Securities Motion to Dismiss Trends (Part 1): The Northern District of California

As I have explained in the past, the motion to dismiss is the main event in private securities class actions. If a case is dismissed with prejudice, it’s time to head to the spa and grab a glass of prosecco. If a case survives the motion to dismiss, buckle up and hope that you have a strong D&O insurance program.

Historically, the securities class action motion to dismiss has been a high-stakes coin flip. Across the federal courts, defendants and plaintiffs each tend to win about half the time.

These motion to dismiss outcomes are the beating heart at the center of the world of D&O insurance. If defendants won the motion to dismiss 90% of the time instead, the D&O landscape might look significantly different. For one thing, the number of suits would go down. For another, insurers would see significantly fewer settlements, driving lower losses and (presumably) lower premiums and expanded coverage.

Motions to dismiss are filed at the district court level. Appellate courts weigh in from time to time, but trial court decisions make up the meat and potatoes of federal securities law. 

As a reminder, the motion to dismiss standard in private securities class actions is more defendant-friendly than in other types of civil litigation. 

Under the Private Securities Litigation Reform Act (PSLRA) and subsequent caselaw, to prevail, plaintiffs must plead with “particularity” that defendants made false statements and include allegations that give rise to a “strong inference” of intent.

These are broad standards, and there is significant variation in the way individual trial judges apply them. But, if you look closely at motion to dismiss decisions, interesting themes emerge that help to explain why some cases are shut down early while others end in big paydays for plaintiffs’ lawyers.

This article is the first in a three-part series looking at recent motion to dismiss decisions and trends in three key district courts across the country: the Southern District of New York, the Northern District of California, and the Central District of California. Last year, these three courts received half of all securities class action filings in the country. First up: The United States District Court for the Northern District of California (ND Cal).

The Northern District of California

ND Cal covers the San Francisco Bay Area, including Silicon Valley. ND Cal handles the second-most securities class actions in the country, behind only the Southern District of New York (the subject of my next post in this series). The court has 22 Article III judges, including those on senior status (some of whom still handle securities cases).

For my money, ND Cal is the best district court in the country, but I’m very biased (I clerked on the court early in my career). More objectively, because of the court’s geography, ND Cal judges handle a disproportionate share of complex business litigation, including the lion’s share of private securities litigation against prominent technology companies.

Across the federal courts, we know that the motion to dismiss is mostly a coin flip. But what about in ND Cal? Over the past 10 years, based on data from Woodruff Sawyer’s proprietary Databox™, ND Cal judges have done away with about 44% of private securities class actions at the motion to dismiss stage. Another 11% of cases are voluntarily withdrawn by plaintiffs. The remaining 45% settle. So, right in line with national averages.

Let’s look at a couple of interesting ND Cal motion to dismiss developments from the past year. 

Volta

Volta, a company involved in deploying charging stations for electric vehicles, went public via de-SPAC transaction in 2021 with a valuation of $1.4 billion. Typical for new entrants to the public markets, Volta made a variety of bullish forward-looking statements in its registration statement about the company’s future prospects. And, like other newly public companies, Volta included safe harbor disclosures and voluminous risk factors in the registration statement. 

Volta had a bumpy ride as a public company. About a year after joining the public markets, Volta’s CEO and president resigned and the company delayed its earnings report. A few months later, the CFO resigned, and the company reported material weaknesses in its internal controls. 

As an aside, it is a pretty strong sign of potential skullduggery when a public company delays an earnings report, discloses accounting issues, and sees senior executives resign.

Over the course of its brief and tragic life as a public company, Volta’s stock price declined precipitously. In 2023, Volta was mercifully acquired by Shell for $169 million. This represented an 88% decline in the company’s valuation from the time it went public. Unsurprisingly, shareholder plaintiffs sued Volta and its executives, claiming they had engaged in a scheme to defraud plaintiffs by making false statements about revenue recognition and guidance, executive departures, and financing needs. 

As we have seen above, the company was certainly giving off smoke. But failing to succeed as a public company does not mean anyone has committed securities fraud. In Volta’s case, despite significant red flags, ND Cal had little difficulty dismissing the case (after giving plaintiffs a chance to amend the complaint, which almost always happens at least once).

Here are some key themes from the court’s motion to dismiss order:

• The Power of the Safe Harbor: Under the federal securities laws, companies have a lot of room to say things in good faith about what they believe will happen in the future. If statements are identified as forward-looking and accompanied by cautionary language, plaintiffs will generally have a very hard time getting past the motion to dismiss stage. This was true in Volta. Plaintiffs relied on a variety of forward-looking statements from the registration statement and tried to bolster those statements by finding a confidential witness who said the company’s financial projections were “unrealistic.” The court was thoroughly unpersuaded—it found that many of the challenged statements were protected by the safe harbor.

• Confidential Witnesses Miss the Mark: In the Volta complaint, plaintiffs put forward allegations from 11 “confidential witnesses.” Given the difficulty of successfully pleading falsity and scienter at the motion to dismiss stage, securities plaintiffs have increasingly recruited anonymous current and/or former company employees to provide purported inside facts to bolster fraud allegations in complaints. In the Volta case, some of the confidential witness allegations looked—to my eye—to be fairly strong. For example, a VP of sales said his team was instructed to “pull in” sales—a big reg flag for potential premature revenue recognition. The court, however, was unpersuaded: Plaintiffs didn’t include enough detail about the VP’s role, the extent to which the alleged “pull in” instruction was given to other sales leaders, and how the “pull in” sales may have impacted revenue recognition. 

  This presents a bit of a conundrum for plaintiffs. It’s very, very hard to find a C-suite “confidential witness.” Most confidential witnesses will have fragmented, incomplete views of potential misconduct. How much detail about a potential fraud is enough to get a complaint across the motion to dismiss line? This is really a facts-and-circumstances determination, and individual district judges have significant discretion to make the call based on their overall read of the allegations. In Volta, the court was not buying what the confidential witnesses were selling.

Okta

In 2022, shareholder plaintiffs sued the cloud computing company Okta in ND Cal for alleged securities fraud. The complaint focused on two buckets of supposedly misleading statements: (1) Okta’s statements about a data breach; and (2) Okta’s statements about integrating the sales team from a company called Auth0 that it had acquired.

In 2023, the court allowed part of the Okta case to move past the motion to dismiss stage and into discovery. Old news, right? Why are we talking about this in a review of 2024 developments?

Well, in late 2024, the court approved a $60 million settlement of the Okta securities class action. This means it’s a good time to look back to see what factors at the motion to dismiss stage ultimately led to a significant payday for plaintiffs’ lawyers. 

In Okta, the court dismissed the claims related to the data breach. But it allowed some of the alleged misstatements related to the Auth0 acquisition integration to survive, ultimately leading to the significant settlement. Here are some things that jumped out to me from the court’s decision:

• Fraud? The part of the case that survived the motion to dismiss focused on Okta’s statements about its plan to integrate its sales team with the Auth0 sales team. In fact, according to the plaintiffs, Okta had no integration plan and when a significant number of sales employees departed the combined company, Okta lacked the internal expertise to effectively sell Auth0 products. This resulted in poor post-acquisition results and forward guidance, which caused a significant stock drop. 

  On paper, this version of events sounds more like poor management than “securities fraud.” What motive would executives have to do a terrible job of integrating a newly acquired company? But, of course, there is no motive requirement in the securities laws—plaintiffs only need to plead (among other things) falsity, materiality, and “scienter” (i.e., intent). In the Ninth Circuit, scienter can be satisfied by recklessness. So, if the court finds that senior executives knew about specific material facts that directly contradicted concrete material statements they were making, this may be enough to get the plaintiff over the hump.

• Senior Confidential Witness Wins the Day: Still, unreasonably sunny statements about integrating a newly acquired company’s sales team don’t stand out as the fraud of the century. So what got the Okta complaint across the line for plaintiffs, ultimately giving rise to the 8-figure settlement? The following excerpt from the court’s order is key:

  [T]he complaint alleges with particularity that around December 2021 the company decided to abandon the integration plan it had had in place for months, and that on just two weeks’ notice Auth0 and Okta sales employees found out they would sell each other’s products while lacking the training to do so. CW2 was Senior Vice President and General Manager of the Americas, who worked for the company from August 2018 until July 2022. CW2 was “intimately involved” in the Auth0 integration, spending “eight hours per day over a period of six or seven months putting together the integration plan.” CW2 recalled that the original plan involved retaining Auth0 employees for approximately one year, while they continued to sell Auth0 products and train and educate Okta employees on those products. Meanwhile, Okta employees would continue selling Okta products. However, after Okta scrapped this plan around December 2021, sales employees were given just half a month’s notice before they would begin selling each other’s products, rather than one year of working together before Okta employees began selling Auth0 products. According to CW2, neither Okta nor Auth0 employees had knowledge of each other’s products and did not receive training or education on each other’s products. (emphasis added; internal citations omitted)

  An SVP-level confidential witness is a significant coup for securities plaintiffs. On the strength of inside allegations from someone with visibility into the senior levels of the organization, the court evidently felt comfortable engaging in what I would characterize as loose and conclusory analysis on falsity and scienter. I don’t think it’s a stretch to call this individual the $60 million dollar witness. If there is any justice in the world, the investigator responsible for pulling this witness out of the hat received a very healthy 2024 bonus.

Conclusion and Next Up

The biggest lessons from Volta and Okta? Outcomes in this area of litigation are correlated to plaintiffs’ ability to secure well-placed confidential witnesses—but are also subject to the vagaries of the trial judge’s view of the case. On paper, Volta (a company in significant distress, with senior executives jumping ship) would seem to be a better candidate for securities fraud than Okta (a company that flubbed part of a post-acquisition integration process). But, as we have seen, the devil is very much in the details. 

Next time, I’ll look at recent outcomes in the Southern District of New York, the 1,000-pound gorilla of securities litigation. Stay tuned.