In the latest lawsuit to emerge in the aftermath of the recent SPAC frenzy, a plaintiff shareholder has filed a securities class action suit against Opendoor Technologies, a residential real estate digital platform, which merged into a publicly traded SPAC in December 2020. The SPAC involved was one of the many financial vehicles launched by the so-called “King of SPACS,” Chamath Palihapitiya, while the SPAC craze was picking up steam. A copy of the October 7, 2022 complaint can be found here.

 

Background

Social Capital Hedosophia Holdings Corp. II (“SCH”) was Special Purpose Acquisition Company (SPAC). It completed an IPO in April 2020. In September 2020, SCH announced its plan to complete a business combination with a private company, Opendoor Labs (“Legacy Opendoor”), which operated a digital platform for residential real estate. SCH and Legacy Opendoor completed the business combination in December 2020. The securities of the combined company, re-named Opendoor Technologies, Inc. began trading on Nasdaq on December 21, 2020.

 

On September 19, 2022, Bloomberg published an article reporting that Opendoor lost money on over 40% of its August 2022 transactions, and that the percentage of money-losing transactions was even greater in certain key real estate markets. The Bloomberg article quoted a source as saying that the findings showed the failure of Opendoor’s Algorithm to adjust accurately to changing market conditions. The subsequently filed securities complaint alleged that the company’s share price declined over 12% over the following two trading sessions after the publication of the Bloomberg article, and after the decline, the company’s share prices was nearly 90% below the closing price on the combined company’s first day of trading.

 

The Complaint

On October 7, 2022, a plaintiff shareholder filed a securities class action lawsuit in the District of Arizona against Opendoor Technologies; its post-merger CEO and CFO; and certain former directors and officers of the SPAC. The complaint purports to be filed on behalf of two classes of Opendoor investors: investors who purchased Opendoor securities between December 21, 2020 (the date the combined company’s shares began trading on Nasdaq) and September 16, 2022 (the last trading day before the Bloomberg article appeared); and investors who purchased Opendoor common stock pursuant to or traceable to the Offering Documents issued in connection with the business combination between the SPAC and Legacy completed on December 18, 2020.

 

The complaint alleges that the Offering Documents contained untrue statements of fact and that during the class period the defendants made false or misleading statements or failed to disclose that: “(i) the algorithm (“Algorithm”) used by the Company to make offers for homes could not accurately adjust to changing home prices across different market conditions and economic cycles; (ii) as a result, the Company was at an increased risk of sustaining significant and repeated losses due to residential real estate pricing fluctuations; (iii) accordingly, Defendants overstated the purported benefits and competitive advantage of the Algorithm; and (iv) as a result, the Offering Documents and Defendants’ public statements throughout the Class Period waw materially false or misleading and failed to state information required to be stated therein.”

 

The complaint alleges that the defendants violated Sections 11 and 15 of the Securities Act of 1933 and 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 two classes of investors.

 

Discussion

By my count, this lawsuit is the 51^st SPAC-related securities suit to be filed since January 1, 2021, and the 20^th to be filed so far in 2022. Though there have been a significant number of SPAC-related suits filed so far this year, the pace of filings has definitely slowed down as the year has progressed. There were only two SPAC-related securities suits filed between the end of May and the filing of this latest lawsuit in early October, and both of those were filed in late August. There were no SPAC-related securities suits filed between the end of May and the end of August and between the end of August and the filing of this lawsuit.

 

I am guessing that a big part of the reason for the drop off in the pace of SPAC-related securities suit filings is that share prices for SPACs and de-SPAC companies generally are beaten down, across the board. There just aren’t as many conspicuous high-fliers poised for a sudden takedown. By the same token, there are fewer high-profile de-SPACs attracting the unwanted attention of short sellers. With the entire sector beaten down, there are just fewer conspicuous share price decliners.

 

I will say that this lawsuit arguably is not the strongest SPAC-related suit to be filed. The Bloomberg article at the center of this lawsuit was not exactly a shocking exposé. The gist of the article is that the company’s trading algorithm performed poorly as residential real estate conditions changed.

 

As for SPACs generally, things have definitely changed. Last month, the Wall Street Journal reported that Chamath Palihapitiya, one of the defendants in this suit who, as noted at the outset of this post, has been called the King of SPACs, was closing two of the numerous SPACs he had formed because he had been unable to find suitable merger target for the SPACs. The world of SPACs and de-SPACs is now far different from where it was when the SPAC involved in this lawsuit combined with Legacy Opendoor in December 2020. Gone are the days when mergers with SPACs were announced to great fanfare – and with over 540 SPACs still seeking merger targets (according to SPACInsider), it seems likelier that there will be more liquidations along the lines of the two SPAC closures that Palihapitiya announced last month.