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Houssam Alkhoury, Et Al. V. Lululemon Athletica Inc., Et Al. 13-CV-04596

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Houssam Alkhoury, Et Al. V. Lululemon Athletica Inc., Et Al. 13-CV-04596 Case 1:13-cv-04596-KBF Document 1 Filed 07/02/13 Page 1 of 24 JUDGE FORREST 13 CV UNITED STATES DISTRICT COURT 4 596 SOUTHERN DISTRICT OF NEW YORK x HOUSSAM ALKHOURY, Individually and on: Civil Action No. Behalf of All Others Similarly Situated, CLASS ACTION Plaintiff, COMPLAINT FOR VIOLATIONS OF THE vs. FEDERAL SECURITIES LAWS LULULEMON ATHLETICA INC., DENNIS J. WILSON and CHRISTINE McCORMICK DAY, Defendants. x DEMAND FOR JURY TRIAL (.) •c:' r ) -fl - C-, u1 i Case 1:13-cv-04596-KBF Document 1 Filed 07/02/13 Page 2 of 24 Plaintiff Houssam Alkhoury, individually and on behalf of all other persons similarly situated, by plaintiff's undersigned attorneys, for plaintiff's complaint against defendants, alleges the following based upon personal knowledge as to plaintiff and plaintiff's own acts, and upon information and belief as to all other matters based on the investigation conducted by and through plaintiff's attorneys, which included, among other things, a review of Securities and Exchange Commission ("SEC") filings by lululemon athletica inc. ("Lululemon" or the "Company"), as well as media reports about the Company. Plaintiff believes that substantial evidentiary support will exist for the allegations set forth herein after a reasonable opportunity for discovery. NATURE OF THE ACTION 1. This is a securities class action on behalf of all purchasers of the common stock of Lululemon between March 21, 2013 and June 10, 2013, inclusive (the "Class Period"). Plaintiff seeks to pursue remedies against Lululemon and certain of its most senior executives under § § 10(b) and 20(a) of the Securities Exchange Act of 1934 (the "Exchange Act"), and Rule lOb-5 promulgated thereunder. The "Individual Defendants" include Lululemon founder and Chairman of the Board, Dennis J. "Chip" Wilson ("Wilson"), who owned nearly 30% of the Company's stock at the start of the Class Period, and Christine McCormick Day ("Day"), who was Lululemon's Chief Executive Officer ("CEO") until the end of the Class Period. 2. Defendant Lululemon, based in Vancouver, British Columbia, was founded by defendant Wilson in 1998 and sells yoga wear that Wilson is credited with inventing. The Company's most iconic product offerings are its tight-fitting Luon yoga pants, which it sells for $98, and its tight-fitting tank tops, which it sells for $64. Priding itself on its high quality offerings, which have permitted Lululemon to command above-market prices for what it claimed was a superior product offering, the Company carved out a lucrative niche with its high-end, fashionable yoga wear, reporting quarter after quarter of stunning sales and profit growth. Case 1:13-cv-04596-KBF Document 1 Filed 07/02/13 Page 3 of 24 3. However, as Under Armour, Nike and others entered this niche market, the Company faced stiffer competition and began cutting corners to keep profit margins up. 4. In January 2012, Wilson was forced to step down as Lululemon's Chief Innovation and Brand Officer, turning over those roles to CEO Day. A few months earlier, Luluiemon had printed an Ayn Rand slogan on its tote bags: "I Am John Gait," a reference to a character and phrase from Atlas Shrugged, one of defendant Wilson's favorite books. Wilson then proclaimed the Tea Party icon an inspiration on his blog, prompting some to wonder whether he was alienating customers. So when he stepped down on January 6, 2012, the price of Luiulemon stock actually rose slightly. 5. However, the Company suffered through several product quality issues. For instance, during the summer of 2012, the Company disclosed a problem with dark colors bleeding. The Company quickly addressed each problem and reassured investors that its quality-control measures were intact. 6. Then, a new shipment of its Luon pant product hit the shelves on March 1, 2013. The fabric used was very thin, overly translucent, and essentially rendered the yoga pants see-through ("See-through Yoga Pants") when wearers bent over - which is what those who wear yoga pants do. Customers began complaining in droves. After weeks of upheaval, Lululemon was forced to formally recall the See-through Yoga Pants and offer customers exchanges or refunds. Initially, Luiulemon blamed the defect on its manufacturers and suppliers. 7. The Class Period starts on March 21, 2013, when Lululemon issued a press release announcing its fourth quarter and fiscal 2012 financial report for the period ending February 3, 2013, and its fiscal 2013 guidance. That day, defendants conceded that defects in Luiuiemon's own quality-control procedures were the source of the problem with the See-through Yoga Pants. -2- Case 1:13-cv-04596-KBF Document 1 Filed 07/02/13 Page 4 of 24 According to defendant Day, there was no way for factory inspectors to determine whether pants were see-through, which she said could only be determined when a customer put the pants on and bent over. Defendant Day assured investors that the Company had put much more rigorous quality- control measures in place to address the problem and they were putting the product gaffes behind them. 8. Upon these and other positive Class Period statements, the price of Lululemon stock would increase to $82 .50 per share in intraday trading by June 10, 2013. Meanwhile, with the price of Lululemon stock artificially inflated, defendant Wilson cashed in, selling 2 million shares of his personally owned stock on the open market and receiving more than $163 million in gross proceeds during a very short trading window lasting from May 10, 2013 to June 7, 2013. These sales were unusual both in sheer size and timing, as defendant Wilson had not sold Lululemon stock since January 2013, and defendants were then aware of internal turmoil at Lululemon. Defendants also mailed out Lululemon's annual proxy statement to shareholders (the "2013 Proxy Statement") in connection with the Company's June 11, 2013 annual general shareholder meeting ("AGM") soliciting proxies in favor of among other things, Wilson's re-election as a director, which investors had to return by 11:00 pm on June 10, 2013 at the latest. By holding off on disclosing the internal turmoil at Lululemon that would result in defendant Day either stepping down or being effectively fired until after the close of business on June 10, 2013, defendants ensured that Wilson's re-election would be less problematic. Defendants also disclosed that Lululemon had been forced to discount some of its product offerings during the Class Period, something Lululemon had long stated it did not do. 9. Following the sudden announcement on June 10, 2013, after the close of trading, that defendant Day was "resigning," with no explanation or replacement in sight, the price of Lululemon -3- Case 1:13-cv-04596-KBF Document 1 Filed 07/02/13 Page 5 of 24 stock plummeted on June 11, 2013, falling $14.43 per share, or more than 17.5%, and erasing more than $1.6 billion in market capitalization. 10. The true facts, which were known by defendants but concealed from the investing public during the Class Period, were as follows: (a) The quality defects in the Luon yoga pants resulted in part from Lululemon's efforts to cut costs in order to raise profit margins to the detriment of product quality and brand reputation; (b) Lululemon was being forced to sell its yoga pants at a discounted price during the Class Period to obtain sales and protect market share; and (c) There were serious discussions concerning defendant Day's continued employment at the Company and the Company was considering replacing defendant Day. JURISDICTION AND VENUE 11. Jurisdiction is conferred by §27 of the Exchange Act. The claims asserted herein arise under §§ 10(b) and 20(a) of the Exchange Act and Rule 1 Ob-5 promulgated thereunder. This Court has jurisdiction over the subject matter of this action under 28 U.S.C. § 1331 and §27 of the Exchange Act. 12. Venue is proper in this District pursuant to §27 of the Exchange Act and 28 U.S.C. § 1391(b) as the Company conducts business in this. 13. In connection with the acts alleged in this complaint, defendants, directly or indirectly, used the means and instrumentalities of interstate commerce, including, but not limited to, the mails, interstate telephone communications and the facilities of the national securities markets. -4- Case 1:13-cv-04596-KBF Document 1 Filed 07/02/13 Page 6 of 24 PARTIES 14. Plaintiff FToussam Alkhoury, as set forth in the accompanying Certification, which is incorporated by reference herein, purchased the common stock of Lululemon during the Class Period and has been damaged thereby. 15. Defendant Lululemon is a Vancouver, British Columbia-based company that markets athletic wear, in particular the Company's iconic yoga wear. The Company's common stock is listed on the Nasdaq, an efficient market, under the ticker symbol "LULU" and, as of June 5, 2013, the Company had more than 113.5 million shares of its common stock outstanding. 16. Defendant Wilson founded Lululemon in 1998 and has served as the Chairman of its Board of Directors since 1998. Defendant Wilson served as the Company's Chief Innovation and Branding Officer from March 2010 to January 2012, and from December 2005 until March 2010, he served as its Chief Product Designer. Defendant Wilson was Lululemon's CEO from 1998 until December 2005. During the Class Period, defendant Wilson sold 2 million shares of his personally held Lululemon common stock during a very short trading window and reaped proceeds of more than $163 million. 17. Defendant Day served as Lululemon's CEO throughout the Class Period, having joined the Company in 2008 and been promoted to CEO in July of that year.
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