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From Securities Regulation Daily, January 7, 2019

Repackaged claims fail to jumpstart fraud action involving electric car manufacturer

By Lene Powell, J.D.

Plaintiffs in a fraud action involving a venture capitalist firm and a doomed automotive startup could not avoid the three-year statute of limitations prescribed by the Illinois Securities Law by arguing that Delaware rather than Illinois law applied. Claims that do not directly invoke the Illinois securities laws may still fall within its statute of limitations, including Delaware common law claims. Major red flags put the plaintiffs on notice of alleged wrongdoing more than three years prior to filing, so the suit was time-barred (Orgone Capital III, LLC v. Daubenspeck, January 7, 2019, Brennan, M.).

The plaintiffs were purchasers of securities of Fisker Automotive, Inc., a manufacturer of luxury hybrid electric cars, which went bankrupt in 2013 after a meteoric rise and abrupt fall. They sued venture capital firm Kleiner Perkins Caufield & Byers, a controlling shareholder of Fisker, and related individual defendants involved in early-stage financing, alleging that the defendants concealed Fisker’s cash crisis and mismanagement while attracting new investors.

The district court held that the three-year statute of limitations of the Illinois Securities Law applied, and that the claims were time-barred based on notice of Fisker’s problems provided by a damning research report and Congressional hearings, allegations of which the plaintiffs had included in their complaint. The district court granted leave to amend. In their amended complaint, the plaintiffs deleted mention of the report and hearings, and instead alleged that they learned of the purported wrongdoing after an action was brought in Delaware against some of the same defendants. The plaintiffs also newly asserted that Delaware rather than Illinois law applied, due to choice of law provisions in some Fisker securities purchase agreements. The district court again dismissed the complaint, finding that Illinois law applied and the claims were time-barred.

Choice of law. The three-judge appellate panel found that the three-year Illinois Securities Law statute of limitations applied. Choice of law provisions did not bind the plaintiffs, and claims that do not directly invoke the Illinois securities laws may still fall within its statute of limitations, including Delaware common law claims like those asserted by the plaintiffs. Drawing on its ruling in Klein v. George G. Kerasotes Corp., the court observed that whether a plaintiff’s claim amounts to an action for relief under the Illinois Securities Law, or upon or because of any of the matters for which relief is granted by the securities law, depends on what acts are encompassed within the securities law.

Here, the plaintiffs claimed that the defendants concealed material information and made knowingly false statements regarding Fisker’s operational and financial conditions in connection with the sale of Fisker securities. Because such conduct is prohibited under Illinois securities laws, the court concluded that the plaintiffs had pleaded acts encompassed within and governed by the Illinois securities laws. A case suggested by the plaintiffs was inapposite, as the plaintiffs were purchasers, not sellers. Moreover, the plaintiffs were essentially forum-shopping, as the outcome they proposed would reward a stockholder who failed to bring suit in the appropriate state in a timely manner. Consequently, the three-year statute of limitations controlled, not Illinois’s residual five-year statute of limitations.

"Plaintiffs cannot avoid Illinois’s statute of limitations by encasing their common law claims in a Delaware husk," wrote the court.

"Breathtaking wreckage" gave notice. Having concluded that the Illinois Securities Law’s three-year statute of limitations controlled, the court next held that the claims were time-barred. The plaintiffs took issue with the district court’s ruling that the plaintiffs were on inquiry notice of the alleged wrongdoing, arguing that "inquiry notice" did not appear in the statute, and that the standard was "actual notice of facts." But the panel noted that "actual notice" did not appear in the statute either, and an inquiry notice standard was consistent with the statute and cases interpreting it.

Further, the suit was time-barred under the plain language of the statute, which required the plaintiffs to show they did not have notice of facts that, in the exercise of reasonable diligence, would lead to actual knowledge of the defendants’ alleged violations on or before October 14, 2013. In their original complaint, the plaintiffs repeatedly referred to Congressional hearings and a research report about Fisker’s downfall, which characterized the company’s failure as "the most tragic venture capital-backed debacle in recent history" and alluded to fraud and breach of fiduciary duties as the cause of Fisker’s "breathtaking wreckage." Together, the hearings and report provided the plaintiffs not just with notice, but with a "detailed litigation roadmap," said the court. In addition, there were media reports of a cash crunch, forced layoffs, scaled-back sales projections, and automobile recalls, all of which should have alerted sophisticated investors like the plaintiffs that something was wrong.

Finally, the court concluded that the district court had permissibly considered findings taken from the prior proceeding, specifically the allegations concerning the research report and Congressional hearings pleaded in the first complaint. Simply deleting mention of these in the amended complaint did not make them go away. That the report existed and the Congressional hearings took place was beyond reasonable dispute, so the district court had satisfied the evidentiary criteria for judicial notice.

Dismissal affirmed. Consequently, the panel found that the district court had correctly concluded that the claims were time-barred and dismissed the case.

The case is No. 18-1815.

Attorneys: Kenneth A. Wexler (Wexler Wallace LLP) and Todd S. Collins (Berger & Montague, P.C.) for Orgone Capital III, LLC. M. Duncan Grant (Pepper Hamilton LLP) for Keith Daubenspeck.

Companies: Orgone Capital III, LLC; Fisker Automotive, Inc.; Kleiner Perkins Caufield & Byers

MainStory: TopStory FinancialIntermediaries FraudManipulation PrivateEquityNews DelawareNews IllinoisNews IndianaNews WisconsinNews

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