234 F. Supp. 3d 540
S.D.N.Y.2017Background
- MaxPoint Interactive completed an IPO in March 2015 using a Registration Statement/Prospectus that warned investors it relied on a small number of customers and disclosed top-customer revenue percentages for 2011–2014.
- The Registration Statement disclosed top-10 customers accounted for ~30–36% of revenue and the top 25 accounted for ~49% in 2014; it stated MaxPoint had 479 enterprise customers as of year-end 2014.
- Plaintiff Lifsehitz sued under Sections 11, 12(a)(2), and 15 of the Securities Act, claiming the Registration Statement omitted material information: (1) greater revenue concentration among the top 50 customers (allegedly ~2/3 of revenue) and (2) a then-known trend of onboarding smaller customers with lower initial spend that was reducing revenue-per-enterprise-customer.
- Defendants (MaxPoint, certain officers/directors, and underwriters) moved to dismiss the First Amended Complaint for failure to plead material misstatements/omissions adequately.
- The district court evaluated pleading standards (Rule 8 vs. Rule 9(b)), applied the Section 11 materiality standard, and analyzed Item 303 (Regulation S-K) disclosure obligations regarding known trends.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether Rule 9(b) applies to the Securities Act claims | FAC alleges omissions and that defendants "knew or should have known," implying fraudulent concealment | Claims plead negligence under Section 11; no allegations of affirmative concealment, so Rule 8 governs | Rule 8 governs; claims evaluated under notice-pleading standard |
| Whether omission of a short-term (two-month) trend in onboarding smaller, lower-spend customers violated Item 303 | MaxPoint had two months of Q1 2015 data before the IPO and thus knew of the unfavorable trend that must be disclosed | Short, in-progress-quarter observations do not establish a known "trend" under Item 303; no duty to disclose quarter-in-progress results | Omission not actionable: two months does not establish a trend and no duty to disclose quarter-in-progress data |
| Whether failure to disclose that top 50 customers constituted ~2/3 of revenue was a material omission under Section 11 | The Registration Statement left out that 10% of customers (top 50) generated two-thirds of revenue, materially increasing concentration risk | Registration Statement already disclosed reliance on a small number of customers and provided data (top 10, top 25, total enterprise count) enabling investors to compute concentrations; the omitted computation would not have altered the total mix | Not material as a matter of law; computation from disclosed data would have shown concentrations and additional breakdown (top 50) would not have significantly altered the total mix |
| Whether Sections 12(a)(2) and 15 claims survive after dismissal of Section 11 claims | Claims rely on same underlying registration-statement defects | If Section 11 fails, related Sections 12 and 15 fail too because they depend on an underlying violation | Sections 12(a)(2) and 15 dismissed as derivative of the dismissed Section 11 claims |
Key Cases Cited
- Rombach v. Chang, 355 F.3d 164 (2d Cir. 2004) (Rule 9(b) applies where securities claims rest on allegations of fraud)
- Ashcroft v. Iqbal, 556 U.S. 662 (2009) (plausibility pleading standard under Rule 8)
- Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007) (complaint must state a plausible claim)
- In re Morgan Stanley Info. Fund Sec. Litig., 592 F.3d 347 (2d Cir. 2010) (elements of a Section 11 claim)
- In re ProShares Trust Secs. Litig., 728 F.3d 96 (2d Cir. 2013) (materiality measured by whether disclosure would have significantly altered the total mix of information)
- In re Focus Media Ltd. Litig., 701 F. Supp. 2d 534 (S.D.N.Y. 2010) (no duty to disclose financial information about a quarter before it concluded)
- In re Turkcell Iletisim Hizmetler, AS Sec. Litig., 202 F. Supp. 2d 8 (S.D.N.Y. 2002) (single-quarter declines need not be disclosed as a trend)
- Kapps v. Torch Offshore, Inc., 379 F.3d 207 (5th Cir. 2004) (short-term market movements do not necessarily constitute a trend requiring disclosure)
- Berson v. Applied Signal Tech., Inc., 527 F.3d 982 (9th Cir. 2008) (post-statement events can sometimes support inference of prior knowledge when they reveal discrete, material events)