Pomerantz Finalizes Settlement on Behalf of Ginkgo Bioworks Investors
By the Editors
On December 13, 2024, the United States District Court for the Northern District of California granted final approval to a $17.75 million settlement on behalf of investors in a securities class action against Ginkgo Bioworks Holdings, Inc. and several officers of Ginkgo and the predecessor SPAC. It was alleged that Ginkgo and its leadership distorted the company’s finances to gain shareholder approval of a SPAC merger that would take the company public. Joshua B. Silverman and Brian P. O’Connell led the litigation. Bernstein v. Ginkgo Bioworks Holdings Inc et al., No. 4:21-cv-08943 (N.D. Cal.).
In its SPAC merger filings, which valued Ginkgo at $15 billion, the company stated that it makes money "in much the same way that cloud computing companies charge usage fees for utilization of computing capacity or contract research organizations charge for services."
However, as Lead Plaintiff alleged in her complaint, Ginkgo’s largest outside investors, whose collective stake in the company totaled nearly 43%, provided the overwhelming majority of funds that were then recirculated back to Ginkgo in “round-trip transactions,” in some cases as purported prepayments for Ginkgo's services.
Shareholders overwhelmingly approved the merger between Ginkgo and the SPAC Soaring Eagle. On September 17, 2021, following the merger, shares of Ginkgo’s common stock began trading on the NYSE under the ticker symbol “DNA.”
On October 6, 2021, market research Scorpion Capital released a short-seller report in which it alleged that Ginkgo is a “colossal scam,” describing the company as a “shell game” whose revenue was highly dependent on related party transactions. According to the report, Scorpion Capital based its findings on an “intensive investigation into Ginkgo’s business model and practices, with a particular focus on the related-party entities that drive the bulk of its revenue.” Another short-seller, Citron, came out with a brief report that same day that largely agreed with Scorpion Capital’s findings. Lead Plaintiff’s complaint alleges that on this news, Ginkgo’s share price plunged approximately 12%, damaging investors.
A securities lawsuit was filed in November 2021, and Pomerantz was appointed lead counsel on behalf of the proposed class of investors. The case was initially brought as a Section 10(b) action but was expanded in the amended complaint to include Section 11 and Section 14(a) claims.
A Section 10(b) claim applies to a material misstatement or omission made in connection with the purchase or sale of a security and requires proof of scienter (the intent to deceive). A Section 11 claim specifically targets false or misleading information within a registration statement for a public offering. A Section 14(a) claim focuses on misleading statements made in proxy materials related to shareholder votes.
In March 2023, the district court denied Defendants’ motion to dismiss Lead Plaintiff’s Section 10(b) and 14(a) claims. Importantly, it found that Lead Plaintiff had alleged that the short-seller reports were corrective disclosures. The Court opined that since the Scorpion Capital report involved 21 research interviews encompassing a broad sample of former employees and executives of Ginkgo, as well as individuals who were then employed at its related-party customers, it “provided new information that was not previously reflected in the stock price.”
The Court found that Lead Plaintiff had alleged falsity, noting that “the fact that the company’s primary customers … operated out of Ginkgo’s headquarters, that many listed Ginkgo’s phone number as their own, and that Ginkgo used intertwined employees, managers, and directors to control these ‘customers’ would surely satisfy the falsity requirement given that Defendants disclosed that it lacked control over these entities.”
The Court also sustained Lead Plaintiff’s 14(a) claims, agreeing with Pomerantz’s position that only allegations of a false or misleading statement made with negligence, not scienter, were required.
For Section 11, the Court dismissed Lead Plaintiff’s claims but granted Lead Plaintiff leave to amend the complaint to expressly include the detailed tracing arguments made in the motion to dismiss briefing. The Court noted that it “finds that the assertions made in the opposition would satisfy the registration requirement, so amendment is certainly not futile.” Pomerantz refiled an amended complaint to address the limited portion of the complaint that the Court had dismissed. The Section 11 claims proceeded to discovery along with the Sections 10(b) and 14(a) claims.
The $17.75 million settlement represents a favorable recovery for the class and involved novel legal issues related to SPACs. Additionally, the Pomerantz litigation team secured important rulings in the evolving area of the law concerning short-seller reports.