Peloton Interactive, Inc. has had quite an eventful legal calendar this spring—with summer not looking any better. Since April 2021, the company has been on the wrong end of two shareholder class action suits. The suits showcase the range of security claims corporations may face in the wake of a crisis. These cases will also be prime case studies for future plaintiffs under similar circumstances.
Dueling Peloton Class Action Suits
Shareholders filed the first lawsuit on April 29, 2021. The complaint alleges that Peloton’s shares fell over 14% as a result of a public statement by its CEO. The CEO announced that the company would continue selling products deemed dangerous by the U.S. Consumer Product Safety Commission (CPSC).
CPSC reported multiple injuries caused by defective Peloton treadmills. One instance even resulted in a child’s death. Yet despite this warning, Peloton insisted its products were safe, followed by a restatement of safety warnings. However, it did not take long for a corporate change of heart—six days to be exact.
On May 5, 2021, Peloton announced it was indeed recalling the Tread and Tread+ treadmills due to the risk of injury and death. Following the recall, on May 24, 2021, shareholders filed a second suit. This complaint cited another 14% stock drop in response to company news. But this time, the losses allegedly stemmed from Peloton’s admittance that its original denial of CPSC reports was a mistake.
Event-Driven Securities Litigation
These two cases are examples of an emerging filing trend: event-driven securities litigation. This describes when investors sue after a company’s share price falls in response to a specific corporate event.
A company’s error or bad act will typically spur a securities fraud action. Shareholders take this action to allege the action caused direct harm to investors. With event-driven litigation, however, these particular events only harmed shareholders indirectly. In the Peloton case, the treadmills didn’t injure the shareholders themselves. Instead, their financial statements took the punch. Is that enough to meet the standards of securities fraud? We can only opine on this question as we wait for its day in court.
Business Judgment or Fiduciary Failure?
If we were to discuss viability with the backdrop of traditional shareholder class-actions, the outlook seems pretty bleak. Shareholders entrust (and choose) officers and board members to make difficult decisions for the company. Absent a complete failure of fiduciary duties, businesses typically get the benefit of the doubt. In the well-established “business judgment rule,” courts will defer to corporate decisions if such a failure is not clear. After all, a judge’s role is to apply the law, not determine the best way to make a profit. Of course, we never know how future precedent will unfurl. However, if these cases are successful, there would be some important consequences.
Stocks and the Game of Risk
By virtue of holding stock, Peloton shareholders consent to share in Peloton’s corporate game of risk. That includes devastating losses just as much as it does gains. In an ever-volatile market, there has to be something more than just another drop in stock. Plus, COVID-19 vaccines are rapidly in full swing. Home fitness equipment is not as in demand as earlier in the pandemic. One might wonder whether April and May’s loss is a result of securities fraud or just terrible timing.
If the courts find this kind of risk unacceptable, there are more questions to answer. What exactly is a corporation’s duty to its shareholders—and do the ends justify the means? As long as shareholders keep seeing profits, they rarely cry securities fraud at questionable officer actions. It is entirely possible that Peloton was trying to do right by their investors. In doing so, it took the conservative route regarding product recalls, only changing course when defects were clear. A premature recall may have had the same effect on Peloton stock.
This is not all to say Peloton’s actions were unquestionably above board or somehow beneficial to the public. Rather, there are simply other avenues to provide relief, attendant with much clearer motives.
Are we to believe the driving force behind these shareholder suits was the desire for corporations’ complete honesty to the public? If the answer is ‘yes,’ wouldn’t even an increase in stock prices via unpopular decisions also be a fiduciary breach? Well, of course, but we are now seeing an opening for investors to say otherwise.