A trio of former Farfetch executives is doubling-down on their bid to beat a lawsuit accusing them of fraud in connection with the downfall of the luxury e-commerce company. In the filing that they lodged with a New York federal court on December 12, Farfetch’s founder and former CEO José Neves, former finance chief Elliot Jordan, and former Group President Stephanie Phair argue that the shareholder plaintiffs “lack of any factual basis for [their] theory that Farfetch’s executives intentionally misled investors about nearly every aspect of [the company’s] business for two years” before Farfetch was liquidated late last year.
The Background: The consolidated class action lawsuit, which got its start in the U.S. District Court for the Southern District of New York in December 2023, targets Farfetch, as well as Neves, Jordan, and Phair. The bulk of Fernando Sulichin and Yuanzhe Fu’s allegations stem from Farfetch’s alleged shift away from its original business model as a third-party marketplace for luxury apparel and accessories in favor of its pursuit of a series of high-cost acquisitions that were poorly integrated into Farfetch’s business, thereby, creating operational inefficiencies and adding substantial costs.
All the while, Sulichin and Fu claim that Farfetch’s growing financial tensions – which ultimately saw it placed in liquidation and acquired by Coupang in a rescue deal last year – were masked by “materially false and misleading statements” made by Neves, Jordan, and Phair (the “defendants”). The executives “systematically misled investors about the company’s true financial health, business model, and growth prospects” and kept the price of Farfetch’s formerly Nasdaq-traded stock inflated, Sulichin and Fu argue.
In response to the headline-making lawsuit, Farfetch, Neves, Jordan, and Phair lodged a motion to dismiss in September, which they reiterate in a newly-filed memo in support.
Failure to Identify False Statements
Looking to chip away at the amended complaint, Neves, Jordan, and Phair argue that the plaintiffs’ “kitchen sink strategy,” which sees them challenge “nearly every statement made over two years about almost every aspect of Farfetch’s business,” falls short because it lacks facts that establish that any such statements were false. And in any event, the former Farfetch execs argue that nearly all the statements that the plaintiffs rely on – many of which center on statements about New Guards Group and Farfetch’s alleged failure to disclose weaknesses in the Milan-headquartered group’s internal controls – are “inactionable expressions of corporate optimism, forward-looking statements, and/or opinions.”
> Disclosed Weaknesses: The plaintiffs allege that Farfetch concealed material weaknesses with regard to New Guards Group, resulting in unreliable financial reporting and especially high operating costs. However, the former executives argue that they repeatedly disclosed these weaknesses in Farfetch’s public filings, including in its 2021 Annual Report and subsequent financial disclosures.
At the same time, the defendants argue that Farfetch disclosed risks regarding a number of its individual brands. In particular, the defendants point to language from Farfetch’s 2020 Form 20-F, which states, “Certain designers and creators, including Virgil Abloh, the founder and Creative Director of Off-White, are critical to the success of the brands within the New Guards portfolio, and their departure could have a significant impact on … New Guards’ business.” They also point to the company’s 2021 Form 20-F, which states that Farfetch “may be unsuccessful in integrating” its acquisitions, such as that of Violet Grey, and “may not achieve the anticipated benefits” due to possible “unanticipated and substantial costs or liabilities.”
(The context here is that Off-White’s sales and demand allegedly “tanked in the 6 to 12 months after the death of Virgil Abloh” in November 2021, according to the plaintiffs, who cite a former employee at New Guards Group, which holds the licensee for Off-White. As for Violet Grey, the plaintiffs take issue with Violet Grey’s “declining growth and depleted finances” under the watch of Farfetch.)
> Puffery: The defendants describe many of the statements cited by the plaintiffs as “corporate puffery” or vague expressions of optimism that are not legally actionable. For example, while the plaintiffs contend that Farfetch misrepresented the state of acquisitions like Violet Grey, the defendants maintain that the claims at issue are not materially misleading. Farfetch’s description of Violet Grey as a “cult favorite beauty destination” even if it was struggling financially is not actionable, as it amounts to puffery, the defendant assert.
> Forward-Looking Statements: In addition to puffery, the defendants argue that many of the statements cited by the plaintiffs, such as projections about Farfetch’s revenue growth or market performance, are “quintessential” forward-looking statements protected under the Private Securities Litigation Reform Act’s safe harbor provision. Neves’ statement that Farfetch was “on track to deliver on our plan,” for example, is a general projection and not a factual claim, the execs argue. Moreover, they claim that the plaintiffs challenge statements that they never actually made. For instance, they argue that the plaintiffs have improperly construed Neves’ statement that Farfetch was “on track to deliver on our plan” to mean that Farfetch “had a reliable business model and strong financial health.”
No Fraudulent Intent
Neves, Jordan, and Phair also argue that the plaintiffs have failed to plead particularized facts that raise any inference of their intent to mislead Farfetch’s investors – much less the “strong” inference of scienter that the Private Securities Litigation Reform Act requires. In particular, the defendants highlight the fact that Farfetch’s executives, including Neves and Jordan, “substantially increased their holdings of Farfetch stock during the Class Period, which undermines any inference of fraudulent intent as a matter of law.” (Emphasis courtesy of the defendants).
In short, Neves, Jordan, and Phair argue that the plaintiffs “offer no coherent theory for why [they] would accumulate massive amounts of Farfetch stock if they knew that the company would ultimately fail.” The “far more plausible inference,” they state, is that they “invested heavily in Farfetch’s growth and were optimistic about its future, disclosed the many risks Farfetch faced, successfully weathered a difficult environment in 2022, but ultimately succumbed to a downturn in the luxury fashion and e-commerce industry in late 2023.”
Also on the issue of scienter, the defendants take on the plaintiffs’ claim that a handful of resignations over a 15-month period “suggests that company executives were aware of Farfetch’s true financial condition and some left to avoid liability.” Shutting down this allegation, Neves, Jordan, and Phair argue that the plaintiffs’ “fact-free speculation is not a sufficient ‘factual basis to conclude that the resignation was tied to participation in or knowledge of the fraud.’”
TLDR: The former Farfetch executives argue that the plaintiffs fail to sufficiently allege claims of securities fraud and fail to meet the legal standards for false statements, scienter, or scheme liability under the Private Securities Litigation Reform Act and applicable case law, and the case should be dismissed.
The case is In Re Farfetch Limited Securities Litigation, 1:23-cv-10982 (SDNY).
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