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COMMITMENTS AND CONTINGENCIES

9 Months Ended

Sep. 30, 2023

Commitments and Contingencies Disclosure [Abstract]

COMMITMENTS AND CONTINGENCIES

12.	COMMITMENTS AND CONTINGENCIES

Class Action Lawsuit

A consolidated class action lawsuit (captioned Rodriguez v. CPI Aerostructures, Inc., et al., No. 20-cv-01026) was filed in the U.S. District Court for the Eastern District of New York against the Company, Douglas McCrosson, the Company’s former Chief Executive Officer, Vincent Palazzolo, the Company’s former Chief Financial Officer, and the two underwriters of the Company’s October 16, 2018 offering of common stock, Canaccord Genuity LLC and B. Riley FBR. The Amended Complaint in the action asserted claims on behalf of two plaintiff classes: (i) purchasers of the Company’s common stock issued pursuant to and/or traceable to the Company’s offering conducted on or about October 16, 2018; and (ii) purchasers of the Company’s common stock between March 22, 2018 and February 14, 2020. The Amended Complaint alleged that the defendants violated Sections 11, 12(a)(2), and 15 of the Securities Act by negligently permitting false and misleading statements to be included in the Company’s registration statement and prospectus supplements issued in connection with the Company’s October 16, 2018 securities offering. The Amended Complaint also alleged that the defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Rule 10b-5 promulgated by the SEC, by making false and misleading statements in the Company’s periodic reports filed between March 22, 2018 and February 14, 2020. Plaintiff sought unspecified compensatory damages, including interest; rescission or a rescissory measure of damages; unspecified equitable or injunctive relief; and costs and expenses, including attorney’s fees and expert fees. On February 19, 2021, the Company moved to dismiss the Amended Complaint. Plaintiff submitted a brief in opposition to the motion to dismiss on April 23, 2021.

On May 20, 2021, the parties reached a settlement in the amount of $3,600,000 (the “Settlement Amount”), subject to court approval. On July 9, 2021, plaintiff filed an unopposed motion for preliminary approval of the settlement. On November 10, 2021, a magistrate judge recommended that the court grant the motion for preliminary approval in its entirety. The court adopted the recommendation on May 27, 2022, and entered an order granting preliminary approval of the settlement on June 7, 2022. On August 5, 2022, plaintiff filed an unopposed motion for final approval. The magistrate judge held a hearing on the final approval motion on September 9, 2022. On February 16, 2023, the magistrate judge recommended that the Court grant the final approval motion in its entirety. The Court adopted that recommendation in its entirety on March 10, 2023, and terminated the case on March 13, 2023. On May 5, 2023, the Settlement Amount was transferred to plaintiff’s counsel from the escrow account established for this purpose.

Shareholder Derivative Action

Four shareholder derivative actions, each based on substantially the same facts as those alleged in the class action discussed above, have been filed against certain current and former members of our board of directors and certain of our current and former officers.

The first action (captioned Moulton v. McCrosson, et.al., No. 20-cv-02092) was filed on May 7, 2020, in the U.S. District Court for the Eastern District of New York. It purports to assert derivative claims against the individual defendants for violations of Section 10(b) and 21D of the Exchange Act, breach of fiduciary duty, and unjust enrichment and seeks to recover on behalf of the Company for any liability the Company might incur as a result of the individual defendants’ alleged misconduct. The complaint also seeks declaratory, equitable, injunctive, and monetary relief, as well as attorneys’ fees and other costs. On October 26, 2020, plaintiff filed an amended complaint. On January 27, 2021, the court stayed the action pursuant to a joint stipulation filed by the parties.

The second action (captioned Woodyard v. McCrosson, et al., Index No. 613169/2020) was filed on September 17, 2020, in the Supreme Court of the State of New York (Suffolk County). It purports to assert derivative claims against the individual defendants for breach of fiduciary duty and unjust enrichment, and seeks to recover on behalf of the Company for any liability the Company might incur as a result of the individual defendants’ alleged misconduct, along with declaratory, equitable, injunctive and monetary relief, as well as attorneys’ fees and other costs. On December 22, 2020, the parties filed a joint stipulation staying the action pending further developments in the class action.

The third action (captioned Berger v. McCrosson, et al., No. 1:20-cv-05454) was filed on November 10, 2020, in the U.S. District Court for the Eastern District of New York. The complaint, which is based on the shareholder’s inspection of certain corporate books and records, purports to assert derivative claims against the individual defendants for breach of fiduciary duty and unjust enrichment, and seeks to implement reforms to the Company’s corporate governance and internal procedures and to recover on behalf of the Company an unspecified amount of monetary damages. The complaint also seeks equitable, injunctive, and monetary relief, as well as attorneys’ fees and other costs.

On March 19, 2021, the parties to the Moulton and Berger actions filed a joint stipulation consolidating the actions (under the caption In re CPI Aerostructures Stockholder Derivative Litigation, No. 20-cv-02092) and staying the consolidated action pending further developments in the class action.

The fourth action (captioned Wurst, et al. v. Bazaar, et al., Index No. 605244/2021) was filed on March 24, 2021, in the Supreme Court of the State of New York (Suffolk County). The complaint purports to assert derivative claims against the individual defendants for breach of fiduciary duty, unjust enrichment, and waste of corporate assets, and seeks to recover on behalf of the Company for any liability the Company might incur as a result of the individual defendants’ alleged misconduct. The complaint also seeks declaratory, equitable, injunctive, and monetary relief, as well as attorneys’ fees and other costs. On April 12, 2021, the parties filed a joint stipulation staying the action pending further developments in the class action.

On June 13, 2022, plaintiffs in the consolidated federal action informed the court that the Company and all defendants had reached an agreement in principle with all plaintiffs to settle the shareholder derivative lawsuits described above. On June 16, 2022, plaintiffs in the consolidated federal action filed an unopposed motion for preliminary approval of the settlement. On July 22, 2022, the court referred the motion to the magistrate judge. The magistrate judge held a conference on September 9, 2022 in the consolidated federal action. On February 14, 2023, the magistrate judge recommended that the court grant the motion in its entirety. On March 6, 2023, the court granted preliminary approval of the proposed settlement.

On May 17, 2023, plaintiffs in the consolidated federal action filed an unopposed motion for final approval of the settlement. The magistrate judge held a final approval hearing on June 7, 2023. On October 27, 2023, the magistrate judge recommended that the Court grant the final approval motion in its entirety. The final approval motion remains pending.

The terms of the proposed settlement are set forth in the stipulation of settlement agreed to by the Company and plaintiffs. Should the proposed settlement receive final approval from the Court, it will result in the dismissal of the shareholder derivative lawsuits. As part of the proposed settlement, the Company has agreed to undertake (or confirm that it has undertaken already) certain corporate governance reforms. In addition, the Company and/or its insurer have agreed to pay a total of $585,000 in attorneys’ fees to plaintiffs’ counsel. The Company’s insurer paid the full amount due of $585,000.

Litigation Settlement Obligation and Insurance Recovery Receivable Pertaining to the Class Action Lawsuit and Shareholder Derivative Action

The attorneys’ fees for both the class action lawsuit and the shareholder derivative actions were covered and paid by our directors’ and officers’ insurance carrier, after satisfaction of our $750,000 retention. As of September 30, 2023, we had previously paid and accrued to our financial statements covered expenses totaling $750,000, and had therefore met our insurance carrier’s directors’ and officers’ retention requirement, which capped the Company’s expenses pertaining to the class action suit at $750,000. Because the Settlement Amount was transferred to counsel for plaintiff in the class action lawsuit on May 5, 2023, from the escrow account established for this purpose, we have relieved from our balance sheet, as of that date, the amounts previously owed from our directors’ and officers’ insurance carrier and to that plaintiff.