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Northern District Of California Denies In Part Motion To Dismiss Securities Class Action Against Cloud Software Company
03/03/2026On February 23, 2026, Judge P. Casey Pitts of the United States District Court for the Northern District of California denied in part a motion to dismiss a securities fraud putative class action against a cloud-based call center operation software company (the “Company”) and two of its officers—its CEO and former CFO (the “Individual Defendants”)—alleging violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the “Exchange Act”), and Rule 10b-5 promulgated thereunder. Lucid Alternative Fund, LP v. Five9, Inc., No. 24-cv-08725-PCP (N.D. Cal. Feb. 23, 2026). In denying in part defendants’ motion to dismiss the amended complaint, the Court held that plaintiffs adequately pled falsity and scienter for certain alleged misstatements regarding the Company’s revenue guidance leading up to the Company’s Q2 2024 announcement reducing the Company’s revenue guidance and subsequent stock price drop. The Court did, however, dismiss the remaining alleged misstatements and omissions.
According to the amended complaint, the Company sells subscription-based software for the operation of remote, cloud-based call centers. Because the Company does not earn revenue for new sales until its product is implemented and a call center is operational, plaintiffs alleged that defendants would have a “very clear picture” of future revenue streams months in advance. Plaintiffs alleged that on February 21, 2024, the Company issued revenue guidance for 2024 of 16% revenue growth, which included an expectation of acceleration in growth during the second half of the year. Defendants allegedly reaffirmed this guidance on earnings calls and at conference in June 2024. Plaintiffs also allege that on August 8, 2024, in announcing its second quarter 2024 results, the Company reduced its annual revenue guidance to 12.2% without any accelerated growth in the second half of the year. This allegedly caused the Company’s stock price to drop and plaintiffs brought this action, alleging various misstatements.
The Court organized the alleged misstatements into three categories: (1) statements touting the Company’s revenue guidance and growth projections for two business streams—its net new sales and existing customer base; (2) statements regarding the Company’s AI products and implementation capabilities; and (3) risk disclosures made in regulatory filings, earnings calls, and investor conferences.
Addressing falsity with respect to the alleged revenue guidance misstatements, the Court first held that plaintiffs failed to plead with particularity that the February 2024 revenue guidance statements were false or misleading when made. However, the Court held that plaintiffs adequately pled falsity as to defendants’ June 2024 statements reaffirming the Company’ 2024 revenue guidance. Specifically, the Court credited allegations from former employees that the CEO admitted in April 2024 that there was “significant underperformance in Q1 toward meeting the Company’s projections,” and in May 2024 acknowledged that the business was “struggling” due to macroeconomic headwinds affecting both new and existing business sales. The Court held that these alleged admissions, combined with allegations regarding budget cuts, a hiring freeze, and internal data undercut defendants’ “full-throated recommitment” to the revenue guidance and plausibly suggested that defendants told investors the Company remained on track while internally recognizing it was falling short. For the same reasons, the Court rejected defendants’ argument that the statements reaffirming the revenue guidance were inactionable corporate puffery.
The Court also held that plaintiffs adequately pled falsity as to defendants’ alleged statements in June 2024 that macroeconomic factors impacted only the Company’s existing customer base, and not its net new business. In so holding, the Court noted that statements allegedly made by the Company’s CEO admitting that macroeconomic headwinds had “negatively affected both new business and existing business sales,” and that former employees recorded macro-related explanations for failed new business leads in the Company’s system, sufficiently demonstrated that defendants’ statements that macroeconomic factors did not impact the net new business were false or misleading when made.
The Court held that plaintiffs failed to plead falsity with respect to the remaining two categories of alleged misstatements. As to the alleged statements touting the Company’s AI products and implementation capabilities, the Court first held that general statements touting the Company’s “leadership in AI” as “a big differentiator” were inactionable puffery. The Court also held that plaintiffs failed to plead with particularity that statements about the Company’s AI products being a driver of enterprise deals were false, finding that former employee allegations were conclusory or too limited to establish on “a company-wide basis” that the Company was not winning enterprise deals at least in part due to its AI offerings. Finally, the Court held that plaintiffs failed to adequately allege that defendants’ risk disclosures were false because either the alleged risks had not yet materialized when the disclosures were made, or the disclosures did not actually identify any specific risks.
Turning to scienter, the Court held that plaintiffs adequately pleaded the requisite mental state as to both Individual Defendants. The Court found that plaintiffs’ allegations regarding the CEO’s admissions acknowledging underperformance and macroeconomic impacts on new business were sufficient to establish a strong inference of deliberate recklessness or intent. As to the former CFO, the Court conducted a holistic review and held that plaintiffs adequately alleged he had access to information contradicting the Company’s public statements, including presentations showing the Company was behind on sales projections, and monthly reports sent directly to him showing year-over-year revenue stagnation below Company expectations. The Court also found that the Individual Defendants’ alleged statements touting their “great visibility” into the Company’s sales data bolstered the inference that they knew of the circumstances about which they later made allegedly false statements. Finally, the Court held that the “core operations” doctrine supported scienter, given that revenue guidance and sales trends for the Company’s software were central to the Company’s operations.
Having found plaintiffs adequately pleaded an underlying Section 10(b) claim, the Court permitted plaintiffs’ Section 20(a) control-person liability claims to proceed as to the Individual Defendants.
