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Northern District Of California Grants Motion To Dismiss Securities Fraud Claim Against Ridesharing Company
01/31/2025On January 16, 2025, Judge Trina L. Thompson of the United States District Court for the Northern District of California granted a motion to dismiss a securities action asserting claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the “Exchange Act”) and Rule 10b-5 against a ridesharing company (the “Company”) and its Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”). Chen v. Lyft, Inc., et al., No. 24-cv-01330-TLT (N.D. Cal. Jan. 16, 2025). Plaintiff claimed that defendants fraudulently misstated the Company’s earnings forecast and failed to correct the misstatement quickly enough. The Court held that (i) the alleged misstatements were inactionable forward-looking statements, (ii) plaintiff in any event failed to allege scienter despite purporting to support its allegations with expert opinions, and (iii) defendants’ update was sufficiently quick to discharge any claimed duty to update even though there is an open question as to whether such a duty exists. On this basis, the Court dismissed the action with leave to amend.
Plaintiff alleged that defendants’ press release on February 13, 2024, issued at 4:05 p.m. EST, projected an adjusted EBITDA margin expansion “of approximately 500 basis points year-over year [sic]” for the 2024 fiscal year. By 4:30 p.m. EST, the Company’s stock price had risen by 67%, trading at $17.95 per share. At 4:47 p.m. EST, according to plaintiff, the CFO stated on a conference call that the Company anticipated an adjusted EBITDA margin expansion of “50 basis points,” which was “a correction from the Press Release.” After the CFO’s correction, the Company’s stock allegedly reversed course and traded at $12.92 per share. At approximately 6:02 p.m. EST, the Company allegedly issued a corrected press release. Plaintiff claimed that the first press release was a misstatement and that defendants failed to discharge an alleged duty to update once they realized the projection was incorrect.
In dismissing the complaint with leave to amend, the Court first held that the Company’s statement about its anticipated financial growth for the year was forward-looking, observing that plaintiff’s complaint “fail[ed] to allege any facts demonstrating how a statement about [the Company]’s anticipated Adjusted EBITDA contained an express or implied concrete assertion concerning a specific current or past fact.” The Court further held that the statement was inactionable under the safe harbor provision of the Private Securities Litigation Reform Act because it was accompanied by meaningful cautionary statements, including, for example, warnings about the macroeconomic environment and the impact of the COVID-19 pandemic.
The Court also held that plaintiff’s complaint failed to allege that defendants acted with the requisite scienter. In attempting to plead scienter, plaintiff included allegations from an expert witness who opined that at least one analyst would have been surprised by the Company’s announcement and reached out to the Company for clarification. While the Court acknowledged some “authority” permitting plaintiffs to rely on expert opinions to state a securities claim, it held that such allegations must satisfy the same standards applied to confidential witnesses. According to the Court, this means “the expert’s opinion must (1) be described with sufficient particularity to establish the expert’s reliability and personal knowledge; and (2) themselves be indicative of scienter.” The Court held that the complaint did not meet this standard. The Court also rejected plaintiff’s attempted reliance on the core operations theory which relies on the presumption that “corporate officers have knowledge of critical core operations of their companies,” holding that the theory only applies, if at all, when accompanied by “specific admissions by one or more corporate executives of detailed involvement in the minutia of a company’s operations.” Finally, the Court was unpersuaded by plaintiff’s argument that defendants had a duty to correct the misstatement sooner than it did. The Court observed that whether a duty to correct exists is an open question of law that it did not need to resolve because plaintiff failed to allege why the correction, which was issued 42 minutes after the publication of the press release, was not made within a reasonable time. In reaching this conclusion, the Court cited to a case in which an update provided six weeks after the alleged misrepresentation was sufficient to discharge a duty to update even assuming such an obligation exists.
Because the Court found that plaintiff failed to plead a primary Section 10(b) claim, the Court also dismissed plaintiff’s secondary 20(a) control person claim. However, the Court granted plaintiff leave to amend its complaint.
