Tharp v. Acacia Commc'ns, Inc.
321 F. Supp. 3d 206
D.D.C.2018Background
- Plaintiffs (class of Secondary Offering purchasers) sued Acacia, certain officers/directors, selling stockholders, and underwriters alleging violations of Sections 11, 12(a)(2), 15 of the Securities Act and Sections 10(b), 20(a) of the Exchange Act based on disclosures in the Secondary Offering prospectus (Oct. 2016) and later corrective disclosures (May–July 2017).
- Core factual theory: defendants failed to disclose weakening demand from major customers (notably ZTE and ADVA), structural uncertainty in China’s transition from a national backbone buildout to provincial rollouts, and product quality/control problems, which allegedly inflated the offering price.
- Plaintiffs sought to amend the consolidated complaint after the court previously warned dismissal could be with prejudice; defendants moved to dismiss the proposed amended complaint as futile.
- The prospectus contained risk disclosures including cautionary language about cyclicality, a China slowdown, customer concentration, outsourced manufacturing risks, and forward‑looking guidance (with cautionary statements).
- The court evaluated pleading sufficiency under Rule 8, Item 303 (Regulation S‑K), the Securities Act safe harbor for forward‑looking statements, and the PSLRA scienter standard for Exchange Act claims.
- Outcome: Court denied leave to amend and dismissed the proposed amended complaint with prejudice in its entirety.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| 1) Whether Section 11/12(a)(2) claims were adequately pleaded against issuer, officers, selling stockholders, and underwriters | Prospectus omitted known trends/uncertainties (China buildout shift), customer demand deterioration, and manufacturing quality issues; misstatements/omissions rendered Offering Documents misleading | Prospectus disclosed the China slowdown, customer concentration, and manufacturing risks; plaintiffs rely on hindsight and subsequent events; forward‑looking statements were accompanied by meaningful cautionary language | Dismissed: prospectus contained sufficient risk/disclosure language; plaintiffs failed to plead material misstatements/omissions for Sections 11 & 12; related Section 15 control claims fall with primary claims where not supported |
| 2) Whether defendants violated Item 303 (failed to disclose known trends/uncertainties) | Defendants knew of China/provincial timing uncertainty and customer forecast weaknesses before the Offering; Item 303 therefore required fuller disclosure | Prospectus expressly warned of market cyclicality, China slowdown, and customer concentration; plaintiffs did not show defendants knew (pre‑offering) of specific trends that made disclosures deficient | Dismissed: plaintiffs alleged general awareness but not particularized facts showing a pre‑offering known uncertainty that was omitted despite Item 303 requirements |
| 3) Whether forward‑looking revenue/growth statements are actionable | Statements about expected revenue and sustained demand were misleading because they omitted the China/provincial risk and quality problems | Forward‑looking statements were qualified by meaningful cautionary language and thus fall within statutory safe harbor | Dismissed: statutory safe harbor applies; cautionary language in prospectus shielded forward‑looking statements |
| 4) Section 10(b)/Rule 10b‑5 (falsity and scienter) | Public statements and insider sales show motive, knowledge, and that defendants recklessly misrepresented demand and quality | Plaintiffs fail to plead particularized facts showing defendants knew statements were false when made; insider sales are not shown to be unusual; no internal documents or witness allegations supporting scienter | Dismissed: plaintiffs did not plead particularized facts raising a strong, cogent inference of scienter as required by the PSLRA; primary Exchange Act claims fail, so control person claims under Section 20(a) also fail |
Key Cases Cited
- Affiliated Ute Citizens of Utah v. United States, 406 U.S. 128 (1972) (doctrine on liability for failures to disclose in securities context)
- Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007) (plausibility pleading standard under Rule 8)
- Silverstrand Investments v. AMAG Pharmaceuticals, 707 F.3d 95 (1st Cir. 2013) (Section 11/Item 303 pleading principles)
- Baron v. Smith, 380 F.3d 49 (1st Cir. 2004) (forward‑looking statements and cautionary language)
- Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (2007) (standard for evaluating whether scienter inference is "strong")
- In re Ariad Pharmaceuticals, Inc. Securities Litigation, 842 F.3d 744 (1st Cir. 2016) (scienter pleading; internal admissions/witnesses/internal records needed for strong inference)