With the passage of time, the impact of the pandemic on business and commerce has evolved, both at the level of the economy as a whole and at the company-specific level. Companies that suffered early in the outbreak are now returning to form, while companies that prospered due to pandemic-related conditions are now returning to earth. One company that unquestionably flourished at the outbreak of the pandemic is home exercise equipment company, Peloton Interactive. The company’s share price has recently declined as the company has experienced declining demand for its products and services. A new COVID-related securities lawsuit has now been filed against the company, based on allegations pertaining to the company’s alleged misrepresentations about the company’s ability to sustain its pandemic-related sales boost. A copy of the November 18, 2021 related securities suit can be found here.
On November 18, 2021, a plaintiff shareholder filed a securities class action lawsuit in the Southern District of New York against Peleton and three of its directors and officers. The complaint purports to be filed on behalf of investors who purchased the company’s securities between December 9, 2020 and November 4, 2021.
The complaint begins by noting that at the outset of the pandemic, “Peleton experienced unprecedented demand for its products and services.” The report also notes that investors were “highly focused on whether Peleton’s growth would decline once vaccines were approved, businesses reopened, and individuals could return to the gym.” The complaint alleges that the defendants “repeatedly, falsely assured investors that Peleton’s recent success was not primarily due to COVID-related increased demand, but rather that the Company’s growth and financial results were sustainable and would continue post-COVID.”
The complaint quotes from a response to an investor question on December 9, 2020 (the first day of the class period) in which a company representative allegedly said that Peleton’s results “have noting to do with COVID,” rather reflected a more basic pattern of individuals wanting to stay fit. The complaint also quotes from company statements to the effect that the company’s continued investment in increased numbers of bikes and other equipment produced “were sound investments that would enable Peleton to align supply and demand of its products.” The complaint also quotes a February 4, 2021 shareholder letter stating that the rising inventory levels the company was reporting “reflected outstanding demand including orders that had not yet been filled, rather than excess supply that outpaced waning demand.”
The complaint alleges that throughout the class period, the company’s representatives continued to assert that the company would continue to succeed and grow post-COVID, representations the complaint alleges were “false.” The complaint alleges that “in truth,” the company’s class period financial results “were primarily driven by COVID-related increases in demand for at-home exercise options.” As demand for at-home exercise options lessened, “demand for Peloton’s equipment and subscription services have declined substantially.”
The complaint alleges that “the truth began to emerge,” first, on August 26, 2021, when the company identified the material weakness in its financial controls relating to its inventory levels, which caused the company’s share price to decline 8.5%. The complaint alleges that the company nevertheless continued to provide reassurance to investors including robust fiscal year revenue guidance.
The complaint further alleges that on November 4, 2021, Peloton “shocked investors” by lowering its fiscal year revenue guidance by a substantial amount “due to declining demand as its customers were increasingly free to exercise outside the home.” The company also disclosed that its inventory value, including finished products held by the company, had increased by 35% over the prior period. The complaint alleges that the company’s share price declined 35% on this news.
The complaint alleges that the defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. The complaint seeks damages on behalf of the plaintiff class.
By my count, this new lawsuit represents the 39th COVID-related securities suit to be filed since the initial coronavirus outbreak in the U.S. in March 2020. The lawsuit is also the 15th COVID-related securities suit to be filed so far in calendar year 2021. Though the bulk of the COVID-related securities suits so far were filed in 2020, the fact is that there still has been a substantial among of coronavirus-related securities litigation this year.
The new lawsuit against Peloton arguably represents an interesting new variant in the kinds of circumstances that are leading to securities litigation. The prior pandemic-related securities suits involved three general types of companies: first, companies that experienced a coronavirus outbreak in their facilities (cruise ship lines, private prison systems); second, companies that claimed they would be able to prosper from the pandemic (diagnostic testing companies, vaccine developers); and third companies whose operations or finances were disrupted by the pandemic (real estate developers, private hospital systems).
The lawsuit against Peloton does not fall into any of these three general categories. Instead, the Peleton lawsuit involves a company whose fortunes had initially prospered because of the coronavirus outbreak but whose business then lagged after pandemic-caused circumstances eased. The Peloton lawsuit is not actually the first in this new category. As I noted here in connection with the lawsuit filed earlier this month against online webinar hosting company ON24, that company also experienced a significant pandemic-related surge in demand for its services at the outset of the outbreak, but, after the company had completed an IPO, the company experienced decreased demand as the pandemic-related circumstances changed.
The new lawsuit against Peloton will not be the last COVID-19-related securities lawsuit to be filed. I also suspect strongly that it will not be the last securities suit involving a company that prospered at the outset of the coronavirus outbreak but whose results changed as the pandemic evolved. As the complaint in the Peloton lawsuit suggests, what the company says about the changing circumstances or about the prospect for changing financial results due to changing circumstances will have a lot to do with whether or not a given company will experience a securities lawsuit.
One final note. This is not the first securities class action lawsuit to be filed this year against Peloton. As reported here, the company was sued in April 2021 based on allegations that the company had made misrepresented the safety of its products. The lawsuit followed media reports concerning injuries to children involving the company’s equipment.