In the surge of SPAC-related litigation that has been filed this year, one of the distinctive features of the filings has been that many of the lawsuits have followed shortly after a short seller published a report critical of the defendant company. In the latest example of this phenomenon, a shareholder has filed a securities class action lawsuit against biotech firm Ginkgo Bioworks Holdings, which merged with a SPAC in September 2021, after the company’s share price declined following the publication of a negative short seller report. As discussed below, this new lawsuit has several other features in common with the SPAC-related securities lawsuits filed this year. A copy of the November 18, 2021 complaint against Ginkgo Bioworks can be found here.
Soaring Eagle Acquisition Corp. (SEAC) was a special purpose acquisition company (SPAC). SEAC completed an IPO on March 4, 2021. Ginkgo Bioworks, Inc. was a privately held company that operated a platform for cell programming to enable biological production of therapeutics, food products, and chemicals. The two companies announced their plan to merge on May 11, 2021. On September 14, 2021, the two companies completed the business combination, with the surviving company known as Ginkgo Bioworks Holdings.
On October 6, 2021, short-seller Scorpion Capital published a 175-page report alleging, among other things, that Ginkgo is a “colossal scam,” and describing the company as a “shell game” whose revenue is highly dependent on related-party transactions. Among other things, the report asserted that the company underreported its related-party revenues. The report claims that in the months leading up to the merger, the company announced a number of new R&D partners, which the report claims are actually undisclosed related parties and fronts. The report also alleged that Ginkgo booked fictitious or overstated revenues. The subsequently filed securities class action lawsuit alleged that the company’s share price declined 12% following publication of the report.
The subsequently filed complaint also alleges that on November 15, 2021, Ginkgo announced that it had received an inquiry from the DoJ related to the allegations in the report.
Because of the subsequent lawsuit complaint’s reference to the company’s statement about the DOJ investigation, it is worth noting what the company actually said in its November 15, 2021 earnings release about the investigation and about the short seller report:
Ginkgo shares conclusions from internal investigation, led by independent law and accounting firms, concluding that short seller claims were unfounded
- As a leader in an emerging field that is innovating on multiple fronts, we are used to folks questioning our capabilities and our valuation and, because those questions are typically in good faith, we welcome those discussions.
- In October however, a short seller with a vested interest in driving down our stock price for financial gain published an inflammatory report claiming financial misconduct by Ginkgo. Due to the nature of the claims in the short report, it was not entirely surprising that shortly after the short report was released, we also received an informal inquiry from the United States Department of Justice.
- Ginkgo responded seriously to the claims in the short report and our audit committee proactively commenced a thorough independent investigation, led by top independent counsel (Milbank) and forensic accountants (Ankura) with deep expertise in these matters.
- This investigation has concluded and found that any suggestion of fraud, reporting violations, accounting errors, or other wrongdoing contained in the short seller’s report were unfounded and that no restatement of Ginkgo’s financials was needed.
On November 18, 2021, a plaintiff shareholder filed a securities class action lawsuit in the Northern District of California against Ginkgo Bioworks. The complaint also names as defendants the CEO and CFO of Ginkgo, as well as the former Chairman of SEAC, Harry E. Sloan, who is also a director of the post-merger company. The complaint purports to be filed on behalf of a class of investors who purchased securities of Ginkgo (or of SEAC prior to the merger) between May 11, 2021 (the date the planned merger was announced) and October 5, 2021 (the day before the publication of the short seller report). The plaintiff’s complaint quotes extensively from the Scorpion Research report.
In the complaint, the plaintiff alleges that the defendants made false or misleading statements or failed to disclose that: “(1) the Company’s failure to derive real revenue from third-party customers left it almost completely dependent on related parties; (2) as a result, most, if not all, of the Company’s revenue came from related parties the Company created, funded, or controlled through its ownership and board seats; (3) the Company was misclassifying and underreporting related party revenue in order to conceal the Company’s near total-independence on related parties; (4) many of the company’s new R&D partner are undisclosed related parties and/or façades; (5) as a result, the Company’s valuation was significant [sic] less than Defendants disclosed to investors; and (6) as a result, Defendants’ public statements were materially false and/or 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. The complaint seeks to recover damages on behalf of the plaintiff class.
By my count, the lawsuit filed against Ginkgo Bioworks is the 27th SPAC-related securities class action lawsuit to be filed so far in 2021. As has been the case with a number of the post-SPAC-merger companies that have been hit with securities suits this year, Ginkgo was sued after the publication of the negative short-seller report. Based on my running tally of the 2021 SPAC-related securities suits, of the 27 SPAC-related suits filed this year, eleven have followed a decline in the defendant company’s stock price following the publication of a negative short seller report. In addition to the 2021 SPAC-related lawsuits, the high-profile lawsuit filed in September 2020 against EV company Nikola Corporation also followed the publication of a short seller report about the company.
Another feature the new lawsuit filed against Ginkgo has in common with many of the prior SPAC-related lawsuits filed in 2021 is that the individuals named as defendants in the Ginkgo lawsuit include a former officer of the SPAC – in this case, the former SPAC officer named as a defendant is Harry E. Sloan, the former Chairman and CEO of the SEAC. This is not the first SPAC-related lawsuit in which Sloan has been named as a defendant. As discussed here, Sloan was also named as a defendant in the securities lawsuit filed in May 2021 against online gaming platform Skillz, which had merged with Flying Eagle Acquisition Corp. (a SPAC) in December 2020. Sloan was the pre-merger CEO of Flying Eagle.
Yet another interesting note about the new Ginkgo lawsuit is that, at least as far as I can tell, this is the first SPAC-related lawsuit relating to a SPAC that completed its IPO during calendar year 2021. The fact that a transaction involving a SPAC from the 2021 IPO class may signal that the enormous numbers of SPACs that completed IPOs in late 2020 and early 2021 may soon be moving into litigation range. The SPAC life cycle events that seem to indicate the onset of litigation risk are the announcement and the completion of the intended merger transaction. As more SPACs from the enormous numbers of companies that completed IPOs during the peak of the SPAC frenzy announce and complete their merger transactions, we are likely to see even more SPAC-related securities lawsuits filed.
The individuals that are named as defendants in the new Ginkgo lawsuit are each named in multiple capacities. The former SPAC CEO Sloan, for example, is named as a defendant both in his role as a former officer of the SPAC and in his role as a director of the post-transaction operating company. The CEO and CFO of Ginkgo are named as defendants in their roles both as officers of the pre-merger private company and in their roles as officers of the post-merger operating company. The multiple roles in which these individuals are named as defendants means that multiple insurance towers potentially are triggered by this claim, a circumstance that could add complexity to the claim processing and resolution.