IN RE ENOVIX CORPORATION SECURITIES LITIGATION

Background

Lead plaintiffs Gary Kung; Discovery Global Opportunity Master Fund Ltd.; Discovery Nymeria Master Fund, Ltd.; and named plaintiffs Robert G. Lee and Traci Selke brought a securities-fraud class action on behalf of people and entities that purchased publicly traded common stock of Enovix Corporation or Rodgers Silicon Valley Acquisition Corporation between June 24, 2021, and January 3, 2023. They sued Enovix and individual defendants under Section 10(b) of the Securities Exchange Act of 1934, Securities and Exchange Commission Rule 10b-5(b), and Section 20(a) of the Act.

The complaint concerned Enovix’s Fab-1 battery-production facility. Plaintiffs alleged that Enovix waived factory acceptance testing, which was intended to occur at the equipment vendor’s factory, and did not conduct site acceptance testing after the equipment arrived at Enovix’s facility. They alleged that the company’s statements about the equipment, production schedule, and risks were misleading because they did not disclose those facts. Plaintiffs also alleged that production problems later caused missed or reduced output and revenue expectations, followed by stock-price declines after disclosures in November 2022 and January 2023.

Defendants moved to dismiss under Federal Rules of Civil Procedure 9(b) and 12(b)(6). They argued that the complaint did not support the conclusion that Enovix conducted no testing, mischaracterized a November 7, 2022 statement by Thurman Rodgers, and failed to plead the required state of mind, known as scienter. They also argued that plaintiffs had not adequately pleaded loss causation for the January 3, 2023 stock decline.

Legal standards

For a Rule 12(b)(6) motion, the court accepts well-pleaded factual allegations as true and asks whether they plausibly state a claim for relief. Securities-fraud claims also must satisfy Rule 9(b) and the Private Securities Litigation Reform Act, which require particular details about each allegedly misleading statement, why it was misleading, and facts supporting a strong inference that each defendant acted with scienter.

To state a Section 10(b) and Rule 10b-5 claim, plaintiffs had to 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.

False or misleading statements

The court grouped the challenged statements into three categories: statements referring to factory or site acceptance testing; statements allegedly omitting the waiver or noncompletion of those tests; and risk disclosures that allegedly should have included those details.

The court found that plaintiffs did not plead with sufficient particularity that Enovix completely waived the factory and site acceptance tests. The court read Rodgers’s November 7, 2022 statement as admitting that Enovix waived milestones requiring Enovix engineers to observe equipment at factories in China and vendor engineers to travel to Enovix—not as admitting that no testing occurred at all. The challenged earlier statements did not say or imply that those specific trips would occur. Plaintiffs therefore did not adequately connect Rodgers’s later statement to the earlier statements or show that the earlier statements were false or misleading when made.

The court also rejected plaintiffs’ omission theory. In the court’s view, plaintiffs essentially argued that statements about equipment installation, supply-chain problems, and vendor support had to include additional details about the testing decisions. The court held that the Private Securities Litigation Reform Act does not impose a general requirement that every statement be complete, and plaintiffs had not adequately explained why the challenged statements were misleading without those additional details.

The court likewise held that the risk disclosures were not actionable as alleged. The complaint did not allege that the risks had begun to materialize by March 25, 2022, the date of the latest challenged statement. Instead, it alleged that Enovix began gradually revealing the problems in the second half of 2022. Because the complaint did not specify when the risks materialized, the court could not conclude that the earlier risk disclosures were false or misleading when made.

Scienter

The court independently found that the complaint did not adequately plead scienter. Plaintiffs’ theory depended on Rodgers having admitted that defendants completely waived the factory and site acceptance tests, but the complaint’s description of his statement did not support that interpretation.

The court also found that the complaint did not state with particularity what each defendant knew and when. The former-employee allegations did not provide direct knowledge of what the individual defendants knew about specific equipment problems or manufacturing delays. The allegations that Rodgers was involved in daily operations, that production reports were available, that Rodgers had a financial motive connected to the merger, and that defendant Cameron Dales sold some stock did not, individually or collectively, create a strong inference of scienter.

Other issues

Because the complaint failed to adequately plead falsity and scienter, the court did not reach defendants’ argument that plaintiffs failed to plead loss causation for the January 3, 2023 disclosure. The court also did not need to consider the parties’ numerous requests to rely on attached documents through judicial notice or incorporation by reference because the complaint was deficient on its face. The court instructed plaintiffs to clearly identify the challenged statements in any amended complaint.

Because plaintiffs failed to state a Section 10(b) claim, the court held that they also failed to state a Section 20(a) controlling-person claim.

Disposition

The court granted defendants’ motion to dismiss the consolidated complaint, with leave to amend. The court stated that appropriate amendment could cure the identified deficiencies and ordered that any amended consolidated complaint be filed by February 16, 2024.