Southern District of New York Dismisses Securities Act Claims With Prejudice, Holding There Was No Duty To Disclose Intra-Quarter Results
02/21/2017On February 13, 2017, Judge Laura Taylor Swain of the United States District Court for the Southern District of New York dismissed with prejudice a putative class action against MaxPoint Interactive, Inc. (“MaxPoint” or the “Company”), several of its officers and directors, and the underwriters of its initial public offering. Nguyen v. MaxPoint Interactive, Inc., No. 15-cv-6680-LTS, 2017 WL 570939 (S.D.N.Y. Feb. 13, 2017). Plaintiff, who sought to bring this action on behalf of investors who purchased MaxPoint common stock that was issued in its initial public offering in March 2015 (the “IPO”), alleged that the registration statement for the IPO contained material misstatements and omissions in violation of Sections 11, 12(a)(2), and 15 of the Securities Act of 1933. In granting MaxPoint’s motion to dismiss with prejudice, Judge Swain held that MaxPoint had no duty to disclose that at the time of its IPO it was signing smaller contracts with customers than it had in the past, and further held that the IPO registration statement gave investors sufficient information about the Company’s customer base.
MaxPoint offers business intelligence and marketing software services designed to enable national brands to reach the most likely local buyers of a specific product. Plaintiff alleged that MaxPoint failed to disclose two pieces of information in its IPO registration statement. First, plaintiff alleged that the Company should have disclosed that, in the first half of 2015, MaxPoint began signing contracts with customers that had smaller budgets, which caused the Company to experience decreased revenue per customer for the third quarter of 2015. Judge Swain dismissed this claim, ruling that there is no general duty to disclose the results of a quarter that is still in progress. The Court also ruled that this circumstance did not qualify as a “trend” that was required to be disclosed under Item 303 of Regulation S-K because “events occurring within a two-month period of time do not establish a ‘trend.’”
Second, plaintiff alleged that MaxPoint did not sufficiently disclose the extent of its reliance on a small number of high-budget customers. According to plaintiff, MaxPoint should have disclosed that two-thirds of the Company’s revenue at the time of the IPO was derived from only ten percent of its customer base. The Court rejected this argument and explained that the IPO registration statement disclosed that MaxPoint had historically relied, and expected to continue to rely, on a small number of customers for a “substantial majority” of its revenue. The Court noted that the registration statement even included a chart showing the percentage of total revenue derived from the Company’s top twenty-five customers. Judge Swain concluded that these disclosures put investors on sufficient notice of the composition of MaxPoint’s customer base. Any additional disclosures concerning the percentage of revenue derived from a different set of customers was therefore not material because that extra information was “not substantially likely . . . [to] have significantly altered the total mix of information already made available to investors.”
Judge Swain dismissed plaintiff’s claims and denied his request for leave to replead as futile. This ruling highlights that companies are generally not required to disclose intra-quarter results and that plaintiffs will have a difficult time repackaging claims about very recent company developments as “trends” that must be disclosed under Item 303.