By Millie Turner
The lawsuit Richard Branson is facing in the US over claims he hid Virgin Galactic’s problems from shareholders is a sign of the times, as investors become rattled by a young market’s growing pains.
The British billionaire has been accused of defrauding shareholders into overpaying for the space tourism company’s shares, a US judge said on Monday.
Shares in Virgin Galactic tumbled around two per cent to $5.10 per share by midday in the US.
“This is one of many space-related cases that has come before the US courts in recent years. As the commercial space industry grows, it is arguably inevitable that we will see a corresponding rise in the number of disputes stemming from this sector,” Rachael O’Grady, partner at American law firm Mayer Brown, told City A.M.
“The fact that the industry is comparatively young and that technologies are still being honed also means that grounds for disputes are particularly fertile.”
Investor confidence
US district judge Allyne Ross has dismissed 31 out of the 35 claims in the security class action, a common dispute in the US when a company suffers a stock price fall.
Branson will have to defend statements made following test flights in July 2019 and July 2021 which did not mention significant failings in the practice runs.
Shareholders could sue over the July 2019 statements that Virgin had made “great progress” overcoming “hurdles” to commercial spaceflight, despite a test flight five months prior when its rocket plane Unity suffered critical damage.
The billionaire must also defend his July 2021 statement that the flight on Unity, which he was aboard, had been “flawless” – despite Unity drifting outside its assigned airspace.
Susannah Streeter, senior markets and investment analyst at Hargreaves Lansdown, said: “Virgin Galactic shares have risen like a rocket multiple times but have dropped disappointingly down to earth as shareholders have faced disappointment upon disappointment about delays to test flights, reducing any hopes of commercial flights to small specs on the horizon.
“With Richard Branson now facing court proceedings in the US over claims he hid problems from shareholders, confidence in the company appears to be ebbing away further.”
The company has lost more than 75 per cent of its stock price value over the past 12-months.
“The problem is that the more test flights are pushed back, the higher the cash burn rate for the company given that very little revenue is in sight,” added Streeter.
“It hasn’t helped that Virgin Galactic has also appeared to lag behind the progress made by Jeff Bezos and his Blue Origin’s tourist programme.”
Virgin Galactic and its lawyers at Latham & Watkins declined to comment.
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