California Central District Largely Denies Motion to Dismiss Putative Class Action Against EV Maker – Corporate/Commercial

United States: California’s Central District largely denies motion to dismiss putative class action lawsuit against electric vehicle maker

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On December 2, 2021, Judge Cormac J. Carney of the United States District Court for the Central District of California largely denied a motion to dismiss a securities class action lawsuit against a manufacturer of electric trucks (the “Company”) allegedly misled investors by overestimating its production capabilities and its chances of winning a multi-billion dollar contract to revamp the US Postal Service (“USPS”) delivery fleet in violation Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. Farrar v Workhorse Grp., Inc., no. 2:21-cv-02072 (CD Cal. 2 December 2021). The plaintiff alleged that the company made false and misleading statements in 2020 and early 2021 regarding the viability of the company’s bid for the USPS contract and the company’s “backlog.” The plaintiff also alleged that the company made misrepresentations regarding its use of Payroll Protection Program (“PPP”) funds provided by the federal government during the COVID-19 pandemic. The court denied the company’s motion to dismiss all claims except the P3s.

In 2017, the USPS selected the company, along with five other manufacturers, to provide prototype electric vehicles for evaluation. The claimant alleges that although the company was able to deliver the required six prototype vehicles, it did not have the manufacturing capacity to produce additional trucks like the prototype. Additionally, the plaintiff alleges that the prototype vehicle “experienced failures during testing, making it unlikely that the USPS would select its prototype for production.” In January 2021, President Biden announced his goal of replacing the government fleet of vehicles with electric vehicles assembled in the United States. Shortly after, the plaintiff alleges that an executive of the company conducted several interviews in which he said that President Biden’s announcement was an indication that the company would be awarded the multi-billion dollar contract with USPS. After the USPS announced on February 23, 2021 that the contract had been awarded to another US company, the company’s shares fell from $28.29 to $12.50 per share, ending the day at 16.43 $.

Plaintiff alleged that four categories of the company’s statements were false or misleading: (1) statements indicating that she was still a viable candidate for the USPS contract when the company knew she had little or no chance of get it; (2) misrepresentations regarding its manufacturing capacity, including that the Company could produce hundreds of vehicles per year, when in fact it could not; (3) misrepresentation that the Company had a “backlog” of vehicle orders, which created the illusion of firm customer orders when in fact they were conditional, cancellable or unrealistic; and (4) misrepresentations regarding its use of PPP funds for payroll purposes when those funds were allegedly used to pay executive bonuses.

With respect to the first category, the Court found that the plaintiff plausibly alleged that the company’s statements of optimism regarding the USPS contract were misleading. The Court noted that the company continued to indicate that it was a viable candidate for the contract even after “an undisclosed parking brake failure during prototype testing caused [the Company’s] prototype vehicle to roll down a slope and into a ditch, resulting in the hospitalization of a USPS driver who was forced to jump from the fleeing vehicle.”

Then the court found that the plaintiff had plausibly alleged that the company had significantly misrepresented its manufacturing capacity when it told investors that it “would be able to produce 300 to 400 trucks by the end of 2020”. Although the company argued that these statements should be protected by the PSLRA’s safe harbor rule for forward-looking statements, the Court ruled that the statements were “not accompanied by meaningful cautionary language.” . The Court further held that the facts alleged, including the facts substantiated by a confidential witness, “tend[ed] to show that [the Company] and its executives knew they did not have the manufacturing capacity to meet their production projections or the announced demand for their vehicles. The Court noted that an officer of the company “assured the public that [the Company] was on track to meet its goal of 300–400 vehicles through October 29, 2020, at a time when fewer than 18 trucks had been manufactured that year. »

Next, the court considered the plaintiff’s allegation that the company made false and misleading statements regarding a “backlog” of orders for 950 vehicles from United Parcel Services (“UPS”), another parcel delivery company. . The plaintiff alleged that the company touted this backlog, but failed to disclose that UPS merely had the option of purchasing the vehicles and had not committed to purchase them. In reviewing this category of alleged misstatements, the Court noted that the company “repeatedly referred to its growing order book as an indicator that it was a strong and growing business capable of meeting growing demand” in earnings calls and public statements, which “affected analysts’ opinion on the value of [the Company’s] stock.” The Court ruled that these statements were actionable because the company knew at the time that the UPS orders were not “firm” orders, but rather were “conditional, voidable or unrealistic” and that UPS had already placed an order for electric vehicles manufactured by a competitor and was therefore unlikely to receive orders from the Company.

Finally, with respect to statements about the company’s use of PPP funds, the Court ruled that the plaintiff’s claims were dismissed because they were based on a confidential witness who did not work in the company’s payroll department. . The Court noted that “it is not clear how [the confidential witness] may have personal knowledge that PPP funds were used to pay executive bonuses.” granted the applicant permission to amend.

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