Michel v. Sumo Logic, Inc.

Background

Joseph Michel and other plaintiffs brought a proposed class action on behalf of Sumo Logic stockholders against Sumo Logic, Inc. and Ramin Sayar. The plaintiffs alleged violations of Sections 14(a) and 20(a) of the Securities Exchange Act of 1934 based on alleged omissions in Sumo Logic’s proxy statement for its merger with Francisco Partners.

The plaintiffs focused on two alleged omissions. First, they claimed that the proxy statement disclosed that Sumo Logic had exceeded public guidance on three financial measures in the second quarter of fiscal year 2023 but failed to disclose that it had also exceeded guidance on those measures in the third quarter. Second, they claimed that the proxy statement said fourth-quarter results were below the company’s internal forecast and analyst estimates for new annual recurring revenue but failed to disclose that Sumo Logic had exceeded public guidance on the same three measures in that quarter.

The plaintiffs alleged that these omissions created a misleading impression that Sumo Logic’s performance and future prospects had deteriorated. Defendants moved to dismiss the Second Amended Complaint under Federal Rule of Civil Procedure 12(b)(6), which tests whether the complaint legally states a claim.

Pleading standard

The court held that the Section 14(a) claim sounded in fraud because the complaint alleged self-dealing, mismanagement, and a unified course of misleading conduct. The court therefore applied Federal Rule of Civil Procedure 9(b), which requires fraud allegations to be stated with particularity, along with the applicable provision of the Private Securities Litigation Reform Act requiring plaintiffs to identify each misleading statement or omission and explain why it was misleading.

Section 14(a) claim

The court granted with leave to amend defendants’ motion to dismiss the Section 14(a) claim for failure to plead negligence. Although the plaintiffs alleged that Sayar knew about the third- and fourth-quarter results and had a duty to review and correct the proxy statement, the court found those allegations insufficiently specific. In particular, the plaintiffs did not adequately allege facts showing why Sayar should have recognized that omitting the guidance results was misleading, especially given the alleged decline in annual recurring revenue growth and the proxy statement’s statement that fourth-quarter results were below the company’s internal forecast.

The court denied defendants’ motion to dismiss on the ground that the proxy statement contained no omissions. It found that the proxy statement did not include, or expressly incorporate by reference, the information that Sumo Logic had exceeded guidance in the third and fourth quarters. The fact that the information was publicly available affected the materiality analysis rather than whether an omission occurred.

The court nevertheless granted with leave to amend defendants’ motion to dismiss because the plaintiffs had not adequately pleaded that the omissions were materially misleading. The court found that the results were publicly available through Sumo Logic’s filings, earnings calls, and press releases and therefore were part of the information available to shareholders. The plaintiffs also did not adequately allege that the omissions created a materially different impression from the company’s actual condition, considering the slowing annual recurring revenue and revenue growth and the proxy statement’s disclosure about the company’s internal forecast.

The court denied defendants’ motion to dismiss on the ground that the omissions were covered by the Private Securities Litigation Reform Act’s safe harbor for forward-looking statements. The court held that the alleged omissions concerned completed third- and fourth-quarter financial performance and therefore were not forward-looking statements.

The court also denied defendants’ motion to dismiss for failure to plead loss causation. It relied on its earlier ruling that the plaintiffs had plausibly alleged an economic loss and a causal connection between the alleged omissions and that loss.

Section 20(a) claim

Section 20(a) imposes control-person liability when there is an underlying violation of the securities laws. Because the plaintiffs failed to adequately plead the Section 14(a) claim, the court granted with leave to amend defendants’ motion to dismiss the Section 20(a) claim against Sayar.

Other rulings and case status

The court granted defendants’ request for judicial notice of the exhibits, which included publicly available financial documents and filings. The court ordered that any amended complaint be filed within 60 days of entry of the order. It also required the amended complaint to include a numbered chart identifying each alleged false or misleading statement, its speaker, date, and alleged reason for falsity, with citations to the complaint, and required plaintiffs to provide a redlined version.

Overall, the court granted in part with leave to amend and denied in part defendants’ motion to dismiss.