Chamath Palihapitiya and Richard Branson are being sued over allegedly covering up flaws in Virgin Galactic's spaceships and pocketing millions by dumping shares

• Chamath Palihapitiya and Richard Branson have been sued for allegedly concealing flaws in Virgin Galactic's spacecrafts.
• An investor lawsuit alleges they dumped shares while aware of that non-public information, making millions of dollars.

Chamath Palihapitiya and Richard Branson face an investor lawsuit that alleges they were aware of defects in Virgin Galactic's spaceships but still capitalized on an inflated stock price to sell shares.

The investor lawsuit, filed February 21 by Virgin Galactic shareholder Thomas Spiteri, seeks damages from the space travel company's directors and others in management.

Palihapitiya took advantage of his role as company chairman to sell 10 million shares for $315 million on "inside information" before he abruptly left his role last month, the derivative action alleges.

Virgin Galactic founder Branson sold 16 million shares for about $458 million while the stock was "artificially inflated," the complaint said.

Social Capital CEO Palihapitiya — nicknamed the "SPAC King" for his involvement in several special acquisition deals— helped take Virgin Galactic public via such a blank-check deal with Social Capital Hedosophia in 2019. A securities filing from March last year shows he cashed out his entire personal stake in the spaceflight company.

Virgin Galactic was founded in 2004 with the aim of taking tourists to the edge of space, but only received regulatory approval last year. In the past year, its stock has taken a hit as the company battled with potentially defective parts and an investigation into its commercial flights.

The investor lawsuit alleges that prototype designs for Virgin's Eve and Unity spacecraft, which the company has promoted for space tourism, were "severely flawed and nowhere near flightworthy."

"In fact, the prototypes were not meant to be taken into the air. Rather, they were meant to provide a starting design point for the company to create its own commercial-grade vehicle that was safe and flightworthy — two things Eve and Unity certainly were not," it said.

Branson and Palihapitiya were aware — "or were highly reckless in not knowing" — of the safety problems in the Eve and Unity spacecrafts, yet failed to openly disclose these to the public, the complainant said.

Branson, Social Capital and Virgin Galactic didn't immediately respond to Insider's request for comment.

The Federal Aviation Administration temporarily grounded Virgin Galactic last year after The New Yorker reported that a rocket ship carrying Branson to space flew out of its clearance zone and failed to communicate the mishap to the aviation regulator.

Its stock plunged 14% in October after the company said it would delay the start of its commercial spaceflight operations until the fourth quarter of 2022.

Virgin Galactic's stock price has slumped by more than 70% in the past 12 months, and is down nearly 30% so far this year.

The chart below shows Virgin Galactic's stock price over the past year:

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