throbber
EFiled: May 04 2023 01:49PNFEDT
`7.)
`Transaction ID 69954400={°;,\4.\"\))
`i wf
`Case No. 2023-0468-KSJM 387s
`XOFmE
`
`IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
`
`KAREN FLORENTINO,derivatively on
`behalf of PELOTON INTERACTIVE,INC.,
`
`Plaintiff,
`
`Vv.
`
`: C.A. No. 2023-0468-KSJM
`
`THOMASCORTESE, JOHN FOLEY,
`MARIANA GARAVAGLIA,
`HISAO KUSHI, WILLIAM LYNCH,
`JILL WOODWORTH, KAREN BOONE,
`JON CALLAGHAN, PAMELA
`THOMAS-GRAHAM,and
`HOWARD DRAFT,
`
`: Original Version Filed:
`: April 28, 2023
`:
`: Public Version Filed:
`: May3, 2023
`:
`
`Defendants,
`
`and
`
`PELOTON INTERACTIVE,INC.,
`a Delaware Corporation,
`
`Nominal Defendant.
`
`VERIFIED STOCKHOLDER DERIVATIVE COMPLAINT
`
`Plaintiff Karen Florentino (“Plaintiff”), by and through her undersigned
`
`attorneys, brings this stockholder derivative action on behalf of Nominal Defendant
`
`Peloton Interactive, Inc. (“Peloton” or the “Company”) and against certain of the
`
`Company’s officer and directors for breach of fiduciary duty and using Peloton’s
`
`material non-public information (“MNPI”)to sell stock and avoid material losses.
`
`EFiled: May 04 2023 01:49PM EDT
`Transaction ID 69954400
`Case No. 2023-0468-KSJM
`
`

`

`Plaintiff makes these allegations upon personal knowledge as Plaintiff and
`
`Plaintiff's actions and, as to all other matters, upon the investigation of counsel,
`
`which includes without limitation: (a) review and analysis of public filings made by
`
`Peloton and other related parties with the United States Securities and Exchange
`
`Commission (“SEC”); (b) review and analysis of press releases, interviews, and
`
`other publications describing statements by certain of the Defendants and other
`
`related nonparties; (c) review of news articles, stockholder communications, and
`
`postings on Peloton’s website concerning the Company; (d) review of Peloton’s
`
`corporate governance documents; and (e) review and analysis of certain (partially
`
`redacted) non-public documents produced by Peloton in response to Plaintiffs
`
`demandfor books and records made pursuantto 8 Del. C. §220.
`
`NATURE AND SUMMARYOF THE ACTION
`
`1.
`
`This is a stockholder derivative action brought by Plaintiff on behalf of
`
`and for the benefit of nominal defendant Peloton against certain of its officers and
`
`directors for breaches of fiduciary duties and insider trading.
`
`2.
`
`Peloton, as an at-home fitness company, experienced a surge in sales
`
`when the COVID-19 pandemic kept many people out of the gym and demandforin-
`
`home exercise options increased dramatically. Peloton experienced unprecedented
`
`demandfor its products and services, especially during the first year ofthe pandemic.
`
`

`

`3.
`
`Peloton reported a 137% increase in its connected fitness subscription
`
`over the prior year, as reported in its September 2020 10Q — andinits stock price —
`
`with pre-Pandemic stock prices at about $25 per share and intra-pandemicprices
`
`rising as high as $150 per share.
`
`4,
`
`But by the close of 2020 stay at home orders had been loosened and a
`
`vaccine was on the horizon, promising a future where people could return to work,
`
`school and the gym in person.
`
`5.
`
`Despite seeing a vaccine and freedom to allow people to gather in-
`
`person on the horizon, Peloton insisted its recent success was not a blip but instead
`
`a permanentshift toward at-homefitness.
`
`6.
`
`On December 9, 2020, Peloton’s founder and then-CEO John Foley
`
`(“Foley”) answered an investor question about “how a post-COVID world impacts
`
`[Peloton’s] view of[its] business opportunity,” by assuring investors that Peloton’s
`
`results “ha[ve] nothing to do with COVID. That is a human need of I wantto get
`
`fit, I want fitness in mylife in a consistent way; .
`
`.
`
`. I want it to be convenient, I want
`
`it to be fun, I wantit to be motivating, and I wantit to be a great value. Andall of
`
`those things are foundational to what Peloton delivers, always delivered it. We
`
`delivered it in pre-COVID, during COVID, and we will deliver it post-COVID.”
`
`

`

`7.
`
`Later, on February 4, 2021, during an investorcall Foley again claimed
`
`Peloton wasseeing strong demandforits products and was not seeing any slowdown
`
`from the COVID vaccine.
`
`.TEMASTTooSee
`Leaea
`
`9.
`
`But as 2021 was ending, the Company wasforced to begin to revealits
`
`fate. On November 4, 2021, the Company announcedit was revising its full year
`
`revenue down by $1 billion. In addition, the Company revealed material weaknesses
`
`in its inventory system noting that as of September 30, 2021, its inventory had
`
`reached $1.27 billion, a 35% increase over the previous quarter.
`
`10.
`
`That day Peloton’s stock dropped from a high of $86.06 per share to
`
`$55.64 per share.
`
`11.
`
`The impact of the pandemic is patently obvious when looking at
`
`Peloton’s stock prices. Peloton shares soared more than 440% in 2020 but dropped
`
`76% in 2021.
`
`12.
`
`Finally admitting the reality that at-home fitness was not going to
`
`continue to grow at the same pace post-pandemic, on February 8, 2022, the Company
`
`announced on an investor call that it was engaging in a $60 million restructuring
`
`program and was cancelling its plans to construct an additional manufacturing
`
`facility in Ohio.
`
`

`

`13.
`
`Throughout the relevant period, Defendants misled the public about
`
`Peloton’s growth and inventory. Worse still, Defendants failure to admit the
`
`Company’s true fiscal integrity provided them an opportunity to sell their Peloton
`
`stockat artificially inflated prices.
`
`14.
`
`On January 19, 2022, Company SECfilings revealed that Company
`
`executives, including the Company’s CEO, Chief Legal Officer, and members of the
`
`Board sold nearly $500 million in stock when the stock was trading at its highest
`
`levels. The SEC filings showedthe selling started when the stock started surging
`
`past $80 a share in thefall of 2020 and gained momentum in 2021 as the stock held
`
`above $100.
`
`15.
`
`As a result of their
`
`fiduciary breaches and misleading market
`
`statements, the Company and Defendants have faced a federal securities fraud class
`
`action and it has been reported that the SEC is investigating Defendants for insider
`
`trading.
`
`Plaintiff
`
`THE PARTIES
`
`16.
`
`Plaintiff Karen Florentino is a stockholder of nominal defendant
`
`Peloton and has continuously held Peloton stockat all relevant times.
`
`

`

`Nominal Defendant
`
`17. Nominal defendant Peloton is a Delaware corporation with principal
`
`executive offices located at 441 Ninth Avenue, Sixth Floor, New York, New York.
`
`Peloton is the largest interactive fitness platform in the world with over 6.7 million
`
`members as of December31, 2022. The Company develops connected, technology
`
`enabled fitness products as well as related content offered through month-to-month
`
`subscriptions. There are two classes of Peloton commonshares: publicly traded
`
`Class A commonstock representing one vote per share and privately held Class B
`
`commonstock representing 20 votes per share.
`
`Officer Defendants
`
`18. Defendant Thomas Cortese (“Cortese”) has been Peloton’s Chief
`
`Product Officer since August 2021, Chief Operating Officer from February 2012 to
`
`August 2021, and Head of Product Development from April 2019 to August 2021.
`
`Cortese co-founded the Company in January 2012. In addition to his prior working
`
`relationship with Foley, Cortese, and Foley are reportedly close friends. Cortese
`
`owns or controls shares representing 9.8% of the Company’s total voting power.
`
`Before selling a portion of his shares based on Peloton’s MNPI as described herein,
`
`Cortese controlled 9.9% of the Company’s total voting power.
`
`19. Defendant Foley was Peloton’s CEO from June 2012 to February 2022;
`
`and Chairman of the Board from April 2015 to February 2022. Foley co-founded
`
`

`

`the Companyin January 2012. After stepping down as CEOFoley kepthis position
`
`on the Board until September 2022. Foley used his position at the Companyto hire
`
`his wife, Jill Foley, as the Vice President of Boutique & Apparel.
`
`In that role Jill
`
`Foley earned an annualbase salary of $334,750, in addition to equity compensation
`
`in aggregate amount of $457,688. Foley wascriticized for appointing his wife, who
`
`had no prior fashion or executive experience,! to this role. Foley owns or controls
`
`shares representing 33.8% of the Company’s total voting power. Before selling a
`
`portion of his shares based on Peloton’s MNPI as described herein, Foley controlled
`
`39.6% of the Company’s total voting power.
`
`20. Defendant Hisao Kushi (“Kushi’”) was Peloton’s Chief Legal Officer
`
`June 2015 to October 2022. Kushi co-founded the Company in January 2012. Kushi
`
`is Foley’s “trusted, best friend” as reported by Fortune Magazine in January 2021.
`
`Kushi used his position at the Company to hire his daughter, Kate Kushi, as
`
`Associate Product Marketing Manager.
`
`In that role Kate Kushi earned an annual
`
`base salary of $106,939, in addition to equity compensation in the aggregate amount
`
`of $30,050. Kushi ownsor controls shares representing 7.7% ofthe Company’s total
`
`voting power. Before selling a portion of his shares based on Peloton’s MNPIas
`
`described herein, Kushi controlled 8.1% of the Company’s total voting power.
`
`! Prior to joining Peloton Jill Foley was a volunteer attorney for Sanctuary for
`Families and prior to that served as staff attorney for NYC Administration for
`Children's Services.
`
`

`

`21.
`
`Cortese, Foley, and Kushi are collectively referred to herein as the
`
`“Controller Defendants.”
`
`22. Defendant Mariana Garavaglia (“Garavaglia”) was Peloton’s Chief
`
`Operating Officer from August 2021 until at least February 2022; Chief Business
`
`Operations Officer from May 2020 to August 2021; and Chief People Officer from
`
`June 2019 to May 2020.
`
`23. Defendant William Lynch (“Lynch”) was Peloton’s President from
`
`January 2017 to February 2022 and a director from August 2019 to May 2022.
`
`Lynch worked with Foley for more than 20 years at his prior position at Barnes &
`
`Noble, together launching the Nook e-book reader. Lynch ownsor controls shares
`
`representing 9.1% of the Company’s total voting power. Before selling off a portion
`
`of his shares based on Peloton’s MNPIas described herein, Lynch controlled 12.3%
`
`of the Company’s total voting power.
`
`24. Defendant Jill Woodworth (“Woodworth”) was Peloton’s Chief
`
`Financial Officer from April 2018 to June 2022.
`
`25. Defendants Cortese, Foley, Garavaglia, Kushi, Lynch, and Woodworth
`
`have all been named as defendants in a related securities fraud class action alleging
`
`violations sections 10(b) and 20(a) of the Exchange Act.*
`
`* Robeco Capital Growth Funds SICAV - Robeco Global Consumer Trends v.
`Peloton Interactive Inc. et al., No. 1:21-cv-09582 (S.D.N.Y.)
`
`8
`
`

`

`26. Defendants Cortese, Foley, Garavaglia, Kushi, Lynch, and Woodworth
`
`are collectively referred to herein as the “Officer Defendants.”
`
`Director Defendants
`
`27. Defendant Karen Boone (“Boone”) has been Chair of Peloton’s Board
`
`since September 2022 and a director since January 2019. Boone was Peloton’s Lead
`
`Independent Director from October 2021 to September 2022. Boone has been the
`
`Chair of Peloton’s Audit Committee since at least October 2020. Boone and
`
`Thomas-Graham both also serve as directors for Rivian, an electric vehicle
`
`manufacturer.
`
`In addition, Callaghan’s venture capital
`
`fund, True Ventures,
`
`provided substantial funding to Modern Animal, a start-up veterinary company
`
`where Booneis a board member.
`
`28. Defendant Jon Callaghan (“Callaghan”) has been a Peloton director
`
`since April 2015 and a memberof Peloton’s Audit Committee since at least October
`
`2020. Callaghan is managing member of True Ventures, a venture capital firm that
`
`was a pre-IPO investor in Peloton in 2015 and together with another venture capital
`
`firm provided $35.5 million in funding to Modern Animal where Booneis a board
`
`member.
`
`29. Defendant Pamela Thomas-Graham (“Thomas-Graham”) has been a
`
`Peloton director since March 2018. Thomas-Graham and Booneserve together as
`
`directors of Rivian.
`
`

`

`30. Defendants Boone, Callaghan and Thomas-Graham are collectively
`
`referred to herein as the “Director Defendants.”
`
`Former Director Defendant
`
`31. Defendant Howard Draft (“Draft”) was a Peloton director from April
`
`2015 to October 2021. Draft was a memberof the Audit Committee from at least
`
`October 2020. Draft abruptly resigned immediately prior to the Company’s
`
`admission of its true financial condition.
`
`32. Draft,
`
`the Officer Defendants, and the Director Defendants, are
`
`collectively referred to herein as “Defendants.”
`
`Relevant Non-Parties
`
`33.
`
`Barry McCarthy (“McCarthy”) has been a Peloton director and
`
`Company’s CEO andPresident since February 2022.
`
`34.
`
`Jay Hoag (“Hoag”) has been a Peloton director since August 2018.
`
`Hoag is a co-founder of TCV, a venture capital firm and one of Peloton’s earliest
`
`investors.
`
`The Company reported in its SEC filings concurrently with the
`
`Company’s IPO “entities affiliated with TCV, an existing stockholder, purchased
`
`from us approximately $100.0 million of shares of our Class A commonstock at a
`
`price per share equal to the IPO price in a private placement.”
`
`35. Angel L. Mendez (“Mendez”) has been a Peloton director since
`
`February 2022.
`
`10
`
`

`

`36.
`
`Jonathan Mildenhall (‘Mildenhall’) has been a Peloton director since
`
`February 2022. Peloton’s SEC filings acknowledge that Mildenhall
`
`is not an
`
`“independent director” due to the Company’s transactions with Mildenhall’s
`
`consultancy firm.
`
`SUBSTANTIVE ALLEGATIONS
`
`Background of the Companyandthe Founders’ Control
`
`37.
`
`Peloton describes itself as “the largest interactivefitness platform in the
`
`world.” The Company designs and manufactures at-homefitness equipment, andits
`
`product offerings include: Peloton Bike, Peloton Bike+, Peloton Tread, Peloton
`
`Tread+, Peloton Row, and Peloton Guide. To complement this equipment, Peloton
`
`markets a monthly subscription of virtual fitness classes that can be taken by its
`
`members using this equipment or independently.
`
`38.
`
`Peloton was founded in 2012 by the Controller Defendants, along with
`
`Graham Stanton, and Yony Feng,all of whom metthrough workingat, or knowing
`
`others that workedat, the media and internet company IAC Interactive Corp.
`
`39.
`
`Peloton at relevant times has been controlled by Foley, Kushi, and
`
`Cortese, who are the Company’s founders and who maintained control through their
`
`ownership of super-voting Class B shares and their managementpositions.
`
`40.
`
`The Controller Defendants collectively controlled over 50% of the
`
`Company’s total voting power at all relevant times. Currently, Foley controls
`
`11
`
`

`

`33.8%; Cortese 9.8%; and Kushi 7.7%. Prior to the insider sales described herein
`
`these insiders controlled over 60% of the Company’s total voting power.
`
`41.
`
`The Controller Defendants are and/or were also Peloton’s top executive
`
`officers at relevant times. Foley was CEO until February 2022 and then Executive
`
`Chair until September 2022; Kushi was Chief Legal Officer until October 2022, and
`
`Cortese is the Chief Product Officer. And Lynch, who owns Class B shares
`
`representing 9.1% of the Company’s voting power, was the Company’s President
`
`until February 2022, director until May 2022 and has a decades-long personal and
`
`professional relationship with Foley stemming from, amongotherthings, their work
`
`together for Barnes & Noble.
`
`42.
`
`Foley had the idea for the Company and spent its founding years
`
`pitching the idea and raising funds.
`
`43.
`
`Peloton started shippingits first bikes in 2014 and in 2018 expanded to
`
`begin selling treadmills.
`
`44.
`
`Peloton went public on September 26, 2019, in what wasatthe time the
`
`third-worst trading debut for a major IPO in overa decade.
`
`The Pandemic’s Impact on Peloton
`
`45.
`
`In early 2020, the pandemic began to spread to the U.S. By March
`
`2020, federal and state governments began to issue stay-at home orders. Businesses
`
`12
`
`

`

`were shuttered. The world was seemingly closed, and people searched for ways to
`
`improvetheir quality of life while being stuck at home.
`
`46. Not being ableto visit the gym orlocal spin studio, individuals looking
`
`to find exercise at home turned to Peloton.
`
`47.
`
`By May 2020, Peloton reported a 66% increase in sales and a 94%
`
`increase in subscribers.
`
`48.
`
`In September 2020, Peloton reported its first profitable quarter, with
`
`sales spiking 172% over the same quarter the year prior and revenuerising to $607
`
`million.
`
`49,geSESIBSieSe
`PEeRaIBaeoe
`CALPayaMe-
`
`50. A weeklater, on September 11, 2020, Foley told investors during an
`
`investor call
`
`that Peloton’s growth was “not COVID dynamics.
`
`These are
`
`fundamental, sustainable dynamics that meet people where they are with content and
`
`programs that exceed their fitness and wellness goals and makeit fun and engaging
`
`to work out at home.”
`
`|
`
`13
`
`

`

`51.
`
`On September 22, 2020, Peloton filed a Form 8-K notifying investors
`
`that Foley had entered into a 10b5-1 trading plan on September 16, 2020, just days
`
`after telling investors that the increased demand for the Company’s products was
`
`“not COVID dynamics.” Under the plan, Foley would sell 100,000 shares of his
`
`Peloton common stock each month for the next two years. These sales would be
`
`Foley’s first post-IPO sales.
`
`b|an
`
`

`

`aeeaeeaee
`vs,EEOBEEELA
`
`56.
`
`On October 30, 2020, during Goldman Sachs’ Builders and Innovators
`
`Summit, Foley again denied that that customer demandwastheresult of a pandemic-
`
`related spike,telling investors:
`
`I hate the COVID dynamic. We want to win fitness in
`regular times. Anytime I hear about Peloton as a COVID
`story, I get annoyed. What we’re buildingis here tostay.
`COVID is helping at-homefitness, but it’s not a pull-
`forward of demand.
`It’s an acceleration of demand.
`It’s
`better to work out at home. There are 35 million homes
`with treadmills in them. They’re crap treadmills. They
`want to work out at home,butit’s not engaging.
`
`The World Begins to Reopen
`
`57.
`
`In early November 2020, Pfizer announced its COVID vaccine was
`
`over 90% effective, giving people hope that the world was about to re-open.
`
`58.
`
`On this news, Peloton’s stock price fell 25%.
`
`59. Despite knowing that an effective vaccine would soon lead to the re-
`
`opening of gyms, Defendants chose to mislead investors that the Company’s short-
`
`

`

`term meteoric rise was not a pandemic-related anomaly but rather was just the
`
`beginning.
`
`60.
`
`On December 9, 2020, Peloton held its Annual Meeting of
`
`Stockholders. During the meeting, attended by Foley, Kushi, Garavaglia, and
`
`Lynch, Foley answered an investor question about “how a post-COVID world
`
`impacts [Peloton’s] view of [its] business opportunity” by assuring investors that
`
`Peloton’s results:
`
`ha[ve] nothing to do with COVID. That is a human need
`of I wantto get fit, I want fitness in mylife in a consistent
`way; ... I want it to be convenient, I want it to be fun, I
`want it to be motivating, and I wantit to be a great value.
`And all of those things are foundational to what Peloton
`delivers, always delivered it. We delivered it
`in pre-
`COVID, during COVID, and we will deliver it post-
`COVID.
`
`The Board Knew the Company’s Sales Boon Was Ending
`
`61.
`
`As vaccines started a successful
`
`rollout
`
`into wide distribution,
`
`Defendants knew that Peloton’s sales would quickly decline with the to returnto in-
`
`personactivities.
`
`oe]Aaaie
`
`guaSauied A
`
`‘eaSyaera
`
`

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`
`2910
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`
`a Wn
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`
`67.
`
`Boone, Callaghan, and Draft were on the Audit Committee at the time
`
`21]
`
`oo bo
`
`,|
`
`we 2
`
`a an
`
`— No
`
`17
`
`

`

`68.ereeyeat. as the vaccine wasbeing rolled out across the
`
`71.
`
`The Boord «soI
`
`‘eeiacael
`orSE
`
`1 1
`
`18
`
`

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`2915
`
`~~
`
`74,
`
`At this
`
`i
`75
`
`18
`
`.
`
`>=
`
`17
`
`—_=_—=
`
`

`

`76.
`
`As alleged in the related securities fraud class action based on
`
`information obtained from confidential witnesses, by February 2021 the Company’s
`
`internal Salesforce data which reported actual sales data used to create forecasts,
`
`“revealed that the sales teams were missing quotas.” The Officer Defendants
`
`received regular Salesforce reports.
`
`77.
`
`The complaint in the securities fraud class action also alleges that
`
`Woodworth and Lynch learned in February 2021 that demand for the Peloton Bike
`
`and Tread would decline by 7%-20% starting in March 2021.
`
`78.
`
`~ ad
`
`9919
`
`oo
`
`—
`
`.
`
`

`

`STEYLSa
`
`82. ara. Foley told investors at a February 4, 2021 call
`
`in
`
`response to a question about the pandemic’s impactthat:
`
`is
`We are not seeing a softening of demand. That
`absolutely not what’s happening here. We are seeing
`incredibly strong organic demand even in the phase of
`light marketing.
`...
`[I]t’s absolutely not a softening of
`demand.... We’re seeing robust demand.
`
`When the vaccine was announcedin the fall, you saw a
`reaction to the stock but we did not see any reaction to our
`sales or demand. Westill have not seen any softening
`since that vaccine was announced and since the vaccine
`has been rolling out.
`So other than investors getting
`nervous, the consumersare still feeling like they want to
`work out at home. .. So we remain very, very bullish on
`our opportunity. We haven’t seen any softening of
`demand.
`
`21
`
`

`

`83.
`
`In response to another Pandemic related question, Lynch told investors:
`
`Wedo research on consumer perceptions around home
`fitness and going back to the gym, et cetera. I don’t know
`if this is what you’re getting at, but as we study the
`consumer and we have quarterly tracking, and we do
`bespoke research. And what’s clear is the shift into the
`home is not a COVID-led phenomenon. It has accelerated
`it. But we see, if anything, as we emerge to whatever the
`new normalis that the norms haven’t changed. There is a
`secular shift into fitness in the home. As John [Foley] has
`said before, it’s a better experience and a better place at a
`better value. And consumersareall seeing that.
`
`And so everything we’ve seen in the data, I think Jill has
`talked in the past about some of the bespoke research
`we’ve done on going back to the gyms and consumer
`perception on that vis-a-vis home workout suggests that
`certainly, COVID has beena tailwind for our demand. But
`in terms of demand for Peloton products and Connected
`Fitness in the home, we see continued momentum in
`foreseeable future.
`
`84.
`
`Woodworth similarly assured investors that demand wasstrong:
`
`Moving on to full year expectations, for fiscal 2021, we
`are raising our estimate of full year total revenue to $4.075
`billion or better representing 123% year-over-year growth
`or higher.
`In the second half of fiscal 2021, we expect
`quarterly sequential revenue growth as we bring down our
`delivery backlog build adequate inventory as a result of
`our shipping and manufacturing investments and resume
`marketing spend. The increase in revenue guide for the
`balance of the year is primarily driven by the continued
`robust global demand for Bike, Bike+ and strong U.S.
`demand for Tread+.
`
`22
`
`

`

`85.
`
`In addition, despite knowing that the vaccine would dampen demand,
`
`Foley told investors the Company would be spending more moneyto get bikes to
`
`consumers more quickly:
`
`In order to do that, we are investing over $100 million in
`expedited shipping to reduce the wait
`times for our
`products.
`This expense will
`include air shipments,
`expedited ocean freight and incremental costs to get
`containers to other ports that are less congested.
`
`86.
`
`In a stockholder letter issued that same day investors were told “our
`
`supply chain investments over the last several months are helping us better match
`
`our supply and demand going forward.” But, in reality, demand was shrinking and
`
`warehouses were amassing a stockpile of unsold equipment.
`
`87.
`
`On February 11, 2021, Foley participated in the Goldman Sachs
`
`Technology and Internet Conference. Foley once again claimed that Peloton’s
`
`success wasjust the beginning, comparing demandfor the Company’s Peloton Tread
`
`treadmill to the permanentshift to smartphones:
`
`I know there’s chatter of — we are a stay-at-home stock,
`and we get back to normal and Peloton dies or whatever
`the anxiety would be. We obviously are taking the other
`side of that. And I'll tell people — I’Il tell everyone on the
`call that for 20 years, 25 years, every year in the U.S.,
`there’s been 5 million treadmills sold. 5 million treadmills
`sold in the U.S. every year, pre-COVID.
`Soit’s not like
`working out at home was a COVIDthing. It has always
`been a thing.
`It’s just the products have been dopey and
`not connected.
`
`23
`
`

`

`So when you think about your — when you had a what you
`could call a dumb phone, the phone you and I grew up
`with, it was connected to the wall in the kitchen where
`your grandma would call you. .. That was a dumb phone.
`Now that there’s smartphones, you can’t imagine going
`back to a dumb phone,right? .
`.
`
`Smartphones are here to stay. Now that you have - now
`that there’s awareness of Peloton and, more than anything,
`COVID has accelerated the awareness that a smart bike
`and a smart treadmill exist, .. . The awareness of that is
`now very high, thankfully.. .
`
`. that the only place you
`I see a world 2 years from now,. .
`can go to look at a treadmill or a bike and future products
`that we’re going to bring to market is a Peloton store. And
`we have 118 of them globally right now. We plan to
`continue investing in them. I don’t know whether we’re
`going to talk about this convertible note we did this week.
`But we now haveover $3 billion on the balance sheet, and
`we have a lot of plans to invest it... So we’re going to
`continue to be one of the great growth stories of the next
`decade. I’m very confident...
`
`[T]he demand has been through the roof, and we have
`largely scaled or more than scaled our supply chain
`capacity from a manufacturing perspective to keep up with
`it.
`
`88.
`
`On March 1, 2021, Woodworth spoke at
`
`the JMP Securities
`
`Technology Conference, telling investors:
`
`Unequivocally, we want COVID-19 to end more than any
`company in the world. We long have believed and held
`the view that fitness is moving to the home. If you have a
`better experience at a better value, with better instructors
`at a better time, there’s no better place to work out than the
`home. .
`. So I feel like this is a trend that’s here to stay.
`COVIDjust accelerated that trend.
`
`24
`
`

`

`And I think as you look out with respect to what our
`growth algorithm looks like in a post-COVID world,it’s
`continuing to further penetrate the markets we’re in,it’s
`new international markets, it’s new products. There are
`just so many vectors for us to grow. And we’resolittle
`penetrated into our sand that we’re just going to be doing
`it through what we’ve known how to doit for ages and
`ages, which is performance, marketing, and the word of
`mouth and doing our best to create the member experience
`that makes people tell their friends and family to buy a
`Peloton product.
`
`89.
`
`
`
`

`

`92.
`
`93,
`
`“hp~~
`
`94.
`
`On May5, 2021, the recall of 125,000 Peloton Tread and Tread+ was
`
`publicly announced.
`
`95.
`
`Even in the face of recalls and a more vaccinated population,
`
`Woodworth continuedto tell investors that the Company believed in continuingits
`
`growth post-COVID during Peloton’s on a May 6, 2021 investorcall: “[O]bviously,
`
`26
`
`

`

`last year was a big comp. It was the first few months of COVID. But that type of
`
`growth over a 2-year stack, we’re pretty excited about, and webelievethat, that can
`
`continue into fiscal ‘22.”
`
`96.
`
`On May 7, 2021, Peloton filed with the SEC its Quarterly Report on
`
`Form 10-Q for the third quarter of FY 2021, ended March 31, 2021. The Form 10-
`
`Q reported the Company increased inventory levels “as we ramped up supply to meet
`
`the current increased demand.”
`
`.Direa
`
`+.asaa
`
`ees
`
`99.
`
`On June 8, 2021, Woodworth presented at the Bank of America Global
`
`Technology Conference and repeated her claims that the future at Peloton was
`
`bright:
`
`[W]e always like the stat that 180 million people around
`the globe at least pre-pandemic belong to a gym, but we
`think it understates the opportunity. Many people, when
`we know from our members, were not comfortable or the
`gym didn’t work for them. They weren’t comfortable in
`the gym environment. And so we actually think the
`addressable market is a lot bigger than the 180 million
`people that belong to a gym. And also what’s interesting
`is that the 4 markets that we’re in today, the U.S., Canada,
`
`“a
`
`

`

`U.K.and Germany, represent 90 million of those 100 — I
`think it’s 182 million gym memberships globally. So we
`think there’s a massive opportunity ahead of us. We think
`the
`180 million memberships could understate the
`opportunity. But
`the opportunity is unchanged since
`COVID,and we’re more excited than ever now that we’ve
`begun marketing our products again, and we have the
`upcoming Tread launch towards the end of the summer..
`. [W]e are still in the very, very early innings even based
`off of what we think 1s a conservative addressable market.
`
`
`
`100.
`
`101.
`
`102.
`
`| 2
`
`8
`
`

`

`Iscenic tn
`
`meeting.
`
`
`
`SPEELSaa 03
`
`this meeting.
`
`Dycoheaa
`
`29
`
`

`

`
`
`1SGAAaeaT
`PS 22120 che meeting
`
`REDACTED
`
`109. On August 26, 2021, the Company disclosed that it had a material
`
`weakness in its internal controls “with respect to identification and valuation of
`
`inventory.”
`
`110. Onaninvestorcall that same day Woodworth told investors: “[W]Je are
`
`entering fiscal 2022 with a normalized backlog for our Bike portfolio and guidance
`
`reflects our expectation of continued demand.” Foley also told investors that “the
`
`33
`
`‘kee
`
`

`

`demand for Bike+ and Bike is robust, and we feel good about the entire year’s
`
`forecast.” Lynch too told investors:
`
`Andso everything in the supply chain from inventory that
`you’re noting, the accumulation up on the balance sheet to
`warehousing and how we’ve expanded our warehouse
`footprint to our delivery infrastructures, people, vans, our
`last-mile facilities, all that we’re staging for what will be
`our biggest holiday ever.
`
`111. Foley also told investors that the price drop for the Peloton Bike+ was
`
`“absolutely offensive as we think about the competitive landscape and we think
`
`about democratizing the accessto great fitness, which has, as you know,always been
`
`in our playbook.”
`
`112. Woodworth echoed Foley’s comments assuring investors that “we do
`
`forecast growth in our Bike portfolio this year on a year-over -year sales basis.” And
`
`Lynchsaid “sales have been robust across our Bike business .
`
`.
`
`. So we are excited
`
`about how many leads are in the hopper for people wanting Treads, and we’re
`
`excited about the demand that we’ve consistently seen this quarter and, frankly, since
`
`COVIDhit, as you know.”
`
`113. Yet three days later on August 30, 2021, Foley terminated his 10b5-1
`
`trading plan and stopped selling his Peloton stock. The trading plan had not been
`
`set to expire until October 31, 2022.
`
`114. Foley terminated the plan because he knew Peloton demandwasnotas
`
`robust as he told investors. With demand waning, and inventory explosively high
`
`31
`
`

`

`Foley knew that it was only a matter of time before the market would realize the
`
`sales boon had cometo an end andstock prices would plummet.
`
`attended the meeting.
`
`32
`
`

`

`
`
`115. aeSSETeaeae
`WENTscoaeRaettattended the meeting.
`,I i. Boss and
`
`management had a clear understanding that their projected growth plan was not
`
`realistic.
`
`The Truth About Peloton Begins to Emerge
`
`121. On November4, 2021, Peloton announcedit wasrevisingits full year
`
`revenue down by $1 billion or almost 25%, from $5.4 billion for FY 2022. The
`
`Companyalso announcedthat as of September 30, 2021, its inventory had reached
`
`nearly $1.27 billion, a 35% increase over the previous quarter. On this news, the
`
`Company’s stock price plummeted over 35%.
`
`*AisinA
`
`38
`
`33
`
`

`

`122. That same day Peloton held an investor call. Stil trying to calm
`
`investors Foley said:
`
`smart
`innovative new products,
`Continued growth,
`performance marketing,
`improved hardware margins,
`rightsized OpEx and a relentless focus on the value that
`our membersreceive from their Peloton membership;all
`of this is within our control. Weare operators andleaders.
`Welove what we do, and we have never been moreexcited
`about our future than we are today.
`
`123.
`
`In addition, Woodworth assured investors Peloton did not need more
`
`funding:
`
`I think just cutting to the chase we don't see the need for
`any additional capital raise based on our current outlook.
`As we mentioned, we’re taking significant steps to adjust
`our expenses across COGS and OpEx with this revised
`revenue guidance. And we havealot oflevers to pull.
`
`ae
`
`34
`
`

`

`125.
`
`126.
`
`127.
`
`42
`
`ieee attended this meeting.
`
`128.
`
`129.
`
`43
`
`ony —_|oe ts
`
`“our CFO does 99% offinance. [engage
`
`

`

`because I want to know how we’re doing. But to say I don’t add value to her
`
`operation is an understatement.”
`
`130.
`
`131.
`
`132.
`
`attended the meeting.
`
`46
`
`133. Thus, less than two weeksaftertelling the market it would not need to
`
`raise any other capital, on November 16, 2021, Peloto

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