Securities Motion to Dismiss Trends (Part 2): The Southern District of New York

1. Daylight between the challenged statements and the concrete situation on the ground at the company (i.e., falsity); and  

2. That the speaker knew or was reckless in not knowing that the statement was false when it was made (i.e., scienter). 

As we have discussed, this is a tall task for plaintiffs who don’t have access to internal company documents at the motion to dismiss stage. Enter the confidential witnesses. 

Three confidential witnesses made the difference in the UiPath decision: a marketing director; an account executive (apparently a line salesperson); and a vice president of value engineering.

The marketing director said that UiPath “did not typically win customers” against Microsoft and was “losing out” to the competitor by 2021. The salesperson recalled that customers brought up Microsoft products in “about half” of sales calls they had attended. The engineering VP instructed the company’s engineers to assist in responding to Microsoft.

Based on these allegations, the judge decided it was misleading for the CEO to say that the company was “not seeing” Microsoft “that much” or that the presence of Microsoft did not change UiPath’s “win rate.”

I understand why the judge felt these statements inched past the line between acceptable and misleading at the pleading stage. I also think other district judges, presented with the same allegations, may have dismissed the case in its entirety. 

It’s not clear, for example, that the CEO was operating from the same dataset as the salesperson when he said UiPath was not seeing Microsoft “that much.” Also, as UiPath tried to argue (unsuccessfully), what does “that much” really mean? Is that statement sufficiently concrete to form the foundation of a securities fraud case?

On UiPath’s win rate, I didn’t see any particularized allegations that UiPath’s win rate was different when Microsoft was present on a deal as a competitor. The company may have been “losing out” to Microsoft generally. But maybe the company was losing at an equal rate when Microsoft was competing on a deal and when other non-Microsoft competitors were competing on a deal. If this was true, the CEO’s statement would have been accurate.

Again, I can see why the district judge felt the plaintiffs did just enough to get past the motion to dismiss hurdle. The two challenged statements, read in the light favorable to the plaintiffs, have the flavor of minimizing significant business headwinds that had already materialized for the company. But, man, it’s a close call. If the CEO had said instead, “We believe that we are well-positioned to compete against Microsoft and have a differentiated product that should be market-leading,” I can’t see this case getting past the motion to dismiss stage. Instead, because the CEO made concrete statements that were not forward-looking or couched in belief, plaintiffs may be in for a payday.

Peloton 

Everyone knows Peloton. I have one in my home office—it’s awesome. Casual observers of the tech industry also know that Peloton experienced a huge surge in demand during the COVID-19 pandemic. In response, the company made large investments to ramp up production. Demand then slowed as vaccines became widely available, and Peloton’s sales slowed significantly. 

Shareholder plaintiffs sued, alleging that Peloton’s senior executives knew demand and sales were headed on a non-stationary bike straight off a cliff, but they hid this from the market. In late 2024, after giving plaintiffs two chances to amend, the SDNY dismissed the class action without leave to amend. Here’s why. 

Words Matter (Safe Harbors Run Deep) 

A frequent dispute in motions to dismiss is whether the challenged statements are forward-looking or represent statements of “then-existing fact.” As we saw in last week’s article, if statements are forward-looking and accompanied by cautionary disclaimers (which will always be present in earnings calls and SEC filings), then plaintiffs are up a creek. If, in contrast, the statements contain some concrete factual representation about the present (e.g., see the UiPath statements discussed above), plaintiffs have a fighting chance. 

In Peloton, the judge found that the challenged statements were forward-looking and protected by the PSLRA safe harbor. These statements were all similar—in one representative example, an executive said: “But it’s absolutely not a softening of demand that now we’re seeing, we’re seeing robust demand.” 

Plaintiffs relied on a full baseball roster of confidential witnesses—34 in total—to allege that, while Peloton senior executives were making these statements, demand was dropping quickly based on internal tracking of orders and backlog. According to the complaint, by April 2021, shipments from Peloton’s largest warehouses had declined by almost 50%.  

I’m not sure that I agree all of the statements at issue were really forward-looking. But when a judge doesn’t like a complaint, the reasoning sometimes gets a little loose.  

I think the more compelling rationale for dismissal came when the judge noted:  

“‘Peloton’s performance exceeded its sales guidance throughout the Class Period,’ meaning the ‘challenged statements were entirely consistent with Peloton’s actual financial results.’”  

It’s hard to make out a case that Peloton misled investors about supposed softness in demand when the company beat guidance. 

Words Matter (Opinion Statements)

The court also found that one of the challenged statements was a statement of opinion. It’s next to impossible for private plaintiffs to successfully plead securities fraud based on opinion statements. Under Supreme Court precedent, opinion statements are non-actionable unless they are both false and the speaker did not actually believe the statements. 

Does this provide executives with carte blanche to say outlandish things about the company’s prospects if they truly believe them? Maybe. But don’t do this: It’s very important to say things that are factually true about your company. To the extent these true things are opinions, though, it can’t hurt to also include language making clear that they are statements of belief (“We believe,” “In my opinion,” etc.).

United Natural Foods 

In 2021 and 2022, grocery wholesaler United Natural Foods engaged in “forward buying”—purchasing product in excess of demand ahead of known price increases—in response to significant inflation. According to shareholder plaintiffs, this practice allowed United to realize meaningfully higher profits while inflation was running hot. 

When inflation began to cool, profits took a dive. Shareholder plaintiffs sued, claiming United failed to disclose that it was engaged in forward buying and that this practice was a substantial profit driver during the period of high inflation. 

As we just saw, Peloton successfully wriggled out of a securities class action focused on the COVID-era boom and bust cycle. United, however, did not make it through the motion to dismiss gauntlet. In late 2024, an SDNY judge allowed the case to move forward. Here’s why.

Omissions and Half-Truths 

The federal securities laws recognize that it’s not feasible to require companies to tell investors everything that is happening at any given time. For this reason, it’s not easy to succeed in private securities litigation by relying solely on omissions. As the district judge in United quoted from Second Circuit caselaw: “[T]here is no duty to disclose a fact . . . merely because a reasonable investor would very much like to know that fact” . . . [but] “once a company speaks on an issue or topic, there is a duty to tell the whole truth.” 

United repeatedly disclosed that its increased profitability was driven by factors “including the impact of inflation.” The company pointed to this disclosure and said that this related to the forward-buying practices. Plaintiffs argued that this statement was a “half-truth” and misleading by omission because it did not specifically disclose the forward-buying trend.

The court agreed with plaintiffs, finding: “While some market analysts may have inferred that inflationary gains meant a substantial amount of forward buying, it does not follow that those phenomena are necessarily wholly overlapping. And the facts alleged suggest that the market was blindsided by the eventual revelation of the significant and unsustainable level of procurement gains that drove profit margins . . . .” (internal citations omitted)

To me, this is a close call. The company did disclose that inflation was having an impact on its results. Was it required to specifically unpack why inflation was driving increased profitability? When we look at the rest of the court’s order, though, the reasoning becomes a bit clearer.

Omitted Risk Factor