In what is a notable development in the emerging SPAC-related securities class action litigation scene, the parties to a SPAC-related securities suit involving the streaming media company Akazoo company have reached a partial settlement in the aggregate amount of $35 million. The deal is a partial settlement because claims remain pending against other defendants. As discussed below, the settlement has a number of interesting features. It is, in any event, a noteworthy data point for the discussion about SPAC-related litigation exposures.



The litigation that resulted in the recent settlement relates to the September 2019 merger of Modern Media Acquisition Corporation (MMAC), a special purpose acquisition company (SPAC), and Akazoo, S.A. Akazoo was at the time of the merger an online music streaming company specializing in emerging markets, and claimed to have 4.3 million subscribers in 25 countries.


MMAC was formed in 2014 and completed an IPO on May 17, 2017. On January 24, 2019, MMAC announced that it had entered an agreement to merge with Akazoo Limited (“Old Akazoo”). In connection with the merger, MMAC completed a PIPE financing. The merger was completed on September 11, 2019.


On April 19, 2020, a securities analyst published a report raising a number of questions about Akazoo. In particular, the analyst questioned Akazoo’s reported subscriber numbers and also the company’s claims about the number of countries in which it was operating. The company appointed an independent committee to investigate the analysts questions. Ultimately, the investigation concluded that the financial statements of Old Akazoo were false and misleading and that Old Akazoo’s management had “defrauded investors.”



The Litigation

As discussed here, on April 24, 2020, a plaintiff shareholder filed a securities class action lawsuit in the Eastern District of New York against Akazoo; certain of its directors and officers; certain of the former directors and officers of MMAC; and Akazoo’s auditor. Other federal court shareholder complaints followed. The federal actions were later consolidated.


In addition to the federal action, other plaintiff shareholders separately filed a ’33 Act liability action in Georgia state court against Akazoo and other defendants. Yet another action was filed on behalf of investors in the PIPE and investors in the SPAC (the “PIPE and SPAC action”).


The parties to the various actions entered settlement negotiations. In December 2020, the parties participated in a mediation session. Further discussions following the mediation ultimately resulted in the partial settlement.


The Settlement

On April 23, 2021, the settling parties jointly filed a Stipulation and Agreement of Partial Settlement (here). The stipulation states that the settling parties had agreed to a settlement of the federal and state class action lawsuits and of the PIPE and SPAC action for a total of $35 million. 86% of the settlement amount, or $30.1 million, is to be paid to resolve the PIPE and SPAC action, and 14% of the total, or $4.9 million, is to be paid to resolve the federal and state court securities class action lawsuits. The stipulation states that percentage breakdown of the $35 million “reflects the proportionate size of the damages of the PIPE and SPAC Action and the Class Actions.” Any additional amounts recovered are to be paid according to the same proportions.


The settling defendants include Akazoo itself; certain former directors and officers of Old Akazoo; certain other directors and officers of Akazoo; certain former directors and officers of MMAC; as well as certain financial entities that were involved in the SPAC and PIPE transactions. The non-settling defendants include several accounting firms that acted as auditors for Old Akazoo, Akazoo, or MMAC; Apostolos Zervos, the founder of Old Akazoo and the CEO of Akazoo; and certain other financial entities and other Akazoo “service providers.” The stipulation also expressly states that a number of D&O insurers, defined as the Akazoo insurers, are also not released as a part of the settlement. (The specific insurers involved are identified by name in definitions section of the stipulation as the “Akazoo Insurers”).


According to the stipulation, the settlement is to be funded with $26 million from Akazoo from its cash on hand, and $9 million funded by MMAC’s insurer. (“MMAC Insurer” is a defined term in the stipulation; the definitions section identifies the MMAC Insurer by name.)


The stipulation further provides that Akazoo is seeking to recover additional funds from additional sources for the settlement. Among other things, the stipulation states that Akazoo is seeking to recover from the “Akazoo Insurers” amounts for “unreimbursed defense costs and unpaid indemnity claims.” Akazoo is also apparently also seeking “a partial refund of the premium paid for its current directors and officers insurance policy based on the cessation of the need for such coverage.” (Akazoo is apparently going into liquidation, thus the supposed absence of need for the insurance?) The stipulation has elaborate provision specifying how any recovery of these amounts, plus other types of recoveries that Akazoo is also seeking, are to be allocated among the parties and their lawyers.



There are a number of reasons why I thought it was important to write a separate blog post about this settlement and to review the settlement features in detail. The most important reason is just to show that not only can SPAC-related transactions wind up in litigation, but also that the litigation can result in material costs and recoveries.


I emphasize these points here because over the last few months, I have had a number of conversations with individuals involved with SPACs and based on those conversations I can say that there is a common perception that the SPAC-related transactions are low risk activities. Among other objections I get when the SPAC-related persons hear about the current disrupted marketplace for D&O insurance for SPAC IPOs are the questions (meant to suggest that the insurers were simply being crazy): “Where are the Claims?” and “Where are the Losses?”


As I believe readers of this blog know, there are now a substantial and growing number of claims. As I noted in a recent blog post, at least one of the recent SPAC-related lawsuits has now survived a motion to dismiss. And now the settlement of this lawsuit shows that these types of claims can result in significant losses. In other words, there are claims, and they can be serious.


To be sure, the Akazoo scenario is unusual. It is not a common occurrence for a post-merger company to conclude and to report publicly that the pre-merger target company had defrauded the acquiror. That aspect of this situation may make the Akazoo situation something less than universally applicable example. Nevertheless, the Akazoo circumstances definitely underscore the fact that involvement in SPAC-related transactions is not necessarily a low risk activity. This settlement, which is only partial, does show that SPAC-related litigation can result in substantial recoveries. At a minimum, this settlement is an important data point in the developing picture of SPAC-related litigation exposure.


Many readers reviewing the facts of this case may wonder whether this sequence of events attracted the attention of regulators. In fact, the SEC did file an enforcement action against Akazoo. A copy of the SEC’s complaint can be found here. The enforcement action resulted in an agreed order of judgment, a copy of which can be found here.