New York City Fire Department Pension Fund v. Snowflake Inc.

Background

Eleven New York City retirement funds brought a proposed securities-fraud class action against Snowflake Inc., former chief executive officer Frank Slootman, and former chief financial officer Michael Scarpelli. The plaintiffs alleged violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934.

Snowflake’s business used capacity contracts under which customers bought a minimum number of credits. Snowflake recognized revenue as customers used those credits. The plaintiffs alleged that significant revenue growth resulted from customers consuming credits too quickly because of platform inefficiencies, including use of an outdated Intel chip. They also alleged that Snowflake’s largest customers complained about poor price performance and sometimes moved to competitors, and that Slootman and Scarpelli knew about these problems.

On March 2, 2022, Snowflake announced a warehouse scheduling service and a change from Intel hardware to Amazon’s Graviton 2 chip. Snowflake also announced lower projected fiscal-year 2023 revenue growth of 65% to 70%. Its stock price fell 15% that day, and the opinion states that the valuation fell from $264.69 per share to $191.61 per share one week later.

The plaintiffs filed a third amended complaint after the court had dismissed an earlier complaint. The defendants moved to dismiss under Federal Rule of Civil Procedure 12(b)(6), which permits dismissal when a complaint does not adequately state a legally recognized claim.

Court’s analysis

To plead securities fraud under Section 10(b), a plaintiff must allege, among other elements, a material misstatement or omission, a required fraudulent state of mind, a connection to the purchase or sale of a security, loss causation, and economic loss. The Private Securities Litigation Reform Act and Rule 9(b) require particularized allegations of falsity and the defendants’ required state of mind.

The plaintiffs’ revised theory was that Snowflake concealed platform inefficiencies that artificially inflated revenue metrics and created the appearance of rapid growth. The court identified three problems with that theory: Snowflake had consistently exceeded its revenue projections, had repeatedly warned the market that platform enhancements would affect revenue and growth, and had disclosed information making a slowdown in its unusually rapid growth the more obvious explanation for the stock-price decline.

The court focused on loss causation—the requirement that the alleged fraud plausibly caused the plaintiffs’ losses. The plaintiffs argued that Snowflake’s March 2, 2022 announcement revealed previously concealed information about the platform’s inefficiencies. The court found that Snowflake had already warned investors that a new chip and other platform improvements were coming and that those improvements could affect revenue. Snowflake had also disclosed customer credit overuse and efforts to help customers optimize their credit consumption.

The court further noted that Snowflake’s actual revenue growth repeatedly exceeded its guidance. For example, Snowflake had projected second-quarter 2022 growth of 88% to 92%, while actual growth was 103%. In the court’s view, the announcement more plausibly showed that Snowflake’s explosive growth was slowing than that previously concealed inefficiencies had been revealed. The court concluded that the plaintiffs’ loss-causation explanation was possible but not plausible, and therefore that they had not adequately alleged securities fraud.

Disposition

The court granted the defendants’ motion to dismiss. Because this was the plaintiffs’ third attempt to plead the action, and because the court had previously allowed an amendment while identifying the need to plead loss causation, the court dismissed the action without further leave to amend and with prejudice.