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On July 5, 2022, Chief Judge Richard Seeborg of the Northern District of California granted motions to dismiss a putative securities class action asserting claims under Section 10(b) of the Securities Exchange Act of 1934 (the “Exchange Act”), Rule 10b-5 thereunder, Section 20(a) of the Exchange Act, and Sections 11, 12(a)(2) and 15 of the Securities Act of 1933 (“Securities Act”), against a mobile gaming technology company (the “Company”), certain of its officers and directors, and its underwriters. Jedrzejczyk, et al. v. Skillz Inc., et al., No. 21-cv-03450-RS (N.D. Cal. July 5, 2022). Plaintiffs alleged that defendants made material misstatements and omissions regarding the Company’s financial condition, technical capabilities, and business prospects. The Court granted defendants’ motions to dismiss, holding that plaintiffs failed to adequately plead falsity, scienter, or loss causation as to the Exchange Act claims, and that plaintiffs had not established standing or adequately pled material untrue statements or omissions as to the Securities Act claims.
According to the consolidated class action complaint, the Company is a mobile gaming technology company that does not develop or distribute games, but instead provides a platform for third-party users to develop, distribute, and compete in their own games. Plaintiffs alleged that the Company went public on December 16, 2020 and launched a secondary public offering on March 18, 2021. Plaintiffs further alleged that, during the putative class period, defendants made misleading statements and omissions concerning the Company’s (1) declining game downloads; (2) expansion to India; (3) synchronous gameplay capabilities; (4) userbase engagement and growth; (5) metrics; (6) revenue disclosures; and (7) classification of SPAC warrants as assets, rather than liabilities. Plaintiffs also alleged that defendants misrepresented that the Company had adequate internal disclosure controls.
Addressing the Exchange Act claims first, the Court held that plaintiffs failed to plead falsity as to any of the alleged misstatements or omissions. Specifically, the Court held that defendants’ alleged statements regarding continued growth in downloads were not inconsistent with the alleged decreasing number of downloads for certain games, finding “it could mean that a title continues to grow at a substantial rate, if its original download rate was especially high.” The Court also held that alleged statements about expanding to India were non-actionable forward-looking statements; statements about “continuously improving” user experience were non-actionable puffery; and that alleged statements regarding the availability of synchronous gameplay could not mislead a reasonable investor who presumably would know that the Company was referring to the capabilities it offered to third-party developers and not what the Company itself developed or had available on its platform. Further, the Court held that plaintiffs had not adequately alleged falsity as to alleged misstatements or omissions about certain metrics, because the SEC only requires disclosure of “known trends or uncertainties” that have had or that the registrant reasonably expects will have a material favorable or unfavorable impact on net sales or revenues or income from continuing operations.
With respect to scienter, the Court noted that “[e]ven if Plaintiffs had adequately pled falsity, they would still have scienter problems.” In particular, addressing only “the strongest” of plaintiffs’ alleged misstatements—regarding the availability synchronous gameplay—the Court held that the purported statement was subject to a contrary interpretation that the Company offered the feature, not that any games are actively employing the feature in fully-tested games. The Court reasoned that “[a]t worst, the statements appear to be poorly worded explanations of what games [the Company] offered, rather than a statement made with ‘a mental state embracing intent to deceive, manipulate, or defraud.’” (citing Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 319 (2007)). Those alleged statements therefore did not rise to the level of establishing scienter in support of a fraud claim under the Exchange Act.
Turning to the issue of loss causation, the Court held that plaintiffs’ reliance on short-seller reports was insufficient, noting the “concerns with relying on reports written by entities with serious financial incentives to damage a company’s stock price.” The Court observed that while courts “have not categorically forbid” the use of short seller reports as corrective disclosures, “numerous courts” have noted concerns with relying on reports written by entities with “serious financial incentives to damage a company’s stock price.”
Having dismissed the Section 10(b) claims, the Court similarly dismissed plaintiffs’ control-person liability claims under Section 20(a), finding no predicate violations of the Exchange Act under which such claims could be established.
The Court then addressed plaintiffs’ Securities Act claims. The Court first held that one named plaintiff failed to establish statutory standing under Sections 11 and 12(a)(2) because he failed to trace his shares back to the secondary offering in March 2021. According to the Court, that plaintiff’s failure to allege direct purchases in the secondary offering, relying instead on allegations that he purchased shares on the same day, were insufficient “due to a significant possibility that the shares purchased originated from the prior offering but were being traded at the secondary offering price.” The Court next held that even if that plaintiff had standing, the amended complaint failed to adequately plead untrue statements or omissions of material facts as to certain of the same alleged statements found to be nonactionable under the Exchange Act. Moreover, the Court held that plaintiffs had not adequately pled false statements or omissions as to the misclassifications on the Company’s financial statement, because the alleged misclassifications of warrants as equity were not misclassified at all or appeared to be the result of a good-faith accounting decision.
Having dismissed the Section 11 and 12(a)(2) claims and finding no primary violation of the Securities Act, the Court similarly dismissed the Section 15 claim. The Court granted plaintiffs leave to amend as to all of the dismissed claims.
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