IN RE CARLOTZ, INC. SECURITIES LITIGATION

Background

This securities class action concerned CarLotz, Inc.’s merger with Acamar Partners Acquisition Corporation, a special purpose acquisition company. The merger was completed on January 21, 2021, after Acamar’s registration statement became effective on December 30, 2020. CarLotz then became publicly traded.

Plaintiffs alleged that, before the merger, Pre-Merger CarLotz and its officers made materially false or misleading statements about CarLotz’s consignment-to-retail business model, capital risk, inventory, sourcing partners, and unit economics. Plaintiffs alleged that later disclosures revealed problems involving excess inventory, reconditioning costs, and the loss or pause of a major corporate sourcing partner, followed by declines in CarLotz’s stock price.

Lead Plaintiff David Berger bought shares of Post-Merger CarLotz after the merger. Plaintiff Craig Bailey bought Acamar shares before the merger. Plaintiffs asserted claims under Section 10(b) of the Securities Exchange Act, Sections 11 and 12(a)(2) of the Securities Act, and related control-person provisions. Defendants moved to dismiss under Federal Rule of Civil Procedure 12(b)(6), which tests whether a complaint states a legally sufficient claim.

Section 10(b) claims

The court held that Plaintiffs could not pursue Section 10(b) claims based on statements that Pre-Merger CarLotz made about itself. Under controlling Second Circuit precedent, a plaintiff must have bought or sold the security about which the challenged misstatement was made. Neither named Plaintiff bought shares of Pre-Merger CarLotz, which was privately held. Bailey bought Acamar shares, and Berger bought Post-Merger CarLotz shares, but Plaintiffs did not establish that Post-Merger CarLotz was legally interchangeable with Pre-Merger CarLotz.

The court rejected Plaintiffs’ argument that applying this rule to a special purpose acquisition company transaction created an improper loophole. The court stated that it was bound by the Second Circuit’s decision and would not reach the merits of whether the alleged statements were false, material, or made with the required intent. The court also did not reach the related Section 20(a) control-person claim because it did not decide the underlying Section 10(b) claim.

The court granted Plaintiffs leave to amend the Section 10(b) claim, even though Plaintiffs had previously withdrawn their request for amendment. The court noted Plaintiffs’ assertion that events after the Second Amended Complaint was filed could strengthen their allegations.

Sections 11 and 12(a)(2) claims

For Section 11, the court explained that a plaintiff must be able to trace purchased shares to the allegedly misleading registration statement. Plaintiffs challenged the Form S-4 registration statement that became effective on December 30, 2020. The complaint did not allege that Berger could trace his shares to that statement. Bailey bought Acamar shares before the merger and therefore did not buy them pursuant to the challenged S-4 registration statement. The court held that the merger did not allow Bailey to trace those earlier-purchased shares to the later registration statement.

For Section 12(a)(2), the court held that only a purchaser who bought securities directly in the initial public offering may bring the claim. Plaintiffs did not allege that either Berger or Bailey bought shares in an initial public offering. The court therefore held that they lacked the required right to pursue a Section 12(a)(2) claim. The court also dismissed the related Section 15 control-person claim because control-person liability requires an underlying violation.

Disposition

Judge Ronnie Abrams granted Defendants’ motion to dismiss. The court dismissed the case without prejudice on the stated standing and pleading grounds, dismissed the Section 11 and 12(a)(2) claims without prejudice, and gave Plaintiffs one opportunity to amend the Second Amended Complaint within 30 days. The court did not decide the merits of the Section 10(b) claims or the related Section 20(a) claim.