Sayce v. Forescout Technologies, Inc.

Background

Christopher L. Sayce and the other named plaintiffs brought a securities class action against Forescout Technologies, Inc., its chief executive officer Michael DeCesare, and its chief financial officer Christopher Harms. Forescout provides cybersecurity services and technology. The plaintiffs alleged that the defendants violated Section 10(b) of the Securities Exchange Act of 1934 and Securities and Exchange Commission Rule 10b-5 by making false or misleading statements and failing to disclose information about employee departures and layoffs, sales productivity, the sales pipeline, deals that did not close, revenue projections, alleged artificial deal-closing practices, an alleged channel-stuffing scheme, and conditions surrounding Advent International’s proposed acquisition of Forescout. The plaintiffs also alleged that DeCesare and Harms were liable under Section 20(a) as controlling persons.

Forescout and the individual defendants separately moved to dismiss under Federal Rule of Civil Procedure 12(b)(6), which tests whether a complaint alleges enough facts to state a legally plausible claim. The defendants argued that the plaintiffs had not adequately pleaded actionable misstatements, loss causation, or scienter. Scienter means the required state of mind for securities fraud, such as an intent to deceive or deliberate recklessness. The individual defendants also argued that the Section 20(a) claims failed because the plaintiffs had not adequately pleaded an underlying Section 10(b) violation.

Court’s analysis

The court held that some statements about Forescout’s sales productivity, pipeline, and deals contained concrete assertions about present operations and therefore were not necessarily protected forward-looking statements. The court also held that statements about revenue projections were protected by the Private Securities Litigation Reform Act’s safe-harbor provision to the extent they were forward-looking and were not alleged to have been made with actual knowledge that they were false.

The court nevertheless found that the plaintiffs had not pleaded falsity with the required particularity. Statements that the sales force was “maturing and ramping nicely” and that productivity was “trending in the right direction” were vague and non-actionable. The confidential-witness allegations did not provide enough detail or reliably show that DeCesare or Harms knew about employee departures, hiring freezes, or problems with sales operations. The allegations about deals and the sales pipeline also lacked sufficient detail, and some confidential-witness accounts contradicted one another. The plaintiffs did not adequately explain how the alleged artificial deal listings made the company’s forecasts false or establish the alleged channel-stuffing method. The court likewise found that the plaintiffs did not show how Forescout’s statements attributing missed projections to economic conditions or the COVID-19 pandemic were false.

The court rejected the defendants’ argument that loss causation was inadequately pleaded. Loss causation is the required connection between the alleged deception and the plaintiffs’ losses. The complaint alleged that Forescout’s stock price fell approximately 37 percent after a reduced revenue projection was announced and approximately 24 percent after the Advent acquisition was terminated. The court found those allegations sufficient at the pleading stage to show that the market reacted to later disclosures of adverse information.

The court found, however, that the plaintiffs also failed to plead a strong inference of scienter. The fifteen confidential witnesses provided general time frames and insufficient detail, and the complaint did not reliably show that the individual defendants knew the alleged operational details. The defendants’ statements that they monitored the sales pipeline and large deals were insufficient without reliable allegations that those statements were false. The defendants’ stock sales occurred under Rule 10b5-1 trading plans, and the complaint did not adequately allege that the sales were dramatically out of line with prior trading practices. The court also held that a potential personal financial motive arising from the Advent acquisition and the timing of later disclosures were insufficient, either separately or together, to establish scienter.

Because the Section 10(b) claim was inadequately pleaded, the court also granted the individual defendants’ motion to dismiss the Section 20(a) claims. The court granted both defendants’ motions to dismiss and granted the plaintiffs leave to amend. The opinion does not state that the court dismissed the claims with prejudice or without prejudice.