Ryan v. Figs, Inc.

1

SEAN RYAN, Plaintiff, v. FIGS, INC. et al., Defendants.

No. 2:22-cv-07939-ODW (AGRx)

United States District Court, C.D. California

January 17, 2024

ORDER GRANTING DEFENDANTS' MOTIONS TO DISMISS THE CONSOLIDATED CLASS ACTION COMPLAINT [98 & 100]

OTIS D.WRIGHT, II UNITED STATES DISTRICT JUDGE

I. INTRODUCTION

This is a putative class action for securities fraud under sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (“Exchange Act”) as well as non-fraudulent securities violations under sections 11, 12(a)(2), and 15 of the Securities Act of 1933 (“Securities Act”). On November 11, 2022, Plaintiff Sean Ryan filed his initial Complaint against Defendants FIGS, Inc. along with individual Defendants Heather Hasson, Catherine Spear, Jeffrey D Lawrence, Daniella Turenshine, and J. Martin Willhite.^[1] (Compl., ECF No. 1.) The case was thereafter consolidated with City of Hallandale Beach Police Officers and Firefighters Personnel Retirement Trust v. FIGS, Inc. et al., No. 2:22-cv-08912-ODW (KSx). (Min Order, ECF No. 64.) The Parties designated Ryan's case as the lead case and designated Plaintiffs Ronald Hoch and Public Pension Plans^[2] as the Lead Plaintiffs. (Joint Stip., ECF No. 58.)

Plaintiffs filed their consolidated Class Action Complaint on April 10, 2023. (Class Action Compl. (“CAC”), ECF No. 88.) In their consolidated complaint, Plaintiffs added Tulco, LLC, and Thomas Tull^[3] as defendants for all claims, and, for Securities Act violations only, Plaintiffs added Sheila Antrum, Michael Sonen, and all Underwriters^[4] involved in FIGS, Inc.'s Initial Public Offering (“IPO”) and Secondary Public Offering (“SPO”). (Id.)

In the Class Action Complaint, Plaintiffs set forth six causes of action against Defendants for (1) violations of section 10(b) of the Exchange Act and Securities and Exchange Commission rule 10b-5; (2) violations of section 20(a) of the Exchange Act; (3) violations of section 20(a) of the Exchange Act against insider trading; (4) violations of section 11 of the Securities Act; (5) violations of section 12(a)(2) of the Securities Act; and (6) violations of section 15 of the Securities Act. (CAC ¶¶ 318-339, 407435.) Plaintiffs allege that these violations occurred between May 27, 2021, and February 28, 2023 (the “Class Period”). (Id. ¶ 1.)

On May 25, 2023, Defendants Tulco, Tull, FIGS, and all individually named Defendants moved to dismiss the Class Action Complaint for failure to state a claim pursuant to Federal Rule of Civil Procedure (“Rule”) 12(b)(6). (Tulco Mot., ECF No. 98; FIGS Mot., ECF No. 100.) The Underwriter Defendants joined Defendants Tulco, Tull, and FIGS in their motions to dismiss. (Underwriter Joinder, ECF No. 103.) Plaintiffs opposed all motions to dismiss, and Defendants responded. (Opp'n, ECF No. 105; Tulco Reply, ECF No. 108; FIGS Reply, ECF No. 106.)

For the reasons below, the Court GRANTS Defendants' motions WITH LEAVE TO AMEND.^[5]

II. BACKGROUND

The Class Action Complaint has over 108 pages of alleged background information. The Court briefly summarizes the relevant facts.

Defendant FIGS is an apparel company that sells fitted athleisure-style scrubs and related clothing to medical professionals using an online, direct-to-consumer (“DTC”) business model. (CAC ¶¶ 29-32.) The company rose to prominence during the COVID-19 pandemic due to heightened demand for medical scrub products and a global shift to online sales. (Id. ¶¶ 42-51.) Throughout the Class Period, FIGS claimed to operate a robust customer data collection and analytic system to “better acquire and retain customers[,] reliably predict buying patterns,” and improve “core operating activities and decision-making processes.” (Id. ¶¶ 41, 166-167.) FIGS also represented its merchandising model as a risk-mitigation “core product strategy” centered on the seasonless nature of scrubs and a repeat customer base comprised of medical professionals. (Id. ¶¶ 42-43, 147-149.) The instant action centers on alleged securities fraud and misconduct committed by all named Defendants during the IPO, SPO, and general Class Period, ultimately resulting in the decline of FIGS stock price and economic loss to Plaintiffs. (See generally id.)

Defendants Heather Hasson and Catherine Spear are Co-Founders of FIGS and served as Co-CEOs during the Class Period. (Id. ¶¶ 17-18.) Defendant Jeffrey D. Lawrence was the CFO of FIGS during the Class Period from December 2020 to December 2021. (Id. ¶ 19.) Defendant Daniella Turenshine replaced Lawrence as the CFO of FIGS in December 2021 and remained CFO for the remaining duration of the Class Period. (Id. ¶ 20.) Defendant J. Martin Willhite is a member of the FIGS Board and has served as Vice Chairman of Tulco since July 2017. (Id. ¶ 21.) Each of the aforementioned Defendants held positions as officers, directors, and controlling persons of FIGS and controlled SEC filings, press releases, and other public statements during the Class Period. (Id. ¶ 25.) Defendant Tulco, LLC is a venture capital investment firm that controlled a significant percentage of FIGS' voting interest by holding a substantial portion of FIGS' common stock during the Class Period. (Id. ¶ 26.) Defendant Thomas Tull is Tulco's Founder, chairman, and CEO. (Id. ¶ 27.)

Plaintiffs are investors who acquired FIGS Class A common stock during the Class Period between May 27, 2021, and February 28, 2023. (Id. ¶ 1.) Plaintiffs allege FIGS, Tulco, Tull, and the Individual Exchange Act Defendants committed Exchange Act violations in two ways. First, Plaintiffs allege these Defendants schemed to artificially increase the price of FIGS securities for the purpose of selling stocks quickly to gain windfall profits (the “pump-and-dump” scheme). (Id. ¶¶ 125-134.) Second, Plaintiffs allege these Defendants misled investors with false statements and omissions during the Class Period ultimately leading to Plaintiffs' economic losses. (Id. ¶¶ 135222.) Regarding the alleged Security Act violations, Plaintiffs assert FIGS, Hasson, Spear, the Tulco Defendants, the Underwriter Defendants, and various other Individual Exchange Act Defendants mislead Plaintiffs with false statements and omissions as well as providing false and misleading IPO and SPO documents that violated Items 105 and 303 of SEC Regulation S-K^[6]. (Id.)

A. Exchange Act Violations

First, Plaintiffs allege the pump-and-dump scheme began in 2017 when Defendants Hasson, Spear, Tulco, and Tull allegedly induced early-stage investors to sell their shares of FIGS stock to Tulco for significantly lower prices. (Id. ¶ 128.) This resulted in Hasson, Spear, and Tulco jointly holding 88% of FIGS' voting rights. (Id. ¶¶ 128-129.) Upon gaining majority control of FIGS voting rights and in connection with the IPO, a voting agreement was created reelecting Hasson, Spear, and Willhite- Tulco's representative-to the FIGS Board of Directors. (Id. ¶¶ 128-130.) With control of the FIGS Board, Hasson, Spear, and the Tulco Defendants allegedly engaged in a scheme to artificially inflate FIGS' share prices by misrepresenting to the public that FIGS possessed and used advanced data analytics and “unique inventory and supply chain management capabilities.” (Id. ¶ 125.) These data analytic systems and management capabilities were allegedly touted as ways FIGS could weather macroeconomic pressures and provide insight into possible market behavior. (Id. ¶¶ 125-126.) Additionally, Defendants promised investors a product strategy focusing on a core set of medical scrub products that would provide consistent predictable revenue from a base of repeat customers. (Id. ¶¶ 43-46.)

On May 26, 2021, Defendants priced FIGS' IPO of 26.4 million shares at $22.00 per share. (Id. ¶ 69.) FIGS and Tulco sold over thirty million shares and gained $546 million by the IPO's closing. (Id. ¶ 76.) During the SPO, FIGS' shares were valued at $40.25 per share, and Hasson, Spear, and Tulco sold another ten million shares for over $412 million by the SPO's closing. (Id. ¶ 84.) Plaintiffs highlight that while the IPO and SPO resulted in nearly $1 billion of FIGS stock sold, only $96 million- less than ten percent of the overall gains-went to FIGS for company operations. (Id. ¶¶ 76, 131.)

Second, Plaintiffs allege FIGS, Tulco, Tull, and the Individual Exchange Act Defendants issued a series of material misstatements and omitted material facts in FIGS' “public filings, press releases and other documents throughout the Class Period” to conceal issues from investors and artificially inflate and maintain inflation of FIGS' share price (Id. ¶ 135.)

Following the public offerings, FIGS, Tulco, Tull, and the Individual Exchange Act Defendants allegedly continued to misrepresent FIGS' data capabilities, financial performance, and market strategies to the public and investors. (Id. ¶¶ 135-136.) On various earnings calls during the Class Period, multiple individual Defendants apparently assured investors that the FIGS' core product strategy would be able to deliver on promised revenue margins despite “COVID-19 macro supply chain challenges.” (Id. ¶¶ 195, 179-181, 185-188, 195, 197-198.) FIGS and the Individual Exchange Act Defendants allegedly made similar claims on their SEC filing Form 10-K and other public filings. (Id. ¶¶ 202-209.) However, according to Plaintiffs, these assurances and reports were far from reality. (See generally id.) Plaintiffs claim that, throughout the Class Period, FIGS, Tulco, Tull, and the Individual Exchange Act Defendants were instead:

“(i) [E]ngaged in a high-risk merchandising model that included developing numerous new styles per quarter for which demand was untested, and: (a) was either failing to consider data and analytics in making purchase orders; or (b) did not have the data capabilities to

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