On Tuesday, the Northern District of California granted information technology and software company Pivotal Software’s motion to dismiss a securities class action against it. The court found that the plaintiffs failed “to plausibly allege that any statement was false and misleading.”
The plaintiffs, who purchased Pivotal’s securities, alleged that Pivotal violated the Securities Act of 1933 (the Securities Act) and the Securities Exchange Act of 1934 (the Exchange Act) for allegedly providing “false and misleading statements about its financial and business condition.” As a result of this conduct, the plaintiffs claimed that they are entitled to damages.
In April 2018, Pivotal completed its initial public offering (IPO), which issued 42,550,000 public shares at $15 per share, which generated $638 million for Pivotal. The plaintiffs alleged that the registration statement and prospectus made false and misleading statements about Pivotal’s business because it omitted certain information. For example, it did not disclose that “Pivotal was facing major problems with its sales execution and complex technology landscape resulting in lengthening sales cycles and diminished growth.” As a result, in June 2019, Pivotal lowered its 2020 revenue guidance “from $798-806 million to $756-767 million.” Consequently, stock prices fell 40 percent from $18.54 to $10.89 per share, which is a drop of $7.65 per share. Pivotal also merged with VMware in 2019 for $15 per share.
The court considered Pivotal’s request for judicial notice and incorporation by reference, in relation to 21 exhibited documents and ruled select documents were subject to judicial notice or incorporation by reference.
The court examined the plaintiffs’ claims about Pivotal’s registration statement and prospectus under the Securities Act. Specifically, the court looked at the plaintiffs’ Section 11 and 12(a)(2) claims, under which the plaintiffs must plausibly allege that the registration statement and prospectus “‘contained an untrue statement of material fact’ or ‘omitted to state a material fact…necessary to make the statements therein not misleading.’” As a result, these statements must be false and material to investors. Pivotal sought to dismiss these claims because the plaintiff “fails to plausibly allege a false or materially misleading statement because (a) Plaintiffs did not establish contemporaneous falsity, (b) many of the statements are not actionable, and (c) SEC Regulation S-K did not impose a duty to disclose.”
The court agreed with Pivotal, finding that the plaintiffs failed to establish falsity because they do not “plead sufficient factual content to allow a reasonable inference that Pivotal’s statements were false or misleading” in violation of Sections 11 and 12(a)(2). The court also found that corporate optimism statements or expressions are not actionable, as other courts have also held. However, the court noted that types of statements could form a securities fraud claim when the statements “‘address specific aspects of a company’s operation and that the speaker knows to be performing poorly,’ but the facts here do not lead to this conclusion.”
The court also reviewed the plaintiffs’ claims about various false and materially misleading statements and omissions made during the class period under Sections 10(b) and 20(a) of the Exchange Act. The plaintiffs alleged that these statements “artificially inflated or maintained Pivotal’s securities price.” Pivotal argued that the Section 10(b) claim should be dismissed because the plaintiffs failed to “plead facts sufficient to establish that any defendant made a false or materially misleading statement” and failed “to plead facts giving rise to a ‘strong inference’ of scienter.” Upon review, the court found that the plaintiffs “failed to plead specific facts indicating why each of Pivotal’s statements were false when made,” instead it provides “a conclusory litany of reasons for the statements’ falsity. As a result, the court agreed with Pivotal’s argument, finding that the plaintiffs failed to show that any statement was false or misleading when made. Additionally, as with its Securities Act review, the court concluded that statements or expressions of corporate optimism are not actionable and forward-looking statements are also not actionable. Subsequently, the court stated that these types of statements should not be included in an amended complaint. The court added that the plaintiffs’ claims also failed because they do not adequately allege scienter. The court dismissed the plaintiffs’ Section 10(b) claims with leave to amend for the aforementioned reasons. The plaintiffs’ Section 20(a) claim was also dismissed with leave to amend because the plaintiff failed to state a claim under Section 10(b).
Pivotal is represented by Morrison & Foerster LLP. The lead plaintiff is represented by Labaton Sucharow LLP. The class is represented by Wagstaffe, Von Loewenfeldt, Busch & Radwick LLP.
