Pending court approval, The RealReal pays $ 11.5 million and implements operational reforms to resolve shareholder claims

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THE FASHION LAW EXCLUSIVE – RealReal will pay $ 11.5 million and reform its existing authentication practices, whistleblower policies, and regulatory policies for “retail practices and customer relationships” to resolve two ongoing shareholder lawsuits, provided the two groups of plaintiffs are given the go-ahead from their respective US Federal courts. As of this month, plaintiffs have had two separate lawsuits filed against The RealReal (“TRR”) in California courts or two headline-grabbing cases that are nearing a final resolution after more than a year of litigation.

In the first case, filed in November 2019 in the U.S. District Court for the Northern District of California, lead plaintiff Michael Sanders TRR, its founder and CEO Julie Wainwright, accused former CFO Matt Gustke, chief accounting officer Steve Lo, board members like Stefan Larsson and the company’s IPO underwriters, including but not limited to Credit Suisse Securities, B of A Securities and UBS Securities (the “Defendants”), who violate federal securities laws.

Specifically, Sanders and the named plaintiffs Nubia Lorelle and Garth Wakeford allege that the defendants misled TRR investors about the type of authentication process used by the company by referring to the offer documents that were issued in connection with TRR’s IPO in June 2019 and in addition were “false and misleading statements” made public statements by the company afterwards.

For example, plaintiffs have alleged that, despite claims made by TRR in its 2019 IPO filings, TRR claims that its “highly trained experts build trust in our buyer base by thoroughly examining and assessing the quality and condition of every item we receive.” authenticate ”, TRR’s“ authentication process ”fell far short of this description” because the “vast majority of the elements that were supposedly ‘authenticated’ by [TRR] were actually only rated by … low-wage hourly workers who often have little or no experience with fashion or luxury products. “

The “false and misleading statements and omissions of material facts” that TRR and its management allegedly made about its “alleged authentication process” served to “artificially inflate” the price of TRR shares, argue the plaintiffs, and then harm the same shareholders, “If” the artificial inflation disappeared “according to several media reports about the” true “nature of the TRR authentication process.

In the undisputed motion for preliminary approval of the settlement, which they filed on Nov. 5, plaintiffs inform the court of the proposed settlement, which includes an amount of $ 11 million to be shared among class plaintiffs and their attorneys . The plaintiffs claim that the scope of the settlement and the corresponding indemnification of the claims against the plaintiffs is “appropriate” and the preliminary approval is “justified because the settlement is the result of serious, informed and unsettled negotiations between experienced lawyers and a highly qualified mediator . ”

In addition to asking the court to provisionally approve the settlement, plaintiffs urge the court to determine that the claim and settlement class – that is, any person and entity that acquired TRR common stock from June 27, 2019 to November 20, 2019, and damaged – are eligible for class certification. Ultimately, plaintiffs asked the court to hold a settlement hearing “to determine whether the proposed settlement, proposed distribution plan, and principal solicitor’s motion for attorney fees and expenses and plaintiffs’ settlement should be approved”.

A hearing on the matter is scheduled for March 24th.

Plaintiffs’ lawsuits are filed almost exactly three months after TRR reported its earnings for the second quarter, which reported a net loss of $ 70.7 million for the period, including “a charge of approximately $ 11 million -Dollars recorded as an accrued legal settlement “. At this point, TRR did not disclose which case the settlement was from; However, TFL stated at the time that it was probably related to the Sanders case.

Derivative action

Not the only settlement in sight for TRR, plaintiffs Iwona Grzelak and Junior Aguirre also filed an uncontested motion on November 5 for preliminary approval of the derivative settlement in the similar – but separate – consolidated proceedings they had filed last year , and accused the directors of TRR and management of “willful or negligent breach of their fiduciary duties” as directors and / or officers and of violating the US Securities Exchange Act.

In the corresponding support briefing they held on the 5th world’s largest online marketplace for authenticated, consigned luxury goods, “TRR’s authentication processes were” nowhere near as robust as the defendants claimed, and most items were allegedly ‘authenticated’ by [TRR] were only reviewed by TRR copywriters who had minimal training or experience in fashion and authentication. ”

As a result, the two plaintiffs allege that “Hundreds of counterfeit items allegedly sold by the [TRR’s] rigorous authentication procedures were sold to the customers of TRR “and meanwhile” between June 27, 2019 and November 20, 2019 the individual [TRR officer and management] Defendants have violated their fiduciary duties by making a number of materially false and misleading statements and omissions regarding TRR’s authentication processes, risk exposure, and alleged growth and success and / or by causing the company to fail internal controls to be maintained. ”

In a rapid run-through and after a mediation attempt and three months to and fro, the parties agreed on the “essential terms of the settlement”. Now, in a two-pronged settlement in the US District Court for the District of Delaware, TRR has agreed to “pay plaintiffs attorney $ 500,000 for their fees and expenses,” pending court approval, and has agreed to do so not doing against “service bonuses” for the two plaintiffs of $ 1,500. Also involved are reforms that “TRR or its board of directors … will implement for at least three years after the day on which the court announces the final order and judgment.”

The reforms, specifically tailored “to address and mitigate the risk of recurrence of the misconduct alleged in this case,” require TRR to improve its authentication practices, including through “incorporation”.[ing] Semi-annual evaluations of all authentication personnel and certifications for the company’s existing training programs “by the Chief Operating Officer of TRR, who” oversees the training of TRR for employees involved in the authentication of TRR products “; and Adopt a new policy for the Board of Directors’ oversight of the company’s retail sales practices and customer relationships, including “semi-annual reporting by the COO or his agent to the board of directors on overseeing TRR’s retail sales practices and the company’s customer relationships”.

Language from Plaintiffs’ Motion Regarding: Whistleblower Policy Reform

In addition, TRR will establish a “Management-level Risk and Compliance Committee to establish, implement and evaluate TRR’s risk management policy and the operation of the TRR risk management framework to identify TRR’s compliance risk”. There will also be “changes to” [its] Whistleblower policy and procedures to specifically indicate that the company’s reporting channels may be used to report ‘concerns about business practices, ethical business or personal conduct, integrity and professionalism’. “

The plaintiffs claim that the settlement reforms in the present case “represent a substantial and essential improvement in TRR’s corporate governance and provide new policies and procedures that will help prevent the alleged misconduct from occurring again”.

By asking the court to “provisionally approve the settlement, arrange for the settlement notice to be issued, and schedule the settlement hearing to consider final approval of the settlement,” plaintiffs claim that the settlement “usefully addresses the issues.” [that they] raised in the consolidated action and provides an excellent solution for TRR through the reforms. “

TRR confirmed the settlement development on Monday and stated that settlement agreements require preliminary and final approval by the courts.

Third quarter results

In addition to the news on the settlement front, TRR released its third quarter results this week, posting sales of $ 118.84 million. The luxury retailer announced that its gross merchandise value (i.e. the value of the luxury goods it sold during the quarter) increased by 50% and 46% in 2020 and 2019, respectively, compared to the same periods. For the 757,000 orders processed in the third quarter, the average was $ 486, up 9% year over year.

Statutory comparative amounts reflected in TRR’s third quarter operating statement

Regarding the company’s position, CEO and Founder Julie Wainwright said in a statement Monday, “We believe the operational and supply side effects of COVID-19 on our business are effectively behind us, and we are well positioned for a strong holiday Season. Additionally, we believe that The RealReal’s unique business model is largely isolated from supply chain bottlenecks and certain inflationary effects of many retailers. ”

Wainwright continued, “Overall, our business is experiencing very positive trends and we believe these trends will continue through the end of the year and into 2022. While we are at the beginning of providing operational expenses, we believe the company is at the beginning “to see the benefits of our previous investments that will leverage our pursuit of profitability over the coming quarters.”

The falls 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.).


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