Artificial Intelligence (AI) has for months been the hot story in the securities marketplace, with share prices of companies with AI connections soaring. In a new lawsuit with several unusual twists, short sellers have filed a securities class action lawsuit company against electronic component power company Vicor Corporation, alleging that the company misleadingly suggested that it had entered a substantial contract with an existing customer for delivery in an AI power platform. The company’s share price surged, and the short sellers were forced to cover their positions at a significant loss. When the company allegedly later tried to walk back the story about the supposed significant customer contract, its share price plunged. The claimants seek to recover damages on behalf of similarly situated short sellers. A copy of the plaintiffs’ July 11, 2024, complaint can be found here.

Background

Patrizio Vinciarelli founded Vicor Corporation in 1981. Vicor designs and makes power components and systems for delivering electrical power in various computer, industrial, and robotics applications. Vicor gained attention for having its power conversion components featured as part of Nvidia’s Artificial Intelligence Chips, including Nvidia’s flagship AI GPUs. However, when Nvidia’s new AI chips emerged in March 2022, Vicor’s shares began to decline. In subsequent months, Vicor’s fortunes flagged, as the company failed to hit milestones and its revenue declined.

In their complaint, the plaintiffs alleged that they “looked at this situation as a good thesis for shorting Vicor’s stock.” Each of the eight named plaintiffs took short positions in Vicor’s stock starting “on or around May 1, 2023 and holding through July 26, 2023 or thereafter.”

On July 25, 2023, Vicor released its 2^nd Quarter earnings report. Among other things, the report quoted Vinciarelli as saying that “Q2 bookings remained weak, ahead of production release of an AI platform with a Lateral Power Distribution Network … now expected to ramp in Q4.”

During the company’s conference call that same day, analysts asked “Can you guys share any more details on the 4G lateral power distribution design that you mentioned in the press release for a new AI platform that ramps in the fourth quarter. Can you say, is this a new customer? Have you worked with this customer previously?” Vinciarelli allegedly said in response “It’s an existing customer. It’s a new generation for the existing customer.” In response to later questions, Vinciarelli allegedly reiterated that “we’re anticipating a Q4 ramp,” and also stated that “This is a significant customer.”

According to the complaint, the market assumed that these statements referred to a relationship with the company’s existing significant customers, Nvidia and Google. The company’s share price, which had been $59 per share before the earnings release, rose to $93.70 by the end of the next trading day. Because of the soaring share price, the plaintiffs were forced to cover their short positions at a significant loss – roughly $35 per share on average.

On October 24, 2023, the company held its earnings call for the third quarter 2023. Analysts asked questions about the significant relationship that the company had announced at the prior quarter conference call. Among other things, rather than referring to a substantial contract with an existing customer, a company representative said only that “we’re having substantial conversations now with customers that will diversity us away from the two big guys we’ve been doing business with.” In answer to questions, Vinciarelli said only “we’re not going to talk about any one customer. I’m sorry, but bear with us, that’s not a level of specificity we want to get involved with.”

The complaint alleges that following this call, the company’s share price plunged. The company’s share price, which had been at $53.19 at market close on the day of the afterhours call, opened trading the next day at $39.01.

The Complaint

On July 11, 2024, eight plaintiffs filed a securities class action lawsuit against Vicor and Vinciarelli in the Northern District of California. The complaint purports to be filed on behalf of a class of investors who held short positions on Vicor’s stock prior to and on July 25, 2023, and who covered their short positions in the days following up to and including October 24, 2023.

The complaint alleges that on July 25, 2023, Vinciarelli announced that Vicor had “entered into a substantial contract with one of its ‘significant’ existing customers which would ramp up at the end of the year in the fourth quarter.” Given that “it was already known that Vicor Corporation’s two major customers were Nvidia and Google, the stock shot up almost immediately.” The plaintiffs were forced to cover their short positions. However, the complaint further alleges, at the October 24, 2023, earning call, the company announced “further struggles” and “for the first time revealed the truth that there was no ‘significant customer’ contract,” and that any growth would be in the medium to long term – meaning, 2025 or 2026. “Overnight the stock came careening down and settled well below where it had been three months earlier – at or near the price Plaintiffs believed they would have covered their short positions for a significant profit.”

The plaintiffs allege that the company and Vinciarelli violated Section 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The plaintiffs seek to recover damages on behalf of the plaintiff class.

Discussion

I have to say that a securities class action lawsuit filed on behalf of a class of investors who held short positions in the defendant company’s stock is a new one on me. I am of course quite familiar with short sellers playing an important role in securities lawsuits – however, the usual role for short sellers in securities suits is quite a bit different than the role the plaintiffs are playing here.

As discussed in greater detail here, the usual role of short sellers in securities litigation goes something like this: a short seller publishes a splashy report with attention-grabbing revelations about the operations or financial results of a listed company; the company’s shares decline; and a plaintiffs’ securities class action law firm files a securities class action lawsuit, often based solely on the accusations in the short seller’s report.

In this more familiar sequence, the securities class action is not filed on behalf of the short seller (who presumptively profited when the company’s share price declined) but rather on behalf of the investors who purchased the company’s stock at a price that allegedly was inflated by the misrepresentations that the short seller’s report exposed. Commentators have long commented that these kinds of circumstances are rife with opportunities for conflicts of interest, and indeed court have indeed in some cases expressed skepticism about securities suit allegations that are entirely reliance on short sellers’ reports.

 By contrast, the aggrieved parties here are not shareholders whose investment interests were harmed when a company’s share price plunged after alleged misrepresentations were revealed; rather, the aggrieved parties are short sellers whose investment interests were harmed when the company’s share price soared, allegedly due to misrepresentations that drove the increase.

While I have no doubt that in the long history of securities class action litigation there may have been a prior case (or cases) in which the plaintiff class was composed of short sellers who alleged they were harmed when the company’s share price rose, I cannot recall such a case off the top of my head. (Readers whose recall is better than mind can perhaps provide other examples of this, if indeed other examples exist.)

Beyond the identify of the claimants and the putative class, there is another interesting thing about this case and one that makes it worthy of comment, and that is that the underlying facts involve AI-related allegations. As readers know, I have been monitoring AI-related litigation as it has been filed this. As discussed most recently here, there have been prior AI-related securities lawsuits filed this year. By my count, this lawsuit is the fourth AI-related securities suit to be filed this year. As I noted in the prior post to which I linked about AI-related litigation, there were in fact other AI-related securities suits filed prior to this year, as well.

Just to lay out the features of this case that I think make it AI-related, I think it is important to note that the product at the center of the case is a platform for delivery of power in connection with AI processors. The connection the market made between the supposedly forthcoming delivery of this platform and the company’s two largest existing customers, suggests that what made the company’s statements about the product significant is its apparent connection to the two AI powerhouses, Nvidia and Google. The wild swings that the company’s share price took, both upwards and downwards, are a direct reflection of the market’s mania for apparent AI-related opportunities. What this lawsuit is about is an AI adjacent company whose share price surged and plunged based on disclosures suggesting the company might or might not be able to profit from the emergence of AI. For all of these reasons, I count this lawsuit as AI-related.