Etsy hit with class action suit following allegations of counterfeit products

A securities class action lawsuit has been filed against an online peer-to-peer e-commerce website for alleged violations of federal securities regulations.

A number of law firms initiated class action claims against Etsy, the online marketplace where people sell handmade crafts and jewelry, among other items. The lawsuit was filed in the United States District Court for the Eastern District of New York on behalf of all shareholders who purchased securities in the company during the class period between April 16, 2015, and May 10, 2015. Individuals who purchased shares in the peer-to-peer marketplace during the class period have until July 13 to request appointment as lead plaintiff.

Etsy was founded in 2005 and is currently headquartered in Brooklyn, New York, with additional offices in Berlin, Germany; Dublin, Ireland; Hudson, New York; London, United Kingdom; Melbourne, Australia; Paris, France; San Francisco, California; and Toronto, Canada. Buyers and sellers connect through the e-commerce website for transactions with all sorts of handcrafted, vintage and unique items.

Among the handmade and vintage goods sold on Etsy are counterfeits, according to several class action claims.Among the handmade and vintage goods sold on Etsy are counterfeits, according to several class action claims.

Class action claims Etsy failed to disclose the presence of counterfeits
One securities class action claim alleges that the company and some of its officers made materially false and/or misleading statements about Etsy’s business, operational and compliance standards. The false and/or misleading statements made by Etsy and its officers focus on claims that some of the items sold through its marketplace were counterfeits.

For example, the company allegedly failed to disclose that over 5 percent of all the products sold through the online marketplace were either counterfeit, or infringed upon trademarks or copyrights. Etsy also failed to mention the fact that certain brands were pursuing sellers suspected of posting knockoff goods to the website, which places the company’s listing fees and commissions at risk.

Etsy downgraded to ‘underperform’ due to presence of counterfeits
On May 11, 2015, before the markets opened, numerous news outlets reported that Gil Luria, an equity analyst at Wedbush Securities, issued a note downgrading the peer-to-peer marketplace to “underperform.”

“I’ve bought my wife, you know, handmade jewelry. I’ve bought her hand-embroidered artwork. And most recently I’ve ordered a lot of counterfeit merchandise,” he explained to Marketplace. “I actually found it to be 20 times more likely that you’ll find a counterfeit item on Etsy than on Alibaba or eBay.”

“Etsy’s growth-oriented actions have opened the website to counterfeiters.”

Luria keeps a box full of knockoff products purchased through the company as proof of the plethora of fake goods sold through the marketplace. He added that Etsy’s growth-oriented actions have opened the website to counterfeiters. In the note, he alleged that more than 5 percent of the products sold through Etsy were counterfeit. Following the news, shares in the company dropped $1.86, more than 8 percent, on unusually heavy volume, to close at $20.85 the same day.

Shares in the company have dropped substantially since its April 16 initial public offering, allegedly due to the misleading statements and/or failure to disclose its struggles with counterfeit goods. In fact, stock in the company fell nearly 50 percent from mid-April to the start of June. This after a massive April IPO for Etsy in which stock prices surged 87 percent.