Carbonite launched a data backup product in October 2018. It withdrew the product from the market in July 2019 after it could not remedy flaws in the program. Investors claimed the officers publicly touted the product’s prospects even they knew it did not work.
The lower granted a motion to dismiss the case, concluding the plaintiff had failed to plead scienter sufficiently.
The appeals court reversed. Record evidence showed the officers made unequivocal statements to investors and analysts that it was a “super-strong” product” that would make the company “extremely” competitive. These were not projections of hoped-for future performance. They were flat-out claims about the product as it then stood.
WHY THIS IS IMPORTANT… To state a viable claim, the plaintiff must adequately plead six elements: (1) a material misrepresentation or omission; (2) scienter; (3) a connection with the purchase or sale of a security; (4) reliance; (5) economic loss; and (6) causation. The question here was the second element. The appeals court said the pleading was adequate.
Some of the statements plausibly conveyed at least three facts: first, that the officer believed the product to be wholly competitive and super strong; second, that his opinion reasonably aligned with the information he possessed at the time; and third, his opinion was based on the type of reasonable inquiry that an investor would expect to have been made.
The bottom line to this decision is that even though the standards for alleging securities fraud have increased, facts that indicate that statements of fact made were untrue or should have been known to be false when made will still support a claim of securities fraud.