Dismissal Denied in SPAC-Related Securities Suit Alleging Supply Chain Misrepresentations5 min read
As I have mentioned in new posts (in this article, for illustration), SPAC-linked securities suit filings continue on to accumulate and signify a important present securities litigation phenomenon. But though the number of suits continues to mount, relatively couple of these situations have nevertheless achieved the dismissal phase. In a modern ruling, however, the defendant company’s motion to dismiss in a SPAC-similar securities accommodate was considerably denied as to the enterprise by itself and its best executives. In specific, the promises dependent on allegations that the company, Romeo Electrical power, and its senior officials made supply chain misrepresentations were being sustained, though the associated promises versus a few former executives of the SPAC with which Romeo had merged have been dismissed. A copy of the June 2, 2022 viewpoint in the case can be observed in this article.
RMG Acquisition Corp., a distinctive objective acquisition enterprise (SPAC), completed its IPO on February 12, 2019. On October 5, 2020, RMG announced that it had entered an settlement to merge with Romeo Electricity, which is targeted on planning and manufacturing battery modules and packs for professional electric vehicles. The merger was finished on December 29, 2020, with Romeo as the surviving entity, with its shares investing on the NYSE.
In the securities lawsuit grievance, the plaintiffs allege that after the merger was declared but ahead of it was completed, the defendants made a quantity of statements in filings and in different information studies that Romeo projected 2021 income of $140 million and that the business experienced critical partnerships with battery cell makers in area. Battery cells are a essential part in Romeo’s battery modules and packs. The enterprise subsequently professional disruption in its battery mobile source, which in transform caused the firm to revise its earnings projections downward.
As discussed below, on April 16, 2021, a plaintiff shareholder submitted a securities course motion lawsuit in the Southern District of New York versus Romeo. The complaint (which can be found listed here) also named several people as defendants, including the CEO and the CFO of Romeo and 3 previous administrators and officers of RMG. The grievance as amended alleged that the defendants had violated Sections 10(b), 14(a), and 20(a) of the Securities Trade Act of 1934 and Rule 10b-5 thereunder. The defendants moved to dismiss, arguing, amongst other factors, that the plaintiffs had failed to adequately allege scienter and falsity.
The June 2, 2022 Impression
In a June 2, 2022 Opinion, Southern District of New York Choose Lorna G. Schofield partly granted and partly denied the defendants’ motion to dismiss. Judge Schofield granted the defendants’ motions as to the plaintiffs’ Area 14(a) claims and Area 20(a) claims in opposition to all person defendants besides as to the Part 20(a) statements from Romeo Power’s CEO and CFO. Judge Schofield denied the defendants’ motions to dismiss the promises beneath Sections 10(b) and 20(a) as to the firm and its CEO and CFO. In denying the motion as to these defendants, Judge Schofield held that, opposite to the defendants’ arguments, the plaintiffs experienced sufficiently alleged falsity and scienter.
With regard to the falsity problem, Decide Schofield held that “at minimum just one of the statements – relating to the selection and extent of Romeo’s battery mobile supplies – is sufficiently alleged to be wrong and warrants denial of the motion to dismiss.” Precisely, Decide Schofield held that the plaintiffs had adequately alleged that the business misrepresented that it relied on four battery cell suppliers, when as a substitute the corporation relied on only two suppliers.
With regard to the difficulty of scienter, Judge Schofield held that “the Criticism sufficiently alleges that Webb and Selwood understood points or had obtain to information and facts that the repeated statements that Romeo has four battery mobile suppliers was not precise.” The defendants tried to argue a competing inference, that is that the organization did not anticipate the offer chain disruptions. Judge Schofield said that Romeo defendants’ “purported failure to forecast offer chain disruptions does not present any foundation for Romeo to claim that it experienced 4 suppliers when it had only one or two.”
When this circumstance was initial submitted again in April 2021, I pointed out that the complaint embodied two separate securities class action litigation filing tendencies that is, the circumstance concerned a SPAC-associated organization and the underlying allegations concerned supply chain disruption. As it turned out, the offer chain disruption allegations provided to be crucial to the survival of the claim. The crucial point about the offer chain concerns is not that the firm skilled a disruption in the battery mobile source the place is that the plaintiffs sufficiently alleged that the organization experienced misrepresented the extent and sturdiness of its offer chain.
As anyone who reads the company pages know, offer chain challenges continue on to disrupt lots of companies’ operations, across a large assortment of industries. As these instances carry on, it would seem most likely that at minimum some of these companies will experience litigation relating to the offer chain troubles. As this situation reveals, alleged misrepresentations relating to a company’s source chain situation provide as a sustainable foundation for securities litigation.
On the other hand, this situation is not just noteworthy mainly because of the offer chain challenges the case is also noteworthy due to the fact it involves a organization that not long ago turned publicly traded as a outcome of its merger with a SPAC. The SPAC angle was appropriate to the plaintiffs’ complaint, as some of the alleged misrepresentations allegedly had been created in the merger-related documents, and, without a doubt, the plaintiffs’ grievance names as defendants a few previous administrators and officers of the SPAC. The information on this challenge is excellent, in that Choose Schofield granted the motions to dismiss of the 3 previous SPAC officers. The situation will only go ahead as Romeo Electrical power and two of its executives.
The dismissal of the a few previous SPAC officers is noteworthy, since quite a few of the lately filed securities course action lawsuits consist of as named defendants former directors or officers of the SPAC. Although the conditions involved in the different instances will of study course vary, the final result of this case at minimum suggests that the former SPAC executives named as defendants may be capable to safe their dismissal from the case. If this proves to be genuine, this could be good news not only for the executives on their own, but also for the SPACs operate-off D&O insurers.