District Of Massachusetts Dismisses Putative Securities Class Action For Failure Adequately To Allege A Material Misstatement Or Omission
On June 18, 2018, Judge William G. Young of the United States District Court for the District of Massachusetts dismissed with prejudice a putative securities class action against Acacia Communications, Inc. (the “Company”), certain of its officers, certain sellers of the Company’s common stock in connection with its secondary offering, and the underwriters for the Company’s secondary offering, alleging claims under Sections 11, 12(a)(2), and 15 of the Securities Act of 1933 (the “Securities Act”) and Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the “Exchange Act”). Tharp v. Acacia Communications, Inc., 17-cv-11504 (D. Mass June 18, 2018). Plaintiffs alleged that the Company, which designs components used in high-speed wireless networks, made misleading statements in the offering documents for its secondary offering, and that the Company’s stock plummeted in mid-2017 when the true facts were disclosed. Finding that plaintiffs’ factual allegations were supported only by conclusory statements, the Court granted the motion to dismiss in its entirety.
Plaintiffs alleged that the offering documents for the Company’s secondary offering failed to disclose uncertainties in the China market, difficulties facing the Company’s two most important customers, and quality control deficiencies in manufacturing. The Court, however, rejected plaintiffs’ argument that the offering documents failed to include such information or address its “potential impact.” Rather, the Court determined that the offering documents indeed warned of the impact of “the economic slowdown in China,” that the loss of any large customer “could materially harm [its] business,” and that outsourced manufacturing meant that the Company “cannot directly control [its] product delivery schedules and quality assurance.” Slip op. at 33-35. Accordingly, the Court concluded that there was “enough cautionary language or risk disclosure that reasonable minds could not disagree that the challenged statements were not misleading.” Id. at 35.
The Court also found insufficient plaintiffs’ claim under Section 11 of the Securities Act for failure to disclose known trends or uncertainties likely to have a material impact, as required by Item 303 of Regulation S-K. While noting that defendants’ knowledge of such trends had been adequately alleged, the Court held that such trends were, in fact, adequately disclosed, as the offering documents acknowledged that “changes in general economic, industry and market conditions and trends, including the economic slowdown in China that began in 2015” could affect the Company’s stock price. Id. at 38.
The Court separately rejected plaintiffs’ argument that the offering documents included misleading forward-looking statements. The Court found these statements to be protected under the Securities Act’s statutory safe harbor for forward-looking statements “accompanied by meaningful cautionary statements.” In particular, the Court highlighted that the prospectus warned investors that the Company had “a history of operating losses, and may not maintain or increase” profits in light of the slowdown in China, and that “revenue growth in recent periods may not be indicative of future growth or performance.” Id. at 40.
For similar reasons, the Court denied plaintiffs’ claims under the Exchange Act for failure to allege a material misstatement or omission. In particular, the Court agreed with defendants’ argument that plaintiffs failed to raise the strong inference of scienter required by the Private Securities Litigation Reform Act. While plaintiffs attempted to plead scienter based on stock sales by the Company’s senior executives and directors, the Court found these allegations insufficient because they failed to show how specific sales were unusual or suspicious, such as providing the amount of trading that the insider conducted before or after the putative class period. Id. at 47. The Court similarly rejected plaintiffs’ assertion that defendants knew of uncertainties in demand in China or the sales forecast for its largest customers, finding that the complaint failed to allege with particularity that defendants knew or were reckless in not knowing that any statements were false when made—such as by providing “internal records or witnessed discussions.” Id. at 48. Rather, the “facts indicate optimism for the future of [the Company’s] business.” Id. Finding that the complaint failed to plead a primary violation under Section 10(b), the Court dismissed the Section 20(a) claim against the individual defendants.