Farfetch’s founder and former executives are looking to escape a securities fraud lawsuit that shareholders waged against them and the luxury e-commerce giant in 2023, arguing that they made “materially false and misleading statements regarding [Farfetch’s] business, operations, and prospects.” In a newly-filed motion to dismiss, Farfetch founder and former CEO José Neves, former finance chief Elliot Jordan, and former Group President Stephanie Phair argue that Fernando Sulichin and Yuanzhe Fu (the “plaintiffs”) have failed to sufficiently allege that they misled investors or acted with fraudulent intent during a two-year period in which Farfetch’s stock price plummeted and the company crumbled.
Setting the stage in the motion to dismiss that they lodged with the U.S. District Court for the Southern District of New York on September 11, Neves, Jordan, and Phair (the “defendants”) state that what began as “a claim based on an earnings shortfall for a single quarter has now expanded to challenge more than 80 different disclosures about dozens of different topics during a nearly two-year period.” And despite such “flailing about,” they argue that the plaintiffs “plead no viable theory of securities fraud,” and thus, their case should be dismissed in its entirety.
Arguments Against Fraud
In particular, Neves, Jordan, and Phair assert that the plaintiffs: (1) have not pled an actionable misstatement or omission; and (2) do not and cannot plead any particularized facts establishing the requisite “strong” inference that any of the defendants acted with fraudulent intent. Beyond that, they argue that they should be shielded by protections afforded to forward-looking statements under securities laws.
> Lack of Actionable Misstatements: A central argument in the former Farfetch executives’ motion to dismiss is that the plaintiffs have failed to identify any actionable misstatements or omissions that give rise to liability. “Throughout the alleged Class Period,” which runs from February 24, 2022 through December 17, 2023, Neves, Jordan, and Phair claim that Farfetch made “detailed and measured disclosures about growth in its business and the risks it was facing.” To this day, they assert that “neither Farfetch nor anyone other than the plaintiffs have ever said that any of these statements was incorrect.”
The plaintiffs challenge dozens of statements made by Farfetch, especially ones about the company’s growth and future financial prospects, in their 189-page amended complaint, which they follow up with “a conclusory assertion that [such statements] were falsely made due to a laundry list of generalized reasons,” Neves, Jordan, and Phair assert. The plaintiffs’ inclusion of “‘large block quotations taken directly from’ 80 different disclosures over a nearly two-year period, many of which ‘are several paragraphs long'” in their amended complaint amounts to a “puzzle pleading” that “obscures precisely which statements [they] wish to challenge.” (Emphasis courtesy of the defendants.) This “kitchen-sink approach … highlights that [they] cannot reasonably identify a particular statement they believe was false and misleading, much less explain why,” according to the former Farfetch executives, thereby, dooming their Securities Exchange Act claims.
> Inactionable “Puffery” and Corporate Optimism: Neves and co. further argue that the plaintiffs fall short in pleading a viable securities fraud claim, as many of the statements that they claim are misleading constitute “corporate puffery” – or vague expressions of optimism about the company’s future that are inactionable under securities law. Courts have consistently held that companies are entitled to express general optimism about their business and outlook without being accused of securities fraud, the defendants argue.
For example, the former Farfetch executives highlight that the plaintiffs are challenging statements about how Farfetch was “on track to deliver on our plan for 2023” and how its Reebok partnership was “on budget and on schedule.” However, these statements are described as “textbook cases of corporate puffery,” per Neves, Jordan, and Phair. They argue that such expressions of corporate optimism are “too general to cause a reasonable investor to rely upon them” and thus, cannot form the basis for a securities fraud claim. The motion to dismiss and corresponding memo in support further emphasize that “statements containing simple economic projections, expressions of optimism, and other puffery are insufficient to state a claim.”
> Protection of Forward-Looking Statements: Beyond that, Neves, Jordan, and Phair cite the Private Securities Litigation Reform Act (“PSLRA”)’s safe harbor for forward-looking statements, which is relevant here, they claim, as many of the statements challenged by the plaintiffs are forward-looking. According to the defendants’ filing, the PSLRA’s “safe harbor” makes it so that “forward-looking statements are not actionable if: (i) they are identified as forward-looking and accompanied by meaningful cautionary language; (ii) they are immaterial; or (iii) the plaintiff fails to prove that the statement was made with actual knowledge that it was false or misleading.”
Among other claims, Neves and co. point to the plaintiffs’ claim that Farfetch’s optimistic financial projections were misleading because the company was allegedly facing significant headwinds stemming from the impact of the war in Ukraine, China’s strict zero-COVID policies, etc. However, the defendants assert that these projections were accompanied by cautionary language that actually warned investors about the risks of volatile macroeconomic conditions and the unpredictable nature of the luxury fashion industry. “Each disclosure was accompanied by a warning that it ‘will include forward-looking statements,’ that ‘[a]ctual results could differ materially,’ and referred investors to ‘the important risk factors that could cause actual results to differ’ in Farfetch’s voluminous disclosures of risk factors in its annual reports filed with the SEC.”
Moreover, the defendants also argue that the plaintiffs have failed to show that these forward-looking statements were made with “knowing falsity,” a necessary element for their securities fraud claim. For instance, the Farfetch executives point to how the plaintiffs alleged that Farfetch’s financial guidance was false because the company was experiencing a significant slowdown in the U.S. market. Yet, they did not provide any facts to show that Farfetch and co. knew the financial guidance was false when made, Neves, Jordan, and Phair argue.
> Failure to Prove Fraudulent Intent: Finally, the former Farfetch executives turn their attention to the lack of fraudulent intent. They argue that the plaintiffs have not alleged any specific facts to show that they acted with the intent to deceive investors. In reality, Neves and co. state that they were “substantially increasing their holdings of Farfetch stock during [the class] period,” and thus, they suffered “substantial losses themselves when the company was liquidated” in December 2023. (Emphasis courtesy of the defendants.) This fact “undermines any inference of fraudulent intent” on their part, the defendants maintain.
“So, too, does the fact that Farfetch expressly (and repeatedly) disclosed each of the risks and uncertainties that eventually came to pass and that [they] collectively lost hundreds of millions of dollars in their stockholdings after the alleged “truth” [about Fafetch’s financial state] came out.”
“The far more compelling inference – required to be considered under Supreme Court law – is that the defendants believed their statements that Farfetch would be successful, but (like many others in the luxury fashion and e-commerce sectors during this period) things did not turn out as they hoped,” the former Farfetch executives contend, arguing that such a lack of scienter is another basis for dismissal.
Farfetch’s Fall
The plaintiffs’ amended complaint, which was filed back in June, consolidates – and expands upon – two proposed class action cases that were waged against Farfetch, Neves, Jordan, and Phair in October and December 2023. The plaintiffs allege 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.
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.”
All the while, the plaintiff’s claim that Farfetch’s growing financial tensions – which ultimately saw the company placed in liquidation and acquired by Coupang in a rescue deal – 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.
The case is In Re Farfetch Limited Securities Litigation, 1:23-cv-10982 (SDNY).
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