Class Action Lawsuit Filed Against Virgin Galactic Alleging Securities Fraud
by Douglas Messier
Managing Editor
A class action lawsuit was filed in New York on Dec. 7 alleging securities fraud by Virgin Galactic, which went public on the New York Stock Exchange (NYSE) in October 2019 after merging with Chamath Palihapitiya’s Social Capital Hedosophia (SCH).
Named in the lawsuit are Virgin Galactic Holdings, CEO Michael Colglazier, former CEO George Whitesides, former current chief financial officer Doug Ahrens, and former chief financial officer Jon Compagna.
The lawsuit was filed amid years-long delays in the start of commercial human suborbital flights that have caused a sharp decline in the value of the stock. Virgin Galactic began trading on the New York Stock Exchange at an opening price of $12.34 on Oct. 28, 2019. The stock is now trading at $14.46 having previously soared to a high of $62.80.
The lawsuit’s table of contents was posted by an employee, Mark Stucky, whom Virgin Galactic fired in July and who now works for Blue Origin, which is Jeff Bezos’ rival suborbital space tourism company.
Virgin Galactic merged with Palihapitiya’s SCH in October 2019. SCH was a special purpose acquisition company (SPAC) that was already traded on NYSE. SPACs pool investor money and are usually given two years to find a company which with the merge and take public under the target company’s name. Virgin Galactic was the company in this case.
Documents filed with the Securities and Exchange Commission prior to the merger projected that Virgin Galactic would complete its flight test program and begin commercial suborbital space tourism flights in June 2020. Service is now projected to begin in the fourth quarter of 2022 after Virgin Galactic completes VSS Unity‘s flight test program next summer.
What neither Virgin Galactic nor Social Capital Hedosophia disclosed to shareholders before or after the merger and going public was that the only flying SpaceShipTwo, VSS Unity, was severely damaged during a suborbital spaceflight on Feb. 22, 2019. It was not capable of flight at the time, rendering the projected schedule highly optimistic at best. News of the near-fatal flight became public in 2021.
It took more than a year for Virgin Galactic to make repairs and modifications to VSS Unity and resume the flight test program. The return to flight was affected by COVID-19 related shutdown orders in California and New Mexico in mid- and late March 2020 that shut down Virgin Galactic operations for periods of time.
VSS Unity Flight Test Program, 2020-21
| Date | Flight | Result | Notes |
|---|---|---|---|
| May 1, 2020 | Glide | Success | First flight in more than 14 months; delayed by COVID-19 lockdowns; first flight from Spaceport America in New Mexico; |
| June 25, 2020 | Glide | Success | |
| December 25, 2020 | Powered | Success | First attempted spaceflight from New Mexico due to computer reboot as engine began to fire; glided back to runway landing |
| May 22, 2021 | Powered | Success | First suborbital spaceflight in 27 months reached 89.23 km (55.45 miles) |
| July 11, 2021 | Powered | Success | First suborbital flight with four people in passenger cabin reached 86.1 km (53.5 miles) |
VSS Unity and its WhiteKnightTwo mothership, VMS Eve, are in the midst of an eight-month overhaul. Virgin Galactic expects to conduct two additional powered flights next summer to complete the test program before beginning commercial flights in the fourth quarter of 2022.
There is a possible factual error in the lawsuit. Parabolic Arc has heard that Scaled Composites warned Virgin Galactic not to place WhiteKnightTwo VMS Eve carrier aircraft and SpaceShipTwo VSS Enterprise (not VSS Unity) that Burt Rutan’s company built into commercial service because the vehicles were proof-of-concept prototypes not intended for such use.
Virgin Galactic was planning to do exactly that in the first quarter of 2015. However, VSS Enterprise broke up during a flight test on Oct. 31, 2014. Virgin Galactic’s subsidiary, The Spaceship Company, built the second SpaceShipTwo, VSS Unity, as Scaled Composites withdrew from the program.
VMS Eve has been the only WhiteKnightTwo built thus far; Virgin Galactic plans to use it for commercial service. Sources have told Parabolic Arc that the 13-year old ship, which first flew on Dec. 21, 2008, was “falling apart” before it was taken into the hangar for an eight-month overhaul.
Palihapitiya and Virgin Galactic founder Richard Branson have been criticized for selling stock while Virgin Galactic has lost hundreds of millions of dollars due to the delays. Parabolic Arc calculates that Branson has sold $1.4 billion worth of stock over the past two years. The British billionaire has reduced his stake in the company from more than 50 percent to 11.9 percent. Palihapitiya sold stock worth about $313 million, tripling his $100 million personal investment in the merger. He continues to own stock in the company indirectly.
It is likely that additional class action suits will be filed that will make similar charges. Typically, such suits are consolidated by the court to be easily addressed.
This is not the first class action suit filed against Virgin Galactic. A series of them were filed over the company’s handling of warrants, which are similar to stock options. Virgin Galactic was forced to restate some of its financial results as a result of a SEC ruling concerning the accounting treatment of the warrants.
14 responses to “Class Action Lawsuit Filed Against Virgin Galactic Alleging Securities Fraud”
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Silly investors, really believing the schedule Virgin Galactic published without doing their due diligence.? It will be interesting to see what the fallout will be for the other New Space SPAC firms.
This is why there is no way Elon Musk will take SpaceX public. The expectations of investors and risks of New Space are incompatible.
I don’t think there will be any “fallout” for other NewSpace firms that have gone the SPAC route. VG is singular in its general sketchiness. As for “expectations of investors,” NewSpace is hardly unique in its risk profile. There have been several waves of new infotech industries ginned up over the last four decades. The NewSpace companies that have actually gone the SPAC route seem much less risky – VG notably excepted – than the average PC, application software, video game or Internet startup that went public back in the day via the pre-SarbOx IPO process.
Suing Whitesides is evil…he just bought into the lie the real villain pitched and got away with. Poor George.
Going from Virgin to BO? Sounds like going from the frying pan into the fire.
I’m not sure what Stucky is going to be doing at Blue, but if it’s anything like his most recent job at VG, then it’s more like jumping from the fire back into the pan or maybe even all the way back onto the kitchen counter. Blue seems to have its suborbital act much more together than VG.
Indeed that is correct. Virgin has it’s orbital game going, but is lost in suborbital, and BO the other way around. So I think your take on it is better.
Which is why there are successful investors and those whose money goes to successful investors. The media today wants to focus on fun things like politics, not an area that requires them to have real knowledge like economics and investment.
That is why if you took all the wealth and distributed it evenly as some want to do with a wealth tax in a decade or so the wealthy would be wealthy again and the rest wouldn’t be.
Got to be careful with true statements like that. Our local commie would say that is a good argument for hammering the wealthy.
Our “local commie” doesn’t need a “good” argument for hammering the wealthy. All the bad old arguments continue to serve just fine. That’s what being a commie is all about, after all.
I also notice that the favored targets of prominent commies – local or otherwise – tend to be the wealthy who are not also professed progressives. One doesn’t hear Elizabeth Warren going on and on about George Soros or Tom Steyer.
She should…unlike Musk, they are of no worth to humanity
Branson isn’t named as a defendant in the complaint, but then he is repeatedly referred to as “Defendant Branson” within the text. That’s some top-notch lawyering right there. This complaint filed Dec. 7 is actually an amended complaint to a case originally filed in May. Looks like they might need to amend it some more to either include Branson or stop referring to him as a Defendant.
SPACs aren’t particularly “easy,” they’re just easier than going through all the Sarbanes-Oxley rigamarole now imposed on new companies wishing to do a traditional IPO. Making IPOs harder and vastly more expensive to do has radically cut the number of new public companies. This doesn’t benefit ordinary investors but it does benefit incumbent players in tech who face less competition from newcomers and makes any such newbies that do appear anyway easier targets for acquisition.
There haven’t really been all that many SPAC deals for space companies and nearly all – Virgin Galactic being a notable exception – have been for companies with actual products and revenues. I have seen no SPAC deals for early-stage startups and don’t expect to.
Agreed!