Image: The RealReal

The lawsuit that a shareholder of The RealReal filed against a handful of the luxury resale company’s executives and directors for allegedly misleading investors about the robustness of its authentication process has been put on hold – for now. In a joint stipulation and order filed late last month, the respective counsels for plaintiff Iwona Grzelak and The RealReal defendants have agreed to stay the proceedings in the case until after a couple of similar and already-pending cases filed against The RealReal have been resolved. 

According to the parties’ joint filing, prior to The RealReal’s defendants – from board members founder Julie Wainwright and PVH Corporation president Stefan Larsson to executives like Chief Financial Officer Matt Gustke and Chief Accounting Officer Steve Lo, among others – being named in a shareholder derivative suit by Grzelak in September, The RealReal, itself, and a number of the same individual defendants were named in two separate putative class actions alleging violations of federal securities laws. 

Because Grzelak’s lawsuit “challenges substantially similar alleged conduct and involves substantially similar questions of law and fact as alleged in the federal securities action” that The RealReal shareholder Michael Sanders filed in November 2019, in which he accused the company and its initial public offering (“IPO”) underwriters, of misleading investors about the nature of it authentication process, the parties call the move to stay Grzelak’s case for the time being appropriate.

At the same time, the parties note that a similar lawsuit that was filed in a California state court in October 2019 (just months after The RealReal’s late June 2019 IPO) has also been stayed pending the outcome in Sanders’ federal case. 

Against that background, the filing states that “upon occurrence of any of (1) the dismissal of [Sanders’] Federal Securities Action and the State Securities Action, with prejudice, by the respective courts, and exhaustion of all appeals related thereto; or (2) the denial of all motions to dismiss the Federal Securities Action filed by defendants in that action; or (3) either of the parties to this stipulation has given written notice that they no longer consent to the voluntary stay of this Action.” 

The RealReal and its various directors have come under fire since its IPO for allegedly disseminating “false and misleading” information, including in their IPO documentation, about its operations, including by “downplay[ing] the risk that [its] authentication process was inadequate.” All the while, that the defendants were allegedly “aware of or recklessly disregarded the fact that the false and misleading statements were being issued concerning the company.” 

(A rep for The RealReal told TFL last month that “shareholder lawsuits are fairly common once a company goes public and there is a dip in its stock price – the allegations in this derivative lawsuit are not new and arise from our IPO,” and emphasized that the company’s “authentication team is highly trained (and receives daily ongoing training) and qualified to authenticate the brands and categories they receive.”)

In particular, Sanders asserts in his complaint that The RealReal defendants – including its IPO underwriters, Credit Suisse, Bank of America, and UBS, among others – “made false and/or misleading statements and/or failed to disclose that: (1) the company’s employees received little training on how to spot fake items; (2) the company’s strict quotas on its employees exacerbated product authentication issues; (3) the potential for counterfeit or mislabeled items to make it through company’s authentication process was higher than disclosed; and (4) as a result, the defendants’ statements about the company’s business, operations, and prospects were materially false and misleading and/or lacked a reasonable basis at all relevant times.” 

As a result, Sanders claims that he and other shareholders “purchased shares of The RealReal common stock at artificially inflated prices pursuant and/or traceable to the company’s IPO,” and were damaged, thereby, prompting him to file the class action lawsuit, accusing the defendants of violating various sections of The Securities Act of 1933.  

The Rise in Stock-Drop Litigation

Sanders’ case is a quintessential stock-drop lawsuit. Such cases generally come about, as Bloomberg’s Matt Levine put it several years ago, when “a company announce[s] bad news and its stock price goes down” below its offering price. For The RealReal, that bad news was largely prompted by CNBC’s 2019 investigative report that “showed that the company’s authentication process was not as robust as it led consumers to believe.” 

“When this happens,” Levine notes, “enterprising lawyers will sue the company saying that it should have announced the bad news earlier and that innocent shareholders were tricked into buying stock because they didn’t know about the bad news.” In other words, plaintiffs’ attorneys will argue that a company or its employees fraudulently misstated or withheld information that would have been material to buying or selling shares in the company.

Hardly a novel type of litigation, stock-drop cases have become particularly common in recent years, as an increasing number of buzzy startups make their respective debuts on the stock market. With the growing number of IPOs in mind, from giants, such as Facebook, Twitter, Tesla, and Alibaba, to the likes of Airbnb, WeWork, Lyft, and The RealReal, the latter of which all listed publicly last year, “Experts are forecasting a surge in IPO litigation,” according to Inc.’s Guadalupe Gonzalez, who notes that the number of IPO-related lawsuits have doubled since 2013, citing data from litigation research firm ISS Securities Class Action Services

“IPOs by their nature tend to be more volatile than other types of stock, so it is a natural phenomenon that we would have suits against IPOs,” Priya Cherian Huskins, senior vice president at insurance brokerage firm Woodruff Sawyer, told Inc., which noted that it was seven months after its September 2018 IPO that online ticketing firm Eventbrite was hit with a stock-drop lawsuit. Lyft, on the other hand, was named in a barrage of suits a little more than two weeks after its IPO in 2019. For The RealReal, the first of such suits came roughly three months into public trading.  

Stock-Drops During COVID

As for how such a rise in stock-drop suits is faring during the COVID-19 pandemic, this trend is only expected to intensify. Vinson & Elkins LLP asserted in a client note in March that “enterprising plaintiffs’ attorneys have already begun seeking to take advantage of the stock market declines that have accompanied the COVID-19 outbreak by filing class action lawsuits.” The firm asserts that while the COVID-19 health crisis – and the sweeping business disruptions and resulting stock market volatility that have come with it – “is certainly unprecedented, such stock-drop lawsuits are not.” 

Winston & Straw stated in a note of their own that “while there is, of course, still enormous uncertainty around the COVID-19 pandemic, it is vitally important for public companies to consider and constantly revisit whether they have provided and are providing appropriate disclosure regarding the effects the virus has had, and is expected to have, on their business.”