Collective Brands Faces Lawsuit

The embattled Collective Brands Inc. is facing a new challenge.

The firm, which is undergoing a strategic review and possibly putting itself up for sale, is now being investigated for potential securities violations during the nine months from December 2010 to May 2011.

A federal class-action complaint filed yesterday by Collective’s common stockholders alleges that the firm’s directors provided false or misleading material information regarding the struggling domestic Payless unit that led the company’s shares to trade at “artificially high prices.”

The directors named in the suit, filed in the U.S. District Court in Kansas, are Matt Rubel, former chairman and CEO of Collective; Douglas Treff, EVP and chief administrative officer; and Douglas Boessen, division SVP and CFO.

According to the filing, it is claimed that the directors of Collective knew “true facts … but concealed [them] from the investing public” before the results were released. Among the withheld information was the fact that “inventory for Payless remained at excessively high levels and … was a concern; sales at domestic Payless stores were significantly worse than expected due to deteriorating customer demand; and the company was forced to mark down Payless’ bloated inventory at significant discounts, which adversely affected margins for the quarter in question.

Meanwhile, Collective’s stock reached a high of $23.44 per share on Feb. 18, 2011, but subsequently tanked nearly 17 percent on April 20, 2011, the day the firm reported its first-quarter results. As it turned out, Collective earned 42 cents per share, or about half the 82 cents expected by analysts. Collective also reported a 7.4 percent decline in comparable-store sales in its Payless Domestic segment.

The suit goes on to imply that Rubel, Treff and Boessen, “because of their positions with the company, and their access to material non-public information available to them but not to the public … knew that the adverse facts … were being concealed from the public and that the positive representations being made were then materially false and misleading.”

Ultimately the suit alleges the firm “caused [the public] to purchase Collective Brands common stock at inflated prices” while its “top officers and directors [were benefiting from] purportedly favorable operating results [that] contributed to the compensation paid to the top officers during the period concerned, some of whom received as much as $7.8 million per year.”

Acting for the plaintiffs are former SEC attorney Willie Briscoe of the Briscoe Law Firm, and the securities litigation firm Powers Taylor.

Collective Brands declined to comment when contacted.

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