As I have noted on this site (most recently here), electric vehicle companies that have merged with publicly traded SPACs have become a favored target for plaintiffs’ securities lawyers. In the latest example of this phenomenon, on December 23, 2021, a plaintiff shareholder filed a securities class action lawsuit against the EV company Faraday Future Intelligent Electric, Inc., which merged with a SPAC on July 21, 2021. Like many of the EV companies that have been sued, Faraday Future’s stock price dropped after it was the subject of a short seller report. A copy of the complaint against Faraday Future can be found here.
Property Solutions Acquisition Corp. (PSAC) was a Special Purpose Acquisition Company (SPAC). PSAC completed an IPO on July 21, 2020. FF Intelligent Mobility Global Holdings Ltd. (Legacy FF) was a private company in the business of designing and building electric vehicles. On January 28, 2021, PSAC and FF Legacy announced that had entered into an agreement to merge. The merger was completed on July 21, 2021.
On October 7, 2021, J Capital Research, a short seller, published a report raising doubts about the Faraday Future’s production capabilities, stating that the company had “reneged on promises to build factories in five locations in the U.S. and China,” is “being sued by dozens of unpaid suppliers,” and “failed to disclose that assets in China have been frozen by courts.” The report also alleged that a very high percentage of the company’s supposed vehicle reservations and deposits had been made by a single undisclosed company that is likely an affiliate. According to the subsequently filed securities complaint, the company’s share price declined more than 4% on this news.
On November 15, 2021, the company issued a statement that it would be unable to timely file its quarterly report on Form-10Q and further announced that its board of directors had formed a special committee of independent directors to review allegations of inaccurate disclosures, including the claims in the J Capital report. According to the securities complaint, the company’s share price fell about 3% on this news.
On December 23, 2021, a plaintiff shareholder filed a securities class action lawsuit in the Central District of California against Faraday Future; against certain of its directors and officers who, prior to the merger, had served as directors or officers of Legacy FF; and against the two other individuals who had served as co-CEOs of PSAC prior to the merger. The complaint purports to be filed on behalf of investors who purchased the securities of Faraday Future (and, prior to the merger, the securities of Legacy FF) between January 28, 2021 (the date the merger was announced) and November 15, 2021 (the date the company announced the delay in filing its 10-Q).
The complaint alleges that during the class period the defendants failed to disclose to investors: “(1) that the Company had assets in China frozen by courts, (2) that a significant percentage of its deposits for future deliveries were attributable to a single undisclosed affiliate; (3) that the Company’s cars were not as close to production as the Company claimed; (4) that, as a result of previously issued statements that were misleading and/or inaccurate, Faraday Future could not timely file its quarterly report; and (5) that, as a result of the foregoing, Defendants’ positive statements about the Company’s business, operations, and prospects were materially misleading and/or lacked a reasonable basis.”
The plaintiff alleges that the defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The plaintiff seeks to recover damages on behalf of the class.
By my count, this new lawsuit is the 31st SPAC-related securities class action lawsuit to be filed so far in 2021. The 31 SPAC-related suits represent about 15% of all securities class action lawsuits filed this year.
This lawsuit has a number of features in common with many of the other SPAC-related suits that have been filed this year.
For starters, the defendant company is an electric vehicle company. By my count, ten of the 31 companies (roughly a third) named as defendants in SPAC-related lawsuits this year are EV companies (as is Nikola, which was named as a defendant in a high-profile securities suit in 2020).
Another feature this lawsuit has in common with many of the other SPAC-related securities suits filed this year is that the individuals named as defendants in this suit include former officers of the SPAC into which the defendant company had merged. By my count, in 20 of the 31 (or just under two-thirds) of the SPAC-related lawsuits filed this year, former officer or directors of the SPAC were named as defendants.
Yet another feature this lawsuit has in common with many of the other SPAC-related lawsuits is that the complaint’s filing followed after a short-seller’s report caused the defendant company’s share price to decline. By my count, 14 of the 31 SPAC-related lawsuits filed this year (about 45%) were filed after the defendant company had been the subject of a short-seller report that caused the company’s share price to decline.
In other words, a securities suit against a post-SPAC-merger EV company that was the subject of a short-seller report and that names former officers or directors as the SPAC as defendants hits the SPAC-related securities litigation trifecta. This lawsuit is at the center of the plaintiffs’ lawyers’ SPAC-related litigation target screen.
One unusual thing about this lawsuit is how modest the share price declines involved are. A drop of only about 4% on the short-seller’s report is so slight that it hardly seems worth talking about. The 3% decline on the company’s announcement that it was delaying its 10-Q is also so minor that it could really just be the ordinary daily variation on the company’s share price. Even the combined 7% drop between these two declines is uncharacteristically small to have triggered a securities suit. For whatever reason, the disclosures upon which this plaintiff is basing this lawsuit weren’t that much of a big deal to investors, which kind of undercuts the plaintiff’s attempt to suggest that this company was revealed to be some kind of massive fraud. Apparently, investors just didn’t think so.
There is one final thing about this lawsuit that is noteworthy, and that is that it involves a SPAC that went public in mid-2020, just as the SPAC IPO frenzy was starting to take off. Since that time, literally hundreds and hundreds of other SPACs have completed IPOs. Most of these SPACs are still in the search phase. But over the coming months, as these SPACs identify merger targets and complete their business combinations, there will be a few merged companies that will stumble. Or that will be the target of a short-seller attack. In many instances, these stumbling or targeted companies are going to get sued, just like this one did. What that means is that in 2022 and probably into 2023 as well, there is going to be just a ton of SPAC-related litigation.
My crystal ball is no better than anyone else’s, but I believe that I am not going out on a limb here by saying that SPAC-related securities suits are going to be a very significant part of securities class action lawsuit filings in 2022.