IN RE CARLOTZ, INC. SECURITIES LITIGATION

Background

This consolidated securities-fraud class action concerns CarLotz, a used-car marketplace, and its merger with Acamar, a special purpose acquisition company. Before and after the January 2021 merger, the companies described CarLotz’s business as an asset-light, low-risk consignment-to-retail model. Plaintiffs alleged that CarLotz actually depended heavily on one corporate sourcing partner and often bought and resold vehicles that did not sell within the contractual period.

Plaintiffs alleged that CarLotz later disclosed that one sourcing partner supplied more than 60% of its vehicles, that inventory problems had caused a logjam, and that CarLotz was responsible for reconditioning and shipping costs on vehicles from that partner. Plaintiffs also alleged that the company’s stock price fell after these disclosures. They brought claims under the Securities Act and the Exchange Act, including claims under Section 10(b) and Rule 10b-5, which prohibit certain fraudulent conduct in connection with securities transactions.

CarLotz, Inc. filed for bankruptcy on October 9, 2023. The bankruptcy triggered an automatic stay as to CarLotz, Inc. and Acamar, which the parties agreed were then a single entity. The case therefore continued only against the individual defendants for purposes of this opinion.

Motion to Strike

The defendants moved to strike many allegations added in the third amended complaint, arguing that the amendments exceeded the permission previously granted to plaintiffs. The court found that this was not clear and that defendants had not shown prejudice. Because the case was still at an early stage and discovery was stayed, the court denied the motion to strike.

Securities Act Claims and Pre-Merger Statements

The court declined to reconsider the prior dismissal of plaintiffs’ Securities Act claims. Plaintiffs had repeated those claims in the third amended complaint to preserve their appellate rights but had not added facts addressing the earlier deficiencies. The court concluded that plaintiffs had forfeited a fresh review of those claims and dismissed them with prejudice.

The court also dismissed claims based on pre-merger statements. Applying the Second Circuit’s purchaser-seller rule, the court held that a plaintiff bringing a Rule 10b-5 claim must have purchased or sold the security about which the alleged misstatement was made. Plaintiffs bought Acamar or CarLotz, Inc. securities, but the pre-merger statements were about CarLotz Group, whose shares plaintiffs did not buy. The court held that the Second Circuit’s decision in Frutarom foreclosed plaintiffs’ argument that the merger created a sufficient direct relationship between the statements and the securities they purchased.

Post-Merger Rule 10b-5 Claims

The court held that plaintiffs plausibly alleged many post-merger misstatements or omissions. The surviving allegations generally concerned: CarLotz’s number and concentration of corporate sourcing partners; its responsibility for reconditioning costs; its description of its business as a consignment-to-retail, asset-light model; its projected gross profit per vehicle; and its failure to disclose a growing dependence on one sourcing partner under Item 101 and Item 303 of Regulation S-K.

The court rejected or dismissed several other allegations. It found that a statement about increasing sourcing from other partners did not rule out buying vehicles at auction. It treated a general statement about having “a lot of levers to pull” as non-actionable corporate optimism. It found that the phrase “best-in-class unit economics” was too indefinite to be actionable, and it rejected a claim based on a statement attributing a stock-price decline to an aggressive growth strategy and corporate expenses without mentioning the logjam. The court also dismissed claims based on allegations in paragraphs 196, 205 to the extent they relied on “best-in-class unit economics,” 210, 220, 225, 227, and 231 of the third amended complaint. It dismissed claims based on Item 503 because that provision had been repealed, and plaintiffs abandoned that theory by failing to respond to defendants’ argument.

Scienter

Scienter means the required intent or recklessness for a securities-fraud claim. The court found a sufficiently strong inference of scienter as to Solorzano, Bor, and Stoltz for at least some of the surviving claims. Plaintiffs plausibly alleged that Solorzano had a substantial financial interest in completing the merger and keeping the company’s stock valuable during a lock-up period. Plaintiffs also alleged that Bor received a $450,000 merger bonus, a doubled salary, and approximately $15.3 million in stock and options, which the court found could support an inference of a concrete personal benefit.

The court found the motive allegations concerning Stoltz and Polak weak. But the allegations that Bor and Stoltz knew, or had access to information showing, the company’s sourcing concentration and alternative fee arrangements supported a strong inference of conscious misbehavior or recklessness. The court also found sufficient allegations that they knew the inventory logjam had harmed the relationship with the main sourcing partner and that Stoltz had a factual basis for projecting first-quarter gross profit per vehicle.

The court held that plaintiffs did not adequately plead scienter as to Polak. Her industry experience and hiring for expertise in wholesale vehicle services did not show that she actually possessed the relevant information or had a duty to monitor it. The court therefore dismissed all claims against Polak and directed that she be terminated from the docket.

Loss Causation and Maker Issues

Loss causation is the required connection between the alleged fraud and the investors’ economic loss. The court held that plaintiffs plausibly alleged this connection through three disclosures: the March 15 disclosure that one partner supplied 60% of the inventory; the May 10 disclosure about reconditioning costs and low first-quarter gross profit per vehicle; and the May 26 disclosure that the partner had paused its relationship with CarLotz. Each disclosure was followed by an alleged stock-price decline that corresponded to particular challenged statements or omissions.

The court did not resolve which individual defendants were the “makers” of particular statements, meaning the persons with ultimate authority over a statement’s content and communication. The parties had not adequately briefed that issue, and the court stated that the opinion should not be read to resolve it beyond the matters expressly discussed.

Control-Person Liability

Plaintiffs also asserted control-person liability under Section 20(a) of the Exchange Act. The court held that the claim against Bor survived because the complaint adequately alleged an underlying Rule 10b-5 violation and defendants did not contest Bor’s control or culpable participation. Plaintiffs abandoned the control-person claims against Polak, Stoltz, and Solorzano by failing to respond to defendants’ arguments concerning control and culpable participation. Those claims were therefore dismissed.

Scheme Liability and Disposition

The court denied without prejudice the defendants’ motion concerning scheme liability under Rule 10b-5(a) and (c). The parties had devoted too little briefing to that claim, and the court preferred to decide its viability on the merits. The court permitted defendants to file a new motion focused solely on scheme liability. If plaintiffs withdrew the claim, the court stated that it would schedule a conference concerning discovery.

In conclusion, the court granted in part and denied in part the motion to dismiss. It granted the motion as to claims based on pre-merger statements; claims against Polak; the specified allegations; claims based on Item 503; and control-person claims against Stoltz and Solorzano. It denied the motion otherwise. The court also denied the motion to strike and directed the clerk to terminate the defendants’ motions and Polak from the docket.