On August 27, 2025, the U.S. Court of Appeals for the Second Circuit issued an opinion highlighting that, when public companies disclose risks using hypothetical language, those disclosures may be deemed misleading if the risks have already materialized. See City of Hialeah Employees’ Ret. Sys. v. Peloton Interactive, Inc., — F.4th —, 2025 WL 2457758 (2d Cir. Aug. 27, 2025). Although this is not a new legal proposition, the Second Circuit’s opinion serves as a reminder to public companies to review their risk disclosures and, where necessary, update them to reflect current circumstances.
Background
In City of Hialeah, the plaintiffs brought a putative securities class action against Peloton and several of its executives, alleging that the defendants made false and misleading statements about the demand for Peloton’s products and inventory levels after the COVID-19 pandemic.
Peloton is a fitness company that manufactures stationary bikes and treadmills and sells a subscription service for remote exercise classes. In 2020, during the COVID-19 pandemic, demand for Peloton’s products surged. But by early 2021, as vaccines became available, the demand for Peloton’s products declined.
On November 4, 2021, Peloton disclosed that 91 percent of its inventory was unsold and reduced its earnings guidance. The next day, the company’s stock price dropped by 35 percent. Later, on January 20, 2022, news reports revealed that Peloton halted production of its bikes to manage excess inventory. Following these reports, the company’s stock price dipped another 24 percent.
The plaintiffs alleged that Peloton and its executives concealed the declining demand from investors and, in so doing, made eight misstatements during the relevant time. The plaintiffs also claimed that they purchased Peloton stock at artificially inflated prices before the truth was disclosed to the market. The district court dismissed the complaint, concluding that all the alleged misrepresentations were not actionable.
Decision
The Second Circuit agreed with the district court that six of the alleged misstatements were not actionable. But it held that two of the misstatements were plausibly alleged.
The first actionable misstatement was made by an executive on an earnings call. Responding to an analyst’s question about whether Peloton dropping the price of its bike was offensive or defensive, the executive said demand for the bike was “robust,” and the price drop was “absolutely offensive.” Id. at *7 (emphasis in original). The Second Circuit found this statement was plausibly misleading because the complaint contained specific factual allegations regarding Peloton’s inventory build-up that were inconsistent with the executive’s “definitive statement” that the “price reduction was an offensive move to expand market share rather than a defensive attempt to mitigate the losses from the excess inventory.” Id. (citation omitted).
The second actionable statement – and the focus of this article – was made in three Peloton filings with the U.S. Securities and Exchange Commission (“SEC”). In those filings, the company disclosed the following risks: “If we fail to accurately forecast consumer demand, we may experience excess inventory levels …. Inventory levels in excess of consumer demand may result in … the sale of excess inventory at discounted prices.” Id. at *8 (emphasis in original). The Second Circuit concluded these risk disclosures were plausibly false or misleading because, by the time the statements were repeated in the second and third SEC filings, “the specific financial consequences described in these disclosures were not merely hypothetical ‘but had already materialized.’” Id. (citation omitted). In other words, the disclosure was actionable because it described a risk as hypothetical when, as alleged, the risk already occurred – that is, Peloton was already selling “excess inventory at discounted prices.” Id.
The Second Circuit thus affirmed in part, vacated in part, and remanded the case for further proceedings.
Takeaways
Although the decision in City of Hialeah did not break new ground, it adds to the growing body of case law – both within and outside the Second Circuit – supporting the proposition that a risk disclosure presented in hypothetical language may be misleading if the risk has already materialized. See also In re Facebook, Inc. Sec. Litig., 87 F.4th 934, 948-49 (9th Cir. 2023); Williams v. Globus Med., Inc., 869 F.3d 235, 242 (3d Cir. 2017). Notably, this proposition may come into play in private securities cases, like those above, and in government enforcement actions brought by the SEC. See, e.g., SEC v. Hurgin, 484 F. Supp. 3d 98, 111-12 (S.D.N.Y. 2020).
Accordingly, public companies and their disclosure committees should not simply recycle old risk disclosures from previous SEC filings. Instead, they should carefully consider whether intervening events may warrant updating their disclosures. A disclosure phrased in hypothetical language that was adequate in the past – because a particular risk had not yet materialized – may be deemed misleading if circumstances have changed and the risk has come to fruition.