In the latest example of a post-SPAC-merger company getting hit with a securities class action lawsuit, the online sports gaming and betting company DraftKings has been sued in a securities suit involving alleged pre- and post-SPAC-merger activity of one of the merged companies. As discussed below, the new lawsuit is the latest SPAC-related securities suit based supposed revelations in a short-seller’s report. A copy of the plaintiff’s complaint can be found here.



Diamond Eagle Acquisition Corp. (DEAC) was a Special Purpose Acquisition Company (SPAC). DEAC completed an IPO on May 10, 2019. On December 22, 2019, DEAC announced its plan for a three-way merger between DEAC; predecessor DraftKings (old DK); and SBTech Global Limited. The merger was completed on April 23, 2020.


On June 15, 2021, short-seller Hindenburg Research published a report alleging that the merger with SBTech exposed DraftKings to dealings in black-market gaming. Among other things, the report, which claimed to be based on interviews with former SBTech employees, as well as investigation of illicit international gaming websites, alleged that “SBTech has a long and ongoing record of operating in black markets,” and estimated that 50% of SBTech’s revenue is from markets where gambling is banned.” The subsequently filed securities lawsuit complaint claimed that DraftKings’ share price declined over 4% on the news.


The Lawsuit

On July 2, 2021, a plaintiff shareholder filed a securities class action lawsuit in the Southern District of New York against Draft Kings; its Chairman and CEO,  Jason Robing; its CFO, Jason Park; Jeff Sagansky, DEAC’s pre-merger CEO and Chairman; and Eli Baker DEAC’s pre-merger CFO and President. The complaint purports to be filed on behalf of a class of investors who purchased their shares in DraftKings or its predecessor-in-interest DEAC between December 23, 2019 (the date the merger was announced) and June 15, 2021 (the date of the Hindenburg Research report.)


The  complaint alleges that the throughout the class period, the defendants made misrepresentations or failed to disclose that: “(i) SBTech had a history of unlawful operations; (ii) accordingly, DraftKings’ merger with SBTech exposed the Company to dealings in black-market gaming; (iii) the foregoing increased the Company’s regulator and criminal risks with respect to these transactions; (iv) as a result of all the foregoing, the Company’s revenues were, in part, derived from unlawful conduct and thus unsustainable; (v) accordingly, the benefits of the Business Combination were overstated; and (vi) as a result, the Company’s public statements were materially false and misleading at all relevant times.”


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. The complaint seeks to recover damages on behalf of the class.



By my count, this lawsuit is the 15th SPAC-related lawsuit to be filed so far in 2021, but also the first SPAC-related securities suit to be filed since late May. Like many of the previously filed SPAC-related securities suits, this lawsuit includes as defendants not only officers of the go-forward public company, but also individuals who served as officers of the pre-merger SPAC. Also like many of these lawsuit, this lawsuit involves alleged misconduct that took place prior to the merger (as well as after the merger).


It is somewhat surprising that among the many post-SPAC-merger companies now in the financial marketplace that DraftKings should be one to attract a lawsuit, as DraftKings is generally viewed in the investment community as one of the more successful SPAC transactions. In that regard, it is noteworthy that the plaintiff alleges that the bad new revelation caused only a four percent drop in the price of the company’s stock, which is hardly the dramatic decline plaintiff’s lawyers typically seek to describe in their complaints, and suggests that the financial markets found the supposed revelations something less than a bombshell.


Another feature of this complaint worth noting is that the complaint both follows and is based on the publication of a short seller report about the defendant company. By my count, of the 15 SPAC-related securities class action lawsuits that have been filed so far this year, eight arose after the defendant company was the subject of a short seller report.


Indeed, this lawsuit is the fourth SPAC-related lawsuit this year to arise after a report by Hindenburg Research. The other three SPAC-related companies to be sued in 2021 following the publication of a Hindenburg Research report are Clover Health (about which refer here); Lordstown Motors (about which refer here) and PureCycle Technologies (here). The SPAC-related lawsuit filed last September against Nikola Motors (refer here) also followed shortly after the publication of a Hindenburg Research report. As I noted in my post about the PureCycle Technologies lawsuit, it is clear that the short sellers are watching the SPAC merger transactions and post-merger companies closely.


The sheer volume of SPAC activity and the likely coming wave of SPAC-acquisitions makes it likely that we will see more of these SPAC-related lawsuits in the months ahead. The level of short seller scrutiny of post-SPAC companies even further increases the likelihood.