In re SentinelOne, Inc. Securities Litigation

Background

Lead Plaintiff filed a proposed securities class action against SentinelOne, Tomer Weingarten, and David Bernhardt on behalf of people who purchased or otherwise acquired SentinelOne securities between June 1, 2022, and June 1, 2023. The complaint asserted claims under Section 10(b) of the Securities Exchange Act and Securities and Exchange Commission Rule 10b-5, which prohibit materially false or misleading statements made in connection with securities transactions, as well as a Section 20(a) control-person claim.

SentinelOne sells cybersecurity products through subscription contracts and tracks annualized recurring revenue, or “ARR,” as a non-generally accepted accounting principles business metric. The defendants defined ARR as the annualized revenue run rate of subscription and capacity contracts, assuming renewal on existing terms. On June 1, 2023, the defendants announced adjustments to previously reported ARR figures and projections. They attributed the changes to removing amounts based on consumption and usage and to discovering that ARR had been double-counted in some contract-renewal situations. SentinelOne also reduced its projected revenue for the fiscal year ending January 31, 2024. The company’s stock price fell from $20.72 to $13.44 per share the following day.

Requests for Incorporation and Judicial Notice

The court incorporated Exhibits 1–15 and 18–19 from the defendants’ declaration into the amended complaint, but declined to incorporate Exhibit 20 under the incorporation-by-reference doctrine because the amended complaint did not specifically refer to that stock-price table. The court took judicial notice of all exhibits in the defendants’ declaration for the limited purpose of considering what was disclosed to the market, without accepting the documents’ factual assertions as true except for the stock-price data. The court declined to take judicial notice of the plaintiff’s disputed consensus estimate.

Section 10(b) and Rule 10b-5 Claim

The court applied the heightened pleading requirements of Federal Rules of Civil Procedure 8 and 9(b) and the Private Securities Litigation Reform Act. The plaintiff had to plead particularized facts showing both falsity and scienter. Scienter means the required wrongful state of mind, including an intent to deceive or deliberate recklessness.

The plaintiff challenged: (1) SentinelOne’s definition of ARR and statements distinguishing ARR from revenue; (2) ARR figures reported in several quarterly and annual filings and repeated during earnings calls; and (3) certifications by Weingarten and Bernhardt concerning the company’s reports and controls.

The court did not decide whether the plaintiff adequately pleaded falsity concerning the ARR definition or the ARR figures insofar as they included consumption, usage, optional-service, or other non-guaranteed amounts. Instead, it dismissed on the independent ground that scienter was inadequately pleaded. The court did find that the plaintiff adequately alleged that the ARR figures were false or misleading because of the admitted double-counting errors.

The court rejected the plaintiff’s scienter theories. The defendants’ later acknowledgment that the ARR figures were inaccurate did not, without additional supporting facts, establish that they deliberately misled investors or acted with deliberate recklessness. The confidential-witness allegations were insufficient because the complaint did not provide adequate indications that the witness knew the individual defendants’ state of mind, and the witness’s employment ended before the class period. The allegations about stock sales did not establish suspicious trading because the complaint provided no prior trading history for comparison. The court also declined to infer knowledge from the importance of ARR to the company because the complaint did not allege that the individual defendants helped calculate ARR, accessed the relevant data, or were informed of possible inaccuracies.

Considering the allegations together, the court found that they did not create a strong inference of intent to defraud or deliberate recklessness. The more convincing inference was that the defendants failed to catch accounting errors and may, at most, have unintentionally misled investors by defining ARR unclearly. The court therefore granted the motion to dismiss the Section 10(b) claim with leave to amend. Because scienter was inadequately pleaded under any standard, the court did not decide whether the statutory safe harbor applied.

Section 20(a) Claim

Because the plaintiff did not adequately plead a Section 10(b) violation, the court granted the motion to dismiss the Section 20(a) claim with leave to amend.

Disposition and Amendment Requirements

The court granted the motion to dismiss with leave to amend. Because it could not conclude that amendment would be futile, the plaintiff may file an amended complaint within 28 days of the order. The court required any amended complaint to include, or attach, a statement-by-statement chart identifying each allegedly false or misleading statement or action, explaining why it was false, misleading, or deceptive when made, and listing the facts supporting any allegation based on information and belief. The chart must also identify which statements or omissions are attributed to each defendant and provide detailed facts supporting a strong inference of the required state of mind, including what each defendant allegedly knew and when.