united states district court eastern district of new...

UNITED STATES DISTRICT COURTEASTERN DISTRICT OF NEW YORK

-------------------------------------------------------------------XKELEL YETEV D’JERUSALEM and B&E

EISDORFER FOUNDATION, individually andon behalf of all others similarly situated,

Plaintiffs,

-against-

VICTOR JACOBS, HERMAN JACOBS, DAVIDSHAMILZADEH, MAYER RISPLER &COMPANY, ARTHUR ANDERSEN LLP andKPMG LLP,

Defendants.

:::::::::::::

Case No.

CLASS ACTIONCOMPLAINT

FOR VIOLATIONSOF FEDERAL

SECURITIES LAW

JURY TRIAL DEMANDED

-------------------------------------------------------------------X

Plaintiffs, by their attorneys, for their Class Action Complaint allege:

NATURE OF THE CASE

1. This is a Class Action brought on behalf of plaintiffs and all other persons or

entities, except for defendants, who purchased or otherwise acquired Allou Healthcare, Inc. (“Allou”

or the “Company”) securities (the “Class”) during the period June 22, 1998 through April 9, 2003,

inclusive (the “Class Period”).

2. This action, based on violations of section 10(b) of the Securities Exchange Act

of 1934 (“Exchange Act”), arises out of a series of false and misleading statements and omissions

of material fact by defendants regarding Allou’s financial results.

JURISDICTION AND VENUE

3. This action arises under sections 10(b) and 20(a) of the Exchange Act, 15 U.S.C.

§§ 78j(b) and 78t(a); and Rule 10b-5 promulgated pursuant to section 10(b) by the Securities and

Exchange Commission, 17 C.F.R. § 240.10b-5. The jurisdiction of this Court is based on section

27 of the Exchange Act, 15 U.S.C. § 78aa; and on sections 1331 and 1337(a) of the Judicial Code,

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28 U.S.C. §§ 1331, 1337(a).

4. Venue is proper in this District under section 27 of the Exchange Act, 15 U.S.C.

§ 78aa, and section 1391(b) of the Judicial Code, 28 U.S.C. § 1391(b). The corporate headquarters

of Allou are located in this District.

5. In connection with the acts and conduct alleged herein, defendants, directly and

indirectly, used the means and instrumentalities of interstate commerce, including the United States

mails and the facilities of the national securities exchanges.

PARTIES

6. Plaintiff Kelel Yetev D’Jerusalem, as set forth in the accompanying certification

of Bernard Eisdorfer, incorporated by reference herein, purchased the common stock of Allou at

artificially inflated prices during the Class Period and has been damaged thereby.

7. Plaintiff B&E Eisdorfer Foundation, as set forth in the accompanying certification

of Bernard Eisdorfer, incorporated by reference herein, purchased the common stock of Allou at

artificially inflated prices during the Class Period and has been damaged thereby.

8. Allou Healthcare, Inc., formerly known as Allou Health & Beauty Care, Inc.,

distributes consumer personal care products and prescription pharmaceuticals on a national basis.

The Company also manufactures upscale hair and skin care products for sale under private labels.

The Company's consumer personal care products distribution business includes prestige brand name

designer fragrances, brand name health and beauty aids products and non-perishable packaged food

items. Its prescription pharmaceuticals distribution business includes both brand name and generic

pharmaceutical products. In April 2003, the Company filed a voluntary petition for protection under

Chapter 11 of the United States Bankruptcy Code.

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9. Defendant Victor Jacobs was at all times relevant to the allegations herein Allou’s

Chairman of the Board of Directors and a Director.

10. Defendant Herman Jacobs was at all times relevant to the allegations herein

Allou's Chief Executive Officer and a Director.

11. Defendant David Shamilzadeh was at all times relevant to the allegations herein

Allou's President and Chief Financial Officer and a Director.

12. Defendant Mayer Rispler & Company, P.C. provides auditing and accounting

services. Mayer Rispler served as the Company’s auditors from the start of the Class Period until

they were replaced by Arthur Andersen in 2001.

13. Defendant Arthur Andersen LLP provides auditing and accounting services.

Arthur Andersen served as the Company's auditors for the fiscal year ended March 31, 2001.

14. Defendant KPMG, LLP provides auditing, accounting and consulting services.

KPMG served as the Company's auditors, providing its auditing and accounting services for the

Company from June 2002 to the present.

15. Defendants Victor Jacobs, Herman Jacobs, and David Shamilzadeh are referred

to herein as the “Individual Defendants.”

16. The Individual Defendants, by reason of their management positions and

membership and ownership of the Company’s stock, were at all relevant times controlling persons

of Allou within the meaning of section 20(a) of the Exchange Act. The Individual Defendants had

the power and influence to cause Allou to engage in the unlawful acts and conduct alleged herein,

and did exercise such power and influence.

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PLAINTIFF’S CLASS ACTION ALLEGATIONS

17. Plaintiff brings this action as a class action pursuant to Federal Rule of Civil

Procedure 23(a) and (b)(3) on behalf of the Class, consisting of all persons who purchased or

otherwise acquired Allou securities between June 22, 1998 through April 9, 2003, inclusive.

Excluded from the Class are defendants; members of the immediate families of the Individual

Defendants; any entity in which any defendant has or had a controlling interest; and the legal

representatives, heirs, successors, or assigns of any defendant.

18. As of February 10, 2003, there were 6,735,351 of Class A, and 1,200,00 of class

B shares of common stock of Allou were outstanding in an actively-traded and efficient market in

which millions of shares were traded during the Class Period. Allou common stock is traded on the

American Stock Exchange (“AMEX”) under the symbol “ALU.” The members of the Class are so

numerous that joinder of all members is impracticable. While the exact number of Class members

is unknown to plaintiff, and can only be ascertained through appropriate discovery, plaintiff believes

that there are thousands of members of the Class. Record owners and members of the Class may

be identified from records maintained by Allou or its transfer agent and may be notified of the

pendency of this action by mail, using the form of notice similar to that customarily used in

securities class actions.

19. Plaintiffs’ claims are typical of the claims of the members of the Class in that

plaintiffs and each Class member purchased securities of Allou during the Class Period and

sustained injury as a result.

20. Plaintiff will fairly and adequately protect the interests of the members of the

Class and has retained counsel competent and experienced in class action and securities litigation.

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21. A class action is superior to other available methods for the fair and efficient

adjudication of this controversy since joinder of all Class members is impracticable. Furthermore,

as the damages suffered by individual Class members may be relatively small, the expense and

burden of individual litigation make it impossible for Class members to seek redress individually

for the wrongs done to them. There will be no difficulty in the management of this action as a class

action.

22. Common questions of law and fact exist as to all members of the Class and

predominate over any questions affecting solely individual members of the Class. Among the

questions of law and fact common to the Class:

(a) Whether the federal securities laws were violated by defendants’ acts as alleged

herein;

(b) Whether defendants acted wilfully or recklessly in omitting to state and

misrepresenting material facts; and

(c) Whether the members of the Class have sustained damages, and if so, what is the

proper measure of damages.

FACTS

23. The Class Period commences on June 22, 1998. On that date, Allou issued a

press release announcing its financial results for the full year ended March 31, 1998. The Company

reported that revenues reached a “historic level” of $301.7 million and that net income was $0.72

per share. Defendant Shamilzadeh commented on the results stating in pertinent part as follows:

Our performance in fiscal 1998 was the best in Allou's 37 yearhistory. EBIT reached $15.3 million after $1.9 million was chargedagainst income relating to the Company's e-commerce andmanufacturing subsidiaries. These results clearly demonstrate

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management's previously announced policy of aggressively pursuinghigh profit margin businesses is well underway.

24. On June 29, 1998, Allou filed its Form 10-K for the year ended March 31, 1998,

with the SEC, which was signed by the Individual Defendants, among others, and confirmed the

previously announced financial results. The Form 10-K contained financial statements for the year

ended March 31, 1998 which were purportedly audited by Mayer Rispler and contained an opinion

letter from Mayer Rispler that represented that it had conducted its audits “in accordance with

generally accepted auditing standards.” The opinion letter further represented that the financial

statements contained in the Form I0-K “present fairly, in all material respects, the financial position

of Allou . . . and the results of its operations and its cash flows for each of the years in the three-year

period ended March 31, 1998 in conformity with generally accepted accounting principles.”

25. The June 1998 Form 10-K valued Allou’s inventory at $122 million and accounts

receivable at $44 million.

26. On August 12, 1998, Allou issued a press release announcing its financial results

for the three months ending June 30, 1998. The Company reported revenues of $68.6 million and

net income of $0.20 per share.

27. On or about August 14, 1998, Allou filed its Form 10-Q for the three months

ending June 30, 1998, with the SEC. The Form 10-Q reiterated Allou’s financial and operational

results reported in the August 12, 1998 press release. It was signed by Defendant Herman Jacobs.

28. On November 16, 1998, Allou issued a press release announcing its financial

results for the three months ending September 30, 1998. The Company reported revenues of $89.7

million and net income of $0.24 per share.

29. On or about November 16, 1998, Allou filed its Form 10-Q for the three months

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ending September 30, 1998, with the SEC. The Form 10-Q reiterated Allou’s financial and

operational results reported in the November 16, 1998 press release. It was signed by Defendant

Herman Jacobs and Defendant Shamilzadeh.

30. On February 16, 1999, Allou issued a press release announcing its financial

results for the three months ending December 31, 1998. The Company reported revenues of $89.5


31. On or about February 16, 1999, Allou filed its Form 10-Q for the three months

ending December 31, 1998, with the SEC. The Form 10-Q reiterated Allou’s financial and

operational results reported in the February 16, 1998 press release. It was signed by Defendant


32. On June 8, 1999, Allou issued a press release announcing its financial results for

the year ended March 31, 1999. The Company reported revenues of $337.4 million and net income

of $0.86 per share.


with the SEC which was signed by the Individual Defendants, among others, and confirmed the





statements contained in the Form 10-K “present fairly, in all material respects, the financial position

of Allou. . . and the results of its operations and its cash flows for each of the years in the three-year


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34. The June 1999 Form 10-K valued Allou’s inventory at $122.9 million and

accounts receivable at $51.7 million.


for the three months ending June 30, 1999. The Company reported revenues of $78 million and net

income of $0.18 per share.



results reported in the August 11, 1999 press release. It was signed by Defendant Herman Jacobs

and Defendant Shamilzadeh.


results for the three months ending September 30, 1999. The Company reported revenues of $101












9


41. On June 21, 2000, Allou issued a press release announcing its financial results

for the year ended March 31, 2000. The Company reported net income of $0.97 per share for the

year. 42. On June 29, 2000, Allou filed its Form 10-K for the year ended March 31, 2000,

with the SEC, which was signed by the Individual Defendants, among others, and confirmed the






of Allou . . . and the results of its operations and its cash flows for each of the years in the three-year









results reported in the August 14, 2000 press release. It was signed by Defendant Shamilzadeh.



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Shamilzadeh.





ending December 31, 2000. The Form 10-Q reiterated Allou’s financial and operational results

reported in the February 12, 2001 press release. It was signed by Defendant Shamilzadeh.


with the SEC which was signed by the Individual Defendants, among others, and confirmed the


ended March 31, 2001 which were purportedly audited by Arthur Andersen and contained an

opinion letter from Arthur Andersen that represented that it had conducted its audits “in accordance

with generally accepted auditing standards.” The opinion letter further represented that the financial


of Allou. . . as of March 31, 2001, and the results of their operations and their cash flows for the

fiscal year then ended in conformity with accounting principles generally accepted in the United

States.”


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52. On July 2, 2001, Allou issued a press release announcing its financial results for

the year ended March 31, 2001. The Company reported net income of $0.82 per share for the year.






results reported in the August 14, 2001 press release. It was signed by Defendant Shamilzadeh.

55. On September 4, 2001, Allou issued a press release announcing that “a definitive

loan agreement was signed with Congress Financial Corp. and Citibank, N.A. for a $200 million

new credit facility, at an improved blended rate of interest.” The press release continued, in

pertinent part, as follows:

David Shamilzadeh, president and chief financial officer of Allou,stated, “This loan agreement is a strong endorsement of Allou’spotential growth. Furthermore, this high level of confidence from twoprestigious financial institutions occurs during a period of fiscalrestraint by lenders and a soft economy.”

He added, “The new credit facility provides the financialinfrastructure for the Company to achieve its short and long termgoals.”


results for the three months ending September 30, 2001. The Company reported revenues of $149


57. On November 14, 2001, Allou filed with the SEC its Quarterly Report on Form

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10-Q for the quarter ended September 30, 2001. The Form 10-Q reiterated Allou’s financial and


Shamilzadeh.

58. The November 2001 Form 10-Q provided the following disclosure with respect

to Allou’s preparation of its financial statements:

The accompanying interim consolidated financial statements of AllouHealth & Beauty Care, Inc. (the “Company”) have been prepared inconformity with generally accepted accounting principles consistentin all material respects with those applied in the Annual Report onForm 10-K for the year ended March 31, 2001. The interim financialinformation is unaudited, but reflects all normal-adjustments whichare, in the opinion of management, necessary to provide a fairstatement of results for the interim periods presented.

59. The November 2001 Form 10-Q provided the following disclosure with respect

to Allou’s financing agreement with Congress Financial Corp. and Citibank, N.A.:

On September 4, 2001, the Company entered into aa three yearfinancing agreement with Congress Financial Corp. and Citibank,N.A. for a $200,000,000 revolving credit facility. Interest is beingcharged at a rate of .25% per annum above the prime rate or at theCompany’s option 2.75% per annum above the Eurodollar rate. Thecredit facility is secured by all of the Company’s assets. Certainofficers of the Company have personally guaranteed the credit facilityfor a maximum of approximately $10,000,000. In addition, there arevarious financial covenants with which the Company must comply.At September 30, 2001, the Company was in compliance with all ofits covenants.

60. On February 6, 2002, Allou announced that it “expects its pharmaceutical

business to significantly contribute to sales growth in the coming quarters. The company recently

disclosed that it had closed a new $200 million revolving credit facility led by Citibank, N.A. and

Congress Financial. The Company has been using the increased availability under the credit facility

to acquire additional lines of pharmaceutical products. The company is aggressively pursuing

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further acquisitions in the pharmaceutical business.” The press release continued, in pertinent part,

as follows:

“We will continue to aggressively focus on opportunities to grow ourpharmaceutical business,” said David Shamilzadeh, president andchief financial officer. “The new credit facility gives us the financialflexibility to acquire additional lines of pharmaceutical products inorder to expand our business. We believe that this area will play animportant role in growing sales in the coming quarter.”







Shamilzadeh.

63. On July 1, 2002, Allou released its financial and operational results for the year

ended March 31, 2002. The press release reported "Record Revenues and Earnings For Fiscal 2002"

and stated, in pertinent part, as follows:

Allou Health & Beauty Care, Inc., today reported record financialresults for its fiscal year ended March 31, 2002. The companyreported record revenue of $564.1 million, versus $548.1 million forthe same period last year. The company generated $6.6 million inearnings, or $0.91 per diluted share, a 168% increase versus $2.5million, or $0.34 per diluted share for the same period last year.

“We are gratified that the many initiatives we took during fiscal 2002resulted in a substantial improvement in our operating results," saidDavid Shamilzadeh, President and Chief Financial Officer of Allou."We demonstrated that despite a challenging environment we wereable to grow revenues and substantially improve profitability. Thepredictability of our revenue base and diversification of products

14

should enable us to continue to grow revenues and earnings duringour current fiscal year.”

Mr. Shamilzadeh continued, “Although our results were favorablyimpacted by the current interest rate environment, we are taking stepsto ensure that we aggressively manage interest expense. Wechanged lenders during the past year, allowing the company to accesscapital under more favorable terms. We are taking further steps toensure interest rate protection in order to negate the impact on ourcompany should interest rates rise in the future. Finally, while we areconfident that we can continue to grow earnings at a double-digitrate, we continue to aggressively seek accretive acquisitions that willcompliment Allou’s core businesses.”

The company expects that revenues for its fiscal year will beapproximately $600 million and earnings should approximate $1.00per share.

64. On July 3, 2002, Allou filed with the SEC its Annual Report on Form 10-K. The

Form 10-K reiterated Allou’s financial and operational results reported in the July 1, 2002 press

release.

65. The July 2002 Form 10-K valued Allou’s inventory at $185.5 million and


66. The July 2002 Form 10-K provided the following disclosure with respect to

Allou’s internal and financial controls and systems:

MANAGEMENT INFORMATION AND CONTROL SYSTEM

We use a proprietary, computerized database management systemthat collects, integrates and analyzes data concerning sales, orderprocessing, shipping, purchases, receiving, inventories and financialreporting. At any given time, we are able to determine the quantityof each item in inventory by brand, style, cost, list price and othercharacteristics. The computerized system enables us to bettermanage our inventories. It keeps a running inventory of goods onhand for each item we distribute. When the inventory of any itemdrops to a certain pre-set level, a purchase order for a set number ofadditional units of the item is automatically written and, after being

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reviewed by management, is sent directly to the manufacturer.

Our system also provides our telemarketing professionals withimmediate product availability and gross margin informationon-screen when receiving customer orders. This system allows us toprovide our customers with real-time inventory and pricinginformation and to ship orders within 48 hours of receipt, whichallows our customers to better manage their inventory.

We have engaged J.D. Edwards & Company, a software technologyprovider, to upgrade our EDP systems. The implementation of thistechnology will provide the technological infrastructure required tomeet our goals for future growth.

67. The July 2002 Form 10-K provided the following disclosure by Allou’s

independent auditor, KPMG, LLP with respect to the preparation, accuracy, and fairness of Allou’s

financial statements:

We conducted our audit in accordance with auditing standardsgenerally accepted in the United States of America. Those standardsrequire that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements.An audit also includes assessing the accounting principles used andsignificant estimates made by management, as well as evaluating theoverall financial statement presentation. We believe that our auditprovides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred toabove present fairly, in all material respects, the financial position ofAllou Health and Beauty Care, Inc. and subsidiaries at March 31,2002, and the results of their operations and their cash flows for theyear then ended, in conformity with accounting principles generallyaccepted in the United States of America. Also, in our opinion, therelated financial statement schedule referred to above, whenconsidered in relation to the basic consolidated financial statementstaken as a whole, presents fairly, in all material respects, theinformation set forth therein.


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69. On August 14, 2002, Allou filed with the SEC its Quarterly Report on Form

10-Q for the quarter ended June 30, 2002. The Form 10-Q reiterated Allou’s financial and

operational results reported in the August 14, 2002 press release. It was signed by Defendant

Shamilzadeh.

70. The August 2002 Form 10-Q provided the following disclosure with respect to

Allou’s preparation of its financial statements:

The accompanying interim consolidated financial statements of AllouHealth & Beauty Care, Inc. (the Company) have been prepared inconformity with accounting principles generally accepted in theUnited States of America consistent in all material respects withthose applied in the Annual Report on Form 10-K for the year endedMarch 31, 2002. The interim financial information is unaudited, butreflects all normal adjustments which are, in the opinion ofmanagement, necessary to provide a fair statement of results for theinterim periods presented. . . .

71. That same day, August 14, 2002, Allou filed with the SEC a Current Report on

Form 8-K, which contained the following Certifications issued by defendants Herman Jacobs and

Shamilzadeh pursuant to Section 906 of the Sarbanes-Oxley Act of 2002:

CERTIFICATION PURSUANT TO18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Allou Health & BeautyCare, Inc. (the “Company”) on Form 10-Q for the period ending June30, 2002 as filed with the Securities and Exchange Commission onthe date hereof (the "Report"), pursuant to 18 U.S.C. Section 1350,as adopted pursuant to Section 906 of the SarbanesOxley Act of2002, Herman Jacobs, Chief Executive Officer of the Company, andDavid Shamilzadeh, President, Principal Financial Officer and

17

Principal Accounting Officer of the Company, each certifies onbehalf of the Company, to such officer’s knowledge, that:

(1) the Report fully complies with the requirements of Section 13(a)or (d) of the Securities Exchange Act of 1934, as amended; and

(2) the information contained in the Report fairly presents, in allmaterial respects, the financial condition and result of operations ofthe Company as of June 30, 2002 and for the quarter then ended.

Allou Health & Beauty Care, Inc.

By: /s/Herman JacobsHerman JacobsChief Executive Officer August 14, 2002

Allou Health & Beauty Care, Inc.

By: /s/David ShamilzadehDavid ShamilzadehPresident, Principal Financial Officerand Principal Accounting Office August 14, 2002 [Emphasis added.]




73. On November 14, 2002, Allou filed with the SEC its Quarterly Report on Form

10-Q for the quarter ended September 30, 2002. The Form 10-Q reiterated Allou’s financial and

operational results reported in the November 12, 2002 press release.

74. The November 2002 Form 10-Q included the following Certifications signed by

defendants Herman Jacobs and Shamilzadeh:

(A) I have reviewed this quarterly report on Form 10-Q ofAllou Healthcare, Inc.;

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(B) Based on my knowledge, this quarterly report does notcontain any untrue statement of a material fact or omit to state amaterial fact necessary to make the statements made, in light of thecircumstances under which such statements were made, notmisleading with respect to the period covered by this quarterly report;

(C) Based on my knowledge, the financial statements, andother financial information included in this quarterly report, fairlypresent in all material respects the financial condition, results ofoperations and cash flows of the registrant as of, and for, the periodspresented in this quarterly report;

(D) The registrant’s other certifying officers and I areresponsible for establishing and maintaining disclosure controls andprocedures (as defined in Exchange Act Rules 13a-14 and 15d-14)for the registrant and we have:

(a) designed such disclosure controls and proceduresto ensure that material information relating to the registrant, includingits consolidated subsidiaries, is made known to us by others withinthose entities, particularly during the period in which this quarterlyreport is being prepared;

(b) evaluated the effectiveness of the registrant’sdisclosure controls and procedures as of a date within 90 days priorto the filing date of this quarterly report (the "Evaluation Date"); and

(c) presented in this quarterly report our conclusionsabout the effectiveness of the disclosure controls and proceduresbased on our evaluation as of the Evaluation Date;

(E) The registrant’s other certifying officers and I havedisclosed, based on our most recent evaluation, to the registrant’sauditors and the audit committee of registrant’s board of directors (orpersons performing the equivalent function):

(a) all significant deficiencies in the design oroperation of internal controls which could adversely affect theregistrant’s ability to record, process, summarize and report financialdata and have identified for the registrant’s auditors any materialweaknesses in internal controls; and

(b) any fraud, whether or not material, that involvesmanagement or other employees who have a significant role in the

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registrant’s internal controls; and

(F) The registrant’s other certifying officers and I haveindicated in this quarterly report whether or not there were significantchanges in internal controls or in other factors that could significantlyaffect internal controls subsequent to the date of our most recentevaluation, including any corrective actions with regard to significantdeficiencies and material weaknesses.




76. On February 14, 2003, Allou filed with the SEC its Quarterly Report on Form

10-Q for the quarter ended December 31, 2002. The Form 10-Q reiterated Allou’s financial and

operational results reported in the February 11, 2003 press release.

77. The Form 10-Q included the following Certifications signed by defendants

Herman Jacobs and Shamilzadeh:

(A) I have reviewed this quarterly report on Form 10-Q ofAllou Healthcare, Inc.;

(B) Based on my knowledge, this quarterly report does notcontain any untrue statement of a material fact or omit to state amaterial fact necessary to make the statements made, in light of thecircumstances under which such statements were made, notmisleading with respect to the period covered by this quarterly report;

(C) Based on my knowledge, the financial statements, andother financial information included in this quarterly report, fairlypresent in all material respects the financial condition, results ofoperations and cash flows of the registrant as of, and for, the periodspresented in this quarterly report;

(D) The registrant’s other certifying officers and I areresponsible for establishing and maintaining disclosure controls andprocedures (as defined in Exchange Act Rules 13a-14 and 15d-14)for the registrant and we have:

20

(a) designed such disclosure controls and proceduresto ensure that material information relating to the registrant, includingits consolidated subsidiaries, is made known to us by others withinthose entities, particularly during the period in which this quarterlyreport is being prepared;

(b) evaluated the effectiveness of the registrant’sdisclosure controls and procedures as of a date within 90 days priorto the filing date of this quarterly report (the "Evaluation Date"); and

(c) presented in this quarterly report our conclusionsabout the effectiveness of the disclosure controls and proceduresbased on our evaluation as of the Evaluation Date;

(E) The registrant’s other certifying officers and I havedisclosed, based on our most recent evaluation, to the registrant’sauditors and the audit committee of registrant’s board of directors (orpersons performing the equivalent function):

(a) all significant deficiencies in the design oroperation of internal controls which could adversely affect theregistrant’s ability to record, process, summarize and report financialdata and have identified for the registrant’s auditors any materialweaknesses in internal controls; and

(b) any fraud, whether or not material, that involvesmanagement or other employees who have a significant role in theregistrant’s internal controls; and

(F) The registrant’s other certifying officers and I haveindicated in this quarterly report whether or not there were significantchanges in internal controls or in other factors that could significantlyaffect internal controls subsequent to the date of our most recentevaluation, including any corrective actions with regard to significantdeficiencies and material weaknesses.

78. The statements referenced above in paragraphs 23-77 were each materially false

and misleading because they failed to disclose and misrepresented the following material adverse

facts:

(a) that Allou was materially overstating its accounts receivables by at least

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$78 million, thereby overstating its revenues and earnings;

(b) that Allou was materially overstating its inventory, thereby overstating

its net worth; and

(c) as a result of the foregoing, Allou’s financial statements were not

prepared in accordance with GAAP and were therefore materially false and misleading. In

addition, it was not true that Mayer Rispler, Arthur Andersen or KPMG conducted

their audits in accordance with GAAS as they knew of the accounting fraud at Allou

or recklessly disregarded it.

79. On April 9, 2003, Allou announced that its “lenders have declared a default

based upon unsatisfied obligations from loans payable as of March 31, 2003 and have accelerated

all other obligations and declared them payable immediately, after negotiations between itself and

its lenders on a forbearance agreement broke down.”

80. That same day, April 9, 2003, Allou announced that its “announced that its

lenders have filed an involuntary petition for bankruptcy in the Eastern District of New York under

the provisions of chapter 11, title 11, of the United States Code (the “Bankruptcy Code”).”

81. Following this news, on April 9, 2003 the AMEX suspended trading in Allou’s

common stock.

The Truth Begins To Emerge

82. On April 22, 2003 an article titled “Discrepencies Led Allou to Bankruptcy,

Suggestion of fraud raised for first time” appeared in New York Newsday, and provided the

following details:

Experts probing Allou Healthcare’s key subsidiaries discovered aninventory shortfall of almost $40 million before they forced the units

22

of the Brentwood-based company into bankruptcy, an outsiderestructuring expert now running the business testified Monday.

Richard Sebastiao also told U.S. Bankruptcy Court in Central Islipthat only $30 million of $108 million in accounts receivable reportedby Allou to its banks seemed to be valid.

“It appears there is a substantial shortfall in accounts receivable,where either goods were not shipped or billings were made withoutany sign of support,” said Sebastiao, who began reviewing Allowsoperations on March 28. Signs of support typically include suchthings as freight bills or receipts.

He said inventories were counted at warehouses in Brentwood,Florida and California.

For the first time since the bankruptcy case of the health and beautyaids company began on April 9, the suggestion of fraud was raised atMonday’s hearing.

“There may be millions of dollars of preferences and fraudulenttransfers,” said Mark Fagnani, executive vice president of Allou’sbiggest lender, Congress Financial Corp. He said Allou’s executiveswere uncooperative with the bank’s financial review.

“We got stiff-armed by everyone at the company, “Fagnani said.“We couldn’t get any documentation to support or refute thefindings.”

Preferential transfers are payments made to benefit a creditor within90 days before a company becomes insolvent or files for bankruptcy.A preferential payment to a company insider is considered to be anypayment made within a year of bankruptcy.

There were these other developments in the unfolding Allou case:

The banks filed a petition to force the publicly held parent company,Allou Healthcare Inc., and other subsidiaries of the company intobankruptcy. Previously, only four Allou subsidiaries were involved.

Lee Stremba, a lawyer for Allou, said because the parent is a publiccompany it may be days before it can consent to the bankruptcyfiling. The subsidiaries named in the petition were Rona BeautySupplies Inc. and Trans World Grocers Inc.

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U.S. Bankruptcy Judge Melanie Cyganowski approved thecompany’s use of its revenues on an interim basis to keep itsbusinesses running. Sebastiao, who plans to sell the businesses, saidhe has had more than 30 inquiries.

The company’s lawyer said Allou’s top executives had been fired butremain on the company’s board. “They have no operatingresponsibilities,” said Stremba, of the Manhattan law firm Jenkens &Gilchrist.

Neither the members of the Jacobs family -- chairman Victor Jacobs,chief executive Herman Jacobs and executive vice president JackJacobs -- nor former president David Shamilzadeh could be reachedfor comment. The Jacobses hold a controlling stake in Allou.

Until now, Allou Healthcare has not been directly involved in thebankruptcy proceedings. Trading in Allou on the American StockExchange has been suspended since April 9.

The banks, including Citibank and LaSalle Business Credit, had lentAllou’s businesses $173 million under a $200-million line of credit.Fagnani said the value of their collateral has shrunk to “$60 [million]to $65 million at best.”

Sebastiao said he has told prospective buyers that he and the banks“will try our best to keep some semblance of an operating businessintact.” He said the company is currently gearing its purchase andselling efforts to its major accounts.

Allou’s troubles date from September, when a fire at a Brooklynwarehouse -- owned by relatives of the Jacobs family -- destroyedmore than $80 million in inventory.

Investigators said the fire was intentional, and Allou’s insurers haverefused to pay the company’s claim. Allou has not been implicatedin the fire and has sued the insurers for $130 million, The blazeremains under investigation.

83. On April 24, 2003, Allou announced that it “believes that the levels of assets

collateralizing loans were substantially overstated in recent reports submitted by the Company to

its senior lenders. The preliminary results of the Company’s investigation indicate that inventory

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was overstated by approximately $35,000,000 and that accounts receivable may be overstated by

$75,000,000 to $80,000,000, for a total overstatement of $110,000,000 to $115,000,000. The

Company has retained a forensic accounting firm to assist with the continuing investigation of this

matter.” The press release continued, in pertinent part, as follows:

The Company Terminates the Employment of Principal ExecutiveOfficers. Allou Healthcare, Inc. (the “Company”) has terminated itsemployment of Victor Jacobs, Herman Jacobs, David Shamilzadehand Jacob Jacobs. Victor Jacobs had been employed by the Companyas Chairman of the Board; Herman Jacobs had been employed by theCompany as Chief Executive Officer; David Shamilzadeh had beenemployed by the Company as President and Chief Financial Officer;and Jacob Jacobs had been employed by the Company as ExecutiveVice President. Each of the four terminated employees has retainedhis seat on the Company’s board of directors, with Victor Jacobs stillholding the board position of Chairman.

Most of the duties of the offices in which the above namedterminated individuals were employed will be performed by RichardA. Sebastiao. The Company previously announced the retention ofMr. Sebastiao as its Chief Restructuring Officer. In connection withits retention of Mr. Sebastiao, the Company entered into anagreement with Mr. Sebastiao’s company, RAS ManagementAdvisors, Inc. (“RAS”) of Providence, Rhode Island, pursuant towhich RAS will evaluate the Company’s existing inventory andreceivables, act as liaison with senior and unsecured lenders, make allemployment-related decisions, review and approve purchase ordersand disbursements, and directly supervise the accounting,information technology, warehousing/distribution, sales, purchasingand security departments. In addition, Mr. Sebastiao will seek buyersfor the various operating units of the Company in an expeditiousmanner.

Lenders File Additional Bankruptcy Petition. On April 21, 2003, theCompany’s senior lenders, led by Congress Financial Corporation,filed an involuntary petition for bankruptcy in the Eastern District ofNew York under chapter 1 I of the United States Bankruptcy Codewith respect to the Company and two of its subsidiaries, Rona BeautySupplies, Inc. and Trans World Grocers, Inc. Chapter I 1 is thereorganization provision of the Bankruptcy Code under which it ispossible for a company to continue its operations, restructure its

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indebtedness and emerge from chapter 11 bankruptcy as areorganized enterprise.

On April 9, 2003, the lenders filed an involuntary chapter 11bankruptcy petition with respect to M. Sobol, Inc., Allou Distributors,Inc., Direct Fragrances, Inc., and Stanford Personal CareManufacturers, Inc., which are principal operating subsidiaries of theCompany. The April 9, 2003 filing was consented to by all partiesinvolved.

Two Directors Resign from Board of Directors. Stuart Glasser andJeffrey Berg have resigned from the Company’s Board of Directors.Mr. Glasser and Dr. Berg were two of the Company’s three outsidedirectors. The remaining five directors are Mr. Sol Naimark, who isnot employed by the Jacob Jacobs, each of whom was previouslyemployed by the Company as noted above.

84. Allou’s inventory and accounts receivable were detailed in their quarterly and

annual filings with the SEC throughout the Class Period. Allou’s quarterly and annual filings with

the SEC did not disclose that inventory and accounts receivable were overstated by over $110

million.

SCIENTER ALLEGATIONS

85. As alleged herein, defendants acted with scienter in that they knew that the public

documents and statements issued or disseminated in the name of the Company were materially false

and misleading; knew that such statements or documents would be issued or disseminated to the

investing public; and knowingly and substantially participated or acquiesced in the issuance or

dissemination of such statements or documents as primary violations of the federal securities laws.

As set forth elsewhere herein in detail, defendants, by virtue of their receipt of information reflecting

the true facts regarding Allou, their control over, and/or receipt and/or modification of Allou’s

allegedly materially misleading misstatements and/or their associations with the Company which

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made them privy to confidential proprietary information concerning Allou, participated in the

fraudulent scheme alleged herein.

COUNT I

PURSUANT TO SECTION 10(b) OF THE EXCHANGE ACT AND

RULE 10b-5 PROMULGATED THEREUNDER(Against All Defendants)

86. Plaintiffs incorporate by reference the allegations of paragraphs 1 through 85 as

if fully set forth herein.

87. The reported financial results of Allou were materially false and misleading, and

defendants knew or were reckless in not knowing they were so, because defendants prepared and

participated in the issuance of the deceptive and materially false and misleading statements to the

investing public, as set forth above.

88. Defendants employed devices, schemes, and artifices to defraud and engaged in

acts, practices, and a course of conduct in an effort to maintain artificially high market prices for

Allou securities in violation of section 10(b) of the Exchange Act and SEC Rule 10b-5.

89. As a result of the dissemination of the aforesaid false and misleading reports and

releases, the market price of the securities of Allou throughout the Class Period was higher than it

would have been had the true facts concerning the Company’s financial condition been known by

the market.

90. In ignorance of the artificially high market prices of Allou’s publicly traded

securities, and relying upon the integrity of the market in which that stock was traded—the

American Stock Exchange—Plaintiffs and the other members of the Class acquired Allou securities

during the Class Period at artificially inflated prices and were damaged thereby.

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91. Had the market known of the true financial condition of Allou, which was falsely

represented by defendants, plaintiffs and the other members of the Class would not have purchased

or otherwise acquired their Allou securities during the Class Period at artificially inflated prices at

which they did. Hence, plaintiff and the other members of the Class were damaged by defendants’

violations of Section 10(b) and Rule 10b-5.

COUNT II

PURSUANT TO SECTION 20(a) OF THE EXCHANGE ACT

(Against the Individual Defendants)

92. Plaintiffs incorporate by reference the allegations of paragraphs 1 through 91 as

if fully set forth herein.

93. This claim is asserted against the Individual Defendants and is based on section

20(a) of the Exchange Act. Individual Defendants acted as controlling persons of Allou within the

meaning of section 20(a) of the Exchange Act. By reason of their positions as officers and directors

of Allou and ownership of Allou stock, Individual Defendants had the power and authority to cause

or to prevent the wrongful conduct of herein and did exercise such power and authority.

94. By reason of the foregoing, Individual Defendants are liable jointly and

severally with and to the same extent as Allou for Allou’s violations of section 10(b) of the

Exchange Act and Rule 10b-5.

PRAYER FOR RELIEF

WHEREFORE, plaintiffs, on behalf of themselves and the Class, pray for judgment

as follows:

(i) Declaring this action to be a proper plaintiff class action maintainable

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pursuant to rules 23(a) and 23(b)(3) of the Federal Rules of Civil Procedure and declaring

plaintiffs to be proper representatives of the Class.

(ii) Awarding plaintiffs and all of the other members of the Class damages

in an amount to be proven at trial, together with prejudgment interest thereon;

(iii) Awarding plaintiffs the costs and expenses incurred in this action,

including reasonable attorneys’, accountants’, and experts’ fees; and

(iv) Granting plaintiffs and the other members of the Class such other and

further relief as the Court deems just and proper.

DEMAND FOR A JURY TRIAL

Plaintiffs hereby demand a trial by jury.

Dated: New York, New York May 29, 2003

RABIN, MURRAY & FRANK LLP

By:________________________________Brian P. Murray (BM-9954)

Maurice Pesso (MP-4884)275 Madison Avenue, 34th FloorNew York, NY 10016Telephone: (212) 682-1818Facsimile: (212) 682-1892

Attorneys for Plaintiffs

united states district court eastern district of new...

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