Applied Digital Corporation Faces Class Action Lawsuit for Violating Federal Securities Laws
Pomerantz LLP, a leading law firm, recently announced that a class action lawsuit has been filed against Applied Digital Corporation (“Applied Digital” or the “Company”) and certain officers. The lawsuit, filed in the United States District Court for the Northern District of Texas, seeks to recover damages caused by the Company’s violations of federal securities laws.
The class action lawsuit represents all persons and entities, except the Defendants, who purchased or acquired Applied Digital securities between April 13, 2022, and July 26, 2023. The plaintiffs aim to pursue remedies under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. They argue that Defendants’ actions have resulted in financial harm to investors.
Shareholders who purchased or acquired Applied Digital securities during the Class Period have until October 11, 2023, to request to be appointed as Lead Plaintiff for the class. More information about the lawsuit can be found at www.pomerantzlaw.com.
Applied Digital, formerly known as Applied Blockchain, is a company that focuses on designing, developing, and operating data centers in North America. The company also provides artificial intelligence (AI) cloud services, computing data center hosting, and crypto data center hosting services.
In April 2022, Applied Digital conducted its initial public offering (IPO), issuing 8 million shares of common stock at $5.00 per share. The IPO generated approximately $40 million in proceeds, with B. Riley Securities, Inc. acting as the primary underwriter. B. Riley Securities is an investment bank and a subsidiary of B. Riley Financial, Inc., a diversified financial services platform.
During the IPO, Applied Digital disclosed close connections between the company and B. Riley. For example, the CEO, Wesley Cummins, had sold a majority interest in a registered investment adviser to B. Riley Financial and became President of B. Riley Asset Management. Additionally, two board members, Chuck Hastings and Virginia Moore, had ties to B. Riley through their respective positions.
As a company listed on NASDAQ, Applied Digital is required to comply with certain regulations, including having a majority of independent directors on its Board. Despite the connections between Applied Digital and B. Riley, the IPO Prospectus assured investors that the company had structured its Board composition to meet NASDAQ requirements.
On May 15, 2023, Applied Digital announced the launch of its cloud service to empower artificial intelligence applications. Soon after, on May 23, 2023, the company entered into a loan and security agreement with B. Riley Commercial Capital, LLC and B. Riley Securities. The purpose of the agreement was to provide additional liquidity for Applied Digital’s AI cloud platform and data center buildout.
However, Applied Digital repaid the total balance of the loan much earlier than expected. This early repayment coincided with B. Riley’s efforts to finance its acquisition of Franchise Group, Inc.
The class action complaint alleges that throughout the Class Period, Defendants made false and misleading statements about Applied Digital’s business, operations, and compliance policies. They suggest that the company overstated the profitability of its data center hosting business and its ability to transition into a low-cost AI cloud services provider. Additionally, the complaint argues that Applied Digital’s Board of Directors did not meet the independence requirements defined by NASDAQ listing rules.
In July 2023, market analysts began examining Applied Digital’s business model and its connections with B. Riley. Reports from Wolfpack Research and The Bear Cave questioned the viability of the company’s business model and raised concerns about misrepresentation. Following the publication of these reports, Applied Digital’s stock price declined significantly.
The Friendly Bear also released a report in July 2023, suggesting that B. Riley was controlling managerial decisions at Applied Digital to the detriment of shareholders. The report further emphasized that Applied Digital’s board did not meet the independence requirements under NASDAQ rules.
In conclusion, Applied Digital Corporation is facing a class action lawsuit for alleged violations of federal securities laws. The lawsuit raises concerns about the company’s disclosures, its corporate governance standards, and its connections with B. Riley. Shareholders who suffered financial harm during the Class Period have the opportunity to participate in the lawsuit and potentially recover damages.
Editor’s Notes:
The class action lawsuit against Applied Digital Corporation highlights the importance of transparency and proper corporate governance in the business world. Investors rely on accurate and reliable information when making investment decisions, and any misrepresentation or violation of securities laws can have significant consequences.
It is crucial for companies to uphold the highest standards of integrity and ensure that their disclosures are accurate and complete. This case serves as a reminder that companies should prioritize the interests of their shareholders and comply with all relevant regulations.
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