We are all used to seeing securities class action lawsuit alleging that the defendants made misrepresentations or omissions in SEC filings, press releases, or in public statements. But how about in a corporate blog post? In a very interesting December 23, 2015 opinion in the Rocket Fuel securities class action lawsuit in which she mostly granted the defendants’ motions to dismiss, Northern District of California Judge Phyllis Hamilton held that certain allegedly misleading statements made in a post on the company’s website were actionable under the federal securities laws. Judge Hamilton’s opinion also includes a number of interesting conclusions about individual and corporate scienter, and loss causation. Her opinion also addresses interesting Securities Act pleading issues in light of the U.S. Supreme Court’s 2015 opinion in the Omnicare case. Judge Hamilton’s opinion can be found here.
As I noted in a prior post (here) discussing IPO-related securities class action lawsuit filings, on September 3, 2014 a plaintiff shareholder filed a securities class action lawsuit in the Northern District of California against Rocket Fuel, Inc., certain of its directors and officers and its offering underwriters. A copy of the complaint can be found here. The company completed its IPO on September 20, 2013. The company Is engaged in managing Internet marketing, which it accomplished by operating a media-buying platform across various video and social media.
The lawsuit alleges that while the company reassured investors that it could identify and manage threats to its model from bot-driven traffic, it was unable to eliminate ad fraud and bot traffic in its advertising campaigns. The complaint alleges that the company overstated its ability to manage bot-generated ad fraud and understated the seriousness of the problem. The company’s share price declined in early August 2014 when the company announced customer concerns about the company’s inability to identify and eliminate fraudulent ad traffic. The defendants moved to dismiss the complaint.
The December 23 Opinion
In her December 23, 2015 opinion, Judge Hamilton granted the defendants’ motion to dismiss in substantial part, but denied motions to dismiss as to the company and the Insider defendants with respect to one of the sets of allegedly misleading statements on which the plaintiff relied.
In considering the defendants’ motions, Judge Hamilton reviewed each of the eight groups of statements that the plaintiff claimed were misleading. She concluded that seven of the eight sets of statements were not misleading, and granted the motions to dismiss as to those statements. Because the plaintiffs’ allegations as to the underwriter defendants and the director defendants related only to one of more of the seven statements that she concluded were not misleading, Judge Hamilton granted dismissed the plaintiffs’ claims against the underwriter defendants and the director defendants.
However, Judge Hamilton did find that one statement on which the plaintiffs sought to rely was actionable. The statement was made in a November 6, 2013 post on the company’s website. The post stated that Rocket Fuel is “able to identify and eliminate all threats before a serving a single ad,” and that the company “undermines fraudulent practices and makes sure con artists always leave empty-handed.” Judge Hamilton said that “the words ‘all’ or ‘always’ serve to distinguish these statements form the remainder of the allegedly false/misleading statements contained in the complaint.”
The defendants attempted to argue that these marketing statements could not be actionable because the statements were, as Judge Hamilton described the defendants’ argument, “so over-the-top that no reasonable investor would have believed them.” Judge Hamilton said “the court knows of no authority for the proposition that a statement can be so clearly false that it should not be considered false or misleading.” She also noted that the defendants attempt to characterize the statements as mere “product marketing statements, when they are, she said, “more properly characterized as ‘factual statements regarding Rocket Fuel’s efforts to combat bot fraud.’” Judge Hamilton concluded that these statements in the November 6, 2013 website posting were false or misleading.
Judge Hamilton also concluded that the plaintiffs had adequately alleged scienter and loss causation. In concluding that the plaintiffs had adequately alleged scienter with respect to the Inside Defendants, she noted that the plaintiff had alleged that the defendants had “ultimate authority” over the statements in the blog post. Judge Hamilton also referenced again the defendants’ argument that the blog post statements were so “over-the-top” that no reasonable investor would rely on them, noting that “to the extent the defendants imply that a reasonable investor would know that the statement was not literally true, that implication also supports a finding that that the statements were made with scienter.” She added that the “core operations theory” (which allows a court to infer that facts critical to a business’s core operations are know to the company’s top officers) “further supports the court’s finding that the plaintiffs have adequately alleged scienter as to the Insider defendants.”
With respect to the question of the scienter of the company itself, the court rejected the defendants’ attempt to argue that the “corporate scienter” doctrine has been accepted in the Ninth Circuit only in “unusual cases,” concluding that in prior relevant cases the Ninth Circuit had “left open the possibility of alleging corporate scienter where the directors and officers were also implicated.” Because she concluded that the plaintiffs had adequately alleged scienter as to three Insider defendants, she also found that the plaintiffs had adequately alleged corporate scienter.
Judge Hamilton also found that the plaintiffs had adequately alleged loss causation, based on two public disclosures in which the company reported disappointing financial results, the second of which, the plaintiffs alleged disclosed that bot traffic was affecting their financial results. In reaching this conclusion, Judge Hamilton said , in reliance on Ninth Circuit precedent, that loss causation is “not to be decided in a 12(b)(6) motion to dismiss,” and that “loss causation becomes most critical at the proof stage.”
There was one further interesting part of Judge Hamilton’s opinion, relating to the Underwriter Defendants’ motion to dismiss the Securities Act claims that had been asserted against them. In opposing the Underwriter Defendants’ motion, the plaintiffs had attempted to rely on alleged misstatements from outside the Registration Statement, in reliance on the U.S. Supreme Court’s opinion in Omnicare in which the Court had said that a company’s representations need to be considered in “a broader frame.”
Judge Hamilton rejected this argument, saying that “plaintiffs stretch Omnicare too far in an apparent attempt to shoehorn their strongest argument (‘identify and eliminate all threats’) into all asserted claims.” She noted that the Court had said only that “an investor reads each statement within such a document, whether of fact or opinion, in light of all its surrounding text, including hedges, disclaimers, and apparently conflicting information.” Nothing, Judge Hamilton said, in Omnicare “endorses plaintiffs’ approach of importing statements into registration materials in order to state a Securities Claim.”
There are so many interesting elements to this opinion, but the part that is going to be of greatest interest to corporate executives is the news that they can be held personally liable under the federal securities laws for alleged misstatements in a post on the company’s website, even if they themselves did not personally make the statements in the post. Judge Hamilton’s opinion represents an unpleasant warning to corporate executives everywhere they can be held personally liable under the federal securities laws for statements in blog posts on their corporate website.
However, before anyone hits the panic button about potential liabilities for corporate blogging, it probably should be noted that there were some unusual facts surrounding the particular misleading statements in the post at issue. That is, the statement from the post that Rocket Fuel “makes sure the ‘bad actors’ always leave empty-handed” wound up being featured in a May 26, 2014 Financial Times article (here) that pointedly contrasted this statement with the high level of bot-driven hits in an ad campaign the company conducted for Mercedes, to which article the company issued a very energetic rebuttal (refer here). The Financial Times quotation of the statement heightened the statement’s significance and the way the newspaper referenced the statement probably helped persuade the court that it was misleading. (The newspaper said that with respect to findings about the Mercedes ad campaign that “the findings raise questions about Rocket Fuel’s assertions on its website.”) The specifics of this situation suggest to me that it might take some extra elements to convince a court that a particular marketing statement in a corporate blog post is actionable under the securities laws.
Judge Hamilton’s conclusions about scienter are also interesting. Judge Hamilton concluded that the plaintiffs had adequately alleged scienter as to the statements in the blog post with regard to the Insider Defendants based on the plaintiffs’ allegation that the individuals posses the “power and authority” to control the contents, which may be true, but I suspect that the individual defendants were not fully aware of the blog post content at the time. This seems at odd contrast to the U.S. Supreme Court’s specification in the Janus Capital case that only “maker of a statement” can be held liable under the securities laws for the statement.
I also find it surprising that Judge Hamilton concluded that the “core operations” theory supported her conclusion that plaintiffs had adequately alleged scienter as to the Individual Defendants. I happen to think blogs are awfully gosh darn important, but I have to say I find it a stretch to say that the blog on Rocket Fuel’s website is part of the company’s core operations. The plaintiffs here successfully convinced Judge Hamilton that blogs are not only important (a proposition with which I think we can all agree), but that they are a critical component of a company’s operations. I tip my hat to the plaintiffs for their success on this argument. As much as I like the conclusion that blogs are “core,” I have to say it kind of empties out the idea of “core operations.” I think it could be argued that if a blog on a company’s website is “core,” then just about everything a company does is “core” and then the whole theory ceases to have any meaning.
Judge Hamilton’s willingness to apply the “corporate scienter” doctrine to conclude that the plaintiffs had adequately alleged scienter as to the company is also interesting. The standard for applying the doctrine in the Ninth Circuit is, it could be argued, not as clear as in, say, the Second Circuit. The defendants, in fact, contended in oral argument that the Ninth Circuit has not adopted the corporate collective scienter doctrine. Judge Hamilton’s willingness to apply the doctrine in this case is for that reason noteworthy.
Judge Hamilton’s rejection of the plaintiffs’ attempt, based on the Omnicare decision, to try to support their Securities Act claims by relying on statements outside of the Registration Statement is also interesting. I thought at the time the Omnicare decision came down that there was a lot of language in the opinion that plaintiffs might find to be helpful. I think there is still the possibility for plaintiffs for a lot of mileage based on some parts of the opinion. But it is noteworthy here that Judge Hamilton was having none of the particular argument that the plaintiffs here were trying to make based on Omnicare.
In any event, the name of the game for securities class action plaintiffs is to try to find a way to live for another day, and so even though the judge found that seven out of the eight sets of supposed misrepresentations were not misleading, and even though the underwriter defendants and the director defendants have been dismissed from the case, this opinion goes down in the W column for the plaintiffs. It is also one of the more interesting opinions I have read in quite a while.
Special thank to the several loyal readers who sent me a copy of Judge Hamilton’s opinion.