In re SelectQuote, Inc. Securities Litigation

Background

The plaintiffs were West Palm Beach Police Pension Fund and City of Fort Lauderdale Police & Fire Retirement System. They sued SelectQuote, Inc., two of its chief officers, people who signed the registration statement, Brookside Equity Partners LLC, Brookside officers and directors, other SelectQuote officers and directors, and twelve IPO underwriters. The claims arose under the Securities Exchange Act of 1934 and the Securities Act of 1933.

The plaintiffs alleged that SelectQuote’s IPO offering materials contained materially false or misleading statements about revenue, growth, the quality of its business, and its sales process. SelectQuote received commissions when consumers bought Medicare Advantage policies, including amounts based on expected policy renewals. The plaintiffs alleged that SelectQuote used excessively high persistency rates—the expected rates at which policies would renew—to inflate revenue, failed to adjust those rates as renewal performance declined, and misrepresented the training of its sales personnel.

The court had previously dismissed the First Amended Complaint but allowed the plaintiffs to file another complaint. It identified deficiencies concerning alleged inaccuracies in the factual bases for forward-looking projections, scienter, and control liability under Section 20(a) of the Exchange Act. The plaintiffs then filed the Second Amended Complaint.

Court’s analysis

The court held that statements estimating future persistency rates and revenue were forward-looking projections. It had previously ruled that such projections were not actionable misstatements and had allowed the plaintiffs to replead by alleging that defendants knew the factual bases for the projections were inaccurate or had failed to account for changed facts. The court found that the plaintiffs did not provide sufficient additional facts.

Although the plaintiffs alleged that defendants knew about declines in persistency rates for certain 2018 and 2019 policy groups before the May 2020 IPO, the court found no specific evidence that defendants had trend data showing those declines by the time of the IPO. The court also noted that the COVID-19 special enrollment period continued until June 2020. It found that the plaintiffs’ statistical analysis was backward-looking and relied on hindsight rather than showing that defendants knew the projections were inaccurate when made.

The court also held that statements about the training, skills, and expertise of SelectQuote’s employees were puffery—general promotional statements that are not actionable as securities fraud. The allegation that some sales agents received only four weeks of training did not make the statement that new agents received up to ten weeks of proprietary in-house training false or misleading.

For scienter, which means the required intent or reckless disregard for the truth, the plaintiffs relied on defendants’ alleged knowledge of persistency declines, access to predictive tools and business information, stock sales, and one executive’s departure from SelectQuote. The court found that these allegations did not create the required strong inference that SelectQuote, Timothy Danker, or Raffaele Sadun intended to deceive, manipulate, or defraud investors. The court also found insufficient particularized allegations that defendants manipulated or could have manipulated persistency metrics, and held that general access to information, stock sales, and the timing of an executive’s departure were insufficient by themselves.

The plaintiffs also asserted control-liability claims under Section 20(a) against Brookside, Donald Hawks, Raymond Weldon, and other board members. The court explained that these claims required a primary securities-law violation, control over the primary violator, and meaningful participation in the alleged fraud. It held that Brookside’s minority ownership, its right to appoint two board members, the defendants’ board positions, and their alleged access to SelectQuote’s records and statements did not establish the required control over the alleged misstatements.

Disposition

The court granted defendants’ motions to dismiss the Second Amended Complaint. The clerk was instructed to terminate the open motions at ECF Nos. 78, 81, and 85 and close the case. The opinion does not state that the dismissal was with or without prejudice.