Leventhal v. Chegg, Inc.

Background

Lead plaintiffs Pompano Beach Police and Firefighters’ Retirement System and KBC Asset Management NV brought a securities-fraud class action against Chegg, Inc., CEO Daniel Rosensweig, CFO Andrew Brown, and President of Learning Services Nathan Schultz. The complaint covered the period from May 5, 2020, through November 1, 2021.

Chegg provides textbook rentals, online tutoring, and homework-help services. The plaintiffs alleged that Chegg and the individual defendants misrepresented the amount of cheating on Chegg’s Expert Q&A platform and falsely attributed the company’s pandemic-era growth mainly to reduced account sharing and international expansion. According to the plaintiffs, remote learning increased subscriptions from students who used the platform to cheat, and the defendants failed to disclose that information.

The plaintiffs asserted claims under Section 10(b) of the Securities Exchange Act and Securities and Exchange Commission Rule 10b-5, Section 20(a) against the individual defendants as controlling persons, and Section 20A against Rosensweig and Schultz for contemporaneous trading. They sought class certification, damages, and attorneys’ fees.

Motion to Dismiss

The defendants argued that the complaint failed to adequately plead three requirements of a Section 10(b) claim: a false or misleading statement, scienter, and loss causation. Scienter means the required wrongful state of mind, including an intent to deceive or deliberate recklessness. The defendants also argued that the Section 20(a) and Section 20A claims failed because the complaint did not allege a primary Section 10(b) violation.

The court held that the plaintiffs adequately pleaded falsity. The complaint included an empirical analysis of Chegg questions, statements attributed to former employees, and reports from universities and faculty members about cheating through Chegg. The court concluded that the plaintiffs did not need to quantify the exact percentage of subscribers who cheated at the pleading stage. It also found that the allegations plausibly connected cheating to Chegg’s subscriber and revenue growth.

The court further held that the challenged statements were actionable. Statements about the frequency of cheating were not merely historical facts or protected aspirational statements. Statements attributing growth to reduced account sharing and other factors could be misleading if they omitted information about cheating and pandemic-related growth. The court also ruled that Chegg’s forward-looking statements were not protected by the Private Securities Litigation Reform Act’s safe-harbor provision because, in light of the allegations, they were not accompanied by meaningful cautionary statements.

The court held that the complaint adequately pleaded scienter. It relied on allegations that universities and faculty repeatedly reported cheating to Chegg, that Chegg responded to those reports, and that former employees described discussions about cheating at company meetings attended by the individual defendants. Considering the allegations together, the court found they met the heightened pleading standard for scienter.

The court also held that the plaintiffs adequately pleaded loss causation. The plaintiffs alleged that Chegg’s stock price fell sharply after the company lowered its revenue projections and that the decline revealed information related to the alleged misrepresentations about growth, remote learning, and cheating. Because the court found a properly pleaded Section 10(b) violation, it also declined to dismiss the Section 20(a) claims against the three individual defendants or the Section 20A claims against Rosensweig and Schultz.

Motion to Strike

The plaintiffs moved to strike paragraphs 34 through 39 of a declaration by Heather Speers, an associate at the defendants’ law firm. Those paragraphs addressed the individual defendants’ stock sales, stock acquisitions, trading plans, and tax withholding. The plaintiffs argued that the declaration contained conclusions and argument, evaded the motion-to-dismiss page limit, and improperly presented disputed facts at the pleading stage.

The court found the defendants’ position persuasive. It ruled that the declaration’s calculations provided factual background for the defendants’ arguments about stock sales and did not violate the local rules or evade the page limit. The court also took judicial notice of the relevant Securities and Exchange Commission Forms 4 in connection with the defendants’ argument about the stock trading plans. The court denied the plaintiffs’ motion to strike paragraphs 34 through 39.

Disposition

The court denied the defendants’ motion to dismiss and denied the plaintiffs’ motion to strike. The opinion did not decide whether the plaintiffs would ultimately prevail on their securities-fraud claims.