The RealReal is not so Real

On September 10, a shareholder, Iwona Grzelak, of The RealReal filed a complaint in the Delaware federal court claiming that fiduciary duties have been neglected by many of its board directors and even the U.S Securities Exchange Act violated. The RealReal (TRR) is a San-Francisco based online brick-and-mortar company that deals in pre-owned luxury products like clothing, jewellery, watches, fine arts, and home decor.

The company has been very vocal about its authentication process since 2011. It has claimed to have ‘the most rigorous authentication process in the marketplace’ and moved onto even say that it is the only company in the world to authenticate every item sold. The company enjoyed growing interest and valued at $1.6 billion dollars in June 2019. But the lawsuit filed by the shareholder brings under fire the very same authentication process.

Iwona Grzelak’s suit mentions that the directors failed to act in the interest of the company. It complaint said that the company was harmed by the defendants ‘by personally making and/or causing the company to make a series of materially false and/or misleading statements regarding its business, operations, and prospects” in official documents and press releases. To the investing public, they painted a promising picture of a  company that had highly trained experts to handle the process.

In reality, many counterfeit products routinely went undetected since ‘the large majority of the items that went through authentication process were not inspected by expert authenticators, but by copywriters, who were hourly employees with minimal training or experience in authenticating luxury goods, and who were forced to meet strict quotas which left them with little time to authenticate any given item’.

During the company’s IPO documentation, it then included ‘misleading’ information which has led to losses and drops in stocks relating to the faulty authentication processes. These stock drops have led to ‘two securities fraud class action lawsuits’. Added to it is Grzelak’s accusation that the defendants gained from such misconduct.

Now the plaintiff is seeking monetary damages through trial and also pressing for the internal processes of the company to be governed by law so as to protect the customers. On this matter, TRR has not commented yet.