NEW YORK (Reuters) -Peloton Interactive must face a lawsuit claiming it defrauded shareholders by masking excess inventory of its home exercise equipment as the worst of the COVID-19 pandemic passed, a divided federal appeals court ruled on Wednesday.

Reversing a lower court ruling, the 2nd U.S. Circuit Court of Appeals in Manhattan said shareholders can try to prove that the maker of stationary bikes and treadmills made three false and misleading statements that inflated its stock price.

The statements included former Chief Executive John Foley's claim in an August 26, 2021 earnings call that a $400 bike price cut was an "absolutely offensive" strategy to boost sales, rather than a defensive strategy to counteract weakness.

They also included two warnings in Peloton regulatory filings of hypothetical risks regarding "excess inventory levels."

Circuit Judge Steven Menashi said shareholders offered evidence that the price cut was actually a defensive move to clear out three months of inventory, and that the risks of excess inventory had already materialized.

"In sum, we conclude that the plaintiffs have plausibly alleged actionable misstatements or omissions," Menashi wrote for a 2-1 majority.

Shareholders sued after the stock price of New York-based Peloton fell more than 80% from February 5, 2021 to January 19, 2022, a period when vaccines became widely available and gyms began reopening.

The decline included a 35% one-day plunge on November 5, 2021, after Peloton reduced its full-year earnings forecast by as much as $1 billion and said 91% of inventory was unsold.

Peloton's stock price has fallen approximately 95% since early 2021.

Wednesday's decision upheld the August 2024 dismissal by U.S. District Judge Andrew Carter in Manhattan of claims based on six other Peloton statements, and returned the case to him.

Circuit Judge Jon Newman dissented, saying Foley's and Peloton's statements were not false and misleading in light of other information available to investors.

He also expressed a "high degree of confidence" the lawsuit will be dismissed because shareholders won't prove Peloton intended to defraud them.

Peloton did not immediately respond to requests for comment. Lawyers for the shareholders did not immediately respond to similar requests.

On August 7, Peloton posted a surprise fourth-quarter profit and forecast fiscal 2026 revenue above analyst forecasts, while announcing it would shed 6% of its workforce to cut costs.

The case is City of Hialeah Employees' Retirement System et al v Peloton Interactive Inc et al, 2nd U.S. Circuit Court of Appeals, No. 24-2803.