Although the filing of SPAC-related securities lawsuits has been one of the important securities litigation stories so far this year, the filing this past week of yet another SPAC-related securities suit did highlight the fact that it is the first SPAC-related securities suit to be filed since late May. As discussed further below, there may be some reasons for this apparent lull in SPAC-related securities suit filings over the last several months. However, the recently filed suit, as also discussed below, at the same time arguably underscores the fact that it is entirely possible that the apparently lull in filings between May and August was purely coincidental and that we are likely to see continued numbers of SPAC-related securities suit filings as the year progresses.
Trident Acquisitions Corp. was a special purpose acquisition company (SPAC) formed in 2016. Trident completed an IPO on June 1, 2018. On February 21, 2021, Trident entered an agreement to complete a business combination with AutoLotto, Inc. AutoLotto was a private company doing business as Lottery.com. AutoLotto operated a platform enabling players to remotely purchase legally sanctioned lottery games in the U.S. and internationally. The two companies completed the business combination on October 29, 2021, with the surviving entity re-named Lottery.com.
On July 6, 2022, Lottery.com filed with the SEC a current report on Form 8-K in which the company disclosed the existence of an internal investigation being conducted by independent counsel which had uncovered “instances of non-compliance with state and federal laws concerning the state in which tickets are procured as well as order limitations.” The 8-K disclosed further that in light of the findings, the company’s board had terminated the Company’s President, Treasurer, and Chief Financial Officer, Ryan Dickenson, effective July 1, 2022. According to the subsequently filed securities suit, the company’s share price declined more than 12% on this news.
On July 15, 2022, the company filed another report on Form 8-K. The filing reported that the company’s Chief Revenue Officer, Matthew Clemenson, had resigned July 11, 2022, effective immediately. The filing also reported with respect to the previously announced investigation that after a review of the company’s cash balances and other items, the company had “preliminarily concluded that it has overstated its available unrestricted cash balance by approximately $30 million and that, relatedly, it improperly recognized revenue in that same amount.” The company, the report said, was validating its preliminary conclusion, assessing its impact on previously issued financial reports, and begun to institute remedial measures. According to the subsequent complaint, the company’s share price declined more than 14% on this news.
Finally, on July 29, 2022, the company filed yet another report on Form 8-K, in which the company advised investors that it did not have “sufficient financial resources to fund its operations or pay certain existing obligations,” and therefore that it intended to furlough certain employees effective July 29, 2022. Moreover, because the company’s resources were not sufficient to fund operations for twelve months, “there is substantial doubt about the Company’s ability to continue as a going concern,” and the company may be forced to wind down its operations or liquidate the company’s assets. According to the subsequent complaint, the company’s share price declined a further 64% on this news.
On August 19, 2022, a plaintiff shareholder (with the truly Dickensian name, Preston Million) filed a securities class action lawsuit in the Southern District of New York against Lottery.com, Dickinson, Clemenson, and company Chairman and CEO Anthony DiMatteo III. A copy of the complaint in the action can be found here.
The complaint purports to be filed on behalf of a class of investors who purchased company shares between November 15, 2021 (the date on which the company announced that it had terminated its prior accounting firm and engaged a different, new public accounting firm) and July 29, 2022.
The complaint alleges that during the class period the defendants had made materially false or misleading statements and/or failed to disclose that: “(i) the Company lacked adequate internal accounting controls; (ii) the Company lacked adequate internal controls over financial reporting, including but not limited to those pertaining to revenue recognition and the reporting of cash; (iii) the Company was not in compliance with state and federal laws governing the sale of lottery tickets; and (iv) as a result, the Company’s public statements were materially false and 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 and Rule 10b-5 thereunder. The complaint seeks to recover damages on behalf of the plaintiff class.
This latest SPAC-related lawsuit is the 49th SPAC-related securities lawsuit to be filed since January 1, 2021. It is also the 18th SPAC-related securities lawsuit to be filed so far in calendar year 2022.
Although the SPAC-related suit filings clearly are one of the important securities litigation stories of the year, there is an interesting note about the timing of this suit – it is the first SPAC-related securities suit to be filed since the end of May. I speculate further below on the cause of this apparent lull over the last several months in the filings of SPAC-relate securities suits.
Although this lawsuit clearly is SPAC-related, owing to the company’s merger with the SPAC just before the class period, the allegations have relatively little to do with the SPAC itself. As far as I can tell, none of the individuals named as defendants were directors or officers of the SPAC (although the complaint’s allegations are not entirely conclusive on this point). All of the wrongful acts alleged in the complaint allegedly took place after the business combination was completed.
On the other hand, this company clearly stumbled in its early months as a public company; the allegations clearly raise the question whether this company was ready for the burdens and scrutiny that go with being a public company. There are also implicit questions about the thoroughness of the pre-merger due diligence as well. In that sense, this lawsuit does share a number of characteristics with the other SPAC-related lawsuits that have been filed.
I do think it is interesting that after a rush of SPAC-related suits in the year’s first five months, there were no SPAC related suits filed between the end of May and the filing of this suit on August 19. Of course a filing lull of this kind could be purely coincidental. It is possible that the plaintiffs’ lawyers have just been busy with other things.
On the other hand, I do think it is relevant that in the last few months a lot of the gas has gone out of the SPAC market. SPAC IPO activity has dropped to its lowest level in at least five years. Instead, the financial pages are full of stories about the number of planned SPAC mergers that have been cancelled. A number of high profile SPACs have announced what is likely to be a growing number of SPAC liquidations in coming months. What had been a high flying sector has now come down to earth.
What does this come-down mean for the prospects for further SPAC-related securities suit filings? In thinking about this question, it is worth keeping in mind that of the 49 SPAC-related securities lawsuit filings since January 1, 2021, 20 of them (or about 40%) were filed based on short seller reports. With the entire market for SPACs so beaten down, there are fewer (or perhaps even no) big targets for the short sellers to attack. There is just less hype for the short sellers to try to expose.
Another factor contributing to the apparent slow down in the number of SPAC-related securities suit filings is the fact that the hype in the electric vehicle market has dissipated. Of the 49 SPAC-related securities suits filed since January 1, 2021, 17 have involved companies in the electric vehicle industry. As the hype in this sector has died down in recent months, the speculative valuations that many of these companies have enjoyed have also diminished. The companies in this sector, or at least for purposes of this discussion the companies in this sector that have not already been sued in securities suits, may not make as attractive of litigation targets as may have been the case in prior months.
Another factor may be the SEC’s proposed SPAC guidelines (discussed here). Among other things, the proposed guidelines make it clear that the same rules that apply to traditional IPOs about making financial projections also apply to proposed SPAC mergers. Even though the guidelines have not yet been finalized, SPAC backers have reconciled themselves to the fact that they cannot promote their proposed SPAC mergers using financial projections of the kind that traditional IPOs could not use. The net result is another turning down of the dial on the SPAC hype machine, which may also be contributing to the apparent downturn in the amount of SPAC-related securities litigation activity.
Of course, all of that said, it may just be that the apparently filing lull over the last several months was purely coincidental and that, as this latest filing itself arguably indicates, SPAC-related securities suit filing activity could pick back up and level out before year end. Indeed, though there have been no new SPAC-related securities class action lawsuit filings over the last several months, other types of SPAC-related litigation have been filed (refer, for example, here and here). It is not like the plaintiffs’ lawyers have gone away or anything like that. But regardless of all of these various observations and speculations, it will be interesting to see what happens to the level of new SPAC-related securities suit filing activity as the year progresses.