Southern District Of New York Denies In Part Motion To Dismiss Securities Act Claims Against Technology Company For Allegedly Misleading Statements About Sales Cycle
On February 25, 2022, Judge Gregory H. Woods of the Southern District of New York granted in part and denied in part a motion to dismiss claims under Sections 11 and 15 of the Securities Act of 1933 (“the Securities Act”) against a technology company (“the Company”) and certain of its officers and directors. In re Tufin Software Techs. Ltd. Sec. Litig., No. 1:20-cv-05646 (S.D.N.Y. Feb. 25, 2022). Plaintiff alleged that the registration statement the Company filed in connection with its IPO “included materially misleading misstatements related to, among other things, the length of its sales cycle” and “its training practices.” The Court granted defendants’ motion to dismiss as to certain of the alleged statements, but denied defendants’ motion to dismiss as to others, finding that plaintiff sufficiently alleged that statements regarding the length of the Company’s sales cycle were “materially misleading to investors.”
The Company “develops and sells cybersecurity software designed to help its customers guard against cyber-crime.” The Company’s software “consists of a suite of five interrelated instances of software that is intended to unify and automate its customers’ policies governing the third-party cybersecurity-related products and tools.” The Company released its preliminary revenue and operating loss estimates after the IPO, which were lower than prior guidance. Plaintiff filed a putative class action that was later consolidated with another action and filed an amended complaint. Defendants moved to dismiss.
As to the Company’s alleged statement that its “highly trained sales force is responsible for overall market development,” the Court held that plaintiff failed to allege the statement was “so false as to mislead a reasonable investor,” emphasizing that plaintiff “acknowledge[d] that new hires did, in fact, receive training,” and noting that “the meaning of the term ‘highly’ is indeterminate and too general to provide meaningful information” regarding the Company’s training practices. The Court also found insufficient plaintiff’s allegations regarding statements that promised “significant” time and resources would be allocated towards training salespeople and educating prospective customers, noting that plaintiff “did not allege that Defendants expended no time or resources into training or customer education.”
As to statements regarding the hiring and retention of its sales personnel, the Court agreed with defendants that these statements were protected by the “bespeaks caution” doctrine, which “provides that a ‘forward-looking statement accompanied by sufficient cautionary language is not actionable because no reasonable investor could have found the statement materially misleading.’” According to the Court, these statements were “inherently forward looking” because they “predict[ed] a future risk,” and thus were not precluded from the doctrine. Although plaintiff argued that the statements were nonetheless misleading because it was a “historical fact” that the Company allegedly under-supported its salespersons, the Court found that plaintiff “ignore[d] the actual content of those statements,” which warned about difficulty with “hir[ing] or retain[ing] sufficient numbers of qualified individuals,” and that “high turnover” alone “did not imply that [the Company] was unable to hire or retain sufficient numbers of individuals in the markets in which it operated.”
As to the alleged statement that the Company “may not be able to accurately predict or forecast the timing of sales,” the Court found that the Registration Statement “expressly disclosed that inaccurate sales forecasting had already occurred,” when stating that “‘[l]arge individual sales have, in some cases, occurred at quarters subsequent to those we anticipated or have not occurred at all,’ and also that . . . ‘the timing of individual sales can be difficult to predict.’” The Court stated that “it is simply implausible that a reasonable investor would understand the statement that Defendant may be ‘unable to accurately forecast’ its sales in the future to mean that all of its then-current forecasts were always accurate.”
The Court held that plaintiff sufficiently pled a Section 11 claim, however, as it related to defendants’ alleged statement that the Company’s sales cycle “usually lasts several months.” The Court held that such statements were false and materially misleading, as pled, citing allegations regarding purported statements by several confidential witnesses that the sales cycle was “‘typically at least a year,’ could take ‘at least two years to close,’ and that ‘a six-month deal was only achievable with luck.’” In so holding, the Court emphasized that “information about the length of the sales cycle would be material to investors.”
The Court rejected defendants’ argument that these alleged statements were not sufficiently pled to be false or misleading, stating that the “the term ‘usually’ suggests that, more often than not, the sales cycle lasted only several months,” and that the statement in the offering documents that the sales cycle could be “long” and “unpredictable” did not provide “any compelling reasons to suggest that a reasonable investor would interpret that statement to mean that the sales cycle in fact took one or two years.”
The Court further rejected defendants’ argument that plaintiffs’ allegations regarding confidential witness statements were “deficient” because the confidential witnesses were “‘low-level employees’ and, as such, could not ‘speak for [the Company] as a whole.’” The Court stated that plaintiff’s allegations were analogous to those made by plaintiffs in New Jersey Carpenters Health Fund v. Royal Bank of Scotland Grp., 709 F.3d 109 , 123-24 (2d Cir. 2013), where the Second Circuit determined that allegations of confidential witness statements “provided an ‘adequate basis for believing that the defendants’ statements were false,’” even though the confidential witnesses had worked at “only a tiny fraction” of defendants’ offices, because “the complaint did not include allegations supporting the inference that the relevant practices were experienced only in those regions, rather than on a company-wide level.” Here, the Court noted that there were “no allegations suggest[ing] that [the confidential witnesses’] knowledge [was] specific to their respective regional areas.” Moreover, although defendants argued that some of the confidential witnesses did not work at the Company during the months preceding the IPO, the Court noted that their purported statements corroborated other purported statements from witnesses who did work at the Company before it went public. In so holding, the Court emphasized that the fact that “the lengthy sales cycle was present both before and after the IPO does not suggest that the lengthy sales cycle was isolated to a certain time period.”
Accordingly, the Court held that plaintiff failed to sufficiently allege a Section 11 violation for statements (i) related to the Company’s training practices and customer education, (ii) regarding the hiring and retention of its sales personnel, and (iii) that the Company “may not be able to accurately predict or forecast the timing of sales.”
The Court granted plaintiff leave to replead the dismissed claims.