In re Stem, Inc. Securities Litigation

Background

Defendants Stem, Inc.; John Carrington; William Bush; Larsh Johnson; Prakesh Patel; Alan Russo; Bryan Ho; Star Peak Energy Transition Corp.; Eric Scheyer; Michael C. Morgan; Alec Litowitz; and Adam E. Daley moved under Federal Rules of Civil Procedure 12(b)(6), 8(a), and 9(b) to dismiss the plaintiffs’ First Amended Consolidated Complaint. The plaintiffs were Vishal Lawale and Vishale Thakkar, who brought the action on behalf of a proposed class of people who purchased Stem securities during the period from December 4, 2020, through April 3, 2023.

Star Peak was a special purpose acquisition company that acquired Stem. After the merger, Star Peak renamed itself Stem, Inc. and operated Stem’s business. Stem provided energy-storage systems and related software services, including its Athena artificial-intelligence software. The plaintiffs alleged that defendants made false or misleading statements about Athena’s automation, Athena’s success in the front-of-the-meter market, risks to Stem’s business, the Massachusetts front-of-the-meter project, and Stem’s financial prospects.

The complaint asserted five claims: violations of section 14(a) of the Securities Exchange Act and Securities and Exchange Commission Rule 14a-9; control-person liability under section 20(a); violations of section 10(b) and Rule 10b-5; additional section 20(a) control-person liability; and insider-selling liability under section 20A. The court had dismissed all of these claims in an earlier order and directed the plaintiffs to present their securities-fraud allegations in chart form.

Analysis

For a Rule 12(b)(6) motion, the court accepted material factual allegations as true but required the complaint to state a plausible claim. Rule 9(b), which applies to fraud-based allegations, required the plaintiffs to identify the who, what, when, where, and how of the alleged misconduct. The Private Securities Litigation Reform Act also required particularized allegations showing why statements were misleading and facts supporting a strong inference of the required state of mind.

Section 10(b) and Rule 10b-5 claims. The plaintiffs identified ninety-four allegedly false or misleading statements and relied on three sources to show falsity: confidential witnesses, a later statement by Carrington, and Stem’s financial results.

The court rejected the theory that statements about Athena represented that all of Athena’s functions were automated. It found that the challenged statements identified particular automated functions, such as switching among battery, onsite-generation, and grid power; system discharges and recharging; or generating energy-market bids. The court concluded that the statements did not represent that every Athena function was automated. The section 10(b) and Rule 10b-5 claims based on that theory were therefore subject to dismissal.

The court also found that the confidential-witness allegations did not establish falsity. The allegations concerning confidential witness 1 did not show personal knowledge of the claimed manual functions or adequately explain the source of information attributed to customers and other employees. Other information attributed to that witness did not show that the challenged statements were false, and the complaint did not provide a sufficient time frame showing falsity when the statements were made. The allegations concerning confidential witness 2 similarly lacked a showing that the sources of the information had personal knowledge and lacked a sufficient time frame. Although the court found that the complaint adequately described confidential witness 3’s job responsibilities, it did not cure the prior failure to show that information conveyed to that witness was based on personal knowledge.

Carrington’s statement during a February 28, 2024 earnings call that Stem’s program-management team added a “human-in-the-loop” to Athena’s operations also did not establish falsity. The statement came after the class period and did not contradict the earlier statements about any specific function or Athena’s success in the front-of-the-meter market. The court further found that Stem’s later financial results did not show that Athena lacked particular automated functions or that earlier statements about success and risk were false when made. The court concluded that the three sources, separately or together, failed to show a false or misleading statement or omission, and dismissed the section 10(b) claims.

Scheme-liability claim. The court dismissed the claim under Rules 10b-5(a) and (c), which concern deceptive schemes. To the extent the claim relied on the same statements that failed to support the section 10(b) claims, it failed for the same reason. The court also rejected three additional theories. It found no allegation that Stem’s acquisition of AlsoEnergy was outside defendants’ normal course of business. It found that the allegations concerning batteries ordered for an Available Power project did not show that the conduct was outside the normal course of business. Finally, the allegations concerning revenue recognition for batteries sold through REX and Lullwater did not show that collection of the revenue was not probable when Stem filed the relevant Securities and Exchange Commission form, or that defendants knew the batteries were defective at that time. The scheme-liability claim was subject to dismissal.

Section 14(a) claim. Section 14(a) and Rule 14a-9 concern materially false or misleading statements in proxy solicitations. The court had previously dismissed this claim for failure to comply with Rule 9(b). It found that the amended complaint still relied on the same statements underlying the section 10(b) fraud claim and merely made a formal distinction between the claims. Because the plaintiffs had not adequately pleaded a false or misleading statement under Rule 9(b), the section 14(a) claim was also subject to dismissal. The court did not reach defendants’ additional arguments about an essential link between the proxy and the plaintiffs’ alleged harm or whether defendants solicited, or permitted the use of their names to solicit, votes.

Sections 20(a) and 20A claims. A section 20(a) control-person claim and a section 20A insider-selling claim require an adequately pleaded independent violation of the Exchange Act. Because the plaintiffs had not adequately alleged such an underlying violation, the court held that the remaining section 20(a) and section 20A claims were subject to dismissal.

Other request and disposition

The court denied defendants’ request for judicial notice as moot because it did not rely on any of the documents covered by that request.

The court granted defendants’ motion to dismiss and dismissed the First Amended Consolidated Complaint without further leave to amend. The court relied on the plaintiffs’ failure to correct pleading deficiencies identified in the earlier dismissal order.