The RealReal will pay $500,000 and make reforms to its corporate governance, including in connection with its authentication practices, whistle-blower policy, and oversight policy for “retail sales practices and customer relationships” to settle an ongoing stockholder derivative lawsuit, after getting the green-light from a federal court in Delaware. In a final order and judgment dated February 11, Judge Leonard Stark of the District of Delaware approved the terms of The RealReal settlement, calling it “fair, reasonable, and adequate as to each of the [plaintiffs] and current [The RealReal] shareholders,” and ordering the parties to “perform the terms to the extent [they] have not already done so.”
At the heart of the settlement terms is the $500,000 in attorneys’ fees and expenses that The RealReal (“TRR”) will pay – $3,000 of which will be awarded to the named plaintiffs, Iwona Grzelak and Junior Aguirre, who filed similar – but initially separate – cases in 2020, accusing the San Francisco-based luxury resale company’s board members and management of “intentionally or recklessly breaching their fiduciary duties” as directors and/or officers, and violating the U.S. Securities Exchange Act in the process. Specifically, both Grzelak and Aguirre claimed in their since-consolidated suits that while TRR has promoted itself – both in its IPO documentation and in subsequent statements by its management team – as a source of “authenticated, consigned luxury goods,” its authentication operations were “nowhere near as robust as the defendants professed.”
As a result, the two plaintiffs claimed that “hundreds of counterfeit items supposedly processed by the [TRR’s] rigorous authentication procedures were sold to [its] customers,” and all the while, “between June 27, 2019, and November 20, 2019, the individual [officer and management] defendants breached their fiduciary duties by making and/or causing the company to make a series of materially false and misleading statements and omissions regarding [its] authentication processes, risk exposure and purported growth and success, and by failing to maintain internal controls.”
After agreeing to the material terms of the settlement and engaging in negotiations regarding the sum that The RealReal will pay to the plaintiffs’ counsel, the parties alerted the court in a motion for final settlement last month that “notice was provided to current TRR Shareholders on December 17, 2021,” and that as of the date of filing their motion, they had not received any objections to the settlement terms from shareholders.
As for what the terms of the settlement entail, in addition to agreeing to “pay $500,000 to the plaintiffs’ counsel for their fees and expenses,” TRR will implement reforms “to address, and mitigate risk of the recurrence of, the misconduct alleged in” the case at hand, the reforms require TRR to make corporate governance improvements, including by “incorporat[ing] semi-annual assessments of all authentication staff and certifications into the company’s existing training programs” by TRR’s Chief Operating Officer, who will “oversee TRR’s training for staff engaged in authenticating TRR’s products;” and adopting a new policy for board oversight over the company’s retail sales practices and customer relationships, including “semi-annual reporting to the Board by the COO or its designee concerning oversight over TRR’s retail sales practices and the Company’s customer relationships.”
Beyond that, TRR will create a “management-level Risk and Compliance Committee to determine, implement, and assess TRR’s risk management policies and the operation of TRR’s risk management framework to identify TRR’s compliance risk exposure.” It will also make “amendments to [its] Whistleblower Policy and Procedures to specifically state that the company’s reporting channels may be used to ‘report concerns relating to business practices, ethical business or personal conduct, integrity, and professionalism.’”
In a filing last year, the plaintiffs asserted that the settlement reforms represent “a material and substantial improvement to TRR’s corporate governance and provide for new policies and procedures that will help to prevent a recurrence of the wrongdoing alleged” in the case at hand. At the same time, TRR stated in the stipulated settlement that it was “entering into this Settlement solely to eliminate the uncertainty, distraction, disruption, burden, risk, and expense of further litigation, and without admitting any wrongdoing or liability whatsoever.”
The RealReal, Sanders Settlement
The settlement comes as TRR is in the midst of coming to a resolution in a separate case, filed in a California federal court in November 2019, in which lead plaintiff Michael Sanders has accused TRR, its founder and CEO Julie Wainwright, former Chief Financial Officer Matt Gustke, Chief Accounting Officer Steve Lo, board members like Stefan Larsson, and the company’s IPO underwriters, including Credit Suisse Securities, B of A Securities, and UBS Securities, among others, of running afoul of federal securities laws.
Sanders and fellow named plaintiffs Nubia Lorelle and Garth Wakeford allege that the defendants misled investors about the nature of TRR’s authentication process by making “false and misleading statements” about it “purported authentication process,” which served to “artificially inflate” the price of its Nasdaq-traded shares, and then damage those same shareholders “when the artificial inflation dissipated” following multiple media reports about the “true” nature of TRR’s authentication process.
As previously reported by TFL, the plaintiffs filed an unopposed motion for preliminary approval of settlement in November, in connection with which The RealReal will pay $11 million to be shared among class members and their counsel. That case is still underway before the U.S. District Court for the Northern District of California.
In its latest monthly business update, TRR revealed that it was continuing to see increases in the wake of the pandemic, reporting gross merchandise value of approximately $153 million for December 2021, an increase of 40 percent and 49 percent compared to the same period in 2020 and 2019, respectively. According to TRR, December average order value was approximately $518, an increase of 10 percent and 4 percent compared to the same periods in 2020 and 2019.
The company says that it introduced monthly reporting on key metrics – gross merchandise value and average order value – “in an attempt additional transparency regarding the effects of the COVID-19 pandemic on its business.” After reporting such figures in a monthly basis through the end of 2021, TRR stated in January that it “plans to return to a more typical quarterly and annual guidance cadence in 2022 and will no longer provide monthly business updates going forward.”
The case is Iwona Grzelak v. Julie Wainwright, et al, 1:20-cv-01212 (D. Del.).