On April 4, 2025, Judge Gordon P. Gallagher of the United States District Court for the District of Colorado dismissed with prejudice a putative class action asserting claims under the Securities Act of 1933 and the Securities Exchange Act of 1934 against a software company and certain of its executives. Cupat v. Palantir Techs., Inc., No. No. 22-cv-02384, slip op. (D. Colo. Apr. 4, 2025), ECF No. 123. Plaintiffs alleged that the company engaged in a scheme to inflate its stock price by touting its sales of software to related companies and made misrepresentations regarding its financial performance. The Court held that plaintiffs’ Exchange Act claims did not adequately allege scienter, while plaintiffs’ Securities Act claims failed for lack of statutory standing because plaintiffs did not allege that they purchased any shares traceable to the challenged registration statement.
With respect to scienter, while plaintiffs argued that scienter could be inferred under various theories, the Court held that, “[w]hen [p]laintiffs’ verbiage is peeled back, it becomes clear that [p]laintiffs over-rely on group pleading, conclusory allegations, and speculation.” Id. at 16. Specifically, while plaintiffs argued that the “Individual Defendants” had “hands-on involvement in [the company’s] business” and had access to relevant data, this type of group pleading was “not persuasive” because it failed to make distinct allegations for each defendant, and scienter cannot be inferred based only on a defendant’s position. Id. at 17–19. The Court also rejected plaintiffs’ argument based on defendants’ statement that they had “strong visibility” into the company’s future revenue growth, noting that “strong visibility” was not the same as “total visibility” and the visibility was based on the company’s small size, which supported an “innocent explanation for [d]efendants’ overly optimistic projections: it would not take very many sales misses to undercut those projections.” Id. at 20.
The Court further observed that the individual defendants’ stock sales—while “clearly significant” and constituting plaintiffs’ “strongest scienter theory”—were also consistent with the expected trading activity for “executives who had access to liquidity for the first time after building a company for 17 years.” Id. at 20–22. Moreover, the Court rejected plaintiffs’ argument for scienter based on the company’s sale of software to certain special purpose acquisition companies (“SPACs”) or SPAC target companies in which the company also had equity positions. The Court rejected the characterization of these transactions as “sham, round-trip transactions,” explaining that they were “not obviously lacking in commercial justification” because the company received equity in the SPACs and typically received a different amount of cash in exchange for selling its software. Id. at 23. The Court also rejected plaintiffs’ argument based on allegations that defendants changed the reporting of key metrics that would have otherwise revealed a downturn in the company’s performance; to the contrary, the Court observed that much of the same information was disclosed in other formats. Id. at 24–26. On balance, even considering the scienter allegations holistically, the Court concluded that the allegations were “vague, conclusory, or overstate the import of more likely innocent actions,” and therefore dismissed plaintiffs’ Exchange Act claims.
With respect to plaintiffs’ claims under Section 11 of the Securities Act, the Court held that plaintiffs failed to establish statutory standing because they failed to adequately allege that they purchased shares traceable to the challenged registration statement. The Court acknowledged that district courts disagree about the degree of specificity that a complaint must contain in order “to plead and prove that [a plaintiff] purchased shares traceable to the allegedly defective registration statement,” as explained by the United States Supreme Court in Slack Techs., LLC v. Pirani, 598 U.S. 759, 770 (2023). Slip op. at 28–29. The Court noted, however, that the only two Circuit Courts of Appeal to address the issue both held that general allegations that a plaintiff purchased pursuant to or traceable to allegedly false offering documents are insufficient. Id. at 29–30 (citing In re Ariad Pharms., Inc. Sec. Litig., 842 F.3d 744 (1st Cir. 2016); In re Century Aluminum Co. Sec. Litig., 729 F.3d 1104 (9th Cir. 2013)). While neither of these decisions were binding on the Colorado District Court, the Court nonetheless agreed that they were persuasive, as bare allegations “to the effect that [p]laintiffs purchased securities traceable to or pursuant to the allegedly defective registration statement” are conclusory and are “the exact sort [of allegations] that binding Supreme Court precedent directs courts not to consider at the pleading stage.” Slip. op. at 30.
The Court further held that, while plaintiffs had not simply alleged traceability generally but had attempted to assert other theories, none of those theories sufficed to show that plaintiffs purchased shares traceable to the challenged registration statement. Specifically, plaintiffs alleged that: (i) it was highly probable, amounting to a “legal certainty,” that lead they purchased at least one registered share; (ii) plaintiffs would be able to prove that they acquired shares traceable to the challenged registration statement “with appropriate discovery;” and (iii) any unregistered shares purchased by plaintiffs should be deemed registered based on an “integrated offering” theory. Id.
As to the first two arguments, the Court observed that plaintiffs identified no case that condoned “pleading-by-probability.” Id. at 32. Instead, the Court held that “a plaintiff must plead facts supporting a plausible inference that its shares are traceable, not simply facts supporting a plausible inference that its shares are probably traceable to the challenged registration statement.” Id.
As for the third argument, plaintiffs contended that, pursuant to the “integrated offering” doctrine, because the company went public in a single liquidity event, the fact that the company also had separate unregistered shares available for purchase at the time of the alleged fraud was irrelevant. Id. at 31. The Court disagreed, holding that allowing such allegations would permit plaintiffs to avoid “what the Supreme Court [in Slack] has suggested is a strict tracing requirement.” Id. at 33. Moreover, the Court explained that the purpose of the “integrated offering” doctrine was to address attempts to evade registration requirements by dividing a single offering into multiple unregistered offerings, which was not alleged to have occurred here. Id. at 34.
The Court acknowledged that its application of the traceability requirement could incentivize companies to structure direct stock offerings to thwart plaintiffs from being able to plead that they could trace the shares they purchased to a particular offering statement. Id. at 35. But the Court observed that those policy considerations had been raised in Slack, and the Supreme Court rejected them. The Court emphasized that it “reads Slack as holding Section 11 plaintiffs to a strict tracing requirement, even if this requirement does create the prospect of a loophole for direct listings,” and that avoiding this consequence was “best resolved through statutory or regulatory changes.” Id. at 36. The Court also acknowledged that some judicial solutions might be available, such as permitting limited discovery to establish tracing. Here, the Court had invited briefing on that issue but explained that it was not persuaded that the discovery approach plaintiffs proposed—using first-in-first-out or last-in-last-out “accounting methods” and examining securities transfer records—was feasible. Id. at 36.
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