Adidas stockholders have named the company and two executives in a new securities lawsuit, accusing them of making “materially false and/or misleading” statements in connection with the Yeezy partnership that it entered into with Kanye West back in 2013 and that carried on until it was terminated by adidas in October 2022. According to the complaint that it filed in a federal court in Oregon on April 28, HRSA-ILA Funds claims that adidas AG, its chief financial officer Harm Ohlmeyer, and former chief executive officer Kasper Rorsted (the “defendants”) ran afoul of the Securities Exchange Act by “misrepresent[ing] and fail[ing] to disclose … adverse facts pertaining to the company’s business,” namely, the risks associated with its once-very-lucrative Yeezy deal with West, thereby, inflating adidas’ stock price.
Setting the stage in its complaint, HRSA-ILA Funds states that adidas entered into a headline-making partnership with West in 2013 (a partnership that deepened in 2016) in furtherance of which West licensed the Yeezy trademark to adidas – which was responsible for making/selling Yeezy-branded goods – in exchange for a 15 percent cut of sales. That partnership very publicly went south in the fall of 2022 when West “began making overtly anti-Semitic and other racially offensive remarks in public, beginning with wearing a shirt with the slogan ‘White Lives Matter’ … to a fashion show in Paris on October 1, 2022,” per HRSA-ILA. This was followed up by West’s since-deleted “death con 3” tweet and an interview with Tucker Carlson that also included anti-Semitic comments.
While West’s comments garnered widespread media attention in 2022, and ultimately, prompted adidas to terminate the partnership on October 25, HRSA-ILA asserts that West actually “began to accrue controversy as a result of his various statements on topics, such as slavery, racial issues, and politics,” dating back to at least May 2018 when he said in an interview with TMZ that slavery in the U.S. was a “choice” for enslaved individuals. Despite such statements over the years, HRSA-ILA claims that adidas “stuck by West,” with the German sportswear giant’s management stating in interviews on multiple occasions throughout the years that West had made statements it did not support, but that he was, nonetheless, an important creator and “a very important part of our strategy.”
Amid the partnership with West and in light of rising controversy, HRSA-ILA Funds claims that adidas and its top executives submitted filings to the U.S. Securities and Exchange Commission that included false or misleading information. For instance, in various sections of its 2018 Annual Report, the defendants “ignored serious issues affecting the partnership, and the resulting potential risk to shareholders, by generally alluding to risks involving individuals that adidas partnered with, rather than stating that the company had actually considered ending the partnership as a result of West’s personal behavior, or how the company’s reputation might be affected if his behavior as it related to the company were to become public.”
Specifically, HRSA-ILA points to sections in adidas’ 2018 Annual Report, including …
– Business Partner Risk section, which stated, in part, “Adidas interacts and enters into partnerships with various third parties, such as athletes, creative partners, innovation partners, retail partners, or suppliers of goods or services. As a result, the company is exposed to a multitude of business partner risks. Injuries to individual athletes or poor on-field performance on the part of sponsored teams or athletes could reduce their consumer appeal and eventually result in lower sales and diminished attractiveness of our brands. Failure to cement and maintain strong relationships with retailers could have substantial negative effects on our wholesale activities and thus the company’s business performance.”
“Unethical business practices on the part of business partners or improper behavior of individual athletes, influencers or partners in the entertainment industry could have a negative spill-over effect on the company’s reputation, lead to higher costs or liabilities or even disrupt business activities. To mitigate business partner risks, adidas has implemented various measures.”
– Inventory Risks section, which stated, in part, “As we place initial production orders up to nine months in advance of delivery, adidas is exposed to inventory risks relating to misjudging consumer demand at the time of production planning. Overestimating demand could result in inappropriate capacity utilization at our suppliers’ factories, lead to overproduction, and cause excess inventory for the company as well as in the marketplace. This can have negative implications for our financial performance, including product returns, inventory obsolescence and higher levels of clearance activity as well as reduced liquidity due to higher working capital requirements.
Similarly, underestimating demand can lead to product shortfalls at the point of sale. In this situation, adidas faces the risk of missed sales opportunities and/or customer and consumer disappointment, which could lead to a reduction in brand loyalty and hurt our reputation. In addition, she company faces potential profitability impacts from additional costs such as airfreight in efforts to speed up replenishment. In order to mitigate these risks, we actively manage inventory levels, for example by continuous monitoring of stock levels as well as centralizing stock holding and clearance activities.”
– Personnel Risk section, which stated, in part, “Achieving the company’s strategic and financial objectives is highly dependent on our employees and their talents. In this respect, strong leadership and a performance-enhancing culture are critical to the company’s success. Therefore, ineffective leadership as well as the failure to install and maintain a performance-oriented culture that fosters diversity and inclusion and strong employee engagement amongst our workforce could also substantially impede our ability to achieve our goals.”
Adidas’ 2019, 2020, and 2021 Annual Reports “either had similar language regarding Partnership Risk, Inventory Risk, and Personnel Risk, or otherwise failed to mention risks relating to the [Yeezy] partnership,” per HRSA-ILA, which claims in the lawsuit that in other filings, adidas also “failed to disclose risks stemming from the partnership.” Still yet, it says that the 2020 Annual Report that adidas posted on its website “included a section on Risks related to media and stakeholder activities.” While the sportswear giant “disclosed that adverse or inaccurate media coverage could have an adverse negative impact on the company, it failed to disclose that the company risked considerable negative media coverage if Kanye West made public comments which were consistent with statements he made internally in the company (such as anti-Semitic statements).”
Further, HRSA-ILA asserts in the lawsuit that adidas “failed to disclose that it stood to receive negative coverage if West’s abusive behavior at the company, and how the company failed to meaningfully act on the issue, were to be publicly disclosed” – and failed “to take meaningful measures” to limit negative exposure – both in terms of PR and financials – if it had to terminate the Yeezy partnership as a result of West’s behavior.
TLDR: HRSA-ILA asserts that adidas and its execs “made false and/or misleading statements and/or failed to disclose that: (1) In addition to other misconduct, Kanye West made anti-Semitic comments in front of adidas staff; (2) adidas was aware of his behavior, and failed to warn investors that it was aware of that behavior, and had considered ending the partnership as a result of it; (3) adidas failed to take meaningful precautionary measures to limit negative financial exposure if the partnership were to end as a result of West’s behavior; (4) adidas overstated the risk mitigation measures it took with regard to Yeezy shoes in the event that it terminated the partnership; (5) as a result, [adidas’] public statements were materially false and/or misleading at all relevant times.”
Things came to a head in November 2022, according to HRSA-ILA, when the Wall Street Journal published an article, entitled, “Adidas Top Executives Discussed Risk of Staff’s ‘Direct Exposure’ to Kanye Wets Years Ago,” which detailed how adidas’ “CEO and senior leaders in Germany discussed as far back as four years ago the risk of continuing a relationship with Kanye West that they feared could blow up at any moment.” The article prompted adidas’ stock price to fall by $2.02 per ADR, or 3.13 percent, to close at $62.34 on November 28, 2022. Fast forward to February 9, 2023, and after adidas management “warned that it could shift from a profit to a loss if it should fail to sell its inventory of Yeezy shoes, following its termination of the partnership,” adidas’ stock price fell by $7.4, or 8.96 percent, to close at $75.16.
With the defendants’ alleged “dissemination or approval of the false statements specified above – which they knew or deliberately disregarded were misleading” – and the corresponding stock price drops in mind, HRSA-ILA asserts a claim under section 10(b) of the Securities Exchange Act, which prohibits the use of any “device, scheme, or artifice to defraud” and imposes liability (via Rule 10b-5) for any misstatement or omission of a material fact regarding a security.
And looking to hold Rorsted and Ohlmeyer liable in an individual capacity, HRSA-ILA sets out a claim under Section 20(a) of the Securities Exchange Act, which provides that “controlling persons” can be vicariously liable for 10b-5 violations. “Because of their senior positions,” Roasted and Ohlmeyer “knew the adverse non-public information about adidas’ false financial statements, [and] as officers and/or directors of a publicly owned company,” HRSA-ILA alleges that they “had a duty to disseminate accurate and truthful information with respect to adidas’ financial condition and results of operations, and to correct promptly any public statements issued by adidas which had become materially false or misleading.” Moreover, since they “exercised their power and authority [in such roles] to cause adidas to engage in the wrongful acts complained of herein, [they] were ‘controlling persons,’” and thus, “participated in the unlawful conduct alleged which artificially inflated the market price of adidas securities.”
On the remedies front, HRSA-ILA is seeking a certification of the class action to enable other individuals/entities “who purchased or otherwise acquired publicly traded adidas securities between May 3, 2018 and February 21, 2023, inclusive” to join in the Yeezy centric lawsuit against adidas, as well a monetary damages award “in favor of [HRSA-ILA] and the other class members against all defendants, jointly and severally, together with interest thereon.”
THE CONTEXT: HRSA-ILA’s case is the latest headline-making stock-drop case, with such cases generally coming about, as Bloomberg’s Matt Levine previously put it, when “a company announces bad news and its stock price goes down” below its offering price. (Here, that bad news is Kanye.) “When this happens,” Levine notes, “enterprising lawyers will sue the company saying that it should have announced the bad news earlier and that innocent shareholders were tricked into buying stock because they didn’t know about the bad news.” In other words, plaintiffs’ attorneys will argue that a company or its employees fraudulently misstated or withheld information that would have been material to buying or selling shares in the company.
A representative for adidas told TFL, “We outright reject these unfounded claims and will take all necessary measures to vigorously defend ourselves against them.”
The case is HRSA-ILA Funds v. adidas AG, et. al., 3:23-cv-00629 (D. Or.).
This article was initially published on April 30, and has been updated with a comment from adidas.
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