Dismissal Briefing Concludes in Zoom Securities Class Action

In a Monday court filing, Zoom Video Communications Inc. said the securities lawsuit filed against it should be dismissed for failing to allege elements required by the applicable federal securities fraud statute. The Northern District of California case arose amid Zoom’s rise to popularity as a video conferencing application during the COVID-19 pandemic. 

According to last month’s opposition, the company’s share price dropped precipitously after executives and official filings misled investors about its end to end encryption feature. In addition, Zoom purportedly collected users’ personal data and shared it with Facebook, even in the case of users without Facebook accounts. Among other things, the investor pointed to an FTC settlement with Zoom over the false representation of its product’s security and encryption.

In this week’s filing, Zoom contended that the complaint “fails to plead a single actionable mis-statement, a strong inference of scienter, or loss causation under the Exchange Act.” In particular, the investors purportedly fell short of pleading that statements were false or misleading with particularity. In addition, the plaintiff incorrectly argued for a definition of end-to-end encryption that clashes with Ninth Circuit precedent because he failed to prove that it is the meaning accepted and used by the industry, the reply said.

Zoom also claimed that the plaintiff put forward only conclusory and nonspecific references in support of his claim that company officers knew or recklessly disregarded that the disputed statements would mislead investors. Allegations concerning founder Eric S. Yuan’s development of the product, and in turn, familiarity with it, fall short of plausibly establishing the state-of-mind requirement, the reply said.

Reference to the FTC settlement, Zoom contended, does not otherwise validate the plaintiff’s falsity and scienter theories. The settlement, wherein Zoom neither admitted nor denied the allegations, is hardly analogous to the SEC and fraud cases to which the plaintiff compares it, the filing said. Instead, the case with the FTC, “an entity whose mandate does not encompass securities fraud and thus does not implicate investors,” is immaterial to the falsity and knowledge allegations.

The video conferencing software company asked the court to grant the motion with prejudice. A hearing on the issue is scheduled for Aug. 26 before Judge James Donato.

Zoom is represented by Cooley LLP, and the investor and putative class by Robbins Geller Rudman & Dowd LLP

A California investor thereafter complained that the company made false claims that users’ communications were encrypted and that user data was secure.