NEW YORK, United States — Aeropostale Inc lost its bid to dismiss a lawsuit accusing the teen clothing retailer of defrauding shareholders in 2011 by hiding problems with excess inventory and slow sales that ultimately weighed on its earnings and stock price.
U.S. District Judge Colleen McMahon in Manhattan on Monday said the lead plaintiff, the city of Providence, Rhode Island, had raised a strong inference that the company, Chief Executive Thomas Johnson and Chief Financial Officer Marc Miller knew they were painting a “much rosier picture” than appropriate.
The plaintiffs said that as the truth became known, Aeropostale’s stock price slid more than 50 percent, wiping out about $1 billion of market value, and same-store sales had fallen by a double-digit percentage.
Aeropostale did not immediately respond on Tuesday to requests for comment.
According to the lawsuit, Aeropostale had been struggling in 2011 with excess back-to-school and holiday inventory from the previous year, and compounded its troubles by launching unpopular spring and summer clothing lines.
But the New York-based company remained publicly upbeat even after entering “full panic mode” in April 2011, with plans for unprecedented promotions and big discounts, the lawsuit said.
McMahon said Providence had sufficiently shown that the defendants knew they had made a “huge merchandising mistake,” even firing a merchandising director who had demonstrated a “disastrously wrong” fashion sense.
“Defendants could see that sales, not just of the holiday inventory, but of spring inventory, were poor and getting poorer,” McMahon wrote. “One can infer that defendants, having access to all this information and watching the downward trend, omitted to disclose all the information necessary to make their statements true and did so either recklessly or consciously – more likely the latter.”
Jonathan Gardner, a partner at Labaton Sucharow representing the lead plaintiff, said in a phone interview that the case will now proceed toward a possible trial.
“We were able to allege that they had access to information that was inconsistent with their public statements,” he said. “It was, at minimum, reckless behavior and constitutes securities fraud.”
The lawsuit seeks class-action status for purchasers of Aeropostale stock between March 11, 2011, and Aug. 18, 2011.
Aeropostale’s stock price fell from $23.05, its closing price at the start of the class period, to a close of $10.71 on the day after the period ended.
McMahon gave Providence 30 days to seek class certification.
Earlier this month, Aeropostale said it operates close to 1,100 stores in all 50 U.S. states, Puerto Rico and Canada.
In afternoon trading, Aeropostale shares were down 14 cents, or 1 percent, at $13.44 on the New York Stock Exchange.
The case is Providence v. Aeropostale Inc et al, U.S. District Court, Southern District of New York, No. 11-07132.