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District Judge Grants Motion To Dismiss Securities Class Action, Finding Forward Looking Statements Protected By PSLRA Safe Harbor
12/12/2016On December 5, 2016, Judge Susan Illston of the United States District Court for the Northern District of California dismissed a securities class action against Hortonworks, Inc. (“Hortonworks”) and certain of its officers, with leave to amend. Monachelli v. Hortonworks, 3:16‑cv‑00980-SI (N.D.Cal. Dec. 5, 2016). Plaintiffs alleged that Hortonworks violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (“Exchange Act”) through a series of misleading statements regarding the sufficiency of available capital that were made shortly before the company raised funds through a secondary equity offering. The Court dismissed plaintiffs’ claims for several reasons, including because some of the alleged misstatements were forward-looking statements that qualified for protection under the safe harbor provisions of the Private Securities Litigation Reform Act (“PSLRA”).
Hortonworks is a vendor of open source software used to link computers into large scale data systems. According to plaintiffs, defendants’ statements that the company had sufficient cash and cash equivalents were false and misleading because the company allegedly knew its operating expenses were straining its available cash. The insufficiency of the company’s cash position supposedly was revealed when Hortonworks announced the secondary offering.
In addition to holding that defendants were not under any obligation to disclose the secondary offering any sooner than the company did, the Court also held that alleged misstatements regarding Hortonworks’s ability to meet future operating expenses were forward-looking statements that were entitled to protection under the safe harbor provisions of the PSLRA because they were accompanied by meaningful cautionary language. Although not fully explained, the Court first held at least implicitly that statements that the company’s available cash “will be sufficient to meet . . . working capital and capital expenditure requirements” were forward-looking in nature. The Court then explained that the company’s quarterly SEC filings warned of the potential need for future debt or equity offerings to meet increased capital requirements and that this might cause existing stockholders to suffer significant dilution. The Court held that these warnings were meaningful because they addressed Hortonworks’s liquidity projections—the very issue that plaintiffs alleged to be misleading—by warning about the possibility of raising additional capital through equity or debt financing to support the company’s growth.
Lastly, the Court held that information from five confidential witnesses was not enough to show under the PSLRA’s pleading requirements that defendants acted with scienter (i.e., intent). Even though these witnesses knew about the company’s rapid growth and increased expenses, none of them were in a position to know about the accuracy of the company’s financial projections or its reasons for raising additional capital.
This case underscores that securities class action complaints often may be dismissed when, as here, a company’s disclosures are accompanied by cautionary language and warnings that address known business challenges.
