Southern District Of New York Grants Software Company’s Motion To Dismiss In Proposed Investor Class Action
On June 2, 2023, Judge Denise Cote of the United States District Court for the Southern District of New York granted a motion to dismiss a proposed class action against a software company (the “Company”), alleging violations of Sections 11 and 15 of the Securities Act of 1933. In re Riskified Ltd. Sec. Litig., No. 1:22-cv-03545, 2023 WL 3791653 (S.D.N.Y. June 2, 2023). The Company’s core product offering was a credit card fraud detection service for online merchants. As part of this offering, the Company agreed to reimburse online merchants for any payment reversals or “chargebacks” resulting from fraudulent transactions that were disputed by cardholders. Plaintiffs alleged that, in connection with the Company’s initial public offering (“IPO”) in July 2021, the Company made several misstatements and omissions concerning the Company increasingly taking on clients with higher chargeback rates, its ability to control chargeback rates, and COVID-19’s impact on its business. The Court dismissed plaintiffs’ second amended complaint in its entirety, finding that plaintiffs failed to plead an actionable misstatement or omission.
The Company’s fraud detection services are designed to help online merchants minimize costs associated with fraudulent online transactions. Plaintiffs alleged that the Company failed to disclose in its Registration Statement that it was taking on a greater proportion of risky clients with higher chargeback rates. Specifically, plaintiffs alleged that the Company onboarded a cryptocurrency exchange in the months leading up to its IPO and that clients in the cryptocurrency industry pose a greater risk for chargebacks. Plaintiffs also alleged that the Company made misleading statements about possible fluctuations in its gross profit margins and its ability to control exposure to chargeback expenses. Finally, plaintiffs alleged that the Company’s statement that it was “well-positioned” to take advantage of the end of pandemic-related travel restrictions was misleading because increased travel transactions allegedly would result in more chargeback expenses.
With respect to the omission claims, the Court first found that plaintiffs did not plausibly plead that there was a trend toward taking on riskier clients at the time of the IPO because the complaint only identified a single “risky” client onboarded by the Company in the months leading up to the IPO. The Court also rejected plaintiffs claim that the Company did not adequately disclose the risk to its gross profit margins allegedly resulting from changes in the mix of the Company’s merchant industry base. In rejecting this claim, the Court noted that the Company “disclosed that its gross profit margins could fluctuate based on its merchant mix” and that “the fluctuations that are the predicates for the plaintiffs’ complaints were within the historical fluctuations of gross profit margins that were disclosed in the financial section of the Registration Statement.”
The Court also found that none of the alleged misstatements were misleading. With respect to statements concerning fluctuations in gross profit margins, the Court held that the Registration Statement “sufficiently explained to investors the risks associated with fluctuations in gross profit margins” and disclosed specific “reasons that the margins could fluctuate, including changes in the merchant mix.” The Court also found that the Company’s statements regarding its ability to control chargeback expenses were not misleading when read in context, because the Registration Statement was “replete with disclosures” that the Company’s control of its chargeback exposure was not ‘a perfect science.’” Finally, the Court found that the Registration Statement contained no misleading statements concerning the impact of COVID-19 on the Company’s business because “the disclosures about COVID-19 indicate that there ‘continues to be significant uncertainty’ regarding the future economic impacts of the pandemic.”
The Court, having already warned plaintiffs that they “would likely not have a further opportunity to amend” their second amended complaint, dismissed the action with prejudice.