Farfetch faces new fraud allegations in class action lawsuit

Individuals who purchased Farfetch shares before its collapse late last year are upping the ante in their class action lawsuit against the luxury e-retailer. In an amended complaint filed last month in the U.S. District Court for the Southern District of New York, Fernando Sulichin and Yuanzhe Fu (the “Plaintiffs”) seek to extend the time frame of their original case and amplify their claims against Farfetch, alleging that the company and its key executives committed corporate fraud and willfully failed to disclose critical aspects of the company’s financial health, which ultimately impacted the value of its shares before its abrupt demise and bailout in December 2023.

The newly amended complaint, filed on June 21, consolidates – and expands – two proposed class action lawsuits filed in October and December 2023 against Farfetch, its founder and former CEO José Neves, former CFO Elliot Jordan, and former corporate president Stephanie Phair (collectively, the “Defendants” or “Farfetch”). The bulk of the amended complaint remains the same. Plaintiffs allege that in pursuit of growth, Farfetch and its executives made a series of expensive acquisitions that they failed to properly integrate into the Farfetch ecosystem, resulting in significant inefficiencies and costs. Although plaintiffs were aware of the financial deficiencies caused by these acquisitions, they argue that Farfetch intentionally misled investors in order to boost the company’s stock price.

Farfetch’s plaintiff shareholders elaborate on their allegations, claiming that before its IPO in September 2019, Farfetch was praised for its platform business model, in which it did not own its own inventory but instead facilitated sales for brands. However, as Farfetch began to struggle to attract customers and generate revenue, the company underwent a “monumental shift in its business model,” according to the plaintiffs. In the process, the company made a series of acquisitions of retailers and e-commerce platforms such as Stadium Goods and New Guards Group (“NGG”) that cost it hundreds of millions of dollars.

The plaintiffs argue that Farfetch not only made a “blatant departure” from its core business model and “significantly assumed significant risks” through a series of costly merger and acquisition transactions, but also that it “failed, without investors’ knowledge, to make the necessary changes to successfully integrate these (newly acquired) businesses into (its) existing platform and to ensure that the future cash requirements of the new acquisitions would not have a negative impact on the Group’s overall balance sheet and working capital.” As a result of the defendants’ “complete disregard for the proper integration” of the new businesses and Farfetch’s “future cash requirements,” these businesses continued to operate as “standalone” companies, resulting in “company-wide inefficiencies, unprecedented operating costs and significant pressure on (Farfetch’s) cash flow.”

“Worse, Farfetch suffered at all relevant times from inadequate oversight and material weaknesses in its internal controls over financial reporting,” which led to “inaccurate and/or overstated sales, gross merchandise value and accounts receivable statements, costly inventory levels and duplicated operating expenses,” the plaintiffs allege. They claim that these inaccuracies helped “paint an overly positive picture of the company’s financial position that was far removed from the reality of its operational and financial challenges.”

Despite initial backlash to the changed strategy (including a 45 percent drop in Farfetch’s stock price immediately after the NGG acquisition was announced), the plaintiffs argue that the full extent of the damage from these acquisitions did not become apparent until 2023, as the company’s mounting problems were partially obscured by the temporary e-commerce boom during COVID-19. “The negative impact of these acquisitions … was conveniently and quickly obscured by the monumental shift to online shopping following the global shutdowns in response to the COVID-19 outbreak beginning in early 2020,” the lawsuit states.

Perhaps more importantly, however, Farfetch’s growing financial stresses were concealed 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 impact on the company’s revenue growth, cash balance and liquidity strength” in quarterly earnings calls, press releases and other communications.

Despite knowing of “significant internal challenges, high operating costs and severe integration issues” resulting from Farfetch’s acquisitions, the plaintiffs allege that Farfetch’s management “rather than adjusting its spending and budgets to reflect lower-than-forecast revenues and rising costs that resulted in significant cash flow problems,” “repeated past behavior (and) acquired more overvalued and underperforming companies, (which) sent the company into a downward spiral that could not be reversed by alleged ‘strategic initiatives.’” At the same time, the defendants “continued to paint an overly optimistic picture” of Farfetch’s health and the success of the strategy shift and the aforementioned acquisitions, which management touted as capable of “improving Farfetch’s position, ‘achieving our long-term platform vision and re-accelerating growth,’” even as the company’s financial situation “worsened.”

Ultimately, the plaintiffs allege that Farfetch’s deep-rooted problems emerged as the effects of the pandemic subsided and the company faced increasing competition from direct-to-consumer luxury brands, further putting pressure on its operating costs and profit margins. In early 2022, internal projections showed that Farfetch would not repeat its pandemic growth, and yet the company and its leadership “recklessly ignored contrary internal guidance and forecasts to the contrary to create unrealistic public expectations of continued growth, continued operating cost leverage from its investments, and profitability (for fiscal year 2023).”

By the second half of 2023, Farfetch’s “slowing and/or stagnant revenues were no longer sufficient to cover its expenses, and combined with its shrinking and/or nonexistent margins and mounting debt, caused the company to implode in a full-blown liquidity crisis before succumbing to bankruptcy in December 2023,” the amended complaint said.

In summary, the plaintiffs argue that the above-mentioned misconduct by the company and its management – ​​from their alleged failure to “conduct adequate due diligence” or exercise “appropriate oversight of their (acquired) subsidiaries” prior to certain acquisitions, 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 harm to the plaintiffs and other class members who “paid artificially inflated prices for Farfetch securities in reliance on the integrity of the market,” they argue, claiming that they “would not have purchased Farfetch securities at the prices they paid, or at all, had they been aware that market prices had been artificially and falsely inflated by Defendants’ misleading statements and/or omissions.”

The plaintiffs allege that Farfetch and Co. are liable for violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and SEC Rule 10b-5 and are seeking damages, interest, and attorneys’ fees.

A representative for Farfetch did not respond to TFL’s request for comment.

The case is In Re Farfetch Limited Securities Litigation1:23-cv-10982 (SDNY).