• Southern District Of New York Grants Motion To Dismiss Securities Class Action Against Former Officers Of Business Communications Company

  09/15/2026

  On September 1, 2026, Judge Paul G. Gardephe of the United States District Court for the Southern District of New York granted a motion to dismiss a putative securities fraud class action against the former CEO and former CFO of a business communications company (the “Company”), 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.  Jiang v. Chirico, et al., No. 23 Civ. 1258 (S.D.N.Y. Sept. 1, 2026).  In dismissing the complaint, the Court held that plaintiff failed to plead any actionable misstatement or omission and further failed to sufficiently allege a strong inference of scienter.

  According to the complaint, the Company began transitioning from a traditional office hardware business into a subscription-based software company.  Plaintiff alleged that this transition strategy was “doomed to fail,” and defendants knew that the Company was not on track to meet its third-quarter and fiscal year 2022 guidance.  Plaintiff alleged that, during the putative class period, from May 10, 2022, through December 15, 2022, defendants issued more than twenty false or misleading statements touting (i) the strength and momentum of the Company’s new business model, (ii) the Company’s path to $1 billion in annualized recurring revenue, (iii) its ability to address $350 million in convertible notes coming due in June 2023, and (iv) the effectiveness of its disclosure controls.  Plaintiff further alleged that two confidential witnesses described steep discounts, short-duration subscription contracts with poor margins, and internal emails in which finance personnel warned that revenue projections rested on dubious assumptions.  The complaint further alleged that a whistleblower letter sent to the board in July 2022 accused senior management of fraud.  Plaintiff alleged that the truth emerged through a series of disclosures, including (i) a July 2022 announcement that prior guidance should no longer be relied upon and that the CEO was being removed, (ii) an August 2022 disclosure of substantial doubt about the Company’s ability to continue as a going concern, and (iii) November and December 2022 disclosures regarding ineffective internal controls and the Company’s confidential lender presentations, each of which allegedly caused the Company’s stock price to decrease.

  The Court first examined whether the alleged revenue-related statements were false or misleading, and held that a reasonable investor would have understood the statements addressed long-term financial performance that was tied to the lifespan of the new recurring contracts, not the Company’s expected third-quarter results.  The Court also held that alleged statements concerning future revenue but allegedly omitting “declining pipeline of existing legacy customers” were not false or misleading when made because the complaint did not provide any data as to the number of existing legacy customers before, during, or after the statements were made.  The Court further held that the alleged confidential witness accounts were insufficient, noting that neither of the confidential witnesses were alleged to have communicated with defendants, and that one witness’s “ipse dixit” alleged assertion that the new revenue model made forecasting impossible “merely repeats” the allegations set forth in the complaint and were insufficient to establish falsity.  With respect to the alleged statements regarding the $350 million in convertible notes coming due and whether the Company would be in position to address them, the Court held that plaintiff did not adequately allege that the statements were false and misleading as to whether the Company would meet its projections.  The Court likewise found insufficient alleged misstatements discussing the portion of the Company’s legacy customer installed base that migrated to the cloud platform on the same basis, holding that plaintiff “must demonstrate with specificity why and how” each statement is false.  Finally, the Court held that plaintiff did not adequately allege that statements regarding the Company’s disclosure controls and procedures—including that they were “effective . . . to provide reasonable assurance” that information required to be disclosed would be disclosed—were false when made, and that in any event, such statements were too general to cause a reasonable investor to rely upon them.

  The Court next addressed whether the alleged statements were subject to the PSLRA Safe Harbor.  The Court held that statements about the Company’s projected revenue and solvency were forward-looking because the accompanying cautionary language “did more than refer to the most general of economic risks” and identified the principal contingencies that could cause results to depart from the projections.  The Court determined that the former CEO’s alleged statements about the Company’s “successful[]” repositioning, strength, momentum, and progress were “too general to cause a reasonable investor to rely upon them” and therefore constituted non-actionable puffery. 

  Turning to scienter, the Court held that plaintiff failed to plead facts sufficient to demonstrate motive.  Specifically, the Court held that the alleged motives—securing financing, holding off insolvency, and inflating the stock price to increase stock-based compensation—were the types of motives possessed by most corporate officers.  The Court noted that the inference of scienter was “especially weak” because neither defendant was alleged to have sold shares during the putative class period.

  The Court then addressed the core operations doctrine, determining that it could not support an inference of scienter because the complaint did not allege that the former CEO received certain email communications regarding alleged inflated revenue projections.  The Court likewise held that allegations that the former CFO had access to sales reports and customer spreadsheets were insufficient, as neither confidential witness allegedly identified what specific contradictory information defendants received or when.  The Court similarly rejected allegations that whatever information was provided to the former CEO “presumably made its way to” the former CFO as vague and conclusory.  The Court also determined that later audit committee findings, the executives’ departures, and the unsubstantiated whistleblower letter did not support a finding fraudulent intent.  

  The Court separately dismissed the scheme liability claim pursuant to Rules 10b-5(a) and (c), holding that such claims were premised on the same alleged misstatements, that plaintiff failed to plead distinct inherently deceptive acts, and that any such claims failed for lack of scienter.

  Having found that plaintiff failed to adequately plead an underlying violation of the securities laws, the Court dismissed plaintiff’s control person liability claim under Section 20(a).  The Court granted leave to move to amend, directing that any motion be filed by September 30, 2026.

  Categories: Control Person Liability,  Exchange Act,  Falsity,  Misstatement/Omission,  Scheme Liability,  Scienter
  

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