The Securities and Exchange Commission (SEC) has charged a group of people and companies for misleading claims about a recent special purpose acquisition corporation (SPAC), assertions which stood to gain one CEO $200 million in shares.
Facing charges are SPAC Stable Road Acquisition Company, its sponsor SRC-NI, its CEO Brian Kabot, the SPAC’s proposed merger target Momentus, and Momentus’s founder and former CEO Mikhail Kokorich. All but Kokorich are in the process of settling for total fines north of $8 million for their roles in misleading claims about Momentus’s technology and about national security risks associated with Kokorich. They will also reportedly agree to tailored investor protection undertakings and the SPAC sponsor’s forfeiture of founder’s shares it stands to receive if the merger, currently scheduled for August 2021, is approved. The SEC has filed a complaint in the U.S. District Court for the District of Columbia against Kokorich.
According to the settled order, Kokorich and Momentus, an early-stage space transportation company, repeatedly told investors it had successfully tested its propulsion technology in space when the only such test failed to show any commercial viability whatsoever. The order also found Momentus and Kokorich misrepresented how much national security concerns involving Kokorich undermined Momentus’s ability to secure required governmental licenses.
Stable Road repeated Momentus’ misleading statements in public filings on the merger and failed in its investor due diligence responsibilities, the SEC order found. While Stable Road claimed to have conducted extensive due diligence of Momentus, it never reviewed the results of Momentus’s in-space test or received sufficient documents relevant to Kokorich’s actual national security risks. Kabot was determined to have participated in Stable Road’s inadequate due diligence and in filing its inaccurate registration statements and proxy solicitations.
“This case illustrates risks inherent to SPAC transactions, as those who stand to earn significant profits from a SPAC merger may conduct inadequate due diligence and mislead investors,” said SEC Chair Gary Gensler. “Stable Road, a SPAC, and its merger target, Momentus, both misled the investing public. The fact that Momentus lied to Stable Road does not absolve Stable Road of its failure to undertake adequate due diligence to protect shareholders. Today’s actions will prevent the wrongdoers from benefitting at the expense of investors and help to better align the incentives of parties to a SPAC transaction with those of investors relying on truthful information to make investment decisions.”
“Momentus’s former CEO is alleged to have engaged in fraud by misrepresenting the viability of the company’s technology and his status as a national security threat, inducing shareholders to approve a merger in which he stood to obtain shares worth upwards of $200 million,” said Anita B. Bandy, associate director of the SEC’s Division of Enforcement. “Our litigation against Kokorich demonstrates our commitment to holding individuals accountable for their statements to investors, which are of particular concern when they are aimed at improperly capitalizing on public interest in popular investment vehicles such as SPACs.”
Without admitting or denying the findings, Momentus, Stable Road, Kabot, and SRC-NI consented to a cease and desist order from future violations. Momentus, Stable Road, and Kabot will pay civil penalties of $7 million, $1 million, and $40,000, respectively. Stable Road and Momentus will provide private investment in public equity investors with the right to terminate their subscription agreements prior to the shareholder vote to approve the merger. SRC-NI will forfeit 250,000 founders’ shares it would otherwise have received upon consummation of the business combination. Momentus requires enhancements to its disclosure controls, including the creation of an independent board committee and retention of an internal compliance consultant for a period of two years.
The complaint against Kokorich alleges he violated antifraud provisions of the securities laws and aided and abetted Momentus’s violations of those provisions. The SEC seeks permanent injunctions, penalties, disgorgement plus prejudgment interest, and an officer-and-director bar against him.