A Louisiana pension fund will lead U.S. litigation accusing Lululemon Athletica Inc of fraudulently hiding defects that caused yoga pants to become nearly sheer, and concealing talks that led to the surprise departure of its chief executive.
U.S. District Judge Katherine Forrest in Manhattan on Tuesday said the Louisiana Sheriffs' Pension & Relief Fund, which owned about $1.3 million of Lululemon stock, will handle the litigation on behalf of shareholders.
Lululemon has long been known for making athletic clothing that could withstand many years of wear and washes.
But trouble surfaced in March when the Vancouver, British Columbia-based company recalled its top-selling item, women's black yoga pants containing its proprietary Luon fabric, after determining the pants were too sheer.
Less than three months later, Lululemon on June 10 announced the departure of Chief Executive Christine Day. Its shares fell 17.5 percent the next day, wiping out $1.62 billion of market value, Reuters data and a regulatory filing show.
Two lawsuits filed in Manhattan blamed the defective pants on cost-cutting, and accused Lululemon, Day and Chairman Dennis "Chip" Wilson of hiding the defects, using deep discounting to boost market share, and concealing plans to replace Day.
Forrest combined the lawsuits and said the Louisiana fund should lead the case because it had a larger financial stake than the other plaintiff, Houssam Alkhoury of Natick, Massachusetts, and was a "sophisticated institutional investor" with experience leading similar lawsuits.
The Baton Rouge-based fund plans to seek class-action status for shareholders between March 21, when full-year results were announced, and June 10. It said it lost $116,000 on transactions in that period. The fund's law firm is Bernstein Litowitz Berger & Grossmann, a shareholder class-action specialist.
A lead plaintiff is entitled to direct litigation and negotiate a settlement on behalf of other shareholders.
On September 12, Lululemon reduced its forecast for fiscal 2013 profit and sales, citing delivery delays resulting from tighter quality control. Day remains at the company's helm while Lululemon searches for a successor.
The case is In re: Lululemon Securities Litigation, U.S. District Court, Southern District of New York, No. 13-04596.
(Reporting by Jonathan Stempel in New York; Editing by Kenneth Barry)