As I have noted in recent posts (most recently here), a few of the many SPAC-related securities lawsuits that have been filed in the last 18 months are so are reaching the dismissal motion stage, and in at least some cases the dismissal motions are being denied, at least in part. In the latest example, the federal judge presiding over the SPAC-related securities class action lawsuit involving commercial space travel firm Momentus and Stable Road Acquisition Corp, its SPAC partner, as well as the SPAC sponsor and certain SPAC executives, has largely denied the defendants’ motion to dismiss. As discussed below, the securities suit may be unusual in that it was only filed after the SEC launched a securities enforcement action against the same entities and individuals and involving the same allegations; however, the court’s rulings nevertheless may have some implications for the many other pending SPAC-related suits.
Stable Road Acquisition Corp. is a special purpose acquisition company (SPAC) that completed an IPO on November 13, 2019. SRC-NI Holdings LLC is Stable Road’s sponsor. Brian Kabot is Stable Road’s Chairman and CEO. Momentus, Inc. is a Delaware corporation based in California seeking to develop and provide commercial space services. Mikhail Kokorich, a Russian citizen residing in Switzerland, served as the CEO and Chairman of Momentus until his January 25, 2021 resignation.
On October 7, 2020, Momentus and Stable Road announced their agreement to merge, with Momentus to be the surviving entity, as a publicly traded company. In connection with the merger agreement, Stable Road entered into a subscription agreement for a private investment in public equity (PIPE) offering.
As discussed here, on July 13, 2021, the SEC filed a settled administrative enforcement action against Momentus, Stable Road, SRC-HI, and Kabot. The SEC also filed a separate civil lawsuit against Kokorich. The SEC alleged that in public statements Momentus had misrepresented the readiness of its space technology and also the national security status of the company and Kokorich. The SEC alleged that Stable Road had repeated Momentus’s misrepresentations and also that Stable Road and Kabot had not undertaken sufficient due diligence.
As discussed here, On July 15, 2021, a plaintiff shareholder filed a securities class action lawsuit in the Central District of California against Stable Road; Momentus; SRC-NI; Kabot and several other Stable Road executives; and Kokorich several other Momentus executives. The complaint purports to be filed on behalf of purchasers of Stable Road’s securities between October 7, 2020 (the date the merger was announced) and July 13, 2021 (the date of the SEC enforcement action).
The securities suit complaint largely repeats the allegations from the SEC enforcement action. The complaint alleges that Momentus had misrepresented its space launch technology; had omitted to disclose U.S. government national security concerns about Kokorich; that as a result of the foregoing misrepresentations, the company’s projections and plans lacked viability and were false and misleading; and that Stable Road had failed to conduct appropriate due diligence of Momentus while repeating Momentus’s projections and representations. The defendants filed motions to dismiss.
The July 13, 2022 Order
In a detailed July 13, 2022 order (here), Central District of California Judge John F. Walter largely denied the defendants’ motions to dismiss, although he granted the dismissal motions of certain Stable Road executives.
In presenting his rulings, Judge Walter divided his analysis between the allegations against the Momentus defendants and the allegations against the Stable Road defendants.
With respect to the Momentus defendants, Judge Walter held that with respect to the defendants alleged misrepresentations and omissions, he “cannot conclude as a matter of law that the alleged omissions or misstatements were not material or misleading.” He concluded further that “the factual allegations taken as a whole permit a strong inference that the individual defendants knew that their representations with respect to Momentus’ inability to obtain regulatory approval because of Kokorich’s national security issues and their knowledge that the only test of Momentus’ core technology had failed.” He added that the “allegations of the roles each individua defendant played in the alleged fraud give rise to a strong inference of scienter on the part of each individual defendant.”
With respect to the Stable Road itself, Judge Walter concluded that the pleaded facts “give rise to a strong inference of scienter-based deliberate recklessness or willful blindness – at least as strong as any opposing inference.” With respect to Kabot, the Stable Road CEO, Judge Walter further concluded that “the allegations are sufficient to plea a strong inference of scienter,” who was “allegedly responsible for making statements regarding Kokorich and Momentus’ technology while at the same time failing to further investigate Kokorich’s national security issues.” However, with respect to three other individual Stable Road officers, he concluded that the allegations were insufficient and he granted those individuals’ dismissal motions.
Finally, Judge denied the motion of the sponsor to dismiss the Section 20(a) control person liability allegations against the SPAC sponsor.
As I have noted in recent posts, a number of the various SPAC-related securities lawsuits are now reaching the motion to dismiss stage. While the outcomes of the dismissal motions so far have been mixed, there already have been several cases in which the dismissal motions were denied at least in part.
There is a sense in which the dismissal motion denial in this case arguably is not totally unexpected. This case involved the unusual circumstance that, before the plaintiff filed his initial complaint, the SEC had filed and settled an enforcement action against Stable Road and Momentus; among other things the Cease and Desist order entered in connection with the enforcement action settlement recited that the defendants named had violated the federal securities laws, and Stable Road and Momentus, as well as Kabot, had agreed to pay fines as part of the enforcement action settlement. Because of this distinctive feature of this case, it may be hard to generalize about the outcome of the defendants’ dismissal motions; the outcome of the dismissal motions here arguably may few or even no implications for most other cases that lack this case’s distinctive set of facts.
However, it is nevertheless noteworthy that Judge Walker denied the motion not only as to the merger target, Momentus, and its executives, he also denied the dismissal motion as to the SPAC; the SPAC CEO; and the SPAC sponsor. The fact that these various SPAC-related entities and individuals were named as defendants and were unable to secure their dismissals has important implications concerning the potential scope of liability in connection with SPAC-related transactions. Among other things, the dismissal motion denial as the SPAC entities and individuals also has implications for insurance structures put in place to protect these individuals and entities. A complete insurance structure in connection with SPACs and SPAC-related transactions clearly must include insurance protection for the SPAC executives and even for the SPAC sponsor.
Many of the numerous SPAC-related securities that have been filed in the last year and a half have only just been filed and they have not yet reached the initial pleading hurdles. However, as this decision and other recent dismissal motion rulings show, some of the earlier filed SPAC-related suits are reaching the dismissal motion stage. There are too few decisions yet to make any generalizations about how the cases overall will fare; however, it is clear, from this decision and others, that some of these cases are going to survive the initial motions, even in some cases only in part. Some cases, it is clear, are going to go forward. And more cases are going to be filed, as well.