Used Car Platform Vroom’s Alleged False Business Statements Drive Investors to Class Action

Investors in a listed ecommerce platform that buys and sells used vehicles are suing the company, saying it lied to them about how the business was faring through the pandemic. 

The nationwide class action lawsuit was filed Thursday in the Southern District of New York, and alleges Vroom violated the Securities Exchange Act of 1934 by making materially false and misleading statements regarding its business, operations and compliance policies. 

Plaintiff and Vroom investor Arif Hudda is seeking to represent anyone who acquired Vroom securities between June 9, 2020, and March 3 this year.

The Start of Vroom’s Losses

Vroom went public through its initial public offering (IPO) on June 9 last year. 

Prior to the IPO, Vroom significantly reduced its inventory to account for an expected drop in demand as a result of the COVID-19 pandemic, the class action alleges. However, Hudda says Vroom didn’t keep investors informed about the resulting impacts of this decision. 

The decision sparked various effects, the class action lawsuit alleges, starting with Vroom decreasing its ability to increase revenues in the second quarter of 2020 and meet a surge in customer demand for online used vehicles.

Vroom then had to invest tens of millions of dollars in getting more stock and paying for more sales support, “materially impacting the company’s short-term profitability,” the claim contends.

Losses were accelerating. Hudda says Vroom’s growth in inventory then far outpaced its sales support capability, creating a bottleneck and slowing profits further. 

“Vroom had been forced to mark down and liquidate existing inventory at fire sale prices,” the class action states.

“Vroom was on track to miss its already disappointing fourth quarter 2020 profit and earnings guidance and such guidance lacked any reasonable basis in fact… as a result of all the foregoing, the Company’s public statements were materially false and misleading at all relevant times.” 

The Earnings

In an August 2020 press release, Vroom revealed disappointing earnings with a decline in revenues, and its stock price fell $12.64 per share, the class action says.

In March this year, Vroom issued its full year financial results for 2020, revealing “operational issues and financial results far worse than previously disclosed to investors,” with a net loss of $60.7 million in the fourth quarter.

On an earning call about the results, Vroom Board of Directors Paul J. Hennessy and Chief Financial Officer David K. Jones, who are both named defendants in the class action, allegedly acknowledged Vroom was operationally constrained and unable to keep up with demand. 

Hennessy allegedly admitted the company bought more inventory than it could actually process, which forced the company to liquidate aging inventory for a significantly reduced profit or even at a loss, despite a historically favorable online used car market, the class action alleges.

“Following these disclosures, Vroom’s stock price fell $12.29 per share, or 28%, to close at $31.61 per share on March 4, 2021, on unusually heavy trading volume of 19.6 million shares traded.”

Alleged Damages

The class action lawsuit alleges investors have suffered significant losses and damages.  

“[Hudda] acquired Vroom securities at artificially inflated prices during the Class Period and was damaged upon the revelation of the alleged corrective disclosures,” the claim states.

Hudda is asking for certification of the class action, damages, costs and fees, any injunctive relief the court deems appropriate, and a jury trial.

Meanwhile, class action lawsuits brought under the Securities Exchange Act can sometimes end in large settlements. In 2012, Citigroup, Inc. reached a $590 million settlement with shareholders to resolve allegations it committed securities fraud. 

Also in 2012, a securities lawsuit against Goldman Sachs Group, Inc., Bank of America, and several other large firms resulted in an $18.5 million settlement.

What do you think of this securities class action lawsuit against Vroom? Let us know in the comments! 

The plaintiff is represented by Jeremy A. Lieberman, J. Alexander Hood II and James M. LoPiano of Pomerantz LLP and Peretz Bronstein of Bronstein, Gewirtz & Grossman, LLC.

The Vroom Securities Act Class Action Lawsuit is Arif Hudda, et al., v. Vroom, INC., Paul J, Hennessy, and David K. Jones, Case No. 1:21-cv-03296,  in the U.S. District Court Southern District of New York.

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