Etsy Inc. might carry counterfeit goods on its platform, but that’s not enough for early investors to claim they were misled and seek compensation for money lost after Wall Street realized the site could have held millions of knockoff items.
The online marketplace saw its stock fall nearly 25 percent in May 2015, about a month after it began trading for about $30 per share, on concerns by analysts that there were potential counterfeit and trademark issues for more than two million products on the site. But now, New York District Judge Ann Donnelly has dismissed claims by a trio of shareholders that Etsy misled investors in the run up to its initial public offering on the issue of counterfeits and how it could affect its value.
Pointing to Etsy’s prospectus, Donnelly said in her dismissal order this week that “no reasonable investor” could see statements Etsy made characterizing itself as “authentic” and “genuine” as misleading on issues the company faced with regard to counterfeit goods.
“The plaintiff’s allegations might show that Etsy’s compliance practices were imperfect — perhaps even awful — and that its managers knew of ongoing infringement problems. The plaintiffs do not, however, establish that the challenged values statements were objectively false or disbelieved when Etsy made them,” Donnelly said.
She went on to note that when Etsy’s prospectus is viewed “in context,” any purportedly “vague statements about ‘authenticity’ and ‘mindfulness’ were surrounded by more definite statements about Etsy’s actual compliance practices, as well as warnings about the limits of its ability to prevent all counterfeiters from gaining access to its site.”
As for claims by the investors that Etsy used an improper method of calculating its value and gross merchandise sales that didn’t account for counterfeit goods, Connelly called the allegation “far-fetched, saying Etsy plainly explained its process for receiving and dealing with infringement complaints and that the company had no obligation to subtract this population from its valuation.”
“The plaintiffs had no reason to believe that the defendants would adjust the financial metrics to account for infringement, and they provide no basis for the assertion that the defendants deliberately failed to do so in order to mislead investors. To put it simply, ‘a violation of federal securities law cannot be premised upon a company’s disclosure of accurate historical data,’” Donnelly added citing circuit court precedent.
A representative of Etsy declined to comment and counsel for the investor plaintiffs could not be reached.
The suit was filed by three investors in May 2015, around the time Etsy’s share price dropped by about 10 percent after Wedbush Securities downgraded the company’s stock to “underperform” based on its own research that showed more than 5 percent of the sites goods could be counterfeit or subject to infringement complaints. Etsy’s shares dropped again in May by about 20 percent after Wedbush and Morgan Stanley issued research notes questioning the site’s ability to grow after it reported a first-quarter drop in revenue.
Relying on a number of “confidential witnesses” who worked for Etsy between 2013 and 2015, the investors claimed that the company knew its practices to fight counterfeit sales were “flawed” and that the “massive volume” of related complaints was not adequately disclosed to potential investors, nor were Etsy’s business practices as a whole.
By misleading the public, the investors said Etsy’s value was artificially inflated and caused them to lose money.
Etsy for its part argued in its push for dismissal that nothing the investors took issue with showed any company statements to be false or materially misleading and failed to show any element of scienter, essentially knowledge of wrongdoing, or how making the allegedly false valuation and business statements benefited the company.
Since the lawsuit was filed, Etsy has updated its intellectual property policies and notification tools and in 2015, the site disabled about 200,000 listings and closed 5,000 shops over infringement issues, according the company’s most recent “Transparency Report.”
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