San Francisco-based customer service software company Zendesk has refuted allegations that it misled investors over a 2016 data breach and subpar sales performance in an answering brief submitted on Wednesday. Zendesk Inc. asks for affirmation of the lower court’s dismissal, either on the grounds previously cited, failure to prove falsity and scienter, or on alternative grounds, failure to prove causation.
Law Street Media previously reported on the shareholder derivative case filed against Zendesk and several of its board members that the Northern District of California court consolidated with the instant appeal. That complaint alleged that the defendants breached fiduciary duties by failing to properly disclose a data breach and misled investors about lagging sales figures in certain regions of the globe, purportedly causing a stock price drop when the truth came to light. In the case of the individual defendants, the complaint accused them of improperly trading on confidential information for their own gain.
Judge Charles R. Breyer granted Zendesk’s second motion to dismiss because the plaintiff did not adequately plead a material misstatement or omission, and the investor’s allegations did not give rise to a strong inference that Zendesk or its officers acted with scienter under the Private Securities Litigation Reform Act (PSLRA). The court granted leave to amend for a third time, but the plaintiff declined, and final judgment was entered in the company’s favor.
In response to the plaintiff’s appeal, Zendesk contends that the plaintiff’s security program claim falls flat because it “has a fatal chronological flaw.” Specifically, the plaintiff “failed to plead facts supporting the contention that the challenged 2019 statements referred to a purported state of affairs that existed three years earlier.” On top of that, Zendesk contends, it expressly disclosed the allegedly omitted fact that earlier iterations of its security program contained vulnerabilities.
Among other defenses, Zendesk offers the Ninth Circuit a chance to grant dismissal on causation grounds, an argument which the district court did not reach. “Plaintiff failed to plead facts showing that its alleged losses were triggered by the revelation of the information it claims Zendesk wrongfully concealed—that is, not that a breach had occurred but that certain features of Zendesk’s security system were not yet in place in 2016,” the brief says.
The shareholder’s reply is due December 3.