California’s Central District largely denies motion to dismiss putative class action lawsuit over proposed acquisition of space industry startup by PSPC
On July 13, 2022, the United States District Court for the Central District of California broadly denied a motion to dismiss a putative class action lawsuit asserting claims under the Securities Exchange Act of 1934 against an investment company. Special Purpose Acquisition (SPAC), a space industry startup. it was SPAC’s target, some executives of both companies and an investor who served as SPAC’s sponsor. In re Stable Road Acquisition Sec. Litigation, no. 2:21-cv-05744, sheet op. (CD Cal. July 13, 2022), ECF No. 154. Plaintiff alleged that the target company made false statements regarding the viability of its technology and the immigration and national security status of its CEO, which the PSPC allegedly repeated without conducting adequate due diligence. . The Court held that the plaintiff’s allegations were largely sufficient, but that the plaintiff had not sufficiently alleged the responsibility of the scientist or the control person with respect to certain managers.
The plaintiff alleged that the target company knew but did not disclose that several government agencies had determined that its CEO posed a national security risk, that the government had revoked the CEO’s work visa and initiated removal proceedings against him, and that the company’s only test of its core technology had failed – which would have made the company’s financial projections misleading. Slip-op. at 5-6. Plaintiff further alleged that PSPC made similar misrepresentations due to its failure to undertake adequate due diligence. Identifier. at 7. Ultimately, the SEC announced a cease and desist order regarding the proposed acquisition and SPAC and the target company agreed to pay civil monetary penalties. Identifier. at 5.
The Court rejected the target company’s arguments that its alleged misstatements and omissions were either forward-looking, non-actionable statements of opinion or were accompanied by adequate risk disclosures. The Court explained that the plaintiff “plausibly alleges[d] that the [company’s] warnings of the risks that could occur [were] misleading for a reasonable investor because [company] knew that many of these risks had already materialized or would most likely materialize. Identifier. at 12.
The Court further found that the plaintiff’s claims gave rise to a strong scientific inference to the target company. Identifier. at 13. The Court determined that the allegations “taken as a whole” supported the inference that company executives knew their statements were misleading due to the alleged omission of information regarding the status of the CEO and the company’s core technology test. Identifier. Specifically, the Court explained that the allegations were sufficient to show that the company’s chief revenue officer had knowledge of the test failure based on an email she received, and that she should also have been aware of the CEO’s test failure and national security and immigration concerns. due to his leadership role and involvement in revenue forecasting. Identifier. The Court further observed that the president of the company should have been aware of the information allegedly omitted because it related to the “main operations” of the company and also because he had given an interview on the same subjects which made “incredible that [he] would only know the facts he disclosed during his interview and none of the other directly relevant and material information that would have made his statements not misleading. Identifier. at 14. The Court also noted that the allegations against the CEO himself were “more than sufficient”. Identifier.
With respect to the SPAC defendants, the Court rejected the argument that the allegations against them amounted to mere negligence for repeating information transmitted by the target allegedly without performing adequate due diligence. Identifier. at 15. Instead, the Court held that the plaintiff had sufficiently alleged a scientist based on a theory of willful disregard or willful blindness as to SPAC and its CEO, who was allegedly responsible for having made inaccurate statements regarding the target company and allegedly promoting the “extensive necessary checks.” Identifier. at 15-16. However, with respect to the other SPAC executives, the Court held that the plaintiff failed to sufficiently allege the scientists based on their high-level positions and alleged involvement in due diligence, without specifically alleging that they were “aware of any red flags they turned their eyes to”. the eye, or that they have made deliberately reckless statements due to the failure to investigate these red flags. Identifier. at 16 years old.
The Court further determined that plaintiff’s control person allegations were properly asserted with respect to the CEO of SPAC and his sponsor. Identifier. at 16. The Court, however, rejected Plaintiff’s control person claims with respect to other officers of SPAC and the target company. Identifier. The Court explained that the plaintiff’s allegations regarding these defendants regarding their senior positions or shareholdings were insufficient to show that they actually exercised control over SPAC or the target company “for the purpose of inducing them to engage in acts that violated securities laws.” Identifier.