On August 8, 2024, the 9th Circuit Court of Appeals issued its ruling in Max Royal LLC v. Atieva, Inc. (In re CCIV / LUCID Motors Sec. Litig.), 110 F.4th 1181 (9th Cir. 2024) (“Atieva”), which affirmed a lower court’s dismissal of securities fraud claims brought under §§10(b) and 20(a) of the Securities Exchange Act and SEC Rule 10b-5.[i] The Ninth Circuit rooted its decision on the grounds that the plaintiffs lacked standing.  

        The action stems from claims brought by a class of plaintiffs who made investments prior to a merger between Atieva, Inc. and Churchill Capital Corporation IV (“CCIV”). In re Cciv/Lucid Motors Sec. Litig., 2023 U.S. Dist. LEXIS 11415 (N.D. Cal. Jan. 11, 2023) (“Lucid Motors”). Before the merger, Atieva Inc. was a privately held electric car manufacturer doing business as Lucid Motors (“Lucid”), and CCIV was a separate special purpose acquisition company, or “SPAC.” [ii] SPACs, also known as blank check companies, are publicly traded companies created for the sole purpose of acquiring another company within a limited window of time to transform the acquired company into a publicly traded company. [iii] Thus, SPACs are seen as an alternative to traditional IPOs for companies to become publicly traded.

        As the merger approached, although CCIV and Lucid generally kept public disclosure of the companies’ negotiations quiet, there were still sufficient rumors and leaks that “it was widely speculated that CCIV would acquire Lucid[.]” [iv] During an interview on CNBC at a time when the market believed a merger between CCIV and Lucid was imminent, Lucid’s CEO “made misrepresentations about Lucid’s ability to meet certain production targets,” grossly overstating Lucid’s ability to produce electric cars.[v] CCIV’s stock price increased 12% after the CEO’s interview on the expectation that CCIV would soon acquire Lucid. [vi]

        Plaintiffs purchased CCIV shares after the misrepresentations were made but before the merger was formally announced.[vii] Concurrent with the merger’s closing, it was disclosed that Lucid was expected to produce far fewer cars than the CEO had represented in the CNBC interview. Over the next two days, CCIV’s stock price fell 37%, spawning the lawsuit.[viii] At issue was whether plaintiffs, purchasers of CCIV stock, had standing to sue Lucid for the misrepresentations made by the Lucid CEO.

        In the District Court, the defendants challenged whether the plaintiffs – as purchasers of CCIV stock – had standing to bring claims against persons who made alleged misstatements concerning the then-separate Lucid. The defendants argued that such claims violated the “purchaser-seller requirement” of Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723 (1975) (“Blue Chip”) that requires a transaction during the alleged class period.[ix] Rejecting this argument, Judge Gonzalez Rogers found that the concern in Blue Chip—whether the plaintiff, who was only offered to buy stock but did not actually purchase stock, could maintain a 10b-5 action—was not present in Lucid Motors.[x] Rather, the Supreme Court in Blue Chip held that “[m]erely abstaining from transacting in a security is inadequate to confer standing for a Section 10(b) claim.”[xi] The Supreme Court explained the plaintiff could only base their claim on oral testimony and, thus, the claim would lack a “time-stamped transaction in a ‘demonstrable number of shares traded.’”[xii] In finding plaintiffs had standing, Judge Gonzalez Rogers parted ways with two Second Circuit cases, finding both misinterpreted Blue Chip: Ontario Pub. Serv. Emps. Union Pension Tr. Fund v. Nortel Networks Corp.  369 F.3d 27, 34 (2d Cir. 2004) (“Nortel”) and Menora Mivtachim Insurance Ltd.  v. Frutarom Industries Ltd., 54 F.4th 82 (2d Cir. 2022) (“Menora”).

        Nortel involved two publicly traded companies, JDS and Nortel, where the class consisted of purchasers of JDS securities and Nortel was JDS’s largest customer.[xiii] During the Class Period, Nortel announced that it saw strong demand for its fiber optic products and expected growth in earnings for the year.[xiv] As a result, JDS also made optimistic projections and its stock price went up.[xv] When Nortel disclosed that it was cutting revenue estimates and halved its growth projections, both Nortel’s and JDS’s share prices fell.[xvi] The Nortel court dismissed, finding that if it conferred standing on the JDS investors who challenged statements made by Nortel, “their standing would lead to the same risk of abusive litigation seen in Blue Chip.”[xvii] Judge Gonzalez Rogers found Nortel unpersuasive because the plaintiff in Blue Chip purchased no shares whereas in Nortel, plaintiffs purchased actual shares in JDS would prove the time, number, and value of securities sold.[xviii]

        In Menora, International Flavors & Fragrances Inc. (“IFF”) was a company seeking to acquire the target company Frutarom Industries Ltd. (“Frutarom”).[xix] Plaintiffs purchased shares in IFF, but sued Frutarom for making material misstatements about itself leading up to the merger.[xx] The Second Circuit held 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 between the two companies.”[xxi]

        Ultimately, Judge Gonzalez Rogers dismissed the case on the grounds that plaintiffs had inadequately pleaded the alleged misstatements’ materiality, but found that plaintiffs had standing to bring the suit in the underlying case, Lucid Motors. The district court reasoned that Blue Chip, Nortel, and Menora do not hold that the plaintiffs must have purchased securities in the same company about which the misstatements were made.

        On appeal, the Ninth Circuit affirmed dismissal, but on the alternative ground that plaintiffs lacked standing under the purchaser-seller rule.[xxii] Specifically, the Ninth Circuit interpreted Blue Chip as requiring the “purchase or sale” of a security in “the security about which the alleged misrepresentations were made[,]” not the “the security about which Plaintiffs allege injury,” as plaintiffs argued.[xxiii] The Ninth Circuit held that the plaintiffs’ argument would impermissibly broaden the scope of the purchaser-seller requirement beyond what Blue Chip allows, stating “hypothetical plaintiffs would need only to have purchased a security—any security[.]”[xxiv] The Ninth Circuit further stated that the fact CCIV ultimately acquired Lucid did not affect its analysis because at the time the misstatements were made, CCIV and Lucid were two separate companies and there is “no recognized exception [to the purchaser-seller requirement] for transactions involving SPACs[,]” adding that “if Congress wants to treat SPAC acquisitions differently than traditional mergers, it has the authority to do so.”[xxv]^, [xxvi]

Would Lucid Have Turned Out Differently if the New SPAC Rules Were in Place?

        Due to the increasing number of recent de-SPAC transactions, investor advocates have called for heightened disclosures and protections in SPAC transactions. On January 24, 2024, the SEC adopted the final rules for SPACs by a 3-2 vote of the SEC Commissioners. The final rules became effective on July 1, 2024.[xxvii] Under the new rules, Lucid and its officers would have had to sign the registration statement filed by CCIV in connection with the de-SPAC transaction (i.e., the merger between CCIV and Lucid), thereby exposing Lucid and its officers to liability for false statements in the registration statement. However in Lucid Motors, the alleged false statements were made in a TV interview prior to the merger. With the new rules in place, plaintiffs may have been able to establish standing and liability as to CCIV as a signatory to the Registration Statement, if the alleged misstatements in the TV interview were incorporated into the Registration Statement.

[i] 15 U.S.C. §§ 78j(b) and 78t(a)), 17 C.F.R. § 240.10b-5.

[ii] Atieva, 110 F.4th at 1183.

[iii] Id.

[iv] Id.

[v] Id.

[vi] Lucid Motors, 2023 U.S. Dist. LEXIS 11415, at *11.

[vii] Atieva, 110 F.4th at 1183.

[viii] Lucid Motors, 2023 U.S. Dist. LEXIS 11415, at *13.

[ix] Id. at *16-17.

[x] Id. at *17.

[xi] Id.

[xii] Id. at *18.

[xiii] Id. at *22.

[xiv] Id. (citing Nortel 369 F.3d at 29).

[xv] Id.

[xvi] Id.

[xvii] Id. at *23 (citing Nortel, 369 F.3d at 32-33).

[xviii] Id.

[xix] Menora, 54 F.4th 84.

[xx] Id.

[xxi] Id. at 88.

[xxii] Atieva, 110 F.4th 1181, at 1182.

[xxiii] Id. at 1185-86 (citing Blue Chip, 421 U.S. 727, 742, 746).

[xxiv] Id.

[xxv] Id.

[xxvi] Following the Ninth Circuit’s decision, the Appellants petitioned for panel rehearing and for rehearing en banc. On September 17, 2024, the panel unanimously voted to deny Appellants petition for panel rehearing and rehearing en banc.

[xxvii] Special Purpose Acquisition Companies, Shell Companies, and Projections https://www.sec.gov/files/rules/final/2024/33-11265.pdf