As I have previously noted, plaintiffs’ lawyers have over the last several months filed a plethora of securities class action lawsuit against companies that became publicly traded through a merger with a Special Purpose Acquisition Company (SPAC). Since these cases have only just been filed, few of the cases have yet reached the initial pleading hurdles. However, in a ruling last week, Central District of California Judge Christina A. Snyder denied in part the defendants’ motion to dismiss the securities suit pending against electric vehicle company Faraday Future Intelligent Electric, Inc., which became a public company through a June 2021 merger with a SPAC. As discussed below, the ruling may have significance for a number of the recently filed SPAC-related securities suits. A copy of Judge Snyder’s October 20, 2022 order can be found here.
Property Solutions Acquisition Corp. (PSAC) was a Special Purpose Acquisition Company (SPAC). PSAC completed an IPO on July 21, 2020. FF Intelligent Mobility Global Holdings Ltd. (Legacy FF) was a private company in the business of designing and building electric vehicles. On January 28, 2021, PSAC and FF Legacy announced that had entered into an agreement to merge. The merger was completed on July 21, 2021. Faraday’s primary product when the merger was announced was a crossover vehicle designated FF 91.
On October 7, 2021, J Capital Research, a short seller, published a report raising doubts about Faraday’s production capabilities as well as about customer vehicle reservations that the company claimed that it had received for the FF 91 vehicle.
On November 15, 2021, the company issued a statement that it would be unable to timely file its quarterly report on Form-10Q and further announced that its board of directors had formed a special committee of independent directors to review allegations of inaccurate disclosures, including the claims in the J Capital report. Among other things, the special committee found that the statements about the company having more than 14,000 reservations for the FF 91 was “potentially misleading” because only several hundred of the reservations were paid, while the others (totaling 14,000) were unpaid indications of interest.”
As discussed here, on December 23, 2021, a plaintiff shareholder filed a securities class action lawsuit in the Central District of California against Faraday; against certain of its directors and officers; and against two former officers of the SPAC. The complaint, as amended, concerns two alleged misrepresentations. First, the January 21, 2021 merger announcement and in subsequent statements stated that the company had “received over 14,000 reservations” for the PF 91 vehicle. This statement is referred to as the “reservations statement.” Second, the merger announcement and subsequent statements stated that the FF 91 was expected to launch within twelve months of the merger (the “expected schedule statement”). The S-4 filed on April 5, 2021 also stated that the company “intends to commercially launch FF91 series within twelve months after closing of the Business Combination.”
The plaintiff alleges that the defendants violated Section 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The plaintiff also alleges that defendants’ misrepresentations in the Proxy Statement violated Section14(a) and 20(a) of the Securities Exchange Act of 1934. The defendants filed motions to dismiss the plaintiff’s claims.
The October 20, 2022 Order
In an October 20, 2022 minute order, Judge Snyder denied in part and granted in part the defendants’ motions to dismiss. With respect to the allegations for which the motion was granted, Judge Snyder gave the plaintiffs leave to seek to replead the dismissed allegations.
With respect to the plaintiffs’ Section 10(b) claims, Judge Snyder held that the plaintiffs’ allegations concerning the reservations statement “adequately alleges that the reservations statement is a material misrepresentation.” Judge Snyder specifically found that “the reservations statement was misleading because it gave the investors a false impression that Faraday had received significantly more that several hundred paid reservations.” The plaintiffs, Judge Snyder said, “have plausibly alleged that the significant difference between 14,000 paid reservations and several hundred paid reservations would have been viewed by the reasonable investor as having significantly altered the total mix of information.” Judge Snyder also concluded with respect to the reservations statement that the plaintiff had adequately alleged scienter and that the individual defendants had “made” the statements.
However, with respect to the alleged misrepresentations with respect to the expected schedule, Judge Snyder found that the statements are “forward-looking statements, accompanied by meaningful cautionary warnings” and therefore protected by the PSLRA’ Safe Harbor for forward looking statements. The defendants’ warnings, Judge Snyder found, had “identified specific factors that could cause delay, including lack of funding, supply shortages, design defects, talent gaps, and/or force majeure.”
Finally, Judge Snyder found that the plaintiffs had adequately stated a claim under Section 14(a) with respect to alleged proxy statement misrepresentations, based on the allegation that the proxy statements omitted a statement clarifying that the 14,000 reservations, discussed in the merger announcement press release and subsequent statements, were unpaid. The plaintiffs, Judge Snyder found, had stated a Section 14(a) claim “based on the omission of information necessary to enable shareholders to understand user interest in Faraday’s product.”
Judge Snyder’s ruling in this case turns on very detail-specific features, including in particular the defendants’ alleged statements about (or omissions) about the supposed 14,000 vehicle reservations. However, the ruling in this case may be significant for many of the other pending SPAC-related securities suits, because of the common features this case shares with many of the other cases.
First, this case, like many of the pending SPAC-related cases, involves an electric vehicle company. By my tally, since January 1, 2021, there have been 51 SPAC-related securities suits filed. Of these 51 cases, 17 (or about 33%) involve companies in the electric vehicle industry. This case, like many of the pending cases, involves allegations that first came to light in a short seller report or expose news report. Of the 51 SPAC-related securities suits filed since January 1, 2021, 20 (nearly 40%) involve allegations that first came to light in a short seller report or news story exposé. Because of these common features, Judge Snyder’s ruling in the case may be of relevance in connection with a number of the many pending SPAC-related securities suits.
But the aspect of Judge Snyder’s rulings that is of perhaps the greatest significance for the other pending cases is that the case survived, at least in part, the initial pleading hurdle. As I noted at the outset, most of the SPAC-related securities suits have only just been filed and few have yet reached the motion to dismiss stage. However, a small number of cases, including the Faraday case, have reached the motion to dismiss stage. The early results appear to be favorable for the plaintiffs.
That is, along with this case, dismissal motions were also denied – at least in part — in the SPAC-related securities suits filed against Velodyne Lidar (as discussed here) and against Romeo Power (as discussed here). Significantly, all three of these cases involve companies in the electric vehicle industry. To be sure, the dismissal motion in the SPAC-related securities suits against Skillz was granted (discussed here), but the balance of the decisions so far, at least based on the limited number of rulings, has been favorable to the plaintiffs. Of course, the motions are yet to be decided in the vast majority of the cases. But so far at least, the plaintiffs’ track record in these cases has been favorable for them.