Two former Performance Sports Group executives can't dodge a proposed securities class action accusing them of misleading shareholders about sketchy sales tactics that bankrupted the sports gear manufacturer after a New York federal judge ruled that alleged misstatements were plausibly misleading.
U.S. District Judge Gregory H. Woods rejected the dismissal bid by ex-CEO Kevin Davis and former Chief Financial Officer Amir Rosenthal on Tuesday, finding that shareholders in the now-defunct PSG provided detailed arguments showing how the two former executives purportedly led the company into ruin.
Led by the Plumbers & Pipefitters National Pension Fund, the investors alleged that under Davis and Rosenthal, PSG's sales departments made a habit of forcing customers, mostly large retail chains, to increase the size of their orders by threatening to revoke steep wholesale discounts, and that this strategy led to a buildup of unused inventory that the executives should have known would eat into future sales.
"The fund has adequately alleged that PSG's sales practices created a trend of increasing inventory of PSG products at PSG retailers and that defendants should have disclosed this trend," Judge Woods said Tuesday. "It was both reasonably foreseeable and material to PSG's future performance that a buildup of inventory would lead to a decline in PSG's future sales. And the fund has alleged circumstances that create a plausible inference that defendants had actual knowledge of this trend because they received repeated warnings that PSG's sales tactics were cannibalizing future sales."
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Lead counsel for the shareholders told Law360 on Wednesday that they were "very pleased" with Judge Woods' decision.
"This was a hard-fought motion, involving complex factual and legal issues," Carol V. Gilden of Cohen Milstein Sellers & Toll PLLC said. "The Court engaged in a very thorough analysis of both sides arguments, and ruled validating the Lead Plaintiff's claims. We look forwarding to proceeding with the case."
Plumbers & Pipefitters National Pension Fund is represented by Carol V. Gilden, Alice R. Buttrick, Steven J. Toll, Megan Kinsella Kistler and S. Douglas Bunch of Cohen Milstein Sellers & Toll PLLC and James R. O'Connell and Mark W. Kunst of O'Donoghue & O'Donoghue LLP.