Competing shareholder class actions against Peloton show 'everything is securities fraud' trend

(Reuters) - Did exercise equipment company Peloton Interactive Inc defraud investors when it insisted last month that its signature treadmill was safe, despite an urgent April 17 warning from the U.S. Consumer Product Safety Commission about children getting trapped under its rear roller?

The Rosen Law Firm says so. The plaintiffs shop filed a shareholder class action on April 29, claiming that Peloton’s shares fell more than 14% when CEO John Foley said in a letter posted to the company’s website that Peloton intended to continue selling the treadmills.

Or did Peloton defraud its shareholders when it reversed course on recalling the treadmills on May 5? That's what the plaintiffs firm Pomerantz contends. It pointed out in a second shareholder class action against Peloton, this one filed on May 24 in the same Brooklyn federal court as the Rosen suit, that Peloton’s stock dropped another 14% after the company acknowledged that its previous hardline approach to the CPSC warning was a mistake.

Was it securities fraud when the company resisted recall – or securities fraud when it caved to the CPSC? Or both? The Rosen Firm, which filed that first complaint based on the 14% plunge in Peloton shares when the company said it would keep selling the treadmills, amended the complaint on May 6 to add allegations based on the May 5 share price slide when Peloton agreed to recall the equipment. According to the amended complaint, Peloton allegedly prolonged its deception of the market even after the Rosen Firm's first complaint presumably alerted investors of the fraud.

The company, I’m sure, has a different story. Peloton counsel Andrew Clubok of Latham & Watkins, who has entered an appearance in the Rosen case but not the Pomerantz class action, did not respond to my email query. But it's a good bet that the company will say none of its statements about the treadmill were fraudulent because it was disclosing facts and expressing opinions as the situation developed.

The duelling Peloton shareholder class actions are an example of the emerging prevalence of so-called event-driven securities litigation, in which investors sue whenever a company’s share price falls in response to a corporate trauma, whether it’s an oil spill, a sexual harassment scandal, a product liability crisis or a data breach.

The catastrophe need not have anything to do with the company’s underlying finances or accounting, the traditional bases for shareholder class actions. Instead, investors look back for corporate statements related to the crisis – in the Peloton suits, shareholders cited corporate statements about the high quality of the company's products and its commitment to safety – and claim the company deliberately deceived investors about risk. Bloomberg’s brilliant columnist Matt Levine summed up the phenomenon with characteristic wit in 2019: “Everything, everywhere is securities fraud.”

A December 2020 report from Institutional Shareholder Services described the recent rise of event-driven securities litigation, from about 6% of all securities class actions in 2018 and 2019 to nearly 11% in 2020. ISS said the rise was notable because event-driven class actions, broadly speaking, are based on “a more tenuous” theory than traditional accounting fraud class actions, asserting that “the occurrence or event upon which the case is based was the materialization of an under-disclosed or downplayed risk.”

In a bit of serendipity, my Reuters colleague Jody Godoy told me about a brand-new Cooley blog post on event-driven securities litigation when I told her about the Peloton suits. As the Cooley post notes, these suits have become such a discernible trend that the U.S. Chamber of Commerce, fearful of shareholder class actions based on COVID-19’s impact on corporations, called last year for the Securities and Exchange Commission to use its rulemaking authority to create a safe harbor for corporate statements about post-COVID plans.

Cooley also explained why event-driven shareholder suits are on the rise: They’re lucrative for plaintiffs lawyers. The post linked to a forthcoming article in the UC Irvine Law Review, “Is Everything Securities Fraud?” by law professor Emily Strauss of the Duke University School of Law. Strauss, who defined “event-driven” class actions as those based on events in which investors were not the primary victims of corporate conduct, homed in on a sample of suits filed between 2010 and 2015. Her first important finding is that more than 16% of the 500 class actions she examined fit her definition of “event-driven.” That’s an even higher number than I’ve seen in other reports.

Strauss found that the majority of the event-driven cases in her sample were brought against well-capitalized defendants by top-tier shareholder firms representing institutional investors. The cream of the shareholder bar, in other words, is betting on event-driven securities class actions.

And plaintiffs firms have good reason to do so, according to Strauss’ analysis. The event-driven suits in her sample were 20% likelier to survive defendants’ dismissal motions – and resulted in an average settlement amount that was double the size of the average settlement in the traditional securities fraud class actions in her sample. (The explanation, she hypothesized, could be that event-driven shareholder suits often piggyback on government investigations.) The Institutional Shareholder Services report from last December highlighted three recent event-driven securities class action settlements of more than $100 million. (The defendants were Equifax, BP and Signet Jewelers.)

Strauss’ paper poses some important policy questions that the data can’t answer. What’s the social benefit of compensating shareholders when they’re not the primary victims of corporate wrongdoing? Do event-driven shareholder suits deter corporate misconduct? Or are shareholders flawed avengers, considering that the corporate crisis may have been spurred by ambition to maximize the company’s share price? As the number of event-driven suits continues to rise, these questions are going to get more attention.

I reached out to the plaintiffs lawyers who filed the Peloton suits, Jeremy Lieberman of Pomerantz and Phillip Kim and Laurence Rosen of the Rosen Firm, to ask about how their cases intersect and diverge. None got back to me.

Opinions expressed here are those of the author. Reuters News, under the Trust Principles, is committed to integrity, independence and freedom from bias.

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