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The RealReal to Pay $11.5 Million in Lawsuit Settlement

A squabble between The RealReal and select shareholders surrounding the luxury resale platform’s authentication practices and their alleged impact on the company’s IPO appears to have come to a close. According to its third-quarter earnings report, San Francisco-based luxury resale company will pay out $11.5 million to settle ongoing shareholder class action cases against the company, some of its executives, and its underwriters.

Plaintiff and shareholder Michael Sanders first filed an initial class action lawsuit in November 2019 on behalf of those who purchased RealReal common stock from June 27, 2019 through Nov. 20, 2019, accusing the resale player and its underwriters of misleading investors about the nature of its authentication process ahead of and throughout its June 2019 IPO.

The suit alleged that The RealReal’s authentication process “fell far short of its description,” in particular that only a small proportion of the “thousands of items processed by the company each day” actually go to its expert authenticators for review.

With that in mind, Sanders accused The RealReal of artificially inflating its stock price and then damaging those same shareholders “when the artificial inflation dissipated upon a series of corrective disclosures.”

Sanders filed an amendment to the suit on April 30, 2021 after a California federal court agreed to dismiss part of the federal securities action, naming additional plaintiffs Nubia Lorelle and Garth Wakeford, and requesting a trial by jury, with hopes of being awarded damages.

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The amended suit included internal memos and photographs from months before the company went public. The documents indicated that The RealReal was aware of problems related to counterfeiting, stating that the company circulated an internal “Faux and Tell” document on a bi-weekly basis that pointed out counterfeit items that made it out the door to shoppers.

On each memo, which included examples of luxury goods from Balenciaga, Christian Dior, Roberto Cavalli, Prada, Fendi, Gucci and Louis Vuitton among others, copywriters included photos and descriptions of the goods with notes that could help future authenticators improve the process.

The RealReal and its individual defendants fired back in June with a motion to dismiss two counts in the suit related to potential violations of the Securities Exchange Act, which requires that investors receive financial and other significant information concerning securities being offered for public sale.

The first disputed count, Count III, alleged that certain RealReal execs “had actual knowledge of the material omissions and/or the falsity of the material statements” related to the authentication process. The second count, Count IV, was related to specific executives’ control of the information and how it was portrayed in public filings in the lead up to, and after, going public.

Despite The RealReal’s challenge of the counts, counsel for Sanders alerted the California court in July that the parties had reached “an agreement in principle to resolve” the case.

The settlement is subject to preliminary and final approval of the court. The payouts will occur within 30 days within preliminary approval, or when the plaintiff’s counsel provides payment instructions. Upon approval, a case management conference initially set for July 29 before being postponed to Nov. 16 will be vacated.

Although the shareholder settlements are nearing their end, the resale platform remains locked in a battle against Chanel, which filed a trademark infringement and counterfeiting suit against it in November 2018. Chanel argued that despite advertising “authentic, secondhand luxury products, including purportedly authentic Chanel-branded products, that it obtains from third-party consignors,” The RealReal sold eight Chanel-branded products that were counterfeit, despite being marketed as genuine.

The RealReal rejects Chanel’s claims, with both parties agreeing to put judicial proceedings on hold in April in an attempt to settle out of court. The two sides are still working on a potential resolution to the case.

RealReal’s losses mount, but company ‘insulated’ from supply challenges

The court cases and ensuing shareholder settlements were not mentioned in The RealReal’s third quarter earnings call, which occurred on Monday after the luxury resale company reported gross merchandise value (GMV) grew 50 percent year-over-year to $368 million, and expanded total revenue 53 percent in the period to $119 million. On a two-year basis, both GMV and revenue jumped 46 percent.

Consignment and service revenue was $89.5 million, an increase of 39 percent and 30 percent when compared to the same periods in 2020 and 2019, respectively. And direct revenue was $29.4 million, an increase of 115 percent and 139 percent compared to the prior periods.

Additionally, The RealReal saw its active buyers grow 25 percent in the period to 772,000, its largest year-over-year growth in buyers since the first quarter of 2020, which saw a 32 percent jump. Thirty percent of new consignors come from the company’s retail locations, while approximately 57 percent of consigners end up being buyers, according to chief financial officer Rati Levesque.

However, the consignment service’s losses continue to widen. Net loss was $57 million for the third quarter, compared to a loss of $44 million in 2020 and a $25 million loss in 20219.

In the call, CEO and founder Julie Wainwright said the effects of Covid-19 are effectively behind The RealReal, with at-home consignments exceeding pre-Covid levels.

And in other good news, Wainwright said The RealReal’s business model is “largely insulated from the supply chain shortages and certain inflationary impacts many businesses are currently experiencing.”

To combat the elevated shipping costs and staffing challenges, specifically in the company’s authentication centers, The RealReal developed and implemented shipping diversification and last mile optimization initiatives, and also expanded automation capabilities within its authentication centers.