February 19, 2014 / 8:19 PM / 5 years ago

Lululemon rejects allegation it misled shareholders

NEW YORK (Reuters) - Lululemon Athletica Inc (LULU.O) says its nearly year-long struggle with bad publicity linked to slowing growth and a messy product recall did not reflect any corporate intent to defraud shareholders, and that an expanded lawsuit suggesting otherwise should be thrown out of court.

A shopper walks out of the Lululemon Athletica store in New York, December 16, 2013. REUTERS/Shannon Stapleton

In a filing on Tuesday night in the U.S. District Court in Manhattan, the Canadian yoga wear retailer said it promptly addressed quality control problems as they became apparent, and updated investors in real time about the impact.

It acknowledged that comments in November by founder and Chairman Dennis “Chip” Wilson that some women’s body shapes “just actually don’t work” with Lululemon yoga pants prompted much negative press.

But it said none of this meant it owes shareholders money.

“While all of this makes for interesting reading,” the company said, “it does not constitute securities fraud.”

Lululemon is seeking to dismiss an amended lawsuit accusing it of misleading and defrauding shareholders between September 7, 2012 and January 10, 2014, just before shares of the company fell to a two-year low after the company issued its second lowered earnings forecast in a month.

Hannah Ross, a partner at Bernstein Litowitz Berger & Grossmann, which represents investors led by the Louisiana Sheriffs’ Pension & Relief Fund, declined to comment on the filing. The fund is based in Baton Rouge, Louisiana.

Shareholders accused Lululemon of hiding defects in its black luon pants, which were recalled; concealing its inability to address quality shortfalls; using deep discounting to boost market share, and concealing plans to replace Christine Day as chief executive.

Last month, Day stepped aside and was replaced as chief executive by former TOMS Shoes president Laurent Potdevin. Wilson is stepping down this year as non-executive chairman. Day and Wilson are defendants in the shareholder lawsuit.

Wilson, in a separate filing on Tuesday, said he had last held a management role at Lululemon in January 2012, and that allegations that he “dipped in and out of daily affairs” did not show he knew about, or was complicit in, any fraud.

He also said his alleged sales of $184 million of Lululemon stock during the class period was not fraudulent, as the lawsuit contended, because they were made under a prearranged trading plan and not suspicious in timing or quantity.

Last month, after Lululemon issued the second reduced earnings forecast, Chief Financial Officer John Currie called the quality issues “a real wake-up call” and admitted that 2013 was a tough year.

“You always hear the phrase that any PR is good PR. What we learned is that’s not always the case,” he said. “We’re taking it seriously. Like, we get it.”

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 Peter Galloway

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