NEW YORK — Just when former Warnaco Group’s chief executive officer Linda Wachner thought she was off the hook in a shareholder class-action lawsuit, she might be hurled back into court again.
On Monday, a federal appeals court in Manhattan reversed a trial court’s dismissal of the lawsuit. The lower court dismissed the action last year on grounds that the shareholders waited too long to sue when they were alerted to possible inventory and accounting issues much earlier from the public firm’s regulatory filings. One filing in question was the 1998 revised annual report that Warnaco filed in April 1999. The shareholders filed their lawsuit in August 2000.
The appellate court found those filings did not place any notice on shareholders to inquire further about the possibility of alleged fraud. It noted that it was “reasonable for plaintiffs not to inquire into Warnaco’s statements because Warnaco had provided the seemingly benign explanation that it had changed accounting methods and revised its financial information for fiscal 1996 and 1997.”
Wachner will await the court’s review to determine if she must defend herself from the shareholders’ claims of securities law violations.
A legal source connected with the case said the lower court will have to redecide the timeliness issue. Also likely to be on the agenda, assuming that the procedural issue of timeliness is ruled in the shareholders’ favor, are legal issues raised by the defendants, such as whether the claims stated sufficient facts that would allow it to continue to trial.
Also named as defendants are Warnaco’s general counsel Stanley Silverstein and former chief financial officer William Finkelstein. The newly restructured Warnaco Group — formed when the operations part of the bankrupt firm exited Chapter 11 earlier this year — is not a party to the lawsuit.
Silverstein and Finkelstein could not be reached for comment. A Warnaco spokesman declined comment on behalf of its general counsel. A spokeswoman for Wachner said, “This is a groundless suit that she intends to contest vigorously.”