In re SentinelOne, Inc. Securities Litigation

Background

This was the defendants’ second motion to dismiss a consolidated putative securities class action. SentinelOne offers cybersecurity products by subscription. According to the Second Amended Complaint, the company generally recognized subscription revenue over the length of a contract and publicly reported a non-GAAP metric called Annualized Recurring Revenue (ARR).

The plaintiff alleged that, beginning sometime in the first quarter of fiscal year 2023, SentinelOne began including annualized consumption and usage revenue in ARR without disclosing the change or updating its ARR definition. The plaintiff also alleged that SentinelOne double-counted revenue in approximately 200 contracts, including contracts in which customers renewed, added services, or upgraded their subscription tier. On June 1, 2023, the defendants announced downward revisions to previously reported ARR figures and projected ARR and revenue growth. The next day, SentinelOne’s stock price fell by more than 35 percent, according to the complaint.

Lead Plaintiff Amir Gupta brought claims under Section 10(b) of the Securities Exchange Act of 1934 and Securities and Exchange Commission Rule 10b-5, and a related control-person claim under Section 20(a). The defendants moved to dismiss the Second Amended Complaint under Federal Rule of Civil Procedure 12(b)(6), which permits dismissal for failure to state a legally sufficient claim.

Scienter Allegations

For the Section 10(b) and Rule 10b-5 claims, the Private Securities Litigation Reform Act required the plaintiff to plead with particularity both falsity and scienter. Scienter means the required mental state, including an intent to deceive or deliberate recklessness.

The court held that the plaintiff did not adequately plead scienter. It rejected the argument that the eventual correction of ARR figures, by itself, showed that the defendants intended to mislead investors when the original figures were calculated and disclosed. The court also found that the allegations about the ARR methodology did not identify when the change occurred, why it occurred, or who was involved in making the decision. The confidential witness cited by the plaintiff had left the company before the alleged methodology change and could confirm only that the change occurred after the witness’s departure.

The court similarly found that the allegations about double-counting did not show that the defendants knew or should have known about the errors. The witness described controls, including spot checks and investigations, that were intended to detect and correct discrepancies before ARR was publicly reported. The court stated that the failure of those controls to catch every error, and the company’s later decision to enhance them, did not establish scienter.

The court also rejected the plaintiff’s reliance on stock sales by Tomer Weingarten and David Bernhardt. It found that the allegations did not show that Bernhardt’s sales were unusual or suspicious. As to Weingarten, the court noted that the proceeds from his sales before and during the class period were nearly identical, and that most of his class-period sales occurred at prices below the class-period high. The court concluded that these allegations did not support a strong inference of scienter.

The court further rejected the alleged motive arising from SentinelOne’s merger with Attivo Networks because the merger closed before the class period. It also held that the plaintiff had not adequately used the core operations doctrine, which can sometimes support an inference that senior executives knew about operational misconduct. The complaint did not allege that either individual defendant helped calculate ARR or knew of the alleged inaccuracies when the statements were made.

Ruling and Disposition

Considering the allegations individually and together, the court found that they did not create a strong inference of scienter that was at least as compelling as innocent explanations. It therefore held that the Section 10(b) claim failed and that the Section 20(a) claim failed as a result.

The court GRANTED the motion to dismiss. Because the plaintiff had already had ample opportunity to amend and had not cured the previously identified deficiencies, the court DISMISSED the case against the defendant without leave to amend. The Clerk was directed to enter judgment in favor of SentinelOne, Inc., Tomer Weingarten, and David Bernhardt, against the plaintiff, and to close the case.