897 F.3d 1291
10th Cir.2018Background
- root9B (cybersecurity firm) rebranded from Premier Alliance in late 2014; CEO Grano and CFO Smith are individual defendants. Root9B raised capital and sold insider shares in 2015 after rebranding statements.
- Two statements at issue: (1) investor letter and SEC filings touting "proprietary hardware and software" as a competitive strength; (2) May 2015 press release and technical report attributing a planned cyberattack on financial institutions to the Sofacy/APT28 group.
- After the Sofacy announcement, root9B stock jumped (≈42%); subsequently two critical articles were published: Brian Krebs questioned the Sofacy attribution, and an anonymous SeekingAlpha piece (Pump Stopper) characterized the Cyber Solutions revenue as a one-time, low-margin hardware resale tied to Digital Shield.
- Hampton sued as class plaintiff under § 10(b), Rule 10b-5 and § 20(a), alleging those statements were false or misleading and caused investor losses; the district court dismissed for failure to plead falsity (and expressed doubts as to scienter and loss causation).
- On de novo review, the Tenth Circuit affirmed dismissal, holding Hampton failed to plead with particularity that either the "proprietary hardware" statements or the Sofacy attribution were false or misleading; § 20(a) claims therefore also failed.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the "proprietary hardware and software" statements were false or misleading | Hampton: Pump Stopper article (and later omission from SEC filings) shows hardware was third-party low-margin resale, not proprietary | root9B: filings and later disclosures show continued development of proprietary platforms and explained discontinuation of resales; Pump Stopper does not prove statements false | Held: Dismissed — plaintiff failed to plead falsity with particularity; alleged connections were speculative and omissions did not prove falsehood |
| Whether the Sofacy/APT28 attribution was false or misleading | Hampton: Krebs article shows attribution was more likely Nigerian phishing actors, thus refuting root9B's Sofacy attribution | root9B: APT28 report cited multiple indicia tying the activity to Sofacy; Krebs offered an alternative theory but did not disprove root9B's evidence | Held: Dismissed — Krebs provided an alternative attribution but not factual proof that the Sofacy attribution was false or misleading |
| Applicability of PSLRA heightened pleading standards (falsity and scienter) | Hampton: alleged facts (articles, stock moves, deleted language) suffice to plead falsity and support inference of scienter | root9B: PSLRA demands particularized facts; plaintiff’s reliance on third-party articles and omissions is insufficient | Held: Dismissed — PSLRA standard not met as to falsity (court did not reach scienter in depth) |
| Section 20(a) control-person liability | Hampton: Grano and Smith should be jointly/severally liable as control persons if § 10(b) violation shown | root9B: No primary violation under § 10(b) means no derivative § 20(a) liability | Held: Dismissed — § 20(a) claims fail because § 10(b) claims fail |
Key Cases Cited
- Adams v. Kinder-Morgan, Inc., 340 F.3d 1083 (10th Cir. 2003) (standards for pleading securities fraud allegations on motion to dismiss)
- Alvarado v. KOB-TV, L.L.C., 493 F.3d 1210 (10th Cir. 2007) (district court may consider documents referred to in complaint that are central and authentic)
- Anderson v. Spirit Aerosystems Holdings, Inc., 827 F.3d 1229 (10th Cir. 2016) (de novo review of dismissal under Rule 12(b)(6))
- Omnicare, Inc. v. Laborers Dist. Council Constr. Indus. Pension Fund, 135 S. Ct. 1318 (2015) (distinguishing opinions from factual misstatements in securities law)
- Halliburton Co. v. Erica P. John Fund, Inc., 134 S. Ct. 2398 (2014) (recognizing private cause of action under § 10(b) and Rule 10b-5)