Image: The RealReal

Since getting its start in 2011, the message from The RealReal has been simple: all of the pre-owned luxury goods it offers up are 100 percent authentic. In furtherance of its title as the world’s largest online marketplace for authentic luxury goods, the San Francisco-based company boasts what it calls “the most rigorous authentication process in the marketplace” for the pre-owned luxury goods it sells, making it “the only resale company in the world that authenticates every single item it sells.” In short: thanks to its “multi-point authentication process,” every product offered up on its e-commerce site and in its brick-and-mortar outposts is the real thing.

Those are the virtues that have enabled The RealReal (“TRR”) and its sweeping selection of Chanel bags, Celine wares, and (relatively) hard-to-come-by Hermes Birkin bags to find fans in a growing – and often dedicated – pool of brands and consumers, alike, and nab a valuation of $1.6 billion when it first listed on NASDAQ in late June 2019, raking in $300 million in funding to fuel further growth. Those very same virtues are now coming under fire, as one of the company’s shareholders is calling foul by way of a strongly-worded shareholder derivative lawsuit.

In the complaint that she filed in a Delaware federal court on September 10, TRR shareholder Iwona Grzelak claims that a number (but not all) of the company’s individual Board members – from founder Julie Wainwright to PVH Corporation president Stefan Larsson – and executives like Chief Financial Officer Matt Gustke and Chief Accounting Officer Steve Lo (collectively, the “defendants”) intentionally or recklessly breached their fiduciary duties as directors and/or officers, and violated the U.S. Securities Exchange Act in the process.

They failed to act in the best interest of TRR, according to the newly-filed suit, “by personally making and/or causing the company to make a series of materially false and/or misleading statements regarding its business, operations, and prospects” in official documentation filed with the U.S. Securities and Exchange Commission (“SEC”) leading up to TRR’s June 2019 IPO, as well as “in subsequent press releases, conference calls, and interviews.” Specifically, Grzelak claims that the defendants “represented to the investing public that [TRR’s] authentication process was extraordinarily robust, and was conducted by highly-trained experts.”

In its IPO documents, for example, TRR “noted the ‘pervasiveness’ of counterfeit goods in the luxury resale market, as well as a lack of effective authentication standards on the part of [its] competitors,” and set itself apart by “purporting that [its] ‘rigorous’ authentication process was critical to building and maintaining the trust of RealReal’s customers.”

Beyond that, Grzelak asserts that various high-ranking executives and board members touted the company’s authentication process, with TRR’s CFO Matt Gustke, for instance, stating at the 2019 Wells Fargo’s Consumer Conference that “every product that is brought into us we see physically and it goes through a multi-point brand specific or product specific inspection. And that product can be touched by multiple people throughout its journey before it even makes it to the site.” Around the same time, Wainwright stated in an interview on CNBC that “every single item on the site has already been inspected, authenticated before it gets on the site … We employ over 100 experts … and we put [the products] through a rigorous multi-point inspection process.”

The problem, per Grzelak, is that “such lofty representations” about TRR’s “robust” authentication system “were far removed from the reality of what was going on at the company,” which “receives pre-owned luxury goods from various consignors, and purportedly makes use of a large team of authenticators at its facilities to inspect, measure, and price such goods, while weeding out fakes and counterfeits.” 

The reality, she argues, is that “the large majority of the items that went through [TRR’s] authentication process were not inspected by expert authenticators, but by [TRR’s] copywriters, who were hourly employees with minimal training or experience in authenticating luxury goods, and who were forced to meet strict quotas which left them with little time to authenticate any given item” that is listed on its site or offered in its brick-and-mortar stores. “Predictably, due to the glaring faults in [TRR’s] authentication process, counterfeit luxury items consistently went undetected,” Grzelak alleges, “and hundreds of such items were sold to [TRR’s] customers.” 

Grzelak – who points to a handful of media reports/investigations from the likes of CNBC and Fashionista, and statements from previously-filed securities class action lawsuits as the basis for her allegations about the state of things at TRR – claims that the defendants “would have been aware” at the time the company filed its IPO documentation with the SEC that such documentation included “materially misleading information, and omitted certain key facts,” including about the nature of TRR’s authentication processes.

As a result of the foregoing “misconduct,” TRR’s officers/directors have subjected the company to losses by way of drops in its stock price, Grzelak argues, pointing specifically to price-drops resulting from media reports centering on “issues with [TRR’s] authentication procedures,” including allegations about “many of the serious, and as-yet undisclosed problems inherent in the system [like] the pressures placed on the company’s minimally trained ‘authenticators.” To date, these stock drops have resulted in “two securities fraud class action lawsuits,” one pending in the U.S. District Court for the Northern District of California and another pending in a California state court.

Unless addressed, the alleged actions by the individual defendants will cause TRR to continue to be “exposed to significant losses.” As such, Grzelak sets forth a handful of claims against the defendants, including for breaching their fiduciary duties, and thereby, causing TRR’s “business and operating results, including its gross merchandise value, to be negatively impacted.” More than that, she asserts an unjust enrichment claim on the basis that each of the defendants “either benefitted financially from the improper conduct or received bonuses, stock options, or similar compensation from [TRR] that was tied to the performance or artificially inflated valuation of [TRR], or received compensation that was unjust in light of the defendants’ bad faith conduct.”

Finally, she accuses the defendants of gross mismanagement, abuse of control, and waste of corporate assets, as well as violations of the U.S. Securities Exchange Act. (It is worth noting that the defendants are not being sued over TRR’s alleged pattern of selling counterfeits; they are being sued in connection with how they (and thus, TRR) characterized its authentication efforts, which ultimately resulted in damages).

Grzelak is seeking a declaration from the court that she “may maintain this action on behalf of [TRR]” (a formality in such a shareholder derivative lawsuit), as well as that the defendants “have breached and/or aided and abetted the breach of their fiduciary duties to [TRR].” She also calls for monetary damages to be determined at trial and an order from the court “directing [TRR] and the individual defendants to take all necessary actions to reform and improve its corporate governance and internal procedures to comply with applicable laws” and protect consumers.  

 UPDATED (September 18, 2020): After initially declining to comment, a representative for TRR told TFL, “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.  These allegations are similar to the existing shareholder litigation we’ve disclosed in our public filings, which the Company is vigorously defending against.”

“Our authentication team is highly trained (and receives daily ongoing training) and qualified to authenticate the brands and categories they receive,” the rep further noted, pointing to additional information on the company’s authentication page.

*The case is Iwona Grzelak v. Julie Wainwright, et al, 1:20-cv-01212 (D. Del.)