In part 1 of this post, we talked about the fiduciary duties of corporate directors and officers. In part 2, we provide an example of the kinds of lawsuits these fiduciaries can face.

Allegations against directors and officers of a California-based company

A shareholder derivative suit is one in which a shareholder sues on behalf of the corporation to protect its interests. These lawsuits frequently target officers and directors with allegations of breach of fiduciary and other legal duties. Any money damages awarded would go to the company.

On Sept. 10, a shareholder of the San Francisco company The RealReal (TRR) filed a shareholder derivative lawsuit in Delaware federal court in which she alleges that certain directors and officers of the company breached their fiduciary duties and violated federal securities laws.

Nature of the claims

TRR sells used luxury goods online and in physical stores. It has widely publicized its “multi-point authentication process,” calling it the “most rigorous authentication process in the marketplace,” reports The Fashion Law. In other words, it claims not to sell counterfeit goods because it authenticates every item before its sale.

Specifically, the shareholder alleges that the defendants made “materially false and/or misleading statements regarding its business, operations, and prospects” in securities filings, press releases, phone calls and interviews. The plaintiff-shareholder claims that the defendants publicly described the authentication process as “extraordinarily robust and … conducted by highly-trained experts” when in reality, copywriters without adequate training and experience quickly look at each item under the pressure of a quota system.

The essence of her complaint is an allegation that misrepresenting the quality of the authentication process misleads investors about the value generated by internal company processes as well as the public when people buy goods that may be counterfeit. She alleges further that these misrepresentations caused stock prices to drop and opened up TRR to two class-action lawsuits in California for securities fraud

The complaint (available through a link at the end of The Fashion Law article linked to above) contains claims for breach of fiduciary duties, unjust enrichment, abuse of control, gross mismanagement, waste of corporate assets and violations of federal securities laws.

The Fashion Law reports that TRR has responded that this lawsuit is similar to others against which they are “vigorously defending” and that the authenticators are trained and qualified.

Takeaway

It will be interesting to see the resolution of this dispute. In the meantime, lawyers at our law firm will continue to advise clients who are directors and officers about their fiduciary duties and, when necessary, strongly defend them in litigation.