Pomerantz Prevails Against Motion to Dismiss Its SPAC Litigation
POMERANTZ MONITOR | JULY AUGUST 2023
Pomerantz, as sole lead counsel, recently won an important victory for investors in a securities fraud litigation against PureCycle Technologies, Inc., certain of its executives (collectively, the “PureCycle Defendants”), and Byron Roth. On June 15, 2023, Judge Byron of the Middle District of Florida denied defendants’ two motions to dismiss the Sections 10(b), 14(a), and 20(as) claims set forth in plaintiffs’ Second Amended Complaint, as well as defendants’ motion to strike, only dismissing the claims as to one of the five individual defendants.
PureCycle is a plastic recycling company that went public via a “de-SPAC” reverse merger with Roth CH Acquisition I Co., a special purpose acquisition company (“SPAC”). SPACs are shell companies set up solely to raise money through an IPO to eventually acquire another company. PureCycle had the dubious honor of being merely one in a long line of questionable reverse mergers Byron Roth has brought public, while misleading investors regarding the underlying business, only to slap a “buy” rating on the stock and collect millions in compensation, leaving innocent investors to suffer the consequences.
To date, PureCycle has never earned any revenue and has only one product -- a process it claimed could cost effectively recycle polypropylene, a common plastic that, since its invention in 1951, has stymied all efforts of the top scientists and chemical companies researching a way to effectively or economically recycle it. As the Court how now twice ruled (in the June 15, 2023 order and a previous order granting defendants’ motion to dismiss the First Amended Complaint in part), the PureCycle Defendants and Roth issued false and misleading statements throughout the November 16, 2020 - November 10, 2021 Class Period, claiming to have achieved the impossible. Specifically, defendants represented in proxy statements, a registration statement, and in press releases, that their recycling process is “proven” to convert waste polypropylene (called feedstock) into virgin polypropylene resin more cost effectively than manufacturing virgin polypropylene traditionally and utilizing a broader range of feedstock than traditional recycling. In reality (as multiple industry experts have attested), the technology underlying the process is unproven, presented serious issues at lab scale, could not be achieved cost effectively, and could not utilize a broader range of feedstock than traditional recycling. Defendants further touted the PureCycle management team -- which claimed to have solved the previously unsolvable polypropylene recycling problem -- as having “broad experience across plastics,” and decades of experience scaling early-stage companies in public markets and leading transformational projects, though they in fact had no background in plastics recycling and previously brought six other early-stage companies public that subsequently imploded, causing substantial investor losses. In the order, the Court held, “Defendants have failed to present any new argument that would cause the Court to reverse what it has already determined.”
The Court further held that plaintiffs sufficiently alleged scienter (a culpable state of mind) for purposes of the § 10(b) claim (the sole basis for the Court’s prior partial grant of defendants’ motion to dismiss the First Amended Complaint); Section 14(a), which is based on false and misleading statements in the proxy statements, does not require scienter. With regard to the PureCycle Defendants, the Court found scienter because the Second Amended Complaint avers with “greater specificity…the repeated instances wherein Defendants collectively and individually flaunted their past experience without disclosing their alleged prior business failings.” The Court reached this conclusion for two reasons: 1) the “shift in phrasing” demonstrating that “each Defendant individually ‘acted with the required state of mind’ by touting his own experience while omitting previous failures,” and 2) “Plaintiffs more precisely emphasize the repeated manner in which Defendants touted their experience.”
Though not determinative on its own, the Court also noted the PureCycle Defendants’ repeated “willingness to bolster their own credibility” as compared to their utter silence when their credibility was attacked in the short seller report that revealed the fraud in this case at the end of the Class Period, causing PureCycle’s stock to plummet 40%. As part of its holistic analysis, the Court also based its scienter ruling on defendants’ significant financial gain from the SPAC merger, access to internal company information, lack of experience with polypropylene recycling, and an SEC investigation that commenced in September 2021 “pertaining to, among other things, statements in connection with PureCycle’s technology, financial projections, key supply agreements and management.”
With regard to defendant Roth, the Court correctly rejected his piecemeal attacks and found scienter based on his “checkered history,” financial motive to act fraudulently, the “core operations” doctrine, Roth’s signing of the S-4, Schedule 14A (which contained the SPAC merger agreement), including the initial Proxy Statement and then later the amended Proxy Statement for Special Meeting of Stockholders of Roth Acquisition with the SEC which showed his “ongoing involvement with the SPAC merger over a period of several [pivotal] months,” and his access to information during that time including the “personnel, books, records, properties, financial statements, internal and external audit reports, regulatory reports, Contracts, Permits, commitments and any other reasonably requested documents and other information of [PureCycle Inc.], when Roth issued his misstatements.”
Defendants filed a motion on June 30, 2023 asking the Court to reconsider its order, claiming that “recent developments,” i.e., that PureCycle’s first plant just started producing “post-industrial recycled pellets” undermine plaintiffs claim. However, as plaintiffs argued in an opposition brief filed on July 14, 2023, the misleading statements set forth in the Second Amended Complaint pertained to the status of PureCycle’s technology almost two years ago, not the status of its technology today. Moreover, the misstatements concerned defendants’ claims that PureCycle could recycle polypropylene into virgin-like resin, more cost effectively than traditional recycling methods, and using a broader range of feedstock than traditional recycling. Defendants have not introduced a single fact to suggest that these recently produced pellets are virgin-like, produced more cost effectively than traditional recycling methods, or using a broader range of feedstock. In fact, less than a year ago, the FDA told PureCycle that it could only recycle polypropylene into packaging for food and drink as long as the feedstock comes solely from drink cups, the antithesis of a broad range. Defendants alternatively argued that the Court committed legal error in its scienter ruling, relying on new arguments they did not raise in their motions to dismiss (and thus are foreclosed from arguing now) and basing their arguments on mischaracterizations of the Order.
The discovery process is set to begin, and plaintiffs will file their motion for class certification in the coming months.