Sayce v. Forescout Technologies, Inc.

Background

Forescout provides cybersecurity services for large computer networks. Plaintiffs Christopher L. Sayce, Meitav Tachlit Mutual Funds Ltd., The Arbitrage LevArb Fund, LP, and Water Island Diversified Event-Driven Fund filed a securities class action against Forescout, Michael DeCesare, and Christopher Harms. DeCesare was identified as Forescout’s President and Chief Executive Officer, and Harms as its Chief Financial Officer.

Plaintiffs alleged violations of Section 10(b) and Section 20(a) of the Securities Exchange Act of 1934, along with Securities and Exchange Commission Rule 10b-5. They alleged that defendants made misleading statements or failed to disclose information about employee layoffs, sales productivity, the sales pipeline, deals recorded in Forescout’s tracking system, revenue projections, alleged channel stuffing, and Advent’s hesitation to complete its proposed acquisition of Forescout.

The court had previously dismissed an earlier consolidated amended complaint for failing to adequately plead falsity and scienter, while finding that plaintiffs had adequately pleaded loss causation and allowing them to amend their falsity and scienter allegations. Plaintiffs then filed the second consolidated amended complaint.

Legal standard

The defendants moved to dismiss under Federal Rule of Civil Procedure 12(b)(6), which tests whether a complaint states a legally sufficient claim. The court had to accept factual allegations as true and draw reasonable inferences for plaintiffs, but it did not have to accept conclusory allegations, unreasonable inferences, or allegations contradicted by materials properly considered on the motion.

For the Section 10(b) claims, plaintiffs had to adequately allege a material misrepresentation or omission, scienter, a connection to the purchase or sale of a security, reliance, economic loss, and loss causation. Scienter means the required wrongful state of mind; in this case, plaintiffs needed particularized facts creating a strong inference that defendants acted knowingly or with deliberate recklessness. The court also considered defendants’ requests to incorporate certain public documents by reference and for judicial notice.

Falsity

The court held that the complaint did not adequately plead that the challenged statements were false. It found that statements about sales productivity, the sales pipeline, and deals contained concrete assertions about present or past operations and therefore were not entirely protected as forward-looking statements. But plaintiffs still had to plead particular facts showing why each statement was misleading.

As to sales hiring, the court found that statements such as Forescout was “hiring like crazy” and had “hundreds of sales reps” were nonactionable puffery. The confidential-witness allegations also indicated that Forescout was hiring while employees left, and did not establish that defendants had a duty to disclose the particular details of layoffs and hiring.

Regarding deals and the sales pipeline, the court found that the confidential-witness statements were speculative and did not provide enough detail to show that particular deals had been falsely reported as “committed” or as “tech wins.”

Regarding the Advent acquisition, the court found that statements that Forescout “expected” or “look[ed] forward” to closing the transaction did not affirmatively promise that the acquisition would close. The complaint also did not adequately show that the omission of Advent’s April 20, 2020 letter made those statements misleading to a reasonable investor.

The court found that plaintiffs’ allegations about the 2019 revenue projections were also insufficient. The complaint did not specify which deals were allegedly listed artificially as closed or committed, when that occurred, or how the cited expert opinion related to Forescout’s use of its revenue operations platform.

Finally, the court found that the channel-stuffing allegations were too vague. The complaint relied on an anonymous whistleblower’s letter and a statement from Advent, but did not establish that Forescout admitted to channel stuffing or adequately describe the alleged method.

For these reasons, the court granted Forescout’s motion to dismiss because the complaint failed to adequately plead falsity. The court also stated that forward-looking statements were protected by the statutory safe harbor to the extent they were not made with actual knowledge of falsity.

Scienter

The court separately held that plaintiffs did not adequately plead scienter as to the individual defendants. Plaintiffs relied on defendants’ access to internal reports, confidential-witness statements, materials from the Delaware litigation, and stock sales. The court found that these allegations did not, individually or collectively, create a strong inference that the individual defendants knew the statements were false or acted with deliberate recklessness.

The complaint did not adequately show that the individual defendants actually accessed specific information in Forescout’s internal reports or its sales-tracking platform. The confidential-witness allegations also lacked sufficient detail about what the witnesses personally knew concerning the individual defendants’ state of mind. The court found that the allegations concerning the Delaware litigation did not provide the contents or context needed to show scienter. It also found that stock sales made under predetermined trading plans did not support a strong inference of scienter.

For this additional reason, the court granted the individual defendants’ second motions to dismiss.

Section 20(a) claims and disposition

Section 20(a) provides potential control-person liability for an underlying securities-law violation. The court held that plaintiffs had not adequately pleaded the required independent securities-law violation and therefore granted the individual defendants’ motion to dismiss the Section 20(a) claims.

In its conclusion, the court granted defendants’ separate motions to dismiss, denied plaintiffs leave to amend, and dismissed the second consolidated amended complaint with prejudice. Judge Susan Illston signed the order.