by Douglas Messier
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
|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.