Sayce v. Forescout Technologies, Inc.

• Court: District Court, N.D. California
• Decided: July 22, 2020
• Docket: 3:20-cv-00076
• Status: Unknown

Opinion

1 2 3 4 UNITED STATES DISTRICT COURT 5 NORTHERN DISTRICT OF CALIFORNIA 6 7 CHRISTOPHER L. SAYCE, et al., Case No. 20-cv-00076-SI

8 Plaintiffs, ORDER TO CONSOLIDATE CASES 9 v. AND REPUBLISH PSLRA NOTICE

10 FORESCOUT TECHNOLOGIES, INC., et Re: Dkt. Nos. 35, 44 al., 11 Defendants. 12 13 Now before the Court is Lead Plaintiff Meitav Tachlit Mutual Funds, Ltd.’s (“Meitav 14 Tachlit”) Motion to Consolidate Cases and Vacate Notice and Lead Plaintiff Deadline (“Motion to 15 Consolidate”). Dkt. No. 35.1 Pursuant to Civil Local Rule 7-1(b) and General Order No. 72-4, the 16 Court finds this matter appropriate for resolution without oral argument and VACATES the July 24, 17 2020 hearing. 18 Having considered the arguments presented in the papers, the Court GRANTS IN PART and 19 DENIES IN PART Meitav Tachlit’s motion. The Court hereby CONSOLIDATES Case Nos. 3:20- 20 cv-00076-SI and 3:20-cv-03819-SI, VACATES its order appointing Meitav Tachlit as lead plaintiff 21 and appointing lead counsel (Dkt. No. 27), and ORDERS that Meitav Tachlit republish notice to 22 potential lead plaintiffs. 23 24 BACKGROUND 25 Defendant Forescout Technologies is a San Jose, California-based cybersecurity company 26 “that purports to provide device visibility and control solutions to businesses and government 27 1 agencies in an attempt to reduce cyber and operational risks.” Dkt. No. 31 ¶¶ 2, 38. The company 2 was founded in Israel in 2000 and had its initial public offering in October 2017. Id. ¶ 38; Dkt. No. 3 44 at 9. 4 On January 2, 2020, plaintiff Christopher Sayce filed a securities class action complaint (the 5 “Sayce Action”) against Forescout Technologies, Inc., Michael DeCesare, and Christopher Harms 6 (collectively, “defendants”) for violations of Sections 10(b) and 20(a) of the Securities Exchange 7 Act of 1934 (the “Exchange Act”) and Rule 10b-5 promulgated thereunder. Dkt. No. 1 at 2. The 8 complaint alleged that “[t]hroughout the Class Period, Defendants made materially false and 9 misleading statements regarding the Company’s business, operational and compliance policies. 10 Specifically, Defendants made false and/or misleading statements and/or failed to disclose that: (i) 11 Forescout was experiencing significant volatility with respect to large deals and issues related to the 12 timing and execution of deals in the Company’s pipeline, especially in Europe, the Middle East, and 13 Africa (‘EMEA’); (ii) the foregoing was reasonably likely to have a material negative impact on the 14 Company’s financial results; and (iii) as a result, the Company’s public statements were materially 15 false and misleading at all relevant times.” Id. ¶ 4. 16 Also on January 2, 2020, Pomerantz LLP, counsel for Sayce, published notice of the filing 17 of the lawsuit “on behalf of a class consisting of investors who purchased or otherwise acquired 18 Forescout securities between February 7, 2019, and October 9, 2019, both dates inclusive . . . .” 19 Dkt. No. 18-2, Pafiti Decl., Ex. B; see also Dkt. No. 1 ¶¶ 1, 46. The notice informed shareholders 20 that they had until March 2, 2020, to ask the Court to be appointed as lead plaintiff for the class. Id. 21 On March 23, 2020, this Court granted Meitav Tachlit’s unopposed motion for appointment as lead 22 plaintiff in the Sayce Action and approved Meitav Tachlit’s selection of Pomerantz LLP as lead 23 counsel. Dkt. No. 27 at 3.2 24 On February 6, 2020, Forescout announced that it “had entered into a definitive agreement 25 to be acquired by the affiliates of Advent International (“Advent”) for $33 per share in an all cash 26

27 2 Within the Order Appointing Lead Plaintiff and Approving Selection of Lead Counsel, this 1 transaction valued at approximately $1.9 billion.” Dkt. No. 31 (“Amended Complaint.”) ¶ 20. On 2 the day of the announcement, the price of Forescout common stock increased from a closing price 3 of $27.98 on February 5, 2020, to $33.28 on February 6. Id. ¶ 21. “On May 18, 2020, Forescout 4 issued a press release which revealed that on May 15, 2019 [sic], Advent notified the Company that 5 it would not proceed with the acquisition as scheduled.” Id. ¶ 25. Stock prices declined to a closing 6 price of $22.57 per share on May 18, 2020, from $29.52 per share at the close of trading on May 7 15, 2020. Id. ¶ 26. 8 On May 22, 2020, Meitav Tachlit filed an Amended Complaint in the Sayce Action that 9 expanded the class to include “persons or entities, who purchased or otherwise acquired the common 10 stock of Forescout between February 7, 2019 and May 15, 2020, both dates inclusive[,]” thereby 11 encompassing the period just before Forescout’s announcement that it would not be acquired by 12 Advent. See id. ¶ 1. 13 On June 10, 2020, the Arbitrage Fund, Water Island LevArb Fund, LP, Water Island 14 Diversified Event-Driven Fund, Water Island Merger Arbitrage Institutional Comingled Master 15 Fund LP, and Altshares Merger Arbitrage ETF (together, “the Arbitrage Fund Plaintiffs”) filed a 16 securities class action complaint (the “Arbitrage Action”) against the same defendants identified in 17 the Sayce Action for violations of Sections 10(b) and 20(a) of the Exchange Act. See The Arbitrage 18 Fund v. Forescout Techs., Inc., Case No. 3:20-cv-03819-SI, Dkt. No. 1 at 3. The complaint in the 19 Arbitrage Action alleges that Forescout made misstatements and omissions about the prospects of 20 the failed Advent acquisition and defines the proposed class as those “persons or entities who 21 purchased or otherwise acquired the common stock of defendant Forescout Technologies, Inc. . . . 22 during the period from February 6, 2020 through May 15, 2020, inclusive . . and were damaged 23 thereby . . . .” Id. On June 11, 2020, Entwistle & Cappucci LLP, counsel for the Arbitrage Fund 24 Plaintiffs, published notice of the filing of the lawsuit, with an August 10, 2020 deadline for potential 25 lead plaintiffs to file a motion with the Court. Dkt. No. 42, Seltzer Decl., Ex. C. The Arbitrage 26 Action was initially assigned to Judge Gonzalez Rogers and was then reassigned to this Court upon 27 a finding that it was related to the Sayce Action. Case No. 3:20-cv-03819, Dkt. Nos. 15, 22. 1 consolidated with the Sayce Action and that notice to the investors of the lead plaintiff deadline in 2 the Arbitrage Action be vacated. Dkt. No. 37 at 3. 3 The Arbitrage Fund Plaintiffs request that the Court deny Meitav Tachlit’s motion and issue 4 an order striking Meitav Tachlit’s Amended Complaint. Dkt. No. 41 at 5. Alternatively, if the Court 5 grants Meitav Tachlit’s request to consolidate the cases, the Arbitrage Fund Plaintiffs assert that 6 “the Court should order publication of a new PSLRA notice and a new lead plaintiff selection 7 process for the entire class period alleged in Meitav Tachlit’s amended complaint.” Id. at 8. 8 Defendants support consolidation of the two related cases in the interest of judicial economy 9 but take no position on the notice or lead plaintiff issues. Dkt. No. 40 at 2. On July 6, 2020, 10 defendants filed a motion to dismiss Meitav Tachlit’s Amended Complaint. Dkt. No. 44. 11 Defendants argue, among other things, that the amended allegations, particularly those concerning 12 the COVID-19 pandemic and Advent’s decision not to close its deal with Forescout, are unrelated 13 to the deficient forecasting allegations of the original complaint. Id. The hearing on the motion to 14 dismiss is set for October 2, 2020. 15 16 DISCUSSION 17 I. Whether the Court Should Consolidate the Cases 18 Meitav Tachlit argues that the Arbitrage Action raises claims against the same defendants 19 for a subset of facts and circumstances already encompassed by the Amended Complaint in the 20 Sayce Action, and the Arbitrage Action therefore should be consolidated with the Sayce Action. 21 Dkt. No. 37 at 3. The Arbitrage Fund Plaintiffs argue Meitav Tachlit’s amended complaint is an 22 impermissible supplemental complaint, and therefore the original Sayce Complaint should be 23 compared with the Arbitrage Complaint in considering consolidation. Dkt. No. 41 at 15. The 24 Arbitrage Fund Plaintiffs assert that since none of the conduct described in the Arbitrage Complaint 25 had yet occurred at the time the original Sayce Complaint was filed, the two actions are completely 26 different, and consolidation is inappropriate. Id. The Arbitrage Fund Plaintiffs further argue that 27 the gravamen of the Arbitrage Complaint is whether Forescout failed to disclose material risks that 1 failed to disclose improper revenue recognition practices. Id. 2 Federal Rule of Civil Procedure 42 allows a court to consolidate actions that “involve a 3 common question of law or fact,” and district courts are granted broad discretion in deciding whether 4 to consolidate cases pending in the same district. Fed. R. Civ. P. 42(a); Investors Research Co. v. 5 U.S. Dist. Court for Cent. Dist. of Cal., 877 F.2d 777, 777 (9th Cir. 1989). “In deciding whether to 6 consolidate cases, ‘the Court should weigh the interest of judicial convenience against the potential 7 for delay, confusion, and prejudice.’” Thomas v. Magnachip Semiconductor Corp., No. 14-CV- 8 01160-JST, 2015 WL 3749784, at *2 (N.D. Cal. June 15, 2015) (quoting Zhu v. UCBH Holdings, 9 Inc., 682 F. Supp. 2d 1049, 1052 (N.D. Cal. 2010)). “Courts have recognized that securities class 10 actions are particularly suited to consolidation to help expedite pretrial proceedings, reduce case 11 duplication, avoid the involvement of parties and witnesses in multiple proceedings, and minimize 12 the expenditure of time and money by everyone involved.” In re Century Aluminum Co. Sec. Litig., 13 Nos. 09-cv-1001-SI, 09-1205-SI, 09-cv-1103-SI, 09-cv-1162–SI, 2009 WL 2905962, at *2 (N.D. 14 Cal. Sept. 8, 2009). Consolidation of related securities actions is appropriate “where the complaints 15 are based on the same ‘public statements and reports.’” In re Netflix, Inc. Sec. Litig. No 12-0225 16 SC, 2012 WL 1496171 at *3 (N.D. Cal. April 27, 2012) (citing Wenderhold v. Cylink Corp., 188 17 F.R.D. 577, 583 (N.D. Cal. 1999)). “Differences in class periods, parties, or damages among the 18 suits do not necessarily defeat consolidation, so long as the essential claims and facts alleged in each 19 case are similar.” In re Royal Ahold N.V. Sec. & ERISA Litig., 219 F.R.D. 343, 348 (D. Md. 2003). 20 Consolidation may be appropriate even where complaints allege different misrepresentations. See 21 Ont. Teachers’ Pension Plan. Bd. v. Teva Pharm. Indus., Ltd., No. 3-17-cv-558 (SRU), 2020 U.S. 22 Dist. LEXIS 42686, at *25-26 (D. Conn. Mar. 10, 2020) (consolidating an action narrowly focused 23 on misstatements regarding anticompetitive activity with a more broad reaching action alleging 24 misrepresentations regarding strong financial results, because the misstatements regarding 25 anticompetitive activity represented a “clear continuation of the conduct” alleged in the broader 26 complaint). Since the question of consolidation turns on commonality of law and fact, it is relevant 27 to examine the specific allegations presented in the operative complaints. 1 The Arbitrage Fund Plaintiffs cite no authority for this request, which they raise in their opposition 2 brief rather than through a properly noticed motion. Moreover, any harm to the Arbitrage Fund 3 Plaintiffs by the filing of Meitav Tachlit’s Amended Complaint is mitigated by the Court’s 4 reopening of the lead plaintiff selection process, explained infra. The Court will therefore focus its 5 analysis here on a comparison of the allegations of Meitav Tachlit’s Amended Complaint and those 6 of the Arbitrage Complaint. 7 The allegations set forth in the Arbitrage Complaint are focused on the failed merger 8 agreement with Advent. The Arbitrage Fund Plaintiffs assert that Forescout failed to disclose to 9 investors and Advent that “its fourth quarter 2019 revenues were inflated through an abnormal 10 transaction with one of its largest resale customers, Merlin International Inc., which a whistleblower 11 has alleged to Advent was the result of a ‘channel stuffing scheme,’” and that “its business had 12 begun to suffer a dramatic and undisclosed downturn, including it [sic] its fast-growing Asia Pacific 13 and Japan (‘APJ’) region that was impacted by COVID-19 starting in January.” Case 3:20-cv- 14 03819-SI, Dkt. No. 1 ¶ 3. The Arbitrage Fund Plaintiffs also allege that, unbeknownst to investors, 15 Forescout was failing to meet its obligations under the “ordinary course” provisions of the merger 16 agreement, and that Advent expressed concerns regarding Forescout’s recent financial performance 17 and was considering terminating the merger agreement. Id. ¶¶ 7-9. The Arbitrage Fund Plaintiffs 18 argue that because of these factors, Forescout knew that closing the merger transaction was 19 exceptionally risky at the time it announced the merger agreement. Id. ¶ 3. 20 Meitav Tachlit’s Amended Complaint also includes allegations relating to the failed merger 21 agreement but encompasses a broader period and scheme of alleged misconduct. See generally Dkt. 22 No. 31. In addition to the conduct alleged in the original Sayce Complaint, the Amended Complaint 23 alleges that on February 6, 2020, when Forescout announced it had entered into a definitive 24 agreement to be acquired by Advent, stock prices rose despite the announcement of poor financial 25 results for the fourth quarter of 2019 on this same day. See id. ¶ 20. Meitav Tachlit alleges that 26 upon Forescout’s announcement on May 18, 2020 that Advent would not proceed with the 27 acquisition, stock prices “plunged.” Id. ¶¶ 25-27. Meitav Tachlit further alleges, among other 1 knew or recklessly disregarded the deterioration of productivity of sales representatives and the 2 value of deals in the sales pipeline; defendants made false and/or misleading statements in order to 3 support its unrealistic projections, while failing to disclose lowered sales and productivity and 4 dismissing unmet revenue projections; Forescout failed to disclose “a mass exodus of experienced 5 sales representatives[;]” and Forescout encouraged Named Account Managers to manufacture 6 “committed” deals that it knew were illusory in order to pad its pipeline and bolster its revenue 7 projections. Id. ¶¶ 3, 7, 13, 53. The Amended Complaint, as does the Arbitrage Complaint, alleges 8 violations of Section 10(b) of the Exchange Act, and Rule 10b-5 promulgated thereunder, and of 9 Section 20(a) of the Exchange Act. 10 Since both actions share common issues of law and fact, the Court will consolidate the two 11 actions in the interest of judicial economy. The Amended Complaint subsumes the class period of 12 the Arbitrage Complaint, and both actions name the same defendants and federal securities law 13 claims. Both the Arbitrage Complaint and the Amended Complaint cite to the same Forescout 14 disclosures and press release concerning the failed Advent acquisition. Although the Arbitrage 15 Complaint focuses solely on the alleged misrepresentations regarding the failed acquisition, while 16 the Amended Complaint alleges additional false and/or misleading statements, there is enough 17 overlap between the two that not consolidating these cases would needlessly waste the resources of 18 the parties and of the Court. 19 Accordingly, the Court CONSOLIDATES Case Nos. 3:20-cv-00076-SI and 3:20-cv-03819- 20 SI. 21 22 II. Whether the Court Should Reopen the Lead Plaintiff Selection Process 23 The Court will next consider whether to reopen the lead plaintiff selection process by 24 ordering that Meitav Tachlit republish notice of the suit in accordance with the Private Securities 25 Litigation Reform Act of 1995 (“PSLRA”). 26 Meitav Tachlit asserts that republication is not needed, and that the Court should vacate the 27 pending lead plaintiff selection process in the Arbitrage Action, because the allegations in the 1 43 at 9 (citing Chun v. Fluor Corp., No. 3:18-CV-01338-X, 2020 U.S. Dist. LEXIS 91862, at *14- 2 15 (N.D. Tex. May 26, 2020)). 3 The Arbitrage Fund Plaintiffs assert that, if the Court consolidates the actions, the Amended 4 Complaint’s expansion of the class period and claims warrants reopening the lead plaintiff selection 5 process, since qualified plaintiffs like themselves could not have applied to be lead plaintiff in the 6 Sayce Action because their claims did not yet exist when the deadline to become lead plaintiff in 7 that action expired. The Arbitrage Fund Plaintiffs argue that allowing Meitav Tachlit to serve as 8 lead plaintiff for the expanded class period would undermine the PSLRA’s goal of providing 9 potential lead plaintiffs with “a reasonable opportunity to identify themselves and present 10 themselves for the Court’s consideration.” Dkt. No. 41 at 18 (quoting Waldman v. Wachovia Corp., 11 No. 08 Civ. 2913(SAS), 2009 WL 2950362, at *1 (S.D.N.Y. Sept. 14, 2009) (requiring re- 12 publication of notice when the amended pleading brought claims on behalf of a new class and the 13 claims extended “far beyond the class and claims proposed in the original complaint”)). The 14 Arbitrage Fund Plaintiffs further argue that the amendments relating to whether Forescout disclosed 15 to investors the material risk that the Advent merger would not close do not represent a “clear 16 continuation” of conduct alleged in the original complaint in the Sayce Action, distinguishing it 17 from Chun v. Fluor Corporation, cited by Meitav Tachlit. See Chun v. Fluor Corp., No. 3:18-CV- 18 01338-X, 2020 U.S. Dist. LEXIS 91862, at *14-15 (N.D. Tex. May 26, 2020) (finding that the 19 expansion of the class period and addition of claims regarding “alleged conduct that was thought at 20 first to be reserved to four gas-fired fixed price projects but was later discovered to perhaps be 21 pervasive to projects throughout defendant Fluor’s business units” to the amended consolidated 22 complaint did not warrant republication, since it represented “a clear continuation of conduct” 23 alleged in the initial consolidated complaint). 24 Pursuant to the PLSRA, the first plaintiff to file suit for a securities class action must provide 25 early notice to the class by publicizing the action. The PSLRA provides:

26 Not later than 20 days after the date on which the complaint is filed, the plaintiff or plaintiffs shall cause to be published, in a widely 27 circulated national business-oriented publication or wire service, a (I) of the pendency of the action, the claims asserted therein, and the 1 purported class period; and

2 (II) that, not later than 60 days after the date on which the notice is published, any member of the purported class may move the court to 3 serve as lead plaintiff of the purported class. 4 15 U.S.C. § 78u–4(a)(3)(A). “This provision is ‘intended to encourage the most capable 5 representatives of the plaintiff class to participate in class action litigation[,] parties with significant 6 holdings in issuers, whose interests are more strongly aligned with the class of shareholders.’” In 7 re Cyberonics Inc. Sec. Litig., 468 F. Supp. 2d 936, 938 (S.D. Tex. 2006) (quoting H.R. Conf. Rep. 8 No. 104–369, at 32 (1995)). 9 “Although courts typically disfavor republication when a complaint is amended, courts have 10 required new notice where the amended complaint substantially alters the claims or class members.” 11 Kaplan v. S.A.C. Capital Advisors, L.P., 947 F. Supp. 2d 366, 367 (S.D.N.Y. 2013) (quoting 12 Waldman, 2009 WL 2950362, at *1). Where changes to a securities class action complaint “make 13 it likely that individuals who could now be considered potential lead plaintiffs would have 14 disregarded the earlier notice,” courts have ordered lead plaintiffs to republish notice under the 15 PSLRA. Id.; see also Kipling v. Flex Ltd., No. 18-CV-02706-LHK, 2019 WL 1472358, at *2 (N.D. 16 Cal. Apr. 3, 2019) (ordering PSLRA notice republication where the amended complaint presented 17 new facts and alleged misrepresentations relating to the defendant’s partnership with Nike that arose 18 after the original complaint was filed); In re Leapfrog Enterprises, Inc. Sec. Litig., No. C 03 05421 19 RMW, 2005 WL 5327775, at *3 & n.1 (N.D. Cal. July 5, 2005) (ordering republication where the 20 original complaint “alleged that defendants made rosy statements about Leap Frog’s financial 21 outlook,” and the amended complaint expanded the class period and added new factual allegations 22 about the defendant’s distribution and supply chain that “dramatically alter[ed] the contours of the 23 lawsuit”). 24 Here, it is entirely possible that individuals who could now be considered potential lead 25 plaintiffs in the Sayce Action would have disregarded the earlier notice, since the Amended 26 Complaint presents new facts and misrepresentations relating to the period of the failed Advent 27 acquisition that arose only after the original complaint was filed. There is no way that investors 1 the announcement of its failure could have been on notice to move to be lead plaintiff in the Sayce 2 || Action, because the losses and misrepresentations related to the merger had not even occurred at the 3 time the Sayce Action was filed or when motions for lead plaintiff were due. Thus, the Amended 4 || Complaint changes the contours of the lawsuit sufficiently to warrant republication of the PSLRA 5 notice. 6 7 CONCLUSION 8 For the reasons set forth above, the Court hereby CONSOLIDATES Case Nos. 3:20-cv- 9 || 00076-SI and 3:20-cv-03819-SI and VACATES its order appointing Meitav Tachlit as lead plaintiff 10 and appointing lead counsel (Dkt. No. 27). The Court ORDERS Meitav Tachlit to republish notice 11 of the consolidated class action complaint in compliance with the PSLRA no later than July 31, 12 2020. Pursuant to 15 U.S.C. § 78u—4(a)(3)(A)G@), any member of the purported class seeking 5 13 appointment as lead plaintiff shall have 60 days thereafter to file a motion with the Court seeking 14 appointment as lead plaintiff. 3 15 The Court DENIES AS MOOT defendants’ pending Motion to Dismiss (Dkt. No. 44), a 16 || without prejudice to re-filing following the conclusion of the new lead plaintiff selection process.

18 IT IS SO ORDERED. 19 || Dated: July 22, 2020 Sate WU tee 20 SUSAN ILLSTON United States District Judge 22 23 24 25 26 27 28