The RealReal is close to settling the lawsuit filed against it in November 2019 by a number of shareholders, who are accusing the resale giant, an array of its executives, and its big-name initial public offering (“IPO”) underwriters of misleading investors about the nature of its authentication process leading up to and in the wake of its June 2019 IPO, thereby, “artificially inflating” the price of the company’s NASDAQ-traded shares and then damaging those same shareholders “when the artificial inflation dissipated.” In a filing late last month, counsel for lead plaintiff Michael Sanders sought to stay deadlines in the case, alerting the court that the parties had reached “an agreement in principle to resolve” the case.
In a since-approved stipulation and proposed order staying motion deadlines dated July 28, lawyers for both sides revealed that while the parties “were unable to resolve this matter at the mediation, after weeks of continued settlement discussions under Judge Phillips’ guidance, [they] accepted a mediator’s proposal and reached an agreement in principle to resolve this action on July 27, 2021, subject to certain matters including formalizing the final terms of settlement.” The stipulation also stated that the plaintiffs will file a motion for preliminary approval of the settlement within 60 days of the court entering its approval.
“Misrepresentations and Omissions”
The agreement between the parties comes a couple of months after The RealReal (“TRR”) and the individual defendants – including TRR founder and CEO Julie Wainwright, Chief Financial Officer Matt Gustke, Chief Accounting Officer Steve Lo, TRR board members like Stefan Larsson, and underwriters, such as Credit Suisse Securities, B of A Securities, Inc., and UBS Securities LLC, among others – sought to have two of the Securities Exchange Act counts in the plaintiffs’ second amended complaint tossed out.
At the heart of the plaintiffs’ case is their allegation that TRR “made untrue statements of material fact” – including that all of its items are subject to a “rigorous authentication process” by “highly trained experts” – and/or failed to include material facts in its registration documents prior to its IPO, and that such “false and misleading statements continued in the months following the IPO, thereby artificially inflating the stock’s market price.” Beyond that, the plaintiffs have pointed to “a number of additional false and misleading statements and omissions of material fact” that TRR and co. have made about its “purported authentication process.” For instance, the plaintiffs claim that on the day of TRR’s IPO, Wainwright appeared on CNBC, and said that “every single item on the site has already been inspected, authenticated before it gets on the site.”
Months later, the plaintiffs assert that the “real” nature of TRR’s authentication process – and thus, its alleged “misrepresentations and omissions” – came to light in articles published by CNBC and other sites, thereby causing “the value of [TRR] common stock to decline substantially.” This caused the plaintiffs to experience “sustained damages,” and prompted them to file suit, accusing TRR of violating the Securities Act and the Exchange Act. (The suit also names a number of TRR executives and board members, as well as its IPO underwriters as defendants as a result of the power that they had “to direct the actions of … the company to engage in the unlawful acts and conduct complained of herein,” thereby, acting “with scienter [as] they knew that the public documents and statements issued or disseminated in the name of the company were materially false and misleading.”)
The plaintiffs filed a second amended complaint after a California federal court agreed to dismiss part of the federal securities action, and shortly thereafter, TRR filed a second motion to dismiss on the basis that the latest version of the twice-amended complaint “adds scant new allegations that do not save the Exchange Act claims from dismissal.”
Motion to Dismiss
In their June 14 motion to dismiss, the San Francisco-based luxury resale pioneer and co. argued that even after Sanders and two other named plaintiffs had the opportunity to amend their complaint, they failed – again – to show that the defendants violated the Exchange Act by allegedly misleading consumers as to the nature of TRR’s authentication practices and “the risk that [its] authentication process was inadequate.” As a result, the price of the company’s stock dropped when details about the alleged shortcomings of its methods of separating the real from the counterfeit were made public by way of media reports in 2019.
Primarily, TRR and co. have argued that the plaintiffs failed to sufficiently establish that the challenged statements are, in fact, false or misleading, as required for a viable Exchange Act claim, with the statements including: (1) “Authentication is literally everything to what we do. It is central to who we are, to what our brand stands for. It is in our name, it is – there’s nothing more important to what we do;” (2) “authentication is core and central to our brand” … and that copywriters “receive daily, weekly, and monthly trainings;” (3) “within their first month on the job, we require that our copywriters receive a minimum of 30 hours of training, including onboarding, job shadowing, daily training sessions, and quizzes;” and (4) that “each copywriter/authenticator gets 30 hours of training.”
According to TRR, the plaintiffs’ securities fraud claim under section 10(b) of the Exchange Act requires that they allege facts “sufficient to establish a material misrepresentation or omission,” among other elements. The plaintiffs fail on this front, per TRR, as the statements at issue are not actually misleading – i.e., they do not “affirmatively create an impression of a state of affairs that differs in a material way from the one that actually exists.” TRR further asserted that at least some of the statements, namely, the ones about how authenticity is at the heart of its business, amount to “vague, generalized assertions of corporate optimism or statements of ‘mere puffing, [which] are not actionable.’”
Beyond that, TRR argued that the plaintiffs’ Exchange Act claim fails because they have not adequately met the additional elements required, as they have not established a strong inference of scienter, and their loss causation allegations are inadequate to support their alleged class period for the Exchange Act claims.
In an order on July 28, the court granted the parties’ stipulation and stayed the upcoming deadlines in the case.
THE BROAD VIEW: TRR is not out of the woods just yet, as the impending settlement is likely to bring a related lawsuit back to the fore after it was put on hold last fall pending the outcome in the case at hand. In her September 2020 complaint, TRR shareholder Iwona Grzelak accused an array of individuals tied to the company of intentionally or recklessly breaching their fiduciary duties as directors and/or officers, and violated the U.S. Securities Exchange Act in the process. 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 TRR shareholder Michael Sanders filed in November 2019, in which he accused the company and its IPO underwriters, of misleading investors about the nature of it authentication process, the court agreed to stay Grzelak’s case.
And still yet, The RealReal is still embroiled in its long-running legal battle with Chanel, which was also put on hold this spring, with Judge Gabriel Gorstein of the U.S. District Court for the Southern District of New York issuing a joint stipulation and order in April, thereby, staying the proceedings in the trademark infringement and counterfeiting, false advertising, and unfair competition case for three months, in light of an agreement between the parties to participate in mediation. That stay has since been extended through September 20, 2021.
Meanwhile, TRR provided its latest monthly business update this week, revealing that its Gross Merchandise Volume (i.e., the total value of the pre-owned luxury goods sold) for the mont of July amounted to approximately $116.6 million, an increase of 56 percent on a year-over-year basis, and 53 percent compared to the same period in 2019. Additionally, the reseller reported that its Average Order Value for the 31-day-period was approximately $502, up 13 percent year-over-year and 16 percent compared to the same period in 2019.
The case is Michael Sanders, et al. v. The Realreal, Inc., et al. 5:19-cv-07737 (N.D. Cal).
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