United States: Southern District Of New York Dismiss Putative Class Action Arising From SPAC Merger, Holding That Plaintiffs Lacked Standing

On March 31, 2023, Judge Ronnie Abrams of the United States District Court for the Southern District of New York dismissed a putative class action arising out of a SPAC transaction that resulted in a consignment-to-retail used car marketplace becoming publicly traded. In re CarLotz, Inc. Sec. Litig., 2023 WL 2744064 (S.D.N.Y. Mar. 31, 2023). Plaintiffs asserted claims under the Securities Act of 1933 and the Securities Exchange Act of 1934 against the marketplace, the SPAC entity, and certain related entities and individuals, alleging that they made misrepresentations regarding the marketplace's business model. Id. at *2. The Court held that plaintiffs lacked standing to sue under either the Securities Act or Exchange Act, and accordingly dismissed the complaint while permitting plaintiffs leave to replead.

With respect to the Exchange Act claims, the Court explained that the Second Circuit's recent decision in Menora Mivtachim Insurance Ltd. v. Frutarom Industries Ltd., 54 F.4th 82 (2d Cir. 2022) (addressed in our prior post), held that a plaintiff, to have standing, must have bought or sold the specific security about which a misstatement was made. CarLotz, 2023 WL 2744064, at *4. The Court further observed that nearly all the challenged statements were allegedly made by the car marketplace prior to the de-SPAC transaction when it was not publicly held. Id. at *4-5. Thus, while certain named plaintiffs had purchased shares in the SPAC entity and some had purchased shares following the de-SPAC transaction in the car marketplace, plaintiffs lacked standing to pursue claims regarding statements made by the car marketplace when it was still a private company. Id. While plaintiffs argued that this result amounted to a "loophole" for SPAC transactions, the Court noted that the Second Circuit had considered and rejected similar policy concerns and emphasized that only Congress could amend the Exchange Act. Id. at *5.

With respect to plaintiffs' claims under Section 11 of the Securities Act, the Court determined that plaintiffs failed to allege that plaintiffs purchased shares traceable to the registration statement for the merger transaction between the car marketplace and the SPAC. Id. at *6. The Court observed that the complaint alleged that plaintiffs purchased shares in the SPAC prior to the challenged offering, and therefore the Court determined that such shares could not have been traceable to that offering. Id. at *7. The Court applied the Second Circuit's decision in DeMaria v. Andersen, 318 F.3d 170 (2d Cir. 2003), which held that a plaintiff can only challenge a registration statement governing the securities purchased by that plaintiff. CarLotz, 2023 WL 2744064, at *7. The Court further rejected plaintiffs' argument that the merger effectively transformed plaintiff's SPAC shares into shares for the newly merged company, as this did not change the applicable registration statement. Id. at *7-8. In addition, while plaintiffs pointed to statements by the SEC and an SEC proposed rule indicating that misrepresentations in a registration statement for a de-SPAC transaction should be subject to Section 11 of the Securities Act, the Court explained that this could not trump the Second Court's holding. Id.

The Court also rejected plaintiffs' Section 12(a)(2) claim, concluding that such a claim requires that plaintiffs have purchased shares in an initial public offering, which plaintiffs did not allege here. Id. at *8.