In re Cloudera, Inc. Securities Litigation

Background

Plaintiffs Mariusz J. Klin and the Mariusz J. Klin MD PA 401K Profit Sharing Plan, Robert Boguslawski, and Arthur P. Hoffman sued Cloudera, Inc., Intel Corporation, and several Cloudera officers, directors, and other individuals. They alleged that, from April 28, 2017, through June 5, 2019, defendants made misleading statements about Cloudera’s cloud-native technology, its Altus product, its cloud capabilities, and the expected benefits of Cloudera’s merger with Hortonworks, Inc.

The complaint asserted five claims: claims under Section 10(b) of the Securities Exchange Act and Rule 10b-5; a control-person claim under Section 20(a) of that Act; claims under Sections 11 and 12(a)(2) of the Securities Act; and a control-person claim under Section 15 of that Act. Plaintiffs alleged that Cloudera’s products were not truly cloud-native during the relevant period and that the company did not have a cloud-native product until it later released Cloudera Data Platform. They pointed to a sharp stock-price decline after Cloudera announced disappointing results and reduced guidance in June 2019.

Motion and judicial notice

Defendants moved to dismiss the consolidated second amended complaint under Rule 12(b)(6), which tests whether a complaint states a legally sufficient claim. Defendants also asked the court to consider 37 exhibits through incorporation by reference or judicial notice. The court denied the request as to Exhibits 10 and 24, took notice of Exhibit 36 only for Cloudera’s historical stock prices, and granted the unopposed requests for the specified other exhibits, including certain securities filings, call transcripts, an agreement limiting Intel’s ownership, and provisions of the New York Stock Exchange’s manual.

Exchange Act claims

For the Section 10(b) and Rule 10b-5 claim, the court held that plaintiffs had not adequately pleaded falsity. Federal securities-fraud rules required plaintiffs to identify each misleading statement, explain why it was misleading, and plead specific contemporaneous facts showing that the statement was false when made. The court found that plaintiffs’ proposed definition of “cloud-native” relied largely on a later article and unsupported allegations. Plaintiffs did not provide sufficient contemporaneous facts establishing that the term had the specific technical meaning they attributed to it during the relevant period.

The court therefore dismissed claims based on 24 statements about Cloudera’s cloud products. It also dismissed claims based on statements that Cloudera was “over-rotated,” that the company had no concern about the market, and that there had been no change in the competitive landscape or end-market demand. The court found that plaintiffs’ allegations—including later product developments and later statements by Cloudera personnel—did not show those earlier statements were false when made.

The court separately held that two other statements were non-actionable corporate puffery. Corporate puffery consists of vague, subjective expressions of optimism rather than specific factual representations. The court found that statements describing the cloud market as a “tremendous tailwind” and Cloudera’s functionality as “best-in-class” fell into that category.

The court also dismissed claims based on statements about the merger’s expected cross-selling opportunities, expanded market, and increased revenue from customer relationships. Those statements concerned future operations or future economic performance, were identified as forward-looking, and were accompanied by meaningful cautionary language. As a result, they were protected by the federal securities-law safe harbor for qualifying forward-looking statements.

Because plaintiffs failed to state a Section 10(b) or Rule 10b-5 claim, the court held that they also could not state a Section 20(a) control-person claim, which requires an underlying securities-law violation.

Securities Act claims

The court applied the heightened fraud-pleading requirements of Rule 9(b) to plaintiffs’ Sections 11 and 12(a)(2) claims because the complaint used essentially the same allegations for those claims as for the alleged securities fraud. The court found that plaintiffs again failed to plead specific facts showing that statements in the merger registration statement about Cloudera’s cloud architecture, public-cloud operation, hybrid-cloud deployment, and Altus were false when made.

The court also dismissed claims based on risk disclosures because plaintiffs did not adequately allege that the warned-of risks had already occurred when the disclosures were made. Claims based on the merger’s projected cross-selling, market-expansion, and customer-revenue benefits were dismissed for the same forward-looking-statement reasons applied to the Exchange Act claims.

Because plaintiffs failed to state a claim under Sections 11 or 12(a)(2), the court held that the Section 15 control-person claim also failed.

Disposition

Judge Chesney granted defendants’ motion to dismiss the consolidated second amended complaint. The court dismissed the complaint without further leave to amend.