Pending Court Approval, RealReal To Pay $ 11.5 Million And Carry Out Operational Reforms To Settle Shareholder Lawsuits
THE LAW OF EXCLUSIVE FASHION – RealReal to Pay $ 11.5 Million and Reform Existing Authentication Practices, Whistleblower Policy and “Retail Practices and Customer Relations” Monitoring Policy to Settle Two Ongoing Shareholder Lawsuits , assuming both sets of plaintiffs get the light green from the respective US federal courts. As of this month, plaintiffs in two separate cases filed against The RealReal (“TRR”) have alerted the courts in California and Delaware, respectively, that they have reached settlement agreements with the luxury retailer and its various directors and officers in developments that bring two cases that make the headlines and approach a final resolution after more than a year of litigation.
In the first case, which was filed in U.S. District Court for the Northern District of California in November 2019, lead plaintiff Michael Sanders accuses TRR, its founder and CEO Julie Wainwright, former CFO Matt Gustke, the chief accounting officer Steve Lo, board members such as Stefan Larsson and the Company’s IPO underwriters, including Credit Suisse Securities, B of A Securities and UBS Securities, (the âDefendantsâ) for violating the federal securities laws.
Specifically, Sanders and his other plaintiffs Nubia Lorelle and Garth Wakeford allege that the defendants misled TRR investors about the nature of the company’s authentication process by making “false and misleading statements” in the company’s documents. offer published in connection with the IPO of RTR in June 2019 and in other public statements made by the company thereafter.
For example, the plaintiffs have asserted that despite TRR’s claims in its 2019 IPO files that its âhighly qualified experts build confidence in our buyer base by thoroughly inspecting the quality and condition of, and by authenticating, every item we receive, âtheâ TRR authentication process fell far short of this description âas theâ vast majority of so-called âauthenticatedâ items by [TRR] were in fact only evaluated byâ¦ low-paid employees, often with little or no experience in fashion or luxury goods.
The “false and misleading statements and omissions of material facts” that the TRR and its management allegedly made about its “alleged authentication process” served to “artificially inflate” the price of TRR’s shares, the complainants say. then to harm those same shareholders âwhen artificial inflation dissipatedâ following several media reports on the âtrueâ nature of the TRR authentication process.
In the unopposed motion for preliminary approval of the settlement they filed on Nov. 5, the plaintiffs alert the court to the proposed settlement, which includes $ 11 million to be shared between the class members and their lawyers. The plaintiffs argue that the scope of the settlement and the corresponding release of claims against the plaintiffs “is reasonable” and that the preliminary approval “is warranted because the settlement is the product of serious, informed and non-collusive negotiations between experienced lawyers. and a highly qualified mediator.
In addition to arguing that the court should pre-approve the settlement, the plaintiffs are pushing the court to conclude that the action and the settlement group – that is, all the people and entities who bought common stock of the TRR from June 27, 2019 to November 20, 2019, and have been damaged – suitable for class certification. Ultimately, the plaintiffs asked the court to schedule a settlement hearing “to determine whether the proposed settlement, the proposed allocation plan and lead counsel’s motion for the award of legal fees and expenses. ‘lawyer and compensatory indemnity to the plaintiffs should be approved’.
A hearing on the matter is scheduled for March 24.
The plaintiffs’ filing comes almost exactly three months after TRR reported second-quarter earnings, in which it cited a net loss of $ 70.7 million for the period, including “a charge from approximately $ 11 million which was recorded as a legal settlement payable “. At the time, TRR did not disclose which matter the settlement arose from; although TFL noted at the time that it was likely related to the Sanders case.
Not the only settlement on the horizon for TRR, also on November 5, plaintiffs Iwona Grzelak and Junior Aguirre filed an unopposed motion for preliminary approval of the derivative settlement in the similar – but separate – consolidated cases that they filed last year, accusing TRR board members and management of “intentional or reckless breach of their fiduciary duties” as directors and / or officers, and violation of the state Securities Exchange Act -United in the process.
In the corresponding supporting brief that they filed on November 5, Grzelak and Aguirre summarize the allegations at the heart of their case, claiming that if the TRR did show up – both in its IPO documents and in subsequent statements by its management team – as “the world’s largest online marketplace for authenticated and returnable luxury goods”, TRR’s authentication operations were “nowhere near as robust as the defendants claimed. , and most of the articles allegedly “authenticated” by [TRR] were simply reviewed by the editors of TRR, who had minimal training or experience in mode and authentication. ”
As a result, the two plaintiffs claim that “hundreds of counterfeit articles allegedly processed by the [TRRâs] rigorous authentication procedures were sold to TRR clients â, and during all this time,â between June 27, 2019 and November 20, 2019, the individual [TRR officer and management] the defendants breached their fiduciary duties by making and / or causing the company to make a series of false and misleading representations and omissions regarding TRR’s authentication processes, risk exposure and growth and claimed success, and failing to maintain internal controls.
Fast forward and after an attempt at mediation and three months of back and forth, the parties reached an agreement on “the material terms of the settlement”. Now, in the United States District Court for the District of Delaware is a two-part settlement whereby TRR agreed to “pay the plaintiffs’ attorney $ 500,000 for their fees and expenses,” under subject to court approval, and agreed not to object to “service rewards” for the two plaintiffs up to $ 1,500. Reforms are also in play, which “TRR, or its board of directors, as the case may be, will implement … for at least three years after the date on which the court issues the final order and judgment.”
Specifically designed “to address and mitigate the risk of recurrence of alleged misconduct in” the case at hand, the reforms require TRR to improve its authentication practices, including by “incorporating[ing] biannual assessments of all authentication staff and certifications in the company’s existing training programs “by the TRR COO, who” will oversee TRR training for staff engaged in the authentication of TRR products’; and the adoption of a new board oversight policy on the company’s retail practices and customer relations, including “a semi-annual report to the board by the chief operating officer or its representative regarding the oversight of TRR’s retail practices and the company’s customer relationships â.
Beyond this, the TRR will create a ‘Risk and Compliance Committee at the management level to determine, implement and evaluate the risk management policies of the TRR and the functioning of the TRR risk management framework. in order to identify the TRR’s compliance risk exposure â. It will also make “amendments to [its] Whistleblower Policy and Procedures to specifically state that the company’s reporting channels can be used to “report concerns about business practices, business ethics or personal conduct, integrity and professionalism.”
The complainants say the regulatory reforms represent “a material and substantial improvement in the corporate governance of TRR and provide for new policies and procedures that will help prevent the recurrence of the alleged wrongdoing” in the present case.
By asking the court to “pre-approve the settlement, order the issuance of the settlement notice and schedule the settlement hearing to consider final settlement approval,” the plaintiffs argue that the settlement “responds. significantly to problems [that they] raised in Consolidated Action and provides excellent resolution for TRR through Reforms. “
TRR confirmed the settlement’s developments on Monday, stating that the terms of the settlement are subject to preliminary and final court approval.
Third Quarter Results
In addition to news on the settlements front, TRR this week released its third quarter results, posting revenue of $ 118.84 million for the three-month period to September 2021, up 53% compared to the third quarter of 2020 and 46% compared to the third quarter of 2019. The luxury retailer revealed that the gross value of its merchandise (i.e. the value of the luxury goods it sold in during the quarter) increased by 50% and 46% compared to the same periods in 2020 and 2019, respectively. Meanwhile, for the 757,000 orders processed in the third quarter, the average value was $ 486, a 9% year-over-year increase.
Reflecting on the state of the business, CEO and founder Julie Wainwright said in a statement Monday: Season. Additionally, we believe The RealReal’s unique business model is largely isolated from supply chain shortages and some of the inflationary impacts many retailers experience. ”
Wainwright added, âOverall our business is experiencing some very positive trends and we believe these trends will continue through the end of the year and into 2022. While we are in the early stages of development ‘Optimizing operating expenses, we believe the business is starting to see the benefits of our previous investments, which will create leverage as we move towards profitability in the coming quarters.
The cases are Sanders, et al. v. The RealReal, Inc., et al. 5: 19-cv-07737 (ND Cal), and Iwona Grzelak v. Julie Wainwright, et al, 1: 20-cv-01212 (D. Del.).