Barely six weeks into the new year, there have already been (according to the SPACInsider website) 127 Special Purpose Acquisition Company (SPAC) IPOs so far this year — that is, in less than a month and a half, there have already been more than 50% of the number of SPAC IPOs as there were in all 52 weeks of the record-setting 2020 SPAC offering year. The SPAC IPO extravaganza has many implications, but unquestionably among the many related consequences is that following-on to the wave of SPAC offerings is the possibility that we are about to see an increase in SPAC-related litigation.
Anyone interested in seeing what this coming litigation might look like will want to take review the securities class action complaint filed last week in the Middle District of Tennessee against Clover Health Investments, a health services firm became a publicly traded company in January 2021 through reverse merger with a SPAC from the SPAC IPO class of 2020. The February 5, 2021 complaint, a copy of which can be found here, alleges that the de-SPAC transaction-related documents and disclosures failed to disclose, among other things, that the acquisition target company was the subject of a DOJ investigation.
Clover Health Investments is a healthcare services company providing Medicare Advantage-related insurance reimbursement products and related information, information-technology, and other services. Clover became a publicly traded company through a reverse triangular merger with Social Capital Hedosophia Holdings Corp. III (IPOC), a SPAC that completed its IPO in April 2020. IPOC announced the planned merger with Clover Health in an October 5, 2020 SEC filings on Form 8-K (here). The merger was approved at a January 6, 2021 shareholders’ meeting. Clover’s shares began trading on the NASDAQ on January 8, 2021 and its redeemable warrants began trading on the NASDAQ on January 11, 2021.
On February 4, 2021, short-seller and Internet research firm Hindenburg Research published a research report (here) asserting that Clover’s platform, Clover Assistant, was the subject of a DOJ investigation for a variety of issues, including illegal kickbacks, marketing practices, and undisclosed related-party transactions.
Among other things, the research report claimed that Clover Health had been served with a DOJ civil investigative demand in October 2020, just after the merger transaction was announced. The research report also asserted that Clover’s sales growth was driven by “deceptive trade practices”; that a related subsidiary, supposedly “unbiased” and “independent,” was helping seniors select Medicare plans; that Clover’s sales were fueled by a brokerage firm controlled by Clover’s head of sales; and that its software product was designed to encourage Medicare “upcoding” to provide higher rates of Medicare reimbursement. According to the subsequently filed securities class action complaint, Clover’s share price declined 12.3% and the price of its warrants declined 5% on February 4, 2021.
On February 5, 2021, Clover Health issued a detailed rebuttal to the research report, in which, among other things, the company’s CEO and President acknowledged that the company had received a request for information from the DOJ but denied that the company had received a DOJ civil investigative demand. The response also provided a point-by-point response to each of the allegations in the research report.
On February 5, 2021, Clover Health also issued an SEC filing on Form 8-K in which Clover Health disclosed that it was conducting an “investigation and requesting document and data preservation from the period January 1, 2021, relating to certain matters that are referenced” in the research report. The subsequent securities lawsuit complaint alleged that the price of Clover’s shares fell 4.3% in intraday trading on February 5 and that the price of its warrants fell 8.2% during intraday trading on February 5, 2021.
On February 5, 2021, a plaintiff shareholder filed a securities class action lawsuit in the Middle District of Tennessee against Clover Health and certain of its directors and officers. The complaint also names as defendants four individuals who served as officers or directors of IPOC, the publicly traded SPAC that acquired Clover in the de-SPAC transaction. The complaint purports to be filed on behalf of investors who acquired publicly traded securities of Clover (or of its predecessor-in-interest, IPOC) between October 6, 2020 and February 4, 2021.
The complaint contains two sets of securities law allegations: first, the complaint alleges that the defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder; and, second, the complaint further alleges that in the registration statement and prospectus issued in connection with the merger the defendants violated Sections 11 and 15 of the Securities Act of 1933.
Specifically, the complaint alleges that in the registration statement, the prospectus, and in other statements and disclosures prior to the merger and prior to the February 4, 2021 publication of the research report, the defendants failed to disclose that: “(1) Clover’s [sic] was under active investigation by the Department of Justice for at least 12 issues ranging from kickbacks to marketing practices to undisclosed third-party deals; (2) the DOJ’s investigation presented an existential risk to the Company, since it derives most of its revenues from Medicare; (3) Clover’s sales were driven by a major undisclosed related party deal and misleading marketing targeting the elderly, not is purported ‘best-in-class’ technology; (4) a significant portion of Clover sales were by way of an undisclosed relationship between Clover and an outside brokerage firm controlled by Clover’s Head of Sales; and (5) as a result, Defendants’ statements about its business operations, and prospects were materially false and misleading and/or lacked a reasonable basis at all relevant times.”
Editor’s Note: In addition to the complaint to which I linked above, another investor filed a separate securities class action lawsuit in the Middle District of Tennessee against Clover Health on February 5, 2021. This separate complaint can be found here.
This new lawsuit is just the latest in a recent series of lawsuit filings in which claimants have targeted companies that recently have become publicly traded as a result of a merger with a SPAC (as I have noted in prior posts, most recently here). The reason I feel confident in predicting that we will see more of these kinds of lawsuits in the months ahead is the sheer scale of the current SPAC financing phenomenon.
The events surrounding Clover Health highlight this point about the likely litigation. Clover Health not only has been hit with this post de-SPAC merger transaction lawsuit described above, but back in October the per-merger SPAC company, IPOC, was hit with a state court merger objection class action lawsuit (here) in which a plaintiff shareholder alleged that the SPAC company’s executives violated their fiduciary duties in connection with entering the merger agreement. There will be many more of both of these kinds of lawsuits (although reflective of current trends among plaintiffs’ lawyers, many of the forthcoming merger objection lawsuits will be filed as individual actions, rather than as class actions).
In addition to the fact of the recently filed securities class action lawsuit itself, there are several other noteworthy things about the Clover Health securities lawsuit complaint.
The first is that the complaint names as defendants not only the post-merger company and certain of its executives, but it also names as defendants four individuals who served as officers or directors of the pre-merger SPAC company. The four individuals are sued as officers or directors of the SPAC, for their pre-merger statements and for the disclosures and representations in the merger-related registration statement and prospectus.
I emphasize this point about the fact that these individuals were named as defendants simply to highlight the extent to which SPAC officials face potential liability in connection with the SPAC-related activities, including specifically and in particular in connection with de-SPAC transaction-related activities. (In that same regard, it should be noted that in the merger objection lawsuit I noted in the preceding paragraph, these same four SPAC officials were also named as defendants.)
There is one other thing about the lawsuit that is particularly noteworthy, and that is that the complaint not only raises allegations of alleged violations of Sections 10(b) and 20(a) of the ’34 Act, it also raises allegations of alleged violations of Sections 11 and 15 of the ’33 Act. Although there have been a number of SPAC-related securities lawsuits filed in recent months, this lawsuit is the first of which I am aware that has raised ’33 Act liability claims.
Interestingly, the ’33 Act allegations in the Clover Health complaint are asserted against all of the defendants, including both Clover Health and its executives and the former directors and officers of the SPAC, alleging securities law violations in connection with the alleged misrepresentations in the registration statement and prospectus. There is a lot I can’t discern from the complaint about the plaintiff’s theory of these claims — for example, the complaint makes no specific allegations about who specifically signed the registration statement or prospectus or in what capacity they signed. But suffice it to say here, at the outset of this lawsuit, that the Section 11 claims were filed both against Clover Health and its directors and officer and against the former directors and officers of IPOC as well.
The third noteworthy thing about this complaint is that among the individuals named as defendants in the lawsuit is former CEO and Chairman of IPOC, Chamath Palihapitiya, who has been referred to as “the King of SPACs.” His investment vehicle Social Capital Hedosophia has already completed at least six SPACs, one of which took Virgin Galactic public. I suppose if you are game for a SPAC takedown, going after the King of SPACs makes some sense. (Also for those who are interested in this sort of thing, the directors of Clover Health include, among others, Chelsea Clinton.)
I should emphasize at this point that this lawsuit has only just been filed and it remains to be seen if it will prove to be meritorious. The Clover Health executives’ response to the research report’s claims (to which I linked above) is detailed and specific and purports to refute the research report’s claims point-by-point. I want to emphasize that though I do believe that we are going to be seeing a lot more SPAC-related and de-SPAC transaction-related securities litigation, that does not mean that I think that much of it is likely to be meritorious. My prediction about the likelihood of future litigation mostly reflects a world-weary cynicism about the opportunism of the plaintiffs’ bar.
That said, you can put a marker on it now – at the end of 2021, we will all be discussing the number of SPAC-related lawsuits that were filed during the year.
Think About It: By my count, inclusive of today, there have been 31 business days so far in 2021. We have already had 127 completed SPAC IPOs this year through yesterday. That means that there has been an average of four SPAC IPOs every business day so far this year.
The number of SPAC IPOs already this year together with all of the SPAC IPOs last year means that right now there are 300 or more SPACs out there looking for private companies to acquire. Eventually (and who knows what eventually means and when eventually will happen) the SPAC IPO machine will wind down as investors start looking for the next flavor du jour. But even then there will still be many dozens of SPACs with tens of billions of dollars of capital (collectively) looking for acquisition targets.
Of course, this is all going to turn out just fine.