The action alleges that the defendants issued a series of false and misleading statements regarding Friedman's financial results and business model, resulting in the company's materially overstating its earnings for the fiscal years 2000 through 2002, and the first three quarters of 2003. The stockholders claim that the earnings issued and representations concerning those results were false and misleading when made, as Friedman's financial statements during the time period were in violation of GAAP and SEC rules. These improper practices are now the subject of a Securities and Exchange Commission investigation, as well as an investigation by the Department of Justice.

In fact, the stockholders allege, the defendants failed to disclose material adverse information, and misrepresented the truth about Friedman's, its financial performance, earnings momentum, and future business prospects, including: (1) that the company's allowance for doubtful accounts was woefully inadequate; (2) that the company's credit losses during the time period were significantly higher than its reserves and higher than the defendants publicly represented; and (3) that the defendants failed to properly write off uncollectible receivables, and materially overstated Friedman's financial results by maintaining known uncollectible accounts as assets during the time period.

On November 11, 2003, Friedman's shocked the market by warning about its future performance and the material adverse impact of an "increase in allowance for doubtful accounts." The company also revealed that its Chief Financial Officer, Victoria Suglia, had been placed on "leave" as a result of the government investigations. As a result, Friedman's was forced to dramatically boost its allowance for doubtful accounts, resulting in a sizable charge of as much as $0.43 per share for 2003. In response to the company's devastating news concerning the financial fraud, the company's stock price plummeted by more than 40% on volumes of about thirteen times the daily average.