On Monday, October 16, 2017, Judge Jon S. Tigar of the United States District Court for the Northern District of California granted in part and denied in part a motion to dismiss a shareholder class action alleging violations of the Securities Exchange Act of 1934 by Twitter Inc. (“Twitter”) and certain of its executives.  Shenwick v. Twitter, Inc., No. 16-CV-05314-JST, 2017 WL 4642001 (N.D. Cal. Oct. 16, 2017).  Plaintiffs alleged that Twitter and its executives made false and/or misleading statements regarding Twitter’s user metrics that painted a misleading picture of Twitter’s financial health and growth.  The Court permitted many of plaintiffs’ claims to proceed, even while dismissing certain allegations as non-actionable “puffery,” and discounting allegations in the complaint attributed to confidential witnesses.
 
Twitter is a social media platform that generates revenue by selling advertising seen by users who view “tweets.”  The allegations in the Complaint generally concerned three interrelated metrics Twitter used to describe customer usage numbers:  Monthly Active Users (“MAU”); Daily Active Users (“DAU”); and advertising engagements.  Plaintiffs alleged that DAU was the key measure of user engagement, and that Twitter declined to disclose DAU, and emphasized MAU and advertising engagements metrics in its place, to conceal negative trends relating to users’ engagement with the platform.  Because more engaged users (i.e., those that used the platform more often) were less likely to leave the platform and were more valuable to advertisers and, therefore, generated more revenue, the alleged misrepresentation could have a material impact on Twitter’s stock price.  In permitting the action to proceed, the Court rejected Twitter’s argument that its accurate reporting of MAU and advertising engagements could never be misleading.  Instead, the Court ruled that “[i]t was misleading for Defendants to rely on favorable ad engagement trends to describe or predict user engagement when DAU, Twitter’s primary metric, was flat or declining,” id. at *18, and, similarly, that disclosure of the DAU figures “would have put investors on alert that . . . aggressive MAU projections . . . were unlikely to materialize,” id. at *15.
 
In evaluating plaintiffs’ claims, the Court distinguished between statements that were mere puffery and those that were actionable under the Exchange Act.  For example, the Court noted that terms such as “good,” “well-regarded,” “pleased with,” “big,” “excellent,” “vibrant,” “strong,” and “robust” had been held to be non-actionable puffery.  Id. at *17.  But it rejected the contention that the word “similar” was puffery, or too vague to give rise to an action for fraud, when used in the context of an April 2015 earnings call during which a Twitter executive stated that DAU to MAU ratios during the previous quarter were “similar” to those provided during an investor conference in November 2014, even though that ratio had allegedly declined from 48% to 44%.  Id.  In contrast, the Court granted the motion to dismiss claims based on statements in the same April 2015 earnings call describing Twitter’s new product initiatives as generating “exciting results” and “driving continuous improvements in engagement,” which the Court found to be analogous to terms deemed non-actionable statements of corporate optimism in other cases.  Id.
 
Finally, although the Court found scienter adequately pleaded based on the timing of defendants’ statements at issue and the resignations and terminations of multiple senior Twitter officials allegedly in connection with those statements, the Court noted that its finding on scienter did not rely on statements by confidential witness that referenced “senior management” but not specific communications with the individual defendants.  The Court held that although the Complaint described the confidential witnesses with “enough specificity to be reliable,” it failed to “establish their reliability and personal knowledge” of the individual defendants’ state of mind.   Id. at *22. 
 
The case is notable in its careful analysis of puffery arguments and provides further dimension to case law discussing the strengths and weaknesses of confidential witness allegations.