On June 6, 2017, United States District Judge George A. O’Toole, Jr. of the United States District Court for the District of Massachusetts dismissed with prejudice a putative securities class action against Sonus Networks, Inc., its CEO and its CFO. Sousa v. Sonus Networks, Inc., et al., No. 16-10657-GAO (D. Mass. June 6, 2017). Plaintiffs alleged that defendants violated Sections 10(b) (and SEC Rule 10b-5 promulgated thereunder) of the Securities Exchange Act of 1934 (the “Exchange Act”), and separately alleged that the individual defendants violated Section 20(a) of the Exchange Act, by misleading investors regarding Sonus’ revenue projection for the first quarter of 2015. The Court held that plaintiff had not met the heightened pleading standard for alleging securities fraud under the Private Securities Litigation Reform Act (“PSLRA”), finding that plaintiff had not sufficiently alleged a material misrepresentation or omission with respect to certain allegations and had not sufficiently alleged scienter with respect to other allegations.
Sonus provides hardware and software-based tools to help businesses secure their internet and communication infrastructures. The Amended Complaint alleges that Sonus and two of its officers made materially false and misleading statements concerning the company’s first quarter 2015 revenue projection at two points during the putative class period: first, on an October 23, 2014 earnings call; and second, in connection with a February 18, 2015 press release and earnings call. On March 24, 2015, approximately five weeks after the February call, Sonus announced that its first quarter revenue was only approximately $50 million compared to its previous projection of approximately $74 million. Plaintiff alleges that as a result of this announcement, Sonus’ shares dropped from $13.16 per share to $8.70 per share.
The Court initially rejected plaintiff’s contention that the October 23, 2014 statement that management was “comfortable with” outside analysts’ Q1 2015 revenue forecast was misleading, holding that this statement was “merely non-actionable corporate puffery.” The Court further rejected plaintiff’s argument that the statement was actionable in light of Omnicare, Inc. v. Laborers Dist. Council Constr. Indus. Pension Fund, 135 S. Ct. 1318, 1328–29 (2015), finding that plaintiff had not adequately alleged that defendants were not in fact comfortable with the external estimate. Notably, the Court noted that while Omnicare involved a claim under Section 11 of the Securities Act of 1933, it “assume[d] that it applies to” the Exchange Act claims in this case. The Court pointed to the Amended Complaint’s recognition that contingencies—such as whether or when a sale to a prominent customer might be finalized—existed to undermine plaintiff’s contention that defendants “must-have-known” that the October 2014 statement was false when made. The Court also noted that the Amended Complaint failed to include specifics as to how defendants became comfortable with the analysts’ projection, and “without more detail” as to the numbers underlying the forecast, “a fact finder could not draw a strong inference” that the October 2014 statement was disingenuous. In support of this conclusion, the Court highlighted that the projections referred to in the statement at issue were not internal projections, but rather were consensus estimates of outside analysts, “presumably formulated on publicly available data.” Moreover, the Court stressed that plaintiff’s reliance on former employees statements to support its allegations are not enough to meet the PSLRA’s heightened pleading standard.
The Court similarly rejected plaintiff’s argument that the February 2015 announcement that the company expected Q1 2015 revenue would be approximately $74 million was misleading, finding that the Amended Complaint “is vague as to when the defendants became aware of facts that should have made them aware of the falseness of their optimistic statements, a circumstance found to weigh against a finding of a strong inference of scienter” under the PSLRA. In particular, the Court found that a “vague assertion that defendants must have known something” because of the level of seniority “does not suffice to adequately allege a strong inference of scienter.” The Court also pointed out that while proof of motive is not required to make out a claim under Section 10(b), the plaintiff had not alleged “any of the telltale motives that have been found to strengthen an inference of scienter, such as insider stock sales or financial incentives far beyond the usual compensation packages.” Acknowledging that it would clearly have been better for the company to announce a modified projection, the Court nevertheless concluded that “under the admonition against finding fraud by hindsight, “general allegations ‘that defendant knew earlier what later turned out badly’ are not sufficient to plead scienter.” For all of these reasons, the Court dismissed the Section 10(b) claims against the defendants without needing to address defendants’ additional arguments for dismissal: failure to plead loss causation and protection under the PSLRA’s safe harbor.
Finding no liability under Section 10(b) of the Exchange Act, the Court dismissed the control liability claims against the individual defendants under Section 20(a). The Court also denied plaintiff’s request for leave to amend the complaint, noting that plaintiff already had amended the initial complaint after the current lead plaintiff had been appointed, and had eleven months between the filing of the initial complaint and the operative Amended Complaint to investigate the claims alleged. In this regard, the Court further noted that defendants’ motion to dismiss had put plaintiff on notice of the deficiencies in the Amended Complaint and there was no suggestion that new information had been discovered such that amendment would not be futile. Accordingly, the Court dismissed the claims with prejudice and the action in its entirety. This decision reinforces the high pleading standard that plaintiffs must meet to plead scienter in securities fraud actions.
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