District Court Dismisses Putative Class Action, Holding That Company’s Optimistic Guidance Fell Within PSLRA Safe Harbor Provision
03/26/2019On March 15, 2019, Judge Edward M. Chen of the United States District for the Northern District of California dismissed a putative class action asserting violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 against a camera technology company (“Company”), along with its officers and executives. Park v. GoPro, Inc., et. al., 18-cv-00193-EMC (N.D. Cal. Mar. 15, 2019). Plaintiffs claimed defendants made false statements during an earnings call following the announcement of the Company’s results for the third quarter of the 2017 fiscal year (“Q3 2017”), and engaged in suspicious stock transactions. The Court dismissed the action on the ground that plaintiffs did not adequately plead falsity or scienter.
The Company develops and manufactures wearable and gear-mountable cameras and accessories. On November 1, 2017, defendants held an earnings call to address Q3 2017 results and provide “guidance” concerning fourth quarter prospects, including that “expected results for 2017 [were] in line or better than the goals that were established at the beginning of the year.” Defendants also allegedly touted anticipated sales performance of four products and indicated that the Company was “restor[ing] growth.” On January 8, 2018, the Company announced sales results that were lower than analysts’ projections, which the Company attributed to the need to cut prices in order to move inventory, including for the four products mentioned during the third quarter call, and the stock price fell 12 percent. Before announcing these results, certain individual defendants sold, in total, approximately 700,000 shares.
Relying on confidential witnesses, plaintiffs alleged that defendants’ statements touting the anticipated strong sales performance of the products made during the third quarter earnings call knowingly did not take into account the lack of demand for certain products and were contrary to the Company’s marketing strategy of slashing prices and introducing upgraded products that directly competed with its other products. Plaintiffs also alleged that defendants’ stock sales were suspicious and that this further supported their scienter allegations.
The Court granted defendants’ motion to dismiss. Noting that the Private Securities Litigation Reform Act (“PSLRA”) precludes claims of “impermissible fraud by hindsight,” Fialkov v. Microsoft Corp., 72 F. Supp. 3d 1220, 1230 (W.D. Wash 2014), aff’d, 692 F. App’x 491 (9th Cir. 2017), the Court found that plaintiffs failed to allege adequately that defendants’ statements contained facts that were actually false or misleading at the time. The Court concluded that many statements were inactionable puffery or “mildly optimistic subjective assessments” about how “strong” or “solid” sales would be and that plaintiffs failed to allege that any of the sales numbers provided by the Company were inaccurate. The Court further held that defendants’ guidance was forward-looking statements that were accompanied by “detailed and extensive” disclosures and therefore protected by the PSLRA Safe Harbor, 15 U.S.C. § 78u-5(i)(1)(A). The Court rejected claims based on aspects of the forward-looking statements that referred to then-present conditions at the Company, such as statements about marketing strategy, on the ground that the allegation of falsity was “conclusory.” As to scienter, the Court held that the confidential witnesses lacked sufficient personal knowledge such that scienter could be established or inferred from their statements and that plaintiffs’ allegations concerning stock sales were inadequate because the stock sales were small. See City of Royal Oak Ret. Sys., 880 F. Supp. 2d 1045, 1069 (N.D. Cal. 2012).