Securities and Exchange Commission v. Rosenberger

Background

The SEC alleged that Synchronoss Technologies, Inc. improperly recognized revenue under generally accepted accounting principles for five transactions from September 2015 through June 2017. The transactions involved software sales to AT&T, the acquisition of Openwave Messaging, a restructured agreement with Windstream Communications, and a purported software-license sale to Sage Management. According to the complaint, these accounting decisions overstated Synchronoss’s revenue in several quarterly and annual filings and helped the company meet or exceed analysts’ expectations.

The SEC alleged that Karen Rosenberger, Synchronoss’s former chief financial officer, directed or approved the revenue-recognition decisions, signed and certified relevant financial filings, and made misleading statements or omissions to Synchronoss’s auditor. The SEC also alleged that Joanna Lanni, Synchronoss’s former Controller, approved a memorandum concerning the Windstream transaction that omitted material information about related agreements. Synchronoss later restated certain financial statements and acknowledged pervasive material weaknesses in its internal financial-reporting controls.

Motions and Applicable Standards

Rosenberger and Lanni each moved to dismiss the claims against her under the standard governing dismissal for failure to state a claim. At that stage, the court accepted well-pleaded factual allegations as true and drew reasonable inferences for the SEC, while disregarding conclusory legal assertions. Because the SEC alleged fraud-based securities claims, the complaint also had to identify the allegedly fraudulent statements, their speaker, where and when they were made, and why they were fraudulent. Knowledge and intent could be alleged generally, but the complaint still had to support a strong inference of the required mental state where applicable.

The SEC moved to strike four exhibits submitted with Rosenberger’s motion. Two were internal accounting memoranda created shortly before Synchronoss restated revenue, and two were emails concerning communications with the auditor. The court explained that, on a motion to dismiss, it may consider certain materials attached to or incorporated into the complaint, legally required public filings, documents known to and relied on by the plaintiff, and documents integral to the complaint.

Ruling on Rosenberger’s Exhibits

The court granted the SEC’s motion to strike all four exhibits. It concluded that none of the documents was properly considered on a motion to dismiss. The two emails were not quoted, referenced, or cited in the complaint, and the other documents also did not fall within the materials the court could consider at that stage.

Ruling on Rosenberger’s Motion to Dismiss

The court denied Rosenberger’s motion to dismiss all claims against her.

The court denied dismissal of the claims under Section 10(b) of the Securities Exchange Act and Securities and Exchange Commission Rule 10b-5 concerning the AT&T and Openwave transactions. It held that the complaint plausibly alleged that Rosenberger signed and certified financial filings that materially overstated Synchronoss’s revenue and that she knew, or recklessly disregarded, the alleged improprieties. The court also held that her certifications could support liability even if treated as statements of opinion, because they allegedly implied that the financial statements had been properly reviewed when they had not. The court did not need to decide whether the allegations also supported liability under the separate scheme-liability provisions of Rule 10b-5.

The court also denied dismissal of the claims against Rosenberger under Rule 13b2-2, which prohibits an officer from making or causing materially false or misleading statements to an accountant in connection with an issuer’s required financial-statement audit or review. The complaint identified alleged false statements and omissions in communications with Synchronoss’s auditor.

The court denied dismissal of the claims under Section 13(a) of the Exchange Act and Rule 13a-14. Those provisions require certain public-company reports to include certifications by the principal financial officer or a person performing a similar function. The court found that the complaint plausibly alleged that Rosenberger signed certifications accompanying filings that omitted material facts and did not fairly present Synchronoss’s financial condition.

The court denied dismissal of the claims under Section 13(b)(5) and Rule 13b2-1. Section 13(b)(5) prohibits knowingly circumventing or failing to implement required internal accounting controls, or knowingly falsifying required books, records, or accounts. Rule 13b2-1 prohibits falsifying or causing the falsification of covered books, records, or accounts. The court found sufficient allegations that Rosenberger approved inaccurate financial statements and other communications while knowing that the revenue recognition was improper. The court noted that scienter, meaning the required state of mind, is not an element of a Rule 13b2-1 claim.

The court denied dismissal of Rosenberger’s three aiding-and-abetting claims under Section 20(e). Those claims concerned alleged primary violations by Synchronoss of Section 10(b) and Rule 10b-5, Section 13(b)(2)(B), and Sections 13(a) and 13(b)(2)(A) along with related SEC rules. The court found plausible allegations that Synchronoss committed the underlying violations, that Rosenberger knowingly provided substantial assistance, and that her conduct contributed to the alleged violations.

Finally, the court denied dismissal of the claim under Section 304 of the Sarbanes-Oxley Act. That provision can require an issuer’s chief executive officer or chief financial officer to reimburse certain compensation and stock-sale profits after a qualifying accounting restatement. The court found that the complaint alleged a required restatement, the relevant inaccurate filings and filing dates, and that Rosenberger was Synchronoss’s chief financial officer when those filings were made. The court did not decide the precise type of misconduct required under Section 304 because it found that the complaint adequately alleged intentional misconduct by Synchronoss management.

Ruling on Lanni’s Motion to Dismiss

The court denied Lanni’s motion to dismiss all three claims against her.

First, the court denied dismissal of the Section 13(b)(5) claim. It found plausible allegations that Lanni understood the Windstream transaction’s multiple-agreement structure but signed and approved a revenue-recognition memorandum that failed to explain why the perpetual license agreement was not part of that larger arrangement. The court held that the complaint identified the internal control allegedly circumvented and the record allegedly falsified.

Second, the court denied dismissal of the Rule 13b2-1 claim. The court held that the allegations supporting the Section 13(b)(5) claim also plausibly alleged that Lanni’s conduct was unreasonable, assuming a reasonableness requirement applied.

Third, the court denied dismissal of the aiding-and-abetting claim based on Synchronoss’s alleged violations of Sections 13(a) and 13(b)(2)(A) and Rules 12b-20, 13a-1, 13a-11, and 13a-13. The court found plausible allegations that Synchronoss committed a primary violation, that Lanni knew revenue recognition for the Windstream transaction was improper, and that her signing the memorandum substantially assisted the alleged violation.

Disposition

The court granted the SEC’s October 28, 2022 motion to strike. It denied Rosenberger’s September 22, 2022 motion to dismiss and denied Lanni’s September 23, 2022 motion to dismiss. The opinion states that discovery was ongoing. These rulings addressed whether the SEC’s claims could proceed at the pleading stage, not whether either defendant was ultimately liable.