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Northern District Of California Grants In Part And Denies In Part Motion To Dismiss Putative Securities Class Action Against Voice-Recognition Technology Company
06/09/2026On May 19, 2026, Judge Rita F. Lin of the United States District Court for the Northern District of California granted in part and denied in part a motion to dismiss a putative securities fraud class action against a voice-recognition technology company (the “Company”), and its CEO and 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. St. John Family Trust, et al. v. SoundHound AI, Inc., et al., No. 25-cv-02915 (N.D. Cal. May 19, 2026). The Court held that plaintiffs adequately pled falsity, scienter, and loss causation as to four alleged representations regarding the Company’s remediation of internal control issues but failed to adequately plead falsity or materiality as to the remaining alleged misrepresentations.
According to the complaint, throughout 2024, the Company allegedly disclosed in its SEC filings material weaknesses in its internal controls and described specific remediation efforts that it had allegedly already undertaken. Plaintiffs alleged that the Company filed a Form 12b-25 in which it announced a delay in filing its 2024 Form 10-K, attributing the delay to the “complexity of accounting” for recent acquisitions—including its August 2024 acquisition of an artificial intelligence company (the “Acquired Company”)—and continuing internal control weaknesses. The complaint alleges that, one week later, the Company filed its 2024 10-K, in which it restated certain financials and allegedly revised its prior account of the progress of its internal control remediation efforts. Plaintiffs further alleged that the Company made several materially false representations about its completed remediation steps, such as having “[c]ompleted a segregation of duties assessment identifying key conflicts and mitigating controls,” which plaintiffs alleged were false when made. Plaintiffs alleged that the truth was revealed by the Company’s delay and late filing of its Form 10-K—which allegedly caused the Company’s stock price to decline.
The Court first addressed the issue of falsity as to six alleged representations concerning the Company’s internal control remediation efforts. The Court held that four of those representations—relating to (i) the completion of a segregation of duties assessment, (ii) the implementation of an automated month- and quarter-end accounting close workflow tool, (iii) the absence of material changes to internal controls during Q3 2024, and (iv) the Individual Defendants’ Sarbanes-Oxley Act (“SOX”) certifications regarding disclosure of such changes—were sufficiently alleged to have been false when made. The Court held that each of the four purported representations was either expressly contradicted by the 2024 10-K or by the confidential witnesses’ alleged descriptions of the Acquired Company’s manual (rather than automated) accounting processes. However, the Court determined that two other alleged misrepresentations—concerning (i) the initiation of an automated segregation of duties tool and (ii) the hiring of personnel with expertise in risk assessment and internal controls—were not sufficiently alleged to be false, because nothing in the 2024 10-K or the confidential witnesses’ alleged accounts contradicted them.
Turning to scienter, the Court held that plaintiffs adequately pled a strong inference of scienter as to the four surviving alleged misrepresentations. The Court reasoned that the Individual Defendants’ SOX certifications when combined with the disclosures supported a reasonable inference that the Individual Defendants were personally and actively involved in the remediation efforts they described to investors. The Court emphasized that the Company was not alleged to be a multinational conglomerate with numerous management layers between the Individual Defendants and the remediation team, and that one confidential witness alleged the CEO personally approved vendor invoices, reflecting a “sufficiently flat management structure.” While acknowledging that SOX certifications alone are insufficient to raise a strong inference of scienter, the Court held that plaintiffs’ allegations went further and permitted a strong inference that the Individual Defendants knew the alleged misrepresentations were false when made.
The Court then addressed loss causation, finding that plaintiffs adequately alleged loss causation as to the Form 12b-25 disclosure even though that filing did not directly reveal the alleged fraud. The Court reasoned that the disclosure of the delayed 10-K, coupled with the acknowledgment of continuing material weaknesses, “permits a reasonable inference that, at the time of the disclosure, the company’s internal control weaknesses were severe enough to contribute to” the delay, and thus did not “speak to different things” than the subsequent 10-K disclosures. Relying on the Ninth Circuit’s decision in Lloyd v. CVB Fin. Corp., the Court further held that the modest stock price decline following the 10-K filing—approximately 0.35%—coupled with the larger decline following the Form 12b-25 disclosure of over 5%, was consistent with the market having absorbed the suggestive information at the earlier date. The Court rejected the Company’s argument that a “quick and sustained price recovery” following a “modest” drop precludes loss causation, observing that the stock price closed below the pre-disclosure level nearly every day for over two months following the allegedly corrective disclosure.
The Court separately held that plaintiffs failed to adequately plead falsity or materiality as to the restated financial line items concerning the Company’s acquisition. The Court explained that although restated line items are “[o]rdinarily … per se false,” the restated items at issue were non-actionable statements of opinion reflecting subjective estimates of goodwill and the fair value of assets acquired and liabilities assumed, and that plaintiffs therefore failed to allege that the Individual Defendants did not hold the beliefs they professed. The Court further held that the statements were neither quantitatively material nor qualitatively material because they reflected only a 2.88% net improvement to the Company’s overall financial position, below the 5% threshold under SEC Staff Accounting Bulletin No. 99, and because plaintiffs did not show why “collectively minor errors” in accounting for the Acquired Company’s assets and liabilities would influence investors’ perceptions of the acquisition.
