IN RE ENOVIX CORPORATION SECURITIES LITIGATION

Background

This proposed securities-fraud class action concerns Enovix Corporation, its co-founder and former chief executive officer Harrold Rust, Executive Chairman Thurman J. Rodgers, and other individual officers. Plaintiffs sued under Section 10(b) and Section 20(a) of the Securities Exchange Act of 1934 and Securities and Exchange Commission Rule 10b-5(b). The proposed class consists of people and entities that purchased or otherwise acquired Enovix or Rodgers Silicon Valley Acquisition Corp. common stock between June 24, 2021, and October 2, 2023.

Plaintiffs alleged that Enovix’s Fab-1 manufacturing equipment, made in part by Shenzhen Yinghe Technology Co. Ltd., repeatedly failed factory acceptance testing in China and never passed that testing before being shipped to Fremont in April 2021. Plaintiffs alleged that Rust and Rodgers approved the shipment anyway, spending $1.4 million to avoid shipping delays. They further alleged that Enovix later made misleading statements about the equipment’s testing and performance.

The complaint identified stock-price declines following disclosures on November 1, 2022; January 3, 2023; and October 3, 2023. On October 3, 2023, Enovix announced that it was abandoning commercial production at Fab-1, laying off 185 workers, and writing off $36 million in Fab-1 equipment.

Legal standards

The defendants moved to dismiss under Federal Rules of Civil Procedure 9(b) and 12(b)(6). Rule 12(b)(6) tests whether a complaint alleges enough facts to state a plausible claim. Rule 9(b) requires fraud allegations to identify the circumstances of the alleged fraud with particularity. The Private Securities Litigation Reform Act also requires plaintiffs to identify each misleading statement, explain why it was misleading, and plead particular facts supporting a strong inference that each defendant acted with the required state of mind.

For a Section 10(b) claim, plaintiffs must plausibly allege a material misrepresentation or omission, scienter, a connection to the purchase or sale of a security, reliance, economic loss, and loss causation. Scienter means an intent to mislead investors or deliberate recklessness about an obvious danger of misleading them. Loss causation requires a causal connection between the alleged fraud and the plaintiffs’ loss.

Statements the court found adequately alleged

The court held that the amended allegations sufficiently pleaded that Statements 4, 6, and 7 were false or misleading:

- Statement 4, in an August 10, 2021 shareholder letter, said that factory acceptance testing had already been performed and that the site acceptance test would confirm that the equipment met performance requirements. - Statement 6, made by Rust on an August 10, 2021 earnings call, said there were “no red flags” in the factory- and site-acceptance process. - Statement 7, made by Rust on September 9, 2021, said that testing each piece of equipment was “going on quite well.”

Accepting the complaint’s allegations as true at this stage, the court found these statements misleading because the equipment allegedly had never passed factory acceptance testing. The court also found that the allegations concerning repeated testing failures, Rust and Rodgers’s decision to ship the equipment, and the $1.4 million charter flight were sufficient to support a strong inference that Rust and Rodgers knew, or were deliberately reckless in not knowing, that the equipment had failed the factory test.

The court further found that plaintiffs adequately pleaded loss causation for the stock-price declines following the January 3 and October 3, 2023 disclosures. At the pleading stage, the court held that plaintiffs sufficiently alleged a causal connection between the alleged fraud, the equipment’s continuing failure, and the later disclosures about Fab-1.

Because the court found that plaintiffs adequately stated a Section 10(b) claim based on Statements 4, 6, and 7, it also found that plaintiffs adequately stated related Section 20(a) control-person claims.

Statements the court found not actionable

The court rejected claims based on statements that merely discussed equipment installation, supply-chain constraints, or vendor support without saying or implying that the equipment had passed factory testing. The court also found that allegations concerning the equipment’s failure to pass site acceptance testing did not show that statements made in August 2021 and March 2022 were false when made, because testing and qualification allegedly continued until at least September 2022.

The court found the February 2021 investor-presentation statements not actionable. The presentation’s statement about factory testing appeared in a footnote, and the June 2021 Proxy Statement did not specifically incorporate that presentation by reference.

The court dismissed claims based on Statements 3 and 10, which were risk disclosures in the June 24, 2021 Proxy Statement and March 25, 2022 Form 10-K. Plaintiffs had not alleged enough particular facts showing that the risks described in those disclosures had already materialized when the disclosures were made.

The court also found Statements 2, 9, and 12 protected by the Private Securities Litigation Reform Act’s safe harbor for forward-looking statements. These included projected production and revenue goals, a statement that Enovix was “on track” to meet a production goal, and Rodgers’s statement that Fab-1 would work and ship many batteries. The court found that the complaint did not show that the statements were made with actual knowledge that they were false or misleading.

Disposition

The court granted in part and denied in part the motion to dismiss the Second Amended Class Action Complaint. Plaintiffs’ claims may move forward based on Statements 4, 6, and 7. The court did not grant plaintiffs further leave to amend at that time. The court also scheduled a case-management conference for August 23, 2024, and required a joint case-management statement by August 16, 2024.