I don’t know how many readers follow Lyle Roberts’s The 10b-5 Daily blog, but if you are not following it, you should. When Lyle posts a new item, it is always interesting. In his latest post, Lyle discusses a recent federal district court decision in which the court confronted the question whether a company’s description of a legal matter as “without merit” could be the basis of a misrepresentation claim under the federal securities laws. Because this is such an interesting question, and because companies routinely describe lawsuits to which they are subject as being “without merit,” I discuss the decision below.

Lyle’s July 25, 2023, post about the decision on The 10b-5 Daily blog can be found here. A copy of the District of Massachusetts court’s July 24, 2023, decision in City of Fort Lauderdale Police and Firefighters’ Retirement Systems v. Pegasystems, Inc. can be found here.


Pegasystems (Pega) provides software solutions that allow customers to build applications for their business. Appian Corporation is one of Pega’s competitors. In 2020, Appian sued Pega in Virginia state court alleging that Pega had misappropriated Appian’s trade secrets. Among other things, Appian alleged that Pega, acting through individuals that Pega referred to as “spies,” had obtained access to or information about Appian’s business products and processes. Appian alleged that Alan Trefler, Pega’s CEO, was directly involved in the efforts to obtain Appian’s trade secrets. Following trial, a jury found that Pega had misappropriated Appian’s trade secrets and found Pega liable for over $2 billion in damages.

Following the entry of judgment in the Virginia action, a plaintiff shareholder filed a securities class action lawsuit in the District of Massachusetts in which the plaintiff alleged that Pega, Trefler, and Kenneth Stillwell, Pega’s CFO, had misled investors with respect to the Virginia action. The plaintiff alleged that the defendants had misled investors by saying that Appian’s claims were “without merit,” and in statements the company had made in which the company promised never to misappropriate trade secrets. The defendants filed a motion to dismiss.

The July 24, 2023, Opinion

In his July 24, 2023, Judge William G. Young, denied the motion as to defendants Pega and Trefler, but granted the motion as to defendant Stillwell. In denying the motion as to defendants Pega and Trefler, Judge Young said that “The facts alleged in the complaint raise a strong inference that Trefler was aware of, involving in, and directed Pega’s corporate espionage against Appian. Moreover, Trefler knew or was reckless in not knowing that Pega’s promise not to misappropriate trade secrets and his assurance that Appian’s claims were ‘without merit’ posed a substantial danger to mislead investors.” However, Judge Young also concluded that the plaintiff’s allegations were insufficient to establish scienter as to defendant Stillwell.

With respect to the question whether or not the statement that the Appian claims were “without merit,” Judge Young said that given the way the full statement was phrased, “a reasonable investor could justifiably have understood Trefler’s message that Appian’s claims were ‘without merit’ as a denial of the facts underlying Appian’s claims – as opposed to a mere statement that Pega had legal defenses against those claims.”

Judge Young’s analysis of the question whether Pega’s commitment, in its Code of Conduct, that it “never use illegal or questionable means to acquire a competitor’s trade secrets or other confidential information” is actionable is particularly interesting. Pega had sought to dismiss the allegations relating to the statement on the grounds that the Code of Conduct statement was merely “aspirational.”

Judge Young rejected the argument that it was “aspirational,” saying that “instead, it describes a specific course of conduct that Pega promised to abjure.” Not only did the company follow this course of conduct, notwithstanding the Code of Conduct statement, but the participants in the conspiracy were not punished but rather were rewarded through cash bonuses. The allegations were sufficient, Judge Young said, to establish that Pega’ senior executives orchestrated the conspiracy “while fostering a corporate culture that promoted and harbored precisely the kind of behavior that Pega promised investors it would prohibit.”


I am glad that Lyle Roberts drew attention to this case in his blog post. The underlying issues are very interesting to me, because at the outset of legal actions, companies routinely issue statement that it believes the actions are “without merit.” It is a form of ritual incantation, like the way lawyers preparing to speak in the courtroom will open their statements by saying “May it please the court.” It is, and I think is often perceived to be, a formulaic response, part of the standard package of things that companies are expected to do and say when addressing the existence of a new legal matter.

However, Judge Young’s opinion underscores that while the statement can be, or at least can take the form of, a ritualistic statement, that does not mean that it is entirely without significance. To the contrary, Judge Young’s opinion shows that a company may not, without incurring potential liability under the securities, publicly claim that a legal matter is “without merit,” if the company’s senior executives are in fact aware that it the matter has merit.

This conclusion does not mean, as Judge Young put it, that companies must “confess to wrongdoing.” Companies may, Judge Young said, “legitimately oppose a claim against it.” Companies may state, without being misleading, that they intend to “oppose” the allegations. Companies may also say, for example, that the company believes it has “substantial defenses” against a claim if it reasonably believes that to be true. An issuer may not, Judge Young said, make misleading substantive declarations regarding its beliefes about the merits of the litigation. Here, Judge Young said, Trefler and Pega categorically denied that Appian’s claims had any merit – despite possessing substantial information about the viability of these claims. Trefler and Pega’s opinion statement that that Appian’s claims were “without merit” were, therefore, “misleading.”

Judge Young’s analysis with respect to the Code of Conduct abjuration against illegal conduct is also interesting. Securities class action plaintiff’s counsel routinely scour corporate expressions of purpose, of conduct, or of ethics, to try to find statements that are contrary to subsequent corporate conduct, in order to try to support allegations that the statements misled investors. Court’s often reject these kinds of allegations on the grounds that the statements are expressions of aspiration rather than concrete commitments of corporate conduct.

However, in this case, Judge Young rejected the defendants’ arguments that the Code of Conduct statements were merely aspirational; the statement he found stated with specificity the conduct the company foreswore, while engaging in precisely the foresworn conduct. Judge Young’s ruling underscores that it is not enough for companies to publish fine words, if where the words are contrary to actual corporate practices.

Just about every aspect of this situation is a cautionary tale. Judge Young’s opinion is a harsh reminder that what companies say about legal matters is important, and that what is said can lead to its own set of problems.