Jakubiak v. QuantumScape Corporation

Background

Jeffrey Jakubiak sued QuantumScape Corporation for breach of contract, fraud, negligent misrepresentation, and violation of Section 10(b) of the Securities Exchange Act and Rule 10b-5. QuantumScape moved to dismiss the fraud, negligent-misrepresentation, and Section 10(b) and Rule 10b-5 claims in the amended complaint. The opinion does not decide the breach-of-contract claim because that claim was not among those challenged by this motion.

QuantumScape succeeded Kensington Capital Acquisition Corporation, which had issued warrants connected to its June 2020 initial public offering. The warrant agreement provided that the warrants could be exercised beginning on the later of 30 days after the business combination or 12 months after the initial public offering. Several versions of a registration statement instead stated that the warrants would become exercisable 30 days after the business combination closed.

Jakubiak alleged that he purchased 12,000 warrants as trustee for the Jeffrey Jakubiak Revocable Living Trust and another 1,500 warrants for himself while relying on the registration statement. After QuantumScape told him that the exercise period would begin on June 30, 2021, rather than 30 days after the November 25, 2020, closing, he began unwinding his positions. He alleged lost warrant profits of $200,000 and more than $400,000 in losses on hedging positions. QuantumScape later began allowing warrant exercises on March 5, 2021.

Section 10(b) and Rule 10b-5 claim

The court held that the complaint adequately pleaded securities fraud. Such a claim requires allegations of a material misstatement or omission, a required state of mind called scienter, a connection with a securities purchase or sale, reliance, and loss caused by that reliance.

The court found that the complaint adequately alleged scienter through facts supporting recklessness. The complaint alleged that Kensington had entered the warrant agreement, that key executives who prepared and signed the registration statement knew its terms, and that the registration statement continued to state the incorrect exercise date through multiple versions. The court concluded that these allegations provided a strong enough inference that the company acted far beyond ordinary carelessness when preparing the filing.

The court rejected QuantumScape’s argument that other documents attached to or filed with the registration statement disclosed the correct exercise period. At the motion-to-dismiss stage, the court found it reasonable for an investor to rely on the clear statement in the main text of the more current registration statement, especially because the complaint alleged that investors were directed to that document when asking about the exercise period.

Common-law fraud

The court held that the complaint also alleged enough facts to support the fraud claim under the heightened requirement for pleading fraud. QuantumScape’s only stated challenge to that claim concerned scienter and reliance, and the court rejected those arguments for the same reasons it rejected them for the Section 10(b) claim.

Negligent misrepresentation

The court applied New York law. Although the plaintiff argued for Florida or California law, the court concluded that New York had the greater interest in regulating the alleged conduct because Kensington was based in New York, the warrants traded on the New York Stock Exchange, and the registration statement was signed in New York.

Under New York law, negligent misrepresentation requires a special or similar relationship that creates a duty to provide correct information, an incorrect statement, and reasonable reliance. The court dismissed this claim because the complaint did not allege the required special relationship, and the plaintiff did not argue that such a relationship existed. The court noted that courts in the district frequently find no such relationship between a security issuer and members of the investing public.

Disposition

The court’s order states that QuantumScape’s motion to dismiss was granted in part and denied in part. The negligent-misrepresentation claim was dismissed. The motion was otherwise denied as to the fraud and Section 10(b) claims. The court also denied QuantumScape’s motion for oral argument as moot and directed the clerk to close the identified motions.