Flannery v. Snowflake Inc.

Background

Suzanne L. Flannery filed a putative securities class action against Snowflake, Inc., its CEO and Chairman of the Board Frank Slootman, and its CFO Michael P. Scarpelli. The complaint alleges violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Securities and Exchange Commission Rule 10b-5. It alleges that the defendants made false or misleading statements and omissions concerning Snowflake’s consumption, performance obligations, product revenue, and projected growth. According to the complaint, Snowflake’s reported growth depended on the knowing and systematic oversale of consumption credits and client discounts. The complaint alleges that disappointing disclosures on March 2, 2022, were followed by a 15% stock-price decline by the next day and another 15% decline by March 8, 2022.

Seven motions initially sought appointment of a lead plaintiff and lead counsel. After two movants withdrew and three filed notices of non-opposition, only competing motions by NYC Funds and the New York State Common Retirement Fund remained.

Legal standard

The Private Securities Litigation Reform Act requires the court to appoint the person or group of persons most capable of adequately representing the class. The statute creates a rebuttable presumption favoring the person or group with the largest financial interest in the relief sought. That presumption may be overcome by evidence that the proposed lead plaintiff cannot fairly and adequately protect the class or faces unique defenses. The lead plaintiff selects class counsel, subject to the court’s approval.

Lead plaintiff

Using the agreed last-in-first-out method for calculating losses, the court found that NYC Funds had the largest financial interest. NYC Funds reported 454,026 total shares, 409,567 net shares, $115,806,643 in net funds expended, and $39,503,789 in losses. The New York State Common Retirement Fund reported 394,072 total shares, 374,527 net shares, $101,110,598.98 in net funds expended, and $31,686,048.73 in losses.

The New York State Common Retirement Fund argued that the court should examine the losses of NYC Funds’ eleven constituent entities separately rather than aggregate them. The court rejected that argument. It reasoned that the statute expressly allows a “person or group of persons” to serve as lead plaintiff and found that NYC Funds was a pre-existing group of related entities, not an artificial group created solely to combine losses. The opinion states that NYC Funds consists of five New York City pension systems and six programs or supplemental funds, with shared oversight, investment management, actuarial and auditing relationships, and common legal counsel through New York City’s Law Department.

The court also rejected the argument that eleven entities were too many to represent the class adequately. It found that the entities were related, received legal advice from the same attorneys, and had previously served as lead plaintiff in smaller combinations. The New York State Common Retirement Fund offered general concerns about how the group would resolve disagreements but did not provide evidence that NYC Funds had failed to resolve disputes or establish acceptable procedures in the past. The court therefore designated NYC Funds as lead plaintiff.

Lead counsel

NYC Funds selected Grant & Eisenhofer P.A. as lead counsel. The court found that this was a facially reasonable choice and that no other party had shown the selection to be unreasonable. The court therefore appointed Grant & Eisenhofer P.A. as lead counsel.

Disposition

The court appointed NYC Funds as lead plaintiff and Grant & Eisenhofer P.A. as lead counsel. This order addressed leadership of the putative class action; it did not resolve the merits of the allegations against Snowflake, Slootman, or Scarpelli.