A recent Ninth Circuit decision reviving securities claims against a consumer products company and its executives highlights disclosure-related risks tied to consumer products companies’ distribution and execution capabilities that may warrant D&O underwriter consideration, particularly in light of recently revived IPO activity involving consumer products and services companies.

On February 4, 2026, the appellate court issued its opinion reversing the Washington District Court’s dismissal of a securities class action brought against pop culture product company Funko and its CEO and CFO on October 19, 2023 (Funko SCA). Funko investors filed their complaint following a 50% decline in Funko’s share price after the company disclosed that tens of millions of dollars of inventory would be written off due to problems associated with bringing a new distribution center online and a failed Enterprise Resource Planning (ERP) implementation. The Ninth Circuit affirmed dismissal of Funko investor claims tied to optimistic operational statements, but revived claims against the company and executives stemming from disclosures that allegedly treated existing operational failures as hypothetical future risks, as well as the related Section 20(a) control-person claims.

The Funko SCA ruling coincided with the recent public debuts of the consumer products companies Once Upon a Farm and Bob’s Discount Furniture, amid expectations that other consumer product and services companies may also pursue IPOs in 2026.  The discussion below examines the Funko securities class action, including the appellate court’s decision to allow certain claims to proceed and the resulting considerations for D&O underwriters of consumer product companies.

Funko SCA

The Funko SCA plaintiffs alleged that during the March 2022–March 2023 class period, Funko and its then-CEO and CFO repeatedly assured investors that inventory was “healthy” and “high quality,” that a consolidated distribution center was operational, and that infrastructure investments were proceeding as planned, while internally the company was experiencing severe inventory disorganization, fulfillment delays, and mounting levels of obsolete and unsalable products. The complaint alleges that, on November 4, 2022, the day after Funko ultimately disclosed tens of millions of dollars in inventory write-downs, abandoned the ERP implementation, and sharply reduced earnings guidance, its stock price declined precipitously.

In May 2024, the district court dismissed Funko SCA with prejudice, concluding that Funko’s executive statements were either non-actionable puffery, forward-looking statements protected by the PSLRA safe harbor, or insufficient to support a strong inference of scienter. The plaintiffs filed their appeal on October 21, 2024, on the ground that certain risk factor disclosures in Funko’s periodic reports were misleading because they described already-occurring inventory mismanagement and distribution failures as hypothetical future risks, meaning the risk disclosures themselves were false or misleading. They also argued that those allegations, together with Funko’s executive knowledge of the underlying problems, sufficiently pleaded scienter and thus supported both the Section 10(b) claims and the related Section 20(a) control-person claims.

On February 4, 2026, the Ninth Circuit issued its opinion, allowing certain securities claims to proceed. The appellate panel agreed that generalized statements about inventory quality, distribution progress, and operational momentum were not demonstrably false and therefore not actionable. However, the court held that plaintiffs plausibly alleged falsity with respect to risk factor disclosures that warned excess inventory and technology failures could occur, where the complaint alleged those risks had already materialized. The court emphasized that risk disclosures may be misleading when they present existing problems as hypothetical future contingencies, and that such statements are not shielded by the PSLRA safe harbor when the misleading aspect concerns present facts rather than future projections.

The Ninth Circuit further held that scienter was adequately pleaded as to those risk disclosures, reasoning that given the scale and centrality of the inventory and systems failures, a factfinder could reasonably conclude it would be “absurd” to believe senior executives were unaware that the disclosures were misleading when made. Because the court reinstated the underlying Section 10(b) claims tied to risk disclosures, it also revived the related Section 20(a) control-person claims and remanded the case for further proceedings.

Discussion

As investor interest in consumer IPOs begins to reemerge, the appellate court’s decision to revive the Funko SCA highlights how disclosure practices around inventory, logistics, and systems challenges can create meaningful D&O exposure for consumer companies entering the public markets.

By way of example, on February 6, 2026, both Once Upon a Farm and Bob’s Discount Furniture went public, trading on the New York Stock Exchange . Both are consumer products companies with different business models and target demographics. Once Upon a Farm, a premium children’s food company co-founded by Jennifer Garner, saw its shares rise approximately 18% on the first day of trading, notwithstanding its lack of profitability and its reliance on brand positioning, consumer loyalty, and celebrity cachet. By contrast, Bob’s Discount Furniture, a profitable Bain Capital–backed retailer serving a budget-conscious consumer base, raised approximately $331 million in IPO proceeds and traded flat following its listing. These offerings stand out against a broader backdrop in which only 15 PE-backed consumer and retail companies went public in 2025, the fewest in over a decade.

In light of recent renewed consumer product IPO activity, the Ninth Circuit’s decision in the Funko securities class action highlights the disclosure risks that can arise when execution challenges accompany rapid growth and public-market scrutiny. As alleged by investors, Funko’s business model depended on the rapid production and distribution of licensed consumer products with limited shelf lives, making inventory management, fulfillment capacity, and enterprise systems critical to performance. In 2022, Funko undertook two major infrastructure initiatives, a new ERP system and the consolidation of multiple warehouses into a single distribution center, that plaintiffs allege faltered almost immediately, resulting in mounting levels of unsalable inventory, fulfillment delays, and escalating costs.

Despite these developments, Funko’s periodic filings continued to warn that excess inventory and distribution disruptions could occur, language the Ninth Circuit held plausibly misleading if, as alleged, those risks had already materialized. The court’s analysis underscores that risk disclosures may be actionable when they characterize existing logistics and systems failures as hypothetical contingencies, highlighting a key source of disclosure-related D&O exposure for consumer companies scaling their operations.

Taken together, the Ninth Circuit’s decision to allow certain securities claims to proceed underscores disclosure risks that may be salient for D&O underwriters of consumer companies entering the public markets, whether growth-driven brands like Once Upon a Farm or scale-based retailers like Bob’s Discount Furniture. Although their business models differ, both rely on effective inventory planning, fulfillment capacity, and distribution infrastructure to support public-market expectations. Funko illustrates how breakdowns in these areas, especially during periods of rapid growth or transition, may give rise to securities exposure when disclosures frame known execution challenges as hypothetical risks.

For D&O underwriters, the Funko SCA decision highlights the possible need to scrutinize consumer product company disclosures concerning warehouse readiness, logistics capacity, inventory visibility, and enterprise systems, particularly where companies emphasize brand strength or growth narratives while simultaneously working to modernize back-end operations.

The views expressed in this article are exclusively those of the author, and all of the content in this blog has been created solely in the author’s individual capacity. This site article is not affiliated with the author’s company, colleagues, or clients. The information contained in this article is provided for informational purposes only, and should not be construed as legal advice on any subject matter.