Lamartina v. VMware, Inc.

Background

William Lamartina and Eastern Atlantic States Carpenters Pension Fund brought a proposed investor class action against VMware, Inc., Chief Executive Officer Patrick P. Gelsinger, and Chief Financial Officer Zane Rowe. They alleged violations of the Securities Exchange Act of 1934 based on alleged material misstatements and omissions concerning VMware’s practice of deliberately and artificially inflating its backlog by deferring revenue to later periods. The plaintiffs alleged that the practice affected the timing of revenue recognition and that VMware’s stock price declined after four corrective disclosures.

Lamartina alleged that he purchased 1,700 shares during the proposed class period and suffered losses. The Pension Fund alleged that it purchased 40,150 shares and suffered substantial losses. In earlier rulings in this case, the court allowed certain claims under Sections 10(b), 10A, and 20(a) of the Securities Exchange Act and Rule 10b-5 to proceed, while dismissing claims based on other statements. Those earlier rulings were not the ruling addressed here.

Class Proposed

The proposed class consisted of all persons who purchased VMware publicly traded Class A common stock from August 24, 2018, through February 27, 2020, inclusive, and were damaged thereby. The individual defendants and their immediate family members were excluded.

Rule 23 Analysis

Federal Rule of Civil Procedure 23 requires a proposed class to satisfy four initial requirements: the class must be so large that joining every member is impractical; it must share legal or factual questions; the representative’s claims must be typical of the class’s claims; and the representative and counsel must adequately protect the class’s interests. For this proposed class, the court found all four requirements satisfied.

The court found numerosity because more than 500 million VMware shares traded on the New York Stock Exchange during the class period, with more than one million shares traded daily. It found commonality because the proposed class members shared questions about whether the defendants violated the Exchange Act, made material misstatements or omissions, knew or recklessly disregarded that the statements were misleading, artificially inflated VMware’s stock price, and caused economic losses.

The court found typicality because the Pension Fund alleged the same type of injury as other class members: purchasing VMware stock at artificially inflated prices and suffering losses after the alleged scheme was disclosed. It found adequacy because the Pension Fund and proposed counsel had no identified conflicts with other class members and had shown a willingness and ability to prosecute the case vigorously.

The court also found that the class-action procedure was superior to individual lawsuits because pooling the claims would be economically preferable, class members were geographically separated, concentrating the case in one forum would reduce the risk of inconsistent decisions, and no management difficulties had been identified. The court found predominance because common questions about falsity, materiality, defendants’ knowledge or recklessness, and whether disclosure of the alleged fraud caused VMware’s stock price to decline outweighed individualized questions.

Class Counsel

Under Rule 23(g), the court considered whether Robbins Geller Rudman & Dowd LLP could fairly and adequately represent the class. The court found that the firm’s experience in securities and complex class-action litigation, investigation of the claims, work defeating the defendants’ motions to dismiss and conducting discovery, and commitment of resources satisfied the rule.

Disposition

The court GRANTED the plaintiffs’ unopposed motion to certify the Class, appoint Eastern Atlantic States Carpenters Pension Fund as Class Representative, and appoint Robbins Geller Rudman & Dowd LLP as Class Counsel. The order decided whether the case could proceed as a class action; it did not state that the defendants were liable on the underlying securities claims.