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Class action suit alleges Luluemon hid CEO exit, yoga pant defect

By Jessica Zuzierla     Jul 3, 2013 in Business
Luluemon Athletica is being sued for allegedly defrauding shareholders, initially hiding yoga pant defects, hiding why now ex-CEO Christina Day resigned, and SEC violations that allegedly resulted in company stock prices inflating artificially.
Reuters reported yesterday that a shareholder is suing Luluemon Athletica for fraud. According to the report, the suit claims that Luluemon, maker of a number of popular lines of yoga pants and other athletic wear, defrauded shareholders and hid the reason that now ex-CEO Christine Day resigned, among other issues.
This Luluemon story began in March of this year, when a manufacturing defect in a pair of Luluemon yoga pants led to a recall, reported the Wall Street Journal. The defect and recall eventually led to a firing, a resignation, and now, alleges a complaint filed by Robbins Geller Rudman & Dowd LLP, a violation of the Securities Exchange Act of 1934 that has led to a class action fraud suit filed against Luluemon on behalf of shareholders.
Fraud suit filed after Chief Product Officer fired and CEO resigns
Filed in Manhattan, NY by Houssam Alkhoury who resides in Natick, Massachusetts, the fraud suit alleges that Luluemon hid cost-cutting measures that led to the yoga pant’s sheerness, and in turn led to the recall, says the Reuters report.
However, according to a Robbins Geller Rudman & Dowd LLP press release, the firm filed the fraud complaint, and then sought and won class action status in the Southern District of New York on July 2. The press release and complaint name former founder and Chief Innovation and Brand Officer, Dennis J. Wilson, and now-ex CEO Christine McCormick Day, who, according to Reuters, resigned on June 10.
The press release also states that the suit covers the period of March 21 until June 10 of this year, and alleges that during this time, the defendants defrauded shareholders by issuing “misleading statements” about the yoga pants, and about the company’s future prospects. Specifically, the suit alleges that the defendants didn’t disclose how Luluemon cut costs to raise profit margins, which resulted in the defects, nor did Luluemon disclose that the company instead sold the pants at a discount to “obtain sales and protect market share,” or that in a closed meeting, the company considered replacing Day as CEO.
Essentially, alleges the suit, the misleading “positive’ statements in addition to Luluemon's failure to disclose information about the defects and Day’s possible replacement violated the Securities Exchange Act of 1934. The press release states that these willful failures to disclose information allowed,
“Wilson to sell 2 million shares of his personally owned stock at artificially inflated prices for proceeds of more than $163 million.”
Robbins Geller Rudman & Dowd LLP states in its Notice of Opportunity that the firm is still searching for a lead plaintiff, and that interested parties who purchased Luluemon stocks during the class period have until August 31, 2013 to file if they qualify.
Other firms investigating
A Shareholder Alert press release issued today by The Briscoe Law Firm PLLC and Powers Taylor LLC, in which Willie Briscoe states that the two firms,
"Are prepared to pursue litigation to preserve the company and the value of Lululemon stock for all shareholders."
Briscoe also mentions that as a shareholders' rights advocate, and based on the class action suit filing, the two firms are investigating the possibility that "fiduciary duties and state laws" were breached by Luluemon executives.
Chief Product Officer fired and CEO resigns
According to Time, Day fired Luluemon’s Chief Products Officer Sheree Waterson in April this year because of the yoga pants’ defects and recall debacle. Newser says that Waterson handled global production, design and merchandise management for Luluemon.
Even though Luluemon still lists Day as the Chief Executive Officer, she is now ex-CEO Day, and resigned June 10 of this year, according to the Reuters report, which was a full three months after Luluemon announced the yoga pants defect and recalled the affected lines. Her resignation also comes two months after firing Waterson.
However, amid speculation that Day resigned because of the yoga pant recall, the NY Post states that Day claimed she resigned for “personal reasons.” The NY Post also reports that Day announced her resignation early for the sake of transparency.
Whether her resignation was a result of the recall debacle or not, or if it was a result of a personal decision, the fact remains that she resigned in June, which, was, according to the lawsuit, well after the company began discussing her potential replacement.
The Luluemon yoga pant recall
Despite the statement Luluemon made, according to a Reuters report,
“Recalling the stretchy, snug-fitting black pants could reduce profit this year by up to $40 million,”
Businessweek reports that Luluemon – based in Vancouver, British Columbia – did in fact issue a recall, and that now ex-CEO Christine Day said in a conference call that,
“The only way to test for the problem is to put the pants on and bend over.”
The Businessweek report also states that Luluemon initiated the yoga pant recall on March 1 of this year, and that the recall affected about 17 percent of the company’s Astro Pant, Skinny Will, and Wunder Unders yoga pant lines. Luluemon said that a full refund or an exchange is available to those who purchased the pants after March 1, says the report.
Essentially, the material used to make the pants, Luluemon's proprietary fabric called Luon, became too sheer when stretching, or performing specific yoga positions. At the time of the statement, Luluemon pointed fingers at Eclat Textile, located in Taiwan and the only Luon manufacturer, saying that the defective batch of pants came from the manufacturer, says Businessweek. Eclat Textiles maintained that the company followed quality control protocols issued by Luluemon, the report says.
An April Wall Street Journal report says that Luluemon issued a statement that the defect fault lies with the company’s own quality testing protocols, or lack thereof, and that the protocols developed years ago have not kept up with the times appears to confirm Eclat Textiles’ statement.
A request for comment from Luluemon had not been answered at the time of publishing. The full text of the complaint against Luluemon Athletica is available here (PDF format).
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