On December 2, 2021, Judge Cormac J. Carney of the United Stated District Court for the Central District of California denied, in substantial part, a motion to dismiss a putative securities class action against an electric truck manufacturer (the “Company”) for allegedly misleading investors by overhyping its production capabilities and its prospects for winning a multibillion-dollar contract to revamp the U.S. Postal Service’s (“USPS”) delivery fleet in violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. Farrar v. Workhorse Grp., Inc., No. 2:21-cv-02072 (C.D. Cal. Dec. 2, 2021). Plaintiff alleged the Company made false and misleading statements in 2020 and early 2021 about the viability of the Company’s bid for the USPS contract and the Company’s “backlog” of customer orders. Plaintiff also alleged the Company made misrepresentations regarding its use of Payroll Protection Program (“PPP”) funds provided by the federal government during the COVID-19 pandemic. The Court denied the Company’s motion to dismiss on all but the PPP claims.

In 2017, USPS selected the Company—along with five other manufacturers—to supply electric vehicle prototypes for evaluation. Plaintiff alleges that, although the Company was able to deliver the six required protype vehicles, it did not have the manufacturing capacity to produce additional trucks like the prototype. Additionally, plaintiff alleges that the prototype vehicle “had experienced failures during testing, making it unlikely USPS would select its prototype for production.” In January 2021, President Biden announced his goal to replace the government’s vehicle fleet with electric vehicles assembled in the United States. Shortly thereafter, plaintiff alleges that a Company executive conducted several interviews in which he stated that President Biden’s announcement was an indication that the Company would be awarded the multibillion-dollar contract with USPS. After the USPS announced on February 23, 2021 that the contract was awarded to another American company, the Company’s stock plummeted from $28.29 to $12.50 per share, finishing the day at $16.43.

Plaintiff alleged that four categories of the Company’s statements were false or misleading: (1) statements indicating it was still a viable contender for the USPS contract when the Company knew it had little to no chance of securing it; (2) misrepresentations regarding its manufacturing capability, including that the Company could produce hundreds of vehicles a year, when in reality it could not; (3) false statements that the Company had a “backlog” of vehicle orders, which created the illusion of firm customer orders when they were really conditional, cancellable, or unrealistic; and (4) false statements regarding its use of PPP funds for payroll purposes when these funds were allegedly used to pay executive bonuses.

With respect to the first category, the Court held that plaintiff plausibly alleged that the Company’s statements indicating optimism regarding the USPS contract were misleading. The Court emphasized that the Company continued to indicate that it was a viable contender for the contract even after “an undisclosed parking brake failure during prototype testing caused [the Company’s] prototype vehicle to roll down an incline and into a ditch, resulting in the hospitalization of a USPS driver who was forced to jump from the runaway vehicle.”

Next, the Court held that plaintiff plausibly alleged the Company significantly misrepresented its manufacturing capability when it told investors that it “would be able produce 300-400 trucks by the end of 2020.” Although the Company argued these statements should be protected under the PSLRA’s safe harbor for forward-looking statements, the Court held that the statements were “not accompanied by meaningful cautionary language.” The Court further held that the facts alleged, including facts supported by a confidential witness, “tend[ed] to show that [the Company] and its executives knew they did not have the manufacturing capability to meet their production projections or the touted demand for their vehicles.” The Court noted that a Company executive was “assuring the public that [the Company] was on track to meet its 300-400 vehicle target as late as October 29, 2020, at a time when fewer than 18 trucks had been made that year.”

Next, the Court addressed plaintiff’s allegation that the Company made false and misleading statements about a “backlog” of orders for 950 vehicles from United Parcel Services (“UPS”), another package delivery company. Plaintiff alleged that the Company touted this backlog but failed to disclose that UPS merely had an option to purchase the vehicles and had not committed to purchasing them. In considering this category of alleged misstatements, the Court emphasized that the Company “repeatedly referenced their growing backlog as an indicator that they were a strong, growing company that was able to meet increasing demand” in earnings calls and public statements, which “affected analyst opinions regarding the value of [the Company’s] stock.” The Court held that these statements were actionable because the Company was aware at the time that the UPS orders were not “firm” orders but instead were “conditional, cancellable, or unrealistic” and that UPS already had placed an order for electric vehicles manufactured by a competitor and was thus unlikely to take orders from the Company.

Finally, with respect to the statements about the Company’s use of PPP funds, the Court held that plaintiff’s claims were dismissed because they were based on a confidential witness who did not work in the Company’s payroll department. The Court noted that “it is unclear how [the confidential witness] could have personal knowledge regarding the fact that PPP funds were used to pay executive bonuses.” Although the Court dismissed plaintiff’s claims as they pertained to the Company’s use of PPP funds, the Court granted plaintiff leave to amend.

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