District Court Of Massachusetts Denies Communications Infrastructure Company’s Motion To Dismiss Finding Plaintiffs Adequately Pled Scienter
On October 20, 2022, Judge George A. O’Toole, Jr. of the United States District Court for the District of Massachusetts (the “Court”) denied a motion to dismiss a putative securities class action against a business communications infrastructure company (the “Company”) and three of its executives. Miller v. Sonus Networks, Inc., et al, No. 18-12344-GAO (D. Mass Oct. 20, 2022). Plaintiff alleged that defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act (the “Exchange Act”), and Rule 10b-5 promulgated thereunder, by making materially false and misleading statements regarding the Company’s projected sales and revenue forecast. The Court denied the motion, finding that plaintiff adequately pled scienter.
The amended complaint (“Complaint”) alleged that in September 2014, the Company inserted a new Vice President of Worldwide Sales, who thereafter changed the Company’s revenue forecasting methodology. Specifically, plaintiff alleged that the Company no longer based its forecast on an aggregate of “realistic” expected sales for each employee in the particular time period (the “commit number”) but instead based its forecast on “estimated sales for [each] employee in a best-case scenario” (the “stretch number”). According to the Complaint, Company management allegedly urged the sales employees to report the stretch numbers or face termination. The Complaint alleged that on October 23, 2014, defendants announced “comfort” with certain analysts’ estimated revenue forecast of $74 million for the first quarter of 2015. Plaintiff further alleged that, following the October announcement, defendants reaffirmed that projection in statements made on January 8 and February 18, 2015. Plaintiff alleged that those statements were materially false and misleading, and that defendants were (at both times) aware that the forecast was unattainable due to sales backlogs, as well as discrepancies between closed (“committed”) deals and speculative (not-yet-closed) deals. Ultimately, on March 24, 2015, the Company issued a press release disclosing that instead of the $74 million projected for the first quarter of 2015, it only expected revenue between $47 and $50 million. The Company’s stock price subsequently dropped from $13.16 to $8.70 per share.
In denying the motion to dismiss, the Court held that the Complaint adequately alleged that defendants were aware “that any basis for optimism that may have existed in October was no longer realistic by January” (i.e., by the time defendants reaffirmed the projection). The Court reasoned that the Complaint alleged specific instances in the months leading up to the February statements that indicate when the defendants became further aware that the forecast would not be met. The Court emphasized that plaintiff alleged that defendants were aware of internal communications by the sales team that expressed pessimism about meeting the forecast, and that defendants were either responsible for, or at the very least aware of, the reclassification of speculative sales into the “committed” sales pipeline. Based on the aforementioned allegations as well as plaintiff’s allegations that defendants were also aware of the reduction of sales prior to the February statements, the Court held that plaintiff made a “sufficient showing of scienter,” and denied defendants’ motion to dismiss.
Having found that plaintiff adequately pled viable Section 10(b) claim, the Court denied defendants’ motion to dismiss the Section 20(a) control person liability claim.
Notably, the Court issued its decision on the motion to dismiss one day after plaintiff filed a mandamus petition in the United States Court of Appeals for the First Circuit, requesting that the First Circuit order the Court to decide the motion, which plaintiff maintained had been fully briefed and pending for more than three years.