Jian Zhou v. Faraday Future Intelligent Electric Inc.

Case 2:21-cv-09914-CAS-JC Document 64 Filed 10/20/22 Pagelof27 Page ID #:1092

UNITED STATES DISTRICT COURT

CENTRAL DISTRICT OF CALIFORNIA

CIVIL MINUTES —- GENERAL ‘O’

Case No. 2:21-cv-09914-CAS (JCx) Date October 20, 2022

Title JIAN ZHOU V. FARADAY FUTURE INTELLIGENT ELECTRIC INC.,

ET AL.

Present: The Honorable CHRISTINA A. SNYDER

Catherine Jeang Not Present N/A

Deputy Clerk Court Reporter / Recorder Tape No.

Attorneys Present for Plaintiffs: Attorneys Present for Defendants:

Not Present Not Present

Proceedings: (IN CHAMBERS) - MOTION TO DISMISS PLAINTIFFS’

AMENDED CLASS ACTION COMPLAINT (Dkt. 59, filed on

JULY 5, 2022)

I. INTRODUCTION

On December 23, 2021, plaintiff Jian Zhou filed a class action complaint against

defendants Faraday Future Intelligent Electric, Inc. (“Faraday”), Carsten Breitfeld, Zvi

Glasman, Walter McBride, Jordan Vogel, Aaron Feldman, and Yueting Jia. Dkt. 1.

On May 6, 2022, plaintiffs filed the operative amended complaint (“Amended

Complaint’). Dkt. 42 (“AC”). Plaintiffs comprise a class of persons that purchased or

otherwise acquired Faraday securities between January 28, 2021, and April 14, 2022, (the

“class period’), and/or beneficially owned and/or held Class A common stock in Property

Solutions Acquisition Corp. (“PSAC”) as of June 21, 2021, and were eligible to vote at

PSAC’s July 20, 2021 meeting. AC § 1. Defendants are Faraday Future Intelligent

Electric, Inc.; Carsten Breitfeld, the Chief Executive Officer of the Faraday legacy

company (“Legacy Faraday”) and CEO of Faraday, Zvi Glasman, the Chief Financial

Officer of Legacy Faraday and of Faraday, Walter McBride, the Chief Financial Officer

of Faraday from November 1, 2021, through the end of the class period, and Yueting Jia,

the founder of Legacy Faraday and Chief Product and User Ecosystem Officer of Legacy

Faraday and Faraday, (collectively, the “Faraday individual defendants”); Jordan Vogel,

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UNITED STATES DISTRICT COURT

CENTRAL DISTRICT OF CALIFORNIA

CIVIL MINUTES — GENERAL ‘oO’

Case No. 2:21-cv-09914-CAS (JCx) Date October 20, 2022

Title JIAN ZHOU V. FARADAY FUTURE INTELLIGENT ELECTRIC INC.,

ET AL.

the Co-Chief Executive Officer of PSAC, and Aaron Feldman, the Co-Chief Executive

Officer and Treasurer of PSAC, (collectively, the “PSAC defendants”). AC § 32-40.!

The Amended Complaint alleges six claims for relief: (1) violations of Section

10(b) of the Securities Exchange Act of 1934 (the “Exchange Act’), 15 U.S.C. § 78)(b),

and Rule 10b-5 thereunder, 17 C.F.R. § 240.10b-5, against Faraday, the Faraday

individual defendants, and the PSAC defendants; (2) violations of Section 20(a) of the

Exchange Act, 15 U.S.C. § 78t(a), in connection with plaintiffs’ Section 10(b) claims,

against the Faraday individual defendants and the PSAC defendants; (3) violations of

Section 14(a) of the Exchange Act, 15 U.S.C. § 78n(a), and Rule 14a-9 thereunder, 17

C.F.R. §240.14a-9, against Faraday, the Faraday individual defendants, and the PSAC

defendants; (4) violations of Section 20(a) of the Exchange Act, 15 U.S.C. § 78t(a), in

connection with plaintiffs’ Section 14(a) claims, against the Faraday individual

defendants and the PSAC defendants; (5) violations of Section 11 of the Securities Act of

1933 (the “Securities Act’), 15 U.S.C. § 77k, against all defendants; and (6) violations of

Section 15 of the Securities Act, 15 U.S.C. § 770, against all individual defendants.* See

generally AC.

On July 5, 2022, defendants filed this motion to dismiss the Amended Complaint

pursuant to Federal Rule of Civil Procedure 12(b)(6) and the Private Securities Litigation

Reform Act, (“PSLRA”), Pub. L. 104-67.7 Dkt. 59 (“MTD”). On September 6, 2022,

plaintiffs filed their opposition to defendants’ motion to dismiss. Dkt. 60 (“Opp.”). On

' The Amended Complaint additionally names as defendants David Amsterdam and Avi

Savar, members of the PSAC board of directors, with respect to plaintiffs’ withdrawn

claims under the Securities Act of 1933. AC § 247, 248.

? In their opposition, Plaintiffs withdraw their Section 11 and Section 15 claims under

the Securities Act (Counts 5 and 6). See Opp. at 25 n.18. Accordingly, the Court

DENIES AS MOOT defendants’ motion to dismiss as to Counts 5 and 6.

> In connection with their motion to dismiss, defendants filed an unopposed request for

judicial notice, requesting that the Court take notice of ten documents that are referenced

in the Amended Complaint and/or publicly available. See Dkt. 59-2. The Court finds it

appropriate to take judicial notice of the documents pursuant to Federal Rule of Evidence

201 and the incorporation by reference doctrine.

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UNITED STATES DISTRICT COURT

CENTRAL DISTRICT OF CALIFORNIA

CIVIL MINUTES —- GENERAL ‘O’

Case No. 2:21-cv-09914-CAS (JCx) Date October 20, 2022

Title JIAN ZHOU V. FARADAY FUTURE INTELLIGENT ELECTRIC INC.,

ET AL.

October 6, 2022, defendants filed their reply in support of their motion to dismiss. Dkt.

61 (“Reply”). Defendants’ motion to dismiss is now before the Court.

On October 17, 2022, the Court held a hearing on defendants’ motion to dismiss.

Having carefully considered the parties’ arguments and submissions, the Court finds and

concludes as follows.

Il. BACKGROUND

A. The Faraday Merger and the Challenged Statements

Faraday is a designer and manufacturer of electric vehicles, incorporated in

Delaware and headquartered in Gardena, California. AC § 32,54. For the relevant

period, the company’s primary product focus was the “FF 91” crossover vehicle, plans

for which Faraday revealed in 2017. AC 9.56. On July 21, 2021, Faraday went public

following a merger of Legacy Faraday with PSAC, a special purpose acquisition

company, which had gone public a year earlier. AC § 46.

The merger plans were first announced publicly on January 28, 2021, when PSAC

and Legacy Faraday issued a press release announcing that they planned to merge,

subject to stockholder approvals and other closing conditions. AC § 65, 66. Upon

closing, Legacy Faraday would acquire PSAC and the combined company, Faraday,

would assume PSAC’s listing on the NASDAQ. AC § 66. On April 5, 2021, PSAC filed

an S-4 registration statement with its preliminary proxy statement, registering common

stock to be paid to Legacy Faraday stockholders as consideration in the merger. AC § 76,

134. On June 24, 2021, PSAC filed a separate final proxy statement and prospectus. AC

| 197. Under the terms of the merger agreement, the PSAC stockholders were entitled to

request redemption of their PSAC shares, prior to the merger vote, for $10 per share, or,

if they did not redeem, to have their common stock converted to Faraday securities. Dkt.

58.2 Exh. 6.

The statements at issue concern two representations. The first representation (the

“reservations statement’) stated that Faraday “ha[d] received over 14,000 reservations”

for the FF 91 vehicle. AC §/ 72. This statement appeared in the January 28, 2021 press

release announcing the planned merger of Legacy Faraday and PSAC (the “January 28

press release”). AC § 74. On March 12, 2021, Legacy Faraday published the text of a

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UNITED STATES DISTRICT COURT

CENTRAL DISTRICT OF CALIFORNIA

CIVIL MINUTES —- GENERAL ‘O’

Case No. 2:21-cv-09914-CAS (JCx) Date October 20, 2022

Title JIAN ZHOU V. FARADAY FUTURE INTELLIGENT ELECTRIC INC.,

ET AL.

Q&A interview (the “March Q&A”), which stated that the company “ha[d] existing

demand for the FF 91 by way of more than 14,000 reservations.” AC § 75.

The second representation (the “expected schedule statement’) stated, in various

ways that FF 91 was expected to launch within twelve months of the merger. AC § 74.

This statement appeared in the January 28 press release. The S-4 filed on April 5, 2021,

additionally stated that “FF intends to commercially launch FF 91 series within twelve

months after closing of the Business Combination” and that “it is positioned to launch a

production try-out in 9 months and commercial production of FF 91 series within 12

months after the Business Combination.” AC 476. A similar statement appeared in the

June 24, 2021 version of the S-4. 4 81.

Both S-4s additionally included a statement that “[p|rior to market open January

28, 2021, PSAC and [Legacy Faraday] jointly issued a press release announcing the

signing of the Merger Agreement, and PSAC filed a Current Report on Form 8-K

announcing the execution of the Merger Agreement and discussing the key terms of the

Merger Agreement in detail.” AC 77, 82.

B. The J Capital Report and Special Committee Investigation

On October 7, 2021, J Capital Research published a report (the “J Capital Report”)

alleging that Faraday was unlikely to ever sell a car and that Faraday’s claimed 14,000

deposits were fabricated because 78% of the reservations were made by a single,

undisclosed affiliate of Faraday. AC 4 105-06. The J Capital Report further alleged that,

while Faraday had represented that it would start production in September 2021, former

engineering executives did not believe the car was ready for production. AC § 107.

Additionally, the J Capital Report stated that Jia had faced numerous financial and legal

issues in China. AC ¥ 109.

On November 15, 2021, Faraday announced that its board of directors had formed

a special committee of independent directors (the “Special Committee”) to investigate the

claims in the J Capital Report. AC § 111. On February 1, 2022, Faraday announced that

the Special Committee had completed its investigation. AC § 115. The Special

Committee found that the statements that Legacy Faraday had received more than 14,000

reservations for the FF 91 was “potentially misleading because only several hundred of

those reservations were paid, while the others (totaling 14,000) were unpaid indications

of interest.” AC § 115. The Special Committee investigation additionally identified

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UNITED STATES DISTRICT COURT

CENTRAL DISTRICT OF CALIFORNIA

CIVIL MINUTES —- GENERAL ‘O’

Case No. 2:21-cv-09914-CAS (JCx) Date October 20, 2022

Title JIAN ZHOU V. FARADAY FUTURE INTELLIGENT ELECTRIC INC.,

ET AL.

certain weaknesses in corporate controls and recommended remedial actions to enhance

oversight. AC § 115-16. The day after the Special Committee publicly released its

findings, Faraday’s share price fell over 7%. AC § 118.

C. The Confidential Witnesses

Four confidential witnesses who were formerly employed at Legacy Faraday

provided information on the FF 91 reservations and the FF 91 production schedule. The

first witness, FE-1, served as a Manufacturing Engineer/CNC Programmer from February

2018 to April or May 2020 at Faraday’s headquarters. AC 87. She stated that there

were various issues with FF 91 design and manufacturing when she worked at Legacy

Faraday, including that “parts didn’t fit.” AC § 89. Additionally, she stated that, by the

time she left Legacy Faraday, much of the technology used by the company was outdated

and the company was “still doing their R&D” and was having issues with suppliers who

had not received payment. AC 4 90, 91.

The second witness, FE-2, served as Senior Global Director — Advanced

Manufacturing Engineering and Contract Manufacturing from February 2015 to

November 2018 and Vice President of Manufacturing and Supply Chain from November

2018 to May 2020, both at Faraday’s headquarters. AC 492. FE-2 stated that, when she

left, the company still had to go through validation and testing steps before production of

FF 91 would be possible. AC § 94. In the spring of 2020, Faraday had paused their

building of the vehicles due to lack of funding. AC § 93. Like FE-1, FE-2 stated that

Faraday was having supply issues and that “[w]hen the funding came back, ‘it would be

longer than 12 months’ to be production-ready with the added supply chain challenges

created by the COVID-19 pandemic.” AC 4 94.

The third witness, FE-3, served as Non-Production/Production Materials and

Logistics Lead from June 2015 to September 2018 and as an IT Asset Manager from

September 2018 to May 2020. AC § 98. She helped set up IT for weekly and biweekly

all-hands meetings where reservation numbers were discussed. AC 4 100. Breitfeld and

Jia, among other officers, attended these meetings. AC 4 100. The fourth witness, FE-4,

was employed as Vehicle Manager and Director—Global Accessories, Parts, Service and

Delivery from October 2016 to June 2019. AC § 101. FE-4 also stated that defendants

had access to weekly and biweekly reports showing reservation figures throughout the

class period and that the individual defendants discussed these reports at meetings with

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UNITED STATES DISTRICT COURT

CENTRAL DISTRICT OF CALIFORNIA

CIVIL MINUTES —- GENERAL ‘O’

Case No. 2:21-cv-09914-CAS (JCx) Date October 20, 2022

Title JIAN ZHOU V. FARADAY FUTURE INTELLIGENT ELECTRIC INC.,

ET AL.

other officers. AC § 101. Specifically, FE-4 stated that Jia provided updates on

reservation numbers to employees during the all-hands meetings. AC § 103.

Il. LEGAL STANDARD

A Rule 12(b)(6) motion tests the legal sufficiency of the claims asserted in a

complaint. “While a complaint attacked by a Rule 12(b)(6) motion to dismiss does not

need detailed factual allegations, a plaintiff's obligation to provide the ‘grounds’ of his

“entitlement to relief requires more than labels and conclusions, and a formulaic

recitation of the elements of a cause of action will not do.” Bell Atl. Corp. v. Twombly,

127 S. Ct. 1955, 1964-65 (2007). “[F]actual allegations must be enough to raise a right to

relief above the speculative level.” Id. at 1965.

Federal Rule of Civil Procedure 9(b) governs fraud claims, including securities

fraud actions. Oregon Pub. Employees Ret. Fund v. Apollo Grp. Inc., 774 F.3d 598, 604

(9th Cir. 2014). A federal securities fraud suit is also subject to the demanding pleading

requirements of the Private Securities Litigation Reform Act (“PSLRA”). Enacted by

Congress in 1995 to provide “protections to discourage frivolous [securities] litigation,”

H.R. Conf. Rep. No. 104-369, 104th Cong., Ist Sess. at 32 (Nov. 28, 1995), the PSLRA

strengthened the already-heightened pleading requirements of Federal Rule of Civil

Procedure 9(b). Under the PSLRA, private actions based on allegations of material

misstatements or omissions must “specify each statement alleged to have been

misleading, the reason or reasons why the statement is misleading, and, if an allegation

regarding the statement or omission is made on information and belief, the complaint

shall state with particularity all facts on which that belief is formed.” 15 U.S.C. § 78u-

4(b)(1). In addition, the PSLRA imposes strict requirements for pleading scienter in

actions brought pursuant to Section 10(b) and Rule 10b-5, requiring that the complaint

“state with particularity facts giving rise to a strong inference that the defendant acted

with the required state of mind.” 15 U.S.C. § 78u-4(b)(2).

The Ninth Circuit has held that “a private securities plaintiff proceeding under the

[PSLRA] must plead, in great detail, facts that constitute strong circumstantial evidence

of deliberately reckless or conscious misconduct.” In re Silicon Graphics, Inc., 183 F.3d

970, 974 (9th Cir. 1999). In determining whether a plaintiff has sufficiently pleaded

scienter, a court must consider “whether the totality of plaintiffs' allegations, even though

individually lacking, are sufficient to create a strong inference that defendants acted with

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UNITED STATES DISTRICT COURT

CENTRAL DISTRICT OF CALIFORNIA

CIVIL MINUTES —- GENERAL ‘O’

Case No. 2:21-cv-09914-CAS (JCx) Date October 20, 2022

Title JIAN ZHOU V. FARADAY FUTURE INTELLIGENT ELECTRIC INC.,

ET AL.

deliberate or conscious recklessness.” Nursing Home Pension Fund, Local 144 v. Oracle

Corp., 380 F.3d 1226, 1230 (9th Cir. 2004) (quoting No. 84 Employer-Teamster Joint

Council Pension Trust Fund v. Am. W. Holding Corp., 320 F.3d 920, 938 (9th Cir.

2003)). Moreover, “[i]n determining whether a strong inference of scienter exists, [a

court] must consider all reasonable inferences, whether or not favorable to the plaintiff.”

Id.

Certain statements are not actionable under the PSLRA because they fall within its

safe-harbor provision. Specifically, the Safe Harbor Provision, 15 U.S.C. § 78u-S(c),

provides that defendants shall “not be liable with respect to any forward-looking

statement, whether written or oral, if and to the extent that” the statement is identified as

forward-looking and accompanied by meaningful cautionary statements. Forward

looking statements include statements of “the plans and objectives of management for

future operations, including plans or objectives relating to the products or services of the

issuer.” 15 U.S.C. § 78u-5(i)(1)(B).

IV. DISCUSSION

A. Section 10(b) Fraud Claim

Plaintiffs’ Section 10(b) claim against Faraday, the Faraday individual defendants,

and the PSAC defendants alleges that defendants caused plaintiffs to purchase Faraday’s

securities at artificially inflated prices by disseminating materially false and/or

misleading information with respect to the reservations and expected production

schedule. AC § 180-91.

The basic elements of a Rule 10b-5 claim are (1) a material misrepresentation or

omission; (2) scienter; (3) a connection with the purchase or sale of a security; (4)

reliance or “transaction causation”; (5) economic loss; and (6) loss causation or a causal

connection between the material misrepresentation and the loss. Dura Pharms., Inc. v.

Broudo, 544 U.S. 336, 341-42 (2005).

Defendants’ motion to dismiss focuses on elements (1) and (2) above, asserting

that plaintiffs have not satisfied their pleading obligations under the PSLRA. MTD at 9-

10.

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UNITED STATES DISTRICT COURT

CENTRAL DISTRICT OF CALIFORNIA

CIVIL MINUTES —- GENERAL ‘O’

Case No. 2:21-cv-09914-CAS (JCx) Date October 20, 2022

Title JIAN ZHOU V. FARADAY FUTURE INTELLIGENT ELECTRIC INC.,

ET AL.

1. Alleged Misrepresentations Regarding the 14,000 Reservations

Defendants contend that plaintiffs have failed to plead any facts controverting the

literal veracity of Legacy Faraday’s statements regarding the 14,000 reservations. Id.

According to defendants, the Special Committee’s conclusion that the statement was

“potentially misleading” because only a few hundred reservations had been paid is not an

admission of falsity, and plaintiffs did not allege that defendants ever represented that the

14,000 reservations were paid. Id. at 10-11. Defendants further argue that the January 28

press release was accompanied by an investor presentation expressly informing investors

that “the reservations reflected nothing more than ‘user interest,’” among other

qualifications suggesting that not all of the reservations had been paid. Id. at 11.

Additionally, defendants argue that plaintiffs “misplace reliance on [J Capital’s]

speculation that 78% of the 14,000 reservations were by one unidentified ‘affiliate’ of

Faraday.” Id. (quoting AC § 129). Defendants state that, while Legacy Faraday’s

financial disclosures in December 2020 reported that a U.S. corporation deposited

$11,635,000 as an advance to purchase FF 91 vehicles, “[t|his disclosure gives no basis

for [J Capital’s] speculative inference . . . that the ‘advance to purchase’ deposit was

counted among the 14,000 reservations.” Id. at 12. Moreover, defendants contend that

this inference is inconsistent with the finding that only a few hundred of the reservations

(as opposed to 78% of them) were paid. Id.

In their opposition, plaintiffs point out that defendants conceded that Faraday had

received only several hundred paid reservations and that the internal investigation

concluded that the statement was “potentially misleading.” Opp. at 5 (citing AC 72.

280). Plaintiffs further contend that this statement was indisputably material to investors

because the promise of 14,000 paid reservations “vastly overstates the approximately $54

million in revenue the Company would have achieved from the few hundred paid

reservations.” Id. Plaintiffs contend that defendants’ statements accompanying the

January 28 press release do not remedy the misrepresentations. Id. at 6. Specifically,

plaintiffs argue that the statement that Faraday had not yet sold any production vehicle to

customers does not indicate that the reservations were not paid. Id. And the projected

sale of 2,400 vehicles in 2022, rather than suggesting that the 14,000 reservations were

unpaid, simply suggests that only 2,400 vehicles would become available. Id.

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UNITED STATES DISTRICT COURT

CENTRAL DISTRICT OF CALIFORNIA

CIVIL MINUTES —- GENERAL ‘O’

Case No. 2:21-cv-09914-CAS (JCx) Date October 20, 2022

Title JIAN ZHOU V. FARADAY FUTURE INTELLIGENT ELECTRIC INC.,

ET AL.

In their reply, defendants argue that plaintiffs fail to point to any industry standard

defining reservations as paid deposits and point out that, in common parlance,

“reservation” is often used to refer to “an wnpaid request for priority.” Reply at 5.

Defendants additionally point to the version of the reservation website page available

prior to the January 28 press release, which invited visitors to make a standard

reservation with no deposit. Id. at 6-7.

At oral argument, counsel for the parties disagreed as to the most relevant version

of the reservations website. Counsel for plaintiffs argued that the version from the period

immediately following the January 28 press release, which only allowed website visitors

to make paid reservations, suggested that the 14,000 reservations were paid. Counsel for

defendants argued that versions of the website predating the January 28 press release,

which allowed website visitors to make paid or unpaid reservations, were more relevant.

Therefore, according to defendants, the reservations website does not support plaintiffs’

argument.

The Court agrees with plaintiffs that the Amended Complaint adequately alleges

that the reservations statement is a material misrepresentation, pursuant to the PSLRA

pleading standards.

To prevail on their claim, plaintiffs “must show that |] defendant|s] made a

statement that was misleading as to a material fact” such that there is a “substantial

likelihood that the disclosure of the omitted fact would have been viewed by the

reasonable investor as having significantly altered the total mix of information made

available.” Matrixx Initiatives, Inc. v. Siracusano, 563 U.S. 27, 38 (2011) (quoting Basic

Inc. v. Levinson, 485 U.S. 224, 238 (1988)) (internal quotation marks omitted).

Plaintiffs’ allegations need not attack the literal veracity of the statement that defendants

received 14,000 reservations. See Miller v. Thane Intern., Inc., 519 F.3d 879, 886 (9th

Cir. 2008) (recognizing that “statements literally true on their face may nonetheless be

misleading when considered in context”): see also McMahan & Co. v. Wherehouse

Entertainment, Inc., 900 F.2d 576, 579 (2d Cir. 1990) (“[D]isclosure required by the

securities laws is measured not by literal truth, but by the ability of the material to

accurately inform rather than mislead prospective buyers.”). Rather, they must

demonstrate that a particular statement, when taken in context, “conveyed a false or

misleading impression.” In re Convergent Technologies Sec. Litig., 948 F.2d 507, 512

(9th Cir. 1991).

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UNITED STATES DISTRICT COURT

CENTRAL DISTRICT OF CALIFORNIA

CIVIL MINUTES — GENERAL ‘oO’

Case No. 2:21-cv-09914-CAS (JCx) Date October 20, 2022

Title JIAN ZHOU V. FARADAY FUTURE INTELLIGENT ELECTRIC INC.,

ET AL.

Here, plaintiffs “specify each statement alleged to have been misleading,” 15

U.S.C. § 78u-4(b)(1), by identifying the specific statements made by defendants that

Legacy Faraday had received 14,000 reservations, see AC {| 74, 75. And, contrary to

defendants’ arguments, plaintiffs specify, with particularity, “the reason or reasons why

the statement is misleading.” 15 U.S.C. § 78u-4(b)(1). Specifically, plaintiffs allege that

(1) the reservations statement was misleading because the user interest and potential

revenue reflected by 14,000 paid reservations differs dramatically from the user interest

and potential revenue reflected by several hundred paid reservations, AC § 72; (2) the

Special Committee that investigated Faraday’s statements concluded that the reservations

statement was “potentially misleading” because only a few hundred reservations were

paid, AC § 85; (3) according to the J Capital Report, an undisclosed affiliate of Legacy

Faraday accounted for 78% of the deposits, AC §] 106; and (4) Faraday’s stock price

dropped by 7% once investors learned that Faraday had not received 14,000 paid

reservations, AC 4 115-18.

Taken as true, these allegations are sufficient to demonstrate that the reservations

statement was misleading because it gave investors a false impression that Faraday had

received significantly more than several hundred paid reservations from independent

potential customers. Defendants’ statements accompanying the January 28 press release

do not change this result. Specifically, the statement that the reservation numbers

reflected user interest does not indicate that user interest was being measured by unpaid,

rather than paid, reservations. And the statements that Faraday had not yet sold any

vehicles and that it projected sale of 2,400 vehicles in 2022 do not directly convey that

the reservations were not paid. Furthermore, the fact that website visitors may have, at

certain times, had the opportunity to make paid as well as unpaid reservations does not

clearly indicate that investors reading the press release would have known that only

several hundred of the reservations were paid. This is particularly true in light of the

different versions of the reservations website available around the time of the January 28

press release. While these statements and the reservations website may come into play at

later stages of the litigation, plaintiffs have plausibly alleged that the significant

difference between 14,000 paid reservations and several hundred paid reservations would

have “been viewed by the reasonable investor as having significantly altered the total mix

of information.” Matrixx Initiatives, 563 U.S. at 38.

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UNITED STATES DISTRICT COURT

CENTRAL DISTRICT OF CALIFORNIA

CIVIL MINUTES —- GENERAL ‘O’

Case No. 2:21-cv-09914-CAS (JCx) Date October 20, 2022

Title JIAN ZHOU V. FARADAY FUTURE INTELLIGENT ELECTRIC INC.,

ET AL.

2. Alleged Misrepresentations Regarding the Expected Schedule

Defendants assert that the expected schedule statement 1s not actionable because it

is a forward-looking statement protected by the PSLRA’s Safe Harbor, which precludes

liability if (1) the statement was accompanied by cautionary warnings or (2) if defendants

lacked knowledge of the statement’s falsity at the time it was made. Id. On the first

Safe Harbor prong, defendants argue that the expected schedule statements were

“quintessentially forward-looking” and “accompanied by meaningful cautionary

statements,” attaching a chart of such statements. Id. at 15; see also Burdick Decl., Chart

A. All of the documents on which plaintiffs’ claims are based, defendants, contend,

reference the risks and uncertainties involved and call out relevant risk factors that could

cause Faraday not to meet the planned production schedule. Id. at 15.

The Court concludes that, as alleged, the expected schedule statements are

forward-looking statements accompanied by meaningful cautionary warnings and,

therefore, are protected by the Safe Harbor. Plaintiff's contention that the expected

schedule statements were not forward-looking because they were “statement|s] about the

current state of |] progress” and thus “a statement of present or historical facts,” Opp. at

9, is not persuasive. Specifically, plaintiffs point to statements that Faraday was “less

than a year away from production and meaningful revenue” and “is positioned to launch a

production try-out in 9 months.” Id. According to plaintiffs, these are statements of

present fact that describe the current progress toward commercial production. Id.

In Wochos v. Tesla, Inc., 985 F.3d 1180 (9th Cir. 2021), the Ninth Circuit Court of

Appeals rejected a similar argument, making clear that “it is not enough to plead that a

challenged statement rests on subsidiary premises about how various future events will

play out over the timeframe defined by the forward-looking statement.” Id. at 1192. In

that case, plaintiffs argued that defendant Tesla’s statements that it was “on track” to

produce 5,000 vehicles per week within a certain timeframe was not forward-looking

because it rested on an assumption of present fact, that is, that Tesla was currently

positioned to produce the vehicles within the expected timeframe. Id. The Ninth Circuit

disagreed, concluding that this statement was forward-looking for PSLRA purposes

because future projections “necessarily reflect|| an implicit assertion that the goal is

achievable based on current circumstances,” and “an unadorned statement that a company

is ‘on track’ to achieve an announced objective, or a simple statement that a company

knows of no issues that would make a goal impossible to achieve, are merely alternative

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UNITED STATES DISTRICT COURT

CENTRAL DISTRICT OF CALIFORNIA

CIVIL MINUTES — GENERAL ‘oO’

Case No. 2:21-cv-09914-CAS (JCx) Date October 20, 2022

Title JIAN ZHOU V. FARADAY FUTURE INTELLIGENT ELECTRIC INC.,

ET AL.

ways of declaring or reaffirming the objective itself.” Id. See also 15 U.S.C. § 78u-

5(1)(1)(D) (defining forward-looking statement to include “any statement of the

assumptions underlying or relating to any statement” otherwise considered forward-

looking).

Defendants’ challenged representations state that “FF 91 is targeted to launch

within twelve months,” Faraday “intends to commercially launch FF 91 series within

twelve months,” and Faraday “is positioned to launch a production try-out in 9 months

and commercial production of FF 91 series within 12 months.” AC 9] 74-81. These

statements express “plans and objectives of management for future operations” and

therefore constitute forward-looking statements under the Safe Harbor. See § 78u-

5(i)(1)(B). Like the “on track” assertions addressed by the Ninth Circuit in Wochos,

these statements may contain assumptions as to Faraday’s then-present circumstances,

but such “subsidiary premises about how various future events will play out” do not

exempt statements of plans and objectives from the Safe Harbor. 985 F.3d at 1192.

Because defendants’ statements are forward-looking, the Safe Harbor applies if

they were accompanied by meaningful cautionary statements.* Plaintiffs argue that

defendants’ cautionary statements were inadequate because the references to potential

significant delays were too general. Opp. at 9. The Court disagrees. “Adequate

cautionary language under the PSLRA must identify ‘important factors that could cause

4 Plaintiffs appear to contend that they can avoid the Safe Harbor by alleging that

defendants acted with actual knowledge, even if adequate cautionary warnings were

given. The Safe Harbor precludes liability where the forward-looking statement is

“Wdentified as a forward-looking statement, and is accompanied by meaningful cautionary

statements” or where “the plaintiff fails to prove that the forward-looking statement . . .

was made with actual knowledge by that person that the statement was false or

misleading.” 15 U.S.C. § 78u-5(c)(1). The Ninth Circuit has made clear that the

disjunctive “or” in the Safe Harbor confirms that “a defendant will not be liable for a

false or misleading statement if it 1s forward-looking and either 1s accompanied by

cautionary language or is made without actual knowledge that it is false or misleading.”

In re Quality Systems, Inc. Sec. Litig., 865 F.3d 1130, 1141 (9th Cir. 2017). Therefore, if

the forward-looking statements were accompanied by meaningful cautionary warnings,

they fall under the Safe Harbor, regardless of the defendants’ state of mind.

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UNITED STATES DISTRICT COURT

CENTRAL DISTRICT OF CALIFORNIA

CIVIL MINUTES — GENERAL ‘oO’

Case No. 2:21-cv-09914-CAS (JCx) Date October 20, 2022

Title JIAN ZHOU V. FARADAY FUTURE INTELLIGENT ELECTRIC INC.,

ET AL.

actual results to differ materially from those in the forward-looking statement.’” In re

Quality Systems, Inc. Sec. Litig., 865 F.3d 1130, 1148 (9th Cir. 2017) (quoting 15 U.S.C.

§ 78u-5(c)(1)(A)()). “[B]oilerplate language warning that investments are risky or

general language not pointing to specific risks is insufficient to constitute a meaningful

cautionary warning.” In re Copper Mountain Sec. Litig., 311 F. Supp. 2d, 857 882 (N.D.

Cal. 2004). Rather, “[t]he cautionary warning ought to be precise and relate directly to

the forward-looking statements at issue.” Id.

Here, defendants’ warnings identified specific factors that could cause delay,

including “lack of funding, supply shortages, design defects, talent gaps, and/or force

majeure.” Reply at 15. Defendants’ references to these risks are sufficiently precise to

convey meaningful warnings. See, e.g., Employers Teamsters Local Nos. 175 and 5050

Pension Trust Fund v. Clorox Co., 353 F.3d 1125, 1132-33 (9th Cir. 2004) (approving of

cautionary warning that “actual results will depend on a number of competitive and

economic factors some of which may be outside the control of the Company,” referring

investors to SEC filings for a list of risks). Furthermore, defendants’ warnings relate

specifically to the forward-looking statements because they identify risks that could delay

production such that the twelve-month timeline would be infeasible. Accordingly, the

Safe Harbor applies, and plaintiffs have failed to state an actionable claim under Section

10(b) with respect to the expected schedule statement.

At oral argument, counsel for plaintiffs argued that defendants’ cautionary

statements were not specific enough because they did not warn of the exact risks that

plaintiffs allege caused the delay, specifically, poor relationships with unpaid suppliers

(as opposed to supply shortages) and research and development issues in connection with

the FF 91 battery. Contrary to this argument, the legislative history of the PSLRA

indicates that application of the Safe Harbor does not require that defendants identify all

of the risks that ultimately caused the delay. See H.R. Rep. No. 104-369 at 43-44

(Conference Report 1995) (“Failure to include the particular factor that ultimately causes

the forward-looking statement not to come true will not mean that the statement is not

protected by the safe harbor.”). See also In re Nuvelo, Inc. Secs. Litig., 2008 WL

5114325, at *16 (N.D. Cal. Dec. 4, 2008) (explaining that the PSLRA does not “require

specification of the particular factor that ultimately renders the forward-looking statement

incorrect.”’).

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UNITED STATES DISTRICT COURT

CENTRAL DISTRICT OF CALIFORNIA

CIVIL MINUTES — GENERAL ‘oO’

Case No. 2:21-cv-09914-CAS (JCx) Date October 20, 2022

Title JIAN ZHOU V. FARADAY FUTURE INTELLIGENT ELECTRIC INC.,

ET AL.

Here, the cautionary statements identified specific, important risks that related

directly to potential delay of the production schedule, including supply shortages, lack of

funding, and design defects. While these warnings may not have referenced all of the

exact factors that ultimately delayed production, they “warned of risks of a significance

similar to that actually realized,” Harris v. Ivax Corp., 182 F.3d 799, 807 (11th Cir.

1999), and any failure to identify “the particular factor that ultimately render[ed] the

forward-looking statement incorrect,” In re Nuvelo, 2008 WL 5114325, at *16, is

insufficient to avoid the Safe Harbor.

3. Inference of Scienter

Defendants argue that plaintiffs have failed to show that any defendant who

purportedly made either of the statements at issue “possessed conflicting contrary

information at the time and recklessly or intentionally disregarded it.” MTD at 19.

Plaintiffs contend that an inference of scienter is sufficiently supported by

numerous allegations in the Amended Complaint. First, plaintiffs point to the statements

of the confidential witnesses regarding defendants’ knowledge. For the reservations

statement, plaintiffs argue that they adequately plead scienter because defendants had

reasonable grounds to believe that Faraday’s reservation figures were false, in light of the

statements of FE-3 and FE-4 that Jia and Breitfeld attended weekly and biweekly

meetings in which reservation numbers were discussed and that defendants had access to

reports showing reservation figures, which were discussed at meetings with officers of

the company, including Jia. Opp. at 12-13. The fact that FE-3 and FE-4 left the

company before the class period, plaintiffs argue, does not render them uncredible, and

there is no reason to believe that production and discussion of these reports would have

ceased during the class period. Id. at 14.

For the expected schedule statement, plaintiffs contend that defendants knew or

were reckless in not knowing that the expected schedule was infeasible, given the

statements of FE-1 and FE-2 indicating that it would take longer than twelve months to

become production ready. Opp. at 13. Plaintiffs argue that FE-2 served as Vice

President of Manufacturing and Supply Chain until May 2020 and “explained that at the

time she left, Faraday ‘still had to go through a number of validation and testing steps

before the car could be produced and go to market,’ but that the Company ‘had paused

because of [lack of] funding.’” Opp. at 8 (quoting AC § 94). Even if more funding was

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UNITED STATES DISTRICT COURT

CENTRAL DISTRICT OF CALIFORNIA

CIVIL MINUTES — GENERAL ‘oO’

Case No. 2:21-cv-09914-CAS (JCx) Date October 20, 2022

Title JIAN ZHOU V. FARADAY FUTURE INTELLIGENT ELECTRIC INC.,

ET AL.

acquired, FE-2 indicated that the timeline would not be met due to supply shortages

resulting from Faraday’s previous failure to pay suppliers and COVID-19-related supply

chain issues. Id. FE-1 “confirmed that Faraday faced chronic supplier mistrust and

debilitating supply issues.” Id. (citing AC § 91).

The inference of awareness created by the witnesses’ statements, plaintiffs argue,

are strengthened by the fact that “Faraday’s sales and production of the FF 91 impacted

Faraday’s core business operations.” Id. at 13. Plaintiffs state that “it ‘would be absurd’

to suggest that Faraday’s executives were unaware of the true nature of the FF 91

reservations and their production issues given the singular importance of the FF 91

reservations to Faraday.” Id. at 15 (citing In re LDK Solar Sec. Litig., 584 F. Supp. 2d

1230, 1249 (N.D. Cal. 2008)).

Finally, plaintiffs point out that they allege that defendant “Jia has been deemed

unsuitable for a high position of publicly listed companies in China as a result of illegal

provision of funding, discrepancies in company financials, and improper use of

proceeds.” Id. at 16 (citing AC 4 158-59). These allegations, according to plaintiffs,

support and inference of unlawful fraudulent activity here. Id.

Defendants argue that these allegations are insufficient to support an inference of

scienter under the PSLRA for several reasons. First, defendants challenge the relevance

of the confidential witnesses, pointing out that none of them were employed at Legacy

Faraday during the class period and do not meet the applicable standards for reliability

and personal knowledge. Id. Defendants also challenge the witnesses’ statements that

Breitfeld, Glasman, and Jia had access to reservation reports discussed at company

meetings and thus “knew or were severely reckless in disregarding the risk that their

public statements about reservation figures were misleading to a reasonable investor.” Id.

(quoting AC § 97). These statements, defendants contend, do not plead scienter because

they fail to identify the internal reports or indicate what they say about paid reservations

and they fail to allege that Glasman or any PSAC defendants attended the meetings. Id.

at 19-20: reply at 17-19. As for the expected schedule statement, defendants cite Wochos

for the contention that the employees’ opinions are not sufficient to demonstrate

defendants’ point of view where there are no specific allegations that defendants in fact

shared employees’ view. Reply at 20 (citing Wochos, 985 F.3d at 1194).

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UNITED STATES DISTRICT COURT

CENTRAL DISTRICT OF CALIFORNIA

CIVIL MINUTES — GENERAL ‘oO’

Case No. 2:21-cv-09914-CAS (JCx) Date October 20, 2022

Title JIAN ZHOU V. FARADAY FUTURE INTELLIGENT ELECTRIC INC.,

ET AL.

With respect to plaintiffs’ core operations argument, defendants contend that the

case on which plaintiffs rely, Berson v. Applied Signal Tech, Inc., 527 F.3d 982, 989 (9th

Cir. 2008) is distinguishable. Reply at 20-21. Defendants argue that here, unlike in

Applied Signal, “there is no mission-critical, undisclosed fact alleged . . . that simply

could not have escaped the notice of any and every [defendant] and that rendered

Faraday’s [statements] materially false when made.” Id. at 21. Finally, defendants

contend that Jia’s past issues in China are irrelevant and do not give rise to an inference

of scienter against any defendant. Id. at 22.

The Court concludes that plaintiffs have sufficiently pled scienter with respect to

the reservations statement. The statements of FE-3 and FE-4 that reservations and

reservations reports were discussed at regularly held meetings, which the Faraday

individual defendants attended, in conjunction with the alleged fact that FF 91 production

and sale constituted the core business operation of Faraday are adequate to “giv[e] rise to

a strong inference that |defendants]| acted with the required state of mind.” 15 U.S.C. §

78u-4(b)(2).

In Applied Signal, the Ninth Circuit concluded that an inference of scienter was

sufficiently supported by plaintiffs’ contention that high-level managers directly

responsible for day-to-day operations must have known that statements about backlogs

were misleading when made, by reason of their positions of authority and the fact that the

backlog issues related to the companies’ core operations, such that “it would be absurd to

suggest that top management was unaware of them.” 527 F.3d at 989. Here, plaintiffs

have alleged that the production and sale of FF 91 was the core of Faraday’s business

operations, and the contention that high-level officers within Legacy Faraday and PSAC

would not recognize that the 14,000 reservations did not constitute paid reservations is

not persuasive. Moreover, the inference of scienter is stronger here than in Applied

Signal, where the plaintiffs did not allege any particular facts supporting their inference,

id. at 987, because plaintiffs here have additionally alleged that, according to confidential

witnesses, the reservation numbers were discussed at regularly held meetings attended by

Jia and Breitfeld and were covered in reports to which defendants had access.

Defendants’ arguments as to the credibility of the witnesses’ statements, which must be

taken as true at this stage, raise issues of fact that are better addressed at a later stage of

litigation and do not alter the result here.

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UNITED STATES DISTRICT COURT

CENTRAL DISTRICT OF CALIFORNIA

CIVIL MINUTES —- GENERAL ‘O’

Case No. 2:21-cv-09914-CAS (JCx) Date October 20, 2022

Title JIAN ZHOU V. FARADAY FUTURE INTELLIGENT ELECTRIC INC.,

ET AL.

The Court does not reach the question of scienter with respect to the expected

schedule statements because the Amended Complaint has failed to state an actionable

claim under the PSLRA based on the expected schedule statements.

4. Makers of the Statements at Issue

Defendants argue that the Section 10(b) claims against the individual defendants*

must be dismissed because the Amended Complaint fails to allege that these defendants

made one or both of the allegedly false statements. MTD at 7. The Court only analyzes

the sufficiency of plaintiffs’ allegations that the individual defendants made the

reservations statement, in light of the Court’s finding that plaintiffs fail to state an

actionable claim with respect to the expected schedule statement.

Defendants contend that a defendant may be held liable under Section 10(b) for a

false and misleading statement only if the defendant is the “maker of the statement,”

meaning “the person or entity with ultimate authority over the statement, including its

content and whether and how to communicate it.” Id. at 7-8 (quoting Janus Cap. Grp..

Inc. v. First Derivative Traders, 564 U.S. 135, 142 (2011)). Defendants argue that, while

Glasman and Jia served as officers of Legacy Faraday and Faraday, this status is

insufficient, on its own, to establish a defendant as the maker of a statement. Id. (citing

Hampton v. Aqua Metals, Inc., WL 6710096, at *17 (N.D. Cal. Nov. 16, 2020)).

According to defendants, plaintiffs have not set forth any additional facts attributing the

challenged statements to either of them. Id.

With respect to each individual defendant, plaintiffs have set forth allegations

indicating that defendants possessed the power and authority to control the contents of

the press release and SEC filings. Vogel and Feldman are alleged to be the Co-CEOs, of

PSAC, the entire purpose of which was to effect a business combination, which ended up

being the merger with Legacy Faraday that Faraday and PSAC jointly announced in the

January 28 press release. AC 38, 39, 45, 66. Jia is alleged to be the founder and Chief

Product and User Ecosystem Officer of Legacy Faraday and Glasman is alleged to be the

Chief Financial Officer of Legacy Faraday, the primary purpose of which is alleged to be

> In their opposition, plaintiffs withdraw all claims against defendant McBride. Opp. at 7,

n.9. Accordingly, the Court DENIES AS MOOT the motion to dismiss as to defendant

McBride and does not address defendants’ arguments as to him in this order.

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UNITED STATES DISTRICT COURT

CENTRAL DISTRICT OF CALIFORNIA

CIVIL MINUTES —- GENERAL ‘O’

Case No. 2:21-cv-09914-CAS (JCx) Date October 20, 2022

Title JIAN ZHOU V. FARADAY FUTURE INTELLIGENT ELECTRIC INC.,

ET AL.

the design and manufacturing of the FF 91. AC □ 34, 36, 53, 56. Further, the Amended

Complaint alleges that “the Faraday [i|ndividual |d]efendants and PSAC [d]efendants

possessed the power and authority to control the contents of the Company’s SEC filings,

press releases, and other market communications.” AC § 42. The Amended Complaint

additionally alleges that the individual defendants “were provided with copies of the

Company’s SEC filings and press releases alleged herein to be misleading prior to or

shortly after their issuance and had the ability and opportunity to prevent their issuance or

to cause them to be corrected.” AC ¥ 42.

Thus, for the purposes of this motion to dismiss, the Court concludes that plaintiffs

have adequately pled that the individual defendants made the challenged statements. See

In re Rocket Fuel, Inc. Sec. Litig., 2015 WL 9311921, *10 (N.D. Cal. Dec. 23, 2015)

(findings complaint sufficient under Janus where plaintiffs alleged company officers

“possessed the power and authority to control the contents of the Company's press

releases [and] investor and media presentations.”’).

Accordingly, the Court DENIES defendants’ motion to dismiss plaintiffs’ Section

10(b) claim as to the reservations statement and GRANTS defendants’ motion to dismiss

plaintiffs’ Section 10(b) claim as to the expected schedule statement WITH LEAVE TO

AMEND.

B. Proxy Violation Claim Under Section 14(a)

Section 14 of the Exchange Act regulates the solicitation of proxies with respect to

any security registered under the Act. SEC Rule 14a—9(a), which was promulgated under

Section 14(a), provides:

No solicitation subject to this regulation shall be made by means of any proxy

statement, form of proxy, notice of meeting or other communication, written or oral,

containing any statement which, at the time and in the light of the circumstances under

which it is made, is false or misleading with respect to any material fact, or which omits

to state any material fact necessary in order to make the statements therein not false or

misleading or necessary to correct any statement in any earlier communication with

respect to the solicitation of a proxy for the same meeting or subject matter which has

become false or misleading.

17 CFR. § 240.14a-9.

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UNITED STATES DISTRICT COURT

CENTRAL DISTRICT OF CALIFORNIA

CIVIL MINUTES —- GENERAL ‘O’

Case No. 2:21-cv-09914-CAS (JCx) Date October 20, 2022

Title JIAN ZHOU V. FARADAY FUTURE INTELLIGENT ELECTRIC INC.,

ET AL.

Plaintiffs’ Section 14(a) claim, which is brought on behalf of all former

shareholders of PSAC who were entitled to vote on the merger of PSAC and Legacy

Faraday, alleges that defendants’ statements in the proxy statement and proxy solicitation

materials contained the false and misleading statements regarding the reservations and

expected schedule, thereby misleading shareholders and denying them the opportunity to

make a fully informed decision in voting on the merger and/or exercising their

conversion right to receive $10.00 per share of PSAC stock. AC {| 205-218.

1. Standing

Defendants first argue that plaintiffs lack standing to bring the Section 14(a) claim

because it is a derivative claim that belongs to Faraday. MTD at 22.

The determination of whether a claim is a derivative claim or a direct claim is

governed by Delaware law, as Delaware is the state of Faraday’s incorporation. See New

York City Emples’ Ret. Sys. v. Jobs, 593 F.3d 1018, 1022 (9th Cir. 2010) (overruled on

unrelated grounds, Lacey v. Maricopa Cnty., 693 F.3d 896 (9th Cir. 2012)). Delaware

law provides that whether a Section 14 claim is direct or derivative depends on who

“suffered the alleged harm—the corporation or the suing stockholders and who would

receive the benefit of recovery.” Tooley v. Donaldson, Lufkin & Jenrette, Inc., 845 A.2d

1031, 1035 (Del. 2004). Under Federal Rule of Civil Procedure 23.1, shareholders

bringing a derivative action to recover for a harm suffered by a corporation must comply

with certain pleading requirements, including the requirement that plaintiffs state “any

effort by the plaintiff to obtain the desired action from the directors or comparable

authority and, if necessary, from the shareholders or members; and [|] the reasons for not

obtaining the action or not making the effort.” Fed. R. Civ. P. 23.1(b)(3).

According to defendants, plaintiffs’ theory of damages is an economic loss that

PSAC and all of its equity stockholders would suffer equally. MTD at 22. Defendants

argue that plaintiffs’ Section 14(a) claim related to voting for the merger must be

distinguished from plaintiffs’ Section 14(a) claim relating to the failure of stockholders to

seek redemption of their PSAC stock at $10 per share. Reply at 22-23. Defendants

contend that plaintiffs lack standing to bring the former claim because it is a derivative

claim, even if the latter is a direct claim. Id. at 24. The claim that plaintiffs lost money

by voting for the merger because Faraday is allegedly worth less than the $10 share,

according to defendants, is “a price-based claim that PSAC paid too much for Legacy

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UNITED STATES DISTRICT COURT

CENTRAL DISTRICT OF CALIFORNIA

CIVIL MINUTES —- GENERAL ‘O’

Case No. 2:21-cv-09914-CAS (JCx) Date October 20, 2022

Title JIAN ZHOU V. FARADAY FUTURE INTELLIGENT ELECTRIC INC.,

ET AL.

Faraday, which affects all [Faraday] stockholders equally.” Id. at 25 (citing In re J_P.

Morgan Chase & Co. Shareholder Litig. v. Harrison, 906 A.2d 766, 774 (2005)).

Accordingly, defendants argue that the Section 14(a) claim based on the merger vote

must be dismissed.

Plaintiffs’ Section 14(a) claim based on the merger vote states that class members

“were denied the opportunity to make a fully informed decision 1n voting on the Merger,

and were damaged as a direct and proximate result of [defendants’| untrue statements and

omissions.” AC 4214. Put simply, plaintiffs allege that defendants’ representations

deprived them of their right to make a fully informed vote. In Jobs, the Ninth Circuit

explained that, under Delaware law, “depriv{ation] of the right to a fully informed vote . .

. 1s independent of any injury to the corporation and implicates a duty of disclosure owed

to shareholders.” 593 F.3d at 1022. See also Inre Tyson Foods, Inc., 919 A.2d 563, 601

(Del. Ch. 2007) (“When a shareholder has been denied one of the most critical rights he

or she possesses—the right to a fully informed vote—the harm suffered 1s almost always

an individual, not corporate, harm). The fact that uninformed votes on the merger may

have a negative impact on the company does not alter shareholders’ standing to bring

claims in connection with their individual right to a fully informed vote. Accordingly,

the Court concludes that the Section 14(a) claim is direct, and plaintiffs have standing.

2. Sufficiency of Allegations

Next, defendants move to dismiss the Section 14(a) claim on the ground that it fails

to allege sufficient facts under the PSLRA’s pleading standards. As an initial matter, the

Court must address the applicable pleading standard, as to which the parties disagree.

The pleading requirements in the PSLRA and Federal Rule of Civil Procedure 9(b) apply

to claims sounding in fraud. See Desaigoudar v. Meyercord, 223 F.3d 1020, 1022-23

(9th Cir. 2000). The Amended Complaint states that the Section 14(a) claim does not

sound in fraud, and Plaintiffs expressly exclude and disclaim any allegation that could be

construed as alleging or sounding in fraud or intentional or reckless misconduct. AC §

206. Where a plaintiff disclaims reliance on fraud, courts may look to the allegations to

determine whether the complaint still sounds in fraud. See id. at 1022, n.5 (agreeing with

district court’s rejection of plaintiff's claim that its Section 14(a) claim sounded in

negligence after “carefully reviewing the complaint’s language,” which alleged knowing

and intentional misconduct): City of Pontiac General Employees Ret. Sys. v. Bush, 2022

WL 1467773, at *3 n.1 (N.D. Cal. Mar. 1, 2022) (determining that complaint clearly

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UNITED STATES DISTRICT COURT

CENTRAL DISTRICT OF CALIFORNIA

CIVIL MINUTES —- GENERAL ‘O’

Case No. 2:21-cv-09914-CAS (JCx) Date October 20, 2022

Title JIAN ZHOU V. FARADAY FUTURE INTELLIGENT ELECTRIC INC.,

ET AL.

sounded in fraud, in light of allegations of knowing and reckless conduct, contrary to

plaintiffs disclaimer).

Here, the Section 14(a) claim “clearly sounds in fraud,” Desaigoudar, 233 F.3d at

1022 n.5. The Section 14(a) claim rests on all of the same representations as the Section

10(b) fraud claim, and plaintiffs’ allegations, despite the disclaimers, “pleads a

culpability that indicates the Section 14(a) claim is based on fraud.” City of Pontiac,

2022 WL 1467773, at *3 n.1. See, e.g., AC § 42 (“Because of their positions with the

Company, and their access to material information available to them but not to the public,

the [individual defendants] knew that the adverse facts specified herein had not been

disclosed to and were being concealed from the public, and that the positive

representations being made were then materially false and misleading.”’).

Accordingly, the Court concludes that the PSLRA and Rule 9(b) pleading

requirements apply to plaintiffs’ Section 14(a) claim. As discussed with respect to

plaintiffs’ Section 10(b) claim, plaintiffs have failed to plead sufficient facts

demonstrating that the expected schedule statements fall outside of the PSLRA Safe

Harbor.

In addition to reiterating the pleading arguments made with respect to Section

10(b), defendants contend that plaintiffs have failed to satisfy their pleading obligations

because they have not alleged how “the proxy solicitation itself, rather than the particular

defect in the solicitation materials, was ‘an essential link’ in the accomplishment of the

transaction” that caused their loss. Id. (quoting Jobs, 593 F.3d at 1022 (9th Cir. 2010)).

The Court disagrees. Plaintiffs have stated that the challenged statements and

omissions, which they allege appeared in the proxy statement, “were material to a

reasonable investor,” “would tend to induce a reasonable investor to misjudge the value

of the Company’s securities,” and “did induce] reasonable investors to misjudge the

value of the Company’s common stock.” AC 4 166, 169-71. See In re Hot Topic Sec.

Litig., No. 13-cv-02939, 2014 WL 7499375, at *11 (C.D. Cal. May 2, 2014) (concluding

plaintiffs had satisfied their pleading obligations by alleging that “the Proxy Statement

makes a series of misrepresentations and omissions that misled investors into believing

that $14.00 per share was a fair transaction.”). Thus, to the extent that plaintiffs have

alleged that the proxy statement contains the challenged statement and omissions, they

have pled sufficient facts as to an essential link.

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UNITED STATES DISTRICT COURT

CENTRAL DISTRICT OF CALIFORNIA

CIVIL MINUTES —- GENERAL ‘O’

Case No. 2:21-cv-09914-CAS (JCx) Date October 20, 2022

Title JIAN ZHOU V. FARADAY FUTURE INTELLIGENT ELECTRIC INC.,

ET AL.

3. Incorporation by Reference

Defendants additionally argue that the S-4 registration and proxy statement do not

include the reservations statement (which plaintiffs concede) or incorporate it by

reference. Id. at 13. Plaintiffs point to a statement in the “Background of the Business

Combination” of the S-4 referencing the January 28 press release “announcing the

signing of the Merger Agreement” and PSAC’s filing of a Current Report on Form 8-K

“discussing the key terms of the Merger Agreement.” Id. (quoting S-4). These

statements, defendants contend, fall far short of the SEC requirements for incorporating a

filing by reference, which require that the registrant make an express statement clearly

describing the specific location of the information, identifying the document where the

information is located, and identifying the location of the information within the

document. Id. Accordingly, defendants contend that plaintiffs cannot state a claim based

on the 14,000 reservations under Section 14 (in connection with the proxy statement). Id.

at 14.

Plaintiffs make several arguments in support of incorporation by reference. First,

plaintiffs argue that defendants’ reliance on the SEC regulations governing incorporation

by reference of documents into registration statements do not apply to incorporation by

reference of documents into proxy statements. Opp. at 21. Second, plaintiffs argue that,

even if they do apply, the regulations’ requirements are met here. Id. Plaintiffs point out

that the proxy statement expressly states that it “incorporates important business and

financial information about PSAC that is not included in or delivered with th[e] proxy

statement,” id. (quoting dkt. 59, Exh. 7 at 139), and argue that the reservations statement

constitutes important business and financial information, Opp. at 21. Plaintiffs further

argue that the proxy statement offers two specific locations where an investor can obtain

the press release because it directs investors to the company’s filings on www.sec.gov,

where the press release was filed, and provides the contact information of Vogel. Id.

Defendants respond by pointing out that PSAC complied with the SEC

requirements for incorporation by reference with respect to other documents, such as a

proposed 2021 Stock Incentive Plan, as to which the S-4 stated “[t]he following

description is qualified in its entirety by reference to the plan document, . . . incorporated

into this proxy statement... by reference.” Id. at 9 (quoting S-4 at 129). Defendants

argue that the lack of similar language in relation to the press release indicates that it was

not incorporated by reference. Id. at 9-10. Defendants further point out that the general

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Case 2:21-cv-09914-CAS-JC Document 64 Filed 10/20/22 Page 230f27 Page ID#:1114

UNITED STATES DISTRICT COURT

CENTRAL DISTRICT OF CALIFORNIA

CIVIL MINUTES — GENERAL ‘oO’

Case No. 2:21-cv-09914-CAS (JCx) Date October 20, 2022

Title JIAN ZHOU V. FARADAY FUTURE INTELLIGENT ELECTRIC INC.,

ET AL.

incorporation by reference provision on which plaintiffs rely does not reference the press

release by name and that the proxy only references the press release as part of a

chronology of events leading up to the merger. Id. at 10. Neither mentions the

reservations statement explicitly. Id.

The Court agrees with defendants that plaintiffs have failed to show incorporation

of the reservations statement into the proxy statement by reference. Federal courts do not

find incorporation of documents by reference into proxy statements based on general

references to the documents but rather require a “specific| | request] | that they be treated

as part of the proxy material or incorporated [] into the materials by reference.” Kelley v.

Rambus, Inc., 2008 WL 5170598, at *5 (N.D. Cal. Dec. 9, 2008), aff'd, 384 F. App’x 570

(9th Cir. 2010) (quoting Stricklin v. Ferland, 1999 WL 89694, at *2 (E.D. Pa. Jan. 19,

1999)). The general incorporation by reference provision in the proxy statement, which

states that it “incorporates important business and financial information about PSAC that

is not included in or delivered with thie] proxy statement,” does not specifically

incorporate the press release. This provision is distinct from the prospectus supplement

provision plaintiffs point to in SEC v. RPM International, Inc., 282 F. Supp. 3d 1, 15

(D.D.C. 2017). In RPM International, the document deemed incorporated by reference

into the prospectus supplement was filed with the SEC and the prospectus supplement

explicitly stated that it incorporated by reference accompanying information filed with

the SEC. 282 F. Supp. 3d at 15. Here, by contrast, the incorporation by reference

provision is more general and does not specifically address the reservation statement, the

press release, or SEC filings.

While the SEC’s regulations for incorporation by reference apply to registration

statements, not proxy statements, they are informative to the extent that they articulate

the level of specificity that would inform readers that a document is incorporated by

reference. The regulations provide that the host document must:

[i]nclude an express statement clearly describing the specific location of the

information you are incorporating by reference. The statement must identify the

document where the information was originally filed or submitted and the location

of the information within that document. The statement must be made at the

particular place where the information 1s required, if applicable. Information must

not be incorporated by reference in any case where such incorporation would

render the disclosure incomplete, unclear, or confusing.

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Case 2:21-cv-09914-CAS-JC Document 64 Filed 10/20/22 Page 24o0f27 Page ID#:1115

UNITED STATES DISTRICT COURT

CENTRAL DISTRICT OF CALIFORNIA

CIVIL MINUTES —- GENERAL ‘O’

Case No. 2:21-cv-09914-CAS (JCx) Date October 20, 2022

Title JIAN ZHOU V. FARADAY FUTURE INTELLIGENT ELECTRIC INC.,

ET AL.

17 CER. § 240.12b-23(e). The general directions to the SEC website and to Vogel for

further information do not “clearly describ[e] the specific location of the” press release

and do not “identify the document where the information was originally filed or

submitted and the location of the [reservations statement] within that document.” Id. See

also Kelley, 2008 WL 5170598, at *5 (finding no incorporation by reference where

“proxy statements merely noted—as is customary—that copies of the financial statements

could be obtained from [defendant] free of charge”). Likewise, neither the general

incorporation by reference provision nor the reference to the press release in the

chronology of events includes an express statement clearly describing the specific

location of the press release. Accordingly, the Court finds that plaintiffs have failed to

allege that the reservations statement was incorporated by reference into the proxy

statement.

At oral argument, counsel for plaintiffs argued that, even if the reservations

statement is not incorporated by reference into the proxy statement, defendants violated

Section 14(a) by failing to include in the proxy materials a statement clarifying that the

14,000 reservations, previously discussed in the January 28 press release and the March

Q&A, were unpaid.

To state a claim under Section 14(a) based on an omission, plaintiffs must allege

that the proxy statement “‘omits to state any material fact necessary in order to make the

statements therein not false or misleading.” 17 C.F.R. § 240.14a-9(a). “An omitted fact

is material if there is a substantial likelihood that a reasonable shareholder would

consider it important in deciding how to vote.” TSC Indus., Inc. v. Northway, Inc., 426

Y.S. 438, 449 (1976). The materiality requirement is satisfied “when there is a

substantial likelihood that the disclosure of the omitted fact would have been viewed by

the reasonable investor as having significantly altered the ‘total mix’ of information made

available.” Matrixx Initiatives, 563 U.S. at 38 (internal quotation marks omitted). “The

“total mix’ of information ‘normally includes information that is and has been in the

readily available general public domain and facts known or reasonably available to

shareholders.’” Anschutz v. Pacific Premier Bancorp, Inc., 2020 WL 7049543, at

*4 (C.D. Cal. Oct. 21, 2020) (quoting Kapps v. Torch Offshore, Inc., 379 F.3d 207, 216

(Sth Cir. 2004)); see also SEC v. Mozilo, 2009 WL 3807124, at *10 (C.D. Cal. Nov. 3,

2009) (explaining that the “total mix” of information “includes information that is

‘readily’ or ‘reasonably’ available to an investor.”).

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Case 2:21-cv-09914-CAS-JC Document 64 Filed 10/20/22 Page 25o0f27 Page ID#:1116

UNITED STATES DISTRICT COURT

CENTRAL DISTRICT OF CALIFORNIA

CIVIL MINUTES —- GENERAL ‘O’

Case No. 2:21-cv-09914-CAS (JCx) Date October 20, 2022

Title JIAN ZHOU V. FARADAY FUTURE INTELLIGENT ELECTRIC INC.,

ET AL.

The Amended Complaint alleges that defendants “materially misled the investing

public . . . by omitting to disclose material facts necessary to make [d]efendants’

statements . . . not false and/or misleading.” AC {| 148. As discussed above with respect

to plaintiffs’ Section 10(b) claim, plaintiffs have satisfied the PLSRA pleading

requirements in alleging that the difference between 14,000 paid reservations and several

hundred paid reservations would have “been viewed by the reasonable investor as having

significantly altered the total mix of information.” Matrixx Initiatives, 563 U.S. at 38.

Furthermore, plaintiffs have set forth sufficient factual allegations to show that the 14,000

reservations statement was in the “total mix” of information readily or reasonably

available to investors because it was made in the January 28 press release announcing the

merger, it was made again in the March Q&A with Breitfeld, and it was included in

Faraday’s SEC filings. Thus, while plaintiffs have failed to allege that the 14,000

reservations statement appears in the proxy statement, they have stated a Section 14(a)

claim based on the omission of information necessary to enable shareholders to

understand user interest in Faraday’s product.°

Accordingly, the Court DENIES defendants’ motion to dismiss plaintiffs’ Section

14(a) claim based on the theory of omission and GRANTS defendants’ motion to dismiss

plaintiffs’ Section 14(a) claims based on the expected schedule statement and the

incorporation by reference of the reservations statement WITH LEAVE TO AMEND.

C. Control Liability Under Section 20(a)

Plaintiffs allege that the Faraday individual defendants and the PSAC defendants

are additionally liable for the Section 10(b) and Section 14 violations pursuant to a

control liability theory under Section 20(a). AC 4 192-96, 219-30.

° Ina footnote, defendants argue that plaintiffs have failed to allege that the individual

defendants constitute makers of the challenged statements for the purposes of Section 14.

MTD at 8, n.2. As discussed above with respect to the Section 10(b) claim, plaintiffs

have adequately alleged that the individual defendants had “the ability and opportunity to

prevent the[]| issuance |of the SEC filings and press releases] or to cause them to be

corrected.” AC 442. See IV.A.4 supra.

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Case 2:21-cv-09914-CAS-JC Document 64 Filed 10/20/22 Page 26o0f27 Page ID #:1117

UNITED STATES DISTRICT COURT

CENTRAL DISTRICT OF CALIFORNIA

CIVIL MINUTES —- GENERAL ‘O’

Case No. 2:21-cv-09914-CAS (JCx) Date October 20, 2022

Title JIAN ZHOU V. FARADAY FUTURE INTELLIGENT ELECTRIC INC.,

ET AL.

In order to prove a prima facie case under section 20(a), a plaintiff must prove: (1)

a primary violation of federal securities laws, and (2) that the defendant exercised “actual

power or control” over the primary violator. Howard v. Everex Sys., Inc., 228 F.3d 1057,

1065 (9th Cir. 2000).

Defendants move to dismiss plaintiffs’ control liability claims, arguing that, even if

plaintiffs had successfully alleged primary violations, they cannot show that all

defendants have secondary liability for violations of Section 10(b) and Section 14 under a

control theory. MTD at 21.

Plaintiffs counter that the Amended Complaint properly alleges control liability

under Section 20(a) because plaintiffs adequately allege primary violations of the

securities laws and that defendants exercised control over the primary violator. Opp. at

16-17. On the question of control, plaintiffs contend that defendants Vogel and Feldman

signed and “were involved in the formulation of” the registration statement.” Id. at 17.

Plaintiffs argue that “by nature of their positions of power in PSAC and control over

misleading company documents,” these defendants constitute control persons. Id. Jia is

likewise a control person, according to plaintiffs, because his role allowed him sufficient

control over Faraday’s day-to-day operations and documents, and plaintiffs’ witnesses

stated that Jia and other officers provided updates on reservation numbers at meetings.

Id. And Glasman is a control person, plaintiffs argue, because he had control over

financial statements and managed day-to-day operations. Id. at 18.

Furthermore, plaintiffs contend, defendants are control persons by reason of their

authorization of misleading public disclosures, namely the reservations statement in the

January 28 press release. Id. Plaintiffs analogize to SEC v. Todd, in which the court

found that defendants acted as control persons with respect to company statements

because they participated in a press release that reported misleading information. Id.

(citing SEC v. Todd, 642 F.3d 1207, 1223 (9th Cir. 2011)). According to plaintiffs,

because PSAC and Faraday jointly issued the January 28 press release, Breitfeld, Vogel

and Feldman, as well as all named defendants who held senior authority positions, were

aware of and in control of misleading information disseminated to the public. Id.

Defendants respond by arguing that plaintiffs fail to acknowledge that Faraday

defendants were not employed by PSAC and PSAC defendants were not employed by

Faraday, which, according to defendants, means that all defendants could not have

CV-90 (10/18) CIVIL MINUTES - GENERAL Page 26 of 27

Case 2:21-cv-09914-CAS-JC Document 64 Filed 10/20/22 Page 27o0f27 Page ID#:1118

UNITED STATES DISTRICT COURT

CENTRAL DISTRICT OF CALIFORNIA

CIVIL MINUTES —- GENERAL ‘O’

Case No. 2:21-cv-09914-CAS (JCx) Date October 20, 2022

Title JIAN ZHOU V. FARADAY FUTURE INTELLIGENT ELECTRIC INC.,

ET AL.

exercised control over one another. Reply at 22. Further, defendants challenge plaintiffs’

reliance on the individual defendants’ titles, arguing that courts reject inferences of

control based on titles and positions. Id. (citing Todd, 642 F.3d at 1223).

The Court concludes that, to the extent that the primary violations are adequately

alleged, plaintiffs have sufficiently alleged control liability for purposes of this motion to

dismiss. The Amended Complaint alleges that “by virtue of their high-level positions and

their ownership and contractual rights, participation in, and/or awareness of the

Company’s operations and intimate knowledge of the false financial statements filed by

the Company with the SEC and disseminated to the investing public,” the individual

defendants “had the power to influence and control and did influence and control,” “the

content and dissemination of the [challenged] statements.” AC 194, 222. Defendants

are correct that “|t|he fact that a person is a CEO or other high-ranking officer within a

company does not create a presumption” of control. Todd, 642 F.3d at 1223. “Rather,

indicia of ‘control’ include whether the person managed the company on a day-to-day

basis and was involved in the formulation of financial statements.” Id. (citing Howard,

228 F.3d at 1065). But, contrary to defendants’ argument, plaintiffs have not simply

relied on job titles to demonstrate control. Instead, plaintiffs have alleged that defendants

controlled day-to-day operations and the content and dissemination of the challenged

statements, signed the SEC documents, and/or issued the press release. At this stage,

these allegations, taken as true, are sufficient to demonstrate control liability.

Accordingly, the Court DENIES defendants’ motion to dismiss plaintiffs’ Section

20(a) claims to the extent that plaintiffs have alleged primary violations of the securities

laws.

V. CONCLUSION

In accordance with the foregoing, the Court DENIES in part and GRANTS in part

defendants’ motion to dismiss WITH LEAVE TO AMEND. Plaintiff shall have up to

and including November 17, 2022, within which to file an amended complaint.

IT IS SO ORDERED.

00 : 00

Initials of Preparer ELUM

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