Image: The RealReal

Plaintiffs in a class action case against The RealReal are pushing for the court to green-light the distribution of millions of dollars in settlement funds in connection with their claims that the reseller misled investors about the nature of its authentication process. Michael Sanders and fellow named plaintiffs Nubia Lorelle and Garth Wakeford filed suit against The RealReal and its directors back in 2019, claiming that they made false and misleading statements in registration documents ahead of the company’s $300 million initial public offering that year, and that those “false and misleading statements continued in the months to following the IPO, thereby, artificially inflating the stock’s market price.”

For instance, the plaintiffs asserted that despite The RealReal (“TRR”)’s claims in its June 2019 IPO filing documentation that its “highly trained experts … thoroughly inspect the quality and condition of, and authenticate, every item we receive,” the luxury resale company’s “authentication process fell far short of that description, [with] only a small proportion of the thousands of items processed by [TRR] each day” –  namely, “only certain brands and items deemed to face a particularly high risk of counterfeiting” – being authenticated by experts. In reality, “The vast majority of supposedly ‘authenticated’ items were reviewed only by … low-wage hourly employees, often with little or no experience in fashion or luxury products,” the plaintiffs argued. 

In short: The documentation that TRR submitted in connection with its IPO (and its subsequent statements made by its directors/officers) “downplayed the risk that its authentication process was inadequate.” 

In addition to making allegedly false or misleading statements about its authentication efforts, the plaintiffs claimed that TRR and its directors made misleading statements about Average Order Value (“AOV”), which is one of the company’s key financial metrics. Specifically, the plaintiffs maintained that a prospectus that was filed with TRR’s Registration Statement was misleading because it failed to disclose that the company’s AOV for Q2 in 2019 had decreased year-over-year “due to promotional pricing and corresponding price cuts by the company that had been occurring since the first quarter of 2019.” 

When “the truth about TRR’s authentication process began to leak out” beginning in September 2019 by way of media articles, the plaintiffs asserted that such information “negatively affected the value of the company’s common stock, dissipating the artificial inflation [caused by the defendants’ allegedly false statements]” by some 19 percent at one point, and “damaged the plaintiffs and other members of the class.” And even before that, Sanders and co. argue that the company’s stock price had fallen as a result of TRR’s failure to provide accurate information: In August 2019 when TRR revealed “for the first time that the company’s AOV for Q2 in 2019 had decreased,” Sanders asserted that the company’s Nasdaq-traded stock dropped at the expense of shareholders. 

(On the heels of a California federal court agreeing to toss out part of the federal securities action in an opinion and order in March 2021 (while allowing other claims to remain in place), the plaintiffs filed an amended complaint, in which they doubled-down on their Securities and Exchange Acts claims. All the while, TRR argued that the plaintiffs failed to meet the heightened pleading requirements applicable in securities fraud cases and asserted that the plaintiffs’ allegations “do not demonstrate that any challenged statements were false or misleading and, in any event, [its statements] represent corporate puffery.”)

Fast forward to November 2021 and the parties entered into a stipulation, the terms of which established an $11 million settlement amount, which the court preliminarily approved in March 2022, noting that the settlement does not amount to an admission of wrongdoing by the defendants. Since then, counsel for the plaintiffs asserts that 7,121 claim forms from class members wishing to participate in the settlement (i.e., individuals or entities that acquired stock issued in connection with the company’s IPO between June 27, 2019, and Nov. 20, 2019) were submitted – 2,269 of which were “valid and properly documented, representing Recognized Losses of $51.7 million.”

Plaintiffs’ counsel is urging the court to accept all 2,269 valid claims, including those submitted between June 28, 2022, and September 30, 2022, even though the deadline for submission was June 28. This “later set of claims has not and will not delay distribution of the settlement fund, or otherwise prejudice any authorized claimant, they argue in their motion for distribution of the class action settlement funds, citing Ninth Circuit precedent that states that a district court has discretion to allow late claims to a settlement fund. 

The settlement follows from a Delaware district court’s February 2022 approval of a settlement in a separate case, which called on TRR to 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 bring an end to a different stockholder derivative lawsuit. In that case, named plaintiffs Iwona Grzelak and Junior Aguirre accused TRR’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.” 

The case is Michael Sanders, et al. v. The RealReal, Inc., et al. 5:19-cv-07737 (N.D. Cal).