Company Name: L.A. Gear, Inc.
Public Availability Date:  Nov. 16, 1992

INQUIRY LETTER

FRIED, FRANK, HARRIS, SHRIVER & JACOBSON
725 SOUTH FIGUEROA STREET, SUITE 3890
LOS ANGELES, CALIFORNIA 90017-5438
TELEPHONE (213) 689-5800

September 15, 1992

Office of the Chief Counsel
Securities and Exchange Commission
Division of Corporation Finance
450 Fifth Street, N.W.
Washington, D.C. 20459

Re: L.A. Gear, Inc.

Ladies and Gentlemen:

We are counsel to L.A. Gear, Inc. (the "Company") in connection with three consolidated class action lawsuits currently pending against the Company and other individual defendants in the United States District Court for the Central District of California (the "Court"), as described below (collectively, the "Lawsuits"). On July 8, 1992, the Company and the plaintiffs as representatives of the classes (the representative plaintiffs and members of the classes are collectively referred to herein as "Plaintiffs") in each of the Lawsuits executed stipulations of partial settlement (the "Stipulations") with respect to each of the Lawsuits, providing, among other things, for the issuance by the Company of shares (the "Shares") of its common stock ("Common Stock") to the Escrow Agent (as defined below) which will hold the Shares on behalf of, and pending final distribution to, the Plaintiffs. A copy of the Companys Form 8-K, which includes as exhibits copies of the Stipulations, filed with the Securities and Exchange Commission (the "Commission") on July 9, 1992 is attached as Exhibit A for your review.

We respectfully request the written advice of the Staff of the Division of Corporation Finance (the "Staff") that the Staff concurs in our view that

(a) the Plaintiffs may sell or otherwise transfer Shares distributed to them by the Escrow Agent following final judicial approval of settlement of the Lawsuits in accordance with the terms of the Stipulations;

(b) following such final judicial approval, attorneys for the Plaintiffs may thereafter sell Shares distributed to them as partial payment of their fees in connection with the Lawsuits; and

(c) following final judicial approval of settlement of the Lawsuits but prior to distribution of the Shares by the Escrow Agent to the Plaintiffs, the Escrow Agent may sell on behalf of the Plaintiffs all or a portion of the Shares held by it and hold the proceeds of such sales for distribution to the Plaintiffs; provided that any such sales are in conformity with the provisions of Rule 144 under the Securities Act of 1933 (the "Act"), as amended, except for the holding period requirement of Rule 144;

in each case without registration of the Shares in question under the Act and assuming that none of the Plaintiffs and their attorneys selling any such Shares are affiliates of the Company.

We further respectfully request the written advice of the Staff that the Staff will not recommend any enforcement action to the Commission if, following such final judicial approval, the Escrow Agent distributes Shares to attorneys for the Plaintiffs as partial payment of their fees in connection with the Lawsuits, without registration of such Shares under the Act.

It is intended that no registration statement under the Act will be filed or effective as to the shares of Common Stock described herein, and that the exemptions from registration afforded under Sections 3(a)(10) and 4(1) of the Act will be available for transactions described herein under the facts and circumstances described below.

I. Background

L.A. Gear, Inc. is a California corporation with its principal executive offices located in Los Angeles, California. The Company is a reporting company under Section 12(b) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), with the common stock of the Company listed on the New York Stock Exchange. The Company currently has outstanding approximately 22,419,155 shares of Common Stock, as well as outstanding options under its stock option plans covering an aggregate of approximately 1,751,861 shares of Common Stock. A stock option covering another 400,000 shares of Common Stock and owned by one option holder are also outstanding. In addition, the Company has outstanding a class of preferred stock that is convertible into 10,000,000 shares of Common Stock, all of which is held by one stockholder. For the 52-week period ended September 4, 1992, the average weekly volume on the New York Stock Exchange for shares of Common Stock was 1,099,315 ranging from 230,400 to 3,792,500.

We have been advised by the Company that none of its current directors and officers, and no one beneficially owning 5% or more of the Common Stock (or that the Company believes could otherwise be deemed to be an affiliate of the Company), is a member of any of the classes of Plaintiffs under the Lawsuits.

II. The Lawsuits

A. Description

The following is a summary of the three Lawsuits:

In Re L.A. Gear Securities Litigation, United States District Court, Central District of California, Master File CV-90-2832 KN(Bx), ("L.A. Gear I"). This is a consolidated class action complaint for alleged violations of the Exchange Act, the Racketeer Influenced and Corrupt Organizations Act ("RICO") and pendent state statutory and common law claims arising out of events leading to the decline in the trading price of the Common Stock prior to and on June 1, 1990. The consolidated class action complaint incorporates numerous separate class action lawsuits which were filed shortly after the Company publicly announced reduced earnings estimates for the fiscal quarter ended May 31, 1990. The Plaintiffs in L.A. Gear I allege false and misleading favorable public statements issued by the Company and its officers, false and misleading financial statements filed with the Commission, concealment of material adverse facts, and sales of Common Stock by certain executive officers and directors of the Company at artificially inflated prices, while such individuals possessed material non-public information. The Plaintiffs in L.A. Gear I seek general and punitive damages and attorneys fees on behalf of a class of purchasers of Common Stock and contract options for the period commencing August 2, 1989 through and including June 1, 1990.

In Re L.A. Gear, Inc. Securities Litigation II, United States District Court, Central District of California, Master File No. CV-91-0400 KN(Bx), ("L.A. Gear II"). This is a consolidated class action complaint for alleged violations of the Exchange Act, RICO and pendent state statutory and common law claims. The consolidated class action complaint incorporates two separate class action lawsuits filed in mid-January 1991 after the public release of the Companys earnings for the quarter ended November 30, 1990. The Court granted the Plaintiffs motion to certify a class of purchasers of Common Stock and contract options during the period from June 4, 1990 to January 21, 1991. In the fall of 1991, a motion to dismiss certain claims was granted and a second amended complaint was served on January 30, 1992. In the second amended complaint, the Plaintiffs in L.A. Gear II allege that commencing after June 1, 1990, the Company and certain current and former senior officers and directors of the Company made false and misleading statements about the causes of the Companys decreased profit margins, made false and misleading statements concerning a Michael Jackson line of shoes and promotional relationship and concealed the causes for the Companys declining financial performance after June 1, 1990.

In Re L.A. Gear Securities Litigation III, United States District Court, Central District of California Case No. CV-91-4039. ("L.A. Gear III"). This is a consolidated class action, with four separate complaints consolidated for purposes of discovery and trial, alleging violations of the Exchange Act and various state law claims. The four complaints were all filed within weeks of the Companys announcement of July 25, 1991 that it was restating its reported earnings for the second fiscal quarter of 1991, previously announced on July 2, 1991. Defendants are the Company and certain current and former senior officers and directors of the Company. Subsequently, a consolidated class complaint was filed. The Plaintiffs in L.A. Gear III allege that defendants made false and misleading statements and omitted material facts concerning the accounting treatment given certain manufacturers credits and the future stream of royalties the Company was to receive under a licensing agreement. A class has been certified by stipulation for all purchasers of Common Stock and contract options for the period July 2, 1991 through July 25, 1991.

The Company has denied and continues to deny any wrongdoing or legal liability arising out of the conduct alleged by the Plaintiffs in the above-referenced actions.

B. The Proposed Settlements

On July 8, 1992, the Company and the Plaintiffs executed the Stipulations with respect to L.A. Gear I, L.A. Gear II and L.A. Gear III. The material terms, definitions, provisions and conditions of the respective individual Stipulations are identical, except for the amounts to be paid in cash and Shares in settlement of the respective Lawsuits; accordingly, our discussions with respect to the proposed settlements and the respective Plaintiffs reflect all three Stipulations, unless otherwise noted. The settlement provided for in each Stipulation, including any distribution of shares to the Plaintiffs, does not become effective until all of the following have occurred (as further discussed below): approval by the Court of each Stipulation, following notice to the members of the class of Plaintiffs in each Lawsuit and a "fairness" hearing as prescribed by Federal Rule of Civil Procedure 23 and Section 3(a)(10) of the Act; the entry of a judgment by the Court approving the settlement embodied in each Stipulation; and such judgment becoming a final judgment no longer subject to appellate review (the "Final Settlement"). On August 31, 1992, the Court in each Lawsuit held a settlement hearing (as described in the Stipulations, the "Settlement Hearings"). On September 3, 1992, the Court approved the terms of each settlement as described in the Stipulations.

The Stipulations provide, in part, the following:

1. Within five business days after the filing of each Stipulation with the Court, the Company would deliver, in cash, $2,612,500 in the case of L.A. Gear I, $2,612,500 in the case of L.A. Gear II, and $275,000 in the case of L.A. Gear III (collectively, the "Escrow Fund") to Milberg Weiss Bershad Specthrie & Lerach in each Lawsuit, co-lead counsel for the Plaintiffs and the classes, as escrow agent (the "Escrow Agent") to be placed in separate interest-bearing accounts and held by the Escrow Agent in custodia legis. These transfers to the Escrow Agent occurred on July 13, 1992.

2. Within five business days after the filing of each Stipulation with the Court, the Company would transfer 522,500 shares of Common Stock in the case of L.A. Gear I, 522,500 shares of Common Stock in the case of L.A. Gear II, and 55,000 shares of Common Stock in the case of L.A. Gear III (collectively, the "Original Shares") to the Escrow Agent to be held by the Escrow Agent in custodia legis. These transfers to the Escrow Agent occurred on July 13, 1992. The Stipulations also contain provisions designed to guarantee a certain per share price (the "Price Protection") as respects the Original Shares. Accordingly, if the average closing price per share of Common Stock for the ten days prior to October 5, 1992 (which will be prior to the Final Settlement) is less than $11.50 per share, then the Company will deliver additional shares of Common Stock (the "Additional Original Shares"), with the number of such shares in the case of each Lawsuit calculated according to a formula set forth in the Stipulations, to the Escrow Agent also to be held in custodia legis. The Company may transfer a specified dollar amount in lieu of the Additional Original Shares to the Escrow Agent to be held in custodia legis in satisfaction of the Price Protection provisions.

3. In addition to the Company, certain former and current officers and directors of the Company are also defendants in L.A. Gear I, L.A. Gear II and L.A. Gear III. These individuals (the "Non-Settling Defendants") were not parties to the Stipulations. The Stipulations provide that if the Plaintiffs had not executed a stipulation of settlement with any of the Non-Settling Defendants prior to the settlement hearing date, then the Company would deliver within five business days after the Court approved the Stipulations, an additional amount of up to 142,500 shares of Common Stock in the case of L.A. Gear I, 142,500 shares of Common Stock in the case of L.A. Gear II, and 15,000 shares of Common Stock in the case of L.A. Gear III (collectively, the "NSD Shares") to the Escrow Agent to be held in custodia legis. At the time of the Settlement Hearing date, August 31, 1992, no settlements had been reached between the Plaintiffs and any of the Non-Settling Defendants. Accordingly, the total amount of NSD Shares were transferred to the Escrow Agent as described above. These transfers occurred on September 8, 1992. The NSD Shares are comparably protected from a decline in the trading value of the NSD Shares. Accordingly, pursuant to Price Protection provisions analogous to those relating to the Original Shares (as discussed above), additional shares of Common Stock (the "Additional NSD Shares"), or cash in lieu thereof, may be delivered to the Escrow Agent and held in custodia legis. In the event that the Company is required to contribute any NSD Shares (including any Additional NSD Shares) as described above, the Stipulations further provide that the Company shall have the right to participate in any recoveries from the Non-Settling Defendants, with a cap of $2.7 million on the aggregate amount that the Company may receive as a result of this participation.

Prior to the Settlement Hearings, notices of the settlement and proof of claim forms were sent to individuals and entities constituting members of the plaintiff classes notifying them of the terms of the proposed settlement, including Plaintiffs counsels application for fees and expenses, and of their opportunity to object thereto upon proper motion and objection. A summary of the notice was also published in two national newspapers.

The Court was advised in the papers submitted in connection with the Settlement Hearings that if the settlement terms contained in the Stipulations were approved, the Shares would be distributed by the Escrow Agent to or on behalf of Plaintiffs and attorneys for Plaintiffs without registration under the Act. Further, members of the classes of Plaintiffs in the Lawsuits were afforded the opportunity to object to the proposed settlement embodied in each of the Stipulations and to related matters, including the attorneys fee award.

On September 3, 1992, the Court in each of the Lawsuits approved all of the terms of the settlement contemplated by the Stipulations. The Court also approved the attorneys fee award as contemplated by Plaintiffs counsels application for fee award. Upon such approval, the Court entered a judgment, in part, that L.A. Gear I, L.A. Gear II and L.A. Gear III were each dismissed with prejudice as against the Company; that the Plaintiffs were deemed conclusively to have released their claims against the Company; and that Plaintiffs are barred and permanently enjoined from prosecuting such claims against the Company. Further, the Court reserved jurisdiction over, among other things, implementation of the settlement and any award or distribution of the Settlement Fund (as defined in the Stipulations) and disposition of the Settlement Fund. However, the judgment of the Court is subject to appeal and will not be final until 35 days after the date of the judgment (i.e., October 8, 1992), provided there is no appeal. A copy of the judgment of the Court in each of the Lawsuits is attached as Exhibit B for your review.

The Stipulations provide that after Final Settlement (as defined above), the Original Shares, the Additional Original Shares (if any), the NSD Shares and the Additional NSD Shares (if any) (collectively being all of the Shares) and the Escrow Fund will be distributed by the Escrow Agent, subject to the supervision, direction and approval of the Court, to those Plaintiffs qualifying as Authorized Claimants (as defined in the Stipulations) and to pay attorneys fees and costs. The Escrow Agent may not sell, transfer or otherwise dispose of the Shares in violation of any state or federal securities laws. However, the Escrow Agent is permitted to sell Shares following Final Settlement on behalf of Plaintiffs, subject to the condition that the Staff has provided written advice with respect to the manner of any such sales and that such sales by the Escrow Agent are in accordance therewith, and provided that such sales are pursuant to an appropriate Court order. However, the distribution of the Shares by the Escrow Agent is not expected to occur immediately following Final Settlement, due to the need to determine precisely the identity of the Authorized Claimants and the appropriate allocation of the Escrow Fund and the Shares among the Authorized Claimants.

If the Final Settlement does not occur or if the Stipulations are terminated or cancelled pursuant to their terms, the Escrow Agent will be required to return all of the Shares held by it to the Company. The certificates representing the Shares bear legends which provide, among other things, that the Shares may not be transferred by the Escrow Agent in advance of the Final Settlement.

As noted above, we have been advised by the Company that none of its current directors and officers and no one beneficially owning 5% or more of the Common Stock (or that the Company believes could otherwise be deemed to be an affiliate of the Company), is a member of the classes of Plaintiffs under the Lawsuits. (Indeed, the Stipulations expressly provide that the Plaintiff classes do not include the named individual defendants -- who are former officers and directors of the Company and some of whom are still in office -- members of their immediate families, any person, firm, trust, corporation, officer, director or other individual or entity in which any such defendant has a controlling interest or which is related to or affiliated with any of such defendants, and their legal representatives, heirs, successors in interest or assigns.) Counsel for the Plaintiffs have informed us that, although they are unable to determine at this time the actual number of Authorized Claimants, the number of potential Authorized Claimants is estimated to be in excess of 15,000, based on the number of notices of the proposed settlement and proof of claim forms sent to potential Authorized Claimants to date.

Furthermore, counsel for the Plaintiffs did not receive a total of more than 30% of the Shares and no individual law firm received more than 15% of the Shares. We have been advised by counsel for the Plaintiffs that, as soon after Final Settlement as possible, the Escrow Agent will distribute any Shares comprising a portion of the fee award to such counsel, and, accordingly, the Escrow Agent will not hold any Shares on behalf of such counsel.

III. Discussion

Under Section 3(a)(10) of the Act, an exemption from the registration requirements of the Act is provided for securities issued "in exchange for one or more bona fide outstanding securities, claims or property interests," as long as certain specified procedures are satisfied. It is well established that the Section 3(a)(10) exemption from registration is available with respect to securities that are issued and distributed pursuant to the settlement of a class action lawsuit provided that (i) every person entitled to receive such securities has received notice of the hearing, (ii) such persons have the opportunity to be heard at the hearing, (iii) the court is advised prior to the hearing that if the settlement is approved the securities issued and distributed pursuant thereto will not be required to be registered under the Act, and (iv) the court approves the terms and conditions of the settlement as fair, reasonable and adequate. See, e.g., Trilogy Limited (available March 28, 1986); AES Technology Systems, Inc. (available May 23, 1984); Houston Complex, Inc. (available February 8, 1982) and Northwest Industries, Inc. (available August 10, 1973). The process for approval by the Court of the settlement of the Lawsuits described in the Stipulations was structured and conducted in a manner to satisfy the procedural requirements set forth above, and, accordingly, the distribution of the Shares to the Authorized Claimants following Final Settlement will be exempt from registration under the Act by virtue of Section 3(a)(10).

The Section 3(a)(10) exemption is not treated by the Staff as covering resales by claimants receiving securities in a settlement. However, in a series of interpretative letters, the Staff has given comfort with respect to the availability in most circumstances of the exemption from registration requirements for such sales under Section 4(1) of the Act on the basis that such claimants are not underwriters or dealers, subject to limitations in the event that such claimants are affiliates of the issuers. See, e.g., Endotronics, Inc. (available October 11, 1988); Gambro AB (available October 19, 1987); and Mattel, Inc. (available February 16, 1976). We believe that the Plaintiffs in this instance fall within the Section 4(1) exemption as outlined in the Staffs letters, and as a result, assuming that none of them are affiliates of the Company, may resell any Shares received by them without registration.

As noted above, we have been advised by counsel for the Plaintiffs that a portion of the attorneys fees and costs awarded by the Court is payable to such counsel in the form of Shares. In several letters, the Staff has treated securities issued to counsel for claimants in such circumstances as being the same as those issued to the claimants themselves, for purposes of the availability of both the Section 3(a)(10) exemption for the original issuance and the Section 4(1) exemption for resale. See, e.g., AES Technology Systems, Inc. (available May 23, 1984); General Public Utilities Corporation (available June 29, 1983); and Mattel, Inc. (available February 16, 1976). Accordingly, distributions to, and subsequent resales by, such attorneys of Shares received in the manner described herein should be exempt transactions under Sections 3(a)(10) and 4(1) of the Act.

But for anticipated delays in the ability to determine precisely the identity of the Authorized Claimants and the appropriate allocation of the Escrow Fund and the Shares among them, the Shares could all be distributed immediately upon the Final Settlement, and, as discussed above, the recipients thereof could sell the Shares at any time thereafter. Instead, however, for some period of time following Final Settlement, the Shares will continue to be held by the Escrow Agent acting on behalf of the Plaintiffs, as principals, to the extent they qualify as Authorized Claimants. The Escrow Agents powers in that role, including the right to sell any Shares held by it, have been expressly authorized by the Plaintiffs in that the Stipulations (as executed and agreed to by the class representatives) specifically provide for such action by the Escrow Agent. In addition, each Plaintiff has been notified of the appointment of the Escrow Agent and of its intended powers, including the right to sell any Shares held by it, and has been afforded an opportunity to object to the settlement embodied in the Stipulations (including the appointment of the Escrow Agent) and to request to be excluded from that settlement and therefore not bound by it. As a result, any Plaintiff who did not wish to grant the Escrow Agent authority in general or specifically to sell Shares held by it had the ability to attempt to dissuade the Court from approving that authority as part of the settlement set forth in Stipulations and could have, in addition, opted out of the settlement and retained all of that Plaintiffs rights against the Company. In addition, the Escrow Agents authority to sell the Shares will depend also on Court approval, not only of the Stipulations as a whole, but also of each individual proposed sale, where the Courts responsibility, in part at least, will be the protection of the interests of the members of the Plaintiff classes. See, e.g., Parker v. Anderson, 667 F.2d 1204 (5th Cir. 1982); Grunin v. International House of Pancakes, 513 F.2d 114 (8th Cir. 1975).

However, because of the large number of Shares that are being held by the Escrow Agent on behalf of the Plaintiffs, the Escrow Agent may be deemed to be an "underwriter" of the Company with respect to the Shares and, if so, sales by the Escrow Agent on behalf of the Plaintiffs would not be viewed as being exempt from registration under the Act by virtue of Section 4(1) of the Act. Within the context of the resale of stock issued pursuant to the exemption provided in Section 3(a)(10) of the Act, the Staff has expressed the view that persons who may be deemed to be affiliates of the issuer (and therefore would not be able to utilize the Section 4(1) registration exemption) may resell such stock without compliance with the registration provisions of the Act provided that such sales of stock are in compliance with the provisions of Rule 144 under the Act, with the exception of the holding period requirements prescribed by Rule 144. See, e.g., Carolco Pictures, Inc. (available January 23, 1991); Riverbend International Corporation (available March 30, 1990); and Trilogy Limited (available March 28, 1986). Consequently, the Escrow Agent should be entitled to sell shares on behalf of Plaintiffs without registration under the Act provided that the manner of such sales is in accordance with the provisions of Rule 144 under the Act, except for the holding period requirements under Rule 144.

Based on the foregoing, and the exemptions from registration provided by Sections 3(a)(10) and 4(1) of the Act, it is our opinion that (i) the Shares transferred by the Company to the Escrow Agent for the benefit of the Authorized Claimants and the attorneys for the classes are exempt from registration based on the exemption provided by Section 3(a)(10) of the Act; (ii) the Shares distributed subsequent to Final Settlement by the Escrow Agent to those plaintiffs qualifying as Authorized Claimants and to the attorneys for the Plaintiffs as partial payment of attorneys fees and costs may be so distributed without registration under the Act; (iii) the Shares so transferred to the Plaintiffs may be freely resold or otherwise transferred by the Plaintiffs without registration under the Act, assuming that none of the Plaintiffs are affiliates of the Company; (iv) the Shares so transferred to the attorneys for the Plaintiffs may be freely resold or otherwise transferred by such attorneys without registration under the Act; and (v) the Escrow Agent may, after Final Settlement, sell on behalf of the Plaintiffs all or a portion of the Shares without registration under the Act, provided that the manner of any such sales is in accordance with the provisions of Rule 144 under the Act (except for the holding period requirement thereunder), and distribute the proceeds thereof to such parties.

Our opinion is based in part on representations made to us by counsel for the Plaintiffs, as reflected in the letter from co-lead counsel for the Plaintiffs, Milberg Weiss Bershad Specthrie & Lerach and Kaplan & Kilsheimer, a copy of which is attached hereto as Exhibit C.

Accordingly, we respectfully request the concurrence of the Staff in the foregoing opinions expressed in clauses (ii) through (v), above, and the advice of the Staff that it will not recommend that the Commission take any action if, following Final Settlement, the Escrow Agent distributes Shares, in accordance with the terms of the Stipulations, to attorneys for the Plaintiffs as partial payment of their fees in connection with the Lawsuits.

If you have any questions in connection with this matter or if additional information is required, please contact the undersigned at (213) 689-5805 or my partner, Edward S. Rosenthal, at (213) 689-5801. It is respectfully requested that your response to this letter be expedited as we anticipate that Final Settlement may occur as early as October 8, 1992.

Very truly yours,

David K. Robbins

DKR:dbr

Enclosures

STAFF REPLY LETTER

November 16, 1992

RESPONSE OF THE OFFICE OF CHIEF COUNSEL

DIVISION OF CORPORATION FINANCE

Re: L.A. Gear, Inc. (the "Company")

Incoming letter dated September 15, 1992

Based on the facts presented, the Divisions positions with respect to your questions regarding the transfer to, and resale of, the Companys Common Stock by the Escrow Agent, the Plaintiffs and their attorneys are set forth below. We note, in particular, your opinion as counsel that the Common Stock will be issued in reliance upon the exemption from registration afforded by Section 3(a)(10) of the Securities Act of 1933 (the "Securities Act").

1. It is the Divisions view that shares of the Company Common Stock issued to the Escrow Agent for distribution to the Plaintiffs and their attorneys upon Final Settlement would not be deemed "restricted securities" within the meaning of Rule 144(a)(3) of the Securities Act. Of course, recipients who are affiliates of the Company may resell pursuant to the provisions of Rule 144 (without regard to the holding period requirement), absent registration or another appropriate exemption.

2. As noted in Securities Act Release No. 6253 (Oct. 28, 1980), the Division does not provide advice with regard to the determination of "underwriter" status, "affiliate" status or the availability of the exemption from registration provided by Section 4(1) of the Securities Act. Therefore, we cannot specifically address, nor does this interpretive response cover, any of the resale transactions outlined on page 11 of your incoming letter.

Because these positions are based upon the representations made to the Division in your letter, it should be noted that any different facts or conditions might require different conclusions.

Sincerely,

Darrell N. Braman, Jr.

Special Counsel