in re zale corporation securities litigation 09-cv-02133...

Case 3:09-cv-02133-B Document 19 Filed 08/09/10 of 93 PageID 253

UNITED STATES DISTRICT COURT

NORTHERN DISTRICT OF TEXAS

DALLAS DIVISION

In re ZALE CORPORATION SECURITIES § Civil Action No. 3:09-cv-02133-BLITIGATION §

§ CLASS ACTION§

This Document Relates To: §§

ALL ACTIONS. §§

CONSOLIDATED CLASS ACTION COMPLAINT FOR VIOLATIONS OF THEFEDERAL SECURITIES LAWS AND JURY DEMAND

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TABLE OF CONTENTS

Page

INTRODUCTION 1

JURISDICTION AND VENUE 4

PARTIES 4

BACKGROUND TO THE CLASS PERIOD 7

DEFENDANTS’ FALSE AND MISLEADING STATEMENTS ISSUED DURING THECLASS PERIOD 11

False and Misleading Statements Regarding Zale’s Financial Results for FiscalYear 2007 11

False and Misleading Statements Regarding Zale’s Financial Results for FiscalYear 2008 27

False and Misleading Statements Regarding Zale’s Financial Results for the FirstThree Quarters of Fiscal Year 2009 46

THE TRUTH BEGINS TO EMERGE AND ZALE RESTATES ITS CLASS PERIODFINANCIAL FIGURES 55

DEFENDANTS’ MATERIALLY FALSE AND MISLEADING FINANCIALREPORTING DURING THE CLASS PERIOD 59

Zale Improperly Accounted for Advertising Costs 61

Zale Also Improperly Accounted for Several Other Items 63

Zale’s Accounting Misstatements Were Material 64

Defendants’ SOX Certifications Were False And Misleading 65

SCIENTER 68

Defendants Were Motivated to Improperly Inflate Earnings When a Change inZale’s Jewelry Warranty Program Resulted in Lower Revenues 68

Defendants Carefully Examined Advertising Expenses During the Class Period 70

Zale’s Restatement Supports Scienter 71

Defendants’ False SOX Certifications Establish Scienter 73

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Page

Zale Was on Notice Based on the Previous SEC Investigation into the Company’sAccounting Practices 73

Executive Compensation 74

Insider Trading 76

Other Indicia of Scienter 76

NO SAFE HARBOR 79

FRAUD-ON-THE-MARKET PRESUMPTION 80

PROXIMATE LOSS CAUSATION/ECONOMIC LOSS 81

CLASS ALLEGATIONS 83

COUNT I 84

Violation of § 10(b) of the Exchange Act and Rule 10b-5 Promulgated ThereunderAgainst All Defendants 84

COUNT II 86

Violation of §20(a) of the Exchange Act Against All Defendants 86

PRAYER FOR RELIEF 87

JURY TRIAL DEMANDED 87

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INTRODUCTION

1. This is a securities fraud class action on behalf of all purchasers and acquirers of Zale

Corporation (“Zale” or the “Company”) securities between November 16, 2006 and October 29,

2009, inclusive (the “Class Period”), against Zale and certain of Zale’s officers and/or directors for

violations of the Securities Exchange Act of 1934 (the “Exchange Act”).

2. On October 29, 2009, Zale admitted it had materially misstated its financial

statements during the Class Period, including the overstatement of its net earnings, earnings from

continuing operations, and earnings per share (“EPS”). On that day the Company restated its

financial statements to correct an overstatement of earnings during the Class Period of $19.6 million,

which included the restatement of over 94% of Zale’s originally reported net income for fiscal year

(“FY”) 2008. 1 Zale admitted it understated its expenses – and thus overstated its earnings – during

the Class Period because it had improperly accounted for advertising costs by failing to expense the

costs for advertisements that had already run. In fact, the Company had improperly classified certain

prepaid advertising costs as an asset on its books, rather than an expense. Zale also restated earnings

it had previously reported during the Class Period because it had failed to properly account for

intercompany accounts receivable, certain depository accounts, and federal income tax expenses.

Zale admitted its restatement was done to correct material errors it made by improperly applying

governing accounting principles.

3. During the Class Period, each of the individual defendants, in their capacities as either

Chief Executive Officer (“CEO”) or Chief Financial Officer (“CFO”) of Zale, signed certifications

required by §906 of the Sarbanes-Oxley Act of 2002 (“SOX”) and 18 U.S.C. §1350. These

certifications attested to the accuracy of Zale’s financial statements and the effectiveness of the

1 Zale’s FY ends on July 31; i.e., FY 2008 ended on July 31, 2008.

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Company’s disclosure controls and internal controls over financial reporting. The October 29, 2009

restatement of Zale’s financial statements was an admission these certifications were false. And

when Zale issued its restated financial statements, it also admitted it had not, as defendants attested

in their SOX certifications, implemented effective disclosure controls and internal controls over the

accounting processes affecting the restated figures during the Class Period.

4. The major restatement of Zale’s financial statements did not escape the attention of

the United States government. Subsequent to Zale’s disclosure on September 18, 2009 that it would

be restating certain financial figures issued during the Class Period, the Securities and Exchange

Commission (“SEC”) notified the Company it had begun an investigation into these accounting

issues and requested related information from Zale. As of June 7, 2010, as disclosed in Zale’s Form

10-Q filed with the SEC for the quarter ending April 30, 2010, the SEC investigation into Zale’s

restated financial statements remains ongoing.

5. The bulk of Zale’s October 29, 2009 restatement was based on the improper

accounting of advertising expenses. Throughout the Class Period, defendants repeatedly assured

analysts and investors that cutting costs was a top priority, and therefore Company executives were

examining each detail of Zale’s expenses – including advertising costs – to determine where dollars

could be saved. In February 2007, for example, Zale CEO Mary E. “Betsy” Burton (“Burton”) told

investors that Zale’s “ ‘good expense control resulted in earnings at the high end of expectations.’”

And then in February 2008, for instance, Zale CEO, Neal L. Goldberg (“Goldberg”) assured the

market the Company was “going through [a] very detailed review of our whole expense structure.”

Goldberg reiterated to investors that Company executives “have gone through and continue to go

through each aspect of the P&L” as of September 2008. It is common sense that the Company’s

overstatement of earnings that ultimately led to Zale’s restatement in October 2009 would have been

evident under such a stringent review of expenses.

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6. Defendants also repeatedly emphasized during the Class Period that advertising was

crucial to the Company’s business strategy to attract consumers and gain market share, which

included the repositioning of the Zale brand. Additionally, defendants’ Class Period assurances that

Zale’s advertising budget would be spent efficiently conveyed to the market the consistent message

that defendants were indeed examining and monitoring the Company’s advertising expenses which –

as Zale admitted by restating those figures on October 29, 2009 – were falsely reported during the

Class Period.

7. Defendants were motivated to artificially inflate Zale’s reported earnings during the

Class Period due to, in part, minimize the negative impact of the Company’s switch from offering

customers a two year warranty on jewelry – two-thirds of the revenue from which was reorganized

in an accelerated manner in the first three months – to a “lifetime warranty” that required the

recognition of all warranty sale revenue to occur over a five year period. Because Zale sold more

warranties after it switched to the lifetime program, this change in accounting, beginning in 2Q07, 2

resulted in a decrease in earnings during FY07 and FY08 in exchange for an increase in deferred

revenue that could not yet be recognized. As an analyst report covering Zale issued by CL King &

Associates on November 21, 2007 noted: “ This deferred revenue recognition method will hurt

reported GAAP earnings throughout FY08, but will then start to benefit earnings beginning in

FY09.” Defendants’ overstatement of earnings during FY07 and FY08 enabled the Company to

downplay the detrimental, immediate impact of this accounting change that would provide a

meaningful benefit to Zale’s financial position in the future.

2 Zale’s fiscal quarter will be referred to as “Q”, i.e., the second quarter of FY07 would be2Q07.

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8. By the start of the Class Period, Zale was no stranger to securities fraud claims. In

2006, the SEC had commenced a separate investigation into Zale’s accounting of extended service

agreements – the two year warranties sold to customers to cover jewelry breakage and sizing issues

that were offered before the Company transitioned to lifetime warranties. The investigation also

looked into Zale’s accounting for the timing of certain vendor payments. The SEC’s investigation

into Zale’s accounting practices in 2006 prompted securities fraud litigation against the Company

and the forced departure of Zale’s CFO Mark Lenz (“Lenz”).

JURISDICTION AND VENUE

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

Exchange Act (15 U.S.C. §§78j(b) and 78t(a)) and Rule 10b-5 promulgated thereunder by the SEC

(17 C.F.R. §240.10b-5).

10. This Court has jurisdiction over the subject matter of this action pursuant to 28 U.S.C.

§1331 and §27 of the Exchange Act (15 U.S.C. §78aa).

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

§ 1391(b), as many of the acts and practices complained of herein occurred in substantial part in this

District.

12. In connection with the acts alleged in this Complaint, defendants, directly or

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

the mails, interstate telephone communications, and the facilities of the national securities markets.

PARTIES

13. By Court Order dated June 10, 2010, Pipefitters Local No. 636 Defined Benefit Plan

(the “Pipefitters Plan”) was appointed as Lead Plaintiff in this action. As set forth in the certification

of Pipefitters Plan, filed in connection with its motion to be appointed Lead Plaintiff, Pipefitters Plan

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purchased Zale securities during the Class Period and, as a result of defendants’ conduct alleged

herein, suffered damages in connection with the purchase of Zale securities.

14. Defendant Zale is a leading specialty retailer of fine jewelry. During the Class

Period, Zale operated an average of over 2,000 stores and kiosks in all 50 states, Canada, and Puerto

Rico, as well as online. Zale is the second largest specialty retailer of fine jewelry in North America,

and operated numerous brands during the Class Period, including its flagship Zales Jewelers, Zales

the Diamond Store Outlet, Gordon’s Jewelers (“Gordon’s”), Peoples Jewelers, Bailey Banks &

Biddle Fine Jewelers, Mappins Jewelers, and Piercing Pagoda.

15. Defendant Mary E. “Betsy” Burton served as director, CEO, and President of Zale

until she resigned from the Company on December 19, 2007. In January 2006, Burton was

appointed Zale’s interim CEO, a role she filled until being permanently appointed to that position in

July 2006.

16. Defendant Rodney Carter (“Carter”) served as Zale’s CFO, Chief Administrative

Officer, and Executive Vice President from October 2006 until he resigned from the Company on

January 20, 2009. Prior to coming to Zale, Carter served as Senior Vice President and CFO of

PETCO Animal Supplies, Inc. since 2004. Upon coming to Zale, Carter had over 23 years of

financial experience in the retail, restaurant/entertainment, and financial services industries.

17. Defendant Neal L. Goldberg served as CEO and director of Zale from December 20,

2007 through the end of the Class Period. Upon his arrival at Zale in 2007, Goldberg had 27 years

of experience in the retail industry, including senior roles at Macy’s, Victoria’s Secret, and Gap Inc.

18. Defendant Cynthia T. Gordon (“Gordon”) served as Zale’s interim CFO from January

2009 until she resigned from the Company on June 30, 2009. Gordon also served as Senior Vice

President and Controller of Zale for several years until her resignation in June 2009.

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19. Defendants Goldberg, Carter, Burton and Gordon (collectively, the “Individual

Defendants”), by virtue of their high-level positions with the Company, had access to adverse,

undisclosed information about Zale’s business, operations, financial statements, markets, and present

and future business prospects, via internal corporate documents, conversations and connections with

other corporate officers and employees, attendance at management and Board meetings and

committees thereof, and reports and other information provided to them as part of their positions.

20. By virtue of their high level positions with the Company, the Individual Defendants

possessed the power and authority to control the contents of Zale’s quarterly reports and other public

filings, press releases, and presentations to securities analysts, money and portfolio managers, and

institutional investors, i.e., the market. Each of the Individual Defendants, by virtue of their high

level positions with Zale, directly participated in the management of the Company and was directly

involved in the day-to-day operations of the Company. The Individual Defendants were involved in

drafting, producing, reviewing, and/or disseminating the false and misleading statements and

information alleged herein, and were aware, or recklessly disregarded, that false and misleading

statements regarding Zale were being issued, and approved or ratified these statements, in violation

of the federal securities laws.

21. As officers and controlling persons of a publicly-held company whose common stock

was traded on the New York Stock Exchange (“NYSE”) during the Class Period, and governed by

the federal securities laws, each of the Individual Defendants had a duty to disseminate promptly

accurate and truthful information regarding the Company’s financial condition and performance,

growth, operations, financial statements, business, markets, management, earnings, and present and

future business prospects, and to correct any previously-issued statements that had become

materially misleading or untrue, so that the market price of Zale’s publicly-traded common stock

would be based upon truthful and accurate information. The Individual Defendants’

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misrepresentations and omissions during the Class Period violated these specific requirements and

obligations.

22. Each of the Individual Defendants also signed SOX certifications accompanying

certain Form 10-Qs and/or Form 10-Ks filed with the SEC during the Class Period.

23. Each of the defendants is liable as a participant in a fraudulent scheme and course of

conduct that operated as a fraud or deceit upon purchasers or acquirers of Zale common stock by

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

The scheme: (i) deceived the investing public regarding Zale’s business; (ii) artificially inflated the

price of Zale’s securities; and (iii) caused plaintiff and other members of the class to purchase Zale

securities at inflated prices.

BACKGROUND TO THE CLASS PERIOD

24. Leading up to the Class Period, and primarily in 2005, Zale implemented a series of

initiatives aimed at recapturing market share under CEO and President Mary Forté (“Forté”). This

strategy was centered on rebranding and “repositioning” the Company’s flagship Zales Jewelers

stores – its largest division – to move away from the traditional focus on mid-tier diamond rings and

jewelry to higher end gold and silver pieces, similar to the products offered by luxury jeweler

Tiffany & Co. This novel focus was supported by an advertising campaign to entice consumers with

the new inventory assortment available. Forté implemented a major advertising shift away from the

Company’s traditional “The Diamond Store” slogan to a “Be Brilliant” campaign to reflect the

inventory assortment.

25. This business plan failed. The campaign led to disappointing earnings and lost

market share. On January 30, 2006, Forté was forced to resign from the Company. The next day,

The Dallas Morning News reported: “Zale Corp. president and chief executive Mary L. Forte

resigned Monday at the request of the board after a shift in strategy failed to translate into higher

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Case 3:09-cv-02133-B Document 19 Filed 08/09/10 Page 1 1 of 93 PageID 263

sales and profit.” Shortly thereafter, Paul Leonard also resigned from the position of President of

Zales Jewelers, Zale’s largest division, as did Sue Gove, Chief Operating Officer (“COO”) and

Board member, and Charleen Wuellner, Senior Vice President, Corporate Services and former

President of Gordon’s and Zale Outlet.

26. Burton was appointed Zale’s interim CEO to replace Forté in February 2006. Shortly

after accepting her new position, Burton told investors the move toward “‘upscale’” customers was

“‘not the right direction.’” As The Dallas Morning News reported on February 18, 2006:

Another change [under Forté] was Zales’ new ad campaign . . . which ditchedthe longtime “The Diamond Store” tag line for a “Be Brilliant” mood campaign.That, too, will be under review, [Burton] said.

27. During an earnings call with the investment community on February 17, 2006, Burton

stated “[t]he key focus is on turning around the Zales brand.” This included reversion to “The

Diamond Store” tag line in advertising. CFO Lenz noted during the conference call that Selling,

General & Administrative (“SG&A”) expenses had increased “primarily a result of increased

investment in advertising.”

28. Then, on April 11, 2006 The Wall Street Journal reported:

Jeweler Zale Corp., which has been beset by disappointing sales andexecutive turnover, said the Securities and Exchange Commission has initiated aprobe into its accounting practices.

The Irving, Texas, company said the SEC on March 31 subpoenaedmaterial from former and current employees related to accounting for extended-service agreements, leases, and payroll accrual. In addition, it requested materialon executive compensation and severance, earnings forecasts, stock trading andthe timing of certain vendor payments.

* * *

Three top executives have left Zale since a disappointing holiday season. Inlate January, the board ousted Chief Executive Mary L. Forte, following a failed planto tailor the company’s core Zales Jewelers brand to a wealthier, more fashionableclientele by de-emphasizing promotional discounting and wedding-related jewelry.The effort, launched during the holiday season, resulted in merchandise shortages, a

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muddled media campaign and a sales slump that Zale’s said contributed to an almost12% decline in fiscal second-quarter profit.

29. On May 6, 2006, the Fort Worth Star-Telegram published an article stating:

Zale Corp., the largest U.S. jewelry retailer, said Chief Financial OfficerMark Lenz has been placed on leave for failing to tell auditors in a “timely”manner about delayed vendor payments, the company said late Friday. The Irving-based company hired George Mihalko, former chief financial officer of the SportsAuthority, to replace Lenz, according to Treasurer David Sternblitz. Vendorpayments as much as $8.2 million scheduled to be made in the last two weeks ofZale’s fiscal year ending July 31, 2005, were delayed until the first week of August,Sternblitz said, and Lenz didn’t properly notify auditors. Sternblitz said Lenzdeclined to comment. . . . The delay increased both net cash flow from operationsand free cash, though revenue and earnings were not affected, he said. Zale said lastmonth that it is being investigated by the Securities and Exchange Commission[about this issue], which has subpoenaed documents.

30. Despite the SEC investigation into the Company’s accounting practices, Burton

moved ahead with the new business strategy that had been implemented under her leadership, which

included an advertising campaign to reposition the Zale brand. During a May 17, 2006 conference

call with analysts and investors, Burton assured investors the Company would work to get “greater

efficiency out of [its] marketing dollars.”

31. Burton emphasized the importance of advertising in implementing Zale’s new

business strategy during an August 31, 2006 earnings conference call with the investment

community:

Now on to Zales brand marketing. First, lessons learned from fiscal ‘06. Weneed to target the gift giver more effectively and reach both the male gift giver andthe female gift giver/influencer. We need to include events TV messaging torecapture a portion of lost events volume. We need to enhance the TV media buy toincrease visibility. And we need to maintain targeted direct mail efforts to increasecustomer retention.

Based on these learnings, we will make the following changes in fiscal ‘07;we will launch new TV creatives, which will show breadth and depth of productalong with a call to action, and we will return to the diamond store.

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Burton also made clear she was familiar with Zale’s advertising expenses, responding to an analyst’s

question about “marketing spend” in the first versus second quarters, stating “the actual dollar spend

will be greater than last year.”

32. On July 24, 2006, The Wall Street Journal reported Zale had appointed Burton to the

CEO post permanently, and had launched a search for a new CFO following the forced resignation

of CFO Lenz due to the alleged improper conduct being investigated by the SEC.

33. Following Burton’s appointment as Zale’s CEO, analysts acknowledged a strong

marketing campaign was essential to implement the Company’s turnaround strategy. On August 29,

2006, the Stanford Group Company issued an analyst report covering Zale, which stated, in part:

We believe a differentiated assortment backed by superb marketing & well-trainedsalespeople and disciplined cost control will be required to substantially move thesales & EPS needles.

34. As of September 2006, Burton was still stressing to the market the importance of

advertising to Zale’s business plan. In a September 1, 2006 National Jeweler article, Burton was

quoted as saying Zale was “repositioning” itself to “return[] back to [its] ‘Diamond Store’ heritage.”

On September 1, 2006, The Dallas Morning News reported: “The company will introduce national

TV ads this holiday season that resurrect the Diamond Store tag line.”

35. On September 25, 2006, Zale issued a press release announcing it appointed Carter to

the position of CFO and Group Senior Vice President effective October 16, 2006, reporting directly

to Burton. Burton was quoted in the release as stating: “‘We are very excited to have someone of

Rodney’s caliber join our management team . . . . His high level of business acumen and extensive

experience as CFO of public retail companies make him a great fit at Zale.’”

36. In the Company’s 2006 Annual Report, which was filed with the SEC on October 13,

2006, Burton reassured investors in a letter to shareholders that she had the right management team

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in place to turn things around at the Company, emphasizing responsibility, accountability, and cost

savings. Burton told investors:

As I entered into my new role at Zale, the first priority was making sure wehad the right management team in place. One of my goals was – and continues to be–creating a culture of empowerment, giving people responsibility andaccountability.

We moved quickly to redefine the strategy going forward for the Zales brand.First and foremost, going back to our roots [including] a renewed emphasis ondiamond fashion and solitaires, and a return to “The Diamond Store.”

* * *

Our team is continuing to work on a number of initiatives aimed at improvingprofitability. We are focused on identifying productivity improvements andoperational cost savings throughout the Company.

37. Little did investors know that the accounting manipulations that led to Zale’s October

2009 restatement of its earnings had already begun.

DEFENDANTS’ FALSE AND MISLEADING STATEMENTSISSUED DURING THE CLASS PERIOD

38. Zale admitted it issued false financial statements during the Class Period when it

issued restated results on October 29, 2009. The restatement included the Company’s financial

statements for FY07, FY08, and the first three quarters of FY09.

False and Misleading Statements Regarding Zale’s Financial Results for Fiscal Year 2007

First Quarter of Fiscal Year 2007

39. False Statement: On November 16, 2006, Zale issued a press release announcing its

financial results for 1Q07. The Company reported, among other figures, a net loss of $26.4 million,

or $0.55 per share. Burton was quoted in the release as stating: “ ‘Earnings performance met

expectations for the quarter . . . .’”

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40. False Statement: The following figures were included in Zale’s 1Q07 financial

results:

Net Income (26,395)(in Thousands of Dollars)

EPS (0.55)(in Dollars)

41. False Statement: On November 16, 2006, Zale hosted a conference call with

analysts and investors to discuss Zale’s 1Q07 financial results. Burton and Carter participated in the

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

any misinformation or misstatements. During the call, Burton stated:

Q1 operating results were on plan. Excluding the impact of derivative accounting,we delivered a net loss of $0.45 per share on overall revenue growth ofapproximately 3% excluding the Bailey Banks & Biddle store closures. Comp storesales increased 0.4%, impacted in large part by the mix of clearance sales at the Zalesbrand.

42. Analysts reacted positively to Zale’s 1Q07 financial results. CL King & Associates,

for example, issued an analyst report covering Zale on November 16, 2006 entitled “ Q1 Results in

Line with Expectations; Reiterate Accumulate Rating.” The report stated, in part:

Zale Corp. reported Q1 (ended October 31) EPS of $(0.55). Excluding $0.10 ofpreviously disclosed non-recurring charges related to gold derivatives losses, EPSwere $(0.45), in line with guidance of $(0.42)-$(0.46) and compared to $(0.47) ayear ago.

43. Consistent with her previous statements that advertising was a key component of

rebranding the Company and thus crucial to Zale’s business strategy, Burton also confirmed she was

aware of how advertising dollars were being spent. She was quoted in The Dallas Morning News on

November 28, 2006 as stating: “ ‘We have new marketing and are shifting ad dollars to popular

shows from Desperate Housewives to Lost.’” The article also reported: “The tag line ‘Zales, the

Diamond Store’ is back with a catchy new theme song, A Thousand Miles by Vanessa Carlton.”

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44. False Statement: On December 8, 2006, Zale filed a Form 10-Q with the SEC setting

forth its 1Q07 financial results, including those discussed above at ¶¶39-41. The Form 10-Q was

accompanied by SOX certifications signed by Burton and Carter substantially identical to the

certifications quoted herein at ¶191.

45. Defendants’ statements regarding Zale’s 1Q07 financial results were materially false

and misleading when made. Defendants knew or recklessly disregarded, but failed to disclose, the

following:

(a) As detailed in ¶¶184-185, during 1Q07, Zale improperly understated

expenses, and thus overstated earnings, by failing to properly account for prepaid advertising costs.

Zale classified as an asset prepaid advertising costs that should have been expensed according to

Generally Accepted Accounting Principles (“GAAP”) because the advertisements had run;

(b) As detailed in ¶187, defendants also improperly overstated earnings during

1Q07 by failing to properly account for intercompany accounts receivable, certain depository

accounts, and federal income tax expenses;

(c) As detailed in ¶192, the Company lacked adequate internal controls;

(d) As detailed in ¶¶188-189, as a consequence of the aforementioned practices,

Zale’s earnings and EPS were artificially inflated and its reported financial results were in violation

of GAAP; and

(e) But for defendants’ improper accounting of advertising costs, intercompany

accounts receivable, certain depository accounts, and federal income tax expenses, the Company

would have reported lower earnings and EPS share during 1Q07.

46. Defendants’ statements on November 16, 2006 and December 8, 2006, which were

false and misleading when made, had a direct effect on Zale’s stock price, which continued to trade

at artificially inflated levels.

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47. Zale’s stock closed on November 16, 2006 at $30.20 a share, a new 52-week high

price. Throughout November 2006, Zale’s stock price continued to increase, reaching a high of

$31.42 per share on December 5, 2006.

48. On January 10, 2007, Burton gave a presentation to the investment community at the

Cowen and Company 5th Annual Consumer Conference. During the conference, Burton reaffirmed

advertising was crucial to Zale’s business plan to regain market share and improve earnings:

Our new TV creative and better media placement was successful in drivingtraffic and increasing transactions. We will build on this campaign, as well asreturn to the tagline, The Diamond Store.

* * *

In terms of marketing, everything I heard, everybody loved our commercials.They saw our commercials this year.

49. On February 1, 2007, Jewelers’ Circular-Keystone published an article called “Zale

Aims to Regain Market Dominance.” The article included excerpts from an interview with Burton,

wherein, when she was asked about marketing, she was quoted as saying:

We’re spending more on TV, buying spots with better visibility on top showsinstead of buying frequent spots. There’s more emphasis on promotional key itemsduring holiday gift-giving periods and key weekend events, which we back with TVexposure.

50. On February 9, 2007, Cowen and Company issued an analyst report covering Zale

entitled “In-Line Q2 (Jan.) Sales Results and Earnings Guidance.” The report recognized the

importance of advertising to Zale’s financial success, and stated, in part:

ZLC reported Q2 sales generally consistent with the trend indicated by the holidayseason sales report including a positive comp store sales performance at the flagshipZales division with customers reacting favorably to the brand’s significantmerchandising and marketing repositioning.

51. In February 2007, Frank Mroczka (“Mroczka”) resigned from his position as Senior

Vice President of Gordon’s, one of Zale’s segments. The Company appointed Steve Lang, who was

currently Vice President of Sale North America, to take Mroczka’s place.

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Second Quarter of Fiscal Year 2007

52. False Statement: On February 21, 2007, Zale issued a press release announcing its

financial results for 2Q07. The release stated, in part:

Zale Corporation, a leading specialty retailer of fine jewelry in North America, todayannounced adjusted net earnings of $94.8 million or $1.94 per diluted share for theCompany’s second quarter ended January 31, 2007, after adjustments for derivativeaccounting under SFAS 133 and a change in methodology in revenue recognition forlifetime jewelry protection plans sold during the quarter. Including theseadjustments, the Company reported net earnings under U.S. GAAP of $88.1 millionor $1.80 per diluted share. The impact of accounting for gold and silver contractsunder SFAS 133 increased net earnings by $2.5 million or $0.05 per share.

* * *

Year-to-date net earnings totaled $61.7 million or $1.26 per diluted share.


results:

Net Income 88,060(in Thousands of Dollars)

EPS 1.80(in Dollars)

54. Although the Company did not meet original expectations for 2Q07, it did meet

revised expectations, and Burton was quoted in Zale’s February 21, 2007 press release as stating:

“‘I’m pleased with the progress we’ve made . . . . At the Zales brand, we had our first comparable

store increase in three years and our first increase in operating earnings in four years. Customers

reacted favorably to our expanded assortment in our core diamond fashion and bridal categories as

well as our marketing repositioning.’”

55. The February 21, 2007 press release also quoted Burton as saying that in the second

half of FY07, Zale would make efforts to “ ‘focus on expense reduction, particularly those

investments in payroll and marketing that did not generate sufficient sales gains to justify. We are

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focused on driving shareholder value over the long-term and believe the Company is being

positioned to achieve that goal.’”

56. False Statement: On February 21, 2007, Zale hosted a conference call with analysts

and investors to discuss Zale’s 2Q07 financial results. Burton and Carter participated in the call and

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

misinformation or misstatements. During the call, Burton stated:

Q2 results were in line with revised expectations. . . .

Here are some of the highlights for the quarter. We gained nice salesmomentum at the Zales brand. This was the first positive comp for the Zales brandin three years, and the first increase in operating earnings in four years. . . .

. . . [W]e were able to meet the demands of the business through the most criticaltime and a return to the Diamond Store, new TV creative, and better mediaplacement proved successful in driving traffic into the stores.

* * *

While some brands had growth in earnings, this was offset by investment spending inothers. Our focus in the second half is on maximizing gross profit dollars andexpense reduction, particularly those investments in payroll and marketing that didnot generate sufficient sales gains to justify.

57. False Statement: During the February 21, 2007 conference call, Carter noted:

SG&A, including the cost of insurance operations was 34.2% for the quarter versus34% last year as a percentage of revenues.

58. Carter also emphasized during the February 21, 2007 call that Zale was focused on

reducing expenses:

SG&A has grown as a percent of total. We want a revision of some of thoseprocesses, whether it is the centralized merchandising that Betsy talked about, thatnot only has some process improvement opportunities, it also has interest expensesavings, commonality and streamline inventory investments.

Burton added:

Just to add to that. We have found that when you look for pennies, youactually can find lots of money. And I think we are trying to make sure the cultureis one of making sure we are not wasteful.

- 16 -574014_1


59. During the February 21, 2007 call, an analyst requested an update on Zale’s important

advertising strategy. Burton responded:

In particular, with the Zale brand which is the one that advertises the most heavily,we really believe we had the right advertising strategy. Which is a TV campaign,again, we returned to the Diamond Store tag. We have had very positive feedbackon the commerces themselves and I hear everybody. When they hear the VanessaCarlton music, 1000 Miles, come on, they don’t have to look at the TV, they know itis a Zales commercial. We are continuing with the use of that song and the over allcreative, and we found the combination of the emotional touch and with a call toaction. It is probably the most successful formula. We do not see any changes inour advertising strategy at this point, in terms of either in amount of money ormedia. We were pleased also, with the results of our improved media placement thisyear versus last year as well.

60. False Statement: On March 9, 2007, Zale filed a Form 10-Q with the SEC setting

forth its 2Q07 financial results, including those discussed above in ¶¶52-53, 56-57. The Form 10-Q

was accompanied by SOX certifications signed by Burton and Carter substantially identical to the

certifications quoted herein in ¶191.



following:




GAAP because the advertisements had run;





- 17 -574014_1




of GAAP; and



would have reported lower earnings and EPS during 2Q07.

62. Defendants’ statements on February 21, 2007 and March 9, 2007, which were false

and misleading when made, had a direct effect on Zale’s stock price, which continued to trade at

artificially inflated levels.

63. On March 21, 2007, Burton made a presentation to the investment community at the

Merrill Lynch Retailing Leaders Conference. She reiterated to conference attendees that advertising

was a significant component of Zale’s business plan to boost earnings:

A significant focus of the past year has been on the Zales brand. Over thelast several years, we had seen Zales market share continue to erode.

To gain this traction, we needed to reinvest back into the brand. . . .

Our new TV creatives and better media placement was successful in drivingtraffic, and customers reacted favorably to the marketing repositioning and areturn to the diamond store.

64. Carter also presented at the March 21, 2007 Merrill Lynch Retailing Leaders

Conference, and told attendees that expense control was important to Zale’s financial position:

As an organization, we are working our way through all aspects of thebusiness, starting with driving top-line growth, gross margin enhancement, a moreefficient expense structure, a disciplined approach or a focus on real estate, allfocused on enhancing long-term returns on capital and increasing shareholder value.

. . . We recognize that expenses have grown faster than sales over the last few years.Much of the expense structure is fairly lean relative to current ways of doingbusiness. However, as Betsy mentioned, we feel there are operational improvementand expense saving opportunities through the evolution of some of the key businessprocesses.

- 18 -574014_1


Third Quarter of Fiscal Year 2007

65. False Statement: On May 22, 2007, Zale issued a press release announcing its

financial results for 3Q07. According to the release:

[Zale] announced a net loss of $3.1 million or $0.06 per share for the Company’sthird quarter ended April 30, 2007. This loss includes, on an after-tax basis, areduction of $6.9 million, or $0.14 per share due to the decline in revenue recognizedfrom the change to a lifetime jewelry protection plan and a benefit of $1.6 million, or$0.03 per share for the net impact of derivative versus hedge accounting on its goldand silver contracts. Excluding these items, the Company reported earnings of $2.2million, or $0.05 per diluted share.

Burton was also quoted in the release: “‘While comp store sales decreased 3.4%, a focus on

maximizing gross margin dollars and good expense control contributed to earnings in-line with

expectations for the quarter . . . we are maintaining our current earnings guidance for fourth

quarter.’”


results:



67. False Statement: On May 22, 2007, Zale hosted a conference call with analysts and

investors to discuss Zale’s 3Q07 financial results. Burton and Carter participated in the call and had

an opportunity to address analysts’ and investors’ questions and concerns, and correct any


Q3 results were in line with revised expectations. While comp store sales decreased3.4%, a focus on maximizing gross margin dollars and expense saves resulted inearnings at the high end of guidance or EPS of $0.05 when you exclude the impactof derivative accounting and the change to a lifetime jewelry protection plan.

* * *

- 19 -574014_1


And while we remain cautious, we are maintaining current guidance of pro formaEPS in the range of minus $0.01 to minus $0.05.

68. False Statement: During the May 22, 2007 call, Carter stated:

SG&A, including the cost of insurance operations was 47.7% for the quarterversus 45.8% last year as a percentage of revenues.

69. During the May 22, 2007 conference call, CL King & Associates analyst Bill

Armstrong asked:

On your guidance, you’re lowering your sales assumption but maintaining yourearnings guidance. So that would imply some improvement versus your previousexpectations either in gross margin or SG&A or some combination. Could you justelaborate in that, please?

Burton responded:

Yes, we continued to look at the same results that we experienced in Q3where we had similar results in terms of Mother’s Day as Valentine’s. Because ofour focus on gross margin dollars, we’re able to pick up gross margin dollars, whichflows through to the bottom line and on top of that, we are focused on expensecontrol. So the combination of the two would suggest that we can, this is not, giventhe macro environment, this is not the year to go after sales. Instead we’re goingafter gross profit dollars and again expense saves.

70. Analysts reacted favorably to Zale’s 3Q07 reported results, especially the Company’s

reported EPS for the quarter. On May 22, 2007 for example, CL King & Associates issued an

analyst report covering Zale entitled “Q3 Results Slightly Above Expectations; Reiterate

Accumulate Rating.” The report stated, in part:

Zale Corp. reported 3Q07 (ended April 30, 2007) EPS of $(0.06), compare with ourestimate of $(0.10). Excluding a $0.03 non-cash gain related to gold derivativeslosses and a $0.14 negative impact due to a change in deferred insurance revenuerecognition, EPS were $0.05, slightly above management’s recent guidance of EPSat the high of a range of $0.00-$0.04. ZLC earned $0.35 in 3Q06; excluding $0.11 ofitems, 3Q06 EPS would have been $0.24.

71. On May 23, 2007, Cowen and Company issued an analyst report covering Zale,

which stated, in part:

- 20 -574014_1


ZLC reported GAAP EPS of $(0.06) and OpEPS of $0.05 (excl $0.14 impact relatedto jewelry protection plans and $0.03 benefit from derivatives accounting) vs. $0.35LY and in line with our estimate of $(0.07) and $0.04, respectively.

72. False Statement: On June 11, 2007, Zale filed a Form 10-Q with the SEC setting

forth its 3Q07 financial results, including those discussed above in ¶¶65-68. The Form 10-Q was

accompanied by SOX certifications signed by Carter and Burton substantially identical to the

certifications quoted in ¶191.



following:











of GAAP; and




- 21 -574014_1


74. Defendants’ statements on May 22, 2007 and June 11, 2007, which were false and

misleading when made, had a direct effect on Zale’s stock price, which continued to trade at


75. On August 6, 2007, Canada News Wire reported John Zimmerman, President of Zale

North America, left the Company, effective immediately.

Fourth Quarter of Fiscal Year 2007 and Fiscal Year 2007

76. False Statement: On August 30, 2007, Zale issued a press release announcing its

financial results for 4Q07 and FY07. The release stated:

[Zale] reported net earnings of $1.5 million, or $0.03 per diluted share for theCompany’s fourth quarter ended July 31, 2007. Earnings for the quarter include, onan after-tax basis, (1) a reduction of $6.3 million, or $0.13 per diluted share due tothe delay in revenue recognized from the change to a lifetime jewelry protectionplan, (2) a benefit of $1.1 million, or $0.02 per diluted share for the net impact ofderivative versus hedge accounting on its gold and silver contracts, and (3) a net taxbenefit of $6.7 million, or $0.14 per diluted share primarily related to a decision toindefinitely reinvest certain undistributed foreign earnings in accordance with APB23. Excluding these items, the Company reported earnings of $0.0 million, or $0.00per diluted share.

For the same period last year, the Company reported a net loss of $27.4million, or $0.57 per share.

* * *

Net earnings for fiscal year 2007 were $59.3 million or $1.21 per share.These earnings treat forward commodity contracts as derivatives under SFAS 133and reflect the change in revenue recognition for jewelry protection plans as a resultof the extended service period covered by plans during the year. The after-tax impactof derivative versus hedge accounting treatment was a $0.4 million benefit, or $0.01per share, the negative impact on revenue recognized from the sale of jewelryprotection plans was $22.3 million, or $0.46 per share and a tax benefit of $6.7million, or $0.14 per share primarily related to the decision to indefinitely reinvestcertain undistributed foreign earnings in accordance with APB 23. Excluding theseitems, fiscal 2007 net earnings were $74.4 million, or $1.52 per share.

For the same period last year, earnings were $53.6 million, or $1.09 per share.

* * *

- 22 -574014_1


The Company also provided its annual forecast for its fiscal year ending July31, 2008. For the full year, the Company expects a comparable store sales increase,including its online sales, of 1% to 2%. GAAP earnings are expected to be in therange of $1.11 to $1.16 per share.

77. False Statement: Zale’s August 30, 2007 release also quoted Burton as saying:

“Improving sales trends post Mother’s Day combined with a focus onmaximizing gross margin dollars and good expense control resulted in earnings atthe high end of expectations . . . .”

. . . “Fiscal 2007 was a year in which we focused on going back to the basics. Wetested investments in inventory assortments as well as in payroll and marketing.While many of these initiatives paid off, others have been pared back. We will takethese learnings as well as the opportunity to refine our pricing and promotionalstrategy for this Holiday to drive meaningful earnings improvement in our all-important second quarter of fiscal 2008. . . . For fiscal 2008, we expect earningsimprovement, a significant reduction in inventory and the continued success of ourlifetime jewelry protection plans to generate approximately $125 million to $150million in free cash flow.”


results:



79. False Statement: The following figures were included in Zale’s FY07 financial

results:



80. False Statement: On August 30, 2007, Zale also hosted a conference call with

analysts and investors to discuss Zale’s 4Q07 and FY07 financial results. Burton and Carter

participated in the call and had an opportunity to address analysts’ and investors’ questions and

concerns, and correct any misinformation or misstatements. During the call, Burton stated:- 23 -

574014_1


Q4 results were in line with expectation. Comp store sales decreased slightly, 0.5%,as trends improved post Mother’s Day. And a continued focus on maximizinggrowth margin dollars and good expense control resulted in pro forma EPS of$0.00, which was the high-end of our guidance.

* * *

Good expense control resulted in a slight improvement in SG&A as the percent ofsales compared to last year . . . . Fiscal ‘07 as a whole was a year in which wefocused on going back to the basics. It marked the return of the Zales brand to itsdiamond store heritage as well as middle America as its core customer. We had thefirst positive holiday comp in the Zales brand for three years. We tested investmentspending and inventory assortments as well as in payroll and marketing.

. . . [O]verall, I am pleased with the progress we have made to date in repositioningthe Zales brand . . . .

* * *

Now, on to fiscal ‘08. Over the past year, we have looked at every aspect ofour operational performance looking to define and refine Zale’s strategy for long-term success. We reviewed our portfolio strategy, the positioning of the variousbrands, as well as looked for opportunities to improve the core business.

81. False Statement: Carter discussed Zale’s 4Q07 and FY07 financial results during the

August 30, 2007 call:

Operating loss for the quarter was $4.7 million. The prior year operating losswas $36.7 million, which includes $40.7 million of a noncash charge and other itemsand a $1.7 million derivative loss. Operating earnings for the quarter on a basisconsistent with guidance and prior years, including hedge accounting forcommodity contracts and accelerated revenue recognition from the sale of warrantiesis $3.8 million or 0.8% as a percent of sales, versus $5.7 million last year or 1.2% ofsales excluding the impact of the mostly noncash charge and derivatives lost. Forthe year on a GAAP basis, operating earnings were $103.1 million, compared to$81.1 million last year, which included a noncash charge settlement of retirementbenefit, Bailey Banks & Biddle store closures and other items. . . .

Net income for the quarter was $20,000, or $0.00 per share . . . . Thiscompares to net income of $959,000 or $0.02 per diluted share last year . . . . Forthe year, net income was $59.3 million, or $1.21 per share versus $53.6 million or$1.09 per diluted share last year.

- 24 -574014_1


82. During the August 30, 2007 call, in response to an analyst’s question about marketing

strategy, Burton emphasized that advertising was critical to Zale’s plan to make the Company’s Zale

Jewelers and Gordon’s brands distinct and unique to avoid “cannibalization” between the chains:

The marketing programs, clearly they both have their unique marketingcampaigns, that will continue. So that will be a different look and feel to the ads,but they will be similar to last year’s for both Zale’s and Gordon’s. The advertisedproduct on TV will clearly be different product. So again, to the customer it willlook very much like two different brands and two different strategies.

83. Burton also told the market during the August 30, 2007 conference call:

We are not overly concerned about the macro environment at this point. We believeour plans are conservative and have taken into account the fact that it’s a challengingmacro environment.

84. Analysts reacted favorably to Zale’s 4Q07 financial results. CL King & Associates,

for example, issued an analyst report on August 30, 2007 entitled “Q4 Results in Line with

Expectations; Reiterate Accumulate Rating.” The report stated, in part:

Zale Corp. reported 4Q07 (ended July 31) EPS of $0.03. Excluding a $0.14 non-recurring tax benefit, EPS of $(0.11) was in line with management’s recentlyrevised expectation of EPS at the high end of previous guidance of $(0.11)-$(0.15).We had been estimating $(0.11).

85. That same day, August 30, 2007, WR Hambrecht + Co. also issued an analyst report

covering Zale, which stated, in part:

The Company outperformed our FQ3 estimate (adjusted diluted EPS) of -$0.04 by$0.04/share, delivering $0.00/share. These were in line with the Company’sguidance of delivering an adjusted EPS at the higher range of its $0.00-$0.04/shareguidance.

86. False Statement: On October 1, 2007, Zale filed a Form 10-K with the SEC setting

forth its 4Q07 and FY07 financial results, including those discussed above in 1[1[76-81. The Form

10-K was accompanied by SOX certifications signed by Burton and Carter substantially identical to

the certifications quoted herein at 1[191.

- 25 -574014_1


87. In the letter to Zale shareholders authored by Burton and included in the Company’s

2007 Annual Report, filed with the SEC on October 1, 2007, she reiterated to investors:

Fiscal 2007 was a year in which we focused on going back to basics. Itmarked the return of the Zales brand to its ‘‘Diamond Store’’ heritage as well as tomiddle America as its core customer. . . . We tested investments in the inventoryassortment as well as in payroll and marketing. . . . [O]verall, I am pleased with theprogress we have made to-date in repositioning the Zales brand and our focus is onan improved customer experience going into the new fiscal year.

88. Defendants’ statements regarding Zale’s 4Q07 and FY07 financial results were

materially false and misleading when made. Defendants knew or recklessly disregarded, but failed

to disclose, the following:

(a) As detailed in ¶¶184-186, during 4Q07 and FY07, Zale improperly

understated expenses, and thus overstated earnings, by failing to properly account for prepaid

advertising costs. Zale classified as an asset prepaid advertising costs that should have been

expensed according to GAAP because the advertisements had run;


4Q07 and FY07 by failing to properly account for intercompany accounts receivable, certain

depository accounts, and federal income tax expenses;




of GAAP; and



would have reported lower earnings and EPS during 4Q07 and FY07.

- 26 -574014_1


89. Defendants’ statements on August 30, 2007 and October 1, 2007, which were false



90. On October 1, 2007, The Dallas Morning News reported:

Richard Marcus, longtime Zale Corp. board member and chairman since2004, has quietly resigned from the Irving-based jewelry chain.

False and Misleading Statements Regarding Zale’s Financial Results for Fiscal Year 2008




[Zale] reported a net loss of $28.4 million, or $0.58 per share, for the Company’sfirst quarter ended October 31, 2007. As previously announced, the sale of BaileyBanks & Biddle was completed on November 9, 2007. Net loss from continuingoperations was $26.7 million, or $0.54 per share and the loss from discontinuedoperations related to the Bailey Banks & Biddle brand was $1.7 million or $0.04 pershare. For the same period last year, the Company reported a net loss of $26.4million, or $0.55 per share, and the net loss from continuing operations was $24.7million, or $0.51 per share. This loss included $4.8 million or $0.10 per sharenegative net impact of derivative accounting treatment for its gold and silvercontracts.

Burton was quoted in the release as stating:

“Earnings performance met expectations for the quarter as we offsetslightly lower sales with gross margin rate improvement across all brands afteradjusting for the warranty change . . . . We continue to execute our strategy ofmaximizing gross margin dollars and maintaining good expense control in thecurrent challenging macro environment.”


results:



- 27 -574014_1


93. False Statement: On November 20, 2007, Zale hosted a conference call with analysts

and investors to discuss Zale’s 1Q08 financial results. Burton and Carter participated in the call and

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


Q1 results were in line with expectations. It should be noted that all numbers reflectresults from continuing operations. We did complete the sale of Bailey Banks &Biddle earlier this month and its results are reported in discontinued operations. . . .

. . . Comp store sales decreased slightly, 0.4%, and the net loss for the quarter fromcontinuing operations was $0.54 per share in line with guidance. Cash fromwarranty sales increased $9.5 million over the first quarter last year, but revenuesrecognized were $6.1 million less than last year as a result of the switch from a twoyear to a lifetime jewelry protection plan. This resulted in an increase inunrecognized revenues for the first quarter of $14.3 million or $0.18 earnings pershare. After adjusting for the incremental unrecognized cash sales, the net loss pershare is $0.36 compared to a net loss of $0.43 last year excluding the loss fromderivatives.

94. False Statement: Carter reviewed the Company’s 1Q08 financial results it had

released earlier that day:

The operating loss for the quarter was $37.5 million compared to $34.2million last year which included the loss from derivatives of $8.6 million. The firstquarter loss was negatively impacted by the change in amortized revenues associatedwith the change in the warranty product. . . . The net loss for the quarter fromcontinuing operations was $26.7 million or $0.54 per share versus a $24.7 million netloss or $0.51 per share last year.

95. Burton also noted during the November 20, 2007 conference call:

The marketing campaign for Zales will also be consistent with last year. Wewill build on TV created from last year that returned us to Zales the Diamond Storeand featured the Vanessa Carlton song 1,000 miles. The ads will remain a blend ofemotion and product. They began airing November 5th, so hopefully you’ve alreadyseen them. We continue to be aggressive in primetime and highly visible TV spots.Our overall advertising spend should be relatively flat with last year.

96. Analysts reacted positively to Zale’s 1Q08 financial results, particularly its reported

EPS. On November 21, 2007, for example, CL King & Associates issued an analyst report entitled

“Q1 Results in Line with Expectations; Reiterate Accumulate Rating.” The report stated, in part:

- 28 -574014_1


Zale Corp. reported 1Q08 (ended 10/31/07) EPS of $(0.58), in line withmanagement’s recently revised expectation of EPS at the high end of originalguidance of $(0.59)-$(0.63). We had been estimating $(0.59).

97. False Statement: On December 10, 2007, Zale filed a Form 10-Q with the SEC

setting forth its 1Q08 financial results, including those discussed above in 919191-94. The Form 10-Q

was accompanied by SOX certifications signed by Burton and Carter substantially identical to the

certifications quoted herein at 91191.



following:

(a) As detailed in 9191184-186, during 1Q08, Zale improperly understated




(b) As detailed in 91187, defendants also improperly overstated earnings during



(c) As detailed in 91192, the Company lacked adequate internal controls;

(d) As detailed in 9191188-189, as a consequence of the aforementioned practices,


of GAAP; and




- 29 -574014_1





100. On December 20, 2007, Zale announced Burton was resigning from her positions as

President, CEO, and member of Zale’s Board of Directors, effective immediately. Defendant

Goldberg was named President, CEO, and a Board member at Zale. Burton, however, continued to

serve as consultant to the Company.

101. On January 15, 2008, Carter gave a presentation discussing Zale to the investment

community at the Cowen and Company Consumer Conference. During the presentation, Carter told

attendees:

Zales is the most trusted and recognized jewelry brand in middle Americawith over $1 billion in revenue and approximately 800 stores. Through the nationalpresence in nationwide marketing, Zales represents leadership and value to thatvalue-oriented customer.

* * *

While we make selective investments, we also maintain strong financial disciplineas it relates to inventory, capital investments and expense management.

102. Carter, in response to an analyst’s question about any potential expense “adjustments”

at the Company, also stated during the January 15, 2008 conference:

[O]n the expense side, we are already doing some things to streamline themerchandising and sourcing organization. That was really one of the primary SG&Asaves. Most of our SG&A is field-based, and it is really store payroll and rentalexpenses, followed by advertising. And so that is really one of the keys.



financial results for 2Q08. According to the release, the Company

announced earnings from continuing operations for the second quarter of fiscal2008 of $52.7 million, or $1.16 per diluted share, compared to $77.1 million, or$1.57 per diluted share for the second quarter of fiscal 2007. The second quarter

- 30 -574014_1


ended January 31, 2007 included a $2.5 million, or $0.05 per diluted share, positiveimpact related to derivative accounting treatment for the Company’s gold and silvercontracts.

104. Goldberg, who had been appointed CEO two months earlier, was quoted in the

February 21, 2008 release as saying:

“We intend to make Zale into a more nimble and efficient organization. Weremain focused on the generation of free cash flow, achieving a high return on capitaland maintaining financial rigor and discipline overall.”


results:



106. On February 21, 2008, Zale hosted a conference call with analysts and investors to

discuss Zale’s 2Q08 financial results. Goldberg and Carter participated in the call and had an

opportunity to address analysts’ and investors’ questions and concerns, and correct any

misinformation or misstatements. During the call, Goldberg stated:

There are three principal components to our plan. One, focusing our value-orientedcustomer. Two, enhancing our operational effectiveness. And three, maintainingfinancial rigor and discipline.

. . . First, the focus on our value-oriented customer. . . . Merchandising andmarketing will always be fundamental to this company, but to be truly successfulwe must create an emotional experience for our customers. . . .

. . . Similarly, our marketing message both in store and externally must be sharperbased on my store visits over the past two months, I saw first hand how we haveconfused the customer with too much in-store signage. The same can be said of ourdirect mailings. Our overall marketing is at best fair, which is not good enough. Weare carefully reviewing our sales and marketing strategies to find more effectiveways to simplify and distinguish our message.

* * *

- 31 -574014_1


Finally, we’re committed to financially rigor and discipline. Especiallywhen it comes to inventory management, expense management and capitalinvestments. Creating a culture of discipline and accountability is vital as acompliment to a tighter strategic focus.

107. False Statement: During the February 21, 2008 call, Carter stated:

SG&A including the cost of insurance operations was 36.9% for the quarterversus 35.6% last year as a percentage of revenue primarily due to deleverage fromthe sales decline.

108. During the February 21, 2008 call, Merrill Lynch analyst Lorraine Maikis asked:

Can you touch a little bit on SG&A expenses going forward in this lowersales environment?

Goldberg responded:

As I said in our remarks, we are going through very detailed review of ourwhole expense structure. And as we get to the finalization of that in the very nearterm, we’ll communicate that.

109. During the February 21, 2008 call, Clover Capital analyst Matthew Cougher

specifically asked about Zale’s advertising expenses:

[Y]ou spent about $2 a share pretax on advertising as I see the debt on the 10K. Thatwould seem to be an area that should come under some type of scrutiny becauseclearly if the advertising dollars are not producing the kind of incremental results youwant on the top line, that rationalizing that line alone could free up a fair amount ofcash and earnings to shareholders. Would you concur with that, or do you see itdifferently?

Goldberg responded:

I concur to most of it. I concur that we have to get more efficient in ourmarketing spend. We do spend a lot of money on it. I don’t think we’ve gotten theresults we wanted. And we have got to become more efficient. That said, I thinkmarketing is a key element of drawing – there is a pull part of the market thatshould get customers into our doors with a great compelling focus message. So,we spend a lot. We have to get more efficient on that spend. I concur on that. Butwe will always be a marketing company that is going to go after our customer. Andboth go after the customer and help solidify our brands to the customer.

110. Analysts reacted favorably to Zale’s 2Q08 financial results. On February 21, 2008,

for example, Stanford Group Company issued an analyst report entitled “ZLC: 2Q08 EPS Review.

- 32 -574014_1


Better-Than-Expected EPS. Our Outlook Remains Cautious. Management Sounded More

Confident, Positive in its Message.” The report stated, in part:

The critical 2Q08 EPS were $1.16 vs. our $1.09 estimate and the Street’s $1.10.The outperformance was due to lower SG&A and fully diluted shares than weexpected.

111. On February 21, 2008, Cowen and Company also issued an analyst report covering

Zale, which stated, in part:

Q2:F08 Results. ZLC reported Q2 GAAP EPS of $1.16 vs. $1.57 LY whichexcludes the discontinued operations of Bailey Banks & Biddle (completed sale toFinlay Fine Jewelry on 11/09/07), better than our estimate of $1.10. Most of theupside relative to our expectations was due to better than expected cost controls.

112. On February 27, 2008, Stanford Group Company published an analyst report entitled

“ZLC: Zale Takes Action to Improve EPS. Announces Plan for $65M in Annual Cost Savings.”

The report stated, in part:

We reiterate our Hold rating but are increasing our EPS estimates and price target to$21 from $16 on the news of the company’s plan to reduce costs.

113. On February 27, 2008, Business Wire published an article entitled “Zale Initiates

Operational Efficiency Program to Generate $65 Plus Million in Annual Savings; – Program Will

Reduce Staffing by Over 200 Positions; – Approximately 105 Store Closures Planned in Fiscal 2008;

– $40 Million Reduction in Capital Expenditures for Fiscal 2009; – $100 Million Inventory

Reduction.” The article stated, in part:

Zale Corporation, a leading specialty retailer of fine jewelry in North America, todayannounced that it has begun the implementation of a program designed to enhancethe Company’s profitability and improve its overall effectiveness. The program,which seeks to generate $65 plus million in ongoing, annualized savings beginningin the Company’s fourth quarter of fiscal 2008, is the product of management’scomprehensive review of operating and capital expenses in consultation with theBoard of Directors. Key elements of the program include . . . .

* * *

Zale President and Chief Executive Officer Neal Goldberg said, “In order toimprove Zale’s overall performance and provide our value-oriented customer with an

- 33 -574014_1


exceptional experience, it is essential that we reduce the Company’s infrastructurecosts, which have outpaced its sales growth since 2002. The program we areannouncing today follows an extensive review, and will enhance our operationaleffectiveness significantly. . . .”

“Creating a culture of cost discipline and financial rigor is vital to Zale’songoing success. While we recognize that expense saves will help drive efficienciesin the near-term, our ultimate success will come from optimizing the balancebetween top-line growth, margin expansion and expense control” . . . concludedMr. Goldberg.

The article further reported:

In addition, approximately $40 million of non-compensation expenses such asconsulting, marketing, and travel are planned to be eliminated, representing 20% ofsuch expenses, as well as $2 million related to distribution.

Reflecting this expense reduction, the Company expects to reduce SG&A as apercent of sales by approximately 250 basis points for fiscal 2009, as compared tothe current fiscal year.

114. The next day, February 28, 2008, CL King & Associates issued an analyst report

similarly praising the Company’s cost cutting plans. The report was entitled “New Cost Reduction

Program Should Improve Earnings; Raising Target Price to $23 from $19; Reiterate Accumulate

Rating,” and stated, in part:

We note that the biggest bucket by far includes non-compensation expenses,including consulting, marketing and travel. . . . Management believes it can achievea more coherent marketing message with less expense.

We commend ZLC’s new CEO, Neal Goldberg, for his aggressive initiativesthus far to improve the company’s financial performance. If these cost savings canbe achieved without sacrificing sales growth, then these new initiatives willmaterially improve the ZLC investment thesis.

115. False Statement: On March 10, 2008, Zale filed a Form 10-Q with the SEC setting

forth its 2Q08 financial results, including those discussed above in ¶¶103, 105, 107. The Form 10-Q

was accompanied by SOX certifications signed by Goldberg and Carter substantially identical to the

certifications quoted herein in ¶191.

- 34 -574014_1




following:











of GAAP; and










- 35 -574014_1


[Zale] reported a net loss from continuing operations for the third quarter of fiscal2008 of $17.4 million, or $0.42 per share, compared to a loss of $5.0 million, or$0.10 per share for the third quarter of fiscal 2007.

* * *

–The earnings from continuing operations for the nine months endedApril 30, 2008 were $8.6 million, or $0.19 per diluted share,compared to earnings of $47.4 million, or $0.97 per diluted share forthe nine months ended April 30, 2007.

119. The May 23, 2008 release also quoted Goldberg:

“We are very pleased with our progress this quarter against our plan . . . . Wehave a focused agenda to improve performance and the team has stayed locked-in onachieving our objectives. This includes focusing on our core customer by clarifyingour merchandise offering, improving our value proposition and simplifying ourmarketing message that is led by product and supported by price. We are enhancingour operational effectiveness through the implementation of our efficiency programand the proper alignment of the organizational structure. Finally, we aremaintaining financial rigor and discipline by executing on our inventory liquidationprogram, generating savings from the $65 plus million in identified expensereductions and returning value to shareholders through a significant stock repurchaseprogram.”


results:



121. On May 22, 2008, Zale hosted a conference call with analysts and investors to discuss

Zale’s 3Q08 financial results. Goldberg and Carter participated in the call and had an opportunity to

address analysts’ and investors’ questions and concerns, and correct any misinformation or

misstatements. During the call, Goldberg discussed the importance of advertising to Zale’s business

strategy:

The time we have spent in the field reinforces our belief that focus and clarity inthe merchandise presentation and marketing is paramount to improving thecustomer experience.

- 36 -574014_1


* * *

The Mom Rocks marketing campaign for Mother’s Day was integrated acrossall channels including television, print, catalogs, in store, direct mail and online. Weare creating an emotional experience that resonates with our customer. . . . Theresponse has been very positive and by focusing on emotion rather than price, wehave connected more quickly with people compared to previous campaigns.

122. Goldberg also stated during the May 22, 2008 conference call:

Finally, our commitment to financial rigor and generating free cash flowwas evident this quarter. . . . We identified $65 million plus in ongoing annualizedsavings. We recognize that expense saves will help drive efficiencies in the nearterm, but our ultimate success will come from optimizing the balance between topline growth, margin expansion and expense control. We committed to fostering aculture of cost discipline and accountability.

* * *

Our financial position is solid. We have strong cash flow and a solid balancesheet that provides flexibility to take advantage of opportunities that may presentthemselves. It is imperative that we maintain the same level of financial rigor anddiscipline regardless of the economic environment.

123. False Statement: During the May 22, 2008 call, Carter discussed the Company’s

financial results for 3Q08. He stated, in part:

Our results are in line with expectations and we anticipate fourth quarter margins toexperience a somewhat higher reduction as we move through additionalinventory. . . .

SG&A, including the cost of insurance operations, was 49% for the quarterversus 49.9% last year as a percentage of revenue, primarily due to leveragegenerated as a result of the sales increase. SG&A dollars increased by $10 million,primarily in variable field payroll and rent. The company achieved approximately$4 million in savings related to the expense reduction initiative that was offset by$2 million of severance and related expenses. Operating loss for the quarter was$21.9 million compared to a loss of $4 million last year.

* * *

During the quarter, we announced our operational efficiency program and the plan togenerate $65 million plus in annual savings. The savings initiative, continuedfinancial discipline and accountability should result in decreased SG&A expenseas a percentage of sales in the coming years.

* * *

- 37 -574014_1


In summary, we are committed to maintaining financial rigor and discipline,especially when it comes to inventory management, expense management andcapital investments.

124. During the May 22, 2008 call, JJK Research analyst Janet Kloppenberg asked about

the Company’s advertising expenses:

And as you look forward with the success of your marketing program here forMother’s Day, what do you think about your marketing spend, Neal, now that youhave been there for a while? Will it remain at current levels, could it move higher?What is the direction of that spend?

Goldberg responded:

The first, most important is we feel very strongly that we need to have ourmarketing to be much more emotional. It has got to be led by product and supportedby price. We really want to make sure it resonates emotionally with our customers. .. . For marketing spend, we are still going to look to get as efficient as possiblewith our marketing.

125. Analysts reacted positively to Zale’s 3Q08 financial results. On May 22, 2008 for

example, CL King & Associates issued an analyst report entitled “3Q08 Results in Line with

Expectations; Reiterate Accumulate Rating.” The report stated, in part:

• Zale Corporation reported 3Q08 (ended April 30) EPS of $(0.42), in line withmanagement’s guidance of $(0.40)-$(0.45) and our estimate of $(0.42). ZLCearned $(0.10) in the year-ago quarter.

• On a pre-tax basis, earnings were actually $4MM better than our modeledexpectation, as gross margins were better than we expected.

126. False Statement: On June 6, 2008, Zale filed a Form 10-Q with the SEC setting forth

its 3Q08 financial results, including those discussed in 1[1[118, 120, 123. The Form 10-Q was

accompanied by SOX certifications signed by Goldberg and Carter substantially identical to the

certifications quoted herein at 1[191.



following:

- 38 -574014_1












of GAAP; and







Fourth Quarter of Fiscal Year 2008 and Fiscal Year 2008

129. False Statement: On August 28, 2008, Zale issued a press release announcing its

4Q08 and FY08 financial results. The release stated, in part:

Zale Corporation, a leading specialty retailer of fine jewelry in North America, todayreported a net loss from continuing operations for the fourth quarter of fiscal 2008 of$4.9 million, or $0.15 per share, compared to net earnings from continuingoperations of $0.7 million, or $0.01 per diluted share, for the fourth quarter of fiscal2007.

The loss for the fourth quarter of fiscal 2008 includes a benefit associatedwith the release of a vacation accrual of $7.7 million, net of taxes, or $0.23 per share,

- 39 -574014_1


and a gain on the sale of an unproductive asset of $3.5 million, or $0.10 per share.The earnings for the fourth quarter of fiscal 2007 included a benefit of $1.1 million,or $0.02 per share, for the net impact of derivative versus hedge accounting on theCompany’s gold and silver contracts and a net tax benefit of $6.7 million, or $0.14per diluted share, primarily related to a decision to indefinitely reinvest certainundistributed foreign earnings in accordance with APB 23.

* * *

–Revenues for the fourth quarter ended July 31, 2008 were $456million compared to $430 million last year, an increase of 6.1%.

* * *

–Revenues for the twelve months ended July 31, 2008 were $2.14billion compared to $2.15 billion last year, a decrease of 0.7%.

* * *

–Earnings from continuing operations for the twelve months endedJuly 31, 2008 were $3.7 million or $0.09 per diluted share, comparedto earnings of $48.1 million, or $0.98 per diluted share for the twelvemonths ended July 31, 2007.

130. False Statement: Goldberg was also quoted in the August 28, 2008 release as stating:

“In the fourth quarter, we exceeded our expectations for sales,earnings . . . .”

“To improve performance over the current fiscal year and beyond, we areconcentrating on improving our customer focus, enhancing operational effectivenessand maintaining financial discipline. Specific actions we are taking to achievethese objectives include differentiating our product offering by simplifying andfocusing our assortment; streamlining the organization to eliminate redundancies;realizing $65 plus million in ongoing annualized savings; and permanentlyreducing $100 million in inventory.”


results:



- 40 -574014_1


132. False Statement: The following figures were included in Zale’s FY08 financial

results:



133. False Statement: On August 28, 2008, Zale hosted a conference call with analysts

and investors to discuss Zale’s 4Q08 and FY08 financial results. Goldberg and Carter participated in

the call and had an opportunity to address analysts’ and investors’ questions and concerns, and

correct any misinformation or misstatements. During the call, Goldberg stated:

For the quarter, we exceeded our own expectations for sales, earnings, andinventory reduction.

* * *

In addition to merchandise improvements by marketing more effectively toour customers, we have simplified our message and brought emotion back to our[advertising] campaigns. . . . We design marketing campaigns that elevate emotionand res[o]nate more strongly with our customer. Our “Mom Rocks” campaign forMother’s Day, for example, was very favorably received by all of our keyconstituents and representing a good start as we work to cut through in themarketplace. Our direct marketing and catalogs reflect our brand positioning, tieinto the emotion of jewelry . . . .

* * *

Underpinning our strategic initiatives is our continued commitment to financialrigor and discipline.

* * *

Additionally, to improve our ROI, we have diversified our marketing spendto becoming more targeted in both the mediums we use and demographics we arereaching.

134. False Statement: During the August 28, 2008 conference call, Carter discussed

Zale’s 4Q08 and FY08 financial results, including the following:

- 41 -574014_1


Total revenues in Q4 were 456 million, compared to 430 million last year, anincrease of 6.1%.

* * *

SG&A, excluding the cost of insurance operations was 47.2% for the fourth quarter,versus 50.6% last year, as a percentage of revenue. SG&A includes a $12.6 millionbenefit from the release of a vacation accrual. Of the benefit, $11 million representan accounting change in the liability, and not an ongoing save; however, $1.5 millionis an ongoing cash save, which was identified as part of our expense reductioninitiative. Excluding this gain, SG&A as a percentage of revenue was 50%. Theremaining decrease is a result of a $6.4 million savings from the $65 million expensereduction initiative. Operating loss for the quarter was $16.4 million, compared toloss of $6.1 million last year.

* * *

Net income for the year including the sale of Bailey, Banks & Biddle, thevacation adjustment, and the gain on the sale of asset, was $10.8 million or $0.25 perdiluted share compared to $59.3 million or a $1.21 per diluted share last year. Netincome from continuing operation was $3.7 million or $0.09 per diluted sharecompared to $48.1 million or $0.98 per diluted share last year. Excluding the after-tax benefit from the release of a vacation accrual, and asset sale gains of $11.2million, the net loss from continuing operations was $7.5 million or $0.18 per share.

135. The next day, on August 29, 2008, Women’s Wear Daily published an article entitled

“Zale Beats Expectations, Stock Climbs.” It reported:

Shares of Zale Corp. surged more than 20 percent Thursday after thejewelry retailer reported a fourth-quarter loss far below analysts’ expectations andlaid out 2009 guidance well above them.

* * *

After spiking more than 22 percent in morning trading and hitting a new 52-week high of $28.29, shares ended Thursday’s New York Stock Exchange session at$27.92, up $4.77 or 20.6 percent. Standard & Poor’s retail analyst Pearl Wangupgraded Zale shares to “hold” from “sell” based on “greater cost efficiencies” and“better-positioned” product offerings focused on diamonds and private brands.

136. On September 3, 2008, Goldberg and Carter participated in the Goldman Sachs

Global Retailing Conference and gave a presentation discussing Zale to the investment community.

During the presentation, Goldberg emphasized the importance of advertising and trimming expenses

to Zale’s overall business strategy. Goldberg stated:

- 42 -574014_1


Marketing message. There is so much noise out there in the jewelry sector,and we felt like we really wanted to change it. It’s about product supported by price.It is not about having an ad with 100 SKUs on a page, its more about making surethat it comes through some emotion, some uniqueness.

* * *

Financial rigor, the third part of our initiatives that we set forth to do, andwe’re very pleased with the results so far. We – $65 million plus, in savings $100million plus, I spoke to – actually it was $127 million we took out in inventory, but$100 million is permanent.

137. On September 10, 2008, Zale hosted an Investor Day with the investment community,

at which Goldberg and Carter, among other Zale executives, gave presentations. At Zale’s Investor

Day, Goldberg again confirmed Company executives were closely examining Zale’s expenses to

promote cost cutting initiatives:

As Neal [Goldberg] alluded to, Theo [Killion, Zale President] alluded to aswell, is actually the financial rigor and discipline permeates all aspects of thebusiness. We have gone through and continue to go through each aspect of theP&L, each driver, and each aspect of the balance sheet, whether it’s operatingdecisions of a significant change in the SKU reduction, the inventory reduction itself,both in terms of the capital cost and the productivity and the presentation to thecustomer, the expense initiative.

* * *

I think the most important thing is to be the most efficient [with advertising costs].

138. On September 17, 2008, Zale executives, including Carter, gave a presentation to

members of the investment community at the CL King & Associates Best Ideas Conference. Carter

told attendees:

So it really is laying the foundation of three key priorities or three basicconcepts and I’ll go through each of those, basically reengaging the core customer,operational effectiveness and obviously the underlying constant of financial rigorand discipline.

* * *

And then marketing it, instead of being what I’d call promotional advertising,truly be brand building product. Emotion is very key to this industry.

- 43 -574014_1


139. False Statement: On September 26, 2008, Zale filed its Form 10-K with the SEC

setting forth its 4Q08 and FY08 financial results, including those discussed above in 1[1[129-134.

The Form 10-K was accompanied by SOX certifications signed by Goldberg and Carter substantially

identical to the certifications quoted herein at 1[191.

140. False Statement: In a letter to Zale shareholders, authored by Goldberg and Zale

President Theo Killion (“Killion”) and included in Zale’ s 2008 Annual Report filed with the SEC on

September 26, 2008, Goldberg and Killion told investors:

Earnings from continuing operations in fiscal 2008 were $3.7 million or $0.09 perdiluted share, compared to earnings of $48.1 million or $0.98 per diluted share in theprior year. For the year ending July 31, 2008, total warranty sales increased 12% to$121 million. Earnings continue to be impacted by the Company’s accountingmethod for its lifetime jewelry protection plan with deferred revenue growing anadditional $79 million in fiscal 2008.

* * *

Our greatest progress in 2008, however, came in shaping and beginning toexecute our strategic plan, which centers on leveraging Zale’s strength as the major“value” player in the jewelry industry. The plan consists of three parts: (1) re-engaging our core customer, (2) enhancing our operational effectiveness, and (3)maintaining financial rigor.

* * *

Over the course of the year, we have also simplified our marketing message.Product now leads our offering, supported by price. . . .

We are now designing marketing campaigns that create an emotionalexperience which resonates with our customer.

* * *

Underpinning our new strategic initiatives is our continued commitment tofinancial rigor and discipline, particularly in the areas of inventory and expensemanagement, as well as the achievement of appropriate returns on our capitalinvestments.

* * *

From a financial standpoint, we will remain disciplined – focused both onthe generation of free cash flow and the identification of efficiencies in ourbusiness.

- 44 -574014_1


141. Defendants’ statements regarding Zale’s 4Q08 and FY08 financial results were

materially false and misleading when made. Defendants knew or recklessly disregarded, but failed

to disclose, the following:

(a) As detailed in ¶¶184-186, during 4Q08 and FY08, Zale improperly

understated expenses, and thus overstated earnings, by failing to properly account for prepaid

advertising costs. Zale classified as an asset prepaid advertising costs that should have been

expensed according to GAAP because the advertisements had run;


4Q08 and FY08 by failing to properly account for intercompany accounts receivable, certain

depository accounts, and federal income tax expenses;




of GAAP; and



would have reported lower earnings and EPS during 4Q08 and FY08.

142. Defendants’ statements on August 28, 2008 and September 26, 2008, which were



143. On November 22, 2008, The New York Times published an article entitled “Hoping to

Sell the Emotion of Love (and Rings).” The article reported:

Neal Goldberg, the chief executive of the Zale Corporation, is betting thatpassion trumps price in selling jewelry. While these are especially gloomy times forretailers, Mr. Goldberg says his company’s marketing campaign, which focuses on

- 45 -574014_1


the emotional aspects of its products, will help it coax sales from consumers whoare increasingly tightfisted.

False and Misleading Statements Regarding Zale’s Financial Results for the First ThreeQuarters of Fiscal Year 2009




Zale Corporation today reported a net loss from continuing operations of $45.3million, or $1.43 per share for the first quarter ended October 31, 2008, compared toa net loss from continuing operations of $26.7 million, or $0.54 per share, for theprior year period. Revenues were $364 million, compared to $377 million in theprior period, a decrease of 3.5%. During the quarter comparable store salesdecreased 3.7% compared to the prior year.

Goldberg was quoted in the release as stating:

“Though the national economic environment is challenging, we havecontinued to deliver strong performance on both store operations and cost control.We have recently eliminated almost $15 million of additional capital expendituresfrom our fiscal 2009 plan, and we intend to find more avenues for reducing bothcapital and expenses in the coming year.”


results:



146. The November 25, 2008 press release concluded with the Company abandoning its

previous earnings guidance:

In view of the uncertainties surrounding the national economy and consumerspending in these extraordinary times, the Company does not believe it can reliablygauge likely Holiday performance or sales in the balance of fiscal 2009 with anyprecision. As a result of this uncertainty, the Company does not believe that itspreviously issued earnings guidance should be relied upon.

- 46 -574014_1


147. False Statement: On November 25, 2008, Zale hosted a conference call with analysts

and investors to discuss Zale’s 1Q09 financial results. Goldberg and Carter participated in the call

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


Though the national economic environment is challenging, we havecontinued to deliver strong performance on both store operations and cost control.The disciplines that we began over the last year are more important than ever.Focusing on our value oriented customer with a price appropriate assortment,operational efficiency in our supply chain and stores, and most importantly in thisclimate, the financial rigor of aggressively managing our cash and capitalexpenditures position us well for the current environment.

* * *

Our third key objective we have been speaking about is maintainingfinancial rigor and discipline.

148. False Statement: Carter discussed Zale’s 1Q09 financial results during the

November 25, 2008 call:

SG&A was approximately $219 million in the first quarter of 2009, essentially flatcompared to the prior year. As a percent of sales, SG&A was 60.2% for the firstquarter versus 58.2% last year, primarily due to the deleverage resulting from thedecline in total revenue.

SG&A included savings of approximately $5.5 million related to the expensereduction initiative announced in February of 2008. This brings the to-date savingsrecognized to $16 million of the identified $65 million plus.

* * *

Our ongoing acute focus on financial rigor to enhance liquidity andoptimize cash flow is even more critical given the current economic volatility. Wehave and will continue to manage our expenses, inventory and capital veryaggressively.

* * *

In summary, we are committed to continued financial rigor and discipline,inclusive of the additional reductions identified in the areas of inventorymanagement, expense management, and capital. This commitment, combined withour financial strength and flexibility, will position us to take market share in the nearterm and drive shareholder value for the long-term.

- 47 -574014_1


As stated in the press release, in view of the uncertainties surrounding thenational economy and consumer spending, the Company does not believe itspreviously issued earnings guidance for 2009 should be relied upon. Sales trendssince mid-October show declines in the mid-teens.

149. On November 25, 2008, after Zale missed expectations and lowered earnings

guidance, but did not yet reveal its improper accounting affecting the Company’s reported earnings,

analysts reacted negatively. CL King & Associates issued an analyst report that day covering Zale,

which stated, in part:

• Zale Corporation reported 1Q09 (ended October 31) EPS of $(1.43), which wasbelow our estimate of $(0.81) and Street consensus of $(0.93). ZLC earned $(0.54)in the year-ago quarter.

• Earnings downside versus our estimate came from lower sales and gross margin andhigher SG&A expenses. In addition, a lower-than-expected tax benefit reduced EPSby $0.16.

* * *

• Management has withdrawn FY09 EPS guidance, which previously stood at $1.10-$1.25. ZLC earned $0.09 in FY08.

150. On this news, Zale’s stock declined $3.73 per share on unusually high trading volume

to close at $5.38 per share – a single day decline of 41%. Zale’s stock continued to trade at

artificially inflated levels, however, due to the assurances and continued misrepresentations made to

the market on November 25, 2008.

151. False Statement: On December 8, 2008, Zale filed a Form 10-Q with the SEC setting

forth its 1Q09 financial results, including those discussed above in ¶¶144-145, 147-148. The Form

10-Q was accompanied by SOX certifications signed by Carter and Goldberg substantially identical

to the certifications quoted herein at ¶191.



following:

- 48 -574014_1












of GAAP; and







154. On January 20, 2009, Carter resigned from his position as CFO. Gordon, the

Company’s Senior Vice President and Controller, assumed the role of Interim CFO.




Zale Corporation, a leading specialty retailer of fine jewelry in North America, todayannounced a net loss from continuing operations of $23.6 million, or $0.74 per share,for the second quarter ended January 31, 2009, that includes approximately, on an

- 49 -574014_1


after-tax basis, (1) charges related to store impairments of $5.0 million, or $0.16 pershare, (2) charges related to goodwill impairments of $5.0 million, or $0.16 pershare, and (3) an $18.6 million charge, or $0.58 per share, related to a valuationreserve on foreign tax credits resulting from our decision to revoke our electionunder Accounting Principles Board No. 23, “Accounting for Income Taxes – SpecialAreas.” Excluding these charges, earnings for the second quarter were $5.1 million,or $0.16 per share. Earnings from continuing operations for the prior year periodwas $52.7 million, or $1.16 per share.

Revenues for the second quarter of fiscal 2009 were $679 million, comparedto $828 million in the prior period, a decrease of 17.9%. During the quartercomparable store sales decreased 18.1% compared to the prior year.

* * *

The Company stated it will continue its focus on financial rigor and liquidityduring the current economic environment.


results:



157. On February 25, 2009, Zale hosted a conference call with analysts and investors to

discuss Zale’s 2Q09 financial results. Goldberg and Gordon participated in the call and had an

opportunity to address analysts’ and investors’ questions and concerns, and correct any


All three of our objectives are important in the current environment but maintainingfinancial rigor and discipline and enhancing operational effectiveness areparamount. . . . We continue to aggressively look for efficiencies as well as bringour expense structure in line with our current business.

158. False Statement: During the February 25, 2009 call, Interim CFO Gordon stated:

SG&A was approximately $284 million in the second quarter of 2009 down $18million compared to the prior year. The decline in absolute SG&A dollars wasprimarily a result of the recognition of $21 million in cost savings from our $75million expense reduction initiative announced last February. Offset by $6 millionprimarily in increased merchant fees, severance and various legal expenses. As a

- 50 -574014_1


percentage of sales, SG&A was 41.9% for the second quarter versus 36.5% last year.The percentage decline relates to the deleverage from the reduction in total revenuesfor the quarter.

* * *

The net income for the quarter excluding the goodwill and store charges and thetax reserve was 5.1 million. The net loss for the quarter from continuing operationsincluding these charges was $23.6 million or $0.74 per shared compared to earningsof $52.7 million or a $1.16 per share last year. The adjustment to net income toreflect total warranty sales was an additional $14 million or $0.44 per share.

* * *

Given the economic environment we intend to be very cautious in all ourspending decisions and rigorous in identifying savings opportunities.

* * *

Our continued focus on financial rigor will include a total review of ourlease portfolio to identify further opportunities for efficiency in the business andrationalize the size and scale of the Company. . . . Financial rigor is critical in thisenvironment.

159. Following Zale’s announcement of its 2Q09 financial results, CL King & Associates

issued an analyst report on February 25, 2009 that recognized the importance of Zale’s strategy of

closely examining the Company’s expenses to find ways to cut costs. It stated, in part:

Management has identified an additional $65MM of cost savings on top ofthe $75MM identified last year. We note that Q2 SG&A dollars declined by$18MM year-over-year, which was encouraging after what seemed to be a lack ofprogress on this front last year.

160. False Statement: On March 11, 2009, Zale filed a Form 10-Q setting forth its 2Q09

financial results, including those discussed above in ¶¶155-156, 158. The Form 10-Q was

accompanied by SOX certifications signed by Goldberg and Gordon substantially identical to the

certifications quoted herein at ¶191.



following:

- 51 -574014_1












of GAAP; and










Zale Corporation, a leading specialty retailer of fine jewelry in North America, todayannounced a net loss from continuing operations of $23.2 million, or $0.73 per share,compared to a loss of $17.4 million, or $0.42 per share, for the third quarter endedApril 30, 2009 and 2008, respectively. As compared with the prior year, earnings pershare were negatively impacted by $0.17 related to the 10 million reducedoutstanding share count.

- 52 -574014_1


Revenues for the third quarter of fiscal 2009 were $379 million as comparedto $477 million for the prior period, a decrease of 20.5%. During the quartercomparable store sales decreased 20.0% as compared to an increase of 5.8% for the2008 period. The prior year’s results were positively impacted by a clearanceinitiative that permanently reduced inventory by $100 million. The Companyachieved a gross margin on sales during the third quarter of fiscal 2009 of 50.1%,compared to 47.5% the prior year. Overall results were impacted positively by areduction of aggregate selling, general and administrative expense by $22 millioncompared to the prior year, primarily resulting from the impact of cost reductionspreviously implemented by the Company.


results:



165. On May 27, 2009, Zale hosted a conference call with analysts and investors to discuss

Zale’s 3Q09 financial results. Goldberg and Gordon participated in the call and had an opportunity

to address analysts’ and investors’ questions and concerns, and correct any misinformation or

misstatements. During the call, Goldberg stated:

As you all have seen today, we also announced Matt Appel as our new ChiefFinancial Officer. . . .

I would like to thank Cindy Gordon who has served capably as our interimCFO. In addition to her ongoing role as Senior Vice President, Controller, she hasbeen and continues to be an important asset to our team.

* * *

We believe today as we believed a year ago in the three major components of ourstrategy. One, focus on our value-oriented customer with differentiated, distinctiveproduct. Two, enhance our operational effectiveness. Three, maintain financialrigor.

166. False Statement: During the May 27, 2009 call, Gordon, still serving as Interim

CFO, stated:

- 53 -574014_1


SG&A was approximately 210 million in the third quarter of 2009, down $22million compared to the prior year. The decline in absolute SG&A dollars wasprimarily a result of the recognition of 19 million in cost savings from the expensereduction initiatives.

* * *

As we mentioned last quarter, our continued focus on financial rigorincludes a total review of our lease portfolio.

167. Following Zale’s announcement of its 3Q09 financial results, CL King & Associates

issued an analyst report on May 27, 2009 that recognized the importance of Zale’s cost cutting

strategy based on a detailed review of Company expenses. It stated, in part:

• Earnings downside versus our estimate came from lower sales, partially offset bylower SG&A expense.

* * *

SG&A dollars actually decreased by $22MM, which was encouraging after whatseemed to be a lack of progress on this front last year. . . . Management expects torealize further SG&A reductions through FY10.

168. False Statement: On June 9, 2009, Zale filed a Form 10-Q with the SEC setting forth

its 3Q09 financial results, including those discussed above in 1[1[163-164, 166. The Form 10-Q was

accompanied by SOX certifications signed by Goldberg and Gordon substantially identical to the

certifications quoted herein at 1[191.



following:

(a) As detailed in 1[1[184-186, during 3Q09, Zale improperly understated




- 54 -574014_1





(c) As detailed in ¶192, the Company lacked adequate internal controls; and



of GAAP.




THE TRUTH BEGINS TO EMERGE AND ZALE RESTATESITS CLASS PERIOD FINANCIAL FIGURES

171. On September 2, 2009, Zale issued a press release entitled “Zale Reschedules Fourth

Quarter Conference Call,” which stated, in part:

Zale Corporation today announced that it has rescheduled the release date for itsfiscal 2009 financial results to Wednesday, September 9, 2009 at 9:00 a.m. ET.During the finalization of the Company’s year-end closing, certain non-cashadjustments were identified impacting prior period results aggregating approximately$13.0 million pre-tax, of which approximately $6.3 million relates to years prior tofiscal 2000. The Company is in the process of finalizing the appropriate accountingtreatment for those adjustments.

172. On September 8, 2009, Zale issued a press release entitled “Zale Postpones Fourth

Quarter Results,” which stated in part:

Zale Corporation today announced that it is postponing its earnings release andinvestor conference call previously scheduled for Wednesday, September 9 at 9:00a.m. ET in order to finalize a review of accounting for prepaid advertising costs thatsurfaced during the Company’s year-end closing process. Once complete, theCompany will announce the date of its earnings call and provide additional details.

173. On September 18, 2009, Zale filed a Form 8-K with the SEC, which revealed to

investors:- 55 -

574014_1


On September 17, 2009, management of Zale Corporation (the “Company”)and the Audit Committee of the Company’s Board of Directors, in consultation withthe Company’s independent registered public accounting firm, Ernst & Young LLP,concluded that the Company’s previously issued financial statements for fiscalyears 2008 and 2007, and interim periods therein and subsequent, included in theCompany’s filings with the Securities and Exchange Commission contain theerrors specified below and should no longer be relied upon. Therefore, theCompany plans to restate its financial statements for fiscal 2008 and interimperiods in fiscal 2008 and 2009, and will present the restated financial statements inits Annual Report on Form 10-K (“10-K”) for the fiscal year ended July 31, 2009.The Company currently expects to file its 10-K on or before October 29, 2009,although this date may change if unforeseen circumstances arise. The restatementpertains to the following issues:

• A significant portion of prepaid advertising costs should have beenrecorded as expense. Prepaid advertising reflected in our balance sheets as ofJuly 31, 2008 and 2007 totaled approximately $23 million and $18 million,respectively.

• Certain adjustments aggregating approximately $9 million on a pretax basis,including (1) a charge related to an intercompany accounts receivableassociated with our wholly owned insurance subsidiaries, (2) a charge relatedto certain depository bank account reconciliations and (3) a benefit related topersonal property tax reserves. In addition, a charge totaling approximately$4 million will be recorded in fiscal 2008 related to federal income taxesresulting from the expiration of net operating loss carryforwards.

174. On this news, Zale’s stock price declined on unusually high trading volume. Zale’s

stock continued to trade at artificially inflated levels, however, because the full truth – the

Company’s restated financial figures based on previous accounting improprieties – had not yet been

revealed to the market.

175. On October 29, 2009, the last day of the Class Period, Zale issued a press release

announcing its financial results for 4Q09 and FY09 and restated Class Period financial results. The

release stated, in part:

Restated Financial Results

As disclosed in the Company’s Form 8-K filing on September 18, 2009,during the finalization of its fiscal 2009 financial statements, the Company concludedthat previously issued financial statements for fiscal years 2008 and 2009 would berestated to reflect certain accounting adjustments for advertising costs, intercompanyaccounts receivable, depository bank accounts, federal income taxes and personal

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property taxes. Restated financial information for fiscal 2008 and 2009 is detailed inthe Company’s Annual Report on Form 10-K that was filed on October 29, 2009.

176. On October 29, 2009, Zale filed a Form 10-K with the SEC setting forth the financial

results described in the above paragraph. The Form 10-K disclosed:

Subsequent to the Company’s disclosure in its Form 8-K filed on September18, 2009 that it would restate certain financial statements, the Staff of the FortWorth, Texas office of the Securities and Exchange Commission notified theCompany that it had begun an investigation and requested certain informationrelating to the matters disclosed in the Company’s Form 8-K. The Company iscooperating with the Staff’s investigation. The Company cannot predict the outcomeor duration of the SEC investigation, but at this time, the Company does not believethat the investigation will have a material effect on the Company’s financialcondition or results of operations.

177. On this news, Zale’s stock price dropped $1.66 per share to close at $4.73 per share

on October 30, 2009, a one-day decline of nearly 26%, on volume of more than 2.7 million shares, or

nearly five times the average three-month daily volume.

178. On October 30, 2009, the day after Zale announced its restated financials, the

Company hosted a conference call with analysts and investors to discuss Zale’s 4Q09 and FY09

financial results. During the call, Zale’s new CFO Matthew W. Appel (“Appel”) stated:

As previously disclosed in our 8-K filing on September 18, 2009, during thefinalization of our fiscal 2009 financial statements we concluded that our previouslyissued financial statements for the quarters and year ended July 31, 2008, as well asthe quarters and nine months ended July 31, 2009, would be restated to reflect certainaccounting adjustments for advertising costs, inter-company accounts receivable,depository bank accounts, federal income taxes, and personal property taxes.

Since September 18 we have conducted an exhaustive review of advertisingaccounting dating back five years. We enlisted the help of third-party experts andworked closely with our audit committee. As a result of this review we determinedthat certain advertising costs previously recorded as prepaid were expensed inperiods subsequent to the period in which the advertisement actually ran.

The impact of this adjustment for fiscal 2008 was a charge of $2.7 millionafter tax. For the nine months ended April 30, 2009, the impact of this adjustmentwas $9 million after tax.

* * *

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Our review of accounting for advertising costs also included acomprehensive analysis of internal controls over the processes. Our conclusionbased on this review is that we had a material weakness in this area. As you wouldexpect, we take these matters very seriously. We have initiated a comprehensiveremediation effort to significantly strengthen controls in the area and to ensure thatthis issue does not happen again.

In addition, there were certain other accounting adjustments identified duringour fiscal year-end close process. The most significant items are as follows. Bankreconciliation adjustments amounted to a charge of $3.7 million after tax for fiscal2008 and a charge of $1.3 million after tax for the nine months ended April 30, 2009.These adjustments were attributable to a material weakness in our reconciliationprocesses in those periods.

Adjustments of income tax expense primarily attributable to an incorrectdetermination made during fiscal year 2008 related to whether earnings from ourPuerto Rican-based operations could be utilized to offset US operating lossesamounted to a charge of $3.9 million for 2008. Adjustment of $5.1 million after taxfor 2008 in prior periods due to an error in the intercompany accounts receivablebalance related to expenses paid on behalf of our wholly-owned insurancesubsidiaries.

In the aggregate adjustments recorded for fiscal 2008 related to advertisingcosts, bank depository accounts, and income tax expense amounted to a charge of$10.2 million after-tax. Accordingly, earnings from continuing operations for fiscal2008 were restated from $3.7 million or $0.09 per share to a loss of $6.5 million or aloss of $0.15 per share.

For the nine months ended April 30, 2009, adjustments amounted to a chargeof $7.6 million after-tax. Accordingly, the net loss for the same period was restatedfrom $92.1 million or a loss of $2.89 per share to a loss of $99.7 million or a loss of$3.13 per share.

Please note that our 10-K, which was filed yesterday, contains certainsummarized restated information for fiscal years 2007, 2006, and 2005. Please referto Part 2, Item 7 of our 10-K for this information. In addition, the shareholderinformation page of our website has additional information on the subject.

I would also like to point out, as disclosed in Part 1, Item 3 of our 10-K, thatwe were notified subsequent to the filing of our Form 8-K on September 18, 2009,that the staff of the Fort Worth, Texas, office of the SEC had begun an investigationand requested certain information relating to the matters disclosed in our 8-K. TheCompany is operating with the SEC on this matter.

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179. The investment community reacted harshly to Zale’s restated financial statements and

the corresponding SEC investigation into the Company’s improper accounting. On October 30,

2009, CL King & Associates issued an analyst report covering Zale, which stated, in part:

• In connection with the company’s restatement of historical financial results, the SEChas begun an investigation. . . . [W]e believe this is a factor behind the massive sell-off in ZLC shares today.

• We are lowering our FY10 EPS estimate by $1.83 to $(3.47), reflecting higherSG&A assumptions and the absence of any income tax benefits.

180. In a letter to Zale shareholders, authored by Goldberg and Killion and included in

Zale’s 2009 Annual Report filed with the SEC on October 29, 2009, Goldberg and Killion told

investors that during FY09:

Our financial focus was on 3 major drivers: SG&A, working capital and realestate.

* * *

Separately, during our year-end financial close, there were items identified thatimpacted prior year financial statements. We conducted a thorough review and haveaddressed the issues. We are taking the necessary steps to strengthen ouraccounting processes and are putting measures in place to prevent this fromhappening again.

DEFENDANTS’ MATERIALLY FALSE AND MISLEADING FINANCIALREPORTING DURING THE CLASS PERIOD

181. As detailed herein, in order to understate Zale’s reported expenses and improperly

inflate Zale’s net income and EPS, defendants caused the Company to falsely report its financial

results included in Zale’s publicly issued financial statements and related earnings releases during

the Class Period. Zale’s financial results were materially false and misleading and in violation of

GAAP3 for the following reasons:

3 GAAP are those principles recognized by the accounting profession as the conventions, rules,and procedures necessary to define accepted accounting practice at a particular time. SEC

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(a) Zale understated expenses and overstated net income and EPS by failing to

properly account for prepaid advertising costs; and

(b) Zale overstated net income and EPS by failing to properly account for

intercompany accounts receivable, certain depository accounts, and federal income tax expenses.

182. As a result of these GAAP violations, each of Zale’s quarterly and annual financial

statements filed with the SEC during the Class Period were materially false and misleading.4 The

total cumulative impact of Zale’s accounting misstatements was over $40 million (for all periods

restated). This included material overstatements of net income, earnings from continuing operations,

and EPS during the Class Period. Zale overstated net income during the Class Period by $19.6

million ($1.8 million during FY07, $10.2 million during FY08, and $7.6 million during the first

three quarters of FY09). For FY08, in fact, Zale was forced to restate over 94% of its originally

reported net income. On October 29, 2009, the Company disclosed a massive restatement and

admitted its “previously issued financial statements for fiscal years 2008 and 2007, and interim

periods therein and subsequent, included in the Company’s filings with the Securities and

Exchange Commission contain . . . errors . . . and should no longer be relied upon.”

183. The restatement of previously issued public financial statements is a serious and

meaningful event. Accounting rules governing the correction of errors or fraud in previously issued

Regulation S-X (17 C.F.R. §210.4-01(a)(1)) states that financial statements filed with the SEC thatare not prepared in compliance with GAAP are presumed to be misleading and inaccurate, despitefootnotes and other disclosure. Regulation S-X requires that interim financial statements must alsocomply with GAAP, with the exception that interim financial statements need not include disclosurethat would be duplicative of disclosures accompanying annual disclosures, per 17 C.F.R. §210.10-01(a).

4 In addition to the GAAP violations described herein, Zale’s financial statements during theClass Period were also misleading because they contained false SOX certifications in which thedefendants certified the accuracy of Zale’s financial statements and the effectiveness of Zale’sdisclosure controls and internal controls over financial reporting. See NN190-192.

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financial statements do not allow a registrant any discretion or election in deciding whether or not to

retroactively restate its previously issued financial statements. GAAP only permits (and requires)

restatements of previously issued financial statements to correct material errors, resulting from

either: (a) “mathematical mistakes, mistakes in the application of accounting principles, or oversight

or misuse of facts that existed at the time the financial statements were prepared”; or (b) a change

in accounting principle or a change in the reporting entity. See Statement of Financial Accounting

Standards (“SFAS”) No. 154, Accounting Changes and Error Corrections, ¶¶2, 4-10, 23-26. In this

case, Zale has admitted that its restatement was done solely to correct “errors,” and not to change

accounting principles or the reporting entity. Therefore, Zale’s restatement of its previous financial

statements is an admission that: (i) the financial results originally issued during the Class Period and

its public statements regarding those results were materially false; and (ii) the financial statements

reported during the Class Period were incorrect based on information available to the defendants at

the time the results were originally reported.

Zale Improperly Accounted for Advertising Costs

184. Zale improperly accounted for advertising costs during the Class Period which

resulted in the Company understating its expenses and overstating its earnings. During FY08 alone,

the Company’s failure to properly account for advertising costs resulted in overstated net income of

over $2.7 million, which represented over 25% of Zale’s originally reported net income for that

period. The cumulative impact of Zale’s failure to properly account for advertising costs is shown

in the chart below:

(in millions) FY 2007 FY First 3

and 2008 Quarters of TOTALPrior FY 2009

Understatement of Advertising $21.7 $2.0 $9.0 $32.7Expenses (Pre-tax)Overstatement of Net Income

$17.7 $2.7 $9.8 $30.3(After-tax)

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185. Through its restatement of its previously issued financial statements, the Company

has admitted that these misstatements are material. The Company has also admitted that its

accounting for advertising costs was in violation of GAAP. Specifically, the Company disclosed the

following in a Form 8-K filed with the SEC on September 18, 2009:

• A significant portion of prepaid advertising costs should have been recorded as[an] expense.

In Zale’s FY09 Form 10-K filed with the SEC on October 29, 2009, the Company disclosed the

following:

[C]ertain advertising costs were recorded as prepaid advertising subsequent to theperiod in which the advertisement ran.

186. Properly accounting for prepaid and current period advertising expenses is based on

fundamental accounting principles that were known or recklessly ignored by Zale’s senior

management, including the defendants. Financial Accounting Standards Board (“FASB”) Statement

of Financial Accounting Concepts No. 5, Recognition and Measurement in Financial Statements of

Business Enterprises (“FASCON 5”) clearly and concisely states that “[e]xpenses are generally

recognized when an entity’s economic benefits are consumed in revenue-earning activities or

otherwise.” FASB Statement of Financial Accounting Concepts No. 6, Elements of Financial

Statements (“FASCON 6”) clearly and concisely states that “ many assets yield their benefits to an

entity over several periods, for example, prepaid insurance . . . . Expenses resulting from their

use are normally allocated to the periods of their estimated useful lives (the periods over which

they are expected to provide benefits) by a ‘systematic and rational’ allocation

procedure . . . . [T]he purpose of expense allocation is the same as that of other expense

recognition – to reflect the using up of assets as a result of transactions or other events . . . .”

Further, American Institute of Certified Public Accountants (“AICPA”) Statement of Position 93-7,

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Reporting on Advertising Costs (“SOP 93-7”) requires that all advertising costs must be either

expensed as incurred or deferred until the first use of the advertising.

Zale Also Improperly Accounted for Several Other Items

187. As part of its October 2009 restatement, Zale admitted that its financial reporting was

in violation of GAAP in several other areas in addition to the prepaid advertising costs described

above during the Class Period. The additional misstatements included improperly accounting for

intercompany accounts receivable, certain depository accounts, and federal income tax expense.

Similar to the understatement of advertising expenses described above, these additional

misstatements allowed Zale to further understate its expenses and overstate its net income during the

Class Period. Through its restatement of its previously issued financial statements, the Company has

admitted that these misstatements are material and in violation of GAAP. Specifically, Zale

disclosed the following in its FY09 Form 10-K filed with the SEC on October 29, 2009:

Intercompany Accounts Receivable

The charge related to an intercompany accounts receivable associated with ourwholly owned insurance subsidiaries. The Company pays certain expenses on behalfof its insurance subsidiaries and is subsequently reimbursed by those subsidiaries.The charge was the result of the Company recording accounts receivable in excess ofthe actual expenses incurred . . . . The intercompany accounts receivable waspreviously recorded in accounts payable and accrued liabilities.

Depository Bank Accounts

The charge corrected the recording of cash receipts from Bailey Banks & Biddlesubsequent to disposition of the brand in fiscal 2008 and certain other errorsassociated with our cash reconciliation system. . . .

Federal Income Taxes

The charge resulted primarily from an incorrect determination made during fiscalyear 2008 related to whether earnings from our Puerto Rican based operations couldbe utilized to offset U.S. operating losses that were expiring.

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Zale’s Accounting Misstatements Were Material

188. Through its restatement of the various financial figures described above, Zale has

admitted its Class Period misstatements were material. The materiality of these misstatements is

further demonstrated by the effect they had on Zale’s originally reported net income and EPS. The

after tax impact of the accounting misstatements referred to above, are shown in the chart below:

(in millions) FY 2007 and FY 2008 FY 2009 (First TOTALPrior 3 Quarters)Effect of Misstatements on NetIncome:

Advertising Costs($17.7) ($2.7) ($9.8) ($30.3)

Intercompany Accounts ($5.1) $ - $ - ($5.1)Receivable

Depository Bank Accounts ($0.9) ($3.7) ($1.3) ($5.9)

Federal Income Tax $ - ($3.9) $3.6 ($0.3)

TOTAL ($23.7) ($10.3) ($7.5) ($41.6)

189. The effect of these misstatements on Zale’s originally reported net income and EPS

during the Class Period are shown in the chart below:

2007 2008 2009 Class PeriodTotal

(In millions except earnings per share FY ended FY ended 1Q ended 2Q ended 3Q endeddata) 7/31/07 7/31/08 10/31/08 1/31/09 4/30/09 Originally reported Net $59.2 $10.8 ($45.3) ($23.6) ($23.2) ($22.0)Income (Loss)Total Misstatements (after ($1.8) $(10.2) ($3.0) ($8.2) $3.6 ($19.5)tax) 5

Restated Net Income (Loss) $57.4 $0.6 ($48.3) ($31.8) ($19.6) ($41.5)

% Overstated (understated)3.1% 1700% 6.7% 34.8% (15.7%) 88%

Originally reported earnings $1.21 $0.25 ($1.43) ($0.74) ($0.73) --per share (E.P.S.)

5 Includes other errors corrected as part of the restatement (Personal Property Tax reserveswere previously misstated and corrected as part of the restatement).

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Adjusted earnings per share $1.17 $0.01 ($1.52) ($1.00) ($0.61) --(E.P.S.)

$ Overstated (understated) $0.04 $0.24 $0.09 $0.26 ($0.23) --

Defendants’ SOX Certifications Were False And Misleading

190. Zale’s executive management, and specifically Burton, Carter, and Goldberg, were

responsible for evaluating the Company’s internal controls over financial reporting and reporting the

results of their evaluation to investors in Zale’s Form 10-K. The following disclosure appeared in the

Company’s Form 10-Ks6 during the Class Period:

Our management is responsible for establishing and maintaining adequateinternal control over financial reporting, as such term is defined in Rule 13a-15(f)promulgated under the Securities Exchange Act of 1934, as amended. Under thesupervision and with the participation of our management, including our principalexecutive officer and principal financial officer, we conducted an evaluation of theeffectiveness of our internal control over financial reporting based on the frameworkin Internal Control-Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO). Based on our evaluation, ourmanagement concluded that our internal control over financial reporting waseffective as of July 31, 2008.

191. As part of their responsibility, the defendants signed the following SOX certifications

in the each of the Form 10-Qs and Form 10-Ks during the Class Period 7 in which they: (1) certified

that they had performed evaluations of Zale’s financial statements , disclosure controls, and internal

controls over financial reporting; and (2) as a result of their evaluations, they were certifying the

6 The statement was signed by Carter and Goldberg on September 25, 2008 in the Form 10-Kfor the year ended July 31, 2008 and by Carter and Burton on October 1, 2007 in the Form 10-K forthe year ended July 31, 2007.

7 Specifically, Class Period SOX certifications were signed as follows: Carter and Burton inZale’s Form 10-K for the year ended July 31, 2007 and in Zale’s Form 10-Qs for the quarters endedOctober 31, 2006, January 31, 2007, April 30, 2007, and October 31, 2007; Carter and Goldberg inZale’s Form 10-K for the year ended July 31, 2008 and in Zale’s Form 10-Qs for the quarters endedJanuary 31, 2008, April 30, 2008, and October 31, 2008; Gordon and Goldberg in Zale’s Form 10-Qs for the quarters ended January 31, 2009 and April 30, 2009.

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accuracy of Zale’s financial statements and the effectiveness of Zale’s disclosure controls and

internal controls over financial reporting:

I, [President & Chief Executive Officer or Chief Financial Officer], certify that:

1. I have reviewed this [annual report on Form 10-K or quarterly report on Form10-Q] of Zale Corporation;

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

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

4. The registrant’s other certifying officer(s) and I are responsible forestablishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financialreporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for theregistrant and have:

(a) Designed such disclosure controls and procedures, or causedsuch disclosure controls and procedures to be designed under oursupervision, to ensure that material information relating to the registrant,including its consolidated subsidiaries, is made known to us by others withinthose entities, particularly during the period in which this report is beingprepared;

(b) Designed such internal control over financial reporting, orcaused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability offinancial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles;

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

(d) Disclosed in this report any change in the registrant’s internalcontrol over financial reporting that occurred during the registrant’s mostrecent fiscal quarter (the registrant’s fourth fiscal quarter in the case of anannual report) that has materially affected, or is reasonable likely tomaterially affect, the registrant’s internal control over financial reporting; and

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5. The registrant’s other certifying officer(s) and I have disclosed, based on ourmost recent evaluation of internal control over financial reporting, to theregistrant’s auditors and the audit committee of the registrant’s board of directors (orpersons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in thedesign or operation of internal control over financial reporting, which arereasonably 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 managementor other employees who have a significant role in the registrant’s internalcontrol over financial reporting.

Date: [ ] By: /s/ [ ]

192. The Company has since admitted, through its restatement, that these certifications

were false because its Class Period financial statements did not “fairly present in all material

respects the financial condition, results of operations and cash flow[] of [Zale].” Additionally, the

Company also admitted it did not maintain effective disclosure controls or internal controls over

financial reporting as of July 31, 2009. In its FY09 Form 10-K, filed October 29, 2009, the

Company stated:

In its assessment of the effectiveness of internal control over financial reporting as ofJuly 31, 2009, the Company determined that there were control deficiencies thatconstituted material weaknesses in the following areas:

• The Company did not maintain effective controls over certain accountreconciliations. Specifically, account reconciliations associated with advertising,depository bank accounts and intercompany accounts receivable lacked appropriatesupporting documentation and were not reviewed in a satisfactory manner. Thismaterial weakness contributed to the restatement of the financial statements as of andfor the year ended July 31, 2008 included in this Annual Report on Form 10-K.

• The Company did not maintain effective segregation of duties and oversight withrespect to its advertising programs. The responsibility to initiate and approvetransactions was maintained by the same individual who determined the timing ofwhen advertising transactions were recorded and expensed. In addition, theappropriate level of oversight did not exist to ensure that advertising transactionswere recorded in the appropriate period. This material weakness contributed to therestatement of the financial statements as of and for the year ended July 31, 2008included in this Annual Report on Form 10-K.

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As a result of these material weaknesses, management concluded that theCompany did not maintain effective internal control over financial reporting as ofJuly 31, 2009.

SCIENTER

193. As alleged in the following paragraphs, defendants had actual knowledge of the

falsity of their Class Period financial statements or acted in reckless disregard of the truth or falsity

of those statements. In doing so, defendants committed acts and participated in a course of business

that operated as a fraud or deceit on purchasers or acquirers of Zale’s stock during the Class Period.

194. The Individual Defendants were Zale’s top executive officers charged with not only

developing Zale’s business strategy, but also overseeing the implementation and execution of that

strategy during the Class Period. Due to the circumstances described in this Complaint, nothing was

more important to defendants than making sure Zale appeared to be a viable competitor in the

jewelry retail industry. Consequently, they carefully monitored, as detailed below, and knew, based

on their review of such information, that their Class Period financial statements were false and

misleading.

Defendants Were Motivated to Improperly Inflate Earnings When a Change in Zale’sJewelry Warranty Program Resulted in Lower Revenues

195. Prior to FY07, Zale had offered its customers the option to buy a two year warranty

covering sizing and breakage issues for jewelry. When a customer purchased a two year warranty,

the Company would recognize two-thirds of the revenue from the warranty sale in the first three

months. In 2Q07, however, Zale changed the warranty it offered. It began to sell life time

warranties – known as “Jewelry Protection Plans” or “JPPs” – and rather than recognize the revenue

from the sale of the warranty on an accelerated basis as it had done for the two year program, it had

to recognize the warranty revenue over a five year period. As a Zale representative described the

new JPPs to the investment community during the September 18, 2007 CL King & Associates Best

Ideas Conference:- 68 -

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The decision to offer lifetime warranties will result in cash sales increase ofapproximately $50 million over prior levels, driven by a 35% increase in averageticket and attachment rates, increasing from approximately 40% to 50%. While thereis a significant positive cash impact, the actual revenue recognized is negativelyimpacted in the intermediate term.

The revenue recognition of lifetime warranties is spread evenly over 60months versus the two -year plan in which two thirds of the sales were recognizedin the first three months, matching the underlying expense flow. On an adjustedbasis, excluding the warranty sales change, the Company’s earnings growth in fiscal2008 is expected to be approximately 15%.

196. On August 30, 2007, a CL King & Associates analyst report covering Zale clarified

the program:

During 2Q07 the company changed its jewelry protection plan (essentially anextended warranty program) to cover the lifetime of the product rather than twoyears. . . . Deferred revenue is now amortized on a straight line basis over fiveyears, versus accelerated amortization over two years previously. This accountingchange penalized reported FY07 EPS by $0.46.

197. The market was well aware Zale’s earnings would be negatively impacted by this

change in recognizing warranty revenue, and defendants were motivated to inflate earnings during

the Class Period – particularly during FY08, for which Zale ultimately restated 94% of its net

income – to meet analysts’ expectations until the deferred revenue could be recognized on the

Company’s books. As a November 21, 2007 CL King & Associates analyst report covering Zale

stated:

1Q08 EPS of $(0.54) included an $0.18 negative impact due to the change indeferred insurance revenue recognition. This deferred revenue recognition methodwill hurt reported GAAP earnings throughout FY08, but will then start to benefitearnings beginning in FY09. EPS is then expected to grow by 30% per annum forFY09 through FY11.

198. While defendants were improperly overstating earnings during the Class Period, they

also consistently assured investors that deferred earnings were piling up by reporting figures such as

unrecognized revenue related to warranty sales and warranty adjusted EPS in Company earnings

releases and conference calls.

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Defendants Carefully Examined Advertising Expenses During the Class Period

199. Throughout the Class Period, defendants consistently told the market advertising was

crucial to Zale’s business strategy and advertising expenses were being closely monitored.

200. In November 2006, for example, Burton confirmed she knew where “ad dollars” were

being spent. In February 2007, she stated Zale was “spending more on TV, buying spots with better

visibility” and that a “new TV creative, and better media placement proved successful in driving

traffic into the stores.” Analysts also recognized the importance of defendants’ focus on advertising

to Zale’s financial success, making statements in their reports such as “customers [were] reacting

favorably to the brand’s significant merchandising and marketing repositioning” resulting in

increased sales at “the flagship Zales division.”

201. Burton assured investors Company executives were closely analyzing advertising

expenses when, for example, she stated in February 2007 that the Company would make efforts to

“ ‘focus on expense reduction, particularly those [in] marketing that did not generate sufficient sales

gains to justify.’” In May 2007, moreover, Burton assured investors “‘good expense control

contributed to earnings in-line with expectations for the quarter.’” And again, in August 2007,

Burton gave credit to “ ‘good expense control resulted in earnings at the high end of

expectations.’” She also emphasized the large role advertising played in the Company’s plan to

make two of their brands – Zale and Gordon’s – unique and distinct in order to increase earnings

when she stated in August 2007 that the two chains would “both have their unique marketing

campaigns” and the “advertised product on TV will clearly be different product.”

202. Under Goldberg’s leadership as CEO beginning in December 2007, Company

executives’ focus on Zale’s advertising strategy and expenses was even greater. In February 2008,

for example, Goldberg stated “to be truly successful we must create an emotional experience for our

customers” and said the Company was “carefully revealing our sales and marketing strategies to find

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more effective ways to simplify and distinguish our message.” Goldberg further assured investors

Company executives were “committed to financial[] rigor and discipline. Especially when it

comes to . . . expense management.” Goldberg even told the market Zale was “going through [a]

very detailed review of our whole expense structure” as of February 2008. And Goldberg told

investors he knew how Zale had “diversified our marketing spend” as of August 2008. In September

2008, Goldberg confirmed Company executives “have gone through and continue to go through

each aspect of the P&L.” And in November 2008, CFO Carter assured investors Zale had been and

“will continue to manage our expenses . . . very aggressively” – including advertising expenses.

Goldberg and Interim CFO Gordon continued to emphasize Company executives’ “continued focus

on financial rigor” and close monitoring of expenses in order to be “rigorous in identifying savings

opportunities” during FY09.

203. Defendants’ close monitoring of Zale’s advertising expenses, as is reflected in these

Class Period statements, would have revealed the blatant accounting errors that ultimately led to the

Company’s restatement of its Class Period financial statements.

Zale’s Restatement Supports Scienter

204. As described above, Zale’s restatement is an admission that the financial statements

originally issued during the Class Period and its public statements regarding those results were

materially false and misleading. Additionally, Zale’s restatement, as described herein, contains the

following indicia of knowledge by defendants:

(a) The type of restatement (misuse of the facts) – Zale’s restatement was not the

result of certain conditions contemplated under Financial Accounting Standard (“FAS”) No. 154

including simple mathematical errors, the honest misapplication of GAAP, or a change in accounting

principle. Rather, Zale’s financial statements were false and misleading and were required to be

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restated as a result of defendants’ misuse of information available to them at the time the financial

statements were originally prepared;

(b) The duration over which the improper accounting was perpetrated – as

detailed herein, the restatement does not hinge on an honest mistake or oversight during a single

quarter or even a single year that was later and corrected on a good faith basis. Zale was forced to

restate its financial statements covering several fiscal years, including the entire Class Period, to

correct its accounting improprieties that could no longer be concealed;

(c) The magnitude or size of the restatement – as detailed herein, Zale’s

restatement was material. Zale overstated its Class Period net income by $19.6 million, including an

overstatement of over 94% of its originally reported FY08 net income;

(d) The types of accounting gimmicks employed – as detailed herein, the

improper accounting corrected by this restatement did not occur as a result of good faith differences

in subjective accounting areas, or interpretations of complicated, vague, or arcane accounting rules.

Zale’s misstatements were the result of failing to comply with clear, concise, and fundamental

accounting rules; and

(e) The income statement effect of the misstatements – moreover, it is more than

sheer coincidence that five of the six purported “errors” identified by the Company as part of the

restatement had the effect of inflating, not reducing, net income and EPS.

205. Finally, it is notable that in 2002 the SEC reiterated its position that, in its

investigations of restated financial statements, it often finds that the persons responsible for the

improper accounting acted with scienter:

[T]he Commission often seeks to enter into evidence restated financial statements,and the documentation behind those restatements, in its securities fraud enforcementactions in order, inter alia, to prove the falsity and materiality of the originalfinancial statements [and] to demonstrate that persons responsible for the originalmisstatements acted with scienter . . . .

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In re Sunbeam Sec. Litig., No. 98-8258-Civ.-Middlebrooks, SEC Amicus Curiae Brief (S.D. Fla.

Jan. 31, 2002).

Defendants’ False SOX Certifications Establish Scienter

206. Defendants’ “review” of Zale’s financial statements, “evaluation” of Zale’s disclosure

controls, and “evaluation of [Zale’s] internal control over financial reporting,” that the Individual

Defendants certified they had personally performed as of the dates they signed Class Period SOX

certifications would have alerted defendants to the many glaring accounting misstatements and

material weaknesses in internal controls described herein. Therefore, defendants either knew of the

material misstatements in the financial statements, the ineffectiveness of the disclosure controls, and

the material weaknesses in internal controls, or, defendants knowingly failed to carry out the

required review of the financial statements, evaluation of internal controls, and evaluation of

disclosure controls (as they stated they had done in the certification). In either case, defendants

knew or recklessly disregarded that the SOX certifications they signed were false.

Zale Was on Notice Based on the Previous SEC Investigation into the Company’sAccounting Practices

207. Defendants were specifically on notice that they were obligated to adhere to proper

accounting processes and issue accurate financial figures due to the SEC’s investigation into certain

accounting practices at Zale the year before the Class Period started. In 2006, the SEC commenced

an investigation into Zale’s accounting of extended service agreements – the two year warranties

sold to customers to cover jewelry breakage and sizing issues that were offered before the Company

transitioned to lifetime warranties. The investigation also looked into Zale’s accounting for the

timing of certain vendor payments. The SEC’s investigation into Zale’s accounting practices

prompted securities fraud litigation against the Company and the forced departure of Zale’s CFO

Lenz.

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Executive Compensation

208. The Individual Defendants’ personal wealth was also directly tied to Zale’s financial

performance, as a significant portion of their executive compensation packages were dependent upon

Zale posting favorable financial results. During the Class Period, the Compensation Committee of

Zale’s Board of Directors approved and administered the Company’s executive compensation

program, including the incentive-based components of the program. The Compensation Committee

placed heavy weight on the compensation recommendations made by the Company’s CEO regarding

fellow Zale executives. According to the Company’s proxy statements filed with the SEC during the

Class Period, Zale’s compensation program was designed to closely align the financial interests of

the Company’s executives with those of its stockholders. But while the Individual Defendants were

paid out during the Class Period as Zale was issuing artificially inflated financial figures, it was the

investors who lost money when defendants’ fraudulent scheme was revealed.

209. Zale’s executive compensation program placed a substantial portion of pay at risk,

meaning payout is dependant upon Company and individual performance, and had three primary

components. Executives were paid a base salary, performance bonuses, and long-term incentive

compensation in the form of stock options and equity, including time-vesting and performance based

restricted stock units.

210. For FY07, Burton and Carter were eligible to receive an Annual Company

Performance bonus, based 50% on the Company’s consolidated net income and 50% on the

weighted average of the operating earnings performance of Zale’s various brands. The target bonus

level was an additional 125% of base salary for Burton and 60% of base salary for Carter.

211. For FY08, Goldberg and Carter were eligible to receive an Annual Company

Performance bonus, based 100% on the Company’s consolidated net income. The target bonus level

was an additional 125% of base salary for Goldberg and 60% of base salary for Carter.

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212. For FY09, Goldberg, Carter, and Gordon were eligible to receive an Annual

Company Performance bonus, based 50% on the Company’s adjusted Earnings Before Interest,

Taxes, Depreciation and Amortization (“EBITDA”), which is computed by adding interest expense,

taxes, depreciation, amortization, and the increase in deferred revenue related to warranty sales to the

Company’s consolidated net income. The target bonus level was an additional 125% of base salary

for Goldberg, 60% of base salary for Carter, and 37.5% for Gordon.

213. The Individual Defendants were paid millions of dollars in executive compensation,

based in part upon Zale’s Class Period financial results the Company ultimately admitted were false,

as follows:

Name and Year Salary Bonus ($) Stock Option Non-Equity Change in All Other Total ($)Principal ($) Awards Awards Incentive Plan Pension CompensationPosition ($) ($) Compensation Value and ($)

($) NonqualifiedDeferred

CompensationEarnings ($)

Mary E. 2007 $850,000 $1,062,500 $237,053 $320,790 $6,821 -- $44,075 $2,521,239BurtonPresident,CEO, andDirector

Name and Principal Year Salary Bonus Stock Option Non-Equity All Other TotalPosition Awards Awards Incentive Plan Compensation

Compensation

Neal L. Goldberg 2009 $1,004,231 $578,125 $1,345,043 $541,914 -- $14,788 $3,484,101CEO

2008 $572,788 $1,378,125 $829,136 $231,281 -- $30,380 $3,041,710

Rodney Carter 2009 $392,931 -- $53,654 $167,669 -- $966,699 $1,580,953Former ExecutiveVice President, Chief 2008 $444,548 -- $80,317 $250,704 -- $7,437 $783,006AdministrativeOfficer, and CFO 2007 $267,885 $500,000 $47,883 $131,914 $62,429 $176,018 $1,186,129

Cynthia T. Gordon 2009 $291,631 -- $24,593 $135,066 -- $9,134 $460,424Former Senior VicePresident, InterimCFO, and Controller

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Insider Trading

214. The Individual Defendants, in addition to being obligated to adhere to all applicable

securities laws, were also required to follow an internal Company “Insider Trading Policy,” which

prohibits the selling of Zale securities by any Company officer, employee, or member of the Board

of Directors while in possession of “material, non-public information.” The current version of

Zale’s Insider Trading Policy is publicly available on the Company’s corporate website.

215. During the Class Period, defendant Gordon sold 74.67% of her holdings of Zale’s

stock – for a total of just under $100,000 – not in accordance with any prearranged 10b5-1 trading

plan. On October 5, 2007, she sold 2,000 shares at a price of $25.00 per share, for a total of $50,000.

On September 10, 2008, Gordon sold 1,839 additional shares at $26.89 per share, reaping over

$49,000 in proceeds. These sales were made when the price of Zale’s stock was near its Class

Period high of $31.42.

216. During the Class Period, insiders Charles Fieramosca and Glen Adams, serving

as executive officer and director of Zale, respectively, also sold a significant portion of their

Company holdings. On October 19, 2007, Fieramosca sold 14,904 shares of Zale stock – over 28%

of his total holdings – at $22.41 per share, for a total of just under $334,000 in proceeds. On

September 11, 2008, Adams sold 15,856 shares – over 18% of his total holdings – at a near Class

Period high price of $27.01 per share, reaping over $428,000 in proceeds. The Class Period sales

made by Adams and Fieramosca were not in accordance with any prearranged 10b5-1 trading plan.

Other Indicia of Scienter

217. Zale executives had been previously instructed, by way of SEC comment letters, to

review various areas in its financial statements, including “cost reduction initiatives” and internal

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controls over financial reporting. 8 In responding to the SEC’s comment letters, the defendants

affirmatively stated they had reviewed the pertinent Class Period financial statements and reiterated

their responsibility for those financial statements. Specifically, in response to SEC comment letters

regarding Zale’s Form 10-Qs for fiscal quarters ended October 31, 2006, January 31, 2007, and

October 31, 2008, Form 8-K filed February 21, 2007, and Form 10-K for FY08, Zale filed response

letters with the SEC that included the following statements:

• “In preparing our response to the comments, the Company acknowledges that: Weare responsible for the adequacy and accuracy of the disclosures in our filings . . . .”

• “Zale Corporation acknowledges that: The Company is responsible for the adequacyand accuracy of the disclosure in its filings under the Securities Exchange Act of1934 . . . .”

• “For the fiscal quarter ended October 31, 3008, we confirm that there were nochanges in our internal control over financial reporting that materially affected, or arereasonably likely to materially affect, our control over financial reporting. We willprovide this confirmation in future filings commencing with the Form 10-Q for thequarter ended January 31, 2009, filed on March 11, 2009.”

These statements confirm defendants’ level of involvement in preparing, reviewing, and approving

Zale’s Class Period financial statements, especially in light of the multiple SEC comment letters they

received during this time.

218. Furthermore, not only did defendants know they were obligated to follow federal and

state laws prohibiting securities fraud, they were also required to follow a Code of Business Conduct

& Ethics (the “Code of Ethics”) applicable to all Zale officers, employees, and members of the

Board of Directors. Zale’s Code of Ethics is available to the public on the Company’s corporate

website. It states: “Honesty, integrity and trust are the underpinnings of Zale’s success and must be

observed in all respects at all times.”

8 The SEC sent comment letters to Zale addressed to Carter on April 10, 2007, May 2, 2008,and May 13, 2008; and addressed to Goldberg on February 7, 2009 and April 7, 2009.

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219. Zale provides a summary of its Code of Ethics, which states, in part, that it:

1. Forbids members of the Board of Directors, officers and other employeesfrom accepting any unauthorized financial gain, benefit, gift, service or favorfrom any of the company’s trade vendors or suppliers of services.

* * *

5. Requires that Zale’s books and records, and its financial condition andtransaction reports be kept accurately, honestly and completely.

6. Requires full and prompt disclosure of all material business events anddevelopments.

7. Requires strict compliance with all federal and state laws governing Zale’sbusiness operations, including, but not limited to:

* * *

• forbidding insider stock trading in Zale stock or other securities . . . .

220. Zale’s Code of Ethics has a section entitled “Maintenance of Books, Records and

Disclosure Procedures,” which states, in part:

All company records must be complete and must accurately record and properlydescribe the transactions they reflect. All assets, liabilities, revenues and expensesshall be recorded in compliance with generally accepted accounting principles.Directors, officers and other employees are expected to cooperate fully with ourinternal and external auditors.

All transactions involving company funds must be accurately reflected on thebooks of account. False or misleading entries in such books are strictly prohibited . .. . Knowledge of any such activity by any employee must be reported promptly tothe general counsel.

* * *

The laws and regulations applicable to filings made with the Securities andExchange Commission, including those applicable to accounting matters, arecomplex. While the ultimate responsibility for the information included in thesereports rests with senior management, numerous other employees participate in thepreparation of these reports or provide information included in these reports.

221. The Company’s Code of Ethics also has a section entitled “Compliance with

Applicable Laws,” which states, in part:

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The company is committed to strict compliance with all federal and state lawsgoverning its business operations.

* * *

Compliance with Federal Securities Laws

The company is a public company and is required to maintain books andrecords, to distribute information to its stockholders, and to file various informationwith the New York Stock Exchange and the Securities and Exchange Commission.Members of the Board of Directors, officers and other employees are required toendeavor to fulfill these obligations in a full, fair, complete, accurate, timely andunderstandable manner. . . .

No member of the Board of Directors, officer or other employee maypurchase or sell Zale common stock or other securities when he or she has personalknowledge of material non-public information about the company’s business,prospects or financial condition. In addition, no member of the Board of Directors,officer or other employee is permitted to “tip” any relative or friend by disclosingnon-public information about the company.

222. Zale’s Code of Ethics requires the immediate disclosure of any violations, and

guarantees no retaliation for reporting a violation when not the actual violator. It also provides for a

“Legal Ethics Anonymous Reporting Hotline” where alleged violations can be reported.

223. Defendants also assured investors in Zale’s SEC filings that the Company had

established corporate governance practices designed to serve the best interests ofthe Company and its stockholders. . . . The Company will continue to review andmodify its policies and procedures to ensure compliance with developing standardsin the corporate governance area.

NO SAFE HARBOR

224. The statutory safe harbor provided for forward-looking statements under certain

circumstances does not apply to any of the allegedly false statements pleaded in this Complaint.

Many of the specific statements pleaded herein were not “forward-looking statements.” To the

extent there were any forward-looking statements, they were not identified as such nor was there

meaningful cautionary statements identifying important factors that could cause actual results to

differ materially from those in the purportedly forward-looking statements given to investors.

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Alternatively, to the extent that the statutory safe harbor does apply to any forward-looking

statements pleaded herein, defendants are liable for those false forward-looking statements because

at the time each of those forward-looking statements was made, the particular speaker knew that the

particular forward-looking statement was false, or the forward-looking statement was authorized or

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

FRAUD-ON-THE-MARKET PRESUMPTION

225. Plaintiff will rely upon the presumption of reliance established by the fraud-on-the-

market doctrine. This presumption provides, inter alia:

(a) Defendants made public misrepresentations or failed to disclose material facts

during the Class Period;

(b) The omissions and misrepresentations were material;

(c) The Company’s securities traded in efficient markets;

(d) The misrepresentations alleged would tend to induce a reasonable investor to

misjudge the value of the Company’s securities; and

(e) Plaintiff and other members of the class purchased Zale securities between the

time defendants misrepresented or failed to disclose material facts and the time the true facts were

disclosed, without knowledge of the misrepresented or omitted facts.

226. At all relevant times, the market for Zale securities was efficient for the following

reasons, among others:

(a) Zale common stock met the requirements for listing, and was listed and

actively traded during the Class Period, on the NYSE;

(b) Zale common stock was regularly followed by securities analysts employed

by major brokerage firms who wrote reports that were distributed to the sales force and customers of

their respective brokerage firms; and

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(c) Zale regularly communicated with the public and investors via established

market communication mechanisms, including via regular dissemination of press releases on major

news wire services and through other wide-ranging public disclosures, such as communications with

the financial press, securities analysts, and other similar reporting services.

227. As a consequence, the markets for Zale securities digested current information with

respect to Zale from publicly available sources and reflected such information in the price of Zale’s

securities. Under these circumstances, all purchasers or acquirers of Zale securities during the Class

Period suffered similar injury through their purchase of securities at artificially inflated prices and,

thus, a presumption of reliance applies.

PROXIMATE LOSS CAUSATION/ECONOMIC LOSS

228. During the Class Period, as detailed herein, defendants engaged in a scheme to

deceive investors and the market and a course of conduct that artificially inflated and maintained

Zale’s stock price and operated as a fraud or deceit on Class Period purchasers of the Company’s

publicly traded securities by issuing false financial statements during the Class Period. When

defendants’ misrepresentations and omissions were revealed, Zale’s stock price fell precipitously as

the prior artificial inflation came out of the price. As a result of their purchases of Zale securities

during the Class Period, plaintiff and other members of the class suffered significant economic loss,

i.e., damages, under the federal securities laws.

229. Defendants’ false statements and omissions, identified herein at ¶¶65-68, 72, 76-81,

86, 91-94, 97, 103, 105, 107, 115, 118, 120, 123, 126, 129-134, 139-140, 144-145, 147-148, 151,

155-156, 158, 160, 163-164, 166 and 168, had the intended effect and caused Zale’s stock to trade at

artificially inflated levels. As a direct result of the disclosures on November 25, 2008,

September 18, 2009, and October 29, 2009, Zale’s stock price suffered material, statistically

significant declines. See ¶¶148-150, 173-177. These three drops removed the inflation from Zale’s

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stock price, causing real economic loss to investors who had purchased the Company’s publicly

traded securities during the Class Period.

230. On November 25, 2008, the Company revealed its FY09 guidance could no longer be

relied upon. The close examination of expenses defendants assured investors was taking place at the

Company, as alleged above, would have revealed – in part – that Zale’s FY08 net income had been

overstated by more than 90% due to defendants’ improper accounting of advertising and other

expenses. Defendants failed, however, to share this information with investors, causing Zale’s stock

price to remain artificially inflated.

231. On September 18, 2009, Zale disclosed its previously issued financial statements for

FY08 and FY07 contained accounting errors and should not be relied upon, and that the Company

would restate its financial figures for FY08 and certain periods of FY09. Zale’s stock price dropped

on this news, however remained artificially inflated because the magnitude of the restatement had

not yet been revealed to investors. These same accounting errors led to Zale’s ultimate restatement

of its Class Period financial figures on October 29, 2009.

232. The major decline in Zale’s stock price following Zale’s disclosure of restated

financial statements on October 29, 2009 – the end of the Class Period – was a direct result of the

nature and extent of defendants’ prior false statements and omissions being revealed to investors and

the market.

233. The timing and significance of these three stock price declines negate any inference

that the loss suffered by plaintiff and other class members was caused by changed market conditions,

macroeconomic or industry factors, or Company-specific facts unrelated to the defendants’

fraudulent conduct. The damages suffered by plaintiff and other members of the class were a direct

result of defendants’ fraudulent scheme to artificially inflate Zale’s stock price and maintain the

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price at artificially inflated levels and the subsequent significant decline in the value of Zale’s stock

when defendants’ prior misrepresentations and omissions were revealed.

CLASS ALLEGATIONS

234. 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 purchasers and acquirers of Zale

securities during the Class Period (the “Class”). Excluded from the Class are the defendants, the

officers and directors of the Company, members of their immediate families, and their legal

representatives, heirs, successors, or assigns and any entity in which defendants have or had a

controlling interest.

235. The members of the Class are so numerous that joinder of all members is

impracticable. Throughout the Class Period, Zale’s securities were actively traded on the NYSE.

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 in

the proposed Class. Record owners and other members of the Class may be identified from records

maintained by Zale or its transfer agent and may be notified of the pendency of this action by mail,

using the form of notice similar to that customarily used in securities class actions.

236. Plaintiff’s claims are typical of the claims of the members of the Class as all members

of the Class were similarly affected by defendants’ wrongful conduct in violation of federal law that

is complained of herein.

237. Plaintiff will fairly and adequately protect the interests of the members of the Class

and has retained counsel competent and experienced in class and securities litigation.

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

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

questions of law and fact common to the Class are:

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(a) Whether the federal securities laws were violated by defendants’ acts and

omissions as alleged herein;

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

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

and

(c) To what extent the members of the Class have sustained damages and the

proper measure of damages.

239. A class action is superior to all other available methods for the fair and efficient

adjudication of this controversy since joinder of all members is impracticable. Furthermore, as the

damages suffered by individual class members may be relatively small, the expense and burden of

individual litigation make it impossible for members of the Class to individually redress the wrongs

done to them. There will be no difficulty in the management of this action as a class action.

COUNT I

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

240. Plaintiff repeats and realleges each and every allegation contained above as if fully set

forth herein.

241. During the Class Period, defendants disseminated or approved the materially false

and misleading statements specified above, which they knew or deliberately disregarded were false.

242. 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 or acquirors of the Company’s publicly traded securities in an

effort to maintain artificially high market prices for Zale’s publicly traded securities in violation of

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§ 10(b) of the Exchange Act and Rule 10b-5. All defendants are sued either as primary participants

in the wrongful and illegal conduct charged herein or as controlling persons as alleged below.

243. Defendants had actual knowledge of the misrepresentations and omissions of material

facts set forth herein, or acted with reckless disregard for the truth in that they failed to ascertain and

to disclose such facts, even though such facts were available to them. As such, defendants’ material

misrepresentations and/or omissions were made knowingly or with a reckless disregard for the truth

and for the purpose and effect of supporting the artificially inflated prices of the Company’s publicly

traded securities.

244. 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 Zale’s publicly traded

securities were artificially inflated during the Class Period. In ignorance of the fact that the market

price of Zale’s publicly traded securities was artificially inflated, and relying directly or indirectly on

the false and misleading statements made by defendants, or upon the integrity of the markets 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, plaintiff and the other members of the Class acquired Zale publicly traded

securities during the Class Period at artificially inflated prices and were damaged when the artificial

inflation came out of the securities.

245. At the time of defendants’ false and misleading statements, plaintiff and other

members of the Class were ignorant of their falsity and believed them to be true. Had plaintiff, the

other members of the Class and the marketplace known the truth regarding Zale’s financial

statements, that was not disclosed by defendants, they would not have purchased or otherwise

acquired their Zale publicly traded securities, or, if they had acquired such securities during the Class

Period, they would not have done so at the artificially inflated prices they paid.

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246. As a direct and proximate result of defendants’ wrongful conduct, plaintiff and the

other members of the Class suffered damages in connection with their respective purchases and sales

of the Company’s publicly traded securities during the Class Period.

COUNT II

Violation of §20(a) of the Exchange ActAgainst All Defendants

247. Plaintiff repeats and realleges each and every allegation contained above as if fully set

forth herein.

248. Defendants acted as controlling persons of Zale within the meaning of §20(a) of the

Exchange Act as alleged herein. By virtue of their high level positions, participation in and

awareness of the Company’s operations, and intimate knowledge of the false statements made by

Zale and disseminated to the investing public, 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 plaintiff contends are false. The defendants

participated in conference calls with investors and were 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.

249. In particular, each of the defendants had direct and supervisory 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.

250. As set forth above, each of the defendants violated §10(b) and Rule 10b-5 by their

acts and omissions as alleged in this Complaint. By virtue of their positions as controlling persons,

the defendants are liable pursuant to §20(a) of the Exchange Act. As a direct and proximate result of- 86 -

574014_1


defendants’ wrongful conduct, plaintiff and other members of the Class suffered damages in

connection with their purchases of the Company’s publicly traded securities during the Class Period.

PRAYER FOR RELIEF

WHEREFORE, plaintiff respectfully prays for relief and judgment, as follows:

A. Determining that this action is a proper class action, and certifying plaintiff as class

representative under Federal Rule of Civil Procedure 23;

B. Awarding compensatory damages in favor of plaintiff and the other members of the

Class against all defendants, jointly and severally, for all damages sustained as a result of

defendants’ wrongdoing, in an amount to be proven at trial, including interest thereon;

C. Awarding plaintiff and the Class their reasonable costs and expenses incurred in this

action, including counsel fees and expert fees; and

D. Such equitable, injunctive or other and further relief as the Court may deem just and

proper.

JURY TRIAL DEMANDED

E. Plaintiff hereby demands a trial by jury.

DATED: August 9, 2010 ROBBINS GELLER RUDMAN& DOWD LLP

X. JAY ALVAREZJULIE A. KEARNS

s/ X. JAY ALVAREZ X. JAY ALVAREZ

655 West Broadway, Suite 1900San Diego, CA 92101-3301Telephone: 619/231-1058619/231-7423 (fax)

Lead Counsel for Plaintiffs

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KENDALL LAW GROUP, LLPJOE KENDALL (State Bar No. 11260700)3232 McKinney Avenue, Suite 700Dallas, TX 75204Telephone: 214/744-3000214/744-3015 (fax)

Liaison Counsel

SULLIVAN, WARD, ASHER & PATTON, P.C.CYNTHIA J. BILLINGS25800 Northwestern Highway1000 Maccabees CenterSouthfield, MI 48075-1000Telephone: 248/746-0700248/746-2760 (fax)

SUGARMAN & SUSSKINDROBERT SUGARMAN100 Miracle Mile, Suite 300Coral Gables, FL 33134Telephone: 305/529-2801305/447-8115 (fax)

Additional Counsel for Plaintiff

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CERTIFICATE OF SERVICE

I hereby certify that on August 9, 2010, I authorized the electronic filing of the foregoing

with the Clerk of the Court using the CM/ECF system which will send notification of such filing to

the e-mail addresses denoted on the attached Electronic Mail Notice List, and I hereby certify that I

caused to be mailed the foregoing document or paper via the United States Postal Service to the non-

CM/ECF participants indicated on the attached Manual Notice List.

I certify under penalty of perjury under the laws of the United States of America that the

foregoing is true and correct. Executed on August 9, 2010.

s/ X. JAY ALVAREZ X. JAY ALVAREZROBBINS GELLER RUDMAN

& DOWD LLP655 West Broadway, Suite 1900San Diego, CA 92101-3301Telephone: 619/231-1058619/231-7423 (fax)E-mail: [email protected]

574014_1

District Version 4.1.1- Page 1 of 1Case 3:09-cv-02133-B Document 19 Filed 08/09/10 of 93 PageID 345

Mailing Information for a Case 3:09-cv-02133-B

Electronic Mail Notice List

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

• X Jay [email protected],[email protected]

• Anne L [email protected],[email protected]

• Lionel Z [email protected] ,[email protected] ,[email protected] ,[email protected],[email protected]

• Michelle LeGrand [email protected],[email protected],[email protected]

• Bruce A [email protected],[email protected],[email protected]

• Julie A [email protected] ,[email protected]

• Joe [email protected] ,[email protected]

• Hamilton [email protected],[email protected]

• Yvette [email protected],[email protected]

Manual Notice List

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

Danielle S MyersCoughlin Stoia Geller Rudman & Robbins LLP655 W BroadwaySuite 1900San Diego, CA 92101-3301

Darren J RobbinsRobbins Geller Rudman & Dowd LLP655 W BroadwaySuite 1900San Diego, CA 92101-3301

https://ecf.t1nd.uscourts.gov/cgi-bin/N4ailList.pl?993085078003838-L_728_0-1 8/9/2010

in re zale corporation securities litigation 09-cv-02133...

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