WASHINGTON (CN) - The 6th Circuit has revived a shareholder suit against Abercrombie & Fitch alleging that executives made misleading statements about the success of the company's business strategy while dumping their own stock.
A Delaware federal judge had dismissed the suit on the recommendation of a special litigation committee appointed by Abercrombie to investigate the shareholders' allegations.
Under Delaware law the recommendations of such committees must be honored if the courts find that the committee was independent, that it conducted its investigation in good faith and that its decision was reasonable.
In reversing the lower court's decision, a split appellate panel in Cincinnati said, "There are serious questions as to Abercrombie's special litigation committee's independence."
One of the special committee members, Abercrombie director Allan Tuttle, recused himself from considering allegations against another director, Robert S. Singer, with whom he had close ties, the April 5 decision states.
"When Tuttle recused himself from considering the claims against Singer, he essentially launched a signal flare that he was not independent," Judge Boyce Martin Jr. wrote for the majority of the three-judge panel.
Tuttle's actions cast doubt on the ability of the committee to review the allegations against the other defendants, Martin continued.
"If Tuttle's relationship with Singer was sufficiently close to make him question his ability to pass judgment on Singer, that same relationship would necessarily infect his judgment regarding other defendants," the majority opinion states.
In a five-page dissent, Judge Richard Allen said that Tuttle demonstrated proper discretion. "Through his partial recusal, Tuttle attempted to expel any doubt regarding the independence of the special litigation committee," Allen wrote.
Shareholders say that in the summer of 2005, Abercrombie shares surged after company officials bragged of their success in "training" customers to pay full price for merchandise compared to other retailers who had to offer deep discounts to move inventory.
Like Abercrombie's prices, the shareholders say the boasts were inflated. They contend that the stock price fell when Abercrombie slashed prices to move surplus inventory, but not before insiders, including chairman Michael Jefferies and several board members, sold off large chunks of their Abercrombie stock.
The case was remanded to the Delaware District Court for further proceedings.
Read the Top 8
Sign up for the Top 8, a roundup of the day's top stories delivered directly to your inbox Monday through Friday.