McIntosh v. Katapult Holdings, Inc.

Background

Katapult provides point-of-sale lease-purchase options to consumers described in the opinion as “non-prime” borrowers. It became a public company in 2021 through a merger with FinServ Acquisition Corp., a special purpose acquisition company. The plaintiffs alleged that Katapult and individual defendants misled investors by failing to disclose adverse economic trends, changes in prime lenders’ approval practices, and risks associated with Katapult’s “waterfall” business model. Under that model, a consumer’s application reached Katapult only after a prime lender declined the application.

The plaintiffs asserted claims under Sections 10(b), 14(a), and 20(a) of the Securities Exchange Act of 1934. The Section 10(b) claims challenged June 15, 2021 statements that Katapult continued to expect specified levels of originations, revenue, and adjusted earnings before interest, taxes, depreciation, and amortization. The Section 14(a) claims alleged that FinServ’s prospectus and other proxy materials failed to explain the conditional nature of Katapult’s access to customers through the waterfall and the risks created by changes in prime lenders’ practices. Section 20(a) claims alleged control-person liability based on the asserted primary violations.

Motion to Strike

The defendants sought to strike the Second Amended Complaint under Federal Rule of Civil Procedure 12(f), arguing that it contained confidential information improperly obtained from a complaint filed in a separate Delaware state-court proceeding. The plaintiffs’ counsel had accessed the information after a publicly posted document was accidentally made viewable through redaction failures.

The court denied the motion to strike. It concluded that the defendants had not shown that the challenged information was redundant, immaterial, impertinent, or scandalous. The court also rejected the argument that the Private Securities Litigation Reform Act’s discovery stay applied because the information had been accidentally disseminated to the public rather than obtained through discovery. It further concluded that the cited New York professional-conduct rule concerning inadvertently sent documents did not apply to these circumstances.

Section 10(b) Claims

The court concluded that the challenged financial-guidance statements were forward-looking statements under the Private Securities Litigation Reform Act. The statements included Katapult’s projection of fiscal-year originations and revenue and Defendant Karissa Cupito’s statement that, based on the available data, the guidance remained reasonable and appropriate.

The court held that the statements were accompanied by meaningful, company-specific cautionary language. The press release identified risks involving merchant concentration, the expected benefits of the merger, competition, and the COVID-19 pandemic. The earnings call also referred listeners to the cautionary statements in the press release and Katapult’s periodic Securities and Exchange Commission reports.

Because the statements were forward-looking and accompanied by the required cautionary language, the court concluded that the plaintiffs’ Section 10(b) claim based on those statements failed. The court also noted that the plaintiffs had withdrawn their claims against Derek Medlin, and those claims were dismissed.

Section 14(a) Claims

The court applied heightened pleading requirements under Federal Rule of Civil Procedure 9(b) and the Private Securities Litigation Reform Act to the Section 14(a) allegations that sounded in fraud, even though the plaintiffs disclaimed a fraud theory. The court explained that the plaintiffs’ repeated use of language describing statements as “false and misleading,” together with allegations about fraud involving special purpose acquisition companies, made the heightened requirements applicable to the relevant allegations. The court also noted that the Private Securities Litigation Reform Act’s separate state-of-mind requirement did not apply to Section 14(a) claims.

The court rejected the plaintiffs’ argument that the Prospectus violated the disclosure requirements of Item 303 of Securities and Exchange Commission Regulation S-K. The plaintiffs had not plausibly alleged that the waterfall structure itself was a qualifying trend, demand, commitment, event, or uncertainty. They also had not plausibly alleged that defendants actually knew, when the Prospectus was issued, about changes in prime lenders’ behavior or the effects of savings and delinquency rates. Later statements by Defendant Orlando Zayas did not establish what defendants knew at the earlier time.

The court reached a different conclusion regarding the Prospectus’s description of the waterfall. It held that the plaintiffs plausibly alleged that more specific disclosures about the waterfall’s nature and its role as Katapult’s sole means of customer acquisition could have significantly changed the total mix of information available to investors. Earlier public statements, a website post, and a news article did not defeat the claim at the pleading stage because the disclosures were sporadic, were not made in the context of the shareholder vote, or were filed with the Securities and Exchange Commission without being distributed to shareholders.

The court also held that the plaintiffs plausibly alleged that Katapult, Zayas, Lee Einbinder, and Howard Kurz acted negligently by failing to provide more precise information about the risks of the waterfall structure. The court rejected the argument that the description was merely non-actionable promotional language. It further held that the plaintiffs plausibly alleged Zayas’s liability because they alleged that he permitted his name to be used in the Prospectus.

Section 20(a) Claims and Disposition

The court held that the plaintiffs plausibly alleged a primary violation only under Section 14(a). Because the defendants’ arguments for dismissing the Section 20(a) claims rested entirely on the absence of a primary violation, the court denied the motion to dismiss to the extent those claims were based on the Section 14(a) violation. The court therefore granted the motion to dismiss in part and denied it in part, denied the motion to strike, and directed that Cupito and Medlin be terminated from the action. Judge J. Paul Oetken ordered the clerk to close the relevant motions.