Sundaram v. Freshworks Inc
- Charles Breyer
- 3:22-cv-06750
- U.S. District Court · Northern District of California
- 11
In Sundaram v. Freshworks Inc., Judge Breyer granted defendants summary judgment, finding alleged IPO omissions caused no recoverable stock losses.
Mohan R. Sundaram and the Freshworks defendants, including Freshworks Inc., its executives and directors, and its IPO underwriters.
What happened
In Sundaram v. Freshworks Inc., Mohan R. Sundaram sued Freshworks Inc., its executives and directors, and its IPO underwriters under Sections 11 and 15 of the Securities Act. He alleged that Freshworks should have disclosed weaker interim third-quarter 2021 results before its initial public offering.
The defendants argued that Sundaram could not recover for losses while the stock traded above the $36 IPO price, and that the later losses below $36 were not caused by the alleged omissions. The court agreed. It found that the market absorbed the third-quarter information before the stock first fell below $36 and that Sundaram had not shown a real factual dispute about causation.
Judge Charles R. Breyer granted the defendants’ motion for summary judgment. The ruling means Sundaram’s claims did not proceed further on the evidence presented because the court found no recoverable losses caused by the alleged omissions.
The detailed version
- Sundaram v. Freshworks Inc · No. 3:22-cv-06750
- Charles Breyer
- Apr. 10, 2025
Background
Freshworks went public on September 22, 2021, at $36 per share. Sundaram bought 1,000 shares the next day for $46 per share. Freshworks’s IPO filings included strong second-quarter 2021 results but did not include weaker interim third-quarter results. Freshworks released those third-quarter results after the market closed on November 2, 2021. Analysts reported on the weaker results before the market opened the next day. The stock fell from $50.07 to $43.06 on November 3 and to $39.59 on November 4. It first fell below the $36 IPO price on November 15, 2021.
Sundaram’s remaining claim alleged that the defendants violated Item 303 of Securities and Exchange Commission Regulation S-K by failing to disclose known trends or uncertainties involving Freshworks’s weaker third-quarter results. The defendants previously lost motions seeking dismissal and judgment on the pleadings. They then moved for summary judgment, arguing that the undisputed evidence defeated the claim.
Legal Framework
Summary judgment is appropriate when there is no genuine dispute about a material fact and the moving party is entitled to judgment as a matter of law. A material fact could affect the outcome, and a genuine dispute exists when the evidence could allow a reasonable jury to rule for the nonmoving party.
Section 11(e) of the Securities Act limits recoverable damages by using the lower of the amount paid for the security and the public offering price. The court had previously ruled that Section 11 does not allow recovery for stock-price declines above the IPO price. Because the IPO price was $36 per share, the court held that only losses from a decline below $36 could potentially be recovered in this case.
The Securities Act also allows a defendant to prove “negative causation”—that is, that some or all of the claimed loss was caused by something other than the alleged misstatement or omission. The defendants had the burden of proving that any potentially recoverable loss was not caused by the alleged omission.
Court’s Analysis
The court found that the defendants established negative causation through evidence concerning an efficient market. In an efficient market, publicly available information is reflected in a stock’s price quickly. The court considered the five factors from Cammer v. Bloom and the three factors from Krogman v. Sterritt. It found that all eight factors supported market efficiency, including Freshworks’s trading volume, analyst coverage, number of market makers, eligibility to file a Form S-3, market capitalization, bid-ask spread, and percentage of shares held by the public. The court also noted a cause-and-effect relationship between the November 2 financial release and the stock-price change on November 3.
Sundaram relied on expert testimony about possible “post-earnings announcement drift,” meaning that stock prices may continue to move after an earnings surprise becomes public. The court found that his expert did not apply that theory to Freshworks-specific facts and therefore offered only speculation, which was insufficient to create a genuine factual dispute. The court also rejected Sundaram’s argument that the defendants had to separately analyze the November 2–4 period and the period after November 5. The defendants showed that the market had absorbed the third-quarter results before the stock fell below $36 on November 15.
The court further rejected Sundaram’s argument that the defendants had to identify the actual cause of every later decline. Under the court’s reading of Section 11(e), the defendants only had to show that the decline was not caused by the alleged omission. They did not have to prove what other factor caused it. The court found that Sundaram had offered no evidence disputing the defense expert’s conclusion that the decline below $36 was not caused by the alleged omissions.
Disposition
The court concluded that no recoverable losses—meaning no losses below the $36-per-share threshold—were caused by the alleged omissions. It held that Sundaram had not identified a genuine dispute of material fact on causation and granted Defendants’ motion for summary judgment. The court also vacated the scheduled April 11, 2025 hearing.
Read the full 11-page opinion on CourtListener, the free public archive maintained by the Free Law Project.