On April 10, 2025, Judge Charles R. Breyer of the United States District Court for the Northern District of California granted a motion for summary judgment in favor of a software company (the “Company”) in a purported class action alleging that the Company violated Sections 11 and 15 of the Securities Act of 1933 (the “Securities Act”). Sundaram v. Freshworks Inc., No. 22-cv-06750-CRB, 2025 WL 1083168 (N.D. Cal. Apr. 10, 2025). The Court granted summary judgment, holding that the uncontested evidence established that “no recoverable losses (that is, no losses below the [offering price] threshold) were caused by the[] alleged omissions.”
The Company conducted an initial public offering on September 22, 2021, at $36.00 per share. Plaintiff alleged that the offering documents included the Company’s “strong Q2 2021 numbers but not its weaker interim Q3 2021 numbers.” On November 2, 2021, the Company’s stock was trading at $50.07 per share. The Company announced results for the third quarter of 2021 on November 2, and its stock dropped to $43.06 the following day. The stock hovered around $40 for a few weeks before falling below its IPO price of $36.00 on November 15, 2021. Plaintiff claimed that the offering documents could and should have disclosed the third quarter results. The Company moved for summary judgment on the grounds that (i) Section 11 does not permit recovery of stock price declines above the offering price, and (ii) the Company’s expert proved that the stock price drops below the IPO price were not caused by the alleged omissions.
The Court first held that plaintiff could not recover losses above the IPO price because Section 11(e) of the Securities Act limits losses to the lower of the amount paid for the security or the price at which the security was offered to the public.
The Court next assessed the Company’s argument that no recoverable losses were caused by the Company’s alleged omission of information about the third quarter. Accepting the evidence of defendants’ expert, the Court concluded that the Company’s stock traded in an “efficient market,” which, the Court noted, presumes that “any publicly released information affects the stock price within minutes or hours—or, at most, within a day.” Because the Company’s stock price remained above the IPO price within a day or two of the announcement of third quarter results, plaintiff could not show that any stock price declines below the IPO price two weeks later—the only recoverable losses—were caused by the alleged omissions.
To argue that the stock price declines nearly two weeks later could have been caused by the third quarter announcement, plaintiff’s expert opined that there could have been “post-earnings announcement drift.” Under this theory, stock prices may drift downward for up to three months following negative earnings surprises. The Court rejected its application in the case, however, because plaintiff’s expert did not show how the movement in the Company’s stock prices supported a finding that any drift had occurred. The Court also noted that it was unaware of any case in which the theory was held to create an issue of material fact as to market efficiency, even as it observed that the theory has been recognized in academic literature.
Plaintiff next argued that defendants failed to disaggregate (or separate) the causes of stock price declines in the days immediately following the third quarter announcement from stock price declines that followed over the next two weeks. The Court rejected this argument on the basis of the Company’s market efficiency expert, concluding that the expert evidence proved that the impact of the third quarter announcement was fully incorporated into the Company’s stock price well before it fell below the IPO price.
Last, plaintiff asserted that the Company needed to affirmatively identify the actual cause of the decline in the value of the Company’s stock. The Court disagreed, noting that the Securities Act only requires a defendant to “show . . . that the decline was not caused by the alleged misstatement or omission.” The Court found that the Company “met [its] burden to show that any recoverable loss was not caused by [its] alleged omissions” and that the Company “[did] not need to do more and ascertain the actual cause.”
Links & Downloads
[View source.]
