IN RE TUFIN SOFTWARE TECHNOLOGIES LTD. SECURITIES LITIGATION

Background

The case arose from Tufin Software Technologies Ltd.’s April 2019 initial public offering. Lead plaintiff Mark Henry alleged that Tufin’s registration statement contained materially misleading statements or omissions concerning the length of its sales cycle, its training and customer-education practices, its ability to hire and retain sales personnel, and its ability to forecast sales. He asserted claims against Tufin and various directors and officers under Sections 11 and 15 of the Securities Act of 1933.

The defendants moved to dismiss the amended complaint. Because the claims were pleaded as negligence claims rather than fraud claims, the court applied the ordinary pleading standard requiring enough factual allegations to make liability plausible. At this stage, the court accepted the complaint’s factual allegations as true and drew reasonable inferences for the plaintiff, but it did not have to accept conclusory statements.

Section 11 Claims

Section 11 generally permits claims when a registration statement contains an untrue material fact, omits a required material fact, or omits information needed to keep its statements from being misleading. The court evaluated the registration statement as a whole and considered whether its statements could have misled a reasonable investor.

The court rejected the claims based on statements that Tufin had a “highly trained” sales force and devoted “significant” resources to training and customer education. The complaint alleged that Tufin provided training and used resources for these purposes, and the court found that terms such as “highly” and “significant” were too general, without more supporting facts, to establish that the statements were false.

The court also rejected the claims based on statements about hiring and retaining sales personnel. Those statements warned about possible future difficulty hiring or retaining qualified employees. The court treated them as forward-looking statements accompanied by cautionary language. Although the complaint alleged high turnover, it did not allege that Tufin had been unable to replace departing employees or that the disclosed risks had already occurred before the registration statement became effective.

The court likewise rejected the claim based on Tufin’s statement that it might not be able to accurately forecast the timing of sales. The registration statement already disclosed that some sales occurred later than expected or did not occur and that sales timing could be difficult to predict. The court found that the possibility of inaccurate future forecasts was not inconsistent with the existence of inaccurate forecasts in the past.

The court allowed the Section 11 claim based on statements that Tufin’s sales cycle “usually” lasted several months from proof of concept to purchase order and was often longer for larger transactions. Confidential witnesses who worked in Tufin’s sales divisions reportedly said that the sales cycle typically lasted at least a year, could take up to two years, and that a six-month closing was achievable only with luck. The court held that these allegations sufficiently supported an inference that Tufin’s statements could have been false and materially misleading to a reasonable investor.

The court also rejected the defendants’ argument that Tufin’s other disclosures—that the sales cycle was long, unpredictable, and often longer for large transactions—eliminated the alleged misleading impression. In the court’s view, those descriptions did not necessarily tell a reasonable investor that the sales cycle usually took one or two years. The court further held that the confidential-witness allegations were adequately supported because the witnesses held sales positions suggesting they would know about the sales cycle, and the complaint did not indicate that their knowledge was limited to their particular regions.

Section 15 Claim

Section 15 imposes liability on a person who controls someone liable under Section 11. Because the plaintiff adequately pleaded a Section 11 violation based on the sales-cycle statements, and the defendants did not presently contest that the individual defendants were control persons, the court held that the Section 15 claim was adequately pleaded.

Disposition

The court granted in part and denied in part the defendants’ motion to dismiss the amended complaint. The claims based on the training, hiring and retention, and forecasting statements were dismissed. The Section 11 claim based on the sales-cycle statements and the related Section 15 claim remained adequately pleaded. The court granted the plaintiff leave to replead the dismissed claims, requiring any amended complaint to be filed by March 31, 2022. The Clerk of Court was directed to terminate the motion at Docket No. 61.