As I have noted in recent posts (here, for example), SPAC-related securities suit filings continue to accumulate and represent a significant current securities litigation phenomenon. But while the number of suits continues to mount, relatively few of these cases have yet reached the dismissal stage. In a recent ruling, however, the defendant company’s motion to dismiss in a SPAC-related securities suit was substantially denied as to the company itself and its top executives. In particular, the claims based on allegations that the company, Romeo Power, and its senior officials made supply chain misrepresentations were sustained, though the related claims against three former executives of the SPAC with which Romeo had merged were dismissed. A copy of the June 2, 2022 opinion in the case can be found here.
RMG Acquisition Corp., a special purpose acquisition company (SPAC), completed its IPO on February 12, 2019. On October 5, 2020, RMG announced that it had entered an agreement to merge with Romeo Power, which is focused on designing and manufacturing battery modules and packs for commercial electric vehicles. The merger was completed on December 29, 2020, with Romeo as the surviving entity, with its shares trading on the NYSE.
In the securities lawsuit complaint, the plaintiffs allege that after the merger was announced but before it was completed, the defendants made a number of statements in filings and in various news reports that Romeo projected 2021 revenue of $140 million and that the company had key partnerships with battery cell manufacturers in place. Battery cells are a critical component in Romeo’s battery modules and packs. The company subsequently experienced disruption in its battery cell supply, which in turn caused the company to revise its revenue projections downward.
As discussed here, on April 16, 2021, a plaintiff shareholder filed a securities class action lawsuit in the Southern District of New York against Romeo. The complaint (which can be found here) also named several individuals as defendants, including the CEO and the CFO of Romeo and three former directors and officers of RMG. The complaint as amended alleged that the defendants had violated Sections 10(b), 14(a), and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The defendants moved to dismiss, arguing, among other things, that the plaintiffs had failed to sufficiently allege scienter and falsity.
The June 2, 2022 Opinion
In a June 2, 2022 Opinion, Southern District of New York Judge Lorna G. Schofield partially granted and partially denied the defendants’ motion to dismiss. Judge Schofield granted the defendants’ motions as to the plaintiffs’ Section 14(a) claims and Section 20(a) claims against all individual defendants except as to the Section 20(a) claims against Romeo Power’s CEO and CFO. Judge Schofield denied the defendants’ motions to dismiss the claims under Sections 10(b) and 20(a) as to the company and its CEO and CFO. In denying the motion as to these defendants, Judge Schofield held that, contrary to the defendants’ arguments, the plaintiffs had sufficiently alleged falsity and scienter.
With respect to the falsity issue, Judge Schofield held that “at least one of the statements – regarding the number and extent of Romeo’s battery cell supplies – is sufficiently alleged to be false and warrants denial of the motion to dismiss.” Specifically, Judge Schofield held that the plaintiffs had sufficiently alleged that the company misrepresented that it relied on four battery cell suppliers, when instead the company relied on only two suppliers.
With respect to the issue of scienter, Judge Schofield held that “the Complaint sufficiently alleges that Webb and Selwood knew facts or had access to information that the repeated statements that Romeo has four battery cell suppliers was not accurate.” The defendants attempted to argue a competing inference, that is that the company did not anticipate the supply chain disruptions. Judge Schofield said that Romeo defendants’ “purported failure to predict supply chain disruptions does not provide any basis for Romeo to claim that it had four suppliers when it had only one or two.”
When this case was first filed back in April 2021, I noted that the complaint embodied two separate securities class action litigation filing trends; that is, the case involved a SPAC-related company and the underlying allegations involved supply chain disruption. As it turned out, the supply chain disruption allegations provided to be critical to the survival of the claim. The key point about the supply chain issues is not that the company experienced a disruption in the battery cell supply; the point is that the plaintiffs sufficiently alleged that the company had misrepresented the extent and durability of its supply chain.
As anyone who reads the business pages know, supply chain issues continue to disrupt many companies’ operations, across a wide range of industries. As these circumstances continue, it seems likely that at least some of these companies will experience litigation relating to the supply chain issues. As this case shows, alleged misrepresentations relating to a company’s supply chain case serve as a sustainable basis for securities litigation.
However, this case is not just noteworthy because of the supply chain issues; the case is also noteworthy because it involves a company that recently became publicly traded as a result of its merger with a SPAC. The SPAC angle was relevant to the plaintiffs’ complaint, as some of the alleged misrepresentations allegedly were made in the merger-related documents, and, indeed, the plaintiffs’ complaint names as defendants three former directors and officers of the SPAC. The news on this issue is good, in that Judge Schofield granted the motions to dismiss of the three former SPAC officers. The case will only go forward as Romeo Power and two of its executives.
The dismissal of the three former SPAC officers is noteworthy, because many of the recently filed securities class action lawsuits include as named defendants former directors or officers of the SPAC. While the circumstances involved in the various cases will of course vary, the outcome of this case at least suggests that the former SPAC executives named as defendants may be able to secure their dismissal from the case. If this proves to be true, this could be good news not only for the executives themselves, but also for the SPACs run-off D&O insurers.