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Lawyers Circling Tween Brands

It's easy to think of one company that's currently "be-Tween" a proverbial rock and a hard place. And while nobody can forecast how it will affect the company or its management, youth retailer Tween Brands (NYSE: TWB  ) is suddenly the target of a flood of lawsuits by disgruntled shareholders.

In August, the retailer that operates Limited*Too and Justice stores, released the results of its second quarter. Let's just say the numbers didn't quite live up to management's expectations. Sure, management can't always be right. After all, no one is perfect. But what makes this time a little bit sketchy is that between the time guidance was issued and the earnings release, CEO Michael Rayden was selling off $6.1 million worth of shares.

May projections of "conservative" per-share earnings were between $0.13 and $0.16, but actual earnings clocked in at $0.07 per share. The results sent the stock tumbling over 28% and shareholders running to the nearest lawyer.

Rayden's explanation for the sizable miss was that later back-to-school start dates and altered timing for state-tax holidays in Texas and Florida had trimmed results. But other retailers like Gap (NYSE: GPS  ) and Abercrombie & Fitch (NYSE: ANF  ) are struggling from similar issues, yet neither company came close to missing estimates like Tween Brands. Both companies actually exceeded analyst estimates for that past quarter. Doesn't the company realize it's obvious that it was fully aware that consumer demand had fallen and costs were rising, since the CEO sold off such a large stake?

But now, headlines for Tween include a string of press releases by attorneys who have filed class action suits, claiming that Rayden "violated federal securities laws by issuing various materially false and misleading statements that had the effect of artificially inflating the market price of the company's securities ..." The attorney's releases essentially invite aggrieved Tween shareholders to join in their class action suits in order to fight for the company to pay for damages on behalf of investors who bought Tween Brands between June 8 and Aug. 21.

I suppose the ultimate effect of these unfolding events is anyone's guess, but the lesson Fools can take away from this is: You can't always have faith in management, and performing due diligence is always a necessity. Fellow Fool Tim Otte recently questioned American Eagle's (NYSE: AEO  ) guidance, so it's a common issue that analysts must keep a close eye on. Any investor who had been on the lookout for inside trading would have caught the fact that the CEO was unloading so many shares, which would have put up a red flag for shareholders.

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11/25/2009 4:01 PM
TWB $10.45 Down +0.00 +0.00%
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