Revisions of Earnings Forecasts Fail to Support Securities Fraud Claims

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A federal court in Texas dismissed a purported securities fraud class action against a clothing retailer because the claims (a) were based on deficient confidential witness statements and (b) failed to demonstrate that the company’s inaccurate earnings projections were made with knowledge of falsity.

An investor sued Men’s Wearhouse, Inc. under § 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934 after the company revised its earnings projections during the third and fourth quarters of 2007. The company’s stock fell 63 percent after these announcements, and the plaintiff proffered statements from four anonymous employees who said company executives should have known the original forecasts were overly optimistic and failed to disclose unfavorable information about the company’s business prospects provided by middle managers. Men’s Wearhouse moved to dismiss.

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