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Risk

Pension Fund Sues Peloton Over Alleged False Statements

The lawsuit claims the fitness company and its executives lied about the prospects of post-COVID growth.

By Michael Katz



The Florida-based City of Hialeah Employees’ Retirement System has filed a securities class action lawsuit against exercise equipment and media company Peloton for allegedly making false and misleading statements by promising the growth it achieved during the COVID-19 stay-at-home mandates would continue. The lawsuit also named Peloton CEO John Foley, President William Lynch, and Chief Financial Officer (CFO) Jill Woodworth as defendants.

According to the complaint, investors were focused on whether the “massive growth and financial success” Peloton experienced during the pandemic were sustainable and would continue post-COVID-19. They were also focused on the company’s inventory levels and what those levels indicated about demand, as well as whether growth would decline once vaccines were approved, businesses reopened, and gyms reopened.

The complaint said the company and its top executives “repeatedly, falsely assured investors that Peloton’s recent success was not primarily due to COVID-related increased demand, but rather that the company’s growth and financial results were sustainable and would continue post-COVID.”

The lawsuit cites a response Foley provided to an investor’s question about how a post-COVID-19 world would affect Peloton’s view of its business opportunity. According to the complaint, Foley assured the investor that Peloton’s results had nothing to do with the pandemic, saying that “we delivered it in pre-COVID, during COVID, and we will deliver it post-COVID.”

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The lawsuit alleges that Peloton’s representations that it would continue to succeed and grow post-pandemic were false and that its financial results were instead primarily driven by COVID-19-related increases in demand for at-home exercise options.

“As gyms have reopened and other outside-the-home exercise options have become more available due to COVID vaccinations being more widespread and other COVID-related restrictions abating, demand for Peloton’s equipment and subscription services has declined substantially,” the complaint said. “Moreover, rather than matching supply and demand, Peloton had a massive growth in inventory that far exceeded customer demand.”

The complaint alleges that the true nature of the company’s financial situation came out after the markets closed on Aug. 26, when Peloton disclosed just ahead of announcing its fiscal year 2021 financial results that “in the course of our fiscal 2021 audit process, a material weakness was identified in our internal controls over financial reporting with respect to identification and valuation of inventory.” In its annual report for fiscal year 2021, the company also said that “this material weakness arose because our controls were not effectively designed, documented, and maintained to verify that our physical inventory counts were correctly counted and communicated for reporting in our financial statements.”

Lawyers for the pension fund argue that as a result of the disclosures, the price of Peloton common stock fell $9.75 per share, or 8.5%, to a closing price of $104.34 per share on Aug. 27 from a closing price of $114.09 per share on Aug. 26.

“At the same time, however, Peloton made false, reassuring statements to investors,” according to the complaint. “Woodworth claimed that ‘We are entering fiscal 2022 with a normalized backlog for our bike portfolio and guidance reflects our expectation of continued strong demand.’”

The lawsuit also says that after the markets closed on Nov. 4, Peloton “shocked investors” when it disclosed that it had revised its full-year revenue guidance down to a range of $4.4 billion to $4.8 billion due to declining demand. Additionally, Peloton disclosed that its inventory increased 35% from the previous quarter to $1.27 billion, and that the majority of its inventory, 91%, was “finished products” that the company still held.

The complaint blames these disclosures for sending the price of Peloton tumbling 35% to $55.64 per share on Nov. 5 from a closing price of $86.06 on Nov. 4, wiping out an alleged $8.1 billion in shareholder value.

Peloton declined to respond to the allegations, saying, “Unfortunately, we cannot comment on active litigation.”

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Home > News > Newsmakers > Florida Pensions Agree to Settle Perrigo Lawsuit for $31.9 Million
Newsmakers

Florida Pensions Agree to Settle Perrigo Lawsuit for $31.9 Million

The complaint centered on a $1.9 billion Irish tax bill incurred by the pharmaceutical company.
By Michael Katz


Pharmaceutical company Perrigo has agreed to pay $31.9 million to settle a class action securities lawsuit led by two Florida pension funds that accused the company of misleading investors regarding a $1.9 billion Irish tax bill.

Lead plaintiffs the City of Boca Raton General Employees’ Pension Plan and Palm Bay Police and Firefighters’ Pension Fund had alleged that Perrigo, which is operationally based in the US and domiciled in Ireland, “made material misrepresentations and omissions” to investors regarding a €1.636 billion ($1.9 billion) tax liability assessed by the Irish government.

The case centers on a disclosure Perrigo made after the stock market closed Dec. 20, 2018, announcing that its subsidiary received a notice of amended assessment from Ireland’s tax authority saying it owed the €1.636 billion in back taxes. Shares of Perrigo fell 29% the following day to $37.03 from $52.36.

According to the complaint, which was filed in the Southern District of New York, the $1.9 billion tax liability was the largest such tax assessment in Irish history, and a “catastrophic result for a company with just $400 million in cash on hand.”

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The complaint also alleged that Perrigo had kept investors in the dark about an audit findings letter it received nearly two months earlier from Irish Revenue saying that the company owed significant back taxes.

The tax assessment was related to the sale of Perrigo’s rights to multiple sclerosis drug Tysabri for approximately $6 billion. The lawsuit alleges that, for years, Perrigo incorrectly treated the proceeds from the sale of Tysabri and the resulting royalty income as ordinary income, which was taxed at a 12.5% rate, rather than as a capital gain, which was subject to a 33% tax rate.

“This incorrect tax treatment clearly violated Irish tax law,” the complaint said.

In November 2017, Irish Revenue launched an audit of Perrigo’s tax treatment of the Tysabri transactions, which it said was triggered by a discrepancy between subsidiary Elan’s tax classification of the Tysabri sale and the tax treatment that company applied to the transaction. Elan had classified the Tysabri proceeds as a net gain on divestment of business, or as ordinary income instead of as capital gains.

The lawsuit alleged Perrigo knew that Irish Revenue was taking the position that the Tysabri transaction was subject to the higher 33% capital gains tax rate. It also alleges that the company misled the public in its US Securities and Exchange Commission (SEC) Form 10-Q by disclosing only that it had received “an audit finding letter” from Irish Revenue without revealing the amount of the potential tax liability and caused shareholders to buy stock at artificially inflated prices.

The settlement hearing will be held on Feb. 16. Perrigo denies any wrongdoing.

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