A suit commenced by both a shareholder of a special purpose acquisition company (SPAC) and a shareholder of the go-forward de-SPAC company was dismissed on the basis that the plaintiffs did not have standing under the securities laws to sue for alleged misrepresentations made by the pre-merger private company.

A SPAC and a used car consignment company announced in October 2020 their intentions to enter a merger. Between the public announcement of the proposed merger and the SPAC shareholder vote approving the transaction, officers of the consignment company made a series of investor presentations that, according to plaintiffs, included materially false and misleading statements. The consignment company claimed that it had the industry’s only consignment-to-retail model, its clients were priced on a flat-fee basis which boosted the company’s gross profit per unit (GPU), it had “superior unit economics,” a “deep pool of sourcing partners,” and the company operated with “limited capital risk.”

However, following the merger, the go-forward company made a series of disclosures that allegedly revealed misstatements made prior to the merger. On March 15, 2021, the CEO disclosed that the company “had acquired so much excess inventory that it was unable to effectively process all of the vehicles,” creating a “log jam” in inventory that negatively impacted the company’s GPU. The CEO also stated that, “[f]or the fourth quarter of 2020 and continuing during the first quarter of 2021 to date, one of our corporate vehicle sourcing partners has accounted for over 60% of our vehicles sourced.”

The company’s share price fell upon this news, as well as additional disclosures. Shareholders, both those that owned SPAC shares and those that purchased after the de-SPAC, initiated a putative securities fraud class action against the public company and its officers.

The defendants moved to dismiss on the grounds that plaintiffs lacked standing to assert the statutory claims. The court, in granting the motion to dismiss, concluded that that the plaintiffs lacked standing to assert Section 10(b) claims under the Securities and Exchange Act of 1934 due to the “purchaser-seller” rule, which limits the class of plaintiffs to “actual purchasers or sellers of securities.” Relying upon appellate court precedent, the court cited authority holding that “purchasers of a securities 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 between the two companies.” The court found that plaintiffs “fail to establish that they bought and sold securities about which the misstatements were made.”

The court also ruled that the plaintiffs lacked standing to assert claims under Section 11 and 12(a)(2) of the Securities Act of 1933 Act, because the plaintiffs failed to allege that they purchased shares traceable to the registration for the merger transaction. The court further rejected the plaintiffs’ argument that the merger effectively transformed the SPAC shares into shares of the newly merged company, as that did not change the applicable registration statement pursuant to which the plaintiffs bought their shares.

While the court granted the motion to dismiss, it did so without prejudice. Following the dismissal, a new amended complaint was filed in which plaintiffs are hopeful to overcome their prior pleading obstacles.

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In re Carlotz, Inc. Sec. Litig., 2023 U.S. Dist. LEXIS 57126 (USDC SDNY, 2023)