City of Hollywood Firefighters Pension Fund v. Atlassian Corporation

Background

The plaintiffs brought a proposed securities class action against Atlassian Corporation, Atlassian Corporation PLC, and several Atlassian executives. The complaint asserted claims under Section 10(b) of the Securities Exchange Act, which prohibits securities fraud, and Section 20(a), which addresses control-person liability.

The plaintiffs alleged that the defendants made materially false or misleading statements about Atlassian’s business during 2022. Atlassian’s business used free software plans to attract customers and charged for additional users. The plaintiffs focused on two metrics: “Free to Paid Conversions” and “Paid User Expansion.” They alleged that the defendants concealed a slowdown in Paid User Expansion and later disclosed weaker cloud growth and missed earnings guidance in November 2022. According to the complaint, Atlassian’s stock price then fell and the plaintiffs collectively lost $7 billion.

The second amended complaint relied heavily on allegations from a confidential witness identified as CW3. CW3 said that growth was already slowing when he joined Atlassian in June 2022, that a hiring freeze was announced in July, and that Atlassian created “Project Big Fish” to find ways to increase user expansion.

Court’s analysis

The court applied the heightened pleading rules for securities-fraud claims. The plaintiffs had to identify each allegedly misleading statement, explain why it was misleading, and plead specific facts creating a strong inference that the defendants acted with intent to deceive or with deliberate recklessness.

The court rejected the challenges to statements made on August 4, August 19, and October 4, 2022. It found that the plaintiffs did not provide sufficiently specific allegations showing that the Paid User Expansion slowdown began before the August 4 statements or before the August 19 annual report. The court also found CW3’s descriptions of slowing growth too vague because they did not clearly identify the metric involved or when the slowdown began. The allegations also conflicted with reported revenue and cloud-growth figures. The court therefore concluded that the plaintiffs had not adequately pleaded that those statements were false or misleading.

The court had previously found that two September 14 statements by Anu Bharadwaj could plausibly be misleading because they emphasized positive aspects of Atlassian’s business without adequately disclosing a slowdown. The defendants asked the court to reconsider that earlier finding, but the court denied that request because the defendants had not properly moved for reconsideration or shown the required grounds.

The court nevertheless found that the plaintiffs still had not adequately pleaded scienter—the required state of mind for securities fraud—as to Bharadwaj. CW3’s allegations did not sufficiently establish his reliability or personal knowledge of what Bharadwaj knew and when she knew it. The court also found that the complaint did not adequately connect Project Big Fish, the reported metrics, and Bharadwaj’s alleged knowledge. Even assuming Bharadwaj knew about declining Paid User Expansion, the court found the plaintiffs’ theory that she withheld the information while waiting for a solution to be too weak to support an inference of intentional or deliberately reckless misconduct.

Disposition

The court granted the defendants’ motion to dismiss. It dismissed the complaint because the plaintiffs again failed to plead the required elements of their securities claims. The court stated that the plaintiffs could clarify their allegations concerning CW3 and their theory of liability, so it gave them one final opportunity to amend. Any amended complaint had to be filed within 21 days of the order.

The parties agreed that if the Section 10(b) claim failed, the Section 20(a) claim also failed. The court therefore dismissed the Section 20(a) claim with leave to amend.