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Eastern District Of New York Dismisses Securities Class Action Against Exercise Equipment Company For Failure To Plead Falsity and Scienter
03/11/2025On 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.
