Pearlstein v. Blackberry Ltd.
93 F. Supp. 3d 233
S.D.N.Y.2015Background
- Plaintiffs (share purchasers) sued BlackBerry Limited and two former officers alleging securities fraud for allegedly concealing poor sales of BlackBerry 10 devices during Mar 28–Sep 20, 2013 (the Class Period).
- Key facts: BlackBerry launched Z10 (all-touch) and Q10 (keyboard) on BlackBerry 10 OS; early foreign reports indicated discounts/weak sales; U.S. launch Mar 28, 2013; Sep 20, 2013 BlackBerry disclosed an expected ~$930M inventory charge tied to Z10s and stock fell.
- Plaintiffs contend defendants made materially false/omissive public statements (press releases, Form 40-F, earnings calls) representing strong demand and embraced products, and used improper accounting (recognizing revenue on shipment, delaying inventory/supply-commitment write-downs) to inflate results.
- Plaintiffs allege motive: preserve company, management jobs, and performance-based compensation; alleged reliance and loss causation from the September disclosure.
- District court considered Rule 12(b)(6) and securities-pleading standards (Rule 9(b) and PSLRA) and dismissed the Consolidated Amended Complaint for failure to plead actionable misrepresentations/omissions and scienter.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether optimistic forward-looking statements and promotional comments were materially false or misleading | Statements that BlackBerry 10 was being "embraced" and launch was successful were false because devices sold poorly and were discounted | Such statements were puffery or protected forward-looking statements with PSLRA cautionary language; not objectively false | Court: Not actionable — puffery/forward-looking; qualified for safe harbor where applicable |
| Whether accounting practices (revenue recognition on shipment; delayed inventory/supply-commitment write-downs) were false/misleading | BlackBerry recognized revenue prematurely and failed to timely write down inventory or obligations, inflating margins and hiding a negative trend | Accounting choices were permitted under GAAP; plaintiffs plead hindsight disagreement, not that defendants did not believe their judgments | Court: Insufficient particularized allegations that accounting judgments were knowingly false; not plausible misrepresentations |
| Whether BlackBerry omitted material adverse trends (Item 303 disclosure) | Failed to disclose known unfavorable trends: high returns, low sell-through, price concessions | BlackBerry is a foreign private issuer (Reg S-K Item 303 likely inapplicable); even if applicable, alleged period too short/volatile to show a reportable trend | Court: Item 303 theory fails (doubtful applicability and implausible trend); omission not actionable |
| Whether plaintiffs pleaded scienter (intent or conscious recklessness) | Motive (save company, keep jobs/bonuses), contemporaneous denials of negative reports, and proximity of positive statements to the later big inventory charge infer scienter | Motives are common to executives and insufficient; alternative, more compelling nonfraudulent inferences exist (sincere confidence, permissible accounting judgments) | Court: Plaintiffs failed to plead a "strong inference" of scienter at least as compelling as nonfraudulent explanations; scienter not met |
Key Cases Cited
- Bell Atl. Corp. v. Twombly, 550 U.S. 544 (standards for plausibility on motions to dismiss)
- Ashcroft v. Iqbal, 556 U.S. 662 (pleading requirements; legal conclusions vs. factual allegations)
- ATSI Commc'ns, Inc. v. Shaar Fund, Ltd., 493 F.3d 87 (particularity in alleging fraudulent statements)
- Dura Pharm., Inc. v. Broudo, 544 U.S. 336 (loss causation and false statements under securities laws)
- San Leandro Emergency Med. Grp. Profit Sharing Plan v. Philip Morris Cos., 75 F.3d 801 (consideration of full text of documents quoted in complaint)
- Stoneridge Inv. Partners v. Scientific-Atlanta, 552 U.S. 148 (elements of securities fraud claim)
- Rombach v. Chang, 355 F.3d 164 (statements of corporate optimism often constitute puffery)
- Fait v. Regions Fin. Corp., 655 F.3d 105 (subjective accounting choices: plaintiff must allege defendants did not believe their representations)
- Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (standard for evaluating competing inferences on scienter)
- ECA, Local 134 IBEW Joint Pension Trust v. JP Morgan Chase Co., 553 F.3d 187 (scienter must be as compelling as nonfraudulent inference)
- S. Cherry St., LLC v. Hennessee Grp. LLC, 573 F.3d 98 (motive/opportunity tests and scienter standards)
- Kalnit v. Eichler, 264 F.3d 131 (ordinary executive motives insufficient for scienter)
- Resnik v. Swartz, 303 F.3d 147 (omissions actionable only where duty to disclose exists)
- Heller v. Goldin Restructuring Fund, L.P., 590 F.Supp.2d 603 (cautionary language can render forward-looking statements immaterial)