Southern District Of New York Grants In Part And Denies In Part Motion To Dismiss Regarding SPAC Acquisition of Online Lottery Company
On February 25, 2025, Judge Jennifer L. Rochon of the United States District Court for the Southern District of New York granted in part and denied in part motions to dismiss amended complaints filed in a putative class action asserting claims under Sections 10(b) and 14(a) of the Securities Exchange Act against a special purpose acquisition company (“SPAC”), its former CEO, and former officers of the target company, an online lottery-sales company (the “Company”), as well as an individual action consolidated with the putative class action and asserting similar claims. In re Lottery.com, Inc. Sec. Litig., No. 1:22-cv-07111 (JLR) (S.D.N.Y. Feb. 25, 2025). We previously covered the Court’s decision dismissing the initial complaints without prejudice. Plaintiffs alleged that defendants made misrepresentations both before and after the merger regarding certain financial information regarding the Company, its revenue recognition, and regulatory compliance. The Court held that plaintiffs had adequately pleaded Section 10(b) claims against the Company and its former CFO based on post-merger representations concerning the Company’s financial performance and financial reporting, that plaintiffs had adequately pleaded Section 14(a) claims against the Company and certain of its former officers with respect to legal and regulatory compliance statements in the proxy for the merger, and dismissed the remaining claims.
The Court first addressed whether plaintiffs had adequately alleged falsity with respect to post-merger financial-performance-related statements. As to those statements, the Court held that, as stated in its opinion addressing the previous motion to dismiss, plaintiffs had adequately alleged that these were false when made, including because the Company later admitted it had overstated its financials. The Court then analyzed whether plaintiffs had sufficiently pleaded that defendants acted with the requisite scienter when making the allegedly false statements. The Court held that plaintiffs had sufficiently pleaded scienter in connection with the post-merger statements concerning the Company’s finances based on the Company’s former CFO’s alleged involvement in the alleged “sham” client transaction. The Court reasoned that because he was CFO, he should have recognized that the transaction was not disclosed on the Company’s balance sheet; this, combined with “the magnitude of the transaction,” his “role as CFO and subsequent termination,” and “the fact that the transaction related to [the Company’s] core operations,” was sufficient to give rise to an inference of scienter with respect to the post-merger statements that postdated the transaction. The Court also held that the CFO’s scienter may be imputed to the Company with respect to the same statements.
The Court then addressed the Section 14(a) claims, limiting its analysis to the proxy statements it had already determined were false or misleading: that the Company “only” purchases tickets for customers in the state where they are physically located and “only” in “accordance with applicable laws.” As to those statements, the Court held that plaintiffs adequately pleaded allegations giving rise to an inference that the Company’s former officers and directors acted negligently in preparing the proxy, noting that the proxy’s assurances that the Company “only” purchased tickets in states where customers were located was belied by allegations that the Company had sold tickets out of state during the relevant time period, as well as the defendants’ “high-level positions; the small size of the company; the centrality of lottery ticket sales of the company’s core operations; and the magnitude of the noncompliance.”
Finally, the Court considered a motion filed by plaintiffs asking the Court to consider allegations in an indictment against the SPAC’s former CEO filed after the operative complaints were filed. The Court
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