A federal district court has refused to dismiss a securities class action arising out of claimed misleading statements made by the company in a 10-K form filed with the Securities and Exchange Commission. This suit follows on the heels of a lawsuit in state court, where a jury reached a verdict of more than $2 billion against the company for its misappropriation of trade secrets from one of its competitors. ABA Litigation Section leaders agree that the company’s arguably false comments on the merits of the state claims open up the company to liability.
A city’s police and firefighters’ retirement system brought a securities fraud putative class action against a company, its chief executive officer (CEO), and its chief financial officer (CFO). This lawsuit follows a Virginia state court decision in Appian Corporation v. Pegasystems Inc. that resulted in an over two-billion-dollar judgment against the company.
The putative class is comprised of investors who purchased or acquired the company’s stock between June 16, 2020, and May 9, 2022. Their complaint alleges two counts: (1) violations of Section 10(b) of the Exchange Act, 15 U.S.C. Section 78j(b) and Rule 10b-5, and (2) violations of Section 20(A) of the Exchange Act. The plaintiff alleges that since 2012, the company’s senior executives and employees participated in a conspiracy to misappropriate a competitor’s trade secrets, which took place in two phases: Project Crush and Project Teardown. The complaint alleges that not only were senior executives and employees aware of the activities, but none of the participants in the conspiracy received “any formal disciplinary consequences” and were instead rewarded with cash bonuses.
After two former company employees came forward in early 2020, one of the company’s competitors filed the Virginia action. Between May 29, 2020, and February 16, 2022, the company filed multiple 10-Q and 10-K forms with the Securities and Exchange Commission but made no express mention of the Virginia action in any of the filings. The competitor amended its complaint on February 11, 2022, and the company filed its Report on Form 10-K for fiscal year 2021, in which it stated that its competitor’s claims “are without merit” and that “any alleged damages…are not supported by the necessary legal standard.”
Following a seven-week trial, the jury returned a unanimous verdict in favor of the plaintiff. The jury concluded that the company and the other defendants had willfully and maliciously misappropriated the competitor’s trade secrets in violation of the Virginia Computer Crimes Act and the Virginia Uniform Trade Secrets Act. The jury awarded compensatory damages of $2,036,860,045 against the company, $5,000 against an employee of a U.S. government contractor with open access to the company’s software and documentation who aided the company, nearly $24,000,000 in attorney fees and costs, and post-judgment interest of approximately $122,000,000.
Following the Virginia action, investors pursued legal action in the U.S. District Court for the District of Massachusetts against the company for falsely characterizing the Virginia lawsuit as “without merit” and falsely claiming never to misappropriate trade secrets. The defendants moved to dismiss for failure to sufficiently allege (1) that any of the challenged statements are false or misleading, (2) a strong inference of scienter, and (3) loss causation. The court disagreed as to the company’s CEO and the company itself, finding that the facts alleged raise a strong inference that they were aware of, involved in, and directed the corporate espionage against the competitor.
The court further held that the company’s CEO knew or was reckless in not knowing that the company’s promise not to misappropriate trade secrets and assurance that the competitor’s claims were “without merit” posed a substantial danger to mislead investors. Finally, as to the company’s CFO, the court held that the complaint did not plead sufficient facts about his involvement or knowledge for a finding of scienter. Thus, the company’s motion to dismiss was granted as to the defendant CFO without prejudice.
“The important takeaway is to ensure accuracy in public-facing communications,” observes Joseph S. Simms, chair of the Litigation Section’s Securities Litigation Committee. “Assertions in defense of a lawsuit are viewed differently than representations to shareholders in shareholder meetings for purposes of the Private Securities Litigation Reform Act.” At this point, “there has not been a finding of liability in the shareholder matter, just a denial of dismissal at the pleading stage.”
The court did not hold that the company was under the obligation to “confess to the wrongdoing” when it disclosed the Virginia action, says Simms. “An issuer may legitimately oppose a claim against it, even when it possesses subjective knowledge that the facts underlying the claims against it are true…For example, an issuer may validly assert its intention to oppose the lawsuit.” Simms notes.
“This was a pretty egregious set of facts,” opines Jason Kellogg, cochair of the Section’s Class Actions & Derivatives Suits Committee. “The plaintiffs had the benefit of a full trial record that they could cite to in their complaint and met the heightened standard for knowledge and causation based on all of the testimony from the trial. Commenting on the merits of the claims and getting into whether the claims are meritorious or not opens up [the party] to liability.”
