Fresno County Employees' Retirement Ass'n v. comScore, Inc.
268 F. Supp. 3d 526
S.D.N.Y.2017Background
- Plaintiffs (institutional investors and William Huff) brought a consolidated securities-fraud action alleging comScore and individual officers recognized revenue from nonmonetary data‑swap (barter) transactions on a fair‑value basis when GAAP required historical‑cost treatment, inflating reported revenue by about $43.2 million during the Class Period (Feb. 11, 2014–Nov. 23, 2016).
- comScore later disclosed an Audit Committee investigation and announced restatements, attributing the accounting adjustments to “misconduct and errors in accounting determinations,” internal control failures, and the need to reverse nonmonetary revenue recognition.
- Counts: (I) Section 10(b)/Rule 10b‑5 against comScore and four senior officers for false revenue statements and omissions; (II) Section 20(a) control‑person claims; (III) Section 14(a)/Rule 14a‑9 proxy claims by Huff for Rentrak shareholders re: the comScore–Rentrak merger; (IV) Section 14(a) claims against Rentrak directors for failing to disclose red flags from Grant Thornton due diligence; (V) Section 11 claims by Huff against registration‑statement signatories for misstatements in the merger registration statement.
- Plaintiffs allege motive (stock‑price inflation to facilitate an all‑stock acquisition of Rentrak), insider sales by executives, contemporaneous defenses to analysts/SEC, and internal control/tone‑at‑the‑top problems that support scienter and falsity.
- Defendants moved to dismiss under Rule 12(b)(6) raising challenges as to falsity/actionability, materiality, scienter, and pleading standards for Sections 11 and 14(a).
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Are the alleged revenue statements and related GAAP representations actionable falsities under Section 10(b)? | Revenue recognition was false because nonmonetary transactions lacked historical‑cost comparators and Audit Committee found misconduct; restatement shows prior statements were false. | Defendants claim statements were subjective opinions, reasonable accounting judgments, or mere puffery and that restatement reflects innocent errors. | Denied — court finds restatement + Audit Committee disclosure plausibly show misconduct and objective falsity, not mere opinion or puffery. |
| Was materiality adequately pleaded (Tarpey challenge)? | Misstated revenues materially affected guidance, analyst focus, stock price and regulatory compliance; qualitative SAB 99 factors apply. | Tarpey argues misstatements while he was CFO were quantitatively small (below usual 5% threshold) and thus immaterial as a matter of law. | Denied — court applies holistic SAB 99 analysis; qualitative effects, restatement, market reaction, and regulatory consequences render materiality plausibly alleged. |
| Was scienter pleaded with requisite particularity for each individual defendant? | Allegations of motive (merger acquisition, large insider sales), opportunity, top‑down misconduct, defensive market statements, and Audit Committee findings collectively give strong inference of scienter. | Defendants offer innocent explanations (turnover, prior disclosures, trading plans, routine sales) and argue circumstantial inferences are weaker than innocent ones. | Denied — court concludes circumstantial allegations (misconduct disclosure, internal control failures, unusual insider sales, motive tied to merger) create a strong, cogent inference of scienter for each key officer and for comScore. |
| Do Huff’s Section 11 and Section 14(a) claims (merger proxy/registration) require fraud‑level particularity or survive only on negligence/strict liability pleading? | Huff pleads these claims as negligence/strict‑liability (Section 11 strict liability; Section 14(a) negligence) and segregated them from fraud counts. | Merger defendants urge Rombach/PSLRA heightened pleading because related allegations reference fraud; Rentrak contends no duty to disclose Grant Thornton “may” red flags or they were immaterial/truth‑on‑market. | Denied — court holds plaintiffs may plead Sections 11 and 14(a) under Rule 8 when pleaded as negligence/strict liability and the complaint segregates fraud counts; Huff plausibly alleged omission of Grant Thornton red flags and materiality. |
Key Cases Cited
- Bell Atl. Corp. v. Twombly, 550 U.S. 544 (plausibility standard for Rule 12(b)(6))
- Ashcroft v. Iqbal, 556 U.S. 662 (legal conclusions not accepted as true on a motion to dismiss)
- Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (pleading standard for scienter — strong inference must be cogent and at least as compelling as any opposing innocent inference)
- ATSI Commc’ns, Inc. v. Shaar Fund, Ltd., 493 F.3d 87 (Rule 9(b) particularity requirements for securities fraud pleading)
- Novak v. Kasaks, 216 F.3d 300 (insider motive/opportunity and pleading scienter via access to contrary information)
- Omnicare, Inc. v. Laborers Dist. Council Constr. Indus. Pension Fund, 575 U.S. 175 (opinion‑statement falsity framework — applied analogously)
- In re Atlas Air Worldwide Holdings, Inc. Sec. Litig., 324 F. Supp. 2d 474 (restatement as basis for falsity at pleading stage)
- Herman & MacLean v. Huddleston, 459 U.S. 375 (Section 11 imposes stringent liability on registration statement signatories)
- Rombach v. Chang, 355 F.3d 164 (Rule 9(b) and Section 11 pleading — fraud vs. non‑fraud claims)
- ECA, Local 134 IBEW Joint Pension Tr. of Chicago v. JP Morgan Chase Co., 553 F.3d 187 (motive must be concrete; common corporate motives insufficient)