An amended complaint filed in a stock-drop lawsuit being waged against adidas AG, its CFO Harm Ohlmeyer, and former CEO Kasper Rorsted for allegedly making “materially false and/or misleading” statements in connection with the Yeezy partnership that it entered into with Ye (formerly Kanye West) back in 2013 and terminated last year is worthy of attention. In the newly-amended complaint, which was lodged with a federal court in Oregon on October 17, Plaintiff HRSA-ILA delves further into the workings of the Yeezy deal and the fall out of the ultra-lucrative collaboration, stating that “adidas’ partnership with West’s design shop – Yeezy – quickly became [its] most profitable line of business.” By 2021, Yeezy generated “more than $1.7 billion in sales, which represented 8 percent of [adidas’] total revenue and more than 40 percent of [its] profits.”
Most interesting, however, is the new focus on adidas’ alleged failure to meet non-financial reporting requirements in connection with the Yeezy deal. At the heart of the complaint are two high-level allegations: HRSA-ILA claims that disclosure obligations imposed a duty on adidas, Ohlmeyer, and Rorsted (collectively, “adidas”) to disclose risks to the Yeezy partnership, and adidas made/issued “materially false and misleading statements” during the class period from May 3, 2018 to February 21, 2023. As a result, HRSA-ILA – which purchased adidas stock during that time period – asserts that adidas’ stock was artificially inflated until information about Ye’s misconduct and adidas’ response to it came to light via media articles, prompting the value of the company’s stock to fall on more than one occasion.
With the foregoing in mind, HRSA-ILA claims that adidas violated 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 Section 20(a) of the Securities Exchange Act, which provides that “controlling persons” – like Ohlmeyer and Rorsted – can be vicariously liable for 10b-5 violations.
Adidas’ Disclosure Obligations
In terms of adidas’ disclosure obligations, HRSA-ILA cites European Union’s Non-Financial Reporting Directive (“NFRD”) – which requires large entities (such as adidas) to publicly disclose non-financial information, including material risks related to their business relationships and how companies manage those risks – and the voluntary Global Reporting Initiative (“GRI”) as key sources of such obligations.
Non-Financial Reporting Directive: Among other things, the NFRD requires adidas to disclose information about “its business model, policies, outcomes, risks, risk management and key performance; and key performance indicators relating to social and employee issues and human rights,” per HRSA-ILA. And in particular, in accordance with Section 29 of the NFRD, adidas is obligated to publish an annual “consolidated non-financial statement containing information to the extent necessary for an understanding of the group’s development, performance, position and impact of its activity, relating to, as a minimum … social and employee matters.”
Specifically, Section 29 requires disclosure of “the principal risks related to those matters linked to the group’s operations including, where relevant and proportionate, its business relationships, products or services which are likely to cause adverse impacts in those areas, and how the group manages those risks.” And beyond that, it calls for the disclosure of “adequate information in relation to matters that stand out as being most likely to bring about the materialization risks of severe impacts, along with those that have already materialized.”
Global Reporting Initiative: At the same time, throughout the class period, HRSA-ILA claims that adidas promised investors that it was following the core requirements of the GRI, which call on companies to disclose a balanced and reasonable representation of its positive and negative contributions to social impact. For example, adidas’ 2018 Annual Report stated that the Annual Report’s “non-financial statement combined with further information in this report and on our corporate website fulfills the GRI’s Standards ‘Core’ option.” In its 2019, 2020, and 2021 Annual Reports, adidas “made nearly identical claims,” HRSA-ILA asserts.
With the NFRD and GRI in mind, HRSA-ILA contends that “West’s misconduct, the risks it posed to [adidas], and [adidas’] inappropriate handling of it were material under the NFRD and GRI standards,” thereby, making it necessary for adidas to disclose information about issues with the Yeezy partnership. For instance, adidas’ “failure to disclose West’s misconduct, and the material risks it posed to the company and the partnership, violated the NFRD’s disclosure requirements,” per HRSA-ILA. The plaintiff claims that a 2018 presentation to adidas’ executive board – which highlighted concerns/risks of continuing to work with Ye in light of his misconduct (including antisemitic commentary and other inappropriate behavior) – “demonstrates that [adidas] was fully aware of the specific risks the Yeezy partnership posed, and [that it] deliberately chose to conceal those risks from investors.”
As for the GRI, adidas’ alleged “omissions concerning West’s repeated misconduct, [its] failure to investigate or act on the misconduct, and the risks the misconduct posed to the company” also made statements in its 2018, 2019, 2020, and 2021 annual reports about its compliance with GRI disclosure standards “untrue.” While adidas’ annual reports identified diversity, equity and inclusion as a material social topic, according to HSRI-ILA, its social impact disclosures “were incomplete because they failed to provide any information concerning West’s misconduct or the impact it had on Yeezy and adidas employees – much less provide a well-reasoned estimate concerning the scope of the impact.”
For one thing, HRSA-ILA says that adidas did not disclose that “West routinely mistreated Yeezy and adidas employees by subjecting them to anti-Semitic comments and other workplace misconduct; that West had paid $5 million to a Yeezy employee to settle allegations that he subjected employees to anti-Semitism; that [adidas] endangered employees by segregating complaints about West from normal human resources reporting to protect him; that [adidas’] reaction to employee complaints about West’s behavior was to either ignore them or to transfer the employee – not to punish West or intervene on the employees’ behalf; and that [adidas] knew and had discussed that these facts, individually and collectively, posed a material risk to [its] finances.”
The “overly rosy” disclosures that adidas did make – sans the aforementioned information – “violated the GRI disclosure requirements [it] claimed to have fulfilled,” per HRSA-ILA.
“False and Misleading” Statements
In furtherance of its causes of action, HRSA-ILA also argues that adidas made materially false and misleading statements. As it did in its initial complaint, the plaintiff claims that a number of adidas’ annual reports were “materially false and/or misleading” due to their alleged failure to disclose adverse facts that were known to adidas in connection with Ye and the Yeezy deal. In a new addition in the amended complaint, HRSA-ILA also highlights a September 2018 press release – in which adidas touted its inclusion in the Dow Jones Sustainability Indices and its rating “as ‘industry leader in corporate economic, environmental, and social dimensions’ and ‘industry best in seven criteria,’ including ‘Human Rights’ and ‘Social Reporting’” – as further evidence of adidas’ false statements.
The press release further held that the Dow Jones index “is based on a thorough analysis of corporate economic, environmental and social performance, assessing issues such as corporate governance, risk management, climate change mitigation, supply chain standards, labor practices, branding and customer relationship management.” The problem here, according to the plaintiff, is that such statements were materially false and/or misleading because adidas omitted Ye’s behavior, and the material risks it posed to adidas’ finances.
THE BOTTOM LINE: The amended complaint demonstrates yet another potential for companies’ ESG-centric statements – including those made in connection with voluntary benchmarks like Dow Jones Sustainability Indices – can serve as the basis for litigation. To date, this has largely seen companies land on the receiving end of false advertising lawsuits as a result of ESG/sustainability statements made on their websites, marketing campaigns, and products, as well as in voluntary reports/roadmaps. The adidas, Yeezy lawsuit demonstrates that such bases for litigation extend further and can come in the form of stock-drop lawsuits, as well, in the event that companies fail to make accurate/complete statements in response to necessary and/or voluntary reporting schemes and the value of the company’s stock later falls as a result of information that the company failed to warn investors about.
The case is HRSA-ILA Funds v. adidas AG, et. al., 3:23-cv-00629 (D. Or.).
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