Sundaram v. Freshworks Inc
- Charles Breyer
- 3:22-cv-06750
- U.S. District Court · Northern District of California
- 4
Sundaram v. Freshworks Inc.: Judge Breyer denied defendants’ motion for judgment on the pleadings in an investor securities case.
The ruling affects Mohan R. Sundaram’s purported investor class and Freshworks Inc., its executives and directors, and its initial-public-offering underwriters. The remaining Item 303 theory was not terminated by this motion, although any eventual recovery is limited to losses below the offering price that were caused by the alleged omission.
What happened
In Sundaram v. Freshworks Inc., Mohan R. Sundaram sued Freshworks, its executives and directors, and its initial-public-offering underwriters on behalf of a proposed investor class. He alleged that the defendants failed to disclose trends affecting the company’s financial results under a Securities and Exchange Commission disclosure rule.
Defendants argued that Sundaram could not recover because the stock stayed above its offering price immediately after the disclosure and later declines were not caused by the alleged omission. The court agreed that recoverable losses must be below the offering price and caused by the alleged omission, but it found that the pleadings did not conclusively show that no such losses could be proved.
Judge Charles R. Breyer denied the defendants’ motion for judgment on the pleadings. The court said whether the alleged omission caused losses was better addressed at summary judgment or trial, potentially with expert testimony.
The detailed version
- Sundaram v. Freshworks Inc · No. 3:22-cv-06750
- Charles Breyer
- Oct. 1, 2024
Background
Mohan R. Sundaram sued Freshworks Inc., its executives and directors, and its initial-public-offering underwriters on behalf of a purported class of investors. He asserted claims under Sections 11 and 15 of the Securities Act of 1933. The court had previously granted defendants’ motion to dismiss in large part and allowed the case to proceed only on allegations that defendants failed to disclose information required by Item 303 of Securities and Exchange Commission Regulation S-K.
Freshworks went public on September 22, 2021. Before the offering, defendants highlighted the company’s year-over-year revenue growth rate, calculated billings growth rate, and net dollar retention rate, including statements that the metrics were positive and accelerating through the second quarter of 2021. The complaint alleged that all three metrics declined in the third quarter, but defendants did not disclose that change in trend before the offering. After Freshworks announced its third-quarter numbers on November 2, 2021, its stock price fell 14% the next day. The stock later fell below the offering price on November 15, 2021, and declined further after later financial announcements.
Defendants’ Motion
Defendants moved for judgment on the pleadings under Rule 12(c). That motion asks whether, accepting the nonmoving party’s pleaded allegations as true, the moving party is entitled to judgment as a matter of law.
Defendants argued that the November 2021 disclosure could not support a claim because the stock remained above its initial offering price on the following day. They also argued that later stock-price declines could not support recovery because the third-quarter numbers had already become public and therefore could not have been caused by an omission about those numbers.
The court agreed with two limits on the proposed recovery. Section 11(e) does not allow recovery for stock-price declines above the offering price. In addition, plaintiffs must ultimately prove that declines below the offering price were caused by the alleged Item 303 violation rather than by another factor. The court stated that recoverable losses therefore had to be both below the offering price and caused by the alleged omission of known trends or uncertainties that had, or were reasonably likely to have, a material effect on the company’s financial results.
Ruling
The court denied defendants’ motion for judgment on the pleadings. It held that defendants had not met the demanding standard for obtaining judgment based only on the pleadings. The court could not conclude as a matter of law that the alleged omission had no negative effect on Freshworks’s stock by November 15, the first day the stock fell below the offering price.
The court noted that the effect of the alleged omissions may have diminished over time, but it could not decide from the pleadings when that effect ended. It said the loss-causation question was better suited for summary judgment or trial, likely with expert testimony. The order did not decide whether Sundaram would ultimately prove the alleged violation or recover damages.
Read the full 4-page opinion on CourtListener, the free public archive maintained by the Free Law Project.