By Mark S. Nelson, J.D.
Shareholders of CleanSpark, Inc. adequately pleaded violations of the federal securities laws against the company in a putative class action suit alleging the company hid details of its business model change from the alternative energy and software markets to Bitcoin mining through the acquisition of a data center company that once was an asset of another company that went bankrupt. Because the complaint adequately alleged a primary violation of federal securities laws, the court also declined to dismiss controlling person claims against CleanSpark’s CEO and chair (Bishins v. CleanSpark, Inc., January 5, 2023, Preska, L.).
Merger critiqued as unrealistic. The crux of the case turns on CleanSpark’s business pivot away from alternative energy to software and ultimately to Bitcoin mining. The complaint alleged that CleanSpark sought to acquirer ATL Data Centers, Inc. with the goal of expanding ATL’s power capacity while simultaneously cutting ATL’s energy costs.
However, a report published by a short seller implied that previous attempts to merge ATL with another company fell through because ATL would soon lose its subsidized power rate. The short seller would later reveal that it believed CleanSpark had lowballed ATL’s mining costs. Both times the short sheller published reports on CleanSpark, CleanSpark’s stock price incurred significant drops.
The complaint bolstered claims made in the short seller’s report by including claims by confidential witness who was a former general manager of ATL’s bankrupt predecessor. According to the former manager, ATL’s earlier merger attempt was dogged by ATL’s certification lapses and safety issues. The former manager also said she believed CleanSpark’s CEO, Zachary Bradford, was aware of the prior troubles at ATL because he sent her comments in response to her revelations. The former manager also said the time frame for closing CleanSpark’s acquisition of ATL was unrealistic.
The plaintiffs filed a putative class action securities fraud case against CleanSpark. The class period was alleged to cover December 10, 2020, to August 16, 2021.
Omissions. The court addressed three sets of alleged material omissions by CleanSpark. First, CleanSpark’s CEO allegedly misled investors or omitted information about when ATL would become a corporate entity while also omitting information about the bankruptcy of ATL’s predecessor. The court concluded that the statements or omissions were actionable and that the PSLRA’s safe harbor for forward-looking statements was inapt because the statements involved historical facts rather than forward-looking statements.
In a second set of alleged misstatements, CleanSpark’s chair attempted to compare CleanSpark to other big players in the market that had become bullish on Bitcoin in an effort to validate CleanSpark’s strategy. CleanSpark argued that the statements were mere corporate puffery, but the court concluded that the statements were “too specific and too grounded in the present” to be puffery. The company’s chair also had not mentioned the earlier busted merger deal for ATL. As result, the omissions could be material.
Lastly, CleanSpark argued that its estimates of when ATL’s expansion would be completed were nonactionable puffery or opinions. However, the court concluded that the estimates were actionable and that the PSLRA’s safe harbor for forward-looking statements was again inapt, this time because the statements lacked meaningful cautionary language.
Scienter. The court first addressed whether CleanSpark’s omission of ATL’s corporate history met the scienter standard. Here, the court concluded that the complaint alleged a strong inference of scienter largely because CleanSpark executives would have known that the assets that would become ATL were still part of ATL’s predecessor’s bankruptcy proceedings.
Second, the court reasoned that scienter had been pleaded regarding the allegedly misleading estimated completion date for ATL’s expansion. CleanSpark argued that its executives’ statements were either puffery, opinions, or that a better interpretation of the statements existed, namely that the company’s CEO believed the estimate and that the former manager’s timeline was unpersuasive. The plaintiffs countered that the better inference was that CleanSpark’s CEO refused to accept that the estimate was wrong. According to the court, the complaint alleged that CleanSpark’s CEO told the former manager that her timeline was insufficient because he had already publicly offered a different timeline. As a result, the court concluded that the plaintiff’s inference was cogent and at least as compelling as CleanSpark’s inference.
Reliance. CleanSpark sought to counter any allegations in the complaint regarding the Basic presumption of reliance by arguing that the plaintiffs could not have relied on statements made after a date certain. However, the court said this argument was limited to statements made after that date but would not cover statements made before the date cited by CleanSpark and, thus, the presumption could apply to earlier statements.
CleanSpark also sought to counter the plaintiffs’ invocation of the Affiliated Ute presumption by arguing that the case was about affirmative misstatements. Here, the court reasoned that the complaint primarily alleged omissions, the subject matter of the presumption and, thus, the presumption applied.
Loss causation. The complaint largely pleaded loss causation via corrective disclosure predicated on the short seller’s reports. CleanSpark argued that the first short seller report was based on public information and did not reveal the omitted facts relied on by the plaintiffs. The plaintiffs countered that precedents show that the short seller report was still relevant and that the subject matter had been hidden in a distant company’s bankruptcy proceedings. According to the court, the plaintiffs’ understanding of the applicable precedents was correct and that loss causation can be based on third party analyses of public information. The court also expressed reservations about applying CleanSpark’s precedent at the motion to dismiss stage of the case.
The court also addressed the plaintiffs’ assertion that, with respect to CleanSpark’s estimates, the risk had materialized. The court briefly analyzed the complaint and concluded that it had sufficiently pleaded loss causation for the estimates arising from materialization of the risk.
The case is No. 1:21-cv-00511.