Investors tell 10th Circuit Palantir sold artificially inflated stocks

(CN) — AI software defense contractor Palantir appeared before a 10th Circuit panel Monday to defend accusations that it artificially inflated stock prices to increase insider profits and defraud investors.

A class of California residents, led by the California Public Employees Retirement System pension fund, say Palantir executives made false statements to investors and overstated the sustainability of its government sector’s growth and revenue, violating the 1934 Securities Exchange Act.

The plaintiffs say the deception allowed executives to sell billions worth of stocks at artificial prices until the company publicly conceded reduced revenue, dropping its stock price by 21% in one day, resulting in significant losses to shareholders.

“The complaint alleges a well pleaded cash out scheme with unusual transactions and unusual selling paired with defendants’ knowledge of the truth while speaking,” class attorney Luke Brooks told the three-judge panel in a Denver courtroom.

Beginning in November 2021, Brooks said executives made more than $2.2 billion from offloading stocks before the company came clean in May 2022.

A trial judge dismissed the class complaint in April, largely citing the plaintiffs not pleading enough facts to strongly infer that the defendant acted “with scienter,” or with intent and knowledge of wrongdoing.

Before the 10th Circuit panel, Brooks argued that the large amount of sales in a short period of time are proof enough that Palantir executives knew what they were doing.

“They took the company public, they made false statements and pumped up the stock, then over a period of 13 months, they sold,” Brooks said. “And the sales are 95% before the first corrective disclosure. Before the first piece of negative information comes out, all those sales are made.”

The plaintiffs point to transcripts from town hall meetings in which CEO Alan Karp and others describe sales data they received and admit to their heavy involvement in sales.

In November 2021, Palantir assured investors it would reach 30% long term profits and break $4 billion in revenue.

Defending the tech giant, attorney Bruce Feldman said Palantir did that and more — eventually. By 2025, Palantir achieved 37% growth and more than $4.5 billion in revenue.

“The company thrived and did better than they had indicated to the market,” Feldman told the judges. “The complaint is about actual growth potential. You can’t just look at one quarter here or there and say well they had a down quarter, so it’s securities fraud.”

Brooks countered that what happened years later is irrelevant, given that the stocks purchased by class members were inflated at the time of sale.

Feldman argued that no typical indicia of scienter is present in the complaint.

In most fraud cases, he said, plaintiffs would have statements from confidential witnesses or former employees. To maintain business, Palantir would have had to restate its correct finances. The complaint includes neither.

“No internal documents contradicted,” Feldman added.

If insiders wanted to squeeze profit out of a dying company, Feldman argued, they would have sold the majority of their shares. Instead, executives retained about 80% of their total shares, selling less than a quarter of what they held. As he said earlier, the company only increased revenue from there.

“There is no basis for saying it was a pump and dump,” he said.

To increase revenue, Palantir also invested in multiple special purpose acquisition companies — shell companies intended to raise capital before merging with larger companies. It invested more than $400 million in these companies in exchange for the companies using Palantir software, even though most, if not all, had no interest in AI or defense technology.

The class plaintiffs argue that Palantir didn’t properly disclose information about the shell companies or the deals made with them. The judges were skeptical that executives would know enough about the inner workings of those deals to be complicit in any illegal scheme.

Feldman said the company disclosed everything it needed to, including that some of the companies had no previous business and were acquired on day one of being publicly traded. He added that there’s no evidence in the complaint to support the claim that the companies had no interest in Palantir products.

The panel, made up of U.S. Circuit Judges Allison Eid, a Donald Trump appointee; David Ebel, a Ronald Reagan appointee; and Richard Frederico, a Joe Biden appointee, did not indicate when or in which direction it would rule.

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