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01 Dec 2022
Peloton execs sued for US$500m insider trading while hiding Tread+ safety risks to children
BY
Frances Marcellin
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The Tread+ was withdrawn from the market over safety problems that injured dozens of children, confirmed by the CPSC, and caused one death in 2021
photo: Peloton
One of Peloton’s investors, Krikor Arslanian, is suing Peloton leaders, including former CEO John Foley, for insider trading. The lawsuit claims they “sold approximately US$494,687,939 worth of their stock collectively” while hiding Tread+ safety issues that caused injury to more than 30 children and one death. Peloton’s Tread+ has been involved in several highly publicised incidents involving children. A six-year-old girl was pulled under the treadmill in 2020, but the most tragic was the fatality of a three year old boy, which is documented as occurring on 3 Feb 2021.
In March 2021 Foley addressed the accident publicly in a letter to Peloton owners claiming the company was “aware of only a small handful of incidents involving the Tread+ where children have been hurt”, yet, conversely, the CPSC (Consumer Product Safety Commission) “was aware of at least 39 incidents of injury”.
“While the Company’s outside stockholders were decimated, certain insiders did quite well for themselves”, stated the court document, as they sold when “Peloton’s stock price was at, or close to, it’s all-time high and with some sales occurring just a week or few weeks after a February 3, 2021 incident involving a catastrophic child injury connected to the Tread+ and about a month before Peloton publicly disclosed the child’s injury from the Tread+”. The lawsuit claims that “Foley sold 600,000 shares of his personally held Peloton stock for proceeds of US$76,894,000”.
On April 17, 2021, the CPSC issued a press release urging consumers to stop using the Tread+. “CPSC staff believes the Peloton Tread+ poses serious risks to children for abrasions, fractures, and death,” it stated. Peloton disputed the CPSC’s claims, calling their statement "inaccurate and misleading".
The lawsuit stated that the Tread+ was “especially dangerous due to its design because the Tread+’s rear roller on the back of the belt is completely exposed” without any rear guard or safety bar. It pointed to competitor brands, such as “Precor and NordicTrack” which had “either a plastic guard or a safety bar on the end of the belts on the treadmills”. In 2019, according to the CPSC there were an estimated 22,500 treadmill-related injuries in the US and around 2,000 of these injuries were to children eight and under.
"There is no reason to stop using the Tread+, as long as all warnings and safety instructions are followed," Peloton responded in a statement. But on 5 May, in a turnaround, Foley admitted “Peloton made a mistake” and recalled the Tread+ in the US – but allowed sales to continue in other countries.
Arslanian asserts in the lawsuit that while initiating the sales of US$500m of stock, the defendants knew certain Peloton products had significant design defects that could result in serious and catastrophic personal injuries.
“By disposing of US$494,687,939 of Peloton stock while in possession of adverse, material nonpublic information, the insider selling defendants exploited their position at Peloton and breached their fiduciary duties to Peloton,” stated the complaint, concluding that they “improperly benefited from this breach of fiduciary duty”.
Foley co-founded Peloton in 2012 and was the company's CEO for ten years when current CEO Barry McCarthy replaced him in February 2022. He moved to executive chair at that time, but resigned in September 2022 with co-founder Hisao Kushi, also one of the defendants named in the lawsuit.
At its peak Peloton was valued at US$50bn and trading at around US$170 (December 2021). Today the company's stock price has decreased to US$11 and dropped around 90 per cent of its stock price since Q3 2021.
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