Allbirds and several of its executives are looking to escape a consolidated class action lawsuit waged against them for allegedly engaging in securities fraud. In the closely-watched case, which was first filed in a California federal court in April 2023, Qu Jinghua and Yau Noi (the “plaintiffs”) claim that Allbirds, its co-founder and co-CEO Joey Zwillinger and other executives, along with directors Neil Blumenthal (co-founder of Warby Parker), Glossier founder Emily Weiss, Dick Boyce, Nancy Green, Mandy Fields, etc. misled investors ahead of and after the company’s blockbuster IPO in 2021 by failing to disclose significant company risks and missteps, which later caused the sustainable footwear company’s stock price to plummet.
According to the motion to dismiss that they filed with the U.S. District Court for the Northern District of California on September 9, Allbirds and the individual defendants argue that the claims being waged against them are unfounded and thus, the plaintiffs’ amended complaint should be tossed out in its entirety. In particular, Allbirds and the individual defendants look to sidestep the case on four key grounds: fraud by hindsight; the failure to plead actionable statements; the lack of statutory standing under Section 11 of the Securities Act of 1933; and the failure to establish scienter or loss causation under Section 10(b) of the Securities Exchange Act of 1934 …
Fraud by hindsight: At the heart of Allbirds’ motion is its argument that the plaintiffs’ case is built on “fraud by hindsight,” an argument that they claim that courts have repeatedly rejected in securities litigation. Allbirds contends that the plaintiffs are improperly using its March 2023 disclosures about “some strategic and executional missteps” in Allbirds’ business strategy to retroactively claim that earlier statements made by the company were fraudulent.
In their motion, Allbirds and co. argue that nothing about their March 2023 disclosure that shed light on issues, such as expanding too quickly and not sufficiently investing in its core products (actions that were part of a strategic transformation plan) demonstrates “a contemporaneous intent to deceive or deliberate recklessness during the class period,” nor does it imply that earlier statements by the company were misleading.
At the same time, they argue that the plaintiffs “cannot use the benefit of 20-20 hindsight to turn management’s business judgment into securities fraud,” Allbirds and co. argue, citing precedent from the U.S. Court of Appeals for the Ninth Circuit that disallows hindsight-centric fraud claims. “Without evidence of contemporaneous falsity, an allegation of a misleading representation, which entirely rests on later contradictory statements, constitutes an impermissible attempt to plead fraud by hindsight,” the defendants assert. In other words, simply because Allbirds later identified mistakes does not mean that the company’s leadership was knowingly deceptive at the time of its IPO or subsequent filings.
Failure to plead actionable statements: Additionally, Allbirds argues that the plaintiffs have failed to identify any specific false or misleading statements in the company’s IPO registration materials or earnings calls that could have served to inflate the company’s NASDAQ-traded stock price. The motion points out that many of the statements highlighted by the plaintiffs are forward-looking or opinion-based, which are legally protected under the Private Securities Litigation Reform Act. (Sound familiar, former Farfetch executives made the same claim in a recent motion to dismiss of their own in a separate securities fraud case.)
In particular, Allbirds and the individual defendants maintain that the plaintiffs’ claims hinge on statements that were either forward-looking or simply expressions of corporate optimism. These include projections about Allbirds’ business strategies, retail expansion plans, and product innovation, which were clearly marked with disclaimers about the potential risks and uncertainties. “The statements Plaintiffs challenge are inactionable as a matter of law because they consist of accurate reports of historical performance, vague expressions of corporate optimism, inactionable statements of opinion, and protected forward-looking statements,” they argue in the motion.
Additionally, Allbirds and co. argue that the cautionary language in the company’s filings should protect the company from liability. Allbirds’ argues that it was transparent about the risks it faced, including supply chain disruptions, consumer demand uncertainty, and challenges related to the COVID-19 pandemic. In light of this context, the company asserts that investors were adequately informed of the risks involved in purchasing Allbirds stock.
Lack of statutory standing: A crucial technical argument in Allbirds’ motion to dismiss revolves around the plaintiffs’ lack of standing to bring claims under Section 11 of the Securities Act of 1933, which allows investors to sue if a registration statement contains material misstatements or omissions, but it applies only to those who purchased shares directly from the registered public offering. The defendants’ motion asserts that the plaintiffs have not traced their shares specifically to the Allbirds IPO. At the time of the IPO, both registered shares from the public offering and unregistered shares sold by employees and insiders were in the market. Since the plaintiffs cannot prove that their shares came from the IPO, they lack standing to bring Section 11 claims, Allbirds argues.
“Plaintiffs’ Section 11 claim fails at the outset because they lack statutory standing to sue under that section. ‘To bring a claim under § 11, the securities held by the plaintiff must be traceable to the particular registration statement alleged to be false or misleading,’” Allbirds states, citing the U.S. Supreme Court’s recent decision in Slack Technologies, LLC v. Pirani. Albirds also emphasizes that the plaintiffs’ failure to plead traceability is not just a technical flaw, but a critical issue that warrants dismissal of their Section 11 claim. “Plaintiffs merely assert that they ‘acquired Allbirds shares pursuant and/or traceable to the Registration Statement for the IPO.’ Such a ‘conclusory allegation’ is inadequate,” the company contends.
Failure to establish scienter or loss causation: Finally, in addition to challenging the plaintiffs’ Section 11 claims, Allbirds also argues that their allegations under Section 10(b) of the Securities Exchange Act of 1934 should be dismissed, as well, for failing to demonstrate scienter and loss causation. The motion points out that the plaintiffs have not provided any evidence showing that Allbirds or its executives knowingly made false statements with the intent to deceive investors. “As to scienter, Plaintiffs identify no contemporaneous facts that demonstrate [that Allbirds and the individual defendants] knew that any challenged statement was false or misleading when made.”
Moreover, the motion contends that the plaintiffs have not shown how Allbirds’ alleged misstatements directly caused their financial losses. “As to loss causation, the plaintiffs do not identify any public disclosure of fraud rather than merely complaining of disappointing financial results,” the motion asserts.
> The Background: Allbirds’ recently-filed motion to dismiss is not the company’s first attempt at getting the court to nix the plaintiffs’ case. On the heels of the court consolidating the original complaint (filed by Gennady Shnayder) with a similar suit lodged by different Allbirds’ shareholders, Allbirds filed a motion to dismiss in November 2023, arguing that the plaintiffs’ allegations reflect “a lack of clarity as to which statement, or portions of statements, are allegedly false and misleading.” The company and the individual defendants went on to highlight several statements that the plaintiffs described as “materially false and misleading statements… in violation of Section 11 of the Securities Act” that the company said simply did not live up to the falsity that the plaintiffs said they did.
In May, the court granted Allbirds’ first motion to dismiss, but gave the plaintiffs the opportunity to file an amended complaint to address the shortcomings. Allbirds is now looking to get the court to dismiss that amended complaint, with a hearing on the matter slated to take place January 2025.
The case is Gennady Shnayder v. Allbirds, Inc., et al., 3:23-cv-01811 (N.D. Cal.)
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