A group of shareholders falls short in making their case against Allbirds, the company and its executives claim. In the reply that they filed on December 4, Allbirds its co-founder and co-CEO Joey Zwillinger and other executives, along with directors Neil Blumenthal (co-founder of Warby Parker), Glossier founder Emily Weiss, Dick Boyce, Nancy Green, and Mandy Fields argue that Qu Jinghua and Yau Noi (the “plaintiffs”)’s securities fraud lawsuit suffers from a critical shortcoming: It is built on “fraud by hindsight.” In other words, they rely on evidence of bad outcomes – namely, the results of Allbirds’ focus on non-core product lines – to support their fraud claims.
A Bit of Background: In the consolidated class action lawsuit, which was filed in a California federal court in April 2023, Allbirds and its executives and directors (the “individual defendants”) are being accused of misleading investors ahead of its initial public offering in November 2021 and in various filings and communications between November 4, 2021 and March 9, 2023. The plaintiffs accuse Allbirds and co. of securities fraud and other violations under Sections 11 and 10(b) of the Securities Act of 1933 and the Securities Exchange Act of 1934 as a result of their “false and misleading statements” in the company’s IPO documentation and in subsequently-issued statements.
In particular, the plaintiffs contend that Allbirds overstated its focus on core products and product innovation while concealing significant strategic missteps and inventory challenges. These “omissions and misrepresentations” misled investors, and ultimately, caused them financial harm when the company’s “inflated” stock price fell following disappointing financial disclosures, the plaintiffs argue.
Fraud by Hindsight
Allbirds and the individual defendants responded to the plaintiffs’ lawsuit with a not-yet-decided motion to dismiss in September, in which they argue that the plaintiffs’ claims lack merit and fail to meet the high pleading standards required for securities fraud claims. Specifically, the sustainable footwear company contends that the plaintiffs rely on “fraud by hindsight,” thereby, bringing a key securities fraud defense to the fore.
> A complaint impermissibly pleads fraud by hindsight when it alleges a defendant’s statement was false based on subsequently available information without also alleging that the defendant knew the statement was false at the time it was made.
Allbirds and the individual defendants have since lodged a reply with the court, echoing claims in their September 2024 motion to dismiss and doubling-down on their fraud by hindsight defense. In the new filing, the company and the individual defendants argue that their March 2023 admissions of strategic missteps, which the plaintiffs argue are evidence of fraud, reflect the company’s evolving understanding of its market challenges and do not amount to an intentional effort to mislead investors. The company maintains that its disclosures were consistent with the facts available at the time of – and in the wake of – the IPO.
And beyond that, Allbirds argues that in order to plead scienter (as required for their securities fraud claim under Section 10(b) of the Exchange Act), the plaintiffs must allege “specific contemporaneous statements or conditions that demonstrate the intentional or the deliberately reckless false or misleading nature of the statements when made.” The plaintiffs fail here, per Allbirds, as they rely on statements that Allbirds’ execs. made (mainly in March 2023) about “some strategic and executional missteps” in Allbirds’ business strategy,” and that such statements were made “in hindsight and admitted only to strategic mistakes, not to fraud.”
In its defense, Allbirds points to precedent from the U.S. Court of Appeals for the Ninth Circuit, which held in Anderson v. Peregrine Pharms., that “see[ing] what went wrong in hindsight … does not make the defendants’ failure to see that problem [in real time] fraudulent.”
In a nutshell: Fraud by hindsight claims reflect the tension between holding companies accountable for genuine misrepresentations and protecting them from liability for unforeseen outcomes. Courts generally reject these types of allegations unless Plaintiffs can present contemporaneous evidence showing the company acted with fraudulent intent or reckless disregard for the truth. That evidence is precisely what Allbirds argues is missing in the case at hand.
In case its fraud by hindsight defense is not enough, Allbirds and the individual defendants also argue that many of the statements that the plaintiffs cite in the complaint – such as those expressing optimism about Allbirds product performance or growth strategies – are non-actionable opinions, puffery, or forward-looking statements protected under the Private Securities Litigation Reform Act’s safe harbor.
The case is Gennady Shnayder v. Allbirds, Inc., et al., 3:23-cv-01811 (N.D. Cal.)
Share
