On August 11, 2017, Judge Lucy H. Koh of the United States District Court for the Northern District of California dismissed a putative securities class action brought against SolarCity Corp. (“SolarCity”) and four of its senior officers that alleged the defendants made materially misleading misrepresentations in SolarCity’s SEC filings, written communications with investors, and quarterly earnings calls with analysts. In re SolarCity Corp. Sec. Litig., No. 5:16-cv-4686, 2017 WL 3453387 (N.D. Cal. Aug. 11, 2017). Plaintiffs asserted a claim under Section 10(b) of the Securities Exchange Act of 1934 (the “Exchange Act”) and Rule 10b-5 thereunder against all defendants, and a claim under Section 20(a) of the Exchange Act against the individual defendants. In dismissing the complaint and granting leave to amend, the Court held that plaintiffs had not adequately alleged that any of the defendants had either made actionable false or misleading statements or acted with the requisite fraudulent intent.
SolarCity provides solar energy systems for commercial and residential use. Plaintiffs alleged that from May 2015 until May 2016, SolarCity misled investors about key operational metrics that tracked (i) the number of customers who had installed or were contracted to install one of its systems, (ii) the number of contracts with customers who had agreed to use energy developed by SolarCity, (iii) megawatt production capacity SolarCity systems, and (iv) recurring payments due from customers. Plaintiffs alleged that these metrics were inflated because SolarCity’s customer contracts were unreliable due to overly aggressive sales practices and because demand for the company’s products was falling. According to plaintiffs, once the true financial condition was disclosed, SolarCity’s stock price plummeted more than 50 percent.
Judge Koh held that all of the alleged misstatements were nonactionable because they are either (i) forward-looking statements that are protected by the Private Securities Litigation Reform Act’s (“PSLRA”) Safe Harbor, (ii) nonactionable statements of corporate optimism, or (iii) statements that are true and not misleading. Judge Koh initially determined that various alleged misstatements were protected by the PSLRA Safe Harbor because those statements were both forward-looking and accompanied by meaningful cautionary language. In particular, the Court found that the alleged statements concerning SolarCity’s predictions regarding its key performance metrics were both forward-looking and expressly referenced the potential lack of demand in the company’s products and services and warned that the predictions were subject to risks and uncertainties that could cause actual performance or results to differ. The Court also agreed with defendants’ argument that many of the alleged misstatements at issue were statements of corporate optimism that were vague and generalized statements of “mere puffing” that could not give rise to a claim. Such statements include that the company was “extremely bullish” on certain markets, was “highly optimistic” about the U.S. market, and anticipated that it would close out the fiscal year “with greater strength, momentum and record results as well as set the stage for continued strong growth for 2016 and beyond.” Separately, Judge Koh held that plaintiffs had failed to allege specific facts indicating that any of the remaining alleged misstatements were untrue or misleading. For example, while plaintiffs alleged that some customer contracts were “low quality,” they did not allege how many “low quality” contracts there were and how those contracts were not adequately reflected in the Company’s reported performance metrics. In this regard, Judge Koh concluded that plaintiffs had not adequately alleged that the disclosure of any omitted fact would have altered the total mix of information. For all of these reasons, the Court dismissed the Section 10(b) claim against all defendants, and also dismissed the Section 20(a) claim against the individual defendants because plaintiffs failed to plead a primary securities law violation.
Anticipating an amended complaint, Judge Koh then addressed other defects in the plaintiffs’ operative complaint. Foremost, the Court noted that even if it were to assume that the alleged misstatements were misleading, the complaint failed to adequately allege that defendants had acted with the requisite scienter. While plaintiffs relied on statements from a number of confidential witnesses that suggested demand for SolarCity products and services was in decline, the Court found that these witness statements failed to allege that this information was known by the SolarCity officers when any of the alleged misstatements were made. Nor had plaintiffs alleged any specific admissions by the SolarCity officers showing that they were involved in the details of tabulating business metrics such that they knew the alleged misstatements at issue were false. For these reasons, the Court found that the “general” and “vague” statements of the confidential witnesses did not create a strong inference of scienter. Separately, the Court found that one of the individual defendants, SolarCity’s Chief Revenue Officer, cannot be held liable because he did not make any of the allegedly false and misleading statements. Citing the U.S. Supreme Court’s decision in Janus Capital, which held that a person can only be held liable under Section 10(b) for false or misleading statements if he or she is the “maker of a statement,” Judge Koh found that the Chief Revenue Officer had not prepared or published any statement at issue on behalf of another. Notably, Judge Koh disagreed with plaintiffs and Judge Rakoff’s decision in City of Pontiac Gen. Emps.’ Ret. Sys. v. Lockheed Martin Corp., 875 F. Supp. 2d 359 (S.D.N.Y. 2012), which held that Janus involved a “third party” and is not applicable to corporate officers. Here, Judge Koh reasoned that in Janus, the Supreme Court’s interpretation of the word “make” in Rule 10b-5 “was based on the text of the regulation and not the circumstances of the parties.”
This case highlights the various hurdles that plaintiffs must overcome in order to survive a motion to dismiss a securities fraud claim, and reinforces that plaintiffs are required to allege specific and particularized facts to plead material misrepresentations with the requisite scienter.
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