Securities Class Action Litigation: A Game of Inches

Interestingly, this trend has been wobbly in the months since I last wrote on the subject, with defendants achieving a considerably higher dismissal rate than the historical average in the first half of 2025. We’ll keep a close eye on this data going forward.

• Words Matter: The specific verbiage that executives use can and often does make the difference between a case that is dismissed and a case that moves on to discovery. Unscripted responses to analyst questions on earnings calls are perhaps the most significant danger zone. Cases are routinely won and lost on individual word choice, not on the master narrative of what happened at the company.
• It Only Takes One: Shareholders only need to convince a judge that defendants made a single material misstatement with intent in order to get into discovery. As a result, plaintiffs’ lawyers usually throw numerous supposed false statements into the complaint with the hope that at least a couple will stick. Judges carefully analyze each individual statement. Not uncommonly, they find that while most of the case is weak and must be dismissed, one or two alleged misstatements are up to scratch.
• Senior Confidential Witnesses Are Plaintiffs’ Best Weapon: Confidential witnesses can be the key that unlocks discovery for plaintiffs. One SVP—with a line of sight into what senior management was thinking and doing—is probably more valuable for plaintiffs than 34 lower-level employees.
• Safe Harbors Run Deep—Watch Out for Hypothetical Risks: Risk factors and safe harbor disclosures are an important prophylactic—and they are also a double-edged sword. After a stock drop, plaintiffs frequently point to hypothetical risk factors—e.g., “if we suffer a significant data breach, our business may suffer”—to argue that the company lied to investors by characterizing something as a possibility when, in fact, it had already happened. District court judges have had varying degrees of willingness to entertain this theory.

Peloton Wins Motion to Dismiss in District Court—But Loses In the Second Circuit

In my article on the Southern District of New York, I covered a 2024 district court decision dismissing a securities class action against Peloton. The case—which was a good illustration of the above trends—centered on allegations that Peloton executives purportedly tricked investors into believing that the company was not experiencing demand and inventory problems after experiencing outsized growth during the home workout boom caused by the COVID-19 pandemic.

Plaintiffs drafted a 133-page amended complaint and relied on a full baseball roster of confidential witnesses—34 in total—to support their allegations. The district court judge, however, was not buying what plaintiffs were selling and dismissed the case with prejudice.

In September 2025, a three-judge panel of the Second Circuit Court of Appeals reversed the district court’s decision. The Peloton Second Circuit opinion gives new texture and context to the key securities class action trends that I have been discussing in 2025. Let’s take a look.

When The Second Circuit Speaks, Securities Lawyers Listen

Before digging into the Peloton appellate opinion, a few words on the Second Circuit’s role in the securities law ecosystem. If the SDNY is the "Mother Court," the Second Circuit is a demanding and rigorous grandmother. Over the decades, Second Circuit opinions have significantly influenced the development of federal securities law.

Many of the most significant and hotly contested securities cases reach their final destination in the Second Circuit. With the United States Supreme Court taking on securities cases infrequently—and reversing its decision to grant certiorari on two impactful cases earlier this year—it is fair to consider the Second Circuit as the most influential court in the country shaping the securities laws on a frequent basis.

The Second Circuit Reverses the District Court’s Decision

The Second Circuit’s Peloton opinion is a great illustration of why securities class action litigation is a game of inches. To convince the district court that the case should be dismissed, the company had to overcome 133 pages of allegations, 34 confidential witnesses, and 20 separate supposed false statements. And the company succeeded.

At the core of the district judge’s decision was the observation that: “‘Peloton’s performance exceeded its sales guidance throughout the Class Period,’ meaning the ‘challenged statements were entirely consistent with Peloton’s actual financial results.’”  As I wrote at the time: “It’s hard to make out a case that Peloton misled investors about supposed softness in demand when the company beat guidance.”

The Second Circuit, however, disagreed. What happened?

Humblebrag: The key trends I identified earlier this year were central to the Second Circuit’s opinion.

It Only Takes One

In its opinion, the Second Circuit agreed with the district court that almost all of the alleged misstatements were too weak to get past the motion to dismiss stage. However, the court of appeals disagreed with the district court on two of the statements, exhuming the case from the dead and putting the company and executives back into litigation. Notably, one of the three appellate judges dissented from the decision and would have affirmed the dismissal of the case in its entirety. This means that defendants convinced two out of four federal judges there was no viable claim—and still ended up losing.

A Senior Confidential Witness Wins the Day

The court of appeals agreed that many early supposed misstatements were not actionable because the statements were well-qualified and plaintiffs had not done enough to allege that demand issues had materialized by the time of the relevant statements. The Second Circuit had less patience for two statements made after demand issues had allegedly matured. How did the Second Circuit get comfortable with plaintiffs’ allegations about senior executives’ knowledge of the demand softness during this later time period?

A pivotal section of the opinion focuses on allegations that “the former senior director of operations and supply-chain management stated that ‘the August 2021 price reduction on the original bike was an attempt to increase sales’” because the company had so much excess inventory. This allegation, the court found, directly contradicted a statement that the same price reduction was “absolutely offensive” in nature and was, implicitly, not defensive.

It bears repeating: Senior confidential witnesses are perhaps plaintiffs’ most dangerous weapon in securities litigation. A senior director is not in the C-suite. Still, you could argue it is reasonable for a court to infer—accepting all of the plaintiffs’ allegations as true at the motion to dismiss stage, as a court is required to do—that a senior director of operations would plausibly know the company dropped prices because it had too much excess inventory. That is clearly what the court inferred. Absent that confidential witness, would the allegation have made it across the line? Who knows, but it certainly would have been an even closer call.

Words Matter

The key statement was: The price reduction was “absolutely offensive” (emphasis mine). The court of appeals decided that there were inconsistencies between this statement and allegations (supported by a senior confidential witness, see above, and also bolstered by other confidential witnesses) that the company was sitting on three months of excess inventory at the time. Of course, inconsistencies don’t mean that the plaintiffs will necessarily win the case—but they do mean that they get to expensive discovery, when most cases ultimately settle.

Imagine if the statement had instead been: “We are confident that the price reduction will position us going forward to play offense.” Or what if the executive had said: “I believe the price reduction is mainly offensive.”  Would the Second Circuit have come out differently?

Again, who knows, but it certainly seems possible. The dissenting judge had a different interpretation of the statement: “The price reduction was ‘offensive’ . . . . It was offensive in the obvious sense that it was made to increase sales.”

The point is that individual word choice—for example, superlatives like “absolutely”—can be and often is the difference between a dismissal and a settlement.

Watch Out for Hypothetical Risks