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District Of Arizona Grants Electric Vehicle Company’s Motion To Dismiss In Investor Class Action
02/14/2023On February 2, 2023, Judge Steven P. Logan of the United States District of Arizona dismissed a putative class action alleging that manufacturer of hydrogen-electric vehicles (the “Company”), the Company’s former CEO (the “CEO”), and certain of its other senior executives (the “Individual Defendants”) misled investors about the Company’s hydrogen fuel cell technology and business prospects for its electric trucks in violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5. Borteanu v. Nikola Corporation et al., No. 20-cv-01797 WL 1472852 (D. Ariz. Feb. 2, 2023). Although the Court held that plaintiff had adequately alleged the falsity of certain categories of alleged misstatements, the Court ruled that plaintiffs failed to plead a strong inference of scienter as to certain defendants and failed to plead loss causation generally.
Plaintiff alleged that the Company made several types of misrepresentations about its business operations, including in SEC filings signed by the Individual Defendants and in social media posts made by the CEO. For example, the Company allegedly made statements in 2020 about its backlog of over 14,000 orders for electric trucks, which it referred to in filings as representing over two years of production and more than $10 billion in potential revenue. Plaintiff alleged that the Company’s reference to the backlog as a list of “pre-orders” or “reservations” was misleading because these reservations were mere expressions of interest to purchase products, cancellable at any time. Plaintiff also alleged that the Company made several misrepresentations in its SEC filings that its electric trucks and hydrogen fuel technology were the center of its business model, even though it had not yet produced the hydrogen technology and its trucks were not ready for sale. Further, plaintiff alleged that the Company made misrepresentations that its development of “demo” stations accurately represented its capability to build hydrogen fueling stations even though the “demo” stations did not actually produce hydrogen but merely stored it. Finally, plaintiff alleged that the Company’s statements about the capabilities of two of its electric truck models were materially misleading because the vehicles were not yet fully functioning and instead were “little more than a concept.” Plaintiff alleged that when the falsity of these misrepresentations came to light through a series of corrective disclosures, including (among other things) media reports that the CEO had been indicted on criminal securities fraud charges and that the SEC had filed a civil action. According to plaintiffs, the Company’s stock value dropped significantly following the corrective disclosures, which resulted in substantial losses for investors.
The Court first addressed the alleged misrepresentations. With respect to the Company’s “backlog” of orders, the Court ruled that plaintiffs adequately alleged a misstatement because the orders were mere expressions of interest that could be canceled. As to the Company’s statements about its business model and “demo” stations, the Court ruled that plaintiffs failed to adequately allege a material misstatement because the Company had used “frequent cautionary language and forward-looking terms.” Finally, the Court ruled that plaintiffs adequately alleged a misstatement related to the capabilities of the Company’s electric trucks because reasonable investors could believe these vehicles were in existence when they were not.
Despite the Court’s ruling that plaintiffs had adequately alleged certain misstatements, the Court dismissed the claims for failure to raise a strong inference of scienter with respect to the Individual Defendants, and for failure to adequately allege loss causation. The Court noted that the complaint lacked “specific, individualized facts showing that the Individual Defendants signed off on the various SEC filings with the requisite intent of misleading the public as to [the] backlog or as to the company’s vehicles.” The Court also rejected plaintiff’s argument that the “core operations” theory could support scienter against the Individual Defendants because plaintiff did not allege “what information [the Individual Defendants] were typically privy to, the extent of their day-to-day oversight over [the Company’s] operations, or the specific duties and responsibilities they had.” In dismissing the claims against the Individual Defendants, the Court noted that they “may have been negligent or even reckless in signing the SEC filings,” but that “mere recklessness or negligence does not satisfy the scienter standard.”
In contrast, with respect to the CEO, the Court held that plaintiff’s allegations created a strong inference that the CEO acted with the requisite intent to defraud or mislead when he made the alleged misstatements. Among other reasons, the Court relied upon allegations that the Company’s employees warned the CEO repeatedly that his public statements were not accurate and that, in light of these inaccuracies, his colleagues at the Company even attempted to “pre-screen” his social media posts. Additionally, unlike with the Individual Defendants, the Court emphasized that plaintiff alleged the CEO was a “hands-on executive” who “engrossed himself in the details of [the Company’s] technology and product development process,” “participated in weekly update meetings” during which he “received updates on [the Company’s] product development, technology, and commercial activity directly from [the Company’s] technical leads,” and “regularly worked with the [C]ompany’s engineers, as he was often seen huddling by the computers with them and even working on [one of the Company’s truck models] itself.”
The Court nevertheless dismissed the claims against the CEO because plaintiff “failed to allege sufficiently particularized facts” related to plaintiff’s loss causation theory. Rather than “identify[ing] the specific misstatements or omissions that each alleged corrective disclosure revealed the truth for,” plaintiff simply repeated “the exact same generalized allegation for all eleven corrective disclosures.” The Court noted that the “[t]he truth concealed behind each of [plaintiff’s alleged] misstatements and omissions was presumably revealed to the public at different times and by different sources, and each time a particular truth was unveiled, [the Company’s] stock price presumably dropped and [investors] suffered distinct economic losses.” According to the Court, however, plaintiff’s “entirely conclusory and generalized allegation” with respect to loss causation made it impossible for the Court “to trace any particular loss” “back to the very facts about which [the CEO] lied.”
The Court dismissed the complaint but granted leave for plaintiff to file an amended complaint.
