Corrected: COLUMN-SmileDirect investors are suing banks over the startup's collapse. But does their legal argument have any teeth?

SmileDirectClub

01/09/2026 11:00

Corrects attribution to underwriters instead of plaintiffs in paragraph 6.
By Jenna Greene
Sept 1(Reuters) - When SmileDirectClub went public in a billion-dollar IPO in 2019, the online dentistry company promised a cheap, convenient way to straighten teeth by selling mail-order plastic aligners for a fraction of what most orthodontists charge.
But the smile soon faded. The Nashville, Tennessee-based company faced regulatory scrutiny of its business practices, allegations of the unauthorized practice of dentistry and widespread customer complaints. SmileDirect’s stock plummeted and the company filed for bankruptcy in 2023 before shutting down later that year.
Predictably, the shareholders sued.
What’s more unusual is how the case, in Tennessee state court is playing out as investors and underwriters battle over who should pay and how much, for the company's collapse. 
The plaintiffs say the mega-banks that underwrote SmileDirect’s IPO, including J.P. Morgan Securities, Citigroup Global Markets, BofA Securities and UBS Securities, burned investors by failing to properly vet the company.
The underwriters deny wrongdoing and argue that they should not be stuck paying for losses allegedly caused by the executives who ran SmileDirect. Such a result would be both unfair and contrary to federal securities laws, they say. 
The banks, which are represented by Sullivan & Cromwell, declined to comment.
Plaintiffs' lawyers from Robbins Geller Rudman & Dowd have not specified damages, but say investors lost hundreds of millions of dollars. 
They argue the Securities Act of 1933 imposes broad, shared liability on underwriters because of the important gatekeeping role they play in bringing companies to market. The underwriters “failed to protect the public by conducting a reasonable investigation” into SmileDirect’s business, the plaintiffs assert.
AN EARLY SIGN OF TROUBLE
The roots of the dispute lie in SmileDirect's rise from startup darling to securities law cautionary tale.
The company was founded in 2014 by childhood friends Alex Fenkell and Jordan Katzman, according to an archived version of SmileDirect's website, and backed by Camelot Venture Group.
Neither Fenkell nor Katzman responded to requests for comment via Camelot, where they are listed as principals. In court papers, they and the company's other former executives deny wrongdoing. Their lawyers from Quinn Emanuel Urquhart & Sullivan; Gibson, Dunn & Crutcher and Benesch Law also did not respond to requests for comment. 
According to SmileDirect, customers could use an at-home kit to make impressions of their teeth. Those impressions would be used to create a series of custom-made, clear plastic aligners shipped to them directly – no office visits required. The company promised a licensed dentist or orthodontist would oversee treatment from afar.
SmileDirect’s September 12, 2019, IPO raised $1.3 billion at an initial valuation of $8.9 billion, though the price fell about 11% the first day that the shares debuted on Nasdaq.
It was an early sign of trouble.
In a state court complaint filed just two weeks later, plaintiffs alleged SmileDirect’s registration statement was riddled with misleading statements and omissions. A parallel action, currently stayed, soon followed in Nashville federal court. (The U.S. Supreme Court ruled in 2018 that shareholders can bring Securities Act class actions in both state and federal court.)
The plaintiffs claim that administrative personnel in Costa Rica, rather than licensed dentists or orthodontists, provided treatment to customers, and that the underwriters failed to flag this and other problems in the IPO disclosures.
“The only involvement of any licensed dentist in the United States prior to prescribing aligners is a cursory review of a treatment plan – at $50 a pop,” the complaint alleges. 
Now-bankrupt SmileDirect was dismissed from the case, but the complaint targets the company’s officers and directors individually, plus the underwriting banks, which allegedly raked in $67.3 million in fees from the IPO. 
     A FAIR SHARE? 
Naming underwriters is routine in securities class actions. But in most cases, they are minor players. That’s because they typically require the company going public to indemnify them against IPO-related liabilities.
But here, SmileDirect’s bankruptcy leaves the underwriters vulnerable.
Earlier this year, the officers and directors reached an unusual $48 million settlement with the shareholders. The preliminary deal, which still requires approval by Chancellor Russell Perkins of Davidson County Chancery Court, would allow the SmileDirect executives to exit the case, leaving the underwriters as the lone defendants. 
The plaintiffs say the payout is the second-highest ever by individual defendants in a Securities Act case. 
But the underwriters object to the terms of the settlement, warning that it could ultimately leave them paying far more than their share of any future judgment.  
        The banks contend damages should be allocated based on each defendant's degree of fault, and say they played only a "secondary role" in any alleged misconduct.
        A hypothetical illustrates the dispute. Suppose a jury returned a $100 million verdict in favor of the shareholders. The underwriters say they could be stuck paying $52 million after the executives' $48 million settlement, even if they were only 10% responsible for investors' losses. The "pro tanto" (or dollar-for-dollar) settlement terms would bar them from seeking reimbursement from the executives for the difference.
“Plaintiffs ask the Court to adopt and impose a new liability scheme that would put the Underwriters at risk of paying a vastly disproportionate share of any judgment in this case,” the underwriters argue.
Both the Securities Industry and Financial Markets Association and a group of law professors and former U.S. Securities & Exchange Commission officials filed amicus briefs backing the underwriters.
In urging the judge to reject the deal, SIFMA wrote that liability in securities offerings should be based on the degree of fault and not “on the depth of a defendant’s pockets.” To find otherwise, they warned, would “reverberate across the capital markets: higher costs for issuers, less favorable terms for offerings, and in extreme cases, the withdrawal of underwriting services.”
The case is now at a pivotal juncture, with a decision from Perkins expected at any time. Should he reject the settlement, all defendants will head to trial next year.

(Reporting by Jenna Greene)
((jenna.greene@thomsonreuters.com;))