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January 7, 2005.

GREATER PENNSYLVANIA CARPENTERS PENSION FUND, On Behalf of Itself and All Others Similarly Situated, Plaintiff,
WHITEHALL JEWELLERS, INC., et al., Defendants.

The opinion of the court was delivered by: AMY J. ST. EVE, District Judge


Plaintiff has commenced this purported class action against Defendants alleging violations of Section 10(b) of the Securities Exchange Act of 1934 (the "Exchange Act"), 15 U.S.C. § 78j(b), Rule 10b-5 promulgated thereunder, and Section 20(a) of the Exchange Act, 15 U.S.C. § 78t-1. Plaintiff purports to represent a class of persons who purchased Whitehall stock from November 19, 2001 to December 10, 2003. In essence, Plaintiff alleges that Defendants knowingly and recklessly reported false and misleading financial results and guidance for the fiscal quarters and full years ended 2000, 2001, 2002, and the first two quarters of 2003, and that Whitehall's former Chief Financial Officer helped cover up the alleged fraud. Defendants have moved to dismiss this securities fraud amended complaint pursuant to Federal Rules of Civil Procedure 12(b)(6) and 9(b). As discussed in detail below, Defendants' motion is granted in part and denied in part. BACKGROUND

I. The Parties

  Lead Plaintiff Pennsylvania Fund brings this suit on behalf of all persons who acquired the common stock of Whitehall Jewellers, Inc. ("Whitehall") between November 19, 2001, and December 10, 2003 (the "Class Period.") (R. 14-1, Cons. Comp. ¶ 1.) The Pennsylvania Fund purchased Whitehall stock during the class period. Its last purchase of Whitehall stock took place on June 6, 2002. The Pennsylvania Fund sold all of its Whitehall holdings by the end of July 2002.

  Whitehall is a Delaware corporation, with its principal offices located in Chicago, Illinois. It is a specialty retailer of fine jewelry operating through 384 mall-based stores in 38 states under the following brand names: Whitehall Co. Jewellers, Lundstrom Jewelers, and Marks Brothers. It trades on the New York Stock Exchange ("NYSE") under the ticker symbol "JWL." (Id. ¶ 15.)

  Defendant Hugh Patinkin serves as Chairman of the Board, Chief Executive Officer ("CEO"), and President of Whitehall. (Id. ¶ 16.) Defndant John H. Browne served as Whitehall's Chief Financial Officer ("CFO"), Treasurer, and Executive Vice President until Whitehall fired him on approximately December 11, 2003. (Id. ¶ 17.) Defendant Matthew Patinkin is Whitehall's President of Operations. (Id. ¶ 18.) Defendant John Desjardins is Whitehall's interim CFO and Executive Vice President of Operations. Desjardins previously served as Whitehall's Executive Vice President of Finance and Administration. (Id. ¶ 19.) Defendant Manny Brown was Whitehall's Executive Vice President of Operations during the Class Period, and had responsibility for the Company's daily operations. (Id. ¶ 20.) II. The Alleged Fraudulent Schemes

  Plaintiff alleges that Defendants engaged in various schemes and fraudulent transactions to inflate Whitehall's inventory balances, net income and earnings per share, which artificially inflated the price of Whitehall's stock.

  A. The Inventory Scheme

  Plaintiff alleges that Defendants engaged in a reciprocal inventory scheme with Whitehall's vendors to inflate Whitehall's financial results. It contends that Defendants deliberately concealed the scheme from investors. Under the alleged scheme, Whitehall purchased merchandise inventory from its vendors, usually on credit and recognized the value of the inventory on its books. (Id. ¶ 27.) After the inventory depreciated in value, Plaintiff alleges that Whitehall improperly failed to write-down the value of the depreciated inventory to reflect its fair market value. Instead, Whitehall negotiated side agreements, outside its normal policies and contractual obligations. This allowed Whitehall to return the inventory to the vendor in exchange for excessive discounts, incentives, "vendor allowances" or "barter credits" which reimbursed Whitehall for the full average cost of the merchandise purchased from the vendor, even though the fair market value of the inventory had depreciated well below its average cost. (Id.) In exchange for these discounts, vendor allowances and credits, Whitehall issued additional purchase orders for new merchandise inventory from the vendor. This, in turn, enabled vendors to inflate their revenues and receivables. (Id.)

  Plaintiff alleges that this inventory scheme enabled Whitehall to falsify its inventory values, net income and earnings per share in violation of Generally Accepted Accounting Principles ("GAAP") by circumventing the required impairment charges on its depreciated inventory. (Id. ¶ 28.) If Defendants had properly accounted for the substandard inventory under GAAP, they would have incurred an expense by establishing a reserve. (Id.)

  B. The Cosmopolitan Scheme

  Plaintiff also alleges that Defendants engaged in a vendor scheme with Cosmopolitan Gem Corporation ("Cosmopolitan"), one of Whitehall's vendors. (Id. ¶¶ 6, 33-54.) Plaintiff alleges that Browne knowingly participated in this scheme and received bribes in return for his involvement. (Id. ¶ 6.)

  According to the Complaint, Capital Factors purchased a security interest in Cosmopolitan's accounts receivable and inventory. Cosmopolitan used that money to finance its operations and pay off debt. (Id. ¶ 34.) Cosmopolitan and Whitehall engaged in a scheme to conceal Cosmopolitan's strained financial condition. Under their arrangement, Plaintiff alleges that Whitehall and Cosmopolitan concealed from Capital Factors excessive discounts, incentives, allowances and credits granted to Whitehall by Cosmopolitan which Cosmopolitan should have deducted from the value of its receivables. (Id. ¶ 36.) Whitehall knowingly permitted Cosmopolitan to create fictitious accounts of Whitehall's payables and to improperly apply payments to Cosmopolitan's oldest receivables. (Id.) Plaintiff alleges that this scheme "improved the appearance of Cosmopolitan's aging receivables, overstated Cosmopolitan's accounts receivable (and Whitehall's accounts payable) and understated Cosmopolitan's financial commitments and obligations to customers." (Id.) Plaintiff further alleges that Whitehall knowingly participated in the scheme with Cosmopolitan because Whitehall received a continuous stream of excessive undisclosed discounts, credits ...

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