On July 3, 2023, Judge Josephine L. Staton of the United States District Court for the Central District of California denied a motion to dismiss a putative class action against an electric automobile company (the "Company"), alleging violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 ("Exchange Act"), Sections 11, 12(a)(2), and 15 of the Securities Exchange Act of 1933 ("Securities Act"), and Regulation S-K. Crews v. Rivian Auto., Inc., No. 2:22-CV-01524-JLS-E, 2023 WL 4361098 (C.D. Cal. July 3, 2023). We previously covered the Court's decision dismissing plaintiffs' initial complaint without prejudice. In their amended complaint, plaintiffs alleged that the company made various misleading statements relating to the pricing and profitability of its vehicles despite knowing for several years prior to the Company's 2021 IPO that it would need to increase pricing to address higher-than-anticipated costs for materials needed for production. The Court held that plaintiffs' amended complaint sufficiently alleged actionable misrepresentations and raised a plausible inference of scienter.
According to plaintiffs, the Company announced in 2018 that the retail price for its vehicles would be approximately $70,000. The Company allegedly arrived at this price based on cost estimates provided by an external consultant. Plaintiffs alleged that the Company concluded by 2019 "that the consultant had vastly underestimated costs and [the Company] would not be able to acquire parts at the prices the consultant had calculated." Allegedly according to plaintiffs' confidential witnesses ("CWs"), the Company realized that the cost of building each vehicle would be more than $110,000 and could be as high as $118,000. On this basis, plaintiffs alleged that numerous of the Company's statements about its pricing and profitability in its Registration Statement and in subsequent SEC filings were misleading. Specifically, plaintiffs alleged that (i) the Company's "warning to investors regarding the financial harm that [the Company] might suffer if its material costs increased was misleading because it characterized as a 'risk' a problem that had already come to fruition"; (ii) the Company's statements attributing its "near-term 'negative gross profit per vehicle' to high 'fixed costs from investments in vehicle technology, manufacturing capacity, and charging infrastructure'" were misleading because the Company did not disclose that it "was generating-and would continue to generate-negative gross profits per vehicle of at least $40,000 on [material] costs alone"; and (iii) the Company made misleading statements that it was considering price increases based on consumer demand and inflation when the Company "had already decided to increase prices in order to mitigate the losses" based on the high cost of materials.
The Court first addressed statements about the risks to the Company's "business and margins that increasing costs and increasing prices posed." Plaintiffs argued that these statements were actionable because the Company's electric vehicle manufacturing costs had already increased above its vehicles' retail prices when the statements were made. The Court agreed, holding that plaintiffs adequately alleged that the Company misled investors by representing cost increases as a "possibility" rather than as a "known problem with which [the Company] had been contending for years already."
Second, the Court addressed statements that the Company would continue to operate at a negative gross profit per vehicle until production eventually ramped up due to high fixed costs. Plaintiffs argued that this statement was misleading because, "even if [the Company's] fixed costs were $0, it still would have operated at a negative gross profit per vehicle" because of the high cost of materials. The Court held that plaintiffs adequately alleged that the Company "misled investors by misidentifying and obscuring the key facts that would ensure [the Company's] continuing negative gross profits absent price increases."
Next, the Court addressed statements relating to the Company's price increases for its electric vehicles. Plaintiffs argued that the Company "led the market to believe that [it] was considering a price increase because of the post-IPO inflation and increased demand for its vehicles" when, plaintiffs alleged, the Company "had already decided to increase prices" because of "the losses that [it] had been suffering (and would continue to suffer absent a price increase) on each vehicle sold." The Court agreed with plaintiffs' interpretation that these statements "painted a misleading picture by misidentifying and omitting the most important factor" that prompted the Company to raise its vehicle prices.
With respect to plaintiffs' Exchange Act claims, the Court held that plaintiffs' allegations, including allegations based on former employee CWs, were "enough to support a strong inference of scienter." Specifically, the Court held that "the inference that [the Company's] senior executives knew that the [manufacturing] cost for each [electric vehicle] exceeded its retail price by approximately $40,000 leading up to the IPO" was "far more plausible than the inference that those executives were in the dark about the issue."
Finally, the Court addressed plaintiffs' claims based on Item 105 of SEC Regulation S-K, which requires that offering materials discuss the most significant risk factors a company faces, and Item 303 of Regulation S-K, which requires the disclosure of "any known trends or uncertainties" materially impacting net sales or revenues. Plaintiffs argued that the Company had an obligation to disclose that the manufacturing costs for each electric vehicle "was significantly in excess of its retail price at the time of the IPO and that the [Company] would never achieve profitability without price increases." The Court agreed with plaintiffs that, "[f]or IPO investors, investing $13 billion in a company that could become profitable by scaling production volumes presents one set of risks, while investing in a company that sells $110,000 worth of car parts to consumers for just $70,000 presents a wildly different and far more severe set of risks."
Links & DownloadsCrews v. Rivian Auto., Inc.
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