Court allows investor claims against Jefferies over $19M SPAC deal

Jefferies must face claims it misled SPAC investors while pocketing $19 million in fees, a Delaware court ruled January 27.

The Delaware Court of Chancery ruled the investment bank cannot escape liability claims over a disastrous merger that ended in bankruptcy, with investors who stayed in the deal losing their investment in an electric vehicle company that collapsed.

The timing is everything. Back in 2020, Forum III Merger Corporation went public as a SPAC, raising $250 million with a two-year clock to find a merger target. The company hired Jefferies as its financial advisor with the usual arrangement: no deal, no fee.

But Jefferies had a problem. Before Forum III even went public, the firm had done work for SF Motors, a Chinese-owned company trying to unload its Indiana manufacturing plant. During that earlier gig, Jefferies learned some unflattering facts. The plant could only produce 50,000 to 70,000 vehicles per year. Nearly all the workers had been furloughed, leaving just 16 people on staff. And the financial projections looked pretty grim, with EBITDA forecasts of $110 million for 2023 and $192 million for 2024.

Fast forward to when Jefferies started working for Forum III on its merger with Electric Last Mile Solutions, which planned to buy that same Indiana plant. Suddenly the story changed. Presentations that Jefferies prepared for the Forum III board and stockholders claimed the plant had 400 employees and could crank out more than 100,000 vehicles annually. The financial projections also got a makeover, now showing EBITDA of $248 million for 2023 and $465 million for 2024.

None of those earlier, less optimistic numbers made it into the materials Jefferies created or the proxy statement it reviewed. The proxy also failed to mention that Jefferies had previously worked for SF Motors, despite stating the firm had not performed past services for any parties to the merger.

Forum III stockholders approved the deal in June 2021. Those who did not redeem their shares stayed invested, relying on what turned out to be inflated projections and incomplete disclosures.

The merged company lasted about seven months. In February 2022, Electric Last Mile Solutions announced that executives James Taylor and Jason Luo had resigned after an internal investigation found they had secretly acquired discounted equity before the merger. By June, the company filed for bankruptcy.

Investors sued, and the case eventually landed before Chancellor McCormick. She had to decide whether Jefferies did more than just stay quiet about problems it knew existed.

The answer was yes. The court found that Jefferies did not simply fail to speak up. It actively created presentations containing information it knew conflicted with what it had learned during its work for SF Motors. That crosses the line from passive silence to active participation in misleading investors.

The ruling applies recent Delaware Supreme Court decisions that clarified when financial advisors can be held liable for helping corporate directors breach their duties to shareholders. The key question is whether the advisor knowingly participated in the breach.

McCormick looked at four factors. Did Jefferies know the disclosures were misleading? Yes, because it had firsthand knowledge from its SF Motors work. Did it substantially assist the breach? Yes, by authoring the presentations rather than just reviewing someone else's work. What was the nature of the relationship? Jefferies served as the financial advisor, a role that can involve significant reliance. Did Jefferies know its conduct was improper? The court said yes, given that it created optimistic presentations while sitting on contradictory information.

Three of those four factors pointed toward liability, enough to let the case proceed.

For advisors, the takeaway is straightforward. Those standard engagement letters stating you rely on information the client provides and take no responsibility for accuracy may not protect you if you actively create materials you know are misleading based on information from other sources.

The court dismissed claims against SF Motors, finding investors had not adequately shown the company was responsible for the misleading disclosures. But Jefferies remains on the hook for both helping directors breach their duties and getting unjustly enriched by collecting fees while investors lacked the information they needed to make informed decisions.

The case continues, so this is not the final word. But it already serves as a warning about the risks of playing both sides and staying quiet about what you know.