Plymouth County Retirement Association v. Advisory Board Company
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Opinion
UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLUMBIA
PLYMOUTH COUNTY RETIREMENT : ASSOCIATION, on Behalf : of Itself and All Others Similarly Situated, : : Plaintiff, : Civil Action No.: 17-1940 (RC) : v. : Re Document No.: 18 : ADVISORY BOARD COMPANY, et al., : : Defendants. :
MEMORANDUM OPINION
GRANTING IN PART AND DENYING IN PART DEFENDANTS’ MOTION TO DISMISS
I. INTRODUCTION
The co-lead plaintiffs in this class action, the City of Atlanta Firefighters’ Pension Fund
and the City of Atlanta Police Officers’ Pension Fund, assert that The Advisory Board Company,
its Chief Executive Officer, Robert W. Musslewhite, and its Chief Financial Officer, Michael T.
Kirshbaum, violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 by issuing
a series of materially false and misleading public statements in 2015. Those statements
concerned Advisory Board’s acquisition of Royall & Company, and Royall’s post-acquisition
performance. According to Plaintiffs, Defendants publicly touted the Royall acquisition’s
success and Royall’s 2015 performance, knowing that the acquisition and Royall’s performance
were unlikely to meet the market’s expectations.
Defendants have asked this Court to dismiss Plaintiffs’ complaint. Defendants argue that
none of the challenged statements were materially false or misleading when made, even if the
statements were wrong in hindsight. Defendants further argue that to the extent their statements were materially false or misleading, Defendants did not possess the state of mind necessary to
hold them liable.
Having combed through Plaintiffs’ voluminous allegations and the relevant record
submissions, the Court agrees that most of Defendants’ statements were not false or misleading.
Plaintiffs’ challenge of these statements amounts to inactionable “fraud by hindsight.” On the
other hand, certain statements about Advisory Board’s projected 2015 revenues were rendered
misleading by Defendants’ failure to tell investors that shortly before the statements were issued,
key executives had left the company. For the reasons set forth in greater detail below, the Court
thus grants Defendants’ motion in part and denies it in part.
II. FACTUAL BACKGROUND
A. Advisory Board and Royall
During the Class Period, Advisory Board was a publicly traded consulting company “that
provided performance-improvement software and solutions to the healthcare and education
industries.” Am. Compl. (“FAC”) ¶ 18, ECF No. 16. 1 Advisory Board’s profits were driven by
its healthcare business. Id. ¶ 97 (referencing Advisory Board’s “core” healthcare business); Jan.
21, 2015 Advisory Board Prospectus at S-1 (noting that Advisory Board served over 3,900 health
care organizations and approximately 600 colleges and universities), Defs.’ Mem. Supp. Mot. to
Dismiss (“Defs.’ Mem.”) Ex. 4, ECF no. 18-5. 2 That said, Advisory Board’s higher education
1 In 2017, after the Class Period, Advisory Board ceased to be an independent public company. See id. 2 This prospectus and the other Exhibits cited in this Memorandum Opinion are explicitly referenced in Plaintiffs’ amended complaint. And “it is well-established that a court ‘may consider the full text of the SEC filings, prospectus, analysts’ reports and statements “integral to the complaint,” even if not attached, without converting the motion into one for summary judgment under Fed. R. Civ. P. 56.’” In re XM Satellite Radio Holdings Sec. Litig., 479 F. Supp. 2d 165, 174 n.8 (D.D.C. 2007) (quoting Bovee v. Coopers & Lybrand C.P.A., 272 F.3d 356, 360–61 (6th Cir. 2001)).
2 business was substantial: At the time of the Royall acquisition it had 700 unique clients with
annual revenue of $57,000 per client. FAC ¶ 37. The business “supported colleges and
universities in enrollment management; academic programming and student learning; faculty
recruitment and retention; student advising and success; alumni affairs and advancement; and
college and university operations.” Id. ¶ 33.
Royall was a consulting company focused on higher education. See id. ¶ 36. Royall
helped its college and university clients “strengthen[] [their] national reputations, broaden[]
student enrollment, improv[e] overall academic profiles, and enhance[] revenue.” Id. It
typically executed multi-year engagements, in which it would optimize clients’ enrollment
programs over time. See id. When it was acquired, Royall had 200 unique clients with annual
revenue of $400,000 per client. Id. ¶ 37. The nature of Royall’s model—comprehensive, high-
margin engagements with fewer clients—meant that client retention and development were
vitally important on a year-to-year basis. See id. ¶¶ 64–66.
On January 9, 2015, Advisory Board finalized its acquisition of Royall for approximately
$871 million; $750 million in cash and $121 million in Advisory Board stock. Id. ¶ 38. Of this
purchase price, approximately $660 million was attributed to Royall’s “goodwill.” 3 See id. ¶¶
38, 72. It was the largest acquisition in Advisory Board’s history. Id. ¶ 39. When Advisory
3 Goodwill is “[a] business’s reputation, patronage, and other intangible assets that are considered when appraising the business, esp. for purchase; the ability to earn income in excess of the income that would be expected from the business viewed as a mere collection of assets.” Goodwill, Black’s Law Dictionary (10th ed. 2014); see also Newark Morning Ledger Co. v. United States, 507 U.S. 546, 555 (1993) (describing goodwill as a company’s value “beyond the mere value of the capital, stock, funds, or property employed therein, in consequence of the general public patronage and encouragement which it receives from constant or habitual customers . . . .” (quoting Metro. Nat’l Bank of N.Y. v. St. Louis Dispatch Co., 149 U.S. 436, 446 (1893)).
3 Board announced the acquisition, it projected that Royall would produce $121 million to $124
million in revenue in 2015, on 15% to 18% growth from 2014 levels. Id. ¶ 40.
B. The Class Period 4
Based in part on information supplied by two confidential witnesses, Plaintiffs allege that
from January 21, 2015 through February 23, 2016 (the “Class Period”), id. ¶ 1, Defendants made
a series of false or misleading statements and omissions regarding Royall’s performance and its
integration into Advisory Board’s business. The touchstone of these allegations is that
Defendants knew of certain developments that would cause Royall to underperform its revenue
projections and fail to properly integrate with Advisory Board, at least in the short-term.
Plaintiffs claim that Defendants delayed revealing these developments to investors, which caused
Advisory Board’s stock prices to remain higher than they would have been if the market had full
information. When the other shoe dropped and the market caught wind of Royall’s problems,
Advisory Board’s stock price plunged. Before evaluating the merits of Plaintiffs’ amended
complaint, the Court will describe the relevant Class Period statements and events.
1. January 2015 Stock Offering
On January 20 and 21, 2015, Advisory Board filed a registration statement and two
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UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLUMBIA
PLYMOUTH COUNTY RETIREMENT : ASSOCIATION, on Behalf : of Itself and All Others Similarly Situated, : : Plaintiff, : Civil Action No.: 17-1940 (RC) : v. : Re Document No.: 18 : ADVISORY BOARD COMPANY, et al., : : Defendants. :
MEMORANDUM OPINION
GRANTING IN PART AND DENYING IN PART DEFENDANTS’ MOTION TO DISMISS
I. INTRODUCTION
The co-lead plaintiffs in this class action, the City of Atlanta Firefighters’ Pension Fund
and the City of Atlanta Police Officers’ Pension Fund, assert that The Advisory Board Company,
its Chief Executive Officer, Robert W. Musslewhite, and its Chief Financial Officer, Michael T.
Kirshbaum, violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 by issuing
a series of materially false and misleading public statements in 2015. Those statements
concerned Advisory Board’s acquisition of Royall & Company, and Royall’s post-acquisition
performance. According to Plaintiffs, Defendants publicly touted the Royall acquisition’s
success and Royall’s 2015 performance, knowing that the acquisition and Royall’s performance
were unlikely to meet the market’s expectations.
Defendants have asked this Court to dismiss Plaintiffs’ complaint. Defendants argue that
none of the challenged statements were materially false or misleading when made, even if the
statements were wrong in hindsight. Defendants further argue that to the extent their statements were materially false or misleading, Defendants did not possess the state of mind necessary to
hold them liable.
Having combed through Plaintiffs’ voluminous allegations and the relevant record
submissions, the Court agrees that most of Defendants’ statements were not false or misleading.
Plaintiffs’ challenge of these statements amounts to inactionable “fraud by hindsight.” On the
other hand, certain statements about Advisory Board’s projected 2015 revenues were rendered
misleading by Defendants’ failure to tell investors that shortly before the statements were issued,
key executives had left the company. For the reasons set forth in greater detail below, the Court
thus grants Defendants’ motion in part and denies it in part.
II. FACTUAL BACKGROUND
A. Advisory Board and Royall
During the Class Period, Advisory Board was a publicly traded consulting company “that
provided performance-improvement software and solutions to the healthcare and education
industries.” Am. Compl. (“FAC”) ¶ 18, ECF No. 16. 1 Advisory Board’s profits were driven by
its healthcare business. Id. ¶ 97 (referencing Advisory Board’s “core” healthcare business); Jan.
21, 2015 Advisory Board Prospectus at S-1 (noting that Advisory Board served over 3,900 health
care organizations and approximately 600 colleges and universities), Defs.’ Mem. Supp. Mot. to
Dismiss (“Defs.’ Mem.”) Ex. 4, ECF no. 18-5. 2 That said, Advisory Board’s higher education
1 In 2017, after the Class Period, Advisory Board ceased to be an independent public company. See id. 2 This prospectus and the other Exhibits cited in this Memorandum Opinion are explicitly referenced in Plaintiffs’ amended complaint. And “it is well-established that a court ‘may consider the full text of the SEC filings, prospectus, analysts’ reports and statements “integral to the complaint,” even if not attached, without converting the motion into one for summary judgment under Fed. R. Civ. P. 56.’” In re XM Satellite Radio Holdings Sec. Litig., 479 F. Supp. 2d 165, 174 n.8 (D.D.C. 2007) (quoting Bovee v. Coopers & Lybrand C.P.A., 272 F.3d 356, 360–61 (6th Cir. 2001)).
2 business was substantial: At the time of the Royall acquisition it had 700 unique clients with
annual revenue of $57,000 per client. FAC ¶ 37. The business “supported colleges and
universities in enrollment management; academic programming and student learning; faculty
recruitment and retention; student advising and success; alumni affairs and advancement; and
college and university operations.” Id. ¶ 33.
Royall was a consulting company focused on higher education. See id. ¶ 36. Royall
helped its college and university clients “strengthen[] [their] national reputations, broaden[]
student enrollment, improv[e] overall academic profiles, and enhance[] revenue.” Id. It
typically executed multi-year engagements, in which it would optimize clients’ enrollment
programs over time. See id. When it was acquired, Royall had 200 unique clients with annual
revenue of $400,000 per client. Id. ¶ 37. The nature of Royall’s model—comprehensive, high-
margin engagements with fewer clients—meant that client retention and development were
vitally important on a year-to-year basis. See id. ¶¶ 64–66.
On January 9, 2015, Advisory Board finalized its acquisition of Royall for approximately
$871 million; $750 million in cash and $121 million in Advisory Board stock. Id. ¶ 38. Of this
purchase price, approximately $660 million was attributed to Royall’s “goodwill.” 3 See id. ¶¶
38, 72. It was the largest acquisition in Advisory Board’s history. Id. ¶ 39. When Advisory
3 Goodwill is “[a] business’s reputation, patronage, and other intangible assets that are considered when appraising the business, esp. for purchase; the ability to earn income in excess of the income that would be expected from the business viewed as a mere collection of assets.” Goodwill, Black’s Law Dictionary (10th ed. 2014); see also Newark Morning Ledger Co. v. United States, 507 U.S. 546, 555 (1993) (describing goodwill as a company’s value “beyond the mere value of the capital, stock, funds, or property employed therein, in consequence of the general public patronage and encouragement which it receives from constant or habitual customers . . . .” (quoting Metro. Nat’l Bank of N.Y. v. St. Louis Dispatch Co., 149 U.S. 436, 446 (1893)).
3 Board announced the acquisition, it projected that Royall would produce $121 million to $124
million in revenue in 2015, on 15% to 18% growth from 2014 levels. Id. ¶ 40.
B. The Class Period 4
Based in part on information supplied by two confidential witnesses, Plaintiffs allege that
from January 21, 2015 through February 23, 2016 (the “Class Period”), id. ¶ 1, Defendants made
a series of false or misleading statements and omissions regarding Royall’s performance and its
integration into Advisory Board’s business. The touchstone of these allegations is that
Defendants knew of certain developments that would cause Royall to underperform its revenue
projections and fail to properly integrate with Advisory Board, at least in the short-term.
Plaintiffs claim that Defendants delayed revealing these developments to investors, which caused
Advisory Board’s stock prices to remain higher than they would have been if the market had full
information. When the other shoe dropped and the market caught wind of Royall’s problems,
Advisory Board’s stock price plunged. Before evaluating the merits of Plaintiffs’ amended
complaint, the Court will describe the relevant Class Period statements and events.
1. January 2015 Stock Offering
On January 20 and 21, 2015, Advisory Board filed a registration statement and two
prospectuses with the SEC, through which Advisory Board offered to sell several million shares
of stock. Id. ¶¶ 70–72. These materials appended Royall’s financial statements for the years
ended June 30, 2012, June 30, 2013, and June 30, 2014, and for the period between June 30,
2014 and September 30, 2014. Id. ¶¶ 41, 73. The financial statements reflected Royall’s
4 Plaintiffs’ amended complaint emphasizes, in bold and italics, many of Defendants’ statements that Plaintiffs claim are false or misleading. See, e.g., id. ¶¶ 89, 95, 107. The Court’s background summary omits these emphases for ease of reading.
4 revenue recognition practice described below, but Advisory Board’s filing did not explain that
practice to investors. Id. ¶ 74.
2. Fourth Quarter 2014
On February 11, 2015, Advisory Board issued a press release and held a conference call
to discuss its financial results for the fourth quarter of 2014. Id. ¶¶ 76–77. In the press release,
Advisory Board projected total 2015 revenues of $780 million to $800 million. Id. ¶ 76.
Advisory Board further projected that $125 million to $135 million of that revenue would come
from Royall. Id. During the conference call, Mr. Musslewhite touted the scalability of Royall’s
business model, stating that “[i]n general . . . Royall is a very high-margin business. We spent a
lot of time diligencing [sic] that to understand the sources of their margin power and how
sustainable they were.” Id. ¶ 78; Feb. 11, 2015 Earnings Call Tr. at 23, Defs.’ Mem. Ex. 6, ECF
No. 18-7. He also added, regarding the acquisition, that
in terms of culture, fit and integration, everything is going very well. John Nester, Royal & Company’s CEO, has been great to work with and his team is strong. Obviously, we’re only a few weeks in here, but there is a lot of positive momentum on both sides and we are confident that this combination is going to yield great success.
FAC ¶ 77. Mr. Kirshbaum echoed Mr. Musslewhite’s comments, but noted that “the revenue
synergies” and “cross-sell potential” of the Royall acquisition would not “have much impact in
calendar ‘15.” Defs.’ Mem. Ex. 6 at 23.
3. Early Royall-Related Issues
Soon after Advisory Board acquired Royall, cracks allegedly began to form in what
Defendants hoped would be a seamless integration of the two companies. First, Royall’s CEO
and CFO unexpectedly left Advisory Board in or around April 2015. FAC ¶¶ 45, 47, 49. A
former Royall Account Coordinator (“FE 1”) corroborates this development, stating that he
attended a meeting on April 15, 2015 during which the Royall CEO’s successor addressed
5 Royall’s employees for the first time. Id. ¶ 45. Plaintiffs claim that several other high-level
Royall employees, including the Chief Technology Officer, left around the same time. Id. ¶¶ 46,
Second, at some point, Advisory Board discovered a discrepancy between how Royall
accounted for its revenue before the acquisition and how Advisory Board would account for
Royall’s revenue after the acquisition. As a private company, Royall regularly delayed closing
its books for a given quarter so that it could recognize revenue for contracts for which work was
performed that quarter, but were not signed or otherwise executed until the next quarter. See id.
¶¶ 88, 95. 5 Advisory Board, as a public company, could not delay closing its books in the same
manner. Id. ¶¶ 88, 95. After the acquisition, Advisory Board corrected this discrepancy by
recognizing $2 million of revenue in third quarter, 2015 that Royall would have recognized in
second quarter, 2015. Id. ¶ 95. In other words, the revenue recognition difference was a timing
issue that resulted in revenue shifting from one fiscal period to the next but, importantly, did not
impact the amount of revenue that Advisory Board could ultimately recognize from Royall’s
work. See id. ¶¶ 88, 95.
4. First Quarter 2015
On May 5, 2015, Advisory Board issued a press release and held a conference call to
discuss its financial results for the first quarter of 2015. In the press release, Advisory Board
reaffirmed its earlier projection that total 2015 revenues would be $780 million to $800 million.
5 As Mr. Kirshbaum put it during the August 4, 2015 conference call: [S]omebody might have started doing work in May and it just took them a while to get the contract ready and the contract might have come in on July 20. And so for us, we’re not going to recognize revenue within the June period, but for them they would be able to catch the contracts they hadn’t closed yet and they would recognize that revenue in June. Id. ¶ 95.
6 Id. ¶ 80. It did not alter its previous Royall revenue projection. See May 5, 2015 8-K, Defs.’
Mem. Ex. 9 at 7, ECF No. 18-10. During the conference call, Defendant Musslewhite stated, in
part, that:
Royall & Company is obviously more recent than the other two [acquisitions], since the [Royall] acquisition only closed in January, and we always had a longer integration timeline planned when we acquired them, with the company running a little bit more independently initially. The good news here is that integration is moving more quickly than we had planned, and we are having some key early wins around introducing Royall’s world-class enrollment managed services to education advisory board members that have an acute need for enrollment services.
We expect to have more news as the year progresses, but early signs lead us to feel good about our future prospects for not only continued cross-selling of Royall solutions to EAB members and EAB programs to Royall members, but also key feature focused activity, such as joint new product development to provide more and more value to the industry around the student success lifecycle and deepen our relationships across our joint member base of the early [sic] 1,000 institutions. 6
Id. ¶ 81 (first two alterations in original). In response to an analyst’s question regarding
“temporary margin pressures on Royall,” Mr. Kirshbaum added:
I think initially we said the first year there was obviously not a great deal of cost synergy. Royall is a high-margin business. I don’t think we expect it to be anything other than that. We expect it to maybe be able to maintain its margins. But a lot of the synergies through revenue synergies would come in out years as we work together to pursue joint sales efforts, to penetrate cross-sell on both sides and develop new products off the platform. That was our expectation. We are pretty early, but those are proceeding as we would expect.
Id. ¶ 82. Finally, when asked if anything surprised him regarding Advisory Board’s internal
expectations for the first quarter compared to actual EBITDA and revenue numbers, 7 Mr.
Kirshbaum stated, in relevant part, that “I think we feel pretty good about pacing for the year, so
nothing surprising to us. . . . For us, we feel like we are definitely within the zone of pacing and
6 “EAB” stands for Education Advisory Board, Advisory Board’s higher education business unit. See id. ¶ 33. 7 EBITDA is a key financial metric: earnings before interest, taxes, depreciation, and amortization. See Earnings, Black’s Law Dictionary (10th ed. 2014).
7 feel pretty confident in our numbers for the year.” Id. ¶ 83. Finally, Mr. Musslewhite
emphasized the “excitement that we have around Royall and so much upside . . . .” Id. ¶ 84.
5. Royall’s Falling Client Retention Rates and Poor Cross-Selling
Advisory Board’s acquisition of Royall was motivated, in part, by the opportunity for
Advisory Board to cross-sell Royall’s clients on Advisory Board’s products. See id. ¶ 37.
According to Plaintiffs, however, it became apparent by June 2015 that Advisory Board’s cross-
selling attempts would be largely unsuccessful in 2015. Id. ¶¶ 61–68. FE 1 attributes this
struggle to Advisory Board’s aggressive sales tactics, which “teed off” Royall’s clients. Id. ¶¶
63–65. A second confidential witness (“FE 2”), a former Royall Senior Data Developer, id. ¶ 47,
proffered that Advisory Board “failed miserably” at hitting its sales targets, in part, because of
competition between Royall’s sales team and Advisory Board’s sales team. Id. ¶ 68.
Advisory Board’s aggressive sales tactics, Plaintiffs claim, also negatively impacted
Royall’s ability to renew its existing client contracts. Id. ¶ 66. As a result, according to FE 1,
Royall’s client retention rate dropped from its historic level of 95–97% to below 90% in 2015.
Id. As a Royall Account Coordinator responsible for fifteen accounts, FE 1 participated in
meetings and received emails in which the declining renewal trend was discussed. Id. He stated
that the client account group was “aware of [the trend] by the end of June 30, [2015,] because we
were talking actively about not hitting goals and things like that, and retention not looking as
good.” Id. ¶ 67. FE 1 could not unequivocally state that Advisory Board’s upper management
received the same information that he did, but he posited that “if people on my level were seeing
it, I imagine everybody above us saw [the information] too.” Id.
8 6. Second Quarter 2015
On August 4, 2015, Advisory Board issued a press release and held a conference call to
discuss its financial results for the second quarter of 2015. In the press release Advisory Board
slightly reduced the top end of its 2015 revenue guidance, from $800 million to $790 million.
See id. ¶ 87. Advisory Board did not mention its Royall revenue guidance in the press release,
see Aug. 4, 2015 8-K, Defs.’ Mem. Ex. 12, ECF No. 18-13, but Mr. Kirshbaum clarified during
the conference call that that the company reduced its top end projection “to account for the
impact of Royall performance,” Aug. 4, 2015 Earnings Call Tr. at 10, Defs.’ Mem. Ex. 13, ECF
No. 18-14.
During the conference call, Mr. Musslewhite for the first time discussed hiccups in the
Royall integration. FAC ¶ 88. He stated that “[t]he only exception to an otherwise strong start
to the year is Royall, where we were disappointed to see slower growth out of the gates than we
expected.” Id. This slower-than-expected growth, according to Mr. Musslewhite and Mr.
Kirshbaum, was attributable to three factors. First, “the [Royall] CEO and CFO chose to depart
earlier than expected, impacting sales and up-sells during a critical time and distracting the
organization.” Id. Put simply, “management turnover.” Id. ¶ 89. Second, Royall’s focus on the
acquisition and transition “took focus away from key commercial activities.” Id. ¶ 88. Put
simply, “[d]eal distraction.” Id. ¶ 89. Third, Advisory Board was required to recognize certain
revenues in the third quarter that Royall would likely have recognized in the second quarter
under its pre-acquisition practice. Id. ¶ 88. Put simply, “lost timing.” Id. ¶ 89. Royall’s lower-
than-expected sales and renewals would cause their revenues to “be below the low end of” the
company’s initial projection “by several million dollars,” on a single-digit growth rate. Defs.’
Mem. Ex. 13 at 12, 16.
9 Mr. Kirshbaum further clarified these hiccups. He noted that “the January through June
period is very busy for Royall as they help schools fill their classes before the May 1 deposit
deadline,” leading to new business and up-selling opportunities for the company. FAC ¶ 89.
The deal distraction and Royall departures “resulted in not capturing as many new clients or up-
sell opportunities as the prior years.” Id. Mr. Kirshbaum also noted that this impact—“fewer
new clients and less client expansion to renew”—would reduce Royall’s revenues for the
following twelve months, into 2016. Id.
Mr. Musslewhite discussed Royall’s management turnover in greater detail. He said that
before the Royall departures, Advisory Board “had a dialogue with [Royall’s management]
around a 5-year term” with a “strong incentive plan” and an oral commitment. Defs.’ Mem. Ex.
13 at 12. He also noted that Royall’s CEO and CFO were heavily involved in the company’s
business. They “had their hands very tightly controlled around if there was any sales
management, it was through those guys in terms of sitting on top of the business and steering the
bus . . . .” FAC ¶ 91. Royall’s “CEO was also personally involved in a lot of the up-sell and
cross-sell type conversations and had some relationships.” Id. Advisory Board was “surprised
by” their departure, Defs.’ Mem. Ex. 13 at 12, in “April, early May,” FAC ¶ 90.
Despite Royall’s underwhelming performance, Mr. Musslewhite put a positive spin on
the Royall integration. He emphasized that Advisory Board “remain[s] on track to deliver strong
overall performance as a company this year,” and that “we feel very good about the path forward
with Royall closely integrated into EAB and much more closely linked to our sales, renewals,
and new product development teams and processes.” FAC ¶ 88. He noted that the problems
discussed on the call “are all one-time issues and very addressable.” Id. “Overall,” according to
10 Mr. Musslewhite, “the integration plan is proceeding ahead of pace.” Id.; see also id. ¶ 101
(“Therefore we need to continue to execute on the integration plan.”).
Not only was the Royall integration plan proceeding ahead of schedule, according to Mr.
Musslewhite, but so was Advisory Board’s plan to cross-sell Royall’s customers. In response to
a question regarding the company’s cross-selling strategy, Mr. Musslewhite stated that “on all
sales-related activity we are in there and already yielding results.” Id. ¶ 102. He added further
that Advisory Board sales teams were “working closely with the Royall sales teams in terms of
relationship intelligence, in terms of teeing up cross-sell opportunities and in terms of actually
managing pipelines . . . .” Defs.’ Mem. Ex. 13 at 19. Noting that “[t]here’ve been a couple of
cross-sells already,” Mr. Musslewhite asserted that “if anything [the strategy] is probably on a
faster schedule than we might have anticipated at the beginning of the year.” Id. at 18.
In sum, Defendants acknowledged that multiple factors combined to cause Royall to
underperform in the first half of 2015. During Royall’s critical sales season, from January to
June, Royall’s employees were distracted by the Advisory Board acquisition and were less
focused on acquiring new customers and up-selling existing customers. And Royall’s CEO and
CFO, who were typically heavily involved in Royall’s sales, left the company just as the sales
season ramped up. While Mr. Musslewhite and Mr. Kirshbaum acknowledged that these factors
would likely cause Royall to underperform in the second half of 2015 and into 2016, they
asserted that Royall’s underperformance was a correctible, one-time event. They also asserted
that the Royall integration was on track overall, and that Advisory Board’s cross-selling strategy
was ahead of schedule and bearing fruit.
Immediately after the August 4, 2015 press release and conference call, Advisory Board’s
stock price fell 21%, from $59.36 per share to $46.99 per share. FAC ¶ 96. Analysts attributed
11 this drop, at least in part, to the Royall hiccups discussed on the August 4 call, including the
departure of Royall’s CEO and CFO. Id. ¶¶ 92–94, 97–99. As one market analyst put it,
“investors seemed to largely ignore the strength in the [company’s] core healthcare [practice]
and focus instead on the Royall sales weakness.” Id. ¶ 97.
7. Third Quarter 2015
On November 5, 2015, Advisory Board issued a press release and held a conference call
to discuss its financial results for the third quarter of 2015. In the press release Advisory Board
reaffirmed the 2015 revenue guidance issued in August: $780 million to $790 million. Id. ¶ 106.
During the conference call, Mr. Musslewhite doubled down on the positivity he expressed in
August regarding the Royall integration: “When I look at the degree of interaction between
multiple, different functional teams and the amount of collaboration across commercial, delivery,
technology and central functions like finance, HR and IT, it feels very much like Royall is just as
much a part of the Company as any other division.” Id. ¶ 107. Because Advisory Board was
“heavily focused on the organization integration efforts,” the company “remain[ed] both on track
to deliver [its] expectations for the year and optimistic about the long-term potential about the
combination of Royall and The Advisory Board.” Id.
8. Delayed Integration
Plaintiffs allege that Advisory Board did not begin integrating Royall in earnest until late
2015 or early 2016, despite Defendants’ positive statements through 2015 to the contrary. See
id. ¶ 52. For instance, FE 2 stated that Advisory Board and Royall employees were still using
separate email systems with separate contacts in early 2016. See id. ¶ 53. More importantly,
according to FE 2, the two companies maintained separate sets of student data through the end of
2015, such that their sales teams could not easily compare the two client rosters. See id. ¶ 55.
12 Instead, Advisory Board’s sales team was forced to manually request data from Royall’s team,
and vice versa. See id. ¶ 56. And through the end of 2015, the two companies used separate
Salesforce software to manage their client relationships. See id. ¶ 57. 8
FE 2 heard a rumor, from a Royall development manager who reported to the Royall
CFO, that “Advisory Board would be ‘basically hands off’ of Royall for the first year after the
acquisition.” Id. ¶ 58. Whatever the reason, FE 2 stated that Advisory Board and Royall “were
basically like two separate companies” throughout 2015. Id. ¶ 52.
9. Fourth Quarter 2015: The Corrective Disclosure
On February 23, 2016, Advisory Board issued a press release and held a conference call
to discuss its financial results for the fourth quarter of 2015. In the press release, Advisory
Board announced a net loss of $101.8 million for that quarter. See id. ¶ 110. The net loss was
“primarily attributable” to a $95.7 million reduction, or “impairment,” of Advisory Board’s
goodwill associated with Royall. Id. ¶¶ 110–111.
During the conference call, Mr. Musslewhite and Mr. Kirshbaum revealed the full extent
of Royall’s problems. Royall achieved 5% revenue growth in 2015, far lower than the 15% to
21% projected growth. See id. ¶ 112. Royall produced $118 million in revenue in 2015, lower
than the $125 million to $135 million projected revenue. See id. And Mr. Kirshbaum predicted
mid-single-digit revenue growth for Royall going forward. See id.
Immediately after the February 23, 2016 press release and conference call, Advisory
Board’s stock price fell another 27%, from $36.29 per share to $26.50 per share. Id. ¶ 118.
8 FE 2 was personally involved in integrating the two Salesforce systems, which did not occur until late 2015 or early 2016. Id.
13 Again, analysts attributed the stock drop to Advisory Board’s apparently poor returns on the
Royall acquisition. See id. ¶¶ 114–17. For instance, one analyst wrote:
The fact that Royall only generated $118M in revenue is painful enough; paying 7x revenue on any business is steep. That is beside the fact that the business is only growing mid-single digits. . . . The lack of a real answer here from management is about as big of a red flag as you can get.
Id. ¶ 115. 9
C. Procedural History
An Advisory Board shareholder, Plymouth County Retirement Association, filed the
current lawsuit in late 2017. See generally Compl., ECF No. 1. The Atlanta Pension Funds
thereafter secured the Court’s appointment as lead plaintiffs. See Mot. For Appointment As
Lead Pl. at 2, ECF No. 6; Order Appointing Lead Pl. at 1, ECF No. 9. Shortly after, Plaintiffs
filed the amended complaint on behalf of the proposed class. See generally FAC. They claim
that Defendants’ conduct described above violated Sections 10(b) and 20(a) of the Securities
Exchange Act, and SEC Rule 10b-5. See id. ¶¶ 133–42. In response, Defendants filed a motion
to dismiss, which is now ripe for the Court’s resolution. See Defs.’ Mot. to Dismiss, ECF No.
18.
III. LEGAL STANDARD
Section 10(b) of the Securities Exchange Act of 1934 provides that it shall be unlawful
“[t]o use or employ, in connection with the purchase or sale of any security registered on a
national securities exchange . . . any manipulative or deceptive device or contrivance in
9 Advisory Board increased its Royall goodwill impairment to $99.1 million in its 2015 Form 10-K, filed with the SEC on March 11, 2016. Id. ¶ 119. The company stated that “[t]he decrease in fair value of the reporting unit from the acquisition was due to reduced projected cash flow growth rates due in part to lower than expected first year performance and lower market derived multiples between the January 9, 2015 acquisition date and the October 1, 2015 goodwill impairment assessment date.” Id.
14 contravention of such rules and regulations as the [Securities and Exchange] Commission may
prescribe as necessary or appropriate in the public interest or for the protection of investors.” 15
U.S.C. § 78j(b). SEC Rule 10b-5 closely tracks Section 10(b), providing that, “in connection
with the purchase or sale of any security,” it is unlawful:
(a) To employ any device, scheme, or artifice to defraud,
(b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or
(c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person[.]
17 C.F.R. § 240.10b-5. And to state a claim under Rule 10b-5, a plaintiff must show:
(1) a material misrepresentation or omission by the defendant;
(2) scienter;
(3) a connection between the misrepresentation or omission and the purchase or sale of a security;
(4) reliance upon the misrepresentation or omission;
(5) economic loss; and
(6) loss causation.
Janus Capital Grp., Inc. v. First Derivative Traders, 564 U.S. 135, 140 n.3 (2011) (quoting
Stoneridge Inv. Partners, LLC v. Sci.-Atlanta, Inc., 552 U.S. 148, 157 (2008)); see also In re
Harman Int’l Indus., Inc. Sec. Litig., 791 F.3d 90, 99 (D.C. Cir. 2015). Section 20(a) is
derivative, subjecting to liability “[e]very person who, directly or indirectly, controls any person
liable under” another provision of the Securities Exchange Act or its implementing regulations.
15 U.S.C. § 78t(a).
“To survive a motion to dismiss, a complaint must contain sufficient factual matter,
accepted as true, to ‘state a claim to relief that is plausible on its face.’” Ashcroft v. Iqbal, 556
15 U.S. 662, 678 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). Although
a court need not accept a plaintiff’s legal conclusions, the court must assume the truth of all well-
pleaded factual allegations in the complaint and draw all reasonable inferences from those
allegations in the plaintiff’s favor. See Doe v. Rumsfeld, 683 F.3d 390, 391 (D.C. Cir. 2012).
In addition to these basic standards, “[s]ecurities fraud class actions must meet the higher,
exacting pleading standards of Federal Rule of Civil Procedure 9(b) and the Private Securities
Litigation Reform Act (PSLRA)” of 1995. Or. Pub. Emps. Ret. Fund v. Apollo Grp. Inc., 774
F.3d 598, 604 (9th Cir. 2014). Under Rule 9(b), a complaint must “state with particularity the
circumstances constituting fraud or mistake.” Fed. R. Civ. P. 9(b). The PSLRA further requires
that the complaint “specify each statement alleged to have been misleading [and] the reason or
reasons why the statement is misleading,” 15 U.S.C. § 78u-4(b)(1)(B), and “state with
particularity facts giving rise to a strong inference that the defendant acted with the required state
of mind,” id. § 78u-4(b)(2)(A) (emphasis added).
IV. ANALYSIS
Defendants have moved to dismiss Plaintiffs’ complaint on two grounds, which the Court
addresses in turn below. First, Defendants argue that Plaintiffs have failed “to allege that any
Defendant made a false statement or omission of material fact.” Defs.’ Mem. at 4. Second, they
argue that “Plaintiffs’ allegations do not offer a cogent inference of scienter as to any
Defendant.” Id. Defendants’ first argument succeeds in significantly reducing the number of
statements and omissions upon which Plaintiffs may rest their claims. Defendants’ second
argument, however, fails to dispose of those surviving statements and omissions. Plaintiffs’
action thus survives in part.
16 A. Defendants’ Alleged Material Misrepresentations
To state Section 10(b) and 20(a) claims, Plaintiffs must plausibly allege that Defendants
made at least one actionable material misstatement or omission. An actionable misstatement or
omission under Section 10(b) and Rule 10b-5 must be both false or misleading and material. See
Harman, 791 F.3d at 99–100, 108. A statement or omission is misleading if a reasonable
investor, reading the statement fairly and in context, would be misled. See Omnicare, Inc. v.
Laborers Dist. Council Constr. Indus. Pension Fund, 135 S. Ct. 1318, 1330 (2015). In addition,
the “statement or omission must have been misleading at the time it was made; liability cannot
be imposed on the basis of subsequent events.” In re NAHC, Inc. Sec. Litig., 306 F.3d 1314,
1330 (3d Cir. 2002) (citing In re Nice Sys., Ltd. Sec. Litig., 135 F. Supp. 2d 551, 586 (D.N.J.
2001)). A statement or omission is material if the stated information or omitted fact “would have
‘been viewed by the reasonable investor as having significantly altered the total mix of
information made available.’” Harman, 791 F.3d at 108 (quoting Halliburton Co. v. Erica P.
John Fund, Inc., 537 U.S. 258, 278 (2014)); see also Matrixx Initiatives, Inc. v. Siracusano, 563
U.S. 27, 38 (2011) (quoting Basic Inc. v. Levinson, 485 U.S. 224, 231–32 (1988)).
“‘[S]tatements of reasons, opinions or beliefs’ regarding material facts can be
actionable, even if these statements contain ‘conclusory terms [like “high” value and “fair],”’
because these terms, when used ‘in a commercial context[,] are reasonably understood to rest on
a factual basis that justifies them as accurate, the absence of which renders them misleading.’”
Howard v. Liquidity Servs., Inc., 177 F. Supp. 3d 289, 304 (D.D.C. 2016) (alterations in original)
(quoting Harman, 791 F.3d at 108–09). With respect to omissions, a defendant need not
immediately disclose to investors all material information. Rather, in general, “a company must
disclose information ‘when silence would make other statements misleading or false.’” Phelps v.
17 Stomber, 883 F. Supp. 2d 188, 211 (D.D.C. 2012) (quoting In re XM Satellite Radio Holdings
Sec. Litig., 479 F. Supp. 2d 165, 178 (D.D.C. 2007)). “The touchstone of the inquiry is . . .
whether [the] defendants’ representations or omissions, considered together and in context,
would affect the total mix of information and thereby mislead a reasonable investor regarding the
nature of the securities offered.” XM Satellite, 479 F. Supp. 2d at 178 (quoting Halperin v.
eBanker USA.com, Inc., 295 F.3d 352, 357 (2d Cir. 2002)).
Plaintiffs’ amended complaint quotes extensively from Defendants’ public statements
made throughout the Class Period. See generally FAC ¶¶ 70–119. The statements and
omissions that Plaintiffs allege were misleading during this period concern six topics: (1)
Royall’s pre-acquisition revenue recognition practice; (2) Advisory Board’s progress integrating
Royall; (3) Advisory Board’s efforts to cross-sell its products and services to Royall’s clients; (4)
Advisory Board’s decision to write down the value of Royall’s goodwill; (5) the departures of
Royall’s CEO and CFO shortly after the acquisition; and (6) Advisory Board’s 2015 revenue
guidance. Despite Plaintiffs’ voluminous allegations, the Court concludes that the only
actionable statements and omissions were those made on May 5, 2015, regarding Advisory
Board’s projected revenue.
1. Statements Regarding Royall’s Revenue Recognition Practice
As a private company, Royall recognized revenue in a different manner than Advisory
Board. Royall at times delayed closing its books for a given quarter so that it could recognize
revenue for contracts performed in that quarter, but which were not technically executed until
just after the next quarter began. See FAC ¶¶ 42, 95. Royall could not continue this practice as
the subsidiary of a public company—Advisory Board—with more stringent accounting
requirements. See id. ¶ 95. Mr. Kirshbaum explained this difference during the August 4, 2015
18 conference call. See id. He also stated that to reconcile the two practices, Advisory Board would
delay recognizing $2 million in revenue in quarter two, 2015 that Royall would have recognized
in that quarter. See id. Plaintiffs argue that Defendants’ failure to explain this difference in its
January, February, and May public statements were material omissions. See id. ¶¶ 74, 79, 85.
Plaintiffs’ claim arising from these alleged omissions fails for several reasons, chief
among them a lack of materiality. Plaintiffs assert that the omissions rendered misleading
Advisory Board’s release of Royall’s past financial statements, see FAC ¶¶ 73–74, and Advisory
Board’s 2015 revenue guidance, see id. ¶¶ 76, 80. But the record and Plaintiffs’ complaint
indicate that Royall’s practice affected only the timing of when Royall recognized revenue, not
the amount of revenue that could be recognized. For instance, Royall may have recognized
revenue in quarter four, 2012 that should have been recognized in quarter one, 2013, and so on.
Royall’s total revenue and year-over-year revenue trends, however, would have looked
substantially similar regardless of revenue timing. In other words, Plaintiffs do not allege that
Royall’s revenues were artificially inflated.
Given that Royall’s revenue was legitimately earned under either practice, Plaintiffs do
not explain why a reasonable investor would have viewed a slight difference in revenue
recognition timing as significantly altering the mix of information available. 10 The case that
Plaintiffs cite in support of this particular argument, In re St. Jude Med., Inc. Sec. Litig., involved
allegations that the defendant public company was unjustifiably “front-loading” sales. 836 F.
10 The magnitude of the omitted information also undercuts its materiality. As noted, Advisory Board reconciled the two companies’ revenue recognition practices by merely pushing $2 million in Royall revenue from quarter two to quarter three of 2015. FAC ¶ 95. Royall alone made $118 million in 2015. Id. ¶ 112. Plaintiffs fail to show that a reasonable investor would alter his or her decision based on what was essentially a rounding error. See In re Bos. Sci. Corp. Sec. Litig., 686 F.3d 21, 29 (1st Cir. 2012) (questioning the materiality of the defendants’ failure to disclose an event responsible for a loss representing “a very small proportion of revenues”).
19 Supp. 2d 878, 905–06 (D. Minn. 2011). Plaintiffs do not raise a similar allegation here; they
acknowledge that Advisory Board discontinued Royall’s practice after the acquisition. FAC ¶
95. Because Plaintiffs have failed to show that an earlier explanation of Royall’s revenue
recognition practice would be “significant to the trading decision of a reasonable investor,” the
omission was not material. Basic, 485 U.S. at 234. 11
2. Statements Regarding Royall’s Integration
After acquiring Royall, Advisory Board faced the task of integrating Royall’s business—
including its sales practices, its products and services, and its administrative systems, such as HR
and finance—into Advisory Board’s. Defendants made several public statements during the
Class Period regarding how this integration was proceeding, most of them optimistic. See, e.g.,
FAC ¶ 77 (“[W]e are confident that this combination is going to yield great success.”) (emphasis
omitted); id. ¶ 81 (“The good news here is that integration is moving more quickly than we had
planned . . . .”) (emphasis omitted). Plaintiffs argue that the Royall integration’s reality was far
different than the rosy picture Defendants painted to investors. In fact, according to Plaintiffs,
“meaningful efforts to integrate Royall” did not begin until 2016, a year after the acquisition. Id.
¶ 103; see also Pls.’ Opp’n at 29 (“[T]he integration failures were ultimately highlighted by
analysts who explained that Royall integration problems led to the disappointing results
11 In addition, Plaintiffs fail to allege that Defendants knew about Royall’s revenue recognition practice when they issued the January, February, and May statements. See In re Stratasys Ltd. S’holder Sec. Litig., 864 F.3d 879, 883 (8th Cir. 2017) (“[T]he shareholders’ claims fail because their allegations do not adequately tie [the defendants’] knowledge of the product quality issues or their financial repercussions to the timing of the statements.”). Plaintiffs do argue that Defendants “were, at the very least, extremely reckless in failing to inform themselves of Royall’s practice,” but that argument rests on the allegation that Defendants “undertook due diligence” before the acquisition. Pls.’ Opp’n at 38. The conclusory allegation that Defendants performed due diligence is not sufficient to show that Defendants should have been aware of every accounting technique utilized by Royall, particularly when a technique’s impact was less than 2% of Royall’s yearly revenue.
20 announced in February 2016.” (emphasis omitted)). Thus, Plaintiffs contend, Defendants’ Class
Period statements regarding the Royall integration were materially misleading because they did
not disclose that the integration was stalled throughout 2015.
Defendants raise two arguments for why their statements regarding the Royall integration
are not actionable. First, Defendants argue that the statements were not false or misleading when
made. Second, Defendants argue that certain of the statements were “puffery.” Both arguments
hold water here.
a. The Statements Were Not False Or Misleading
Plaintiffs painstakingly detail Defendants’ optimistic statements about the Royall
integration, but Plaintiffs’ arguments fail to place those statements in context. From the start,
according to Defendants, the Royall integration involved multiple “levers” that were intended to
proceed along different timelines, some longer than others. The three levers were sales, product
development, and organizational integration. See Defs.’ Mem. at 20; Nov. 5, 2015 Earnings Call
Tr. at 6 (“We remain focused on 3 key levers: First, driving commercial excellence across sales
and renewals and cross-sales in particular; second, capturing the fantastic new product
opportunities across the student life cycle presented by the combination of Royall and EAB; and
third, ensuring strong organization integration and collaboration.”), Defs.’ Mem. Ex. 19 at 6,
ECF No. 18-20. Defendants claim that Advisory Board prioritized developing the first two
levers in 2015, while addressing organizational integration later in the year and into 2016. See
Defs.’ Mem. at 20–21.
This contention finds support in the record. For instance, during the May 5, 2015 call,
Mr. Musslewhite stated that Advisory Board “always had a longer integration timeline planned
when we acquired [Royall], with the company running a little bit more independently initially.”
21 FAC ¶ 81. Similarly, during the August 4, 2015 call, Mr. Musslewhite explicitly referred to the
three levers. See Defs.’ Mem. Ex. 13 at 18 (“For all the integration plan levers, [the departure of
Royall’s CEO and CFO] has accelerated it [sic].”). During the November 5, 2015 call, Mr.
Musslewhite indicated that Advisory Board was beginning to focus on organizational integration.
See Defs.’ Mem. Ex. 19 at 6 (“[W]e are heavily focused on the organizational integration efforts.
. . . my hope is that this strong operational alignment will lead to good Royall results across
2016.”). And during the February 2016 call, Mr. Musslewhite stated that Advisory Board was
“bringing Royall online for some key HR, financial, and accounting systems.” Feb. 23, 2016
Earnings Call Tr. at 4, Defs.’ Mem. Ex. 21, ECF No. 18-22.
Defendants also note that their statements about the integration were all relative to the
“longer integration timeline” that Mr. Musslewhite disclosed to investors in May. For instance,
during that same call, Mr. Musslewhite stated that “integration is moving more quickly than we
had planned.” FAC ¶ 81 (emphasis added). Similarly, in August, Mr. Musslewhite stated that
“the integration plan is proceeding ahead of pace.” Id. ¶ 88 (emphasis added). And in
November, Mr. Musslewhite stated that “from an integration and operational standpoint, we are
making good progress there.” Id. ¶ 107 (emphasis added). Plaintiffs identify no statement in
which a Defendant represented that a specific aspect of the integration would be accomplished
by a specific period. Thus, Defendants claim that their optimistic, but general, public statements
in 2015 reflected merely that certain aspects of the integration were proceeding as planned,
according to the longer integration timeline disclosed to investors, and that other aspects would
not begin until the following year. See Defs.’ Mem. at 20–21.
Plaintiffs do not contradict Defendants’ characterization of Advisory Board’s integration
plan. Nor could they. Plaintiffs’ confidential witnesses were relatively lower-level Royall
22 employees; an Account Coordinator responsible for fifteen Royall clients, and a Senior Data
Developer. See FAC ¶¶ 45, 47. They provide some insight into specific aspects of the
integration, such as Advisory Board’s efforts to synchronize administrative functions and
Salesforce systems, see FAC ¶¶ 52–60, but they provide no insight into Advisory Board’s
broader integration plan or how the integration actually progressed in comparison to that plan. In
fact, FE 2 admitted to being in the dark about Advisory Board’s integration plan. See FAC ¶ 58
(discussing a “rumor” that “Advisory Board would be ‘basically hands off’ of Royall for the first
year after the acquisition”). It is unclear, then, how Plaintiffs’ witnesses could determine
whether the integration was proceeding according to plan, as Defendants publicly stated.
In addition, Plaintiffs’ witnesses’ somewhat contradictory statements in some ways
support Defendants’ position. FE 2 asserted that no integration took place in 2015; that Royall
and Advisory Board “were basically like two separate companies” until 2016. Id. ¶ 52. FE 2
also admitted, however, that the two companies exchanged student data in 2015, albeit slowly,
id. ¶¶ 47, 56, and that the companies’ Salesforce software may have been integrated by “the end
of 2015,” id. ¶ 57. And both witnesses stated that “aggressive” cross-selling efforts began
“shortly after” Advisory Board acquired Royall. Id. ¶¶ 61, 68. These statements do not show
that the Royall integration failed to progress according to, or ahead of, plan in 2015, given that
Mr. Musslewhite stated early on that the integration would operate on a “longer . . . timeline”
with Royall “running a little bit more independently initially.” Id. ¶ 81. And as noted, Plaintiffs
have not shown that their confidential witnesses had access to information confirming that the
integration fell behind Advisory Board’s plan.
The facts here are not unlike those considered in Jui-Yang Hong v. Extreme Networks,
Inc., a case cited by both parties. In that case, the plaintiffs alleged that the defendants publicly
23 touted the progress of a post-acquisition integration, when in reality the integration was a failure.
No. 15-cv-4883, 2017 WL 1508991, at *1–5 (N.D. Cal. Apr. 27, 2017). In support of their
claim, the plaintiffs relied on several confidential witnesses who asserted that integration
problems “began immediately after the acquisition and worsened throughout the Class Period.”
Id. at *15. The court, however, held that the plaintiffs did not demonstrate that the defendants’
statements about the integration were misleading when made. Id. The plaintiffs failed to explain
“how or why” their witnesses—lower-level employees—“would have been privy” to the
company’s integration plan. Id. at *16. “That the [witnesses] personally observed or
experienced the [c]ompany’s integration efforts [was] insufficient.” Id. The court also found it
significant that certain witnesses corroborated the defendants’ public statements. For instance,
the plaintiffs’ witnesses claimed that “top sales performers” from the legacy company were
replaced, which was consistent with the defendants’ claim that the integration plan involved
“making significant cuts in personnel.” Id. Thus, the plaintiffs’ factual allegations were
insufficient to support an inference that “statements regarding an integration plan were false
when made.” Id. at *17.
Similarly, Plaintiffs’ witnesses here merely provide snapshots of Advisory Board’s
Royall integration plan. And those snapshots could be entirely consistent with Advisory Board’s
integration plan, even accepting Plaintiffs’ allegations as true. For instance, in February 2015,
only one month after the Royall acquisition closed, Mr. Musslewhite touted the integration’s
“positive momentum” and stated that it was “going very well.” FAC ¶ 77. While at that point
Advisory Board may not yet have merged its HR system with Royall’s, it had begun developing
its cross-selling pipeline. See FAC ¶ 68 (stating that the Royall “sales team felt pressure soon
after the acquisition to quickly grow sales and customers”). Similarly, in May, Mr. Musslewhite
24 stated that the integration was “moving more quickly than we had planned” and Mr. Kirshbaum
asserted that revenue synergies between the two companies were “proceeding as we would
expect.” FAC ¶¶ 81–82. Again, these statements could just as easily be referring to Advisory
Board’s efforts at developing new products as to its efforts at merging the two Salesforce
platforms. Finally, in August, Mr. Musslewhite stated that he “[felt] good about the path
forward, with Royall closely integrated into EAB and much more closely linked to our sales,
renewals, and new product development teams and processes.” Id. ¶ 100 (emphasis added).
These statements could refer to “the cross-sells already that came through EAB relationships” by
that date, id. ¶ 102, rather than the offering of Advisory Board health insurance to Royall
employees. There is no basis to conclude that the integration was not progressing according to
Advisory Board’s longer integration timeline—a timeline it disclosed to investors. That
Plaintiffs’ witnesses “personally observed” particular aspects of Advisory Board’s “integration
efforts”—without knowing the integration plan—is “insufficient” to show that the integration
was falling apart in 2015. Extreme Networks, 2017 WL 1508991, at *16.
Plaintiffs’ arguments to the contrary are unpersuasive. Plaintiffs rely on Harman to
assert that their confidential witnesses need not have had personal contact with Advisory Board’s
leadership to cast doubt on the Royall integration’s progress. But the confidential witnesses
discussed in Harman had personal knowledge of material, undisclosed problems faced by the
defendant company. Harman, 791 F.3d at 104, 106–07 (discussing the allegations of a sales
engineer who knew of a modification that rendered a particular product obsolete, and an account
manager who knew the volume of obsolete products held on the company’s books). Here, on the
other hand, Plaintiffs have not alleged that their witnesses knew or participated in Advisory
Board’s full integration plan.
25 Even crediting Plaintiffs’ allegations that certain components of the Royall integration
did not begin until a year after the acquisition, Plaintiffs have failed to show that the integration
lagged behind Advisory Board’s internal timeline, to which Plaintiffs’ witnesses were not privy.
See XM Satellite, 479 F. Supp. 2d at 183 (“The PSLRA requires plaintiffs to ‘plead with
particularity sufficient facts to support [their] beliefs’ as to why defendants’ statements were
misleading.” (alteration in original) (emphasis omitted) (quoting Novak v. Kasaks, 216 F.3d 300,
313–14 (2d Cir. 2000))). This is particularly true given that Defendants indicated early on that
the integration would proceed on a longer timeline, and that Royall would initially run a bit more
independently.
b. Certain Statements Were Inactionable Puffery
Several of Defendants’ statements about the Royall integration were also inactionable
puffery. “‘[S]tatements [that] are too general to cause a reasonable investor to rely upon them’
are immaterial and inactionable.” Harman, 791 F.3d at 109 (quoting ECA & Local 134 IBEW
Joint Pension Tr. of Chi. v. JP Morgan Chase Co., 553 F.3d 187, 206 (2d Cir. 2009)). “‘Puffery’
refers to one type of immaterial statement: the sort of ‘generalized statements of optimism that
are not capable of objective verification.’” Id. (quoting Grossman v. Novell, Inc., 120 F.3d 1112,
1119 (10th Cir. 1997)). “Statements that constitute puffery employ terms that are ‘too squishy,
too untethered to anything measurable, to communicate anything that a reasonable person would
deem important to a securities investment decision.’” Id. (quoting City of Monroe Emps. Ret.
Sys. v. Bridgestone Corp., 399 F.3d 651, 671 (6th Cir. 2005)).
Harman is instructive on how courts should toe the line between inactionable corporate
optimism and actionable assertions. In Harman, the D.C. Circuit held that a defendant’s
statement that sales of a product were “very strong during fiscal 2007” was actionable, not
26 puffery. Id. at 109. The statement was “specific about product and time period.” Id. It was thus
“plausibly understood as a description of historical fact rather than unbridled corporate
optimism, i.e., immaterial puffery.” Id. On the other hand, the court noted, more “generalized
boasting” about a company’s business is too vague for an investor to evaluate and incorporate
into investment decisions, and thus is not actionable. Id. at 109–10.
Defendants claim that nine of the integration-related statements challenged by Plaintiffs
were “generalized boasting” rather than descriptions of fact that could be evaluated by an
investor. See Defs.’ Mem. at 25–26 (listing nine statements contained in FAC paragraphs 77, 81,
84, 88, and 107). Defendants are correct as to eight of those statements. For instance,
Defendants claimed at various points that the integration was “going very well,” FAC ¶ 77, that
the integration was benefiting from “positive momentum,” id., that Defendants were “confident
that this combination is going to yield great success,” id., that there was “so much excitement”
about the integration, id. ¶ 84, and that Advisory Board was “making good progress” on the
integration, id. ¶ 107. These are the types of squishy statements of corporate optimism that an
investor could not evaluate and act on. See Grossman v. Novell, Inc., 120 F.3d 1112, 1121–22
(10th Cir. 1997) (holding that a defendant’s statements that the defendant company’s integration
had achieved “substantial success” and was moving “faster than [the defendant] thought” were
puffery); XM Satellite, 479 F. Supp. 2d at 180 (“[W]hether marketing expenditures are ‘cost
effective,’ ‘sound,’ ‘smart,’ or ‘efficient’ is for the most part a relative and subjective judgement
and can ‘neither be quantified nor specified in any way.’” (quoting Cutsforth v. Renschler, 235 F.
Supp. 2d 1216, 1239 (M.D. Fla. 2002))); Extreme Networks, 2017 WL 1508991, at *11–12
(holding that “statements that Extreme had substantial success integrating . . . sales teams,”
statements that a merger was “exceed[ing] . . . expectations” and “going very well,” and
27 “statements in anticipation of synergies resulting from the merger” were not actionable (second
alteration in original)); Melot v. JAKKS Pac., Inc., No. CV13-5487, 2016 WL 6902093, at *19
(C.D. Cal. Nov. 18, 2016) (holding that “words and phrases such as ‘growing,’ ‘showing strong
momentum,’ ‘off to a positive start,’ ‘off to a good start,’ and ‘off to a solid start’” are “‘feel
good monikers’ that are not actionable.”).
Plaintiffs, in large part, fail to respond to Defendants’ puffery arguments. Plaintiffs note
that Defendants did not argue that every challenged statement was puffery. See Pls.’ Opp’n at
35. This is true, but it does not provide the Court any basis to disregard Defendants’ argument
that certain statements were puffery. As to those statements, Plaintiffs argue that only one was
not puffery: Mr. Musslewhite’s November 5, 2015 statement that “[w]hen I look at the degree of
interaction between multiple, different functional teams and the amount of collaboration across
commercial, delivery, technology and central functions like finance, HR and IT, it feels very
much like Royall is just as much a part of the Company as any other division.” Pls.’ Opp’n at
35–36. This statement is closer to an actionable “description of historical fact,” Harman, 791
F.3d at 109, because it relates to the status of particular Royall functions—finance, HR, and IT—
at a particular time—November 2015. It contains verifiable information about the state of
Advisory Board’s organizational structure. However, Mr. Musslewhite’s statement, that “it feels
very much like Royall is just as much a part of the Company as any other division,” is the type of
executive-speak that is too “squishy” and “untethered to anything measurable,” to support an
investment decision.” Id. at 109 (quoting City of Monroe Emps. Ret. Sys., 399 F.3d at 671); see
also Mazzaferro v. Aruba Networks Inc., No. 13-cv-2342, 2014 WL 12680773, at *1 (N.D. Cal.
Aug. 1, 2014) (holding that “vague comments such as, ‘I feel like we are in the most superior
28 position’ . . . simply express corporate optimism and cannot support a claim for securities
fraud”).
Not to mention, Plaintiffs have not plausibly alleged that Mr. Musslewhite’s statement
was misleading when it was made, in November 2015. FE 2 stated that operational and
administrative integration of Advisory Board and Royall began “towards the end of 2015 and the
beginning of 2016.” FAC ¶ 52. FE 2 also stated that Advisory Board began “taking” Royall’s
student data “sooner than January 2016,” FAC ¶ 56, and integrating the two companies’
Salesforce systems at “the end of 2015,” id. ¶ 57. Mr. Musslewhite may have engaged in
corporate overexuberance when he stated that it felt like Royall was “as much a part of the
Company as any other division,” but Plaintiffs’ allegations indicate that Advisory Board’s and
Royall’s operations teams were interacting and collaborating by that point. 12 Because Plaintiffs
have not shown that the statement was false or misleading when made, it is inactionable. See In
re Stratasys Ltd. S’holder Sec. Litig., 864 F.3d 879, 882 (8th Cir. 2017) (“[E]ven to the extent the
claim of ‘unmatched speed’ could be actionable [non-puffery], the shareholders do not allege any
facts demonstrating that the 5G printers are not faster than [a competitor’s] other printers or other
desktop 3D printers on the market.”).
* * *
In summary, Plaintiffs cannot rest their securities fraud claims on Defendants’ general
statements about the Royall integration’s progress. First, Plaintiffs have not plausibly alleged
that the statements were false or misleading when made. Plaintiffs claim that certain business
12 And Plaintiffs fail to describe Advisory Board’s relationships with its other “divisions.” If those divisions also operate more independently, as Royall did in 2015, Mr. Musslewhite’s “feeling” may not have been incorrect, even given the lack of operational integration.
29 functions were not integrated between Advisory Board and Royall until 2016, but that claim is
not necessarily inconsistent with Advisory Board’s longer-term integration plan, a plan that
Plaintiffs’ witnesses could not speak to. Second, eight statements challenged by Plaintiffs, in
complaint paragraphs 77, 81, 84, 88, and 107, are inactionable puffery. See Defs.’ Mem. at 25–
26. They were expressions of corporate optimism that no reasonable investor would rely upon.
3. Statements Regarding Cross-Selling Efforts
Advisory Board’s Royall acquisition was driven, in part, by the potential for Advisory
Board to cross-sell its products and services to Royall’s clients, and vice-versa. See Jan. 21,
2015 Advisory Board Prospectus at S-3 (“Over time, we aim to realize additional value [from the
acquisition] by expanding member relationships across our portfolio and developing new
programs based on our joint assets.”), Defs.’ Mem. Ex. 3, ECF No. 18-4; Defs. Ex. 6 at 6 (“[W]e
see tremendous cross-sell opportunities across our thousand-strong joint member base . . . .”).
Advisory Board began cross-selling its products and services shortly after the deal closed. See
FAC ¶ 64 (stating that after the acquisition, “Advisory Board started basically saying, o.k.,
Royall, give us your client list, we’re going to sell all of our products to those people.”); id. ¶ 68
(stating that the “sales team felt pressure soon after the acquisition to quickly grow sales and
customers”). And Defendants touted their cross-selling efforts throughout the Class Period. See,
e.g., FAC ¶ 81 (“[E]arly signs lead us to feel good about our future prospects for . . . continued
cross-selling of Royall solutions to EAB members and EAB programs to Royall members . . . .”
(emphasis omitted)). Plaintiffs claim that these statements were false or misleading because they
failed to disclose that “to the extent that there had been an effort to cross-sell EAB’s services to
Royall customers, those efforts had generally been unsuccessful.” Id. ¶ 85. Defendants again
30 argue that the statements were not misleading when made. Defs.’ Mem. at 20. Again, the Court
agrees.
Although cross-selling opportunities were a key driver of the Royall acquisition,
Advisory Board cautioned investors that those opportunities would not necessarily bear fruit in
the short term. For example, during the February 11, 2015 conference call, Mr. Kirshbaum
stated that “the revenue synergies” and “cross-sell potential” of the Royall acquisition would not
“have much impact in calendar ‘15. It’s probably more of an outyear issue.” Defs.’ Mem. Ex. 6
at 23. Similarly, during the May 5, 2015 call, Mr. Kirshbaum stated that “a lot of the
[acquisition’s] synergies, mostly through revenue synergies, will coming [sic] in outyears as we
work together to pursue joint sales efforts . . . .” May 5, 2015 Earnings Call Tr. at 10, Defs.’
Mem. Ex. 10, ECF No. 18-11. And at least some investors internalized those statements. For
instance, during the May call, an analyst asked how investors “should . . . think about [revenue
synergies between Advisory Board and Royall] over the next 12 to 24 months[.] Certainly not
expecting much of anything over the near term, but as we get into the 2016 time frame, is this
something that really accelerates Royall’s growth rate?” Defs.’ Mem. Ex. 10 at 19 (emphasis
added).
In line with their longer-term projection, Defendants acknowledged limited cross-selling
success during the Class Period. Mr. Musslewhite stated, during the May call, that Advisory
Board “fe[lt] good about [its] future prospects for . . . continued cross-selling of Royall solutions
to EAB members and EAB programs to Royall members . . .” FAC ¶ 81 (emphasis added).
Similarly, during the August 15, 2015 call, Mr. Musslewhite acknowledged “a couple of cross-
31 sells already that came through EAB relationships.” 13 Id. ¶ 102. He also stated that “the cross-
sell of Royall into Advisory Board members is already—we are moving quickly there” and
“you’d see the same thing back into the Royall membership across the next six months.” Id.
(emphasis omitted). In other words, Defendants stated during the Class Period that Advisory
Board was developing its cross-selling pipeline and that some cross-selling occurred, mostly of
Royall’s services to Advisory Board’s clients, but that the full benefits of Advisory Board’s
cross-selling efforts would not manifest until later.
Plaintiffs again fail to allege that these statements were false or misleading. FE 1, a
former Royall Account Coordinator, stated that Advisory Board’s sales tactics “teed off” or
“turned off” some of Royall’s customers during the Class Period. FAC ¶¶ 63–65. According to
FE 1, these tactics “had a significant negative impact” on the number of client contracts Royall
renewed in 2015. Id. ¶ 66. Importantly, however, FE 1 did not claim that Advisory Board failed
to sell any of its programs to Royall clients in 2015, nor did he claim that Advisory Board clients
rejected Royall’s offerings. FE 2 similarly stated that the sales teams “failed miserably” at
hitting their sales targets, id. ¶ 68, but FE 2 did not describe those targets or the types of sales
they called for. 14 The complaint simply does not sufficiently allege that investors were deprived
13 Certainly, a “couple” of cross-sells is not an exuberant claim, and it puts into context some of Defendants’ other non-specific, qualitative statements. Notably, Plaintiffs’ confidential witnesses never assert that no cross-sells took place, but rather that cross-selling was an uphill battle. 14 Again, it is important to place the alleged facts and Defendants’ statements into the proper context. Plaintiffs, and their confidential witnesses, claim that Advisory Board’s aggressive cross-selling caused Royall’s renewal rates to drop. See Pls.’ Opp’n at 31; FAC ¶¶ 61, 66. FE 1 stated that by June 30, 2015, Defendants “had to have been aware” of dropping renewal rates. FAC ¶ 67. And during the first investor call after that date, on August 4, 2015, Defendants acknowledged the low renewal rates and adjusted Advisory Board’s revenue guidance downward by several million dollars. See id. ¶¶ 87–89; Defs.’ Mem. Ex. 13 at 12, 16. It is thus unclear how the market was deprived of material information regarding the impact of Advisory Board’s allegedly deficient cross-selling efforts.
32 of material information, given that Defendants cautioned the market against the benefits of cross-
selling in the short term. See Howard, 177 F. Supp. 3d at 309–10 (holding that the defendants
were not required to describe an integration in the pejorative terms asserted by the plaintiffs
where “[t]hroughout the Class Period, the defendants continued to make disclosures about the
significant costs required to fully integrate GoIndustry into LSI, and to acknowledge that
GoIndustry was not operating at a profit”); XM Satellite, 479 F. Supp. 2d at 180 (holding that
“despite the [defendants’] optimistic language” about certain metrics, “no reasonable investor
would have expected” those metrics to improve in the short term because the defendants stated
that the numbers would deteriorate).
4. Statements Regarding Goodwill
In February 2016, Advisory Board reduced the value of the goodwill associated with
Royall on its balance sheet. FAC ¶ 111. This impairment, in large part, caused the company to
suffer a $101.8 million loss in quarter four, 2015. See id. ¶¶ 110–11. Plaintiffs claim that
Defendants were aware in November 2015 that such an impairment was likely. See id. ¶ 108
(“[A]s of October 1, 2015, the estimated fair value of the Royall reporting unit did not exceed its
carrying value and, therefore, Royall had failed step one of the goodwill impairment test . . . .”).
Plaintiffs argue that Defendants’ failure to disclose that information during the November 5,
2015 conference call rendered the optimistic statements made during that call—specifically, that
Advisory Board was “on track to deliver [its] expectations for the year”—misleading. Id. 108.
But Plaintiffs have failed to plausibly allege that the impairment had been determined at the time
of the November 2015 call.
Plaintiffs plead only one fact indicating that Advisory Board had decided to issue a
goodwill impairment as of November 2015: Advisory Board conducted its “annual goodwill
33 assessment on October 1, 2015.” Id. ¶ 119 (emphasis omitted) (quoting Advisory Board’s March
11, 2016 10-K filing). But as Defendants note, that statement merely indicates that Advisory
Board began the assessment in October 2015, not that it had completed the assessment by
November. Defs.’ Mem. at 31. The record indicates, in fact, that Advisory Board was still
auditing its books as of Defendants’ February 23, 2016 conference call. See Defs.’ Mem. Ex. 21
at 8 (discussing Advisory Board’s “preliminary estimate” of the impairment charge, which could
change because the company was “still auditing”). Advisory Board did not issue its final
goodwill impairment until March 11, 2016. FAC ¶ 119. While Defendants’ optimistic
statements during the November 2015 call were, in hindsight, incorrect, Plaintiffs have failed to
sufficiently plead that those statements were rendered misleading by a failure to discuss a
goodwill impairment that had not yet been established. “Fraud cannot be pled by hindsight.”
SRM Glob. Fund Ltd. P’ship v. Countrywide Fin. Corp., 448 Fed. App’x 116, 118 (2d Cir. 2011)
(citing Shields v. Citytrust Bancorp, Inc., 25 F.3d 1124, 1129 (2d Cir. 1994)).
5. Failure to Disclose Key Royall Departures
Around April 2015, Royall’s CEO and CFO unexpectedly left the company. See FAC ¶¶
45–46, 50. Defendants, however, did not disclose those departures in their May 5, 2015 public
statements. See id. ¶¶ 80–84. They concede as much. See generally Defs.’ Mem. Plaintiffs
allege that this omission rendered the following public statements, made on May 5, misleading:
• “The good news here is that [the Royall] integration is moving more quickly than we had planned.”
• “[E]arly signs lead us to feel good about our future prospects for . . . continued cross- selling of Royall solutions to EAB members and EAB programs to Royall members . . . .”
• “We are pretty early, but [revenue synergies and cross-selling efforts] are proceeding as we would expect.”
• “There is so much excitement that we have around Royall . . . .”
34 • There was “nothing surprising” to Defendants in terms of how the previous quarter compared to their internal expectations.
• “[W]e feel like we are definitely within the zone of [revenue] pacing . . . .”
Id. ¶¶ 80–84 (emphasis omitted). 15
In response, Defendants claim that they simply were not obligated to disclose the
departures to investors in May. See Defs.’ Mem. at 26–28. As noted, “there is no general duty
on the part of a company to provide the public with all material information.” XM Satellite, 479
F. Supp. 2d at 178 (citing In re Burlington Coat Factory Sec. Litig., 114 F.3d 1410, 1432–33 (3d
Cir. 1997)). “However, under Rule 10b-5, a company has a duty to disclose ‘when silence would
make other statements misleading or false.’” Id. (quoting Taylor v. First Union Corp., 857 F.2d
240, 243–44 (4th Cir. 1988)). And Plaintiffs contend that Defendants’ silence regarding the
Royall departures made their May 5 statements regarding “Royall’s prospects for sales and
cross-selling and revenue and earnings expectations” misleading. Pls.’ Opp’n at 25. Plaintiffs’
allegations do not support this contention, except as to Defendants’ statements regarding revenue
expectations, which are discussed below.
Otherwise, Plaintiffs fail to connect the Royall departures to the specific statements
challenged in the complaint. First, Plaintiffs argue that because the departures would impact
Royall sales, renewals, and revenue, at least in the short-term, disclosure of the departures was
necessary to make any discussion of cross-selling accurate. See Pls.’ Opp’n at 23–26; FAC ¶ 88
([T]he CEO and CFO chose to depart earlier than expected, impacting sales and up-sells . . . .”)
(emphasis omitted). But by May, Mr. Kirshbaum had already told investors that Advisory Board
15 Plaintiffs also allege that the revenue guidance issued on May 5, and Mr. Kirshbaum’s statement that the Defendants “feel pretty confident in our numbers for the year,” were misleading when made. See id. ¶¶ 83, 85. The Court will discuss those particular allegations in greater detail below.
35 was taking a longer-term approach to cross-selling and product development vis-à-vis Royall,
and that revenue synergies from the Royall acquisition would likely not bear fruit until 2016.
See Defs.’ Mem. Ex. 6 at 23 (stating in February that “the revenue synergies” and “cross-sell
potential” of the Royall acquisition would not “have much impact in calendar ‘15.”). And Mr.
Kirshbaum reaffirmed that guidance during the May call. See FAC ¶ 82 (“[A] lot of the
synergies through revenue synergies would come in out years . . . .”). Defendants could thus
“feel good” about the company’s future cross-selling prospects based on “early signs,”
notwithstanding the short term disruption caused by the Royall departures. Id. ¶ 81.
Second, certain of the challenged statements touted the Royall integration’s status as of
May 5. See id. ¶ 81 (“[I]ntegration is moving more quickly than we had planned . . . .” (emphasis
added)); id. ¶ 82 (“We are pretty early, but [revenue synergies and cross-selling efforts] are
proceeding as we would expect.” (emphasis added)). The Royall departures occurred shortly
before May 5. See id. ¶ 45 (stating that the CEO’s replacement addressed Royall employees for
the first time on April 15, 2015); id. ¶ 90 (stating that the departures happened in “April, early
May”). Plaintiffs do not contend that in the short time between the departures and Defendants’
statements, Advisory Board’s integration plan fell apart. Nor could Plaintiffs, because, as
discussed above, their confidential witnesses were not privy to that plan. Thus, it was not
misleading for Defendants to state that the Royall integration had gone smoothly in the previous
quarter, even suspecting that the departures could possibly impact the integration later. See
Williams v. Globus Med., Inc., 869 F.3d 235, 241–43 (3d Cir. 2017) (holding that the defendant
was not required to disclose its decision to terminate a distributor relationship when the
termination had not yet impacted the company’s sales, and the plaintiffs failed to plead “that a
drop in sales was inevitable”).
36 For the same reason, Mr. Kirshbaum’s statements that he “fe[lt] like [Advisory Board
was] definitely within the zone of [revenue] pacing” in May, and that there was “nothing
surprising” to him, were not rendered misleading by Defendants’ omission. Mr. Kirshbaum was
asked whether “anything surprised [him] . . . in the quarter in terms of how [Advisory Board]
compared to [its] internal expectations” for revenue and EBITDA. FAC ¶ 83. While the
unexpected departures of Royall’s CEO and CFO less than a month earlier may have generally
been surprising to Mr. Kirshbaum, Plaintiffs have not shown how those departures would have
impacted the previous quarter’s revenues and EBITDA, the subject of Mr. Kirshbaum’s
statements.
Plaintiffs seem to argue that because Defendants’ May 5 statements related in some
manner to cross-selling and integration, Defendants were required to disclose all material
information that could also relate to cross-selling and integration. The PSLRA requires greater
precision. Plaintiffs must plausibly allege that the specific statements challenged were rendered
misleading by Defendants’ failure to disclose the Royall departures. Plaintiffs have failed to do
so with respect to the statements listed above.
6. Statements Regarding Revenue Guidance
At several points during the Class Period, Advisory Board issued guidance projecting
2015 revenues for Advisory Board and Royall. See FAC ¶¶ 76, 80, 87, 106. Defendants
occasionally discussed this guidance in their public statements. See id. ¶ 83 (“[W]e feel like we
are definitely within the zone of pacing and feel pretty confident in our [revenue and EBITDA]
numbers for the year.”). Plaintiffs claim that Defendants “lacked a reasonable basis” to issue the
guidance, see, e.g., id. ¶ 103(b), and that Defendants’ May 5, 2015 revenue guidance and
accompanying statements were rendered materially misleading by Defendants’ failure to disclose
37 the unexpected departures of Royall’s CEO and CFO in April, see id. ¶ 85(c), (d). These claims
have merit only as to Defendants’ May 5, 2015 guidance.
a. February 11, 2015 Guidance
On February 11, Advisory Board issued guidance projecting $780 million to $800 million
in 2015 revenue, including $125 million to $135 million from Royall. See id. ¶ 76. Plaintiffs
contend that this guidance was misleading because it failed to account for Royall’s revenue
recognition practice, the stalled Royall integration, and Advisory Board’s failing cross-selling
efforts. See id. ¶ 79. However, as discussed above, Plaintiffs have not pleaded facts indicating
that Royall’s previous revenue recognition practice would impact Advisory Board’s 2015
revenue, or that a reasonable investor would consider it significant. And Plaintiffs have failed to
show that the Royall integration was not going according to plan, particularly only one month
after the Royall acquisition closed.
In addition, as Defendants note, their February 11 statements informed the market that
the February revenue guidance was not contingent on Advisory Board achieving significant
synergies from the Royall acquisition in 2015. See Defs.’ Mem. Ex. 6 at 23 (stating that “the
revenue synergies” and “cross-sell potential” of the Royall acquisition would not “have much
impact in calendar ‘15”). And the guidance was not a “commentary on [Royall’s] performance.”
Id. at 20. A reasonable investor would thus have been on notice that Advisory Board’s cross-
selling efforts were not materially relevant to the February guidance. Failure to further discuss
those efforts, then, did not render the guidance misleading. See Phelps, 883 F. Supp. 2d at 214
(holding that a public statement was not actionable where “the relevant facts were disclosed and
were clearly available to plaintiffs,” though not in the precise form the plaintiffs wanted).
38 b. May 5, 2015 Guidance
On May 5, Advisory Board reaffirmed its February guidance: Advisory Board would
produce $780 million to $800 million in revenue in 2015, $125 million to $135 million of it from
Royall. 16 See FAC ¶ 80. Mr. Kirschbaum expressed confidence in this guidance during the
conference call on that date, stating that Defendants “feel pretty confident in our numbers for the
year.” Id. ¶ 83. Plaintiffs contend that the guidance was misleading because it failed to account
for Royall’s revenue recognition practice, the failing Royall integration and cross-selling efforts,
and the “sudden” departures of Royall’s CEO and CFO in or around April. Id. ¶ 85. Plaintiffs
have plausibly alleged that Defendants’ failure to disclose the departures was materially
misleading.
According to Plaintiffs, Defendants’ “reaffirmation of Advisory Board’s revenue
guidance . . . is actionable because Defendants knew that the (undisclosed) departure of [Royall’s
CEO and CFO] would have a material impact on sales and revenue.” Pls.’ Opp’n at 38. Thus,
Plaintiffs argue, Advisory Board “was not on track to achieve its 2015 financial projections” by
May, yet Defendants led investors to believe that it was on track. Id. at 39. Again, Defendants
do not contest that Royall’s CEO and CFO left before May. Nor do they argue that Advisory
Board accounted for the departures in its revenue guidance. Nor do they dispute that, in
hindsight, the departures hurt Royall’s 2015 sales and renewals. Rather, Defendants argue that
16 Advisory Board’s May revenue guidance did not explicitly reaffirm the Royall guidance issued in February. Defs.’ Mem. Ex. 9 at 8. In theory, then, the guidance could have incorporated a lower revenue projection for Royall, and higher projections for other Advisory Board business units. See Williams, 869 F.3d at 246 (holding that the plaintiffs’ revenue projections were inactionable because the plaintiffs did “not plead[] any facts to support their claim that [the defendant company] incorporated anticipated revenue from” a cancelled supplier contract in those projections). However, Defendants did not raise this issue, and the parties seem to assume that Advisory Board implicitly reaffirmed the Royall guidance in May, along with the Advisory Board guidance. See Defs.’ Mem. at 32.
39 “any such calculus [about the Royall departures] made as of May 5 would have been pure
speculation.” Defs.’ Mem. at 28. In other words, Defendants argue that the May revenue
guidance was not materially misleading because it was impossible for Advisory Board to account
for the Royall departures at that time. 17
Defendants’ own statements in August 2015 make clear that the Royall departures
materially harmed Royall’s 2015 renewals and up-sells. Mr. Musslewhite stated that Royall’s
“CEO and CFO chose to depart earlier than expected, impacting sales and up-sells during a
critical time and distracting the organization.” FAC ¶ 88 (emphasis omitted). He further
explained that the two executives “had their hands very tightly controlled around if there was any
sales management,” that they sat “on top of the business and steer[ed] the bus,” and that the CEO
was “personally involved in a lot of the up-sell and cross-sell type conversations and had some
relationships.” Id. ¶ 91. And Mr. Kirshbaum stated that the departures resulted, among other
reasons, in Royall “not capturing as many new clients or up-sell opportunities as the prior years.”
Id. ¶ 89. Plaintiffs’ confidential witnesses corroborate those statements. For instance, FE 2
stated that the departures created uncertainty among Royall’s customers and “hindered [Royall’s]
sales efforts.” Id. ¶ 48.
Although Defendants may not have been able to quantify the Royall departures’ impact
in May 2015, it is plausible to infer that the departures, which occurred after the February
revenue guidance was issued, made it more likely that Royall would ultimately underperform
that guidance. A reasonable investor would have found that information significant. Cf.
17 Defendants similarly argue that they “could not have foreseen, as of May 5, 2015, what impact [the departures] would have on Royall before the critical spring sales season ended on June 30.” Defs.’ Mem. at 28. While couched as a materiality argument, it is more properly analyzed as an argument that Defendants lacked the necessary state of mind to be held liable for their May statements. The Court will analyze this argument below, in its discussion of scienter.
40 Howard, 177 F. Supp. 3d at 306 (“[E]ven if the [defendant company’s] financial statements were
not themselves inaccurate, the defendants’ public statements publicizing the strong performance
of divisions, which were in fact doing poorly, are material because these statements ‘would be
viewed by the reasonable investor as having significantly altered the total mix of information
made available.’” (quotation marks omitted) (quoting Basic, 485 U.S. at 231–32)). Instead, with
no caveat, Advisory Board told investors that Royall would achieve the same revenue it had been
projected to achieve before the departures. Plaintiffs have thus plausibly alleged that
Defendants’ revenue reaffirmation was misleading by omission. See Harman, 791 F.3d at 105
(holding that the plaintiff stated a Section 10(b) claim where the defendant touted “its plan to
reduce its substantial inventory” but “did not disclose historical facts that could have affected the
success of the plan being discussed”); Institutional Inv’rs Grp. v. Avaya, Inc., 564 F.3d 242, 249,
263–66 (3d Cir. 2009) (holding that a company’s “reaffirmed projections of revenue and margins
were . . . no longer sound (and were thus misleading)” when the company experienced
significant pricing pressure during the previous quarter, yet failed to disclose that pressure);
Howard, 177 F. Supp. 3d at 306 (holding that “misrepresentations regarding the financial
performance of the two business components that the defendants . . . publicly touted as growing
with healthy margins [were] clearly material”).
Defendants’ reliance on Boston Scientific and Williams is unpersuasive because those
cases involved more speculative risks than the risk faced by Defendants in May 2015. In Boston
Scientific, the defendant company and its executives issued a series of statements in late 2009
and early 2010 touting the company’s positive sales outlook and successful sales force. In re
Bos. Sci. Corp. Sec. Litig., 686 F.3d 21, 24–26 (1st Cir. 2012). The company did not disclose,
however, that it was in the process of firing a key regional vice president of sales and several
41 sales reps, who would defect to a competitor. Id. at 28–29. The plaintiffs claimed that the
company’s positive statements about its sales force were rendered materially misleading by the
company’s failure to disclose the firings. Id. at 27–28. The First Circuit disagreed, for the most
part. Id. at 28. It concluded that the “main risk” to the company was that the fired sales reps
would “take business with them.” Id. at 29. Thus, the company’s failure to disclose the firings
was not material before they occurred because the risk of lost business was uncertain then. Id. at
28. The omission was still not material after the firings occurred, but before the disgraced reps
were hired by a competitor, because it was “not plainly foreseeable” that the reps would flee to a
competitor and take business with them. Id. at 29. The firings were particularly immaterial at
that time because the company predicted lost sales of, at most, one percent of its annual
revenues. Id.
Halting there, Defendants argue that Boston Scientific is analogous to this case.
According to Defendants, the Royall departures were not material in May because their impact
was not foreseeable, like the impact of the sales rep firings in Boston Scientific was not
foreseeable before the reps were hired by a competitor. Defendants, however, ignore the rest of
Boston Scientific’s materiality analysis.
The fired regional vice president in Boston Scientific was hired by a competitor in
January 2010, after which the company’s CEO made additional positive statements about the
company’s sales force. Id. at 25; In re Bos. Sci. Corp. Sec. Litig., No. 10-cv-10593, 2011 WL
4381889, at *2 (D. Mass. Sept. 19, 2011). While the “main risk” to the company—that the fired
reps would take business with them—may not have been foreseeable before these statements
were made, the risk had manifested by then. The district court determined that it was reasonable
to infer that the company’s executives “knew, at that time, that the[] terminations may have some
42 impact on the [c]ompany’s . . . revenues.” Bos. Sci., 2011 WL 4381889, at *12. Given this
inference, the court concluded that “the ‘total mix of information’ available to investors may
have been somewhat ‘skewed’ by the lack of disclosure of the terminations.” Id. (citing
Lormand, 565 F.3d at 249). The court thus held, and the First Circuit did not disturb, that the
company’s failure to disclose the sales rep firings was material. Id. at 14. Similarly here, the
Royall departures’ risk to Advisory Board’s business—the loss of key sales relationships—had
manifested before the May 2015 statements. Plaintiffs have pled that the departures would
foreseeably have some impact on Royall’s sales and renewals. It is thus reasonable to infer that
the departures, like the sales rep departures in Boston Scientific, would have materially impacted
the mix of information available to investors.
Williams is also inapposite. The plaintiff in that case challenged a company’s failure to
disclose, when issuing earnings guidance, its decision to terminate its agreement with a
distributor. 869 F.3d at 238. That termination ultimately caused a material drop in the
company’s sales. Id. at 239. However, when the company issued the guidance, the distributor
was still distributing the company’s products, the company had “spent months preparing to end
its relationship” without an impact on sales, and the plaintiffs failed to adequately plead that the
company’s executives “should have expected” the negative financial impact that ultimately
occurred. Id. at 242–43. Here, on the other hand, when Defendants issued the May guidance,
the Royall executives had recently and unexpectedly left, and the complaint’s allegations
plausibly support an inference that Defendants understood, at the time, the impact the departures
would have on revenues. 18
18 Andropolis v. Red Robin Gourmet Burgers, Inc., upon which Defendants also rely, is even more inapplicable to the facts of this case. Red Robin involved a company’s failure to disclose the reason for its CFO’s departure, having disclosed the departure itself. 505 F. Supp.
43 Defendants also note that “the maximum measure of [the Royall departures’] impact on
2015 sales [was] a mere 0.9% to 2.2% of the Advisory Board’s revenue,” Defs.’ Mem. at 28,
potentially less than the impact the First Circuit found immaterial in Boston Scientific. It is true
that “information regarding a small business segment that is unlikely to affect the future of the
entire company is generally not material.” Howard, 177 F. Supp. 3d at 310 (citing City of
Edinburgh Council v. Pfizer, Inc., 754 F.3d 159, 174 (3d Cir. 2014)). But again, the touchstone
of materiality is whether information “may affect the desire of investors to buy, sell, or hold the
company’s securities.” Castellano v. Young & Rubicam, Inc., 257 F.3d 171, 180 (2d Cir. 2001).
Thus, if information could impact a reasonable investor’s decision making, the information’s
importance to the company’s bottom line is largely irrelevant. For that reason, though the
product at issue in Harman was a “rather small component of” the company’s “total portfolio,”
statements regarding the product were material because it was “part of the [c]ompany’s largest
division and had been the focus of recent public statements.” 791 F.3d at 109. Likewise here,
while the Royall departures made a small dent in Advisory Board’s overall revenues, they were a
key development in Advisory Board’s largest acquisition ever, an acquisition that had generated
significant investor interest. A reasonable investor would consider the departures material to
Advisory Board’s revenue outlook. 19
2d 662, 686 (D. Colo. 2007). The court found that omission immaterial, both because no SEC regulation mandated the disclosure, and because the plaintiff failed to sufficiently allege that “had [the defendant] disclosed the reasons for [the CFO’s] termination . . . a ‘reasonable investor’ would have considered the disclosure important.” Id. at 688. Here, to the contrary, a reasonable investor would have considered the Royall departures important, regardless of SEC regulations. 19 The market’s reaction after the departures were disclosed on August 4 provides additional evidence that the Royall departures were material. See Oran v. Stafford, 226 F.3d 275, 282 (3d Cir. 2000) (“[W]hen a stock is traded in an efficient market, the materiality of disclosed information may be measured post hoc by looking to the movement, in the period immediately following disclosure, of the price of the firm’s stock.”); XM Satellite, 479 F. Supp.
44 Finally, Defendants argue that their “statements regarding revenue guidance” are
protected by the PSLRA’s safe harbor provision. Codified at 15 U.S.C. § 78u-5(c)(1)(A)(i), the
safe harbor protects “forward-looking statement[s]” that are “identified as . . . forward-looking
statement[s], and [are] accompanied by meaningful cautionary statements identifying important
factors that could cause actual results to differ materially from those in the forward-looking
statement[s].”20 Even in the absence of meaningful cautionary language, a forward-looking
statement is protected unless it was made “with actual knowledge . . . that the statement was false
or misleading.” Id. § 78u-5(c)(1)(B)(i); see also In re Quality Sys., Inc. Sec. Litig., 865 F.3d
1130, 1149 (9th Cir. 2017); In re Harmon Int’l Indus., Inc. Sec. Litig., 27 F. Supp. 3d 26, 40–41
(D.D.C. 2014), rev’d on other grounds, 791 F.3d 90 (D.C. Cir. 2015). The second form of safe-
harbor protection—the actual knowledge requirement—relates to Defendants’ scienter, discussed
below. The first form—meaningful cautionary language—does not help Defendants here.
Meaningful cautionary language “calls for substantive company-specific warnings
tailored to the specific future projections, estimates or opinions in the [statements] which the
plaintiffs challenge.” Howard, 177 F. Supp. 3d at 308 (alteration in original) (quoting Harman,
2d at 182 (evaluating an analyst’s response to information in determining whether that information was material). Advisory Board’s stock price fell 21% over the next day. See FAC ¶ 96. And analysts attributed that drop, at least in part, to the Royall departures. See id. ¶ 97 (quoting analysts’ reports that, in selling off Advisory Board’s shares, “investors seemed to largely ignore the strength in the core healthcare and focus instead on the Royall sales weakness,” and that “most of the Royall weakness was due to executives leaving”); id. ¶ 94 (quoting an analyst’s report that “[t]he unanticipated departure of Royall’s CEO and CFO weighted heavily on the critical June Q sales period”). 20 Plaintiffs concede that the May 5 statements regarding revenue guidance are “forward- looking” under the PSLRA. See 15 U.S.C. § 78u-5(i)(1)(A), (C) (categorizing “a projection of revenues” and “a statement of future economic performance” as forward-looking); Avaya, 564 F.3d at 254–55 (holding that the defendants’ statement that they were “on track to meet [their] goals for the year” was forward-looking). Rather, Plaintiffs argue that those statements do not meet the PSLRA’s other requirements for safe harbor protection. See Pls.’ Opp’n at 38–41.
45 791 F.3d at 102). “Cautionary language cannot be ‘meaningful’ if it is ‘misleading in light of
historical fact[s].’” Harman, 791 F3d at 102 (quoting Slayton v. Am. Exp. Co., 604 F.3d 758,
770 (2d Cir.2010)).
In determining when cautionary language is sufficiently meaningful, Harman is again
instructive. In that case, the D.C. Circuit considered whether the defendants included adequate
cautionary language when they issued a sales forecast for a specific product, and announced an
ambitious sales drive to reduce their inventory of that product. 791 F.3d at 96–97. The forecast
warned that the company’s product inventory had grown significantly, and that its sales could
suffer if the company “failed to ‘develop, introduce and achieve market acceptance of new and
enhanced products.’” Id. at 104. According to the plaintiffs, the sales forecast was misleading
because the defendants knew that the company held a “large inventory of older generation,
obsolete [products] which” the company “could not sell or was forced to sell at a substantial
loss.” Id. at 105. Taking that fact as true, the D.C. Circuit held that the company’s warnings
were insufficient to provide safe harbor protection for the statement at issue. Id. Although the
defendants’ cautionary statements suggested that obsolescence could become a problem in the
future, the statements did not disclose the “obsolescence that had already materialized” and that
posed a significant threat to Defendants’ forecast. Id. at 104. In other words, “[e]ven if viewed
as implicitly raising the specter of obsolescence, the statements were insufficient for at least the
reason that they did not warn of actual obsolescence that had already manifested itself.” Id.
Thus, “the purportedly cautionary statements were not meaningful because they were misleading
in light of historical fact.” Id.
Like the cautionary language in Harman, Advisory Board’s May 5 warnings ignored
facts existing at the time they were issued. In relevant part, the May 5 press release stated that
46 Advisory Board could “fail[] to realize the anticipated benefits of the Royall acquisition,” and
that its financial condition could be harmed by the “diversion of management’s attention from
operations by activities focused on the integration of Royall’s business.” Defs.’ Mem. Ex. 9 at 9.
Advisory Board’s form 10-KT, which the May guidance incorporated by reference, stated that
the company’s financial condition would be “adversely affected” if the company was “unable to
integrate successfully Royall’s operations into [its] own.” Form 10-KT Transition Report at 7,
Defs.’ Mem. Ex. 7, ECF No. 18-8. The 10-KT also stated that the “diversion of management’s
attention [because of the acquisition] and any difficulties encountered in the transition and
integration process could otherwise harm [its] business, financial condition, and operating
results.” Id. Finally, the 10-KT stated that “[d]elays in successfully integrating and managing
employee benefits could lead to dissatisfaction and employee turnover.” Id.
These general warnings suggest that management turnover could impact Advisory
Board’s ability to realize the full benefits of the Royall acquisition. But by the time of
Defendants’ May statements, key management turnover had already occurred. And Defendants
have not identified any cautionary language addressing that turnover, warning investors that the
recent departures of Royall’s top two executives could impair Royall’s sales during its critical
season. See XM Satellite, 479 F. Supp. 2d at 185 (holding that a company’s cautionary language
was adequate when the company predicted that certain metrics would decrease or stabilize, but
warned that consumer demand and advertising could cause those specific metrics to increase).
Even reading Defendants’ May warnings broadly, the warnings “identifie[d] a potential risk, but
‘impl[ied] that no such problems were on the horizon [though] a precipice was in sight.’”
Harman, 791 F.3d at 102 (quoting Asher v. Baxter Int’l Inc., 377 F.3d 727, 733 (7th Cir. 2004)).
Such language is inadequate to meet the safe harbor standard because it “fail[ed] to account for
47 the materialization, rather than abstract possibility, of the important risk posed by” Royall’s
management turnover. 21 Id. at 106; see also Howard, 177 F. Supp. 3d at 308 (holding that the
warning that “increased competition may result in reduced operating margins and loss of market
share” was not meaningful when “increased competition had already resulted in reduced margins
and loss of certain customers” (emphasis added)). 22
c. August 4, 2015 and November 5, 2015 Guidance
On August 4, Advisory Board reduced the top end of its 2015 revenue guidance from
$800 million to $790 million. FAC ¶ 87. Mr. Kirshbaum clarified during the August 4 call that
the company reduced its guidance “to account for the impact of Royall performance.” Defs.’
Mem. Ex. 13 at 10. Mr. Musslewhite further explained that “from a growth perspective Royall
ha[d] not yet performed as [they] expected.” Id.; FAC ¶ 88. Despite these disclosures, Plaintiffs
assert that Advisory Board should have gone farther, that it “lacked a reasonable basis” for even
the reduced revenue guidance. FAC ¶ 103. Thus, according to Plaintiffs, the amended guidance
was misleading because it still painted too rosy a picture of Advisory Board’s financial
condition. See Pls.’ Opp’n at 39.
21 This conclusion is reinforced by the fact that “the Company’s cautionary statements remained unchanged” throughout the Class Period, “despite a significant change in circumstances of material importance.” Harman, 791 F.3d at 107. For instance, both the May and August press releases warned generally of Advisory Board’s “failure to realize the anticipated benefits of the Royall acquisition,” and “diversion of management’s attention” due to the Royall integration. See Defs.’ Mem. Ex. 9 at 9; Defs.’ Mem. Ex. 12 at 10, ECF No. 18-13. Yet between May and August, the deleterious impact of the Royall departures had become apparent. As the D.C. Circuit stated in Harman, “‘[t]he consistency of the defendants’ language over time despite’ changing circumstances ‘belies any contention that the cautionary language was ‘tailored to the specific future projection.’” Harman, 791 F.3d at 107 (quoting Slayton, 604 F.3d at 773). 22 Defendants also argue that the February, August, and November revenue guidance falls within the PSLRA’s safe harbor. Defs.’ Mem. at 34. But the Court need not address that argument, because Plaintiffs have failed to show that the guidance was misleading when issued.
48 Plaintiffs’ complaint does not identify any facts that contradict the August and November
guidance; it merely asserts that the guidance lacked a “reasonable basis.” FAC ¶¶ 103(b),
108(c). Plaintiffs’ opposition brief provides more color. It asserts that the guidance “still
underestimated the likely impact on sales and revenue caused by the departure of [Royall’s CEO
and CFO] because Defendants knew the impact would reverberate in 2016.” Pls.’ Opp’n at 39.
But Plaintiffs’ complaint and the record indicate that Advisory Board accounted for the
Royall departures in reducing its revenue guidance. During the August 4 call, Defendants stated
that “management turnover” hurt Royall’s “sales and up-sells” and distracted the organization.
FAC ¶¶ 88–89. Those effects would, at least in part, cause Royall’s revenues to “be below the
low end of” the company’s initial projection “by several million dollars.” Defs.’ Mem. Ex. 13 at
12, 16. And the effects would continue to deflate Royall’s revenues in the second half of 2015
and into 2016. FAC ¶ 89. The revenue guidance was thus informed by “the likely impact on
sales and revenue caused by” the Royall departures, and the market knew it. Pls.’ Opp’n at 39.
It appears, then, that Plaintiffs simply disagree with Advisory Board’s August and
November guidance, given that the guidance proved to be inaccurate. But “[t]he fact that
[Advisory Board’s] performance did not conform to that predicted supports no inference that [the
company’s] statements lacked a reasonable basis when made.” Kowal v. MCI Commcn’s Corp.,
16 F.3d 1271, 1278 (D.C. Cir. 1994). And Plaintiffs fail to plausibly allege that the August and
November guidance lacked a reasonable basis when made. Plaintiffs’ claims based on this
guidance are thus “fraud by hindsight” for which Section 10(b) provides no recourse. XM
Satellite, 479 F. Supp. 2d at 176 (“Where fraudulent projections are alleged, the plaintiff[s] must
. . . identify in the complaint with specificity some reason why the discrepancy between a
company’s optimistic projections and its subsequently disappointing results is attributable to
49 fraud.” (alteration in original) (quoting Hillson Partners Ltd. P’ship v. Adage, Inc., 42 F.3d 204,
209 (4th Cir.1994))).
7. Summary of the Alleged Material Misrepresentations
Plaintiffs have sufficiently alleged that Advisory Board’s revenue guidance issued on
May 5, 2015, and Mr. Kirshbaum’s statement in support of that guidance, were materially
misleading because they failed to account for the sudden departures of Royall’s CEO and CFO.
See FAC ¶¶ 80, 83; Defs. Mem. Ex. 9. At the very least, those public statements were rendered
misleading by Defendants’ failure to disclose the departures. On the other hand, Plaintiffs have
failed to identify any other statement or omission attributable to Defendants during the Class
Period that was materially false or misleading. Defendants’ motion to dismiss is thus granted
with respect to those statements or omissions identified in the complaint, other than the May 5,
revenue-related statements.
B. Scienter
Plaintiffs have sufficiently alleged that the revenue guidance issued by Defendants on
May 5, 2015, and Mr. Kirshbaum’s accompanying statement, were rendered materially
misleading by Defendants’ failure to disclose the Royall departures. To state a Section 10(b)
claim, however, Plaintiffs’ allegations must also give “rise to a strong inference that the
defendant[s] acted with the required state of mind” in issuing the misleading guidance. Harman,
791 F.3d at 100 (quoting 15 U.S.C. § 78u-4(b)). Plaintiffs must plausibly allege facts such that a
“reasonable person would deem the inference of scienter cogent and at least as compelling as any
opposing inference one could draw from the facts alleged.” Howard, 177 F. Supp. 3d at 311
(quoting Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 324 (2007)). In making this
50 determination, “the [C]ourt’s job is not to scrutinize each allegation in isolation but to assess all
the allegations holistically.” Tellabs, 551 U.S. at 326.
Section 10(b) and Rule 10b-5 liability normally require a mental state embracing “intent
to deceive or defraud, or extreme recklessness to that effect . . . .” Lorenzo v. SEC, 872 F.3d
578, 589 (D.C. Cir. 2017); see also Liberty Prop. Trust v. Republic Props. Corp., 577 F.3d 335,
342 (D.C. Cir. 2009) (quoting SEC v. Steadman, 967 F.2d 636, 641 (D.C. Cir. 1992)). As
discussed above, however, a plaintiff seeking to impose liability for a forward-looking statement
must show “actual knowledge” that the statement was false or misleading. 15 U.S.C. § 78u-
5(c)(1)(B)(i). The question here, then, is whether Plaintiffs’ have met that burden with respect to
Defendants’ May 5, 2015 revenue guidance and the accompanying statement.
Defendants concede that they knew about the Royall departures by May 5. This
knowledge is necessary, but not sufficient to make out a Section 10(b) claim. Plaintiffs must
also plausibly allege that Defendants knew, on May 5, that the Royall departures would likely
cause the company to miss its revenue projections. And to that point, Plaintiffs argue that
Defendants “understood, at the time of [the Royall departures], the impact the departure[s] would
have on Royall’s sales, cross-selling, and revenue and earnings estimates.” Pls.’ Opp’n at 24.
This is a close case, but the Court concludes that Plaintiffs’ allegations plausibly support their
argument.
Plaintiffs have alleged “strong circumstantial evidence” that Defendants closely
monitored the Royall acquisition. See Howard, 177 F. Supp. 3d at 312 (quoting New Orleans
Emps. Ret. Sys. v. Celestica, Inc., 455 Fed. App’x 10, 13 (2d Cir. 2011)) (holding that strong
circumstantial evidence can support a finding of scienter). It was Advisory Board’s largest
acquisition ever. See FAC ¶ 39. Defendants touted the diligence devoted to it. See id. ¶ 78.
51 Defendants often referred to the acquisition, and Royall’s performance, in their public
statements. See, e.g., id. ¶ 77 (“[T]here is a lot of positive momentum on both sides and we are
confident that this combination is going to yield great success”) (emphasis omitted); id. ¶ 81
(“[W]e are having some key early wins around introducing Royall’s world-class enrollment
managed services to education advisory board members.”). And those statements indicated that
the Royall acquisition’s success was a key priority for Advisory Board in 2015. See Defs.’
Mem. Ex. 10 at 19–20 (stating, when asked about Advisory Board’s merger plans going forward,
that “[t]here is so much excitement we have around Royall and so much upside from a lot of the
things we’ve talked about on this call that I think that’s really going to occupy our growth efforts
around the higher ed side.”).
Given the attention Defendants paid to the acquisition and Royall’s subsequent
performance, it is plausible to infer that Defendants understood the key drivers of that
performance. See Avaya, 564 F.3d at 271 (holding that, when the defendant company’s
“operating margin was viewed as so important to the health of the company (and its
attractiveness to investors) that its supposed ability to hold and grow this margin was described
as the ‘Avaya story,’” it was plausible to infer that the company’s CFO “was paying close
attention to these numbers”); Howard, 177 F. Supp. 3d at 313 (holding that the plaintiffs
plausibly alleged that the defendants were aware of certain business segments’ weak financial
performance, when the defendants “often referred to metrics” that were relevant to those
segments).
Plaintiffs have also alleged strong circumstantial evidence that Defendants had an idea of
how important Royall’s CEO and CFO were to Royall’s performance. Defendants implied a
close working relationship between the two companies’ executives. See FAC ¶ 77 (stating, in
52 February 2015, that “John Nester, Royal & Company’s CEO, has been great to work with and
his team is strong”). Advisory Board was negotiating five-year contracts with Royall’s CEO and
CFO when they left the company. Defs.’ Mem. Ex. 13 at 12. The departures occurred in the
middle of Royall’s key sales period, the “critical time,” between January and the end of June.
See FAC ¶¶ 88–89. Only three months after Defendants’ May statements, they acknowledged
that Royall’s poor performance was due in large part to the Royall departures. Id. ¶¶ 88–91.
And, critically, Mr. Musslewhite admitted in August that Royall’s CEO and CFO “had their
hands very tightly controlled around . . . sales management,” and that Royall’s CEO was
“personally involved in a lot of the up-sell and cross-sell type conversations and had some
relationships.” Id. ¶ 91 (emphasis omitted).
Thus, at least at the pleading stage, “all of the facts alleged, taken collectively, give rise
to a strong inference” that Defendants knew in May that the Royall departures would likely
cause Royall to miss its revenue expectations. 23 Tellabs, 551 U.S. at 323 (emphasis in original).
Defendants were intimately involved in the Royall acquisition and worked closely with Royall’s
23 Plaintiffs also argue that Defendants were “motivated to conceal the truth” about Royall’s lagging performance “in order to secure approval at the June 9, 2015 annual meeting of Advisory Board stockholders for their significantly higher [2014] compensation.” FAC ¶ 123. Plaintiffs acknowledge that the shareholder vote was retrospective, governing Defendants’ compensation for the year before the Royall acquisition. Id. The vote was thus entirely disconnected from the success of the Royall acquisition. Plaintiffs’ argument, at its core, is that Defendants were motivated to keep Advisory Board’s stock price stable so that shareholders would not penalize them for their 2015 performance by docking their 2014 pay. But, as Defendants note, profit motive alone is insufficient to support a strong inference of scienter, or else securities fraud plaintiffs would have no trouble pleading that any individual executive acted with scienter. See Kalnit v. Eichler, 264 F.3d 131, 140 (2d Cir. 2001) (“[A]n allegation that defendants were motivated by a desire to maintain or increase executive compensation is insufficient because such a desire can be imputed to all corporate officers.”); Stevens v. InPhonic, Inc., 662 F. Supp. 2d 105, 124 (D.D.C. 2009). Nonetheless, the facts pled here permit a strong inference of scienter even without Defendants’ alleged compensation-based incentive. See Avaya, 564 F.3d at 279–80 (finding scienter based on circumstantial evidence, without sufficient allegations of insider trading or related motives).
53 leadership. It is thus reasonable to infer that Defendants understood the importance of Royall’s
CEO and CFO to the company’s client relationships. True, Defendants may not have known the
full extent of that impact until the flagging sales numbers became apparent in late June. FAC ¶
67. But Plaintiffs have plausibly alleged that Defendants knew enough in May to understand that
the revenue projection issued in February was less likely to come to fruition, and thus that
reaffirming that same guidance would mislead investors without an appropriate disclaimer. Cf.
Avaya, 564 F.3d at 270 (“Even if [the CFO] were not aware of the full extent of the unusual
discounting . . . he might be culpable as long as what he knew made obvious the risk that his
confident, unhedged denials of unusual discounting would mislead investors.”); In re Symbol
Techs., Inc. Sec. Litig., No. 05-cv-3923, 2013 WL 6330665, at *7–8, (E.D.N.Y. Dec. 5, 2013)
(holding that a company’s revenue projections were materially misleading when the company
knowingly failed to disclose the poor internal controls inflating the projections).
Defendants proffer the following inference to be drawn from these facts: “Defendants
were excited and optimistic about the Royall acquisition at the time of the merger,” and “they
timely disclosed negative information about the acquisition as they learned it.” Defs.’ Mem. at
40. Plaintiffs’ allegations, however, contradict the inference that Defendants timely disclosed
negative information; Defendants learned of the Royall departures before May, yet failed to
disclose them. At the very least, the inference that Defendants knew that the Royall departures
would negatively impact their revenue projections is “at least as compelling as” Defendants’
inference of mere excitement and optimism. Howard, 177 F. Supp. 3d at 311. Plaintiffs have
thus plausibly alleged scienter.
54 C. Defendants’ Section 20(a) Liability
Section 20(a) imposes joint and several liability upon individuals who exercise control
over a Section 10(b) violator, typically a corporation. See Harman, 791 F.3d at 111. Thus, “[a]
claim under Section 20(a) can exist only if there is a viable claim against the corporation.” Id.
Here, Plaintiffs claim that Mr. Musslewhite and Mr. Kirshbaum, Advisory Board’s CEO and
CFO during the Class Period, were “controlling persons” who culpably participated in Advisory
Board’s, and their own, underlying violations of Section 10(b) and Rule 10b-5. See FAC ¶¶
138–41. Defendants’ only argument in opposition is that Plaintiffs failed to adequately plead
Section 10(b) and Rule 10b-5 violations. See Defs.’ Mem. at 41. Because, as discussed above,
Plaintiffs have plausibly alleged that Advisory Board committed Section 10(b) and Rule 10b-5
violations with respect to the May 5, 2015 revenue guidance, Defendants’ motion to dismiss
Plaintiffs’ Section 20(a) claim is denied as to that allegation.
V. CONCLUSION
For the foregoing reasons, Defendants’ Motion to Dismiss (ECF No. 18) is DENIED
with respect to Advisory Board’s May 5, 2015 revenue guidance and Mr. Kirshbaum’s
statement, recounted in paragraph 83 of Plaintiffs’ amended complaint, regarding that guidance.
Defendants’ Motion to Dismiss is GRANTED as to the remainder of Plaintiff’s complaint. An
order consistent with this Memorandum Opinion is separately and contemporaneously issued.
Dated: March 29, 2019 RUDOLPH CONTRERAS United States District Judge
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