DeKalb County Pension Fund v. Roblox Corporation

Background

This proposed class action was brought on behalf of shareholders against Roblox Corporation and certain of its officers. Plaintiffs alleged that Roblox’s stock price was artificially inflated during the proposed class period, March 10, 2021, through February 15, 2022, because of misrepresentations in public statements.

Roblox operates an online video game platform. Users can purchase the company’s virtual currency, Robux, to buy virtual goods and access paid experiences. The opinion states that Robux purchases, also called bookings, make up nearly all of Roblox’s revenue. The complaint focused on Roblox’s efforts to show that its user base was becoming older and on the relationship between user age and bookings.

The challenged statements included statements about the percentage of users over age 13 and whether monetization was similar for users under and over age 13. Plaintiffs relied on reports from five former Roblox employees, identified as confidential witnesses, who allegedly had information about company performance data.

Legal standard

The defendants moved to dismiss under Federal Rule of Civil Procedure 12(b)(6), which permits dismissal when a complaint does not adequately state a legal claim. The court was required to accept the complaint’s material factual allegations as true and view them favorably to plaintiffs, but conclusory allegations and unsupported inferences were not enough.

The claims arose under Section 10(b) of the Securities Exchange Act and Rule 10b-5. To state such a claim, plaintiffs had to adequately allege a material misrepresentation 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, such as an intent to deceive or deliberate recklessness. Loss causation means a causal connection between the alleged misrepresentation and the plaintiff’s loss. Section 20(a) provides a related claim against controlling persons and requires an underlying Section 10(b) violation.

The heightened pleading requirements of the Private Securities Litigation Reform Act required plaintiffs to identify each allegedly misleading statement, explain why it was misleading, and state with particularity the facts supporting allegations based on information and belief.

Court’s analysis

The court held that plaintiffs had not plausibly alleged falsity. The allegations about user numbers and bookings were inconsistent, and the complaint did not provide enough clarity, specificity, or factual support to show that the confidential witnesses knew of actual metrics contradicting Roblox’s public statements.

The court further held that dismissal would be warranted even if the confidential-witness allegations were sufficient to establish falsity. Plaintiffs had not alleged a corrective disclosure or other event showing that the market learned the challenged statements about user ages or their effect on bookings were false. The stock-price decline followed the release of data showing that bookings were not growing as strongly as expected, but the complaint did not allege that the market learned that Roblox’s earlier statements about user ages were false. The court found that treating the market’s reaction to slower growth as a reaction to disclosure of the alleged fraud was insufficient to plead loss causation.

The court also addressed scienter, but did not determine that issue independently. Because plaintiffs had not adequately alleged actionable misrepresentations or omissions, they had not established scienter. The court stated that it was difficult to assess whether scienter could be adequately pleaded in an amended complaint without knowing what statements or omissions plaintiffs might allege. The court noted, however, that defendants appeared to have potentially meritorious arguments concerning the confidential witnesses’ knowledge and the alleged stock sales.

Disposition

The court granted the motion to dismiss, with leave to amend. It ordered that any amended complaint be filed within 20 days of the order. The opinion did not state that the dismissal was with prejudice or without prejudice.