Individuals that purchased Farfetch shares ahead of its collapse late last year are upping the ante in their fraud-centric class action against the luxury online retailer. In an amended complaint lodged with the U.S. District Court for the Southern District of New York last month, Fernando Sulichin and Yuanzhe Fu (the “plaintiffs”) are looking to expand the timeline of their original case and enhance their claims against Farfetch, alleging corporate deception and intentional failures by the company and its key executives to disclose critical issues about the company’s financial health that ultimately impacted the value of its stock ahead of its abrupt decline and rescue buy-out in December 2023.
The newly amended complaint, which was filed on June 21, consolidates – and expands upon – two proposed class action cases that were waged against Farfetch, its founder and former CEO José Neves, former chief financial officer Elliot Jordan, and former Group President Stephanie Phair (collectively, the “defendants” or “Farfetch”) in October and December 2023. The bulk of the amended complaint remains the same, with the plaintiffs alleging that in a quest for growth, Farfetch and its executives engaged in a series of expensive acquisitions that they failed to properly integrate into the Farfetch ecosystem, thereby, resulting in significant inefficiencies and costs. Despite being aware of the financial short-comings caused by these acquisitions, the plaintiffs argue that Farfetch intentionally misled investors in an effort to boost the company’s stock price.
Delving into their allegations, the Farfetch shareholder plaintiffs assert that before its September 2019 initial public offering, Farfetch was praised for its platform business model, in furtherance of which it did not actually own inventory, and instead, facilitated sales for brands. However, as Farfetch began to experience difficulty engaging consumers and generating revenue, it underwent a “monumental shift in [its] business model,” according to the plaintiffs, one that saw it execute a series of acquisitions of first-party retailers and e-commerce platforms like Stadium Goods and New Guards Group (“NGG”) that cost it hundreds of millions of dollars.
In addition to engaging in a “blatant deviation” from its core business model and taking on “a material assumption of significant risk” thanks to a string of costly M&A deals, the plaintiffs argue that “unbeknownst to investors, Farfetch failed to make any of the necessary changes to successfully integrate these [newly-acquired] businesses into [its] existing platform and to ensure that the future cash needs of its new acquisitions would not have a negative impact on the group’s overall balance sheet and working capital.” As a result of the defendants’ “utter disregard for proper integration” of the new entities and for Farfetch’s “forward cash needs,” these companies continued to operate as “standalone” entities, which created “company-wide inefficiencies, unprecedented operating costs, and significant pressures on [Farfetch’s] cash flow.”
“Worse yet, at all relevant times, Farfetch suffered from inapt oversight and material weaknesses in its internal controls over financial reporting,” which resulted in “inaccurate and/or overstated revenue, gross merchandise value, and receivables, costly inventory stockpiles, and duplicative operating expenses,” the plaintiffs maintain. They assert that such inaccuracies helped to present “an overly positive picture of the company’s financial position, which was far from the reality of its operational and financial challenges.”
Despite initial backlash to its changing strategy (including a 45 percent drop in Farfetch’s stock price immediately following the announcement of the NGG acquisition), the plaintiffs argue that the full extent of the damage from these acquisitions did not became apparent until 2023, as the company’s mounting issues were hidden, in part, by the temporary e-commerce boom during COVID-19. “The negative impacts of these acquisitions … were conveniently and swiftly covered up by the monumental shift to online shopping following worldwide shutdowns in response to the outbreak of COVID-19 beginning in early 2020,” the complaint contends.
Maybe more importantly, however, Farfetch’s growing financial tensions were masked by “materially false and misleading statements” made by the defendants, who “systematically misled investors about the company’s true financial health, business model, and growth prospects” by “downplaying the negative impacts affecting the company’s revenue growth, cash position, and liquidity strength” in earnings calls, press releases, and other communications.
Despite knowing about “significant internal challenges, high operational costs, and severe integration issues” due to Farfetch’s acquisitions, the plaintiffs claim that “instead of adjusting its spending and budgets to account for lower-than-forecast revenues and growing expenses resulting in significant cash flow issues,” Farfetch’s management “repeated past behaviors [and] acquired additional overvalued and underperforming businesses, [which] sent the company into a downward spiral that could not be reversed by purported ‘strategic initiatives.’” At the same time, the defendants “continued to paint an overly optimistic picture” of the Farfetch’s health, as well as the success of the change in strategy and the aforementioned acquisitions, which the company’s leadership touted as capable of “better[ing] Farfetch’s position ‘to achieve our platform long-term vision and reaccelerate growth,” even as the company’s financial condition “worsened.”
Ultimately, the plaintiffs contend that Farfetch’s deep-seated issues began to surface as the pandemic’s effects waned and as the company started to face increased competition from luxury brands’ direct-to-consumer sales, which pressured its operating expenses and profit margins further. By early 2022, internal forecasts showed that Farfetch would not replicate its pandemic growth, and yet, the company and its leadership “recklessly disregarded contrary internal guidance and forecasts to set unrealistic public expectations for continued growth, continued operating cost leverage from its investments, and profitability [for FY 2023].”
By the second half of 2023, Farfetch’s “slowed and/or stalled revenues were unable to sustain its expenses and coupled with its dwindling and/or non-existent margins, and mounting debt, caused the company to implode under a full-blown liquidity crisis before succumbing to insolvency by December 2023,” according to the amended complaint.
Taken together, the plaintiffs argue that the aforementioned misconduct by the company and its management – from their alleged failure to “perform proper due diligence” prior to certain acquisitions or exercise “proper oversight of its [acquired] subsidiaries” to their overstatement of the company’s financial results and their publication of “unreliable” financial expectations/guidance – served to “fraudulently” inflate the value of the company’s stock. This resulted in significant damages for the plaintiffs and other members of the class, who “in reliance on the integrity of the market, paid artificially inflated prices for Farfetch securities,” they argue, claiming that they “would not have purchased Farfetch securities at the prices they paid, or at all, if they had been aware that the market prices had been artificially and falsely inflated by the defendants’ misleading statements and/or omissions.”
As such, the plaintiffs maintain that Farfetch and co. are on the hook for violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and SEC Rule 10b-5, and the plaintiffs are seeking compensatory damages, interest, and legal fees as a result.
A representative for Farfetch did not respond to TFL’s request for comment.
The case is In Re Farfetch Limited Securities Litigation, 1:23-cv-10982 (SDNY).
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