In the latest SPAC-related federal court securities class action lawsuit to be filed, a plaintiff shareholder has filed a securities suit against a building management technology company – which merged with a SPAC in 2021 — that recently restated its financial statements for the reporting periods after the company became publicly traded. The complaint in the new lawsuit filed against Latch, Inc. can be found here. As also noted below, in a separate development, a different plaintiff shareholder has filed a separate SPAC-related Delaware Chancery Court action against former directors and officers of a SPAC and the SPAC’s sponsor.

Background

TS Innovation Acquisitions Corp. (TSIA) was a SPAC. TSIA completed an IPO on November 16, 2020. Latch is a building technology company that offers a full-building operating system, LatchOS, to address the essential requirements of modern buildings. Latch became a publicly traded company as a result of a business combination with TSIA, which was completed on June 3, 2021.

In an August 25, 2022 press release (here), Latch announced that it would restate its financial statements for 2021 and for the first quarter of 2022 due to revenue recognition errors related to the sale of hardware devices. In its press release, the company stated that “certain revenue recognition errors occurred as a result of unreported sales arrangements due to sales activity that was inconsistent with the Company’s internal controls and procedures.” According to the subsequently files securities class action complaint, the company’s share price declined over 12% on this news.

The Lawsuit

On August 31, 2022, a plaintiff shareholder filed a securities class action lawsuit in the Southern District of New York against Latch and certain of its directors and officers. The complaint purports to be filed on behalf of a class of investors who purchased the company’s securities between May 13, 2021 (the date the SPAC filed its prospectus/proxy statement relating to the proposed business combination) and August 25, 2022 (the date of the company’s restatement announcement).

The complaint alleges that the during the class period, the defendants failed to disclose to investors: “(1) that there were unreported sales arrangements related to hardware devices; (2) that, as a result, the Company had improperly recognized revenue throughout fiscal 2021 and first quarter 2022; (3) that there were material weaknesses in Latch’s internal control over financial reporting related to revenue recognition; (4) as a result of the foregoing, Latch would restate financial statements for fiscal 2021 and first quarter 2022; 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 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.

Discussion

By my count, this lawsuit is the 50^th SPAC-related securities class action lawsuit to be filed since January 1, 2021, and it is the 19^th SPAC-related securities suit to be filed so far in calendar year 2022. Regular readers know that I recently observed on this site that there had been a lull in SPAC-related securities suit filings between May and the end of August. The apparent filing lull ended a few days ago with the filing of the SPAC-related securities suit against Lottery.com. Now with the filing of this latest suit against Latch just a few days letter, it seems increasingly likely that the apparent filings lull may just have been coincidental rather than the result of some more meaningful litigation dynamics.

I have denominated this case as SPAC-related, because it involves a company that merged with a SPAC during the class period, the involvement of the SPAC itself is not a major component of the plaintiff’s allegations. Indeed, as far as I can tell from the face of the complaint, none of the three individual defendants named in the complaint were former directors and officers of the SPAC. Rather, they appear to have acted solely in the capacities as executives of the operating company. On the other hand, the complaint does allege misrepresentations that allegedly were made prior to the business combination in the SPAC’s SEC filing relating to the then-proposed business combination, so the SPAC transaction is relevant to the complaint.

Another reason to categorize this lawsuit as SPAC-related has to do with the basic allegations in the complaint – that is, that the company had to restate all of its financial statements for the reporting periods immediately after it became a public company, due to weaknesses in its financial reporting systems. What this case is about, and what so many of the SPAC-related cases are about, is that a private company that became publicly traded through merger with a SPAC, and that after the business combination the company stumbled because it apparently was not ready for the burdens and scrutiny that go with being a public company. Of course, not all companies that merge with SPAC have these kinds of problems. However, it is one the risks associated with de-SPAC companies, that they may not be ready for what goes with being a public company.

It is noteworthy to me that the SPAC involved here completed its IPO in November 2020, when the SPAC frenzy was already underway and building up momentum that carried into early 2021. As more of the SPACs that completed their IPO during the frenzy in 2020 and 2021 approach the end of their search periods and complete business combinations, there could be more SPAC related securities suits filed (assuming here for the sake of discussion that the apparently filing lull I noted above in the first paragraph of this section was only coincidental and not a reflection of other litigation specific factors). In any event, it does seem clear that the SPAC-related lawsuits are continuing to be filed.

Another SPAC-Related Direct Action Breach of Fiduciary Duty Lawsuit: Although I have been closely tracking the number of SPAC-related securities class action lawsuit filings, plaintiffs’ lawyers have been filed other kinds of SPAC-related lawsuits. Of particular interest are the state court direct action breach of fiduciary duty class action lawsuits that have also been filed. This type of lawsuit has been of particular interest since the Delaware Court of Chancery’s January 2022 “groundbreaking” ruling in the MultiPlan SPAC-related direct action lawsuit sustaining the plaintiff’s complaint. As I noted at the time of the Chancery Court’s MultiPlan ruling, plaintiffs’ lawyers could have significant incentives to pursue these types of state court actions against SPACs rather than to pursue federal court securities class action lawsuits. I also speculated that competing sets of plaintiffs’ lawyers might seek to pursue these kinds of claims even if other lawyers are already pursing securities class action lawsuits in connection with the same SPAC transaction.

In support of the idea that plaintiffs’ lawyers may be drawn toward filing a state court direct action lawsuit relating to SPACs, on August 30, 2022, a plaintiff shareholder filed a lawsuit in Delaware Chancery Court against several former directors and officers of FinServ Acquisition Corp., as well as against FinServ Holdings LLC, the SPAC’s sponsor.  A copy of the complaint can be found here. The SPAC completed its IPO in November 2019. The lawsuit is filed as a class action lawsuit on behalf of investors who held the SPAC shares at the time the SPAC merged with Katapult Holdings in June 2021. Significantly, the Katapult Holdings SPAC transaction already is the subject of a separate securities class action lawsuit (as discussed here).

 

The complaint alleges that the defendants were highly motived financially to complete the merger with Katapult and indeed they were so motivated to ensure that deal closed that the defendants withheld from investors negative information of which the SPAC executives became aware prior to the date of the shareholder vote on the proposed merger transaction. In particular, the complaint alleges that the defendants became aware that Katapult “would not come close” to meeting its projections. The “truth” the complaint alleges, began to emerge just ten days after the merger was completed, and in August 2021 Katapult disclosed that gross originations were down significantly from the prior year. The company’s share price declined more than 56% on this new and now is down over 92%. The complaint alleges that the defendants breached their fiduciary duties and seeks damages on behalf of the class.

This new Delaware state court lawsuit will be interesting to watch, as it may suggest a different procedural path for plaintiffs’ lawyers to follow in seeking to pursue SPAC-related claims. It is also interesting because this is a lawsuit solely against the former directors and officers of the SPAC, and the SPAC sponsor; the plaintiff is not pursuing claims against Katapult or its executives. The complaint focuses on the conflicts of interests of the SPAC executives and their financial incentives to complete the business transaction, contrary to the interests of the SPAC’s public shareholders. The lawsuit is a combination of factual allegations and legal claims that other disappointed SPAC investors might well seek to raise – and that is why this new lawsuit will be interesting to watch.