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Northern District Of California Holds Complaint Against Cybersecurity Company Fails To Allege Scienter For A Second Time
10/21/2025On October 2, 2025, Judge Haywood S. Gilliam Jr. of the United States District Court for the Northern District of California granted a motion to dismiss a putative securities class action against a cybersecurity company (the “Company”) and its CEO and former CFO (the “Individual Defendants” and, collectively, the “Defendants”). In re SentinelOne, Inc. Sec. Litig., No. 4:23-cv-02786 (N.D. Cal. Oct. 2, 2025). Plaintiffs alleged Defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the “Exchange Act”) and Rule 10b-5 by overstating key business metrics, necessitating downward revisions to revenue and projections. In a prior Order, which we covered here, the Court granted the motion to dismiss with leave to amend because the complaint failed to plead facts giving rise to a strong inference of scienter. The Court reached the same conclusion in this latest decision and dismissed the further amended complaint with prejudice.
The Company sells one- to three-year subscriptions for cybersecurity products. Plaintiffs alleged the Company changed the way it reported Annualized Recurring Revenue (“ARR”) in early 2023 in a way that overstated the projected annual revenue from subscription contracts because it included both subscription revenues and usage revenue. In June 2023, the Company allegedly announced a downward adjustment to ARR, saying the previous ARR had been overstated as a result of including usage revenue, which the Company allegedly said was variable and declining given macroeconomic conditions and resulted in double counting for approximately 200 contracts because of the way subscription and usage revenue were added together.
Plaintiffs’ argument that scienter could be inferred because the inclusion of usage revenue in ARR was misleading was rejected as circular. The Court also noted that plaintiffs acknowledged that usage revenue was volatile and so was just as likely to drag down ARR as it was to increase it.
The Court next found that amendments to confidential witness allegations fell short. One confidential witness alleged the Company abruptly changed ARR methodology in 2023 to include “consumption and usage revenue” to inflate ARR. But the Court held that the witness left the Company before the ARR methodology was temporarily changed. Another confidential witness alleged the Company’s finance department had discovered instances of double-counting revenue in the past, but the complaint did not allege any Individual Defendant was aware of those discrepancies.
Plaintiffs’ theories based on Defendants’ trading activity also failed. The Court found the CFO’s sales were modest, largely pursuant to 10b5-1 plans, and consistent with his broader trading history, while the CEO’s trading was comparable to his historic trading activity. Nor did plaintiffs’ allegation that the Company inflated its ARR so that it could use its stock, and save cash, in connection with its purchase of another cybersecurity firm suffice to allege scienter. The Court explained that the merger closed before the Class Period, when the Company first allegedly changed its ARR methodology, and because generalized allegations of seeking profits though a merger, without more, are legally insufficient to plead scienter.
Finally, the Court rejected plaintiffs’ argument that scienter was alleged sufficiently because the alleged misrepresentations fell within the Company’s core operations. Observing that pleading scienter based on the core operations theory is “not easy,” the Court held that plaintiff was required to “produce either specific admissions by one or more corporate executives of detailed involvement in the minutia of a company’s operations” or “witness accounts demonstrating that executives had actual involvement in creating false reports.” The Court held the complaint did not allege that any of the Individual Defendants played a role in calculating ARR or was aware of potential inaccuracies before the downward adjustment. The allegation that Individual Defendants relied on the metric did not suffice to allege they had access to or were involved with the underlying data.
Finding plaintiff failed to plead scienter for a second time, the Court dismissed Plaintiff’s the complaint with prejudice.
