Securities Regulation Daily Wrap Up, FRAUD AND MANIPULATION—2d Cir.: Appeals court partly vacates dismissal of suit based on Peloton’s ‘misleading’ statements, (Aug 28, 2025)

By Rebecca E. Hoffman, J.D.

The Second Circuit finds that three of the statements were false or misleading and should be reconsidered but Judge Jon O. Newman dissents in part in a separate opinion.

Institutional investors’ class action brought on behalf of Peloton shareholders will return to the Southern District of New York for further consideration of three of the original 18 allegedly false or misleading statements about post-pandemic demand for Peloton products, the Second Circuit decided Aug. 27 (City of Hialeah Employees’ Retirement System v. Peloton Interactive, Inc., No. 24-2803 (2d Cir. Aug. 27, 2025)).

Although the Second Circuit panel agreed with the district court regarding most of the statements, it found that three of the statements were plausibly actionable, and remanded.

Because the Covid-19 pandemic forced gyms to close, demand increased dramatically and quickly for Peloton stationary bikes and treadmills during that time, causing a backlog in deliveries. Peloton increased production and inventory to correct this. In early 2021, the demand began to decline, and unsold inventory built up.

Abundance of bikes. In November 2021, the company disclosed that 91 percent of its inventory was unsold and reduced its earnings guidance. In January 2022, it came to light that Peloton was taking a break from making bikes. On both occasions, the stock price dropped. The plaintiffs sued Peloton and its principals on behalf of stock purchasers between February 5, 2021 and January 19, 2022, alleging violations of Exchange Act Section 10(b), 20(a), and 20A, and Rule 10b-5.

The plaintiffs claimed that the defendants falsely stated during the class period that demand for, and profits from, Peloton bikes and treadmills remained high when the world began to come out of the pandemic. The plaintiffs relied on confidential witness statements from former Peloton employees who said, among other things, that sales had begun to decline as early as December 2020, and that inventory backlog was so significant that Peloton had to pay substantial demurrage fees for letting its inventory sit at ports. The district court found that the challenged statements were “‘entirely consistent with Peloton’s actual financial results,’” and dismissed the action. The defendants appealed.

To determine whether a statement is false or misleading under Section 10(b), it must be determined whether the statement, taken in context, would mislead a reasonable investor. For it to be deemed “material,” there must be enough specificity to allow an investor to reasonably rely on the statement to guarantee a particular outcome.

Not misleading. The appeals court affirmed the court’s holding below as to most of the statements. For example, it found that a Feb. 4, 2021 earnings call statement that “‘We are not seeing a softening of demand. … We are seeing incredibly strong organic demand,’” is not actionable because the plaintiffs failed to plead with particularity that demand had decreased by this point in time.

On May 25, 2021, at an analyst conference, in response to a question about future bike demand, an executive said that they were looking to the fourth quarter of 2019 to determine where demand was headed, since the pandemic was “‘an anomaly,’” and noted that “‘bike demand is still over 3x where it was a couple of years ago.’” The Second Circuit agreed that this was not misleading, given that the executive acknowledged the outsized pandemic demand, and the statement about demand being three times higher than before was factually true. “A reasonable investor would have understood [the] statement to address long-term growth trends rather than sequential quarter-over-quarter changes,” the court said.

Statements to review on remand. However, the Second Circuit found that the district court erred as to a few of the statements. In August 2021, Peloton reduced the price of its original “Bike” by $400. An earnings calls statement that the price drop was “‘absolutely offensive’” was plausibly misleading, the court found, in light of other statements that the price was reduced to address the excess inventory, and thus a defensive tactic.

Three filings contained a statement that “‘[i]f we fail to accurately forecast consumer demand, we may experience excess inventory levels or a shortage of products available for sale.” The court found that this was not misleading as to the May 2021 Form 10-Q, but including this statement in August and November filings was misleading, because the “risks had already materialized” by then and were no longer hypothetical.

Dissent. The concurring/dissenting opinion disagreed that these statements are false or misleading. “[A] price reduction inevitably serves both an offensive and a defensive purpose,” Judge Newman observed. He also pointed out that “[n]o reasonable investor could have regarded Form 10-Q [’s risk disclosure] as misleading when simultaneously apprised of this $1 billion [earnings guidance] reduction.”

The case is No. 24-2803.

Judge: Newman, J.; Chin, D.; Menashi, S.

Attorneys: Daniel Lawrence Berger (Grant & Eisenhofer P.A.) for Robeco Capital Growth Funds Sicav Robeco Global Consumer Trends and City of Hialeah Employees Retirement System. Michele D. Johnson (Latham & Watkins) for Peloton Interactive, Inc. and Thomas Cortese.

Companies: Robeco Capital Growth Funds Sicav Robeco Global Consumer Trends; City of Hialeah Employees Retirement System; Peloton Interactive, Inc.

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