Sundaram v. Freshworks Inc

Background

This order addresses competing motions under the Private Securities Litigation Reform Act of 1995 (PSLRA) to appoint a lead plaintiff and lead counsel in a proposed securities class action. Mohan R. Sundaram, the plaintiff in the action, sought appointment as lead plaintiff and proposed Scott+Scott LLP as lead counsel. Vivek Nagarajan also sought appointment as lead plaintiff and proposed Pomerantz LLP as lead counsel.

The complaint alleges that Freshworks Inc.’s initial-public-offering documents made misleading statements about the company’s continued growth, broad appeal, net dollar retention rates, and year-over-year revenue growth. According to the complaint, the documents omitted that Freshworks’s net dollar retention rate had plateaued and its revenue growth rate was slowing. Freshworks priced its initial public offering at $36 per share on September 22, 2021. After the company announced fourth-quarter 2021 earnings reporting the growth slowdown, its stock price fell 18 percent, to $18.41 per share. Sundaram brought claims under Sections 11, 12(a), and 15 of the Securities Act on behalf of people and entities that purchased or otherwise acquired Freshworks common stock issued in connection with the initial public offering.

Lead- Plaintiff Standard

The PSLRA requires the court to appoint the “most adequate plaintiff” as lead plaintiff. The court applied the Ninth Circuit’s three-step process: determining whether proper notice was given, comparing the competing applicants’ financial interests, and evaluating whether the applicant with the largest financial interest satisfies Federal Rule of Civil Procedure 23, particularly its typicality and adequacy requirements. Competing applicants may attempt to rebut the presumptive lead plaintiff’s showing by demonstrating that the applicant cannot fairly and adequately protect the class or faces unique defenses.

Both Sundaram and Nagarajan timely moved for appointment after the required notice was published. The court considered four factors commonly used to compare financial interests: shares purchased, net shares purchased, total net funds expended, and approximate losses. The court treated approximate losses as the most important factor.

Financial Interest

Sundaram calculated losses of $32,840 using a method based on the remedy available under Section 12 of the Securities Act. Nagarajan calculated approximately $23,677 using the method applicable to Section 11 claims. Under Nagarajan’s calculation, Sundaram’s losses would be approximately $22,840.

The court held that neither the PSLRA nor Ninth Circuit precedent requires a single method for calculating the largest financial interest. It concluded that both proposed methods were rational. Sundaram’s Section 12-based method was permissible because he brought a Section 12 claim on behalf of the proposed class, and Section 12 allows recovery of the consideration paid for the security. Because either method could be used, the court proceeded to evaluate both applicants under Rule 23(a).

Rule 23 Requirements

Rule 23(a) includes requirements that the representative’s claims be typical of the class and that the representative fairly and adequately protect the class’s interests. Adequacy concerns whether the proposed representative and counsel have conflicts with other class members and whether they will pursue the case vigorously. Typicality concerns whether class members suffered the same or similar injury from the same alleged conduct and whether the proposed representative faces unique defenses.

The court found that Sundaram met these requirements. He alleged that he purchased Freshworks stock traceable to the initial public offering and was injured by the company’s alleged material misstatements and omissions. The court found his injury similar to that of other prospective class members. It also found no evidence that he faced unique defenses or had conflicts with the class. The court rejected Nagarajan’s argument that Sundaram had overstated his financial interest, concluding that no particular loss-calculation method was required and that Sundaram’s method was rational.

The court found that Nagarajan did not satisfy Rule 23(a). Nagarajan did not dispute that he purchased his shares after the lock-up period expired and did not provide additional evidence that his shares were traceable to the registration statement at issue. The court distinguished a Ninth Circuit decision involving a direct listing, where registered and unregistered shares were offered at the same time without a lock-up period. Here, Freshworks shares were purchased in a mixed market after the initial public offering and after previously locked-up shares became eligible for public sale. Because Nagarajan did not plausibly allege that his shares were traceable to the initial public offering, the court found his claims atypical.

Lead Counsel and Disposition

The PSLRA allows the most adequate plaintiff to select and retain lead counsel, subject to court approval. Sundaram selected Scott+Scott LLP, which the court found experienced in prosecuting complex securities class actions. The court found no reason to disapprove that selection.

Judge Charles R. Breyer vacated the February 10, 2023 hearing, granted Sundaram’s motion, and denied Nagarajan’s motion. The court appointed Mohan R. Sundaram as lead plaintiff and Scott+Scott LLP as lead counsel.