This article originally appeared in the October 2022 issue of Security Business magazine. When sharing, don’t forget to mention Security Business magazine on LinkedIn and @SecBusinessMag on Twitter.
As a lawyer, I am often contacted by recruiters soliciting me to move my law practice to another law firm. Sometimes, well-intentioned recruiters pitch me with exciting opportunities for a “securities” lawyer like me. Inevitably, I correct their misapprehension – clarifying that I am a “security” lawyer, not a “securities” lawyer. Big difference.
Yet, sometimes these two worlds collide – as is the case in a recent class action lawsuit filed against security company Latch Inc. for alleged securities law violations.
Latch is a technology company that specializes in keyless entry security systems to open and manage doors in apartment buildings from a smartphone. In June 2021, Latch became a public company and was listed on the NASDAQ trading platform under symbol LTCH. As a public company, Latch is subject to federal and state securities laws – which, among other things, require regular disclosures about the company’s financial condition.
On Aug. 25, 2022 (after the U.S. public markets were closed), Latch announced in a filing with the Securities and Exchange Commission that it committed material errors and possible irregularities relating to, among other things, the way it recognized revenue associated with the sale of hardware devices since becoming a public company.
Latch stated that its financial statements for 2021 and the first quarter of 2022 should no longer be relied upon and would need to be restated following preliminary findings of an audit committee investigation. The next day, on Aug. 26, shares of Latch declined in value by 12.96%. Months earlier, on Feb. 24, 2022, Latch slashed guidance by 25% when announcing its results for the fourth quarter of 2021. The next day, Latch’s shares declined by 24%.
Sharp losses in the value of a stock, combined with public reporting irregularities such as these, can cause securities class action lawyers to pounce. And so they did…
The Risk of Going Public
A class action lawsuit was filed in September against Latch in the United States District Court for the Southern District of New York for alleged violations of securities laws. The case is known as Brennan v. Latch, Inc., et al., Case No. 1:22-cv-07473.
A class action is a lawsuit in which a group of similarly situated individuals join together to sue a defendant, claiming that the defendant caused the group the same or very similar injuries. Class actions can be brought in various industries, including, as is the case here, the public markets.
In this circumstance, anyone who purchased Latch stock between May 13, 2021 and Aug. 25, 2022 is eligible to join the class, even if they sold their shares. Shareholders are also entitled to opt out of the class and pursue individual claims if they wish.
The lawsuit alleges that Latch made false and/or misleading statements and/or failed to disclose that: There were unreported sales arrangements related to hardware devices; the Company had improperly recognized revenue; there were material weaknesses in Latch’s internal control over financial reporting of revenue recognition; Latch must restate financial statements for fiscal 2021 and first quarter 2022; and Latch’s positive statements about its business, operations, and prospects were materially misleading and/or lacked a reasonable basis.
To be clear, these are only allegations. Latch is entitled to defend itself and to oppose class certification; however, the lesson here is that companies that go public are held to higher and more onerous reporting requirements. Unlike a private company (which may have a better opportunity to resolve accounting irregularities with its private investors), public companies raise money from investors with whom they often have no relationship. That presents the opportunity to raise funds from a greater pool of investors, but also carries greater responsibility and greater scrutiny from regulators and private parties – such as securities lawyers.
Latch did the right thing by correcting its public disclosures, but may have to face consequences for previously providing inaccurate information to its investors. This is yet another reason for you and your company to hire capable professionals – particularly accountants and lawyers to navigate these issues and, if necessary, defend against any threatened or actual claims.
Timothy J. Pastore, Esq., is a Partner in the New York office of Montgomery McCracken Walker & Rhoads LLP (www.mmwr.com), where he is Vice-Chair of the Litigation Department. Before entering private practice, Mr. Pastore was an officer and Judge Advocate General (JAG) in the U.S. Air Force and a Special Assistant U.S. Attorney with the U.S. Department of Justice. Reach him at (212) 551-7707 or by e-mail at [email protected].
