Did Farfetch make untrue statements or fail to set out material information in its filings with the U.S. Securities and Exchange Commission (“SEC”) ahead of its blockbuster initial public offering on the New York Stock Exchange in September 2018? That is the question being asked by at least nine national law firms that are currently taking a close look at London-based e-commerce giant.
Almost a year after its IPO, Seattle-based Hagens Berman LLP revealed in a release on Wednesday that it is investigating “possible disclosure violations” by Farfetch concerning “the veracity of [its] statements about the company’s business model, particularly related to [its] growth and profitability.” Such representations, the firm asserts, “allowed Farfetch to go public” in September 2018 and raise over $880 million, thereby valuing the company at roughly $6.2 billion.
The mounting scrutiny of Farfetch – which Ann M. Lipton, a business law professor at Tulane University Law School, says appears to center on potential violations of federal securities laws that prohibit making misleading statements with respect to the sale of securities – comes after the company released a string of poor financials over the past several months. For instance, as Hagens Berman asserts in connection with its investigation, “Farfetch released disappointing Q1 2019 results [on May 16, 2019], disclosing accelerating losses.”
In response to its such results, Hagens claims that Farfetch “CEO José Neves attempted to allay investor concerns by highlighting the company’s ‘excellent growth.’”
Fast forward to early this month and the firm claims that 12-year old Farfetch – which has proven appealing to investors thanks to its inventory-less model of connecting consumers to retailers, while taking a cut of the sale, “plus its links to high-fashion brands including Chanel, Gucci and Balenciaga” – “delivered another disastrous quarter.”
To be exact, the group “reported wider-than-expected losses, including from [its] recent $675 million acquisition of New Guards Group,” per Hagens, which resulted in a 40 percent drop in Farfetch’s stock price, and prompted analysts to question the value of Farfetch’s stock.
“Taking a step back, it’s clear that the story has changed meaningfully since the IPO, and Farfetch shares are headed to the ‘penalty box’ (we doubt investors will be clamoring to buy the expected weakness in the shares),” wrote analysts led by Wells Fargo’s Ike Boruchow – as highlighted in Hagens’ release. However, as MarketWatch stated this week, some analysts remain “bullish based on the ‘huge opportunity’ for online luxury goods” given the under-penetration nature of the market in the digital sphere.
As for Hagens Berman, which prides itself as a class-action and complex litigation law firm with sweeping success at taking on corporations, partner Reed Kathrein says that they are “focused on investors' losses and whether Farfetch misled investors about the company's growth and profitability outlook.” In issuing a release, the firm is aiming “to solicit information about any potential fraud from insiders, and, potentially, seeking to act as counsel to a whistleblower if a whistleblower emerges and wishes to contact the SEC,” George S. Georgiev, a law professor at Emory University with expertise in securities regulation, told TFL.
And Hagens is not the only firm paying attention. On Thursday, San Diego-based shareholder rights firm Johnson Fistel, LLP stated that it is also working to determine whether Farfetch’s IPO filings with the SEC and “subsequent investor communications contained untrue statements of material facts or omitted to state other facts necessary to make the statements made therein not misleading concerning [its] business, and operations.”
Bronstein, Gewirtz & Grossman, LLC revealed that it is investigating “concerns about whether Farfetch and certain of its officers and/or directors have violated federal securities laws” in connection with Farfetch’s announcement of “poor second quarter results and the resignation of its COO in 2020.” Glancy Prongay & Murray LLP stated that it is “continuing” its investigation of the company, citing “larger-than-expected losses” for Q2. Still yet, Bragar Eagel & Squire, P.C., Holzer & Holzer, Kirby Mcinnerney LLP, The Schall Law Firm, and the Law Offices of Howard G. Smith are similarly investigating on behalf of Farfetch shareholders.
Such investigations and subsequent “lawsuits against companies that have recently gone public are fairly routine when the stock price drops after the IPO, as it has done in this case,” according to Georgiev. However, the investigations at hand are “noteworthy in the sense that because of the drop in its stock price and Farfetch’s earnings announcement, [the company] is, in fact, vulnerable to securities law liability.”
In practice, Georgiev says this might mean that Farfetch “may need to pay to settle a lawsuit if one is filed and assuming it survives a motion to dismiss.”
It is worth noting that one point that has not been raised in the aforementioned firms’ releases is the fact that a month before Farfetch revealed its Q2 financials and shortly thereafter, announced its New Guards Group acquisition, Condé Nast, one of Farfetch’s early investors, pulled its nearly $300 million stake in the company in July “amid concerns over how the luxury marketplace is being managed,” according to the London Times.
A representative for Farfetch told TFL that the company will not be commenting on the investigations.
UPDATE (August 16, 2019): This article was updated to include the names of additional firms that are investigating Farfetch on behalf of shareholders. The number of firms is currently eight, up from four at the time of initial publication.