In re Nutanix, Inc. Securities Litigation

Background

Plaintiffs Ryan Scheller, Bristol County Retirement System, Joseph S. Maroun, and the City of Miami Fire Fighters and Police Officers Retirement Trust brought a proposed class action against Nutanix, Inc., Dheeraj Pandey, and Duston M. Williams. The plaintiffs alleged that Nutanix concealed a declining sales pipeline and revenue by making misleading statements about lead generation, an alleged practice of moving sales into earlier quarters, new-customer growth, sales hiring, and sales productivity.

The plaintiffs filed a Second Amended Complaint after the court had dismissed their earlier amended complaint for failing to adequately plead falsity and scienter. Scienter means the required state of mind for a securities-fraud claim, such as an intentional or deliberately reckless misstatement. Nutanix again moved to dismiss under Federal Rule of Civil Procedure 12(b)(6), which requires dismissal when a complaint does not adequately state a legally valid claim.

Legal standard

The court applied the pleading requirements for claims under Section 10(b) of the Securities Exchange Act and Securities and Exchange Commission Rule 10b-5. A plaintiff must adequately plead a material misstatement or omission, scienter, a connection with the purchase or sale of a security, transaction and loss causation, and economic loss. The Private Securities Litigation Reform Act also requires plaintiffs to identify each allegedly misleading statement, explain why it was misleading, and plead particular facts supporting a strong inference of scienter.

At the motion-to-dismiss stage, the court accepts well-pleaded allegations as true and draws reasonable inferences for the plaintiffs, but it need not accept conclusory allegations or unreasonable inferences.

Alleged lead-generation misstatements

The court held that the plaintiffs still had not adequately alleged that Nutanix’s statements about increased marketing and sales activities were false. The statements generally referred to marketing, sales, brand awareness, promotions, trade shows, and partner programs; they did not specifically state that Nutanix was increasing spending on “lead generation.”

The plaintiffs alleged that lead generation was a component of marketing spending and that Nutanix had kept lead-generation spending flat. But the court found that the plaintiffs did not explain why reasonable investors would understand Nutanix’s statements about marketing as representations about lead generation specifically. The court therefore rejected these allegations as a basis for the securities-fraud claim.

Alleged pull-in practice

The plaintiffs alleged that Nutanix moved sales expected to close in a later quarter into the current quarter, sometimes using discounts or free products to encourage early closings. The court held that pulling in sales was not, by itself, fraudulent. The relevant question was whether Nutanix’s statements about new customers were misleading because the practice concealed a declining pipeline.

New-customer and pipeline statements

The plaintiffs did not allege that Nutanix’s reported customer numbers were mathematically inaccurate. They argued instead that Nutanix created a misleading impression by presenting sales to existing customers as new-customer growth while its pipeline was declining.

The court rejected challenges to statements about “end customers” and found insufficient allegations concerning Nutanix’s November 2017 statements about new customers. But it found that the plaintiffs adequately alleged that several later statements were materially misleading. Those included March 2018 statements that Nutanix had added a record number of new customers and made a major contribution to mid-market customer acquisition, as well as May 2018 statements about renewed focus on new-customer sales channels and excitement about the pipeline for new customers.

The court concluded that the allegations could lead a reasonable investor to believe that Nutanix had a strong new-customer pipeline when, according to the complaint, that pipeline was substantially declining.

Sales hiring and productivity statements

The court again found that statements about the numerical increase in Nutanix’s sales and marketing personnel were facially true and that the plaintiffs had not adequately alleged that those statements misled reasonable investors about employee retention or productivity.

However, the court found adequately pleaded falsity for statements that Nutanix had achieved “record sales productivity,” executed its hiring plans “flawlessly,” had strong hiring success that positioned it for future growth, and had increased sales-representative productivity. The plaintiffs alleged high attrition, missed sales quotas, demoralized sales representatives, and poor actual productivity. The court found those allegations sufficient to support the conclusion that the statements were misleading.

Scienter

The court found that the plaintiffs adequately pleaded scienter for the statements concerning new-customer growth and sales productivity. The complaint alleged that Nutanix’s pipeline was tracked in internal systems, that pipeline problems were discussed at company meetings attended by Pandey and Williams, and that Pandey regularly met with sales personnel about pipelines and prospective customers. Taken together, the allegations supported a strong inference that the individual defendants knew, or were deliberately reckless about, the substantial decline in Nutanix’s pipeline.

The court did not find scienter adequately pleaded for the statements about hiring. It reasoned that general allegations about sales-force attrition did not make it at least as plausible as the opposing inference that the defendants understood their facially true statements about hiring to be misleading.

Disposition

The court concluded that the plaintiffs adequately stated claims concerning certain statements about new-customer growth and sales productivity. It denied Nutanix’s motion to dismiss. The order set a case-management conference for October 27, 2020, and required the parties to file a joint case-management statement on October 20, 2020. Because the order ruled on a Rule 12(b)(6) motion to dismiss, it addressed pleading sufficiency rather than deciding the ultimate merits of the securities claims.