Farfetch, Execs. Face a Securities Lawsuit for Allegedly Misleading Shareholders

Amid news that Farfetch founder and CEO José Neves may take the NYSE-listed company private, which puts its deal with Richemont in the spotlight, the online fashion retailer and a trio of executives are facing a federal securities class action lawsuit. According to the complaint that he filed in a federal court in Maryland in October, Michael Ragan claims that Farfetch, Neves, former chief financial officer Elliot Jordan, and Group President Stephanie Phair are on the hook for making “materially false and misleading statements regarding [Farfetch’s] business, operations, and prospects” between March 9, 2023 and August 17, 2023. 

In the lawsuit, Ragan asserts that London-headquartered Farfetch and Neves, Jordan, and Phair (the “individual defendants”) misled Farfetch shareholders – like himself and “hundreds, if not thousands” of other holders of Farfetch’s Class A ordinary shares – by making false statements and/or failing to disclose material facts regarding the state of the U.S. and Chinese markets, its gross merchandise value (“GMV”) growth, and the state of its partnership with Reebok. (In 2022, Farfetch announced a deal with Reebok owner, Authentic Brands Group, by which Farfetch would operate Reebok’s e-commerce operations and wholesale business in Europe.)

“False and/or Misleading Statements”

Specifically, Ragan claims that Farfetch and the individual defendants “made false and/or misleading statements and/or failed to disclose” that: “(i) Farfetch was experiencing a significant slowdown in growth in the U.S. and China; (ii) Farfetch faced onboarding challenges impacting the launch of its Reebok partnership; (iii) Farfetch downplayed challenges it faced with respect to, and/or overstated its ability to manage, its supply chain and inventory; (iv) all the foregoing was having a significant negative impact on Farfetch’s revenue and GMV growth; (v) accordingly, [it] was unlikely to meet market expectations for its Q2 2023 financial results or its own FY 2023 revenue guidance; and (vi) as a result, the company’s public statements were materially false and misleading at all relevant times.” 

In terms of the allegedly misleading statements made by Farfetch and/or the individual defendants during the class period (March 9, 2023 and August 17, 2023), Ragan claims that they asserted that Farfetch had “ensured Reebok’s wholesale and e-commerce operations are up and running on time and on budget,” that the company’s “sequential improvement in GMV growth in the U.S. and China, our two largest markets . . . indicate the strength and resilience of our core business,” that the company was “tightening [its] inventory balances,” that sales in the Chinese market were “back to growth in Q2 [2023] to-date,” the company “expect[ed] revenue of $2.9 billion up circa 25 percent” for 2023, etc.

The Stock Drop

As a result of the defendants’ “dissemination of the aforementioned false and misleading reports, releases and public statements,” Ragan argues that the market price of Farfetch securities was “artificially inflated throughout the class period,” and that the subsequently “declined sharply” in August when Farfetch issued a press release announcing its Q2 2023 financial results, which were “significantly less than the market consensus.” In addition to its Q2 results, on August 17, 2023, Farfetch also issued an FY 2023 revenue forecast of approximately $2.5 billion” – down from the company’s prior FY 2023 revenue forecast of $2.9 billion. In a Q2 conference call on the same day, Farfetch management “disclosed that significant slowdowns in growth in the U.S. and China, onboarding challenges affecting the launch of the Reebok partnership, and issues with inventory and shipping had negatively impacted Farfetch’s revenue and GMV for the quarter, [and] forced the company to rein in expectations for FY 2023.” 

Farfetch’s “poor Q2 2023 results and disappointing guidance for FY 2023” prompted multiple analysts to downgrade Farfetch’s stock on August 18, which, Ragan says caused the company’s Class A ordinary share price fell $2.15 per share, or 45.17 percent, to close at $2.61 per share on August 18, 2023. “As a result of the defendants’ wrongful acts and omissions, and the precipitous decline in the market value of the Company’s securities,” Ragan says that he and other class members have “suffered significant losses and damages.” Had they “known the truth, they would not have purchased or otherwise acquired said securities or would not have purchased or otherwise acquired them at the inflated prices that were paid.” 

In addition to waging claims against Farfetch, Ragan maintains that the individual defendants are also on the hook, as they “possessed the power and authority to control the contents of Farfetch’s SEC filings, press releases, and other market communications.” Because of “their positions with Farfetch, and their access to material information available to them but not to the public,” he claims that the individual defendants “knew that the adverse facts specified herein had not been disclosed to and were being concealed from the public, and that the positive representations being made were then materially false and misleading.” As such, the individual defendants “are liable for the false statements and omissions” alleged in the complaint. 

Seeking to recover damages caused by the defendants’ alleged “failure to disclose material adverse information and misrepresented the truth about Farfetch’s finances and business prospects,” Ragan accuses them of violating 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 Farfetch’s executives – can be vicariously liable for 10b-5 violations.

The Bigger Picture

The case comes as Farfetch continues to lose momentum. Its market value has fallen to just upwards of $400 million from its pandemic peak of $23 billion in early 2021. Meanwhile, the company’s shares have lost more than 95 percent of their value since it listed on the New York Stock Exchange in 2018. Even since it reached a deal with Richemont, the value of its shares has dropped from $10 to about $1.15. 

It is also worth noting that the case coincides with a continued decrease in the number of securities class action filings. Annual surveys from NERA Economic Consulting and Cornerstone Research reveal that the number of such suits declined for the fourth consecutive year in 2022, with 8 percent fewer Rule 10b-5 lawsuits being filed in 2022 compared to 2021. Despite such a drop, Davis Wright Tremaine’s James Goldfarb, Brendan Mangan, Theodore Snyder, and Cameron Matheson stated in a note that these “time-consuming, costly litigations still target 5 percent of all S&P 500 companies in an average year, and settlement costs rose in 2022.” 

At the same time, such a drop in filings in 2022 should be considered against the fact that “risks to the economy present risks to corporations,” the Davis Wright Tremaine attorneys asserted, noting that “during times of financial stress, investors turn to litigation to generate revenue, [and] so, securities litigation volume [can be expected] to be impacted” accordingly. Considering that the pace of e-commerce sales growth has slowed significant following significant double-digit growth from in 2020 to 2021, Farfetch and other online retailers have seen a sizable drop in sales in the wake of previous pandemic-prompted highs. As the Financial Times put it recently, “No one wants to buy luxury goods online anymore.” 

That is having an effect on the stock prices of brands and retailers, alike, which could – when considered alongside other financial stressors, including a spending slowdown in China, signs of caution among aspirational shoppers in the U.S., etc. – make for more risk exposure for companies, especially those in the e-commerce realm.

The case is Ragan v. Farfetch Limited, et al., 8:23-cv-02857 (D. Md.).