(CN) — Adidas shareholders argued in federal court Thursday against dismissal of their accusations that the German sportswear brand committed security fraud via its partnership with Ye, the controversial artist formerly known as Kanye West.
HRSA-ILA Fund filed the class action against Adidas in April 2023, arguing the company violated the Securities Exchange Act’s anti-fraud provision by failing to disclose Ye’s problematic behavior within the company to investors.
Adidas severed ties with Ye and his Yeezy brand in October 2022 after the rapper made a series of antisemitic and racist remarks in public and on social media, leading to a plunge in the company’s profit earnings.
Central to the shareholders’ argument is the accusation that Adidas’ business risk disclosure implies that the company had not encountered the risk yet, though the plaintiffs say Adidas was already aware of the rapper’s controversial remarks.
Shareholder attorney Daniel Tyre-Karp of the Rosen Law Firm argued to U.S. District Judge Karin Immergut Thursday that Adidas should have either disclosed the risk had occurred or omitted mentioning the risk entirely.
He said the disclosure misled investors into believing the chance for that specific risk was hypothetical.
“They cannot say that a risk could impact a company when that risk has already taken place,” Tyre-Karp said.
Included in the company’s business risk disclosure was a section warning that “unethical business practices on the part of business partners or improper behavior of individual athletes, influencers or partners in the entertainment industry could have a negative spill-over effect on the company’s reputation, lead to higher costs or liabilities or even disrupt business activities.”
The shareholders maintain that the company had known for years that Ye had a propensity for antisemitic remarks and misled investors about the risk the celebrity partnership posed to the company.
Attorneys for the plaintiffs pointed to an article from the Wall Street Journal in November 2022 that detailed Adidas executives’ discussions about the risk of their staff’s exposure to Ye, including that the rapper showed pornographic videos to executives and that his behavior had been a topic of discussion among senior leaders for years. He argued that Ye’s misconduct surfacing to public awareness and the company experiencing backlash was inevitable.
“When the truth came out, the stock price went down,” Tyre-Karp said.
Immergut, a Donald Trump appointee, questioned whether the drop in Adidas’ share prices was due to Ye’s public statements or the revelation that Adidas was likely to terminate its relationship with Ye. She also questioned whether the company could have reasonably predicted his public statements.
“Do you agree that people can change?” Immergut asked the plaintiffs.
The judge also disregarded the plaintiffs’ argument that Adidas failed to adhere to the core requirements of the Global Reporting Initiative despite saying otherwise on the basis that the initiative is open-ended and not a requirement under United States securities law.
The lawsuit names Adidas and the company’s former chief executive officer Kasper Rorstead and chief financial officer Harm Ohlmeyer as defendants, though Rorstead has yet to be served.
Adidas holds that the case is a business issue, not securities fraud, and accused the opposing counsel of incorrectly interpreting the risk disclosure and applying fraud by hindsight.
“That disclosure is not warning of the risk of celebrity misbehavior,” Adidas attorney Maeve O’Connor of Debevoise and Plimpton said. “It doesn’t say behavior could occur — it almost takes it as a given.”
Immergut did not indicate when she would rule.
Since Adidas dropped Ye it has been selling some of the leftover stock from Ye’s Yeezy brand and donating a portion of the profits to anti-hate groups.