Hessong v. Pinterest, Inc.

Background

Paul Hessong brought a proposed class action against Pinterest, Inc., Ben Silbermann, and Todd Morgenfeld under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Securities and Exchange Commission Rule 10b-5. Hessong alleged that defendants made materially false or misleading statements and omitted material information about Pinterest’s U.S. addressable market, U.S. user growth, average revenue per user (ARPU), and risk of losing advertising revenue.

Hessong focused on statements made between May 16 and August 2, 2019, including statements about strong U.S. revenue and ARPU, expected user growth, the number of monthly active users (MAUs), and the company’s ability to increase advertising. He alleged that the truth emerged in Pinterest’s October 31, 2019 third-quarter disclosures, which showed slower U.S. MAU growth and led, according to the complaint, to a 17% decline in Pinterest’s share price on November 1, 2019.

Defendants moved to dismiss under Federal Rule of Civil Procedure 12(b)(6), arguing that Hessong did not satisfy the heightened pleading requirements of the Private Securities Litigation Reform Act (PSLRA) for falsity and scienter. Scienter means the required fraudulent state of mind. Defendants also asked the court to take judicial notice of certain public filings. Hessong did not oppose judicial notice of the filings and clarified that his theory concerned omissions: when defendants spoke positively about U.S. user growth and ARPU, he argued, they had to disclose adverse information about slowing growth and possible market saturation.

Court’s Analysis

The court granted defendants’ request for judicial notice. It observed that Pinterest’s public filings reported increases in U.S. MAUs and ARPU during the relevant period, that the company raised its revenue guidance, and that it later exceeded the top of its 2019 revenue guidance. Hessong clarified that he was not challenging Pinterest’s revenue guidance itself, but instead challenged statements concerning U.S. MAU and ARPU growth.

The court held that the amended complaint did not identify actionable misstatements or omissions with the specificity required by the PSLRA. Hessong quoted many statements but generally did not explain why each statement was false or misleading. The court also found that he did not allege the contrary facts supposedly known to Pinterest that would show why the statements were misleading based on an alleged slowdown in U.S. MAU growth and its effect on U.S. ARPU.

The court considered two statements Hessong emphasized: Morgenfeld’s statement that Pinterest had “comfortable room” in its markets to drive advertising content higher, and a statement that Pinterest expected to grow users in the United States and internationally. The court concluded that the first statement concerned advertising content and advertiser numbers, not U.S. user growth. It also found that Hessong did not dispute the literal truth of the general statement that Pinterest expected user growth in both regions. The complaint did not allege facts showing that the U.S. market was so saturated that the user-growth statements were necessarily misleading or that a declining U.S. growth rate would reduce ARPU.

The court further characterized several challenged statements as general expressions of corporate optimism. It found that Hessong had not shown why those statements created a materially false impression about Pinterest’s situation. The court distinguished a case involving more specific statements about acceleration of a key user metric because Hessong did not allege comparable facts showing negative trends at the time Pinterest made its statements.

The court identified two overarching deficiencies: Hessong did not adequately identify actionable statements or omissions concerning MAU growth rate or ARPU, and he did not allege facts showing market saturation or explaining why saturation would make the challenged statements false or misleading. Because the court dismissed on those grounds and allowed amendment, it did not separately decide whether Hessong adequately pleaded scienter or whether the statements were protected forward-looking statements under the PSLRA safe harbor.

Disposition

Judge William H. Orrick granted defendants’ motion to dismiss, with leave to amend. The court ordered Hessong to file a second amended complaint within twenty days of the order. Defendants were allowed twenty days after that filing to respond or file another motion to dismiss. The order did not separately resolve the scienter or PSLRA safe-harbor issues.