In re Arcimoto, Sec. Litig.

IN RE ARCIMOTO INC., SECURITIES LITIGATION

No. 21-CV-2143 (PKC)

United States District Court, E.D. New York

December 22, 2022

MEMORANDUM & ORDER

PAMELA K. CHEN, UNITED STATES DISTRICT JUDGE:

Lead Plaintiff Tarun Kapoor, on behalf of a putative class, brings this action against Defendant Arcimoto, Inc. (“Arcimoto”) based on alleged violations of federal securities laws. Presently, Arcimoto has moved to dismiss Plaintiff's Consolidated Amended Complaint pursuant to Fed.R.Civ.P. 12(b)(6). For the reasons stated herein, the Court grants the motion.

BACKGROUND^[1]

I. The Arcimoto-FOD Capital, LLC Deal

According to its public filings, Arcimoto is a publicly traded Oregon entity operating in the automotive industry and manufacturing small two-passenger, three-wheeled, electric vehicles. (Am Compl., Dkt. 32, ¶¶ 21, 29, 30.) Defendant Mark Frohnmayer (“Frohnmayer”) founded Arcimoto in 2007 and has served as Arcimoto's president and chief executive officer (“CEO”) since then. (Id. ¶¶ 22, 29.) Defendant Douglas M Campoli (“Campoli”) is Arcimoto's chief financial officer (“CFO”). (Id. |23.) Arcimoto's “flagship product” is a small vehicle named the Fun Utility Vehicle (“FUV”). (Id. ¶¶ 2, 34.) The FUV began selling in October 2019, retailing at approximately $20,000 per unit. (Id. ¶¶ 2, 34.)

In late 2018, according to public disclosures, Arcimoto struck a deal with an entity named FOD Capital, LLC (“FOD”), with one of its principals being Michael T. Raymond (“Raymond”). (Id. H 41-45, 53.) On December 27, 2018, Arcimoto filed a public disclosure with the SEC informing the public about the FOD-Arcimoto deal. (Id. | 44.) Specifically, Arcimoto disclosed that it had made a deal with FOD, pursuant to which FOD took control of up to 1,442,857 Arcimoto shares, amounting to roughly 9% of Arcimoto's stock. (Id.) The next day, Arcimoto filed another public disclosure report with the SEC (“December 8-K Report”). (Id. | 41.) There, Arcimoto again stated that it had reached an agreement with FOD giving FOD control of up to 1,442,857 Arcimoto shares and resulting in FOD receiving a $3 million senior secured note. (Id.) The disclosure further stated that “[i]n connection with the [FOD-Arcimoto deal], [Arcimoto] granted [FOD] [] franchise rights for the lower Florida Keys[.]” (Dkt. 41-1, at ECF 4.) The disclosure incorporated by reference, and included as exhibits, four different agreements that FOD and Arcimoto had signed. (Id. (“[The agreements] are incorporated herein by reference in their entirety.”); Am. Compl., Dkt. 32, | 43.) Exhibit 4.1 to the December 8-K Report, titled “Subscription Agreement,” featured FOD's business address, “7009 Shrimp Road, Suite #4, Key West, FL 33040,” and clearly stated that “Michael T. Raymond” was FOD's manager and had signed the agreement. (Dkt. 41-1, at ECF 8, 14; Am. Compl., Dkt. 32, | 42.)^[2] Section 6(1) of the Subscription Agreement reiterated that FOD had received franchise rights for the Florida Keys, subject to Arcimoto's standard franchise Agreement. (Dkt. 41-1, at ECF 19.)

Similar disclosures followed. On or about January 4, 2019, Raymond filed a public disclosure with the SEC notifying the public that he was a resident of Michigan, the manager of FOD, and the controller of up to 1,442,857 Arcimoto shares. (Dkt. 41-1, at ECF 26, 29 (“The investments of FOD [] are managed by [Raymond]. . . As of the date of signing of this report, Mr. Raymond, as the Manager of FOD Capital, has the sole power to vote and dispose . . . of 1,442,857 [Arcimoto shares] owned by FOD Capital.”); Am. Compl., Dkt. 32, | 45.) That filing featured FOD's address in the Florida Keys: “7009 Shrimp Road, Suite 4, Key West, FL 33040.” (Dkt. 411, at ECF 26.) In April 2019, three months later, Arcimoto filed one more disclosure form with the SEC reiterating virtually the same facts and estimating that FOD had actual control or the right to control up to 9.3% of Arcimoto's stock. (Am. Compl., Dkt. 32, | 46.) Five months later, on September 18, 2019, Arcimoto filed yet another public disclosure with the SEC. (Dkt. 41-1, at ECF 194-96; Am. Compl., Dkt. 32, | 47.) The September 2019 disclosure again reminded the public that in December 2018 Arcimoto and FOD had struck a deal, inter alia, granting FOD control of 9% of Arcimoto's stock and franchise rights for the Florida Keys, and further advised the public that on September 12, 2019, FOD and Arcimoto had signed a revised agreement that controlled FOD's “franchise rights for the Florida Keys.” (Dkt. 41-1, at ECF 195; Am. Compl., Dkt. 32, I 47.) The September 2019 disclosure included, as Exhibit 4.1, the revised subscription agreement itself, which identified Raymond as the manager of FOD. (Am. Compl., Dkt. 32, | 47.)^[3] The well-publicized Arcimoto-FOD deal notwithstanding, in 2019 and 2020, Arcimoto was an unprofitable enterprise. (Id. ¶¶ 84-86.) In both years, Arcimoto sold less vehicles than it produced, and eleven safety issues emerged in the vehicles it had managed to sell, necessitating public recalls. (Id. ¶¶ 32-33.) Former Arcimoto employees alleged that Arcimoto's production processes at the time were substandard, and one employee alleged that during the 2019 to 2020 period Arcimoto was “just scrambling to get things out the door.” (Id. ¶¶ 36-40.) In both 2019 and 2020, Arcimoto released annual disclosures advising the public that Arcimoto's “ability to continue as a going concern” depended, not on its sales, but on its ability to “rais[e] additional capital.” (Id. ¶¶ 84-86.) Arcimoto further disclosed its intention to obtain “additional funding” through “debt and/or equity offerings.” (Id.)

During this period, on October 2, 2019, Arcimoto issued the following press release announcing the launch of its first franchise in the Florida Keys:

Arcimoto . . . announced today that it has signed its first rental franchise, which will open in the Florida Keys and be operated by Key West-based franchisee R-KEY-MOTO, LLC. . . Located at the Stock Island Marina Village, the new FUV Hub location will house 21 FUVs to be used as rental vehicles for tourists and cruise ship passengers to explore Key West, one of the most popular tourist destinations in the world.

(Id. I 56 (emphasis omitted).) The press release included a quote from Michael Raymond as the “principal of R-KEY-MOTO.” (Id. ¶ 57.) R-KEY-MOTO is a Florida entity whose business address is 7009 Shrimp Road, Suite #4, Key West, FL 33040, and which Raymond controls together with FOD. (Id. I 50.) Arcimoto did not identify its transaction with R-KEY-MOTO as a “related party transaction” in any of its subsequent filings with the SEC, including its 2019 annual disclosure, its April 2020 proxy statements, and 2020 quarterly reports. (Id. ¶¶ 61, 62, 64, 68, 70, 72, 74, 76, 78, 80.)

On July 22, 2020, in another press release, Arcimoto announced that it would be pursuing another venture in the Florida Keys:

Arcimoto . . . and Wahlburgers are teaming up on a pilot program to field test [an Arcimoto vehicle]. The pilot program is anticipated to begin this August [2020] at the newest Wahlburgers location [in Key West].

(Id. I 82.) Wahlburgers is a food business operated through Wahlkey, LLC, a Florida entity whose business address at the time was 7009 Shrimp Road, Suite #4, Key West, FL 33040, and which Raymond controlled together with FOD. (Id. ¶¶ 51-52.) Despite the optimistic tone of the pressrelease, the Wahlburgers-Arcimoto “pilot program” consisted of the sale of a single FUV to Wahlburgers. (Id. I 102.)

II. The Bonitas Report

On March 23, 2021, before the various stock exchanges opened, Bonitas, a self-proclaimed “short-seller”^[4] published a report discussing, among others, the Arcimoto-FOD deal (the “Bonitas Report”). (Id. I 94.) In relevant part, the Bonitas Report stated the following:

LARGEST CUSTOMER IS UNDISCLOSED RELATED PARTY FOD CAPITAL

. . . In [the fourth quarter of 2019], Arcimoto announced its first rental franchisee customer in Key West as R-Key-Moto, LLC (“R-Key-Moto”) . . . However, Arcimoto never mentioned in its investor communications via SEC filings, presentations, earnings calls or promotional videos that R-Key-Moto is an undisclosed related party owned by insider FOD Capital, LLC (“FOD Capital”) . . . Arcimoto never disclosed any related party revenues from FOD Capital, which at US$ 20,000 per vehicle would amount up to US$ 420,000, or 29% of Arcimoto's total product revenue in [the fourth quarter of 2019] and [the first quarter of 2020]. R-Key-Moto's 2020 Annual Report lists Michael Raymond and Matthew Strunk as Managers, who are respectively the Managing Director and Director of Accounting and Finance of FOD Capital. In addition, R-Key-Moto shares the same registered address as FOD Capital.

In [the third quarter of 2020], Arcimoto promoted a pilot program . . . with Wahlburgers Key West . . . Arcimoto once again failed to disclose that Wahlburgers Key West is actually operated as a franchisee location by Wahlkey, LLC (“Wahlkey”), which is owned by undisclosed related party shareholder FOD Capital. Wahlkey's 2021 Annual Report lists Michael Raymond as its manager and the same address as FOD Capital[.]

(Dkt 41-1, at ECF 269-71.) Bonitas advised its readership that they “c[ould] publicly access any piece of evidence cited in this report or that we relied on to write this report.” (Id. at ECF 275.) Accordingly, Bonitas corroborated the above-cited portion of its report with citations to Arcimoto's public filings and internet websites displaying pictures of information, seemingly stored with the Division of Corporations of the Florida Department of State. (Id. at ECF 269-71; see also Am. Compl., Dkt. 32, ¶¶ 49, 51 (repeating, in effect, information contained in the Bonitas Report, see Dkt. 41-1, at ...