IN RE TWITTER, INC. SECURITIES LITIGATION

Background

Lead plaintiffs Weston Family Partnership LLLP and the Twitter Investor Group brought a consolidated securities class action against Twitter, Inc., chief executive officer Jack Dorsey, and chief financial officer Ned Segal. They asserted claims under Section 10(b) of the Securities Exchange Act and Securities and Exchange Commission Rule 10b-5 against all defendants, and a control-person claim under Section 20(a) against Dorsey and Segal.

The alleged misconduct concerned Twitter’s Mobile Application Promotion product, or MAP, and issues involving user privacy settings, data sharing, and targeted advertising. Plaintiffs challenged statements made in July 2019 about improvements to MAP and expected revenue, Twitter’s August 6, 2019 announcement about privacy-setting issues, and Segal’s statements at a September 4, 2019 technology conference. Plaintiffs alleged that these statements concealed software bugs, declining MAP advertising demand, and the financial effects of suspending certain data sharing.

Twitter’s October 24, 2019 investor call disclosed that changes addressing the privacy violations had reduced third-quarter revenue growth and would continue to have negative effects. Twitter also reported that a decline in Japanese revenue was related to bugs in its legacy MAP product. Its share price fell more than 20 percent after the disclosures.

Legal standards

The defendants moved to dismiss under Federal Rules of Civil Procedure 9(b) and 12(b)(6), the rule governing whether a complaint adequately states a legal claim. Because the case alleged securities fraud, the Private Securities Litigation Reform Act also required plaintiffs to identify misleading statements and explain why they were misleading with particularity. It further required facts supporting a strong inference of scienter, meaning knowledge of falsity or deliberate recklessness.

Section 10(b) and Rule 10b-5 claims

The court held that plaintiffs did not adequately allege a material misrepresentation or omission. It found that the July statements about continued work on MAP, gradual revenue effects, and projected improvement were vague optimism, or “puffery,” and were not measurable or tied to verifiable facts. The court also held that the statements were forward-looking and accompanied by meaningful cautionary language, including that Twitter was “not there yet.” The complaint did not plausibly show that Twitter was not working to improve MAP or had promised a specific timetable.

The court rejected the challenge to Twitter’s July risk disclosures. Those disclosures warned about undetected software errors, failures of new or enhanced products, and changes that might fail to generate revenue. The court reasoned that the complaint did not show that the later decision to stop sharing certain user data had already affected revenue when the disclosures were made on July 31, 2019.

The court also rejected the challenge to Dorsey’s and Segal’s Sarbanes-Oxley certifications because those allegations depended on the complaint’s unsuccessful allegations that the underlying Form 10-Q statements were false or misleading.

As to Twitter’s August 6 tweet and blog post, the court found that plaintiffs had not shown an affirmative misrepresentation. Twitter said it had fixed issues related to users’ settings choices and data sharing; it did not state that it had repaired the underlying software bugs. The court also found that the alleged omissions were either not plausibly shown to have occurred by that time or were not connected sufficiently to the statements to make them misleading. The tweet’s reference to fixing the settings-related issues also disclosed that Twitter had suspended data sharing to conform to user preferences.

The court found that Segal’s September statements that MAP work was ongoing, Twitter continued to sell the existing MAP product, and Twitter had made improvements to MAP were not actionable. The first and third statements were treated as forward-looking or vague statements, and the complaint lacked specific facts showing that MAP revenue was materially declining or that Segal knew of such a decline on September 4. The court likewise found that Segal’s statement that Asia had historically been more MAP-focused did not contradict allegations that MAP sales were declining in Asia.

Scienter

The court separately held that plaintiffs had not pleaded scienter. Allegations that Dorsey and Segal received daily reports containing key advertising metrics did not describe the reports’ specific contents or provide concrete data showing that the reports contradicted defendants’ public statements. The court also rejected plaintiffs’ theory that MAP’s importance to Twitter’s advertising business, by itself, showed that the individual defendants knew of the alleged problems.

The court found that Twitter’s privacy obligations and policies did not supply particularized facts showing an intent to deceive investors. It also found that Segal’s sale of approximately 10 percent of his holdings did not support a strong inference of scienter because plaintiffs did not allege that the amount or timing was unusual or suspicious, and the sales were made under a Rule 10b5-1 trading plan. Finally, the court held that the timing of the August disclosure did not establish that defendants knowingly lied in July; the complaint did not provide enough detail about the confidential witness’s technical knowledge, and hindsight did not establish earlier falsity.

Disposition

Judge Yvonne Gonzalez Rogers granted defendants’ motion to dismiss the Section 10(b) and Rule 10b-5 claims. The court did not reach loss causation because the falsity and scienter allegations were insufficient. Because the Section 20(a) claims depended on an adequately pleaded Section 10(b) violation, the court also granted the motion to dismiss those claims.

The court granted the motion to dismiss the consolidated class action complaint with leave to amend. Plaintiffs were ordered to file an amended complaint by January 15, 2021; otherwise, the consolidated complaint would be deemed dismissed. The order terminated Docket Number 53.