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Southern District Of New York Dismisses Securities Fraud Claims Against Artificial Intelligence Company
07/29/2025On July 23, 2025, Judge John P. Cronan of the Southern District of New York granted a motion to dismiss a putative securities class action brought against an artificial intelligence (AI) company (the “Company”) and certain of its executives. In re UiPath, Inc. Sec. Litig., No. 24-cv-4702 (S.D.N.Y. July 23, 2025). Plaintiffs asserted claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the “Exchange Act”) and Rule 10b-5 thereunder, alleging that defendants made misleading statements and omissions regarding the success of the Company’s turnaround strategy. The Court granted defendants’ motion to dismiss, holding that plaintiffs failed to adequately plead falsity or scienter as to certain alleged misstatements and that they failed to adequately plead loss causation for the remaining alleged misstatements.
Plaintiffs alleged that beginning in 2022, in the face of poor performance, the Company embarked on a turnaround strategy by rebranding itself as an AI-powered “Business Automation Platform” and hired a new CEO, restructured its go-to-market model, and began prioritizing enterprise clients. According to the complaint, defendants misled investors about the success of the Company’s turnaround strategy. Plaintiffs alleged two categories of misleading statements: (i) “execution statements” touting successful contracts and deal quality, and (ii) “investment statements” asserting ongoing investments in the Company’s sales force and customer success function. Relying on allegations concerning purported statements by former employees who described internal policy shifts that purportedly caused deal delays and cancellations, plaintiffs alleged defendants misrepresented the success of the turnaround strategy, which purportedly came to light in May 2024, when the Company reinstated its prior CEO and cut full-year revenue guidance by $150 million, which allegedly caused a significant stock drop upon the announcement.
The Court first addressed the alleged execution statements, holding that defendants’ statements celebrating “meaningful outcomes” and “larger, more strategic deals” were inactionable puffery or too generalized to be verifiable. Although the Court noted that defendants’ alleged statements that the Company’s overhauled go-to-market strategy had “better execution” and improved “deal quality” and “customer quality” presented “closer calls,” the Court did not reach those arguments, holding that plaintiffs failed to adequately plead scienter for any of the execution statements. As to scienter, the Court first found that, even interpreting plaintiffs’ argument “generously,” the alleged motive amounted to “nothing more than a desire to conceal past errors, to remain employed as executives, or to protect professional reputations,” which are motives possessed by virtually all corporate insiders and therefore not indicative of fraud. The Court further rejected plaintiffs’ argument that the executive defendants’ access to information contrary to the alleged misstatements, finding that plaintiffs failed to identify the reports or statements defendants had access to that directly contradicted the alleged misstatements. Similarly, the Court found plaintiffs’ allegations concerning (1) the timing of the CEO’s departure, (2) the proximity between the final alleged misstatement and the alleged corrective disclosure, and (3) the core operations were insufficient on their own or taken together to support the strong inference of scienter required.
Turning to the alleged investment statements, the Court held that plaintiffs failed to allege loss causation and did not address falsity or scienter. As to loss causation, the Court held that a statement revealing poor performance is not an actionable corrective disclosure unless it unmasks prior fraud. The Court rejected plaintiffs’ contention that the reinstated CEO’s statement that certain investments had “fallen short” was sufficiently “corrective” and revealing of a prior fraudulent statement regarding the Company’s investments in its sales team and customer success functions, finding that the alleged corrective disclosure was “oblique and nonspecific” and that plaintiffs therefore failed to establish a sufficient nexus to the alleged misstatements.
Because the Court held that plaintiffs failed to sufficiently allege a primary violation of Section 10(b), it similarly dismissed the derivative Section 20(a) control person claims. The Court granted plaintiffs leave to amend.
