international markets. We anticipate shipping Paris Hilton watches and handbags during our fourth quarter, and development for Paris Hilton cosmetics and a babyGund fragrance are on schedule for holiday 2006.”Mr. Lekach continued, “I am especially pleased that our earnings growth has accelerated. Assuming the acceptance of our new product introductions remain on course and economic conditions stay stable, our previous earnings guidance of $2.00 to $2.20 per share on revenues of approximately $190 million for the fiscal year ending March 31, 2006 should be achieved.”Mr. Lekach added, “Based on the continued strength of our brands and the planned new product introductions, our preliminary guidance for fiscal 2007 is for sales to exceed $300 million, with earnings in the range of $3.00 to $3.25 per share.” 65. On February 9, 2006, defendants filed a quarterly report on Form 10-Q for
the period ending December 31, 2005. The 10-Q repeated the financial results detailed
in the press release above, and particularly emphasized the strong sales to related parties.
With respect to related party transactions, the 10-Q stated:
The Company had net sales of $18,648,334 and $30,403,037 during the nine-month periods ended December 31, 2005 and 2004 ($6,502,845 and $9,486,314 during the three months ended December 31, 2005 and 2004), respectively, to Perfumania, Inc. (“Perfumania”), a wholly-owned subsidiary of E Com Ventures, Inc. (“ECMV”), a company in which the Company’s Chairman and Chief Executive Officer has an ownership interest and held identical management positions until February 2004. Perfumania is one of the Company’s largest customers, and transactions with them are closely monitored by the Company’s Audit Committee and Board of Directors. Perfumania offers the Company the opportunity to distribute its products in approximately 240 retail outlets and its terms
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with Perfumania take into consideration the companies’ over 15 year relationship. Pricing and terms with Perfumania reflect (a) the volume of Perfumania’s purchases, (b) a policy of no returns from Perfumania, (c) minimal spending for advertising and promotion, (d) exposure of the Company’s products provided in Perfumania’s store windows and (e) minimal distribution costs to fulfill Perfumania orders shipped directly to their distribution center. In addition to Perfumania, during the nine months ended December 31, 2005 and 2004, the Company had net sales of $30,582,084 and $12,029,395 ($12,844,799 and $4,298,684 during the three months ended December 31, 2005 and 2004), respectively, to fragrance distributors owned/operated by individuals related to the Company’s Chairman/CEO, including a distributorship for the Mexican market. These sales are included as related party sales in the accompanying condensed consolidated statements of income and are closely monitored by the Company’s Audit Committee and Board of Directors. As of December 31, 2005 and March 31, 2005, trade receivables from related parties include $4,552,288 and $13,154, respectively, from these customers, which were current in accordance with their sixty or ninety day terms.
66. In response to the announcements of seemingly stellar financial results,
Parlux stock price increased dramatically, trading at as much as over $38 per share during
February 2006.
Defendants 3Q05 Statements Were Materially False and Misleading
67. Defendants statements concerning related parties, the financial results
achieved during the third quarter, and the Company’s projections for future results were
false and misleading. In violation of GAAP, defendants’ disclosures regarding related
party transactions failed to discuss the existence of the arrangements with Grupo Tulin
and Sarpres. In addition, defendants knew that product was reentering the United States
from these related parties, which was devaluing Parlux brands and causing a decline in
sales to department stores.
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Defendants Unload Millions of Dollars Worth Of Parlux Stock Prior to Disclosure of the Company’s Earnings Miss
68. During the Class Period, when the stock was at or near its high, defendants
sold millions of dollars worth of their Parlux stock. These sales were unusual in both
timing and amount, they far exceeded defendants' previous sales, and preceded
defendants' announcements that Parlux would not meet its earnings expectations. The
suspicious nature of the insider selling was noted in a June 13, 2006 Miami Herald
article, which stated:
Parlux Fragrances' stock has plummeted by more than half this year. But six of its seven directors sold shares -- three cashing out their holdings entirely -- at or near its peak. The stock of the Fort Lauderdale perfume distributor hit an all-time high of $38.48 on Feb. 22. Over the course of just two weeks in mid-to-late February, directors sold roughly $16 million worth of stock, according to financial documents. Four months later, CEO Ilia Lekach offered to buy the company for $29 a share -- less than he or the other directors got for their own stock. He withdrew that offer Wednesday. The reasons the directors gave for their sales ranged from needing the money for family reasons to wanting to diversify. David Wong, a founder of Form 4 Oracle, a Boston area company that tracks insider trading, said the trades could be a "red flag.'' ‘SOMETHING HAPPENED' 'It doesn't seem like there has been a regular pattern of selling, so it certainly is an event,'' he said. “Something happened in mid-February . . . One could easily be convinced that there is something unusual going on.'' Insider trading is illegal if the insiders sell based on private knowledge of events that could send the stock down. The sales made up about 5 percent of the company's market value at the time. Here were the trades: Frank Buttacavoli, chief financial officer, sold $2.5 million worth of shares on Feb. 13 and 14 for an average $33 a share. Lekach sold $11.7 million worth of shares through a firm he controls on Feb. 15 and Feb. 16,
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also at about $33 a share. He still owns about 26 percent of the firm. His son, Isaac Lekach, who sings for an indie band in Los Angeles and sits on the board of directors for Parlux, sold all his stock -- worth about $650,000 -- at about $36 a share, two days after its peak. Esther Choukroun, CFO of real estate firm PIX Group, sold all her shares for $1.1 million on Feb. 22. Glenn Gopman, a Miami accountant, sold about $190,000 of stock at the all-time high. None of the directors had made any market sales or purchases in the previous nine months. However, some of them could not have sold earlier because of a financial regulation that requires directors to hold onto stock for a year before selling. 69. As detailed in the chart below, Defendants sold significant portions of
their Parlux holdings during the Class Period, and three directors sold all of their Parlux
holdings.
Summary of Parlux Insiders' Class Period Sales
Insider Position Date Shares Sold Price Proceeds
F. Buttacavoli CO,CFO,OD,EVP 2/13/2006 10,296 $16.76 $172,561 2/13/2006 9,834 $16.78 $164,965 2/13/2006 9,400 $16.81 $157,967 2/13/2006 9,298 $16.77 $155,927 2/13/2006 5,600 $16.75 $93,800 2/13/2006 5,000 $16.82 $84,075 2/13/2006 4,894 $16.80 $82,219 2/13/2006 4,800 $16.79 $80,568 2/13/2006 4,398 $16.81 $73,930 2/13/2006 4,382 $16.51 $72,347 2/13/2006 4,000 $16.56 $66,240 2/13/2006 3,960 $16.82 $66,607 2/13/2006 3,800 $16.64 $63,213 2/13/2006 3,600 $16.70 $60,120 2/13/2006 3,018 $16.76 $50,567 2/13/2006 2,990 $16.72 $49,978 2/13/2006 2,586 $16.87 $43,626 2/13/2006 2,200 $16.83 $37,015 2/13/2006 2,106 $16.68 $35,128
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Insider Position Date Shares Sold Price Proceeds
Buttacavoli (cont.) 2/13/2006 2,200 $16.78 $36,916 2/13/2006 2,000 $16.52 $33,030 2/13/2006 1,826 $16.85 $30,768 2/13/2006 1,798 $16.54 $29,739 2/13/2006 1,400 $16.79 $23,506 2/13/2006 1,000 $16.55 $16,545 2/13/2006 800 $16.58 $13,260 2/13/2006 800 $16.64 $13,312 2/13/2006 800 $16.69 $13,352 2/13/2006 800 $16.71 $13,368 2/13/2006 800 $16.77 $13,412 2/13/2006 800 $16.80 $13,436 2/13/2006 600 $16.63 $9,975 2/13/2006 600 $16.86 $10,116 2/13/2006 598 $16.58 $9,915 2/13/2006 400 $16.57 $6,626 2/13/2006 400 $16.68 $6,670 2/13/2006 320 $16.71 $5,346 2/13/2006 202 $16.61 $3,354 2/13/2006 200 $16.53 $3,305 2/13/2006 200 $16.63 $3,326 2/13/2006 198 $16.59 $3,284 2/13/2006 198 $16.59 $3,285 2/13/2006 198 $16.60 $3,286 2/13/2006 100 $16.84 $1,684 2/14/2006 7,234 $16.54 $119,650 2/14/2006 5,900 $16.55 $97,645 2/14/2006 3,000 $16.63 $49,875 2/14/2006 2,600 $16.65 $43,290 2/14/2006 2,398 $16.55 $39,675 2/14/2006 2,000 $16.64 $33,280 2/14/2006 1,600 $16.75 $26,800 2/14/2006 1,400 $16.61 $23,254 2/14/2006 1,400 $16.72 $23,408 2/14/2006 1,200 $16.56 $19,866 2/14/2006 1,000 $16.60 $16,600 2/14/2006 600 $16.61 $9,963 2/14/2006 406 $16.54 $6,713
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Insider Position Date Shares Sold Price Proceeds
Buttacavoli (cont.) 2/14/2006 698 $16.65 $11,618 2/14/2006 400 $16.63 $6,652 2/14/2006 400 $16.66 $6,662 2/14/2006 400 $16.67 $6,668 2/14/2006 400 $16.69 $6,676 2/14/2006 400 $16.73 $6,690 2/14/2006 366 $16.68 $6,105 2/14/2006 200 $16.53 $3,306 2/14/2006 200 $16.70 $3,340 2/14/2006 200 $16.72 $3,343 2/14/2006 198 $16.57 $3,280 Buttacavoli Class Period Totals: 150,000 $2,506,028 E. Choukroun D 2/22/2006 8,628 $18.93 $163,285 2/22/2006 7,000 $18.90 $132,300 2/22/2006 6,960 $18.92 $131,648 2/22/2006 6,200 $18.95 $117,490 2/22/2006 5,218 $18.93 $98,777 2/22/2006 3,200 $18.90 $60,464 2/22/2006 2,800 $18.95 $53,046 2/22/2006 2,600 $18.92 $49,192 2/22/2006 2,412 $18.91 $45,611 2/22/2006 2,400 $18.86 $45,264 2/22/2006 2,000 $18.98 $37,950 2/22/2006 2,000 $18.96 $37,920 2/22/2006 2,000 $18.94 $37,880 2/22/2006 1,600 $18.94 $30,296 2/22/2006 1,400 $18.89 $26,446 2/22/2006 800 $18.88 $15,104 2/22/2006 600 $18.99 $11,394 2/22/2006 600 $18.91 $11,343 2/22/2006 582 $19.01 $11,064 2/22/2006 400 $18.88 $7,550 2/22/2006 200 $18.98 $3,796 2/22/2006 200 $18.89 $3,777 2/22/2006 200 $18.84 $3,768 E. Choukroun Class Period Totals: 60,000 $1,135,365
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Insider Position Date Shares Sold Price Proceeds
G. Gopman D 2/22/2006 10,000 $19.00 $190,000 Ilia Lekach 1 CEO,CB,H 2/15/2006 172,000 $16.63 $2,859,500 2/15/2006 100,000 $17.00 $1,700,000 2/15/2006 30,000 $16.66 $499,800 2/15/2006 8,000 $16.66 $133,240 2/15/2006 5,000 $16.95 $84,725 2/15/2006 5,000 $16.75 $83,750 2/15/2006 4,000 $16.91 $67,620 2/15/2006 4,000 $16.68 $66,700 2/15/2006 3,000 $16.72 $50,160 2/15/2006 2,000 $16.85 $33,700 2/15/2006 2,000 $16.78 $33,560 2/16/2006 226,000 $16.60 $3,751,600 2/16/2006 91,000 $16.63 $1,512,875 2/16/2006 20,000 $16.65 $333,000 2/16/2006 10,000 $16.61 $166,050 2/16/2006 8,000 $16.66 $133,240 2/16/2006 6,000 $16.63 $99,780 2/16/2006 4,000 $16.74 $66,960 Ilia Lekach Class Period Totals: 700,000 $11,676,260 Isaac LEKACH D 2/24/2006 20,000 $18.05 $361,000 2/24/2006 10,000 $17.88 $178,750 2/24/2006 5,800 $18.13 $105,125 2/24/2006 200 $18.11 $3,621 2/24/2006 200 $18.10 $3,620 2/24/2006 200 $18.09 $3,618 Isaac Lekach Class Period Totals: 36,400 $655,734 D. Stone D 3/24/2006 20,000 $15.80 $316,000 Grand Totals: 976,400 $16,479,387
1 Source: Form 4 dated 2/17/06. Represents shares owned by Pacific Investment Group, Inc. a corporation in which the Reporting Person owns a controlling interest.
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70. Also suspicious is the fact that when comparing pre-Class period sales to
Class Period sales, defendants sold a huge percentage of their stock during the Class
Period, as detailed in the chart below:
Defendants’ False Statements Continue
71. On May 9, 2006, defendants issued a press release reporting “record”
revenues for the fiscal year ended March 31, 2006. The press release stated:
Parlux Fragrances, Inc. (NASDAQ:PARL) announced today that based upon preliminary unaudited information, the Company anticipates reporting record total revenues and record fully diluted earnings per share for the fiscal year ended March 31, 2006.
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Revenues for the fiscal year are expected to approximate $183 million, an increase of 82% over the prior fiscal year ended March 31, 2005. Fully diluted earnings per share for the fiscal year ended March 31, 2006 are expected to more than double and be in the range of $2.05 to $2.10 per share compared to $1.02 per share for the prior fiscal year. 72. Commenting on the results, Ilia Lekach, Chairman and Chief Executive
Officer, said:
“Our excellent results were attributable to the continuing solid performance of our Perry Ellis fragrances combined with the stellar growth of Paris Hilton fragrances and the successful launch of our GUESS fragrances. We recently initiated the sale of Paris Hilton watches and handbags and expect to introduce Paris Hilton cosmetics and sunglasses during fiscal 2007.” Mr. Lekach continued, “I remain optimistic for fiscal 2007 and anticipate revenues in the range of $270-$280 million and earnings in the range of $2.80-$2.90 per share assuming the successful implementation of our anticipated new launches and stable economic conditions.” 73. On May 17, 2006, defendants announced a 2-for-1 split of the Company’s
common stock effected in the form of a stock dividend. Commenting on the stock split,
defendant Lekach stated:
The stock split is a result of the Company’s solid growth and price performance. Over the past three fiscal years our significant growth in revenues has provided increased earnings per share of over 300% and the market price of our stock has almost tripled. We believe that this stock split, combined with our plans for continuing growth, will increase retail ownership and provide pricing levels that are accessible to a broader group of investors. 74. The statements detailed above in Parlux’s SEC filings and press releases
were materially false and misleading, because at the time these statements were made: (a)
defendants were well aware that due to their board positions and/or supervision over
related parties that sales to these related parties had declined and were continuing to
materially decline; (b) defendants knew that sales to domestic department stores had
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declined because of the flooding of products from related parties into the grey market; (c)
defendants had generated fictitious invoices and recognized revenue in violation of
GAAP with respect to certain related party transactions detailed above which caused a
reduction in future orders to related parties; and (d) the Company had material internal
control issues which impacted the quality of its financial reporting.
The Truth Begins to Emerge
75. Between June 8, 2006 and August 10, 2006, material adverse information
about the Company was slowly revealed. On June 8, 2006, Parlux stock dropped 13%
after two analysts downgraded the stock due to disappointing distribution and sales of
Paris Hilton-branded products. According to an article published on that date:
Stock of the Fort Lauderdale, Fla.-based company fell $3.04, or 13 percent, to $21.06 in early afternoon trading on the Nasdaq Stock Market. Thursday's weakest level of $20.18, on heavy volume, was a 52-week low surpassing the prior low on Oct. 27 of $21.97. There was a 52-week high of $38.48 on Feb. 22. Parlux makes and markets fragrances and accessories through brands such as Perry Ellis, Ocean Pacific, Paris Hilton, XOXO, Guess, Maria Sharapova and Andy Roddick. Feltl & Co. cut its rating of Parlux shares to "buy" from "strong buy," while Wedbush Morgan Securities downgraded the stock to "hold" from "strong buy" -- both citing the recent launch of Paris Hilton-branded accessories. "After conducting a wide round of channel checks from specialty retailers to major department store chains, we have not seen the newly launched watches and handbags in nearly as many retail doors as we had earlier thought they would be in by this point," said Wedbush analyst Rommel Dionisio, who expressed concern about Parlux's ability to hit the firm's previous near-term revenue and earnings forecasts, which he lowered. 76. Despite the fact that analysts were beginning to independently uncover the
fact that Parlux’s sales had declined materially, the Company continued to hide the truth
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from the investing public. On June 13, defendants issued the below press release
announcing strong sales growth.
77. On June 13, 2006, defendants issued a press release announcing that the
Company would be forced to delay the filing of its Annual Report on Form 10-K for the
year ended March 31, 2006. The press release stated:
Parlux Fragrances, Inc. (NASDAQ:PARL) announced its unaudited fiscal 2006 results reflecting sales of $182,236,594 compared to its prior year of $100,360,981, an increase of 82%. Unaudited net income was $22,483,263, or $2.13 per diluted share compared to prior year net income of $10,824,256, or $1.02 per share, an increase of 109%, exceeding previous estimates. On June 9, 2006, the Company filed a Form 12b-25, requesting an extension for filing its Annual Report on Form 10-K for the fiscal year ended March 31, 2006. Due to the increase in the Company’s market capitalization as measured on September 30, 2005, the Company became an accelerated filer under the Sarbanes-Oxley Act of 2002 (“SOX”). While reducing the year-end filing requirement from 90 to 75 days, SOX also required the Company to assess its internal controls and report on their effectiveness as of March 31, 2006. In spite of its best efforts and significant expense, the Company will be unable to complete certain of these new requirements by the initial filing due date of June 14, 2006. While the Company has grown rapidly, it has not significantly expanded its administrative staff to assist with the preparation of its financial statements, nor modified major systems/applications for recording of transactions. Management’s review, testing and assessment of its internal control procedures required by SOX has identified certain documentation, design and operating deficiencies, some of which management believes will be categorized as material weaknesses. Accordingly, we anticipate that management’s report on the effectiveness of internal controls will conclude that certain internal controls were not operating effectively as of and during the year ended March 31, 2006. The Company is taking immediate action to address and remediate these control deficiencies. 78. Thereafter, defendant Lekach offered to acquire the outstanding stock of
the Company. As noted in a June 14, 2006 press release:
Parlux Fragrances, Inc. (NASDAQ:PARL) announced today that its Board of Directors had received an unsolicited letter from its Chairman and CEO, Mr. Ilia Lekach, representing PF Acquisition of Florida LLC,
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pertaining to the possible acquisition of all of the outstanding common stock of the Company at a proposed price of $29.00 per share in cash, representing a premium of 55% over the closing price of the common stock of the Company on June 13, 2006. 79. The Company noted, with respect to Lekach’s offer:
Through their legal counsel, the Committee responded (the “Response”) to the offer by stating that the Committee does not believe it is prudent for Parlux to move forward to consider the transaction with the significant financial and other contingencies contained in the Proposal. Further, the Committee questions the propriety of a proposed break up fee. The Committee believes that if Parlux proceeds with the Proposal and the transaction does not close, it may have a very negative effect on Parlux. In order to protect Parlux and its shareholders, the Committee believes that the closing contingencies should be removed from the Proposal and Acquisition Co. should provide a deposit to the Company as evidence of Acquisition Co.’s ability to proceed and in recognition of the significant cost Parlux will incur in considering the Proposal. The Committee continues to state that, in the event that the transaction cannot be completed due to an inability by Acquisition Co. to obtain financing, the deposit would be used to reimburse Parlux for its costs and expenses in connection with the consideration of the Proposal. 80. After receiving the Response, Acquisition Co. sent a follow-up letter (the
“Follow-up Letter”). The Follow-up Letter stated that Acquisition Co. does not expect
the Committee to incur any expense until Acquisition Co. has obtained its financing
commitments and when Acquisition Co. completes that task, it would expect to proceed
in a customary fashion without any deposit or waiver of the financial and other
contingencies and with a break up fee.
81. On June 29, 2006, defendants revealed that the 10-K would continue to be
delayed due to defendants’ failure to assess Parlux’s internal controls. In a press release
issued that date, defendants stated:
Parlux Fragrances, Inc. (NASDAQ: PARL) announced today that the filing of its Form 10-K would be delayed as a result of management not yet completing its assessment of the internal controls and reporting
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requirements under Section 404 of the Sarbanes-Oxley Act of 2002 (SOX). The Company became obligated to comply with the quicker implementation schedule under Section 404 when it became an accelerated filer on September 30, 2005, the end of its second quarter. Management completed its testing and has concluded that its internal control procedures contain material weakness in areas such as access to certain computer master files, segregation of duties, processing of certain adjustments to accounts payable and accounts receivable, and management overrides, despite the fact that the Company’s testing did not disclose any improprieties. The Company is completing the assessment and reporting process involved in complying with its SOX obligations. The Company will issue its Form 10-K after the assessment and reporting processes, including those of the Company’s independent auditors, are completed. This delay in the Company’s SOX procedures is not expected to affect the Company’s previous announcement that net sales for the fiscal year ended March 31, 2006 will approximate $182 million and net earnings per share will reach $2.13 ($1.07 post common stock split) per share. Parlux will request a hearing before the Nasdaq Listing Qualifications Panel, thereby automatically deferring the delisting of its common stock pending the Panel’s review and determination. Until the Panel issues a determination and the expiration of any exception granted by the Panel, Parlux’s common stock will continue to be traded on The Nasdaq National Market. However, as a result of the delayed filing of its Form 10-K, the trading symbol for the Company’s common stock will be changed from PARL to PARLE. As announced on June 29, 2006, Parlux has delayed filing its Annual Report on Form 10-K until completion of management’s assessment of the internal controls and reporting requirements under Section 404 of the Sarbanes-Oxley Act of 2002 (“SOX”). Parlux intends to file its Form 10-K for the fiscal year ended March 31, 2006 as soon as practicable following completion of the SOX assessment and reporting processes, including those of the Company’s independent auditors. 82. On July 13, 2006, defendant Lekach announced he was withdrawing his
offer to acquire the Company.
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Additional Information Regarding Parlux’s Problems Is Belatedly Revealed
83. On August 10, 2006, defendants finally revealed that sales for the quarter
ended June 30, 2006 had declined materially. According to an article released on August
11, 2006:
Shares of perfume and accessories maker Parlux Fragrances Inc. sank to a new 52-week low on Friday after the company said it would not file its quarterly report on time and quarterly results would fall well below Wall Street expectations. Shares of Fort Lauderdale, Fla.-based Parlux, which holds the license to Paris Hilton's line of accessories, dropped $3.06, or 37.5 percent, to $5.10 on the Nasdaq in morning trading. Earlier in the session, the shares hit a new low of $4.95. The previous 52-week range was from $7.64 to $19.24. In a filing on Thursday with the Securities and Exchange Commission, Parlux said its report for the quarter ending June 30 would be late because the company was working to complete its delayed annual 10-K report for fiscal 2006, which it eventually did in July. Parlux said it would file its quarterly report by Aug. 14 or shortly afterward. For the quarter ending June 30, the company said it expects earnings in the range of 4 cents to 5 cents per share -- well below the 22 cents per share forecast by analysts, according to a Thomson Financial poll. "The reduction is mainly attributable to the decrease in sales to U.S. department stores due to the acquisitions and consolidations in this sector, and a reduction in sales to related parties," the company said in the filing. 84. In response to the adverse news which was belatedly revealed about the
Company, Parlux stock dropped by over 40% on unusually high trading volumes, trading
at slightly over $4 per share on August 11, 2006, a far cry from the Class Period high at
which defendants sold huge quantities of their Parlux holdings.
CLASS ACTION ALLEGATIONS
85. Plaintiff brings this action as a class action pursuant to Federal Rule of
Civil Procedure 23(a) and (b)(3) on behalf of a Class, consisting of all persons who
purchased or otherwise acquired Parlux common stock between November 15, 2006 and
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August 10, 2006, inclusive (the "Class Period"), and who were damaged thereby.
Excluded from the Class are defendants, members of the immediate family of each of the
Individual Defendants, any subsidiary or affiliate of Parlux and the directors, officers
and employees of Parlux or its subsidiaries or affiliates, or any entity in which any
excluded person has a controlling interest, and the legal representatives, heirs, successors
and assigns of any excluded person.
86. 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 plaintiff at this
time and can only be ascertained through appropriate discovery, plaintiff believes that
there are thousands of members of the Class located throughout the United States.
Throughout the Class Period, Parlux common stock was actively traded on the NASDAQ
(an open and efficient market) under the symbol “PARL”. Record owners and other
members of the Class may be identified from records maintained by Parlux and/or its
transfer agents and may be notified of the pendency of this action by mail, using a form
of notice similar to that customarily used in securities class actions.
87. Plaintiffs’ claims are typical of the claims of the other members of the
Class as all members of the Class were similarly affected by defendants' wrongful
conduct in violation of federal law that is complained of herein.
88. Plaintiffs will fairly and adequately protect the interests of the members of
the Class and have retained counsel competent and experienced in class and securities
litigation.
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89. Common questions of law and fact exist as to all members of the Class
and predominate over any questions solely affecting individual members of the Class.
Among the questions of law and fact common to the Class are:
a) whether the federal securities laws were violated by defendants' acts and omissions as
alleged herein;
b) whether defendants participated in and pursued the common course of conduct
complained of herein;
c) whether documents, press releases, and other statements disseminated to the investing
public and the Company's shareholders during the Class Period misrepresented
material facts about the business, finances, financial condition and prospects of
Parlux ;
d) whether statements made by defendants to the investing public during the Class
Period misrepresented and/or omitted to disclose material facts about the business,
finances, value, performance and prospects of Parlux;
e) whether the market price of Parlux common stock during the Class Period was
artificially inflated due to the material misrepresentations and failures to correct the
material misrepresentations complained of herein; and
f) the extent to which the members of the Class have sustained damages and the proper
measure of damages.
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90. A class action is superior to all other available methods for the fair and
efficient adjudication of this controversy since joinder of all members is impracticable.
Furthermore, as the damages suffered by individual Class members may be relatively
small, the expense and burden of individual litigation make it impossible for members of
the Class to individually redress the wrongs done to them. There will be no difficulty in
the management of this suit as a class action.
UNDISCLOSED ADVERSE INFORMATION 91. The market for Parlux securities was open, well-developed and efficient at
all relevant times. As a result of these materially false and misleading statements and
failures to disclose, Parlux securities traded at artificially inflated prices during the Class
Period. The artificial inflation continued until the time Parlux admitted that it was
experiencing declining sales and these admissions were communicated to, and/or
digested by, the securities markets. Plaintiffs and other members of the Class purchased
or otherwise acquired Parlux securities relying upon the integrity of the market price of
Parlux securities and market information relating to Parlux , and have been damaged
thereby.
92. During the Class Period, defendants materially misled the investing
public, thereby inflating the price of Parlux securities, by publicly issuing false and
misleading statements and omitting to disclose material facts necessary to make
defendants' statements, as set forth herein, not false and misleading. Said statements and
omissions were materially false and misleading in that they failed to disclose material
adverse information and misrepresented the truth about the Company, its business and
operations.
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93. At all relevant times, the material misrepresentations and omissions
particularized in this Complaint directly or proximately caused or were a substantial
contributing cause of the damages sustained by plaintiffs and other members of the Class.
As described herein, during the Class Period, defendants made or caused to be made a
series of materially false or misleading statements about Parlux's business, prospects and
operations. These material misstatements and omissions had the cause and effect of
creating in the market an unrealistically positive assessment of Parlux and its business,
prospects and operations, thus causing the Company's securities to be overvalued and
artificially inflated at all relevant times. Defendants' materially false and misleading
statements during the Class Period resulted in plaintiffs and other members of the Class
purchasing the Company's securities at artificially inflated prices, thus causing the
damages complained of herein.
APPLICABILITY OF PRESUMPTION OF RELIANCE: FRAUD ON THE MARKET DOCTRINE
94. At all relevant times, the market for Parlux stock was an efficient market
for the following reasons, among others:
a) Parlux stock met the requirements for listing, and was listed and actively traded, on
the NASDAQ, a highly efficient market;
b) As a regulated issuer, Parlux filed periodic public reports with the SEC and the
NASD;
c) Parlux stock was followed by securities analysts employed by major brokerage firms
who wrote reports which were distributed to the sales force and certain customers of
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their respective brokerage firms. Each of these reports was publicly available and
entered the public marketplace; and
d) Parlux regularly issued press releases which were carried by national newswires.
Each of these releases was publicly available and entered the public marketplace.
95. As a result, the market for Parlux securities promptly digested current
information with respect to Parlux from all publicly-available sources and reflected such
information in Parlux 's stock price. Under these circumstances, all purchasers of Parlux
securities during the Class Period suffered similar injury through their purchase of stock
at artificially inflated prices and a presumption of reliance applies.
COUNT I For Violations Of Section 10(b) Of The 1934 Act And Rule 10b-5 Promulgated Thereunder Against All Defendants
96. Plaintiffs repeat and reallege the allegations set forth in paragraphs 1
through 95 above as though fully set forth herein. This claim is asserted against all
defendants.
97. During the Class Period, Parlux and the Individual Defendants, and each
of them, carried out a plan, scheme and course of conduct which was intended to and,
throughout the Class Period, did: (i) deceive the investing public, including plaintiff and
other Class members, as alleged herein; (ii) artificially inflate and maintain the market
price of Parlux common stock; and (iii) cause plaintiff and other members of the Class to
purchase Parlux stock at artificially inflated prices. In furtherance of this unlawful
scheme, plan and course of conduct, defendants Parlux and the Individual Defendants,
and each of them, took the actions set forth herein.
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98. These defendants: (a) employed devices, schemes, and artifices to defraud;
(b) made untrue statements of material fact and/or omitted to state material facts
necessary to make the statements not misleading; and (c) engaged in acts, practices and a
course of business which operated as a fraud and deceit upon the purchasers of the
Company's securities in an effort to maintain artificially high market prices for Parlux
securities in violation of Section 10(b) of the Exchange Act and Rule 10b-5. These
defendants are sued as primary participants in the wrongful and illegal conduct charged
herein. The Individual Defendants are also sued herein as controlling persons of Parlux ,
as alleged below.
99. In addition to the duties of full disclosure imposed on defendants as a
result of their making of affirmative statements and reports, or participation in the making
of affirmative statements and reports to the investing public, they each had a duty to
promptly disseminate truthful information that would be material to investors in
compliance with the integrated disclosure provisions of the SEC as embodied in SEC
Regulation S X (17 C.F.R. § 210.01 et seq.) and S-K (17 C.F.R. § 229.10 et seq.) and
other SEC regulations, including accurate and truthful information with respect to the
Company's operations, financial condition and performance so that the market prices of
the Company's publicly traded securities would be based on truthful, complete and
accurate information.
100. Parlux and the Individual Defendants, individually and in concert, directly
and indirectly, by the use of means or instrumentalities of interstate commerce and/or of
the mails, engaged and participated in a continuous course of conduct to conceal adverse
material information about the business, business practices, performance, operations and
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future prospects of Parlux as specified herein. These defendants employed devices,
schemes and artifices to defraud, while in possession of material adverse non-public
information and engaged in acts, practices, and a course of conduct as alleged herein in
an effort to assure investors of Parlux's value and performance and substantial growth,
which included the making of, or the participation in the making of, untrue statements of
material facts and omitting to state material facts necessary in order to make the
statements made about Parlux and its business, operations and future prospects in the
light of the circumstances under which they were made, not misleading, as set forth more
particularly herein, and engaged in transactions, practices and a course of business which
operated as a fraud and deceit upon the purchasers of Parlux securities during the Class
Period.
101. Each of the Individual Defendants' primary liability, and controlling
person liability, arises from the following facts: (i) each of the Individual Defendants was
a high-level executive and/or director at the Company during the Class Period; (ii) each
of the Individual Defendants, by virtue of his responsibilities and activities as a senior
executive officer and/or director of the Company, was privy to and participated in the
creation, development and reporting of the Company's internal budgets, plans, projections
and/or reports; (iii) the Individual Defendants enjoyed significant personal contact and
familiarity with each other and were advised of and had access to other members of the
Company's management team, internal reports, and other data and information about the
Company's financial condition and performance at all relevant times; and (iv) the
Individual Defendants were aware of the Company's dissemination of information to the
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investing public which they knew or recklessly disregarded was materially false and
misleading.
102. These defendants had actual knowledge of the misrepresentations and
omissions of material facts set forth herein, or acted with reckless disregard for the truth
in that they failed to ascertain and to disclose such facts, even though such facts were
readily available to them. Such defendants' material misrepresentations and/or omissions
were done knowingly or recklessly and for the purpose and effect of concealing Parlux's
operating condition, business practices and future business prospects from the investing
public and supporting the artificially inflated price of its stock. As demonstrated by their
overstatements and misstatements of the Company's financial condition and performance
throughout the Class Period, the Individual Defendants, if they did not have actual
knowledge of the misrepresentations and omissions alleged, were reckless in failing to
obtain such knowledge by deliberately refraining from taking those steps necessary to
discover whether those statements were false or misleading.
103. 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 price of
Parlux ' securities was artificially inflated during the Class Period. In ignorance of the
fact that the market price of Parlux's shares was artificially inflated, and relying directly
or indirectly on the false and misleading statements made by defendants, or upon the
integrity of the market in which the securities trade, and/or on the absence of material
adverse information that was known to or recklessly disregarded by defendants but not
disclosed in public statements by defendants during the Class Period, plaintiffs and the
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other members of the Class acquired Parlux securities during the Class Period at
artificially inflated high prices and were damaged thereby.
104. At the time of said misrepresentations and omissions, plaintiffs and other
members of the Class were ignorant of their falsity, and believed them to be true. Had
plaintiffs and the other members of the Class and the marketplace known of the true
performance, business practices, future prospects and intrinsic value of Parlux , which
were not disclosed by defendants, plaintiffs and other members of the Class would not
have purchased or otherwise acquired their Parlux securities during the Class Period, or,
if they had acquired such securities during the Class Period, they would not have done so
at the artificially inflated prices which they paid.
105. By virtue of the foregoing, Parlux and the Individual Defendants each
violated Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder.
106. As a direct and proximate result of defendants' wrongful conduct,
plaintiffs and the other members of the Class suffered damages in connection with their
purchases of the Company's securities during the Class Period.
COUNT II For Violations Of Section 20(a) Of The 1934 Act Against Individual Defendants
107. Plaintiffs repeat and reallege the allegations set forth in paragraphs 1
through 106 above as if set forth fully herein. This claim is asserted against the
Individual Defendants.
108. The Individual Defendants were and acted as controlling persons of Parlux
within the meaning of Section 20(a) of the Exchange Act as alleged herein. By virtue of
their high-level positions with the Company, participation in and/or awareness of the
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Company's operations and/or intimate knowledge of the Company's actual performance,
the Individual Defendants had the power to influence and control and did influence and
control, directly or indirectly, the decision-making of the Company, including the content
and dissemination of the various statements which plaintiff contends are false and
misleading. Each of the Individual Defendants was provided with or had unlimited
access to copies of the Company's reports, press releases, public filings and other
statements alleged by plaintiff to be misleading prior to and/or shortly after these
statements were issued and had the ability to prevent the issuance of the statements or
cause the statements to be corrected.
109. In addition, each of the Individual Defendants had direct involvement in
the day-to-day operations of the Company and, therefore, is presumed to have had the
power to control or influence the particular transactions giving rise to the securities
violations as alleged herein, and exercised the same.
110. As set forth above, Parlux and the Individual Defendants each violated
Section 10(b) and Rule 10b-5 by their acts and omissions as alleged in this Complaint.
By virtue of their controlling positions, the Individual Defendants are liable pursuant to
Section 20(a) of the Exchange Act. As a direct and proximate result of defendants'
wrongful conduct, plaintiffs and other members of the Class suffered damages in
connection with their purchases of the Company's securities during the Class Period.
PRAYER FOR RELIEF
WHEREFORE, plaintiffs on their own behalf and on behalf of the Class, pray for
judgment as follows:
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a) (Declaring this action to be a class action pursuant to Rule 23(a) and (b)(3) of the
Federal Rules of Civil Procedure on behalf of the Class defined herein;
b) (Awarding plaintiffs and the other members of the Class damages in an amount which
may be proven at trial, together with interest thereon;
c) Awarding plaintiffs and the members of the Class pre-judgment and post-judgment
interest, as well as their reasonable attorneys' and experts' witness fees and other
costs; and
d) Such other relief as this Court deems appropriate.
JURY DEMAND
Plaintiffs demand a trial by jury
Dated: November 8, 2006
.
By:__/s/ Maya Saxena__________
SAXENA WHITE P.A Maya Saxena (Fla Bar. No. 0095494) [email protected] Joseph E. White III (Fla Bar. No. 0621064) [email protected] 2424 North Federal Highway Suite 257 Boca Raton, FL 33431 Main 561.394.3399 Fax: 561.394.5082
Lead Counsel for Plaintiffs
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CERTIFICATE OF SERVICE I HEREBY certify that on the 8th day of November 2006, I presented the
foregoing to the Clerk of the Court for filing and uploading to the CM/ECF system, which will automatically effect service on counsel of record identified below.
/s/ Maya Saxena
Alvin B. Davis, P.A. Richard E. Brodsky Squire, Sanders & Dempsey L.L.P. 200 South Biscayne Blvd., Suite 4100 Miami, FL 33131 Tel: 305 577-7028 Fax: 305 577-7001 Counsel for Defendants
Lewis Kahn Michael A. Swick Kahn Gauthier Swick, LLC 650 Poydras Street, Suite 2150 New Orleans, LA 70130 Tel: 504 455-1400 Fax: 504 455-1498 Counsel for Plaintiff Thomas Haugh
Wayne H. Schwartz [email protected] Eric Lee [email protected] Lee & Amtzis, P.L. 5550 Glades Road, Suite 401 Boca Raton, FL 33431 Tel: 561 981-9988 Fax: 561 981-9980 Counsel for Plaintiffs Mark W. Byers and Brad Bogue William B. Federman [email protected] Federman & Sherwood 120 N. Robinson, Suite 2720 Oklahoma City, OK 73102 Tel: 405 235-1560 Fax: 405 239-2112
Alison K. Clark Marc A. Topaz Richard A. Maniskas Schiffrin & Barroway, LLP 280 King of Prussia Road Radnor, PA 19087 Tel: 610 667-7706 Fax: 610 667-7056 Counsel for Plaintiff Brad Bogue Charles J. Piven Brower Piven A Professional Corporation 401 East Pratt Street Suite 2525 Baltimore, MD 21202 Tel: 410 332-0030 Fax: 410 685-1300
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Counsel for Plaintiff Mark W. Byers Counsel for Plaintiff Can T. Duong
Steven J. Toll Daniel S. Sommers Joseph P. Helm, III Cohen, Milstein, Hausfeld & Toll, P.L.L.C. 1100 New York Avenue, NW Suite 500 – West Tower Washington , D.C. 20005 Tel: 202 408-4600 Fax: 202 408-4699 Counsel for Plaintiff John H. Spooner
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