Latch Blames Lack of "Sufficient Experience" In Fraud Allegation Lawsuit
Latch, a once high-flying unicorn that subsequently lost 90% of its market value, blamed a lack of "sufficient experience" in its former management team for "revenue recognition errors" as it sought to defend itself against fraud allegations from investors in a class action lawsuit.
The claims in Latch's recent court filing stand at odds with its previous statements to investors just a few years ago touting the experience of its executives, including its former CEO Luke Schoenfelder, who worked for Apple before co-founding Latch and was named a Forbes "30 Under 30" in 2017.
In the note, we examine the company's arguments, Latch's ongoing financial restatement, and the likelihood that a judge will be persuaded to throw out the case.
Executive *******
***** *** ********** ********** ***** ** the ******* — ************, ****** *** Garth ********, *** ****** ******* *** Barry ********* — ******** ***** ******* in* ****** ** ******* * ***** action**** ******* **** ** ******** ** multiple ******* ** ******* ******* *******. The ********** ******* **** "**** *****, not *****," *** *** ***** ** the ******.
*** ******* *********** ************ **** ******** *************** **** ****** ***** ***** ********** who ******** *********** ** *** ********** as "************ *********." *****'* ********* *** dismissing *** ********* **** **** ** technical *******, ***** ** ****** ** the ***** ***** ** * ******* before ********* ** *********.
**** ****, *****'* *********** ** "**** faith" **** ****** ** ******* ******* the ************* ** *** ******* *********** effort, ***** *********** *** ** *** company's ********* ******* ***** **** *** the *******'* ******* ** **** ********* for ********** ********* **********. *******, ***** has *** ***** *** *** ********* disclosures ***** ** ****, ******* ** its **-******* **** *** ******.
*** *************** ** *** ******* *********, ********* "******* ********," ************ *******-**-****** as ****** *******, *** ********* **** prices, *** ******* *********** ****, ** true, ***** ******* ***** *** *** former ********** ** **** *********** ***** liability ** **** ** *** *********** of ******** *******.
** *** ******* ******** *** ********* attempt, ** ***** ****************** *** ***** ********'* ******* **** ***** ****** *** ******* the ***** **** ******* ** ******** services ***************.***.
"Lacked ********** **********"
********* ****** **** *** ******* ******* were ***********,***** *******: "***** ** * **** **********, nonfraudulent ***********."
***** *** * ****-******* ******* **** recognized—and ********* ********** *** ***** ******—**** itlacked ********** **********, *********, *** ********* **** ********* *********, which resulted in deficient internal controls. [Emphasis Added.]
*** ******* ******* **** *** ******** management **** *********** ******* ** ******* experts ** *********** *** ******* ******* reporting ****** ** **** ** *** executives ****** ***** ** ****.
***** ****** **remediate *** ********* ********** with help from independent consultants, and updated investors on its progress. Yet it had not done so in time to preventsome ***** ********* from failing ** ****** ******* ***** ** ***** ******** ***** ********** with some customers. [Emphasis Added.]
******* *********** ******* **** **********, *** company **** *** ****** **********'* ******* "demonstrates **** ***** *** ****** **********, not *****." ************** *** ********** ** the ******* ** *** *****, ** which *** ***** ********* ***** ***** needed ** ******* *** ** *** financials ***** ****, *** ******* ****:
***** ***** ****unspecified ******* *********** ****** occurred as a result of a failure by some ***** ********* to report the terms of sales arrangements to which they agreed with some *********. [Emphasis Added.]
Early ***** ** *******
*******, ***** ** ******* *** ******* well ****** *** ******* ********* * board ************* **** *** ********* *********. Having ************* ***** ** *** ********* ***********, *** ******* ******** ** ***** 2022 **** ************* "*********"**** ********* **** *** ******* ******** of ********** *** ********* ** ****-**** software ********* ** ********** ********.
** *** *** ** **** *****, Mitchell *** ******* **** ** ***, and *** ***** ********* ********** ****************** ** ********* *********.*** ******* ********* *** ***** ********* probe ** ***. **, ****. **** days *****,**** ******** *************** ***** ****** ***** ********* ******** that *** ******* *********** *** ******** revenue ***** ******* ** ****** (****).
Touting **********
********* **** *** ****** ***** ************* management **** *** ******* ********* ************* in ********** **** *** **** ****** in ****.*****'* ******** ************* *** ********** ** * "****** management ****" **** *** "**** ********* to *** ******* ***** ****" ********* multiple ******* **** ********** ** *****:
*** **** ******* ********** "****** *******," which ******** ****, ** * "*** metric."
***** *** **** ********** ***** ********* an ********* ********* *** ****** ******* growth.
"A ******** ****"
****** **** ******* *** *********' ****** about ********* **********, ***** ****** **** the ********* ****** **** ** *** Generally ******** ********** ********* ********* ******* with *** *********** ** *******.
******** ********* ****** ****every ***** ****** ****** ********** *******, misrepresented Latch’s revenue reporting practices, and/or omitted internal controls weaknesses, Plaintiff’s claims are all based on a ****** ******* **** *********—that Latch violated *** *** by “recognizing revenue on LOIs and on hardware … without an actual change in control". [Emphasis Added.]
*** ******* ******* ****** **** *********** whether ** ****** * *********** ** "revenue" *** "********** * ******** ****" and **** ** *** ****** ********* of *** ***** ********** **** ****** those *********. ************, ***** ****:
*********** *******was *** * *************** *******. Latch acknowledged that the timing of revenue recognition, as well as the amount to recognize, was inherently * ******** ****. For hardware, Latch historically recorded as revenue the amount it expected ** ******* **** *** **** of its products and included potential costs associated with warranties—costs associated with returning defective hardware and, in certain circumstances, nondefective hardware—as a cost of revenue. [Emphasis Added.]
"Generic" ************ *********
***** ********** *** ******** ******** ******** by ****** ***** ********** ** *** plaintiffs ** "******* [************ *******] ******* of ********* ******** ***** *********." *** company ******* ****** **** *** ************ witnesses' ********* — ********** *****-**** ******* to ********* ******* ******* "******* ********," LOIs, *** ********** ****** — "** not ********* ********* *******."
***** *********:
** *** *** ***, *** *** is ******* ** **** *** *** involvement ****, ** ******* ****, *****’* revenue *********** ********* ****** *** ***** Period—they *** ****** ** ***** ** as ** ********.None *** ***** ** ******* ***** ******** **** ****. Plaintiff thus fails to allege any actionably false statements. [Emphasis Added.]
No *********** ** *************
******* ***** *** *** *** ***** its ******** **********, *** ********* **** also **** ****** ** ***** **** exactly ******* **** ********** *** ** how ****, *** ******* ****.
"*** **** **** ** * ******** restatement **** *** ********* **** **********' revenue ********** **** *********** *****," ***** alleged ** *** ******. ***** **** alleged **** *** ********* ****** ******* "tying ************, ********, ** ********* ** the ******* ** *** ******** ************* the ********** ********** ** ***."
**********, *** ******* ******:
*********does *** ****** * ****** **** showing **********’ ********** **** ********* ***** **** ****, or that Defendants’ opinion statements about revenue, revenue reporting, and the effectiveness of internal controls are actionable. [Emphasis Added.]
*******, *** ******* ****: "*** **** reasonable ********* **** *** ******* ***** is **** ********** ********* * ********* effort ** *********** *** *** ********* errors—not **** **** ************ ***** ** deceive."
Outlook *** *****
***** ********** ***** ** ***** *********, ****** ******* ********** ** *** light **** ********* ** *** ********* when *********** ******* ** ***** * motion ** *******.
** **** ***** ** *** **********, the ***** ***** *** ** ****** on *** ****** *** ****** ** whether *** ********* **** ************ ****** the ******** ********* ** ****** ***** case. *** ***** ******* **** ********** making ***** ****** ******* ********** ******* to ******* "* ****** ********* **** the ********* ***** **** *** ******** state ** ****."
** *** ********** *** ***, * judge ***** **** *** ****** ** dismiss *** ****** ********* ** ****** more ********.
***** *** ********* ********* **** *** of *** ***** — *** ********, they *** *** **** ** *** public ****** ** *** **** ***** how ********* *****'* ******* **** ******* Latch *** *** ********* ********* ******** — *** ********* ******** ***** ******* about *** ******* ***** *******. *** level ** ******, ********* *** ******** by ****** **********, ** ****** **** in **** ***** ***** ********** ***** lawsuits, ***** ******** *** ****** *** well-founded.
******* ** ***** *******, ** ** highly ******** *** ***** ***** ******* the **** ******* ** ***** ********* an *********** *** *** ********** ** amend **. ** **** *****, ***** may **** ****** ******** ** ******. If ********* ** *********, **** **** damaging ***** *** ***** *** **** to *****.
******: *** ********** **** ******* *** complaint *****, ******** ** *********** ********* were ****.
**** ** ********* ******* *********.
**** ** ** ************* ** ******* ***** ** ******* ******** ** *** ****** *********.
***** *** *** ***** ********** **** requested **** ********* ** ********* ******* court, ******** ** **** *** **** set ***.
when **** "**** ** '*** *** **** **" ****** **** *****... *** **** *** **** **** ********
"**** *****, ** ****'* ****** ***** - ** **** ****** ****'* **** what ** **** *****."