On February 14, 2025, Judge Margo Brodie of the United States
District Court for the Eastern District of New York granted a
motion to dismiss a putative class action asserting claims under
Sections 10(b) and 20(a) of the Securities Exchange Act of 1934
(the "Exchange Act") against an exercise equipment
company (the "Company") and certain of its officers and
directors (the "Individual Defendants"). Jia Tian, et
al. v. Peloton Interactive, Inc., et al., 23-cv-4279-MKB
(E.D.N.Y. Feb. 14, 2025). Plaintiffs alleged that defendants made
material misstatements and omissions regarding the safety of the
Company's products. The Court granted defendants' motion to
dismiss with leave to amend, holding that plaintiffs failed to
sufficiently allege any materially misleading statements or
omissions, or scienter.
Plaintiffs, shareholders that invested in the Company between May
10, 2022 and May 10, 2023, alleged that defendants made material
misstatements and omissions concerning the Company's products.
Specifically, plaintiffs alleged that defendants "concealed
[a] recurring [safety] issue" from customers and regulators
while continuing to "laud the quality" of the
Company's products, and that the safety issue ultimately led to
a product recall. The Court dismissed plaintiffs' securities
fraud claims, holding that plaintiffs failed to plead falsity or
scienter.
With respect to the issue of falsity, the Court held that the
Company's risk disclosures explicitly warned investors that the
Company's products may be affected by design and manufacturing
defects that could adversely affect the Company's business and
result in reputational harm, and further held that although
defendants had been informed of some safety issues, plaintiffs did
not allege that defendants knew, at the time of the alleged
misstatements, that customer complaints would lead to a product
recall. The Court also held that statements regarding the
Company's loss accruals and statements that the recall was
"voluntary" were not false or misleading, because the
loss accrual statements were forward-looking and accompanied by
sufficient cautionary language and because a reasonable investor
would have understood that the recall was not mandatory under the
relevant regulations. The Court further held that statements
regarding the Company's corporate values, product safety, and
product quality—including that the Company's product was
the "best" on the market—were nonactionable
statements of corporate puffery.
With respect to the issue of scienter, the Court held that
plaintiffs did not plausibly allege how defendants' purported
knowledge of 35 customer complaints about its products in light of
the millions of products sold over multiple years would demonstrate
knowledge that any of the challenged statements was false when
made. The Court reasoned that even if defendants knew of the
complaints, that could not support an inference that the complaints
would lead to a recall of the product. Moreover, the Court held
that plaintiffs' allegations that defendants were motivated to
conceal the product's defect because defendants wanted to avoid
another costly recall of the Company's products was
insufficient to support scienter because the desire to maintain
corporate profitability and avoid regulatory scrutiny is common
and, without more, is not indicative fraudulent intent. The Court
similarly held that plaintiffs' allegations regarding the
Individual Defendants' financial motives did not raise a strong
inference of scienter because plaintiffs did not allege that the
Individual Defendants sold Company stock during the putative class
period, plaintiffs' allegation that one of the Individual
Defendants pledged Company stock during the putative class period
was insufficient to establish scienter, and plaintiffs did not
adequately allege that one of the Individual Defendant's
establishment of a 10b5-1 plan during the putative class period was
intended to take advantage of an inflated stock price.
Having found that plaintiffs failed to adequately plead their
Section 10(b) claim, the Court dismissed the derivative control
person claims against the Individual Defendants under Section
20(a). The Court did, however, grant plaintiffs leave to file a
second amended complaint.
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