In re XL Fleet Corp. Securities Litigation

Background

Lead Plaintiff Delton Rowe and additional plaintiffs Jeffrey Suh, Carl Enslin, Simone Heridis and Soraya Matamoros sued XL Fleet Corp. and Jonathan J. Ledecky, James H.R. Brady, Kevin Griffin, Thomas J. Hynes III, Dimitri Kazarinoff and Brian Piern. The plaintiffs brought the case individually and purportedly for a class of people and entities that purchased or otherwise acquired XL Fleet securities between September 18, 2020, and March 31, 2021.

The amended consolidated complaint asserts claims under Section 10(b) of the Securities Exchange Act and Securities and Exchange Commission Rule 10b-5 against all defendants. It also asserts a control-person claim under Section 20(a) against the individual defendants. The defendants moved to dismiss under Federal Rule of Civil Procedure 12(b)(6), which permits dismissal for failure to state a legally sufficient claim.

XL Fleet was formed after the December 2020 completion of a merger involving Pivotal Investment Corp. II and XL Hybrids, Inc. The complaint challenged statements made in press releases, Securities and Exchange Commission filings and media appearances about XL Fleet’s sales pipeline, revenue projections and technology. The complaint also relied in part on former employees and a Muddy Waters Research report. The opinion states that XL Fleet’s share price fell 13% after the report was published.

Court’s analysis

The court accepted well-pleaded factual allegations as true and drew reasonable inferences for the plaintiffs, as required at the motion-to-dismiss stage. For securities-fraud claims, the plaintiffs also had to plead the alleged misleading statements and the reasons they were misleading with particularity, and allege facts creating a strong inference that the defendants acted with the required fraudulent intent, commonly called scienter.

The court held that the complaint sufficiently alleged falsity as to statements about XL Fleet’s sales pipeline and revenue projections. The complaint alleged that Piern instructed employees to record sales opportunities without a reasonable basis, assign inflated probabilities to potential sales, and keep entries after customers indicated they would not order XL Fleet products. It also alleged examples involving companies that had not expressed meaningful interest or could not purchase compatible products, and alleged that sales probabilities were changed from 25% to 75%.

The court stated that this category of allegations was sufficient to warrant denial of the motion to dismiss, but did not discuss the other challenged categories of statements because one adequately pleaded category was enough at this stage. The court also found adequately pleaded the allegation that XL Fleet’s explanation of its forecasting method was misleading because the company said its projections used historical conversion rates while the complaint alleged that manipulated data formed the basis for those projections.

The court rejected the defendants’ arguments that the allegations were conclusory, that the inflated figures affected only reports to XL Fleet’s board, and that the complaint lacked context for the sales probabilities. It also found that the former employees’ allegations were sufficiently supported by their business roles and by the Muddy Waters report, which was attached to the complaint and contained information the opinion says XL Fleet admitted or did not deny.

Scienter

The court held that the complaint alleged a strong inference that the defendants acted consciously or recklessly. The allegations included pressure from XL Fleet’s vice president of sales and marketing to inflate sales probabilities, the use of those figures in revenue projections, the statement that projections were based on historical conversion rates, and a former employee’s alleged report of the overstated pipeline to Pivotal’s attorneys during merger due diligence.

The court found allegations supporting scienter for Ledecky, Griffin and Brady based on their alleged substantial involvement in due diligence concerning XL Fleet’s financial projections. It found allegations supporting scienter for Hynes, Kazarinoff and Piern based on Piern’s reporting relationships, their work on sales targets and projections, and their alleged knowledge of XL Fleet’s operations. The court stated that the alleged scienter of Hynes and Kazarinoff could be attributed to XL Fleet.

Claim concerning Piern

The court denied the motion to dismiss the Section 10(b) claim against Piern without prejudice. The defendants argued that Piern could not be directly liable because the complaint did not allege that he determined, drafted or disseminated the challenged public statements. The court rejected that argument based on the complaint’s allegation that Piern helped create the sales and revenue data used to mislead investors.

The court treated the claim as one based on scheme liability under Rule 10b-5(a) and (c), which cover deceptive conduct beyond simply making a misleading statement. It held that the complaint adequately alleged that Piern engaged in deceptive conduct, acted with the required state of mind, and had a sufficiently direct connection to investors’ alleged reliance and injury. The court emphasized, however, that the Second Circuit had not yet addressed whether liability could apply in these circumstances and stated that the denial could be renewed if the Second Circuit or Supreme Court issued clearly contrary law before the case ended.

Section 20(a) claim and disposition

The court held that the complaint adequately pleaded the Section 20(a) control-person claim because it adequately pleaded a primary violation under Section 10(b). The defendants’ only stated argument against that claim was that there was no viable primary violation.

The court denied the defendants’ motion to dismiss. It also denied the defendants’ request for oral argument as moot and directed the clerk to close the motion at Docket Number 84.