Pomerantz Secures Important Ninth Circuit Ruling in Nikola

POMERANTZ MONITOR | JANUARY FEBRUARY 2022

By J. Alexander Hood II

On November 18, 2021, Pomerantz LLP and Block & Leviton LLP were appointed as co-lead counsel in a securities class action on behalf of investors in the securities of Nikola Corporation, on behalf of a group of three individual investors serving jointly as co-lead plaintiffs. The co-lead counsel appointment in Nikola was the culmination of a 14-month process that began in September 2020 and included a successful petition to the Ninth Circuit Court of Appeals for a writ of mandamus, securing an opinion that provided important clarity to the lead plaintiff appointment provisions of the Private Securities Litigation Reform Act of 1995 (the “PSLRA”).

In September 2020, the first of several related class actions complaints was filed in the United States District Court for the District of Arizona on behalf of Nikola investors, alleging that Nikola and its founder and Executive Chairman, Trevor Milton, had defrauded investors by, among other things, claiming to have designed technology and vehicle components that Nikola had, in reality, purchased from other manufacturers, and wholly fabricating the existence of a purportedly “breakthrough” battery system that Milton claimed was under development. After Nikola’s malfeasance was laid bare, that value of the company’s securities plummeted, damaging investors.

On the November 16, 2020 motion deadline, the Pomerantz LLP and Block & Leviton investor group (the “P-BL Group”) was one of several movants to seek appointment as lead plaintiff in the Nikola class action, alleging an aggregate loss of $6 million.

The PSLRA, which governs federal securities class actions, provides a three-step analysis for the appointment of a lead plaintiff. Specifically, the statute creates a strong presumption that a court will appoint the movant or group of movants that: (1) possesses the largest financial interest (generally meaning monetary loss) in the litigation; and (2) has made a preliminary showing that it is adequate and typical under Federal Rule of Civil Procedure 23—that is, that the class representative’s interests are not antagonistic to those of the class and its claims against the defendants arise from the same course of conduct as those of the other class members. After a movant has satisfied those two criteria, a competing movant may attempt to rebut the presumption in favor of that movant’s appointment by presenting proof that the presumptive movant is in fact atypical or inadequate to represent the class, or otherwise subject to some disqualifying unique defense (Step 3 of the analysis).

Considering the competing motions in Nikola, the district judge applied the PSLRA’s three-step analysis. At Step 1, the district judge recognized that the P-BL Group’s $6 million loss was “millions higher than any other would-be lead plaintiff,” giving the group the largest financial interest in the litigation. At Step 2, the court likewise found that the group was both typical and adequate.

Having satisfied the requisite financial interest and adequacy and typicality criteria at Step 1 and Step 2, the district judge found that the P-BL Group was the presumptive lead plaintiff.

Turning to Step 3, however, the district judge found that competing movants had rebutted the presumption in favor of the group’s appointment as lead plaintiff. Despite finding that the group’s submissions had demonstrated its adequacy under Rule 23, the court considered arguments made by two competing movants—specifically, that the P-BL Group’s submissions had not demonstrated that it was sufficiently cohesive and prepared to supervise the litigation, given that its members lacked a pre-litigation relationship—and expressed “misgivings about the cohesion of [the group] and its ability to control the litigation without undue influence from counsel.” On that basis, the court denied the group’s motion and appointed instead an individual movant, Angelo Baio, with a significantly smaller loss than the group.

Pomerantz and co-counsel promptly filed a petition for a writ of mandamus with the Ninth Circuit Court of Appeals, arguing that the district judge had erred in applying the PSLRA. Specifically, having determined that the P-BL Group had secured the “most adequate plaintiff” presumption after reviewing the evidence in the record, the judge could not then, at the next stage of the analysis, cite the same evidence that had established the presumption in the group’s favor as the basis for “misgivings” and deny the group’s motion.

The Ninth Circuit panel agreed that the district court had misapplied the statute and issued an opinion largely adopting Pomerantz and B&L’s arguments: “For the presumption to have meaning at step three, competing movants must point to evidence of inadequacy. Competing movants must convince the district court that the presumptive lead plaintiff would not be adequate, not merely that the district court was wrong in determining that the prima facie elements of adequacy were met. That is the purpose of the presumption and burden-shifting. The district court made a prima facie determination at step two that the group was adequate. But at step three, it appeared to change its mind because other courts usually prefer members of the group to have a pre-litigation relationship. It pointed to no evidence to support its decision, instead relying only on the absence of proof by the group regarding a pre-litigation relationship and its misgivings. That does not comport with the burden-shifting process Congress established in the PSLRA.”

Accordingly, the Ninth Circuit vacated the lead plaintiff order and remanded to the district court “to redetermine the lead plaintiff in a manner that is consistent with this opinion.”

On remand, the district judge duly applied the statute in a manner consistent with the Ninth Circuit’s opinion. At Step 1, nothing changed in the court’s analysis, as the group having the largest financial interest was never in dispute. This time, however, at Step 2, the court expressly considered the group’s lack of a pre-litigation relationship in making an adequacy determination, as the Ninth Circuit acknowledged it could have done in the first instance. After considering the relevant factors, including the group’s relatively small size and the prosecution procedures and communication mechanisms that the group attested to having adopted, the court ultimately reaffirmed its finding that the group was adequate, its lack of a pre-litigation relationship notwithstanding. Finally, at Step 3, the court found that no evidence had been adduced to the effect that the P-BL Group, as the presumptive “most adequate plaintiff,” was inadequate, atypical, or subject to some disqualifying unique defense—expressly noting this time that the competing movants’ arguments about the group’s unrelatedness had already been addressed at Step 2.

Accordingly, the district court vacated Baio’s appointment as lead plaintiff and appointed the P-BL Group as lead plaintiff instead.

This represents a significant achievement by Pomerantz and Block & Leviton. Guidance from the federal appellate courts on PSLRA jurisprudence is relatively rare, and the Ninth Circuit’s issuance of an opinion, adopting in larger part the arguments advanced by Pomerantz and Block & Leviton, brings important clarity to a sometimes overlooked but nonetheless essential aspect of federal securities litigation. Moreover, the case against Nikola has only grown more compelling since the initial complaints were filed. In July 2021, Nikola’s founder and former CEO, Trevor Milton, was indicted for fraud by federal prosecutors, and in December 2021, Nikola agreed to pay $125 million to settle fraud charges with the U.S. Securities and Exchange Commission.