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MANHATTAN (CN) — A federal appeals panel issued a split ruling on Wednesday that vacated in part the dismissal of Peloton investors’ securities fraud claims that the fitness technology company misled shareholders about excess inventory in financial reporting after a historic spike in business during the Covid-19 lockdowns of 2020.
The shareholder plaintiffs accused the New York-based fitness tech company of misleading investors in 2021 by claiming demand for its high-tech home fitness products remained strong, even as sales plunged and unsold inventory piled up when gyms reopened and consumers resumed pre-pandemic routines.
“We agree with the district court that most of the alleged misstatements were not actionable,” Trump-appointed U.S. District Judge Steven Menashi wrote in the panel’s opinion. “But we conclude that the plaintiffs plausibly alleged actionable misstatements or omissions based on three statements. We vacate the judgment of the district court insofar as it dismissed the claims based on those statements, and we otherwise affirm.”
One of the revived claims concerned an August 2021 earnings call, where a Peloton employee described a $400 price drop for the company’s signature Peloton Bike+ as “absolutely offensive” — rather than as a defensive attempt to mitigate the losses from the company’s excess inventory.
Menashi was joined in the majority opinion by U.S. Circuit Judge Denny Chin, a Barack Obama appointee.
In a separate dissenting opinion, U.S. Circuit Judge Jon O. Newman challenged that the price drop statement was neither false nor misleading because the price reduction could have been both offensive and defensive.
“First, Foley did not say that the price was reduction was not defensive. He simply asserted that the statement was offensive, which it was,” the Jimmy Carter appointee wrote. “Furthermore, the majority’s concern with Foley’s response ignores the obvious fact that a price reduction inevitably serves both an offensive and a defensive purpose, unless production of new product is increased, which no one claims occurred in this case as of August 2021.”
“In the circumstances of this case, the offensive and defensive purposes are virtually two sides of the same coin,” Newman continued. “Any reasonable investor, hearing that the price reduction was offensive, would understand that the reduction would also be defensive because Peloton would reduce inventory (where else would the bikes come from?).”
Newman also predicted in his dissent that the revival of the shareholders’ claims on appeal will be unlikely to bring about any windfall for the plaintiffs.
“So, although I dissent from the Court’s ruling that statements 14 and 20 were adequately pled to survive the motion to dismiss, I have a high degree of confidence that the complaint will ultimately be dismissed for lack of an adequate pleading of scienter and that the heavy pressure often felt to settle a class action securities fraud case will not yield a monetary recovery for the class in this case.”
The proposed civil class action, led by Dutch investment firm Robeco and the City of Hialea, Florida’s employee pension fund, seeks to recoup losses after Peloton’s stock price declined more than 80%.
U.S. District Judge Andrew Carter Jr. sided with Peloton in September 2024, ruling that Peloton’s statements were simply forward-looking and optimistic corporate “puffery" — not actionable fraud. Carter, an Obama appointee serving on the U.S. District Court for the Southern District of New York, also noted that several optimistic statements about the company’s future were accompanied by “very detailed warnings,” including that after lockdowns concluded, consumers would likely return to their pre-pandemic fitness routines.
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