As readers of this blog well know, over the last 18 months or so there has been an onslaught of SPAC-related securities class action litigation. Most of these cases have only just been filed and therefore have not yet reached the motion to dismiss stage. However, a number of the earlier filed cases are now reaching that dismissal motion stage, and although the results so far are mixed, some of the cases are surviving the initial pleading hurdles, at least in part.
On July 1 ,2022, and in the latest example of a SPAC-related securities suit surviving the dismissal motion at least in part, Northern District of California Judge Susan Illston partially denied the motion to dismiss in the SPAC-related securities suit filed against Velodyne Lidar and certain of the executives of the SPAC into which Velodyne merged. As discussed below, there are several interesting features of Judge Illston’s opinion, a copy of which can be found here.
Graf Industrial Corp. was a special purpose acquisition company (SPAC). It completed its IPO in October 2018. On July 2, 2020, Graf and Velodyne announced their intent to merge, with Velodyne to be the surviving company. Velodyne develops automated systems for surround-view lidar sensors. Velodyne was founded by David Hall in 1983. The companies completed their merger on September 30, 2020. Hall remained as Chairman of the post-merger company.
In January 2021, Velodyne announced that it removed Hall as Chairman, after an Audit Committee investigation concluded that Hall and his wife (the company’s chief marketing officer) had each “behaved inappropriately with regard to certain Board and Company processes, and failed to operate with respect, honesty, integrity, and candor in their dealings with Company officers and directors.” The subsequently filed securities lawsuit alleges that in January 2022, Hall filed a civil lawsuit in California state court against Velodyne and others concerning his termination as Chairman. Many of the allegations in the securities lawsuit complaint draw on Hall’s allegations in the California state court lawsuit. Among other things, Hall alleged that his termination was pretextual because he refused to endorse the “wildly overstated” financial guidance Velodyne wanted to issue.
As discussed here, in March 2021, a plaintiff shareholder filed a securities class action lawsuit in the Northern District of California against Velodyne and certain of its directors and officers. As subsequently amended, the complaint also named as defendants Anand Gopalan, the former Velodyne CEO; Michael Dee, former President and CFO of Graf and current Chairman of Velodyne; and James Graf, former CEO of the Graf SPAC, and a current director of Velodyne. The complaint purports to be filed on behalf of a class of Velodyne investors who purchased securities in the company (or its SPAC predecessor) between July 2, 2020 (the date the merger was announced) and March 17, 2021.
The complaint consists of three counts. Count I alleges that all of the defendants violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5; Count II alleges that Graf and Dee are liable under Section 10(b) and Rule 10b-5(a) for employing a “device, scheme, or artifice to defraud”; and Count III alleges that all of the individual defendants violated Section 20(a) of the Exchange Act.
The misrepresentations alleged in the complaint fall into four categories: first, the complaint alleges that the defendants falsely assured investors about Hall’s continued role in the company while secretly trying to oust him; second, the complaint alleges that the defendants misrepresented Velodyne’s revenue and growth trajectory; third, the complaint alleges that the defendants mislead investors about Ford’s continued involvement in Velodyne as a strategic investor and customer; and fourth, the complaint alleges that the defendants misled investors about the quality of Velodyne’s corporate governance and internal controls over financial reporting.
The defendants moved to dismiss the plaintiffs’ complaint, arguing that the amended complaint failed to sufficiently allege falsity and scienter.
The July 1, 2022 Opinion
In a detailed July 1, 2022 opinion, Judge Illston denied the motion to dismiss as to the Section 10(b) and Rule 10b-5 claims against Velodyne, Gopalan, and Dee based on Hall’s ouster; and the Section 20 claims against Gopalan, Dee, and Graf based on Hall’s ouster. Judge Illston granted the motion to dismiss as to all of the plaintiffs’ other claims, finding that the other claims failed “to satisfy the PSLRA’s stringent pleading requirement.”
In sustaining the plaintiffs’ claims as to Hall’s ouster, Judge Illston considered the numerous statements the company had made, both before and after the merger, emphasizing the Hall’s importance to the company and its operations and stressing Hall’s continuing involvement in the company. Judge Illston found that these statements were misleading because, the complaint alleges, Velodyne’s board had disregarded Hall’s input on corporate governance and strategy and Hall had “stepped back from day to day management” after Gopalan began serving as Velodyne’s CEO, seven months before the merger occurred. Judge Illston also found that existence of the investigation of Hall and other facts and circumstances created “a strong inference of scienter for the statements” about Hall’s role at the company. However, she specifically found that the complaint does not adequately allege that Graf or Dee “employed a device, scheme, or artifice to defraud.”
With respect to the plaintiffs’ allegations that the defendants mislead investors by overstating business growth and anticipated revenues, Judge Illston found that all but two of the challenged statements were accompanied by appropriate cautionary language; as to the two statements that were not accompanied by cautionary language, Judge Illston found that the complaint fails to plead actual knowledge of falsity.
With respect to the plaintiffs’ allegations of Ford’s continuing involving in Velodyne, Judge Illston found that the plaintiffs had failed to allege falsity as to any of the statements pertaining to Ford. Similarly, with respect to the plaintiffs’ allegations concerning Velodyne’s internal controls, Judge Illston found that the plaintiffs “threadbare recitals” failed to state with particularity the deficiencies of the controls and failed to allege scienter.
Judge Illston’s opinion found that many of the plaintiffs’ allegations in the amended complaint were deficient. Claims based on three of the four separate sets of alleged misrepresentations were dismissed. Yet, crucially from the plaintiffs’ perspective, one of the claims did survive the initial pleading hurdle, at least in part. The survival of at least one claim makes all the difference for the plaintiffs, as the name of the game for securities litigation plaintiffs is to survive the dismissal motion and to live for another day.
What makes this case interesting with respect to the SPAC-related litigation wave, and what makes Judge Illston’s opinion interesting in that regard, is that the defendants Dee and Graf are named as defendants both in their capacities as former directors and officers of the SPAC and in their capacities as post-merger directors of Velodyne. The plaintiffs’ allegations against these two individuals involves alleged misconduct that allegedly took place both before and after the merger. The dual capacities in which these two are alleged to have acted at least potentially triggers two separate towers of insurance: the former SPAC’s runoff insurance and the go-forward operating company’s insurance.
The question of these two insurance programs’ respective obligations will turn in part the timing of the alleged misrepresentations relative to the merger date. The insurers’ representatives undoubtedly will be reading Judge Illston’s opinion closely in order to determine whether and to what extent the alleged misrepresentations with which Dee and Graf allegedly were involved were made pre-merger and which were made post-merger. The calibration will also have to weigh the misconduct of Dee and Graf against the alleged misconduct of Velodyne and Gopalan, in order to assess how the alleged liabilities, fall out with respect to the respective towers of insurance. All of this ultimately will have to be shaken out as the case goes forward. But in any event, the present situation in the Velodyne involves the kind of “Tower vs. Tower” dispute that Boris Feldman foresaw d in his April 2021 memo about SPAC-related litigation, which I discussed in a prior post, here.
As I noted at the outset, relatively few of the various SPAC-related securities suits have yet reached the motion to dismiss stage. For the few cases that have reached the dismissal stage, the results are mixed. For example, as I noted in a prior post (here), on July 5, 2022, the court in the SPAC-related securities suits against Skillz was granted. On the other hand, as discussed here, last month the court in the SPAC-related securities suit pending against Romeo Power was denied. In this case, the case against Velodyne survived the dismissal motion, albeit with large parts of the complaint dismissed.
It is hard to generalize from these few examples how the SPAC-related securities suits are likely to fare. However, the dismissal denials in this case (even if only partial) and in the Romeo Power case do suggest that in some instances these cases will survive the initial pleading hurdles. And as discussed above, these cases’ survival could present some complicated insurance issues.
One final note. In thinking about what the Velodyne decision might mean for other SPAC-related securities suits, it is important to consider that Judge Illston’s decision turned on some very case-specific facts having to do with the interactions between the merger target company’s founder and company management following the merger. The dismissal was denied in this case because of factors that are unlikely to be present in many of the other SPAC-related cases. So there are limits to how much can be read into the outcome of this case. It may have limited implications with respect to other SPAC-related cases.
Special thanks to a loyal reader for sending me a copy of the opinion in the Velodyne lawsuit.