Law Street Media

Court Partially Rebukes Securities Suit Against Virgin Galactic SPAC Deal

Rocket launch.

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On Monday, Judge Allyne Ross of the Eastern District of New York issued an opinion that granted in part and denied in part a motion to dismiss the complaint in a federal securities law class action brought against Virgin Galactic Holdings, Inc. (Virgin Galactic), Richard Branson and other individual defendants.

Plaintiffs allege violations of Sections 10(b), 20(a) and 20(A) of the Securities Exchange Act of 1934. Defendants’ motion addressed the sufficiency of the allegations in the Corrected Amended Complaint. In their 153 page pleading, plaintiffs allege that at the beginning of the class period (when Virgin Galactic went public), “Defendants claimed it [Virgin Galactic] was on the cusp of sending tourists to space.” In fact, according to plaintiffs, the program had tremendous safety problems. “When the truth emerged through unexplained flight program delay after unexplained delay, as well as several corrective disclosures, investors suffered tremendous losses.”

The defendants are Virgin Galactic, Richard Branson, Chamath Palihapitiya (who plaintiffs identity as the former chairman of the special purpose acquisition company (SPAC) through which Virgin Galactic went public and the Chairman of the Virgin Galactic board afterwards) and several other present or former Virgin Galactic officers.  The two lead plaintiffs are Mark Kushner and Robert Scheele, among several other named plaintiffs.  

The plaintiffs purportedly sue “on behalf of all persons or entities who purchased Virgin Galactic or Social Capital common stock from July 10, 2019 through October 14, 2021 … and who held shares past at least one of the corrective disclosures … “ Plaintiffs identify Social Capital, or Social Capital Hedosophia Holdings Corp., as the SPAC through which Virgin Galactic went public through a merger, or De-SPAC transaction, in October 2019. The July 10th date is the day following the announcement of the merger between the SPAC and Virgin Galactic.

Judge Ross provides an exhaustive and detailed analysis of the alleged misrepresentations and omissions during the class period and considers whether those allegations satisfy pleading requirements for materiality, loss causation and scienter under the Exchange Act. Only a subset of the allegedly actionable statements survived the motion. Perhaps most notably, in view of Mr. Branson’s fame, Judge Ross found that he acted with scienter with respect to public disclosures contained in a letter filed with the SEC in July 2019. “Although the letter was filed … three months prior to the transaction [with the SPAC], Branson had no other means of selling the shares before the de-SPAC was completed [i.e. before the merger, Virgin Galactic was private held]. In light of the timing and amount of this stock sale, I find that plaintiffs have adequately pled scienter…”

Plaintiffs must file an amended complaint on or before November 28.

Plaintiffs’ counsel are The Rosen Law Firm, P.A. and Glancy Prongay & Murray LLP.  Defense counsel is Latham & Watkins LLP.

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