City of Omaha Police and Firefighters Retirement System v. Cognyte Software Ltd

Background

City of Omaha Police and Firefighters Retirement System, individually and on behalf of all other persons similarly situated, brought a proposed class action against Cognyte Software Ltd., Elad Sharon, and David Abadi. The complaint asserted securities-fraud claims under Section 10(b) of the Securities Exchange Act of 1934 and its implementing Rule 10b-5, as well as a control-person liability claim under Section 20(a). Plaintiff purchased Cognyte stock during the proposed class period, February 2, 2021, through January 19, 2023.

The complaint challenged statements in Cognyte’s Code of Conduct, Securities and Exchange Commission filings, and public earnings calls. According to the complaint, those statements portrayed Cognyte as operating ethically, complying with applicable laws, and providing security products to customers seeking to prevent wrongdoing by bad actors. Plaintiff alleged that reports concerning Cognyte’s products and a reported sale of intercept spyware to a Myanmar state-backed telecommunications firm revealed that those statements were false or misleading and caused Cognyte’s stock price to fall.

Motion and Legal Standard

Defendants moved to dismiss under Federal Rule of Civil Procedure 12(b)(6), which tests whether a complaint alleges enough facts to state a legally plausible claim. For securities fraud, the court explained, a plaintiff must plead a material misstatement or omission, scienter, a connection to the purchase or sale of a security, reliance, economic loss, and loss causation. Scienter means the required wrongful state of mind. Loss causation means the required causal connection between the alleged misconduct and the investor’s loss. Securities-fraud claims also must satisfy heightened pleading requirements under Rule 9(b) and the Private Securities Litigation Reform Act.

Section 10(b) Claim

The court first held that the claims against David Abadi were dismissed because the complaint contained no allegations against him.

The court then considered the alleged misstatements. Statements in Cognyte’s Initial Registration Statement were not actionable because they were made before the proposed class period began. The court also found no duty to correct those statements because they described conditions existing at the time of Cognyte’s original public listing and did not sufficiently imply future circumstances.

The statements in the Code of Conduct about acting ethically, honestly, and lawfully were held to be nonactionable “puffery.” Puffery is language so general that a reasonable investor would not rely on it as a specific factual representation. The court viewed Cognyte’s statements as general declarations and, in context, as directives to employees rather than concrete assertions about the company’s past conduct.

The court also held that Cognyte’s descriptions of its business and customers did not amount to actionable misstatements or omissions. The defendants had not represented that Cognyte sold exclusively to customers seeking to prevent wrongdoing. In addition, the company’s risk disclosures warned that it might sell certain solutions to countries or customers considered disfavored by media or political or privacy organizations. The court therefore found that the challenged statements were not misleading in light of the warnings. It also found the complaint’s allegations about Cognyte’s control over the accounts described in the Meta Report to be conclusory.

The court rejected the claim that Cognyte’s public risk warnings falsely represented compliance with all applicable laws. The warnings stated that Cognyte’s compliance systems might be inadequate, that personnel might violate laws and regulations, and that failure to obtain or maintain export and marketing approvals could interrupt the business. The court concluded that these statements did not represent that Cognyte would unfailingly comply with the law.

The court further held that the complaint did not plead any underlying legal violation with sufficient particularity. It identified only one alleged instance involving a possible sale of intercept spyware to a Myanmar state-owned telecommunications company, but did not identify the particular law or regulation violated, its elements, or facts showing that Cognyte’s conduct satisfied those elements. The complaint also did not allege that the sale actually occurred or that Israeli authorities had charged Cognyte with a violation.

Scienter

The court held that the complaint did not adequately plead scienter as to Sharon or Cognyte. Plaintiff did not rely on motive and opportunity, and instead argued that Sharon must have known about alleged violations because of his experience and position as Cognyte’s chief executive officer. The court found those allegations conclusory and insufficient. The July 2021 letter from the Norwegian Government Pension Fund Global referred to public allegations concerning Cognyte’s predecessor before the spin-off and did not identify a Cognyte sale violating export-control law. Because no individual defendant or other corporate officer was adequately alleged to have the required state of mind, the complaint also failed to plead corporate scienter for Cognyte.

Loss Causation

The court held that the complaint did not adequately plead loss causation. The alleged disclosures were materializations of business and reputational risks that Cognyte had already disclosed, rather than disclosures of concealed information. The court also noted that Cognyte’s stock price rose after some alleged disclosures, fell during periods when no corrective disclosure was alleged, and declined during a period that included the marketwide effects of the COVID-19 pandemic. The complaint therefore did not plausibly connect the alleged disclosures to the stock-price decline.

Section 20(a) Claim and Disposition

Section 20(a) requires an underlying Exchange Act violation and control over the primary violator. Because the Section 10(b) claim failed, the court held that the Section 20(a) claim failed as well.

The court granted defendants’ motion to dismiss. Plaintiff requested permission to file another complaint. The court directed that, if plaintiff had additional facts that could cure the identified problems, plaintiff could submit by October 21, 2024, a letter seeking permission to replead, accompanied by a proposed Second Amended Complaint showing the changes. The court directed the Clerk to close the motion at Docket Number 54.