THREE DONNKENNY EXECS HIT WITH SHAREHOLDER’S SUIT
Byline: Vicki M. Young
NEW YORK — Three Donnkenny executives sold $13.5 million in company stock June 1995 through August 1996 at prices ranging from $17.25 a share to $33.88. The stock closed Thursday at 7 3/4, down 3/8, in over-the-counter trading, with 661,300 shares in action.
A shareholder’s suit has been filed in Manhattan Federal Court, charging the executives with insider trading and withholding material information.
The three executives named in the suit are chief executive officer and president Richard Rubin; former chief financial officer Edward T. Creevy and former controller Ronald Hollandsworth.
According to CDA/Investnet, an investment research firm in Fort Lauderdale, Fla., the three executives sold stock totaling close to $3 million from May through August of this year.
Rubin sold 100,000 shares on Aug. 13 for $17.50 a share and sold another 50,000 shares the next day for $17.25 a share.
Hollandsworth bought 8,000 shares through options exercised on May 8 at $9.94 a share and sold them that day for $19.38 a share. Creevy bought 8,000 shares through options exercised on June 10 at $9.94 a share and sold them the next day for $20.97 a share.
As reported, the company, which manufactures women’s and men’s sportswear, saw its stock plunge 29 percent last week following reports of accounting irregularities. The stock dropped 3 5/8 to 8 7/8 on Nov. 7 as investors dumped their shares following news of the possible accounting scandal. The Donnkenny trading volume that day was 9.2 million shares, compared to an average trading volume of 290,000 shares.
The company had announced Nov. 6, after the close of the market, that its auditing committee, along with independent counsel, was investigating the company’s financial statements. Its auditor, KPMG Peat Marwick, has resigned and been replaced by Deloitte & Touche.
Following the preliminary results of the investigation, the firm reassigned Hollandsworth and an assistant controller to non-financial positions. The company also hired a new financial officer, Stuart S. Levy, former chief financial officer of Ralph Lauren Polo. Creevy was placed on leave.
Rubin told WWD earlier this week that the restatement of past results would have no effect on earnings, explaining that the changes involved the timing in which the revenue was booked. He had said that revenue coming in just after the close of a fiscal period may have been booked in the earlier period, but he stressed that “there will be no change in the total of reported earnings.” Rubin also said that “whatever is taken away from one period will be added to the other. It will be a wash.”
He said earnings for the third quarter would be released Thursday and would show earnings meeting analysts’ estimates of $1.30 a share plus. The earnings were not issued Thursday, but a company spokesman said they would be available today.
Rubin also stressed that Donnkenny’s situation was “nothing like Leslie Fay.” Leslie Fay went bankrupt in 1993 following the disclosure that its books had been juggled to convert losses into profits.
The shareholder suit against Donnkenny was filed by Ellen Grauer, who holds 500 shares purchased at 14 3/8 on Feb. 27, 1996, for herself and on behalf of all Donnkenny stock purchasers from Feb. 14, 1995 through Nov. 6, 1996.
The suit charges Rubin and Creevy with filing false and misleading statements with the Securities and Exchange Commission for the company’s end-of-year financial statements, for 1994 and 1995, as well as quarterly financial statements for the four quarters of 1995 and the first two quarters of 1996. Hollandsworth is charged with responsibility for the 1994 yearend filing.
The three executives, the suit said, “controlled all aspects of Donnkenny’s operations, including the dissemination of information to investors.”
In addition, the effect of their conduct was to “create and prolong the illusion of the company’s success, to inflate the price of the common stock of the company, to conceal the adverse facts concerning the results of operations and fiscal condition of the company.” The suit also charges the executives sold much of their own stock holdings at “artificially inflated prices.”
Rubin is specifically charged with selling over $2.5 million in company stock “only three weeks before Donnkenny disclosed that its financial statements were materially incorrect and would need to be restated.” The trade dates were Aug. 13 and 14, with disclosure of the accounting irregularities filed to the Securities and Exchange Commission on Sept. 6.
In support of the charges of misleading information, the complaint cites:
Rubin’s comment on Donnkenny’s Nov. 20, 1995, 2-for-1 stock split that the decision to split the stock was due in part to “solid earnings results, the strong performance of our stock and continued optimism for our future. We believe the 2-for-1 split will increase shareholder liquidity and enhance shareholder value.”
Donnkenny shares jumped 2 3/8 to 12 5/8 upon distribution of information to the marketplace based on a conference call between Donnkenny and financial analysts the day after the fourth quarter and yearend December 2, 1995, earnings were released, in which the complaint contends company officials outlined “very strong prospects” for 1996 and indicated that “it was comfortable with analysts’ earnings estimates” for fiscal 1996.
When contacted, a Donnkenny spokesman said the company was in the process of reviewing the complaint.