On August 8, 2024, the United States Court of Appeals for the
Ninth Circuit affirmed United States District Judge Yvonne Gonzalez
Rogers's dismissal of a putative securities class action
asserting claims under Sections 10(b) and 20(a) of the Securities
Exchange Act of 1934 ("Exchange Act") and Rule 10b-5
against an electric vehicle company (the "Company") and
certain of its executives. In re CCIV / Lucid Motors Sec. Litig.,
No. 23-16049 (9th Cir. Aug. 8, 2023). Plaintiffs, who allegedly
purchased shares in a Special Purpose Acquisition Company
("SPAC") that later merged with the Company, averred
that, prior to the merger, the Company overstated its projections,
which induced plaintiffs to purchase the SPAC's stock at an
artificially inflated price before the deSPAC transaction closed.
The district court dismissed plaintiffs' claims for failure to
identify an actionable misrepresentation or omission. We previously
covered the district court's ruling here. Reviewing the district court's
decision de novo, the Ninth Circuit affirmed dismissal on the
alternative ground that plaintiffs lacked standing to assert
Exchange Act claims based on statements by the Company made before
the deSPAC transaction closed.
According to the complaint, merger negotiations between the SPAC
and the Company took place between January 11 and February 22,
2021. During that time, there allegedly was wide speculation in the
financial press that the merger would occur, but neither entity
made public comments. On February 5 and 12, 2021, the Company's
CEO allegedly made bullish remarks about its projected production
of vehicles for 2021 during a televised interview. Plaintiffs aver
that they purchased SPAC stock after the Company's
representations but before the merger's announcement. On the
day of the merger announcement, the Company disclosed that it
expected to produce only 577 cars in 2021 compared to the 6,000 to
7,000 vehicles the CEO had projected. The SPAC's stock price
allegedly fell in response and plaintiffs filed suit.
Defendants moved to dismiss on two grounds: (1) lack of standing to
assert claims under Section 10(b) and (2) failure to state a claim.
As to standing, defendants argued the Supreme Court's decision
in Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 737 (1975),
requires that plaintiff must have purchased the security about
which the alleged misrepresentations were made. The district court
rejected defendants' interpretation of Blue Chip, finding,
among other things, that it imposed a standard that was too
limiting. The district court instead applied a more forgiving
"direct relationship" standard, concluding that the
merger between the SPAC, whose stock plaintiff purchased, and the
Company, who was actually subject to the alleged
misrepresentations, sufficed to establish such a relationship.
Nevertheless, the district court dismissed the complaint for
failure to state a claim.
On appeal, the Ninth Circuit's interpretive analysis of Blue
Chip led it to the opposite conclusion than the one reached by the
district court. The Ninth Circuit held that Blue Chip's
language that limits statutory standing to "purchasers or
sellers of the stock in question" should be construed to mean
that only a plaintiff who purchases the security of the issuer
about which a misrepresentation allegedly was made has standing to
sue under Section 10(b). The Ninth Circuit reached this conclusion
by examining both the doctrinal underpinnings of Blue Chip and the
Second Circuit's decision in a substantively similar case,
Menora Mivtachip Ins. Ltd. v. Frutarom Indus. Ltd., 54 F.4th 82,
88–89 (2d Cir. 2022). We previously covered the Second
Circuit's ruling in Menora here. First, the panel found it to be
significant that the "purchaser-seller rule" articulated
by the Blue Chip Court created a "bright line" rule that
prevents the "endless case-by-case erosion" of the
limitations on standing, Blue Chip, 421 U.S. at 755, and that
Supreme Court precedent warns that the contours of Section 10(b)
should not be expanded to "provide a private cause of action
against the entire marketplace in which the issuing company
operates," id. at 753 n.3. The Court concluded that the
"direct relationship" test applied by the district court
thus contradicts Blue Chip's limiting purpose.
Second, the Court found comfort that its interpretation of Blue
Chip aligned with the Second Circuit's decision in Menora,
where the Second Circuit addressed substantially the same statutory
standing question. Menora holds that "purchasers of a security
of an acquiring company do not have standing under Section 10(b) to
sue the target company for alleged misstatements the target company
made about itself prior to the merger." Menora, 54 F.4th at
88. Like the Ninth Circuit here, the Second Circuit's decision
in Menora is premised upon Supreme Court precedent that cautions
against expanding the reach of Section 10(b).
Having clarified the requirements of Section 10(b) standing, the
Court next turned to deciding whether plaintiffs had standing to
sue the Company. The Court concluded plaintiffs lacked standing
because they purchased securities from the SPAC, not the Company.
The Court further declined plaintiffs' invitation to impute the
alleged misstatements to the SPAC or the combined entity that
survived the merger, opining that the SPAC's later acquisition
of the Company is irrelevant for standing purposes.
Finding plaintiffs' lack of Section 10(b) standing was
independently fatal to the complaint, the Court concluded it need
not assess the lower court's ruling that plaintiffs failed to
state a claim.
In re CCIV / Lucid Motors Sec. Litig.
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