Lululemon Athletic Inc. is a manufacturer of athletic apparel. Among its most popular products are fitness pants made from a proprietary material known as luon, an amalgamation of 86 percent nylon and 14 percent Lycra. The black luon pants were recalled in March 2013 after customers complained that they were transparent. The recall amounted to 17 percent of the company’s sales. After the recall, customers reported additional problems, including pilling, flawed seams, and continuing sheerness. The Louisiana Sheriffs’ Pension & Relief Fund purchased common shares of Lululemon during the time Lululemon made representations that its apparel’s quality level was the “highest in the industry,” it was the “leader in technical fabrics and quality construction,” and that “quality” was the company’s “key differentiating factor” from its peers. After the recall, Lululemon’s sales and the market price of its shares plummeted. The pension fund sued Lululemon under Securities Exchange Act Section 10(b) and Rule 10b–5, claiming that Lululemon’s statements were irreconcilable with Lululemon’s actual, undisclosed quality control practices. Was the pension fund’s claim successful?
