Lawyers May Target More SPACs in Lawsuits Citing Investment Company Act

The lawyers whose action prompted billionaire investor William Ackman to make changes to his special purpose acquisition company (SPAC) could target more such vehicles, according to three people familiar with the matter.

The group, which includes former U.S. Securities and Exchange Commissioner Robert Jackson, filed lawsuits last week against three blank-check acquisition firms: GO Acquisition Corp , E.Merge Technology Acquisition Corp and Ackman’s Pershing Square Tontine Holdings.

The lawsuits accuse the SPACs of operating illegally by not registering as investment companies. Ackman last week said the lawsuit against his SPAC was without merit, but acknowledged that the legal uncertainty hanging over it would make it tougher to find a merger partner.

The lawyers group, which includes law firms Susman Godfrey LLP and Bernstein Litowitz Berger & Grossmann LLP, one of the most prolific U.S. shareholder class action firms, is actively monitoring the SPAC sector to identify potential issues at other SPACs, the sources said.

Two of the sources said the number of potential new lawsuits could end up being as high as 50. A third source, however, said this estimate was incorrect and that no new legal action was imminent.

GO Acquisition declined to comment, while E.Merge Technology Acquisition did not respond to requests for comment.

The lawyers and their firms either declined to comment or did not respond to questions for comment.

While none of the group’s lawsuits have had their day in court, they point to a rapidly escalating legal campaign against SPACs. These shell vehicles raise money in an initial public offering to pursue a merger with a private company. There are currently 438 SPACs, which, like those that were sued, have yet to clinch a merger, according to data from SPAC Research.

SPACs became one of Wall Street’s hottest investment trends last year as many retail investors stuck at home during the COVID-19 pandemic placed speculative bets on them. They lost some of their appeal after many went on to report weak financial performance and a regulatory crackdown ensued over their disclosures.

‘Frequent Filer’

The three lawsuits were all filed on behalf of George Assad, a shareholder in the SPACs. He has been named as plaintiff in at least 33 other shareholder lawsuits since 2010 against a range of companies, from oil and gas explorer Noble Energy to consumer credit bureau Equifax Inc, a search of legal databases shows.

Financial Industry Regulatory Authority records list Assad as an employee of broker-dealer Revere Securities LLC, and public records show he lives in Methuen, Massachusetts, a city north of Boston.

Assad, 76, referred all questions to his lawyer, who did not return calls and emails for comment. Revere Securities also did not return calls seeking comment.

None of the lawyers in the SPAC lawsuits responded to questions about their affiliation with Assad.

Two lawyers who have not been involved with Assad’s cases said it was common for law firms and their financial backers to enlist nominal shareholders – often referred to in legal circles as “frequent filers” – when they target companies.

Thompson Hine LLP litigation lawyer Riccardo DeBari said courts typically focus on the validity of the claims rather than the people who file them.

The second lawyer, Foley & Lardner LLP corporate partner Louis Lehot, said there is nothing wrong with frequent filers but that it would be ethically problematic for the lawyers involved if Assad was a “straw man” for the shareholder lawsuits without having been substantially harmed himself by the companies involved.

“Our court system relies on actual plaintiffs bringing actual claims that they actually suffered, and having those claims adjudicated,” Lehot said.

Investment Company Act

SPACs have traditionally relied on being exempt from registering as investment companies under the Investment Company Act of 1940 so they can make investments and sell stock without restrictions before merging with a company. They typically park the money they have raised from an IPO in U.S. government bonds and money market funds until they find a merger target.

The lawsuits claim that such investments fall outside a SPAC’s primary mission of merging with a company and constitute breaches of the Investment Company Act. They argue that the SPAC sponsors have turned these vehicles into extensions of their hedge funds.

Many Wall Street law firms that work on SPACs say the lawsuits are unlikely to succeed. In a memo to clients sent this week, White & Case LLP said the lawsuits “contain no novel arguments or revelations” and that their thesis “was rejected long ago by the SEC.”

Douglas Ellenoff, a corporate and securities partner at law firm Ellenoff Grossman & Schole LLP, said the lawsuits may be successful in putting off some companies from proceeding with SPAC mergers while the litigation is ongoing.

“It has a very chilling effect on all responsible capital markets, participants who are trying their best to do things in compliance with the securities laws,” Ellenoff said.

Ackman said last week he planned to give his SPAC shareholders warrants in a “better structured vehicle,” which he dubbed a special purpose acquisition rights company. The SPARC warrants would give Tontine shareholders the right to invest in a merger with a private company once the target has been announced – unlike a SPAC, in which investors tie up their money while the sponsor searches for a suitable target.

Jackson served as SEC commissioner between 2018 and 2020, and then returned to New York to teach at New York University School of Law. Among his partners on thelawsuits is Yale Law professor John Morley, who has spent years researching investor protections.