Kolominsky v. Root, IncKolominsky v. Root, Inc
Defendants Root, Inc. (“Root“), Alexander Timm, Daniel Rosenthal, Megan Binkley, Christopher Olsen, Doug Ulman, Elliot Geidt, Jerri DeVard, Larry Hilsheimer, Luis von Ahn, Nancy Kramer, Nick Shalek, and Scott Maw (collectively, the “Root Defendants“), jointly with Goldman Sachs & Co. LLC, Morgan Stanley & Co. LLC, Barclays Capital Inc., and Wells Fargo Securities, LLC‘s (the “Underwriter Defendants“; together with the Root Defendants, “Defendants“) move to dismiss the Amended Complaint. ECF No. 57. For the reasons below, the Court GRANTS Defendants’ motion.
I. BACKGROUND
A. Factual Background
Plumbers Local #290 Pension Trust Fund (“Plaintiff“) brings this putative class action on behalf of all who purchased Root‘s Class A common stock traceable to the Registration Statement issued in connection with Root‘s initial
Root, a Columbus-based holding company founded in 2015, operates a technology company that “seeks to disrupt the traditional automobile insurance model by pricing and quoting insurance through a mobile phone app and using the app to collect driving data from Root‘s customers.” Am. Compl. ¶¶ 4, 23, ECF No. 37. Through this model, Root believes it is better able to screen risky drivers compared to traditional automobile insurers like GEICO, Allstate, and Progressive. Id. Defendant Alexander Timm co-founded Root and served as Root‘s CEO and as a member of Root‘s board of directors (the “Board“); Defendant Daniel Rosenthal was Root‘s Chief Financial Officer at the time of the IPO, as wеll as a director on the Board; Defendant Megan Binkley was Root‘s Chief Accounting Officer at the time of the IPO; Defendants Christopher Olsen, Doug Ulman, Elliot Geidt, Jerri DeVard, Larry Hilsheimer, Luis von Ahn, Nancy Kramer, Nick Shalek, and Scott Maw were all directors on the Board at the time of the IPO. Id. ¶¶ 24, 27-37. Defendants Goldman Sachs & Co. LLC, Morgan Stanley & Co. LLC, Barclays Capital Inc., and Wells Fargo Securities, LLC served as underwriters and co-lead book running managers of the IPO. Id. ¶ 39.
On October 28, 2020, Root executed its IPO, and Root Class A common stock began trading on the NASDAQ. Id. ¶ 60. Leading up to its IPO, Root filed a Registration Statement with the SEC, becoming effective on October 27, 2020. Id. ¶¶ 53-57.
Much of this case revolves around the language of the Registration Statement and certain public statements (and omissions) made by the Root Defendants preceding the IPO. Particularly important to Root, and central to this case, is Root‘s customer acquisition cost (“CAC“), which reflects the average cost of acquiring a new customer. Id. ¶¶ 73, 75-79, 106. CAC is a critical performance metric for newer companies like Root because it measures how well a company can improve its profitability as it continues to grow. Id. ¶ 75. A company‘s CAC is also critical to investors.
As articulated in the Registration Statement, Root‘s purportedly low CAC compared to traditional automobile insurance companies provided Root with a competitive advantage. Id. ¶ 79. Examples from the Registration Statement include:
- Within digital marketing we use data science models to dynamically bid on the basis of expected lifetime value. Over time we believe the ongoing data we accumulate through growth will fuel a pricing advantage for target customers, driving improved conversion and a cost of acquisition advantage in all channels.
- Engaging our customers and prospective customers directly through the mobile device gives us access to an underutilized distribution channel, mobile, through which many incumbents have historically had difficulty profitably acquiring customers. Through our hyper-targeted, data-driven and ever-improving performance marketing capabilities, we have been able to acquire customers for below the average cost of doing so through each of the direct and agent-based channels.
- The efficiency of our customer acquisition strategy has resulted in a cost of acquisition advantage versus direct and agent channels. While our customer acquisition costs can vary by channel mix, by state or due to seasonality, over the period from August 2018 to
August 2020 our average customer acquisition cost was $332. In the near term, as we expand our licensed footprint to 50 states, we will invest in our national brand, which will increase awareness, build credibility and support all four of our distribution channels.
Id. ¶ 106 (alteration in original).
But Root‘s CAC as of the IPO was higher—and would continue to be higher—than the $332 average disclosed in the Registration Statement. This cost increase was allegedly triggered by Root‘s planned nationwide expansion (at the time of the IPO, Root was licensed to sell insurancе in 36 states). Id. ¶¶ 89-91; Registration Statement at 2, ECF No. 57-2. As alleged, Root‘s “increased marketing expenditures had caused Root‘s customer acquisition cost as of the IPO to be virtually the same as those of the traditional insurers that the Registration Statement stated the Company had a competitive advantage over in terms of customer acquisition costs.” Am. Compl. at ¶ 91, ECF No. 31. Thus, Root‘s elevated CAC signaled the loss of its competitive advantage. Id. ¶ 107.
This nationwide marketing rollout began prior to the IPO, but Root allegedly did not disclose its increased marketing expenditures until after the IPO. Id. ¶¶ 93-94. Defendants Timm and Rosenthal did, however, participate in a “roadshow” (i.e., a series of meetings with prospective investors) prior to the IPO in which Defendant Timm discussed Root‘s focus on “becoming a national brand” and explained that, as part of those efforts, Root was “experimenting” with “some brand campaigns.” Id. ¶ 124. Mr. Timm then noted that there was a “recent spike” in CAC arising “from some of this experimentation on brand.” Id.
In addition to Defendant Timm‘s comments, Root‘s Registration Statement also indicated Root‘s intention to expand nationwide:
- [W]e intend to increase our presence in digital and traditional channel media and launch a national advertising campaign to build our brand awareness.
- We will continue to aggressively invest in domestic growth by becoming active in more states while creating brand awareness through a national marketing campaign.
- In the near term, as we expand our licensed footprint to 50 states, we will invest in our national brand, which will increase awareness, build credibility and support all four of our distribution channels.
- We are licensed in 36 states, of which we are currently active in 30 states, and our goal is to be licensed in all 50 states by early 2021.
- [W]e will incur additional expenses to support our growth[.]
- Our expansion within the United States and any future international expansion strategy will subject us to additional costs and risks, and our plans may not be successful.
Registration Statement at 2, 9, 22, 28, 83, 120, ECF No. 57-2.
Along with the above representations, the Registration Statement included the following risk disclosures:
- You should not rely on forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this prospectus primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition and operating results.
- The marketing of our insurance products depends on our ability to cultivate and maintain cost-effective and otherwise satisfactory relationships with digital app stores, in particular, those operated by Google and Apple. As we grow, we may struggle to maintain cost-effective marketing strategies, and our customer acquisition costs could rise substantially.
- Our ability to attract new customers will depеnd on a number of factors, including the pricing of our products, offerings of our competitors, our ability to expand into new markets, and the effectiveness of our marketing efforts.
- We may lose existing customers or fail to acquire new customers.
- Our expansion into new markets may place us in unfamiliar competitive environments and involve various risks.
- [D]ue to other factors beyond our control, we may be unable to attract new customers rapidly and cost-effectively.
Id. at 22, 26-27, 65, 83, ECF No. 57-2.
Investors began learning of Root‘s increased marketing expenditures in late November 2020, when analysts reported that Root‘s CAC had risen above $500 as of the IPO and that Root‘s “heavy customer acquisition costs will result in elevated cash burn and net losses through 2023.” Id. ¶¶ 94-95, 130-33. On December 1, 2020, in Root‘s first financial report as a publicly traded company, Defendant Rosenthal confirmed that Root‘s CAC for the third fiscal quarter, which closed prior to the IPO, was “elevated” due to “amplified brand spend” and would remain elevated “for the next two quarters.” Id. ¶ 96. In Root‘s second financial report, Defendant Timm stated that Root “still ha[s] much work to do in the quarters and years ahead, particularly around . . . managing customer acquisition costs.” Id. ¶ 97. Then on August 12, 2021, in a letter addressed to shareholders, Root stated that it had to reduce Root‘s profitability guidance for 2021 because Root needed “to take active steps to reduce our customer acquisition costs.” Id. ¶¶ 100-01.
As of the IPO, Root‘s Class A common stock sold for $27.00 per share, resulting in over $600 million in net proceeds for Root and achieving a valuation for the company of approximately $6.7 billion. Id. ¶¶ 3, 143. Less than five months later, the stock traded at $12.00 per share. Id. ¶ 144. And, on November 18, 2021, a little more than a year after the IPO, Root‘s Class A common stock closed at just $4.43 per share. Id. ¶ 145.
B. Procedural Background
On November 19, 2021, Plaintiff filed its Amended Complaint. ECF No. 31. The Amended Complaint alleges violations of the Securities Act and the Exchange Act. Id. ¶ 2. More precisely, Plaintiff alleges: (1) violations of Section 11 of the Securities Act, against all Defendants, based on allegedly misleading statements about customer acquisition costs in the Registration Statement (Count I); (2) violations of Section 12(a)(2) of the Securities Act, against Root, Mr. Timm, Mr. Rosenthal and the Underwriter Defendants, based on the same allegedly misleading statements in the Registration Statement as well as Mr. Timm‘s roadshow statements (Count II); (3) violations of Section 15 of the Securities Act, against the Root Defendants (Count III); (4) violations of Section 10(b) of the Exchange Act, against Root, Mr. Timm, and Mr. Rosenthal (Count IV); and (5) violations of Section 20(a) of the Exchange Act, against Mr. Timm and Mr. Rosenthal (Count V). Id. at ¶¶ 153-222, ¶¶ 758-73. All claims are premised on purported pre-IPO misstatements and omissions concerning Root‘s customer acquisition costs.
On May 20, 2022, Defendants jointly move to dismiss Plaintiff‘s Amended Complaint under
II. STANDARD OF REVIEW
A. 12(b)(6)
B. Pleading Securities Fraud
Regarding Plaintiff‘s claims sounding in fraud, Plaintiff must also satisfy
In its analysis, the Court will address which claims sound in fraud and, therefore, must satisfy the more stringent requirements of
III. ANALYSIS
Defendants move to dismiss all of Plaintiff‘s claims. First, they assert that the Court should dismiss Plaintiff‘s claims brought under Section 11 of the
A. Plaintiff‘s Claims under Sections 11 and 12(a)(2)
1. Pleading Standard
The Court will begin by addressing the threshold issue of whether the
Here, Plaintiff contends that
The Court agrees with Defendants. Plaintiff‘s “blanket disavowal in the complaint that the claims do not allege fraud . . . is insufficient to rescue them from the requirements of
2. Defendants’ Allegedly False or Misleading Statements and Omissions
Because Plaintiff‘s Sections 11 and 12 claims largely rest on the same purported false and misleading statements and omissions, with the exception of Defendants Timm and Rosenthal‘s roadshow statements, which apply solely to the Section 12 claim, the Court will consider the parties’ arguments regarding these claims together. See Am. Compl. ¶¶ 153-176, ECF No. 31.
“Claims under sections 11 and 12(a)(2) are . . . Securities Act siblings with roughly parallel elements.” Sohol v. Yan, No. 1:15-cv-393, 2016 U.S. Dist. LEXIS 56049, *19 (N.D. Ohio Apr. 27, 2016) (quoting In re Morgan Stanley Info. Fund Sec. Litig., 592 F.3d 347, 359 (2d Cir. 2010)). “So long as a plaintiff establishes one of the three bases for liability under these provisions—(1) a material misrepresentation; (2) a material omission in contravention of an affirmative legal disclosure obligation; or (3) a material omission of information that is necessary to prevent existing disclosures from being misleading—
A plaintiff may also support a Section 11 claim where the defendant fails to comply with certain SEC disclosure requirements. Under Item 303 of SEC Regulation S-K,
a. Alleged Misstatements in the Registration Statement
The Court will begin by addressing each alleged misstatement contained in the Registration Statement, with the understanding that Plaintiff has used bold and italicized typeface to highlight the actionable portion of the statement, beginning with the following:
Within digital marketing we use data science models to dynamically bid on the basis of expected lifetime value. Over time we believe the ongoing data we accumulate through growth will fuel a pricing advantage for target customers, driving improved conversion and a cost of acquisition advantage in all channels.
Am. Compl. ¶ 106, ECF No. 31. Plaintiff asserts that this statement is actionable because, by highlighting Root‘s CAC, Defendants had a duty to speak fully and truthfully. That is, Defendants should have disclosed that Root‘s CAC had increased significantly as of the IPO and that it would remain elevated thereafter, thereby negatively impacting Root‘s financial performance and eliminating Root‘s competitive advantage. Id. ¶ 107.
The Court finds this statement unactionable because of the “bespeaks caution” doctrine. As an initial matter, the Court must address the continued viability of the “bespeaks caution” doctrine. The Private Securities Litigation Reform Act (“PLSRA“) contains the “Safe Harbor” provisions which, like the “bespeaks caution” doctrine, protect securities-litigation defendants who make certain forward-looking statements.
It is not at all clear whether the “bespeaks caution” doctrine survived its codification in the PSLRA. As a general rule, “Congress is understood to legislate against a background of common-law adjudicatory principles” and courts “may take it as given that Congress has legislated with an expectation that the principle[s] will apply except when a statutory purpose to the contrary is evident.” Astoria Fed. Sav. & Loan Ass‘n v. Solimino, 501 U.S. 104, 108 (1991). Such evidence of congressional purpose, however, need not be “clear and manifest,” nor need Congress “affirmatively proscribe the common-law doctrine at issue.” City of Milwaukee v. Illinois & Michigan, 451 U.S. 304, 316-17 (1981); United States v. Texas, 507 U.S. 529, 534, (1993) (internal quotation marks and citations omitted).
Instead, courts “start with the assumption that it is for Congress, not federal courts, to articulate the appropriate standards to be applied as a matter of
Given these principles, if the Court were considering the continued viability of the “bespeaks caution” doctrine in a vacuum, it might conclude that the Safe Harbor provisions abrogate the “bespeaks caution” doctrine. That is, Congress has specifically addressed a question (whether certain forward-looking statements are actionable in securities litigation) that was previously governed by federal common law (the “bespeaks caution” doctrine). Thus, the reasoning would go, federal сourts no longer have authority to use their common law as a substitute for the statutory Safe Harbor provisions. In addition, using the “bespeaks caution” doctrine in cases expressly excluded from the Safe Harbor provisions (like this one) severely undercuts Congress‘s desire to not protect forward-looking statements in those excluded situations.
This Court is not considering the issue in a vacuum, however. Federal courts across the country have decided that the “bespeaks caution” doctrine survived its codification as the safe-harbor provisions in its entirety. See, e.g., Kurtzman v. Compaq Computer Corp., No. CIV.A. 99-1011, 2002 WL 32442832, at *22 (S.D. Tex. Mar. 30, 2002) (“The bespeaks caution, doctrine . . . developed prior to the PSLRA and survives today.” (internal citation omitted); Gavish v. Revlon, Inc., No. 00 CIV. 7291 (SHS), 2004 WL 2210269, at *21 (S.D.N.Y. Sept. 30, 2004) (“The PSLRA‘s safe harbor was modeled in part after, but not meant to displace, the judicial bespeaks caution doctrine.” (cleaned up)). Against this backdrop, this Court will also apply the “bespeaks caution” doctrine here.
Under the “bespeaks caution” doctrine, Defendants are excused from liability for “projections, statements of plans and objectives, and estimates of future economic performance” so long as the statement is identified as “forward-looking” and is accompanied by “meaningful cautionary statements.” Helwig, 251 F.3d at 547; see also In re Humana, Inc. Sec. Litig., No. 3:08CV-162, 2009 U.S. Dist. LEXIS 53535, *34 (W.D. Ky. June 15, 2009) (noting that meaningful cautionary language “must convey substantive factors that realistically could cause results to differ materially from those projected in the forward-looking statements“).
Both elements are met here. First, the statement here is forward-looking because it expressly reflects Defendants’ expectation that ongoing data accumulation “will fuel” a CAC advantage “over time.” Second, alongside this statement was meaningful cautionary language, such as “[y]ou should not rely on forward-looking statements as predictions of future events,” Root “may struggle to maintain cost effective marketing strategies, and our customer acquisition costs could rise substantially,” and Root‘s “ability to attract new customers will
Next, Plaintiff takes issue with this statement from the Registration Statement:
Engaging our customers and prospective customers directly through the mobile device gives us access to an underutilized distribution channel, mobile, through which many incumbents have historically had difficulty profitably acquiring customers. Through our hyper-targeted, data-driven and ever-improving performance marketing capabilities, we have been able to acquire customers for below the average cost of doing so through each of the direct and agent-based channels.
Am. Compl. ¶ 106, ECF No. 31. Like the previous statement, Plaintiff takes the position that Defendants’ reference to its low CAC triggers a duty to disclose that Root‘s CAC had increased substantially as of the IPO and would continue at an
The Court finds that this statement, which concerns Root‘s past performance, does not give rise to liability under the Securities Act. It is axiomatic that “a violation of federal securities law cannot be premised upon a company‘s disclosure of accurate historical data.” In re Sofamor Danek Group, Inc., 123 F.3d 394, 401 n.3 (6th Cir. 1997); see also In re Ford Motor Co. Sec. Litig., 381 F.3d 563, 570 (6th Cir. 2004) (“[T]he disclosure of accurate historical data does not become misleading even if . . . [the company might predict] less favorable results . . . in the future.“) (quoting In re Sofamor, 123 F.3d at 401 n.3). Here, the challenged statement simply states an undisputed fact: Root, in the past, has had a below-average CAC through each of its channels in comparison to traditional insurers. Plaintiff asserts that this language created a duty to disclose that Root no longer maintained a CAC advantage in the near or long term. But there is no “duty to update” statements about past performance, so long as those statements “referred only to past events or conditions and did not imply anything about future circumstances.” IBEW Local Union No. 58 Pension Trust Fund & Annuity Fund v. Royal Bank of Scot. Grp., 783 F.3d 383, 390 (2d Cir. 2015). This statement falls within the category of statements referenced in IBEW Local and therefore is not actionable.
Like the previous two statements, Plaintiff asserts that the following statement from the Registration Statement required Defendants to disclose that
Mobile is the fastest growing retail channel in the United States, as customers spend less time in front of computers and utilize smart phones for more convenient shopping. We therefore designed a mobile-directed customer acquisition strategy, delivering customer acquisition costs below the average cost of doing so through each of the direct and agent channels[.]
Am. Compl. ¶ 106, ECF No. 31.
This statement fails to be actionable for the same reason the prior statement was unactionable—namely, the statement relates to Root‘s past performance and concerns facts that neither party disputes. The statement unambiguously provides that Root “designed” a mobile-centric customer generating strategy that was “delivering” CAC superior to the average CAC associatеd with “direct and agent channels.” This statement was true as of the IPO, and Plaintiff does not allege otherwise. As such, it does not give rise to liability under the Securities Act.
Plaintiff also challenges this statement contained in the Registration Statement:
The efficiency of our customer acquisition strategy has resulted in a cost of acquisition advantage versus direct and agent channels. While our customer acquisition costs can vary by channel mix, by state or due to seasonality, over the period from August 2018 to August 2020 our average customer acquisition cost was $332. In the near term, as we expand our licensed footprint to 50 states, we will invest in our national brand, which will increase awareness, build credibility and support all four of our distribution channels.
But this statement does not give rise to such a duty. Defendants do not have a duty to update accurate information unless, without the update, the facts actually disclosed would be rendered misleading—and this statement, which is expressly limited to a 24-month period, is not misleading. Indeed, accurate information, such as the information herе, “is not rendered misleading by a failure to disclose conditions that might render future results less favorable.” City of Pontiac Gen. Emples. Ret. Sys. v. Stryker Corp., 865 F. Supp. 2d 811, 823 (W.D. Mich. Mar. 30, 2012); McDonald v. Kinder-Morgan, Inc., 287 F.3d 992, 998 (10th Cir. 2002) (“It is well-established that the accurate reporting of historic successes does not give rise to a duty to further disclose contingencies that might alter the revenue picture in the future.“). That Plaintiff would have liked the Registration Statement to have disclosed Root‘s CAC for the period following August 2020 does not create an affirmative duty to do so. See Walker v. L Brands, Inc., No. 2:19-CV-3186, 2020 WL 6118467, at *17 (S.D. Ohio Oct. 16, 2020) (“[A] corporation is not required to disclose a fact merely because a reasonable investor would very much like to know that fact.” (quoting In re Time Warner, Inc. Sec. Litig., 9 F.3d 259, 267 (2d Cir. 1993))). Finally, the Registration Statement
The next challenged statements concern Root‘s planned national advertising campaign:
Our long-term growth will depend, in large part, on our continued ability to attract new customers to our platform. We intend to continue to drive new customer growth by leveraging our differentiated consumer experience and our telematics-based pricing. Additionally, our proprietary dataset will continue to scale as we grow, enabling us to enhance our predictive models that will further improve pricing and attract potential new customers. We will also continue to target attractive potential customer segments through our digital marketing channels and strategic partnerships. Similarly, we intend to increase our presence in digital and traditional channel media and launch a national advertising campaign to build our brand awareness.
* * *
In the near term, as we expand our licensed footprint to 50 states, we will invest in our national brand, which will increase awareness, build credibility and support all four of our distribution channels. Furthermore, we continue to invest in the technology and data science behind our distribution with A/B tests, dynamic bidding models, and rapid updates and iterations, supporting differentiated cost of customer acquisition over the long term.
Am. Compl. ¶ 108, ECF No. 31.
According to Plaintiff, by discussing Root‘s national advertising efforts, Defendants had a duty to disclose that Root‘s planned expansion throughout the
The final statement Plaintiff challenges from the Registration Statement is contained within the section titled “Risk Factors,” and it provides: “As we grow, we may struggle to maintain cost-effective marketing strategies, and our customer acquisition costs could rise substantially.” Am. Compl. ¶ 110, ECF No. 31 (emphasis in original). Plaintiff contends that this statement was materially false because Root‘s CAC “had significantly increased as of the IPO, and would
The Court finds the above statement unactionable. This statement, like several of the previously challenged statements, is a forward-looking statement concerning Root‘s future CAC. As Root grows, Root certainly could struggle to maintain cost-effective marketing strategies and its CAC could increase substantially—but this prediction about Root‘s future could not have materialized as of the IPO. Moreover, this statement is a risk factor, and Plaintiff has not shown how its allegations support that this risk factor itself is false. See Zeid v. Kimberley, 930 F. Supp. 431, 437 (N.D. Cal. 1996) (“Defendants’ warnings regarding potential adverse factors are not actionable as a matter of law” where plaintiffs were asserting that defendants should have stated that certain adverse factors “are” affecting rather than “may” affect the financial statements.).
In making its argument that the “hypothetical risk” had already materialized, thus rendering the challenged statement false or misleading, Plaintiff relies on In re Facebook, Inc., IPO Sec. & Deriv. Litig., 986 F. Supp. 2d 487 (S.D.N.Y 2013) and Galestan v. OneMain Holdings, Inc., 348 F. Supp. 3d 282 (S.D.N.Y. 2018).
In sum, Plaintiff has failed to allege that the challenged statement is false or misleading. The Court instead finds that the statement is forward-looking and accompanied by meaningful cautionary language, and therefore fails to be actionable under the Securities Act.
b. Roadshow Statements
The Court next addresses the alleged misstatements and omissions arising from Root‘s roadshow, which pertain to Plaintiff‘s claim under Section 12(a)(2). Plaintiff asserts that Defendant Timm misled prospective investors when he stated:
On slide 19 you‘ll also see we do believe that becoming a national brand is important and we do believe we can do that in a very differentiated way that is not gimmicky. So really Root is based on fairness. What you see here, on the lеft side of slide 19, is a bit of a taste for our brand. Judge me by the way I drive, not my job. Age is just a number. Phillip isn‘t. Root‘s all about you. Those are some brand campaigns that we‘re going to be experimenting with. We don‘t believe we will ever be at the level of brand spend of a Geico or Progressive. We think we‘ll always be more performance oriented, but we also believe that there still is value to becoming a recognized brand and so we will intelligently experiment with the brand channel.
Am. Compl. ¶ 124, ECF No. 31. Plaintiff contends that these bolded statements were inaccurate statements of material fact because Root‘s increased CAC was not caused by “marketing experimentation,” but rather by a “sustained increase in marketing expenditures as part of the Company‘s expansion throughout the
The Court disagrees. The above statement is protected under the bespeaks caution doctrine—that is, the statement is forward-looking and accompanied by meaningful cautionary language. See Helwig, 251 F.3d at 547. First, these statements are forward-looking; they refer to Root‘s intention to experiment with brand campaigns in connection with “becoming a natiоnal brand” and that Root “will intelligently experiment with the brand channel.” Am. Compl. ¶ 124, ECF No. 31 (emphasis added). Moreover, Root included a page in the Registration Statement titled “SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS,” which specifically identifies statements concerning Root‘s “ability to maintain and enhance our brand and reputation,” and its “ability to maintain . . . marketing efficiency” as forward-looking. Registration Statement at 64, ECF No. 57-2. This challenged statement, addressing matters identified as forward-looking and prefaced as Root‘s thoughts and beliefs, puts a reasonable investor on notice that Root is making a forward-looking statement. See Slayton v. Am. Express Co., 604 F.3d 758, 769 (2d Cir. 2010) (concurring with the SEC in that “[t]he use of linguistic cues like ‘we expect’ or ‘we believe,’ when combined with an explanatory description of the company‘s intention to
Second, these statements are accompanied by meaningful cautionary language in the Registration Statement. Plaintiff, however, argues that cautionary language within the Registration Statement cannot immunize representations made outside of the Registration Statement, such as Defendant Timm‘s roadshow statements. ECF No. 58 at 38. Plaintiff, however, does not cite to any binding caselaw for this proposition, and the case it does cite undermines its own position. In P. Stolz Family P‘ship L.P. v. Daum, 355 F.3d 92 (2d Cir. 2004), the Second Cirсuit affirmed the district court‘s dismissal of several Section 12(a)(2) claims pursuant to the bespeaks caution doctrine. Id. At issue were defendants’ oral representations that it purportedly had hired an investment bank to do a $30 million financing and to subsequently take the company public, which would raise an additional $50 to $100 million. Id. at 97. After finding that several of the 12(a)(2) allegations rested on forward-looking statements, the Second Circuit turned to Defendants’ prospectus and subscription agreement in search of meaningful cautionary language. Id. at 98. The documents contained such language, prompting the Second Circuit to hold that “[a]ny oral representations concerning a sought-after $30 million or a future IPO (as opposed to the existence of an agreement to try to plan an IPO) were neutralized by [the prospectus and subscription agreement‘s] cautionary statements.” Id.
The Court reiterates its earlier conclusion that the Registration Statement contains meaningful cautionary language that precisely addressed the risks that Plaintiff alleges. The Registration Statement cautioned that Root “may struggle to maintain cost effective marketing strategies, and our customer acquisition costs could rise substantially,” and Root‘s “ability to attract new customers will depend on a number of factors, including . . . our ability to expand into new markets, and the effectiveness of our marketing efforts.” Registration Statement at 27, 83, ECF No. 57-2. Root also explicitly warned investors that they “should not rely on forward-looking statements as predictions of future events. Id. at 65. Additionally, the Registration Statement disclosed that Root‘s expansion “into new markets,” would “subject [Root] to additional costs and risks, and [Root‘s] plans may not be successful.” Id. at 13. To be sure, vague disclaimers of general risks do not remove the threat of liability. Lockhart v. Garzella, No. 3:19-CV-00405, 2022 WL 1046766, at *11 (S.D. Ohio Apr. 7, 2022).
But these warnings are company-specific and “based on a realistic description of the risks applicable to the particular circumstances,” and are therefore protected under the bespeaks caution doctrine. See id. Accordingly, Defendant Timm‘s statement does not give rise to Section 12(a)(2) liability.
And you can see the results on the right-side of the page. Our customer acquisition cost has maintained well below the direct average and so we really are more competitive. You see the recent spike? That is from some of this experimentation on brand that you see over here on the left side оf the page. And again, we‘re constantly testing new marketing channels and we‘ll continue to do that short term. But we believe -- and we‘ve seen long term -- that we do have the ability to keep our customer acquisition costs much lower than our competitors.
Am. Compl. ¶¶ 124, 127, ECF No. 31. Plaintiff asserts that Defendant Timm‘s reference to the “recent spike” in CAC, coupled with the plan to continue experimenting on brand in the “short term,” were inaccurate statements of material fact because Root‘s sustained increase in marketing expenditures had caused the increase to its CAC, and such increase would remain in place, thereby eliminating Root‘s competitive advantage. Id. ¶ 126. Plaintiff also argues that Defendant Timm‘s statement that Root has “the ability to keep our customer acquisition costs much lower than our competitors” was an inaccurate statement of material fact because, by September 2020, Root had lost its competitive advantage over traditional insurers in terms of CAC. Id. ¶ 128.
The Court finds the challenged statement to be unactionable. Beginning with the “recent spike” statement, this statement does not give rise to liability under Section 12(a)(2) because it is an accurate statement that is not misleading. Defendant Timm directly attributed the increase in CAC to “experimentation on brand” in connection with “becoming a national brand“—i.e., Root‘s planned national marketing campaign. Id. ¶ 124. Given that Defendant Timm
Plaintiff also insists that Defendant Timm‘s labeling of the experimentation as “short term” was an inaccurate statement of material fact because the marketing campaign was “set to continue long-term.” Resp. 35-36, ECF No. 58. But Plaintiff offers no facts supporting that, at the time Defendant Timm made the statement, the marketing experimentation would be long-term. At best, Defendant Timm‘s statement indicated that, so long as Root was experimenting with “becoming a national brand,” Root‘s elevated CAC could persist—but this understanding does not automatically mean that Defendant Timm‘s statement was inaccurate when made.
Plaintiff next argues that Defendant Timm‘s statement concerning Root‘s “ability to keep our customer acquisition costs much lower than our competitors” is actionable. It is not. This statement is mere corporate puffery that is unactionable as a matter of law. In re Ford Motor Co. Sec. Litig., 381 F.3d 563, 570-71 (6th Cir. 2004) (“Courts everywhere ‘have demonstrated a willingness to find immaterial as a matter of law a certain kind of rosy affirmation commonly heard from corporate managers and numbingly familiar to the marketplace - loosely optimistic statements that are so vague, so lacking in specificity, or so clearly constituting the opinions of the speaker, that no reasonable investor could find them important to the tоtal mix of information available.‘“) (citation omitted);
For the reasons stated above, the Court finds that Defendant Timm‘s roadshow statements do not engender Section 12(a)(2) liability.
c. Alleged Omissions
The Amended Complaint also sets forth certain material omissions that Plaintiff argues Defendants had a duty to disclose:
Am. Compl. ¶¶ 107, 126, 129, ECF No. 31.
While the Court has largely addressed Plaintiff‘s arguments pertaining to these alleged omissions in other sections of this Opinion and Order, the Court will briefly do so again here. First, the Court begins by noting that Root did not have a duty to disclose Root‘s September 2020 “spike” in CAC. This is so despite having disclosed its CAC average for the period between August 2018 and August 2020 because this disclosure was both accurate and not misleading. See Section III.A.b.i. Moreover, Plaintiff fails to allege that a one-month increase in CAC meant that, at the time of the IPO, Root‘s long-term average CAC had materially increased. See Section III.A.b.i n.2. Second, notwithstanding the absence of a duty to update its CAC, Root nevertheless did so when Defendant Timm disclosed to investors that Root had experienced a “recent spike” to its CAC in connection with its national marketing campaign. See Section III.A.b.ii. Third, the Registration Statement also warned investors that Root was engaging
Fourth, concerning Root‘s alleged loss of its competitive advantage, Plaintiff fails to allege any facts suggesting that Root no longer had a competitive CAC as compared to other channels as of the IPO. What is alleged speaks exclusively to Root‘s short-term increase in its own CAC due to the nationwide marketing campaign; the Amended Complaint is silent as to whether this elevated CAC eliminated Root‘s advantage as to other channels as of the IPO. Put differently, the Amended Complaint places Root‘s fluctuating CAC in a vacuum, which is insufficient to allege that it no longer possessed a competitive advantage vis-à-vis other channels in the insurance industry.
Fifth, also with respect to Root‘s alleged loss of its competitive advantage as of the IPO, Plaintiff fails to allege any facts that Root‘s short-term increase in CAC meant that it could not, in the long term, maintain competitively low CAC. Given the absence of any factual allegations indicating that Root‘s future predictions were incorrect or that Root should have made a differing prediction leading up to the IPO, coupled with the forward-looking and puffery nature of such a prospective assessment, Root had no obligation to disclose that it no longer possessed a competitive advantаge that was negatively impacting Root‘s financial operations and performance. See Sections III.A.b.i–ii.
All told, Plaintiff‘s alleged omissions do not subject Defendants to liability under the Securities Act because, to the extent Defendants did not already
3. Defendants’ allegedly false or misleading statements and omissions do not give rise to liability under Sections 11 and 12(a)(2)
Considering the Court‘s findings in Section III.A.b., the Court holds that the allegedly false or misleading statements and omissions identified in the Amended Complaint are not actionable under the Securities Act. This is so even when considering the SEC disclosure requirements, which Plaintiff also asserts impose Section 11 liability on Defendants. Beginning with Item 303, which requires disclosure “where a trend, demand, commitment, event or uncertainty is both presently known to management and reasonably likely to have material effects on the registrant‘s financial conditions or results of operations,”2 the Registration Statement complied with Item 303 because the Registration Statement disclosed Root‘s planned nationwide marketing campaign. See Registration Statement at 2, 9, 22, 28, 83, 120, ECF No. 57-2. Nor did the Registrаtion Statement run afoul of Item 105 because the Registration Statement disclosed specific risks associated with Root‘s CAC, the potential increase in costs, and other “significant
B. Securities Exchange Act Claims: 10(b) and Rule 10b-5
Plaintiff also brings claims under Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934. These claims rely on the same alleged misstatements and omissions as Plaintiff‘s Sections 11 and 12(a)(2) claims.
Section 10(b), in relevant part, provides:
It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce or of the mails, or of any facility of any national securities exchange . . . [t]o use or employ, in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered, or any securities-based swap agreement . . . any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors.
The SEC regulation promulgated under Section 10(b) states:
It shall be unlаwful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange,
(a) To employ any device, scheme, or artifice to defraud,
(b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or (c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security.
Regarding the applicable pleading standard for Section 10(b) claims, because they sound in fraud, a plaintiff‘s pleadings must meet the heightened pleading standard of
Here, Plaintiff‘s Amended Complaint does not make clear exactly which of Rule 10b-5‘s categories it claims Defendants violated. See Am. Compl. ¶¶ 215–19, ECF No. 31. Givеn this ambiguity, Defendants’ Joint Motion to Dismiss challenged Plaintiff‘s Section 10(b) claims in their entirety, though focusing largely on Plaintiff‘s presumed Rule 10b-5(b) misrepresentation claim. Plaintiff has since clarified in its opposition papers that the Amended Complaint alleges
1. Plaintiff‘s claim under SEC Rule 10b-5(b)
Section 10(b) and Rule 10b-5 “prohibit fraudulent, material misstatements or omissions in connection with the sale or purchase of a security.” Zaluski v. United Am. Healthcare Corp., 527 F.3d 564, 570 (6th Cir. 2008) (quoting PR Diamonds, Inc. v. Chandler, 364 F.3d 671, 681 (6th Cir. 2004)). To state a claim under Section 10(b) and Rule 10b-5(b), Plaintiff must allege: “(1) a material misrepresentation or omission by the defendant; (2) scienter; (3) a connection between the misrepresentation or omission and the purchase or sale of a security; (4) reliance upon the misrepresentation or omission; (5) economic loss; and (6) loss causation.” Ohio Pub. Empls. Ret. Sys. v. Fed. Home Loan Mortg. Corp., 830 F.3d 376, 383–84 (6th Cir. 2016) (quotation omitted). “The test for whether a statement is materially misleading under Section 10(b) and Section 11 is whether the defendants’ representations, taken together and in context, would have misled a reasonable investor.” Albert Fadem Trust, 334 F. Supp. 2d at 1019 (quoting Rombach, 355 F.3d at 172 n.7).
Here, as discussed with respect to Plaintiff‘s Sections 11 and 12(a)(2) claims, Plaintiff fails to allege an actionable misstatement or omission by Defendants, thus failing to plead the first element of a Rule 10b-5(b) claim. This
2. Plaintiff‘s claim under SEC Rule 10b-5(a) and (c)
Plaintiff also alleges scheme liability under SEC Rule 10b-5(a) and (c).4 At the outset, the Court notes that the Sixth Circuit has not defined the elements of scheme liability, though it has explained that such claims “encompass conduct beyond disclosure violations.” Benzon, 420 F.3d at 610. Turning to “the two circuit courts that traditionally see the most securities cases, the Second and Ninth Circuits,”5 they have concluded that “[a] defendant may only be liable as part of a fraudulent scheme based upon misrepresentations and omissions under Rules 10b-5(a) or (c) when the scheme also encompasses conduct beyond those misrepresentations or omissions.” WPP Luxembourg Gamma Three Sarl v. Spot
The Second Circuit has articulated the pleading standards governing scheme liability claims: “To state a scheme liability claim, a plaintiff must show: ‘(1) that the defendant committed a deceptive or manipulative act, (2) in furtherance of the alleged scheme to defraud, (3) with scienter, and (4) reliance.‘” Plumber & Steamfitters Local 773 Pension Fund v. Danske Bank A/S, 11 F.4th 90, 105 (2d Cir. 2021) (citing In re Mindbody, Inc. Sec. Litig., 489 F. Supp. 3d 188, 216 (S.D.N.Y. 2020)).
Here, the Amended Complaint specifically addresses Defendants’ scheme in just four of its 222 pаragraphs:
Root and Timm and Rosenthal knew and/or recklessly disregarded the false and misleading nature of the information which they caused to be disseminated to the investing public. The fraudulent scheme described herein could not have been perpetrated during the Class Period without the knowledge and complicity or, at least, the reckless disregard of the personnel at the highest levels of the Company, including Timm and Rosenthal.
[...]
As set forth elsewhere herein in detail, Timm and Rosenthal, by virtue of their receipt of information reflecting the true facts regarding Root, their control over, and/or receipt and/or modification of Root‘s allegedly materially misleading statements and/or their association with the Company that made them privy to confidential proprietary information concerning Root, participated in the fraudulent scheme alleged herein.
[...]
As detailed herein, Root and Timm and Rosenthal engaged in a scheme to deceive the market and a course of conduct that artificially inflated the price of Root Class A common stock and operated as a fraud or deceit on Class Period purchasers of Root Class A common stock. When the prior misrepresentations and fraudulent conduct of Root and Timm and Rosenthal were disclosed and became apparent to the market, the trading price of Root Class A common stock fell precipitously as the artificial inflation was removed.
[...]
Root and Timm and Rosenthal: (i) employed devices, schemes, and artifices to defraud; (ii) made untrue statements of material fact and/or omitted to state material facts necessary to make the statements not misleading; and (iii) engaged in acts, practices, and a course of business which operated as a fraud and deceit upon the purchasers of Root Class A common stock during the Class Period.
Am. Compl., ¶¶ 187, 194, 198, 217, ECF No. 37 (emphasis added).
In the Court‘s view, the scheme alleged in the Amended Complaint consisted of the same series of statements and alleged omissions discussed with regard to Plaintiff‘s other claims. That is, these purported misstatements and omissions served to deceive the market in order to artificially balloon the price of Root‘s Class A common stock, thereby defrauding purchasers. In other words, there is no meaningful distinction between Plaintiff‘s misrepresentation theory under 10b-5(b) and its scheme liability theory under 10b-5(a) and (c). This
In any event, Defendants’ Joint Motion to Dismiss does not challenge the adequacy of the Amended Complaint‘s allegations concerning Defendants’ “deceptive or manipulative act[s]” or the extent to which Defendants acted “in furtherance of the alleged scheme to defraud.” Instead, Defendants’ Joint Motion to Dismiss argues that Defendants lacked the requisite intent—i.e., scienter—tо prevail on its Section 10(b) and Rule 10b-5 claims. Mot. 33-36, ECF No. 57.
The PSLRA mandates that a plaintiff pleads facts “giving rise to a strong inference that the defendant acted with the requisite state of mind” in violating the securities laws.”
In evaluating the sufficiency of securities fraud pleadings regarding scienter, courts consider the allegations against the backdrop of a non-exhaustive list of factors: (1) insider trading at a suspicious time or in an unusual amount; (2) divergence between internal reports and external statements on the same subject; (3) closeness in time of an allegedly fraudulent statement or omission and the later disclosure of inconsistent information; (4) evidence of bribery by a top company officiаl; (5) existence of an ancillary lawsuit charging fraud by a company and the company‘s quick settlement of that suit; (6) disregard of the most current factual information before making statements; (7) disclosure of accounting information in such a way that its negative implications could only be understood by someone with a high degree of sophistication; (8) the personal interest of certain directors in not informing disinterested directors of an impending sale of stock; and (9) the self-interested motivation of defendants in the form of saving their salaries or jobs. Helwig, 251 F.3d at 552; see also Omnicare, 769 F.3d at 484 (applying the Helwig factors).
The Court holds that the Amended Complaint fails to allege enough facts to create a strong inference of scienter to support Plaintiff‘s scheme liability claim. Plaintiff‘s opposition to Defendants’ Joint Motion to Dismiss lists multiple facts that purportedly establish a strong inference of scienter. Resp. 44, ECF No.
First, Plaintiff argues that Defendants understood but disregarded “the most current factual information” about Root‘s CAC leading up to and as of the IPO. Id. First, this argument falls short because Plaintiff fails to identify what particular factual information Defendants disregarded. See In re The Goodyear Tire & Rubber Co., 436 F. Supp. 2d 873, 902 (N.D. Ohio Mar. 22, 2006). While Plaintiff references “adverse facts” concerning Root‘s CAC, the specific “adverse facts” remain unclear. But even if the Court assumes these “adverse facts” refer to Root‘s increased CAC in September 2020, Defendants still did not disregard this information. As stated in the Amended Complaint, Defendant Timm disclosed to investors the September spike in Root‘s CAC. Am. Compl. ¶ 124, ECF No. 31.
Second, to the extent Plaintiff argues that Defendants intended to deceive investors by failing to disclose a long-term loss in Root‘s CAC advantage, this argument likewise fails. Plaintiff has alleged facts indicating that Defendants Timm and Rosenthal were aware of the September 2020 increase in CAC, but there are no factual allegations suggesting that they knew the September 2020 increase was the beginning of a long-term elevation in CAC. Thus, this weighs against finding a strong inference of scienter. See Lachman v. Revlon, Inc., 487 F. Supp. 3d 111, 134, 137 (E.D.N.Y. 2020) (where defendants stated that they “expect[ed] continued improvement going forward,” and plaintiffs failed to plead
Plaintiff also argues that Defendants Timm and Rosenthal, given their executive roles with Root and their participation in the roadshow, must have known the future of Root‘s CAC. But simply being in a high-level role with a company is insufficient to give rise to a finding of scienter. See, e.g., Pittman v. Unum Grp., 861 F. App‘x 51, 55 (6th Cir. 2021) (“[T]he fact that executives are intimately familiar with a core component of their business does little to suggest fraudulent intent. So this is not a scienter-bolstering fact.“); PR Diamonds, Inc, 364 F.3d at 688 (“Contrary to Plaintiffs’ assertions, fraudulent intent cannot be inferred merely from the Individual Defendants’ positions in the Company and alleged access to information . . . . [T]he Complaint must allege specific facts or circumstances suggestive of their knowledge.“).
Plaintiff also argues that the “closeness in time of the alleged misstatements and omissions made on October 28, 2020 and Root‘s disclosures of contrary information beginning on December 1, 2020” supports a strong inference of scienter. ECF No. 58 at 44. This Helwig factor raises an inference of scienter so long as the later-disclosed information is “inconsistent” with the allegedly fraudulent statements or omissions. Helwig, 251 F.3d at 552. Here, however, the information disclosed subsequent to the IPO is largely consistent
Plaintiff does identify a report from February 25, 2021 indicating that Root “still ha[s] much work to do in the quarters and years ahead, particularly around . . . managing customer acquisition costs.” Resp. 47, ECF No. 58. This suggests that Root‘s elevated CAC has become a long-term cоncern; however, given the nearly four-month gap between the IPO and this report, the Court does not find this extended period of time to be probative of scienter. See Doshi v. Gen. Cable Corp., 823 F.3d 1032, 1042 (6th Cir. 2016) (stating that an 86-day gap did not allow a scienter inference). Thus, this Helwig factor favors rejecting a scienter inference.
Plaintiff has also failed to establish the ninth Helwig factor—that Defendants Timm and Rosenthal possessed the “self-interested motivation . . . of saving their salaries or jobs.” Helwig, 251 F.3d at 552. Under this factor, Plaintiff argues that an inference of scienter is warranted because the Defendants substantially increased the size of the IPO before the IPO, in order to “make it as lucrative as possible,” and “the IPO generated an enormous amount of wealth for
Plaintiff premises its final scienter argument on Defendant Timm‘s “failure during the roadshow to disclose the true reason for the spike in CAC as of the IPO, while falsely stating that Root had the ‘ability to keep [its] customer
In sum, nothing in the Amended Complaint, taken collectively and taken as true, gives rise to a strong inference that Defendants acted with scienter. Indeed, nothing in the Amended Complaint would lead a reasonable person to “deem the inference of scienter cogent and at least as compelling as any opposing inference one could draw from the facts alleged.” Tellabs Inc., 551 U.S. at 323–24. Put differently, the Amended Complaint fails to plead “with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind.” See
C. Sections 15 and 20(a): Control Person Liability
Plaintiff also asserts claims against the Root Defendants as “controlling persons” under Section 15(a) of the Securities Act (Count III) and Sеction 20(a) of the Exchange Act (Count V). Am. Compl. ¶¶ 177–84, 220–22, ECF No. 31.
Section 15 of the Securities Act, codified at
Both Sections 15 and 20(a) require a primary violation of Section 10(b), 11 or 12. Given the Court‘s rulings above finding no such primary violations, Plaintiff has failed to allege the prima facie elements for control person liability pursuant to both Section 15 and Section 20(a). Consequently, the Court dismisses Counts III and V of the Amended Complaint. See Local 295, 731 F. Supp. 2d at 715–15, 728 (dismissing Section 15 and Section 20(a) claims where plaintiffs failed to allege a primary securities law violation).
IV. CONCLUSION
For the reasons stated herein, the Court GRANTS Defendants’ Joint Motion to Dismiss with prejudice. ECF No. 57. Accordingly, Plaintiff‘s Amended Complaint is DISMISSED with prejudice, and the Clerk is DIRECTED to close the case.
IT IS SO ORDERED.
MICHAEL H. WATSON, JUDGE
UNITED STATES DISTRICT COURT