By Jack Grauer

Philadelphia-based Urban Outfitters had a stunning a realization in 2013: Why stop at selling an inflated version of youth culture back to itself at profit? Couldn’t profit be maximized by selling stock shares traded on inflated confidence with regard to the rate at which youth culture will buy itself back from itself at an inflated price? Prosecutors in a lawsuit filed against the firm in 2013 explain exactly how this ingenious second-level grift was perpetrated.

UO Inc. shareholders have accused senior firm executives of securities fraud in a federal court. These employees allegedly misreported the brand’s fiscal health during 2013, then sold their own company holdings at artificially inflated prices. Subsequently, those investments rapidly depreciated in value.

Three defendants named in the suit are company executives CEO Richard Hayne, CFO Frank Conforti, and UO Group CEO Tedford Marlow.

Hayne sold 5% of his own holdings, valued at more than $50 million, in March of 2013. Conforti around that time sold about 99% of his holdings, arguably equivalent to about another $1 million. The prosecution calls these sales “unusual in both scope and in timing” because neither Hayne or Conforti had sold any stock for at least 18 months prior.

The case’s outcome hinges on the prosecution’s ability to prove that:

the defendants foresaw the relatively poor performance by the brand throughout the period in question and prior to the sale of their holdings and that

the investing public received inadequate, misrepresentative information regarding the brand’s fiscal outlook during the period in question.

Here’s one of the statements that leads the prosecution to believe UO execs misled the public: In a March 2013 conference call, defendant Tedford Marlow claimed the company was in a “healthy place.” Marlow also said he liked the “way the trends that we see in the market fashion-wise marry with the stories that we are telling at point of sales.”

Testimony by managers at UO branch stores in New Jersey, Los Angeles, Milwaukee, New York and elsewhere didn’t feel those statements by Marlow and others by Conforti and Hayne around that time were accurate. According to information gathered by the prosecution through interviews with these branch managers, the UO brand struggled throughout 2013 to get merchandise

off the shelves, and, in fact, the witnesses also reported that they… didn’t have enough racks for the sale items. They had product bursting at the seams, coming out of closets and out of back storerooms. And they reported just a general desperation by managers that — that things just were not going that well and that somehow they needed to pick up the business.

The complainants hold that UO executives understood the problems faced by the brand perfectly well. In fact, orders to administer the “markdowns and promotional campaigns emanated from corporate headquarters here in Philadelphia.”

Furthermore, UO’s main office sent those orders via the company’s Intranet: the same internal computer system that granted branch managers access to all the grim local and national sales data produced during the class period.

If the court certifies this lawsuit as a class action and rules in the plaintiffs’ favor, any and all people who owned shares of the brand may receive settlement payments as a result.

In a section labelled “contingencies,” included with their latest Form 10-K filing, UO reported the brand will in the future

be impacted by litigation trends, including class action lawsuits involving consumers and shareholders, that could have a material adverse effect on our reputation, the market price of our common shares, or our results of operations, financial condition and cash flows.

How a “material adverse effect” on UO’s “reputation” might impact the 1,000 jobs the company promised the Nutter administration remains to be seen.

Defendant Tedford Marlow this past April sold personal holdings in the company, valued at $2.2 million. UO announced he’ll step down from his post at the firm this August.

Jack Grauer is a Philadelphia-based journalist and regular contributor to The Spirit Newspapers and The Declaration. Follow him on Twitter at @Jack_Grauer. This article first appeared at JackGrauer.com.