ORDER GRANTING DEFENDANTS' MOTION TO DISMISS

Re: Dkt. No. 123

Yvonne Gonzalez Rogers, United States District Court Judge.

Plaintiff Arkansas Teacher Retirement System, as lead plaintiff, brings this consolidated second amended complaint against defendants Nimble Storage, Inc. ("Nimble"), Suresh Vasudevan, Anup Singh, Varun Mehta, and Dan Leary for alleged violations of federal securities laws. (Dkt. No. 121, "SAC.") Specifically, plaintiff claims that all defendants violated section 10(b) of the Exchange Act and Rule 10-b5 promulgated thereunder for allegedly making fraudulent statements regarding Nimble's prospects and financial condition between November 24, 2014 and November 19, 2015 (the "Class Period"). Additionally, plaintiff brings claims against defendants Vasudevan and Singh under section 20 of the Exchange Act.

The Court previously dismissed plaintiff's complaint, which focused on its allegations that defendants misled the public by failing to disclose Nimble's: (i) limiting its investments in Sales and Marketing ("S/M"); (ii) diversion of investments from its commercial segment to its enterprise segment; and (iii) failure to penetrate clients for its enterprise segment in a meaningful fashion.1 Plaintiff's SAC now focuses on three other theories, namely that defendants misled the public by: one, failing to inform investors that Nimble's commercial segment was weakening throughout the Class Period; two, suggesting that Nimble's enterprise segment was growing while simultaneously misclassifying commercial clients as enterprise clients; and three, informing the public that Nimble remained on-track to "breakeven" while knowing that its commercial and enterprise segments were struggling.

Now before the Court is defendants' motion to dismiss the SAC. Having carefully reviewed the pleadings, the papers and exhibits submitted on this motion, and oral arguments heard on April 18, 2017, and for the reasons set forth more fully below, the Court GRANTS defendants motion as follows: The Court DISMISSES WITH PREJUDICE plaintiff's claims relating to statements regarding the commercial segment prior to August 25, 2015. The Court DISMISSES WITHOUT PREJUDICE plaintiff's remaining claims, granting leave to amend as outlined herein.2

I. DISCUSSION

A. Section 10(b) and Rule 10b-5 Claim

Defendants raise the following grounds upon which they argue plaintiff's claims should be dismissed: (i) plaintiff has failed to plead with particularity any false or misleading statements; (ii) certain statements are forward-looking and protected by the Private Securities Litigation Reform Act's ("PSLRAs") safe harbor; and (iii) plaintiff has failed to plead a strong inference of scienter. Because, as discussed below, the Court finds that plaintiff has not adequately pled any false or misleading statements or omissions, the Court does not address defendants' alternative bases for dismissal.

Generally, plaintiff has alleged three categories of false or misleading statements: first, the failure to disclose that the commercial segment was weakening throughout the Class Period; second, misleading the public about growth in the enterprise segment, which was based on fraudulent reclassifications of commercial clients as enterprise clients; and third, expressing sentiments that Nimble was "on track" to breakeven because it led investors to believe defendants' statements regarding growth in the commercial and enterprise segments.

1. Statements Regarding the Commercial Segment

By way of background, plaintiff previously articulated that defendants failed to disclose sufficiently the extent to which they were diverting S/M resources from commercial to enterprise, which ultimately resulted in weakness in the commercial segment. The Court previously rejected the same, explaining that defendants had disclosed the shift in investment and plaintiff had failed to identify any duty to disclose the exact extent to which defendants were shifting S/M resources. (Dkt. No. 113 at 11-13.) Plaintiff now alleges that certain statements relating to the commercial segment were misleading because at the times such statements were made, the commercial segment was already showing significant weakness. (See, e.g., SAC ¶ 215 ("So we feel very good about both the pace of new customer acquisition in the mid-sized enterprise segment as well as the fact that we are growing our base in large enterprises."); ¶ 270 ("And we've been able to sustain our growth ramp based on our customer acquisition machine."); ¶ 279 ("We are systematically expanding our customer base across the mid-sized enterprise, large enterprise and cloud service provider segments of the market."); see also id. ¶¶ 215, 226, 236, 268, 270, 279, 290, 293.)

Defendants argue that plaintiff's allegations with regard to the commercial segment should be dismissed because plaintiff lacks particularized facts supporting claims that the commercial segment was weak throughout the Class Period and, given other allegations and uncontested facts in defendants' SEC filings, such claims are illogical. The Court agrees.

Plaintiff simply cannot reconcile its allegations with the undisputed fact that Nimble consistently exceeded its revenue projections for each quarter during the Class Period, except for its last projection. (SAC ¶ 119.) Specifically: At the start of the Class Period, Nimble announced that its revenue for Q3 2015 was $59.1 million and projected that its Q4 2015 revenue would be between $65 and $67 million. Nimble reported $68.3 million in revenue for that quarter and projected revenue of $68 to $70 million for Q1 2016, during which Nimble earned $71.3 million in revenue. For Q2 2016, Nimble projected revenues of $77 to $79 million and ultimately reported $80.1 million in revenue. For the last quarter of the Class Period, Nimble projected revenue of $86 to $88 million, but reported only $80.7 million. (Id. ¶ 18.)

It is illogical for plaintiff to allege that Nimble was failing to penetrate enterprise at the same time that its commercial segment was weakening, while also reporting record revenues each quarter. This is particularly so where plaintiff has alleged that deals in the commercial segment were generally completed within ninety days. (Id. ¶¶ 52, 177.) Therefore, any growing weaknesses would have become manifest throughout the Class Period rather than merely during the last quarter of the Class Period. See In re JDS Uniphase Corp. Sec. Litig., No. 02-CV-1486-CW, 2003 WL 26615705, at *4 (N.D. Cal. Nov. 3, 2003) (dismissing claims on grounds they were "simply illogical," as plaintiff failed to provide a "reasonable explanation" for how defendant could be experiencing uncontroverted growth without experiencing strong demand).3

As defendants acknowledge, at some point during the final quarter of the Class Period, Nimble experienced a decline in both its commercial and enterprise segments, resulting in the missed revenue guidance. (See SAC ¶ 300 ("We believe that this decreased investment led to slower growth than we would have seen, had we maintained our previous pace of investment."); ¶ 308 ("It was really pressure that we saw throughout Q3 ... for us this quarter, throughout, we noticed that there was more competitive intensity, and certainly that carried on through month three.").) The Court can foresee a claim surviving for that short window during Q3 2015 prior to the corrective disclosures on November 19, 2015, to the extent that plaintiff can adequately allege any actionable statements. Plaintiff, however, has failed to do so in the SAC.4

Accordingly, the Court DISMISSES WITH PREJUDICE plaintiff's claims relating to defendants' statements about Nimble's commercial segment, except as to statements made within the last quarter of the Class Period. Claims relating to those statements are DISMISSED WITHOUT PREJUDICE and with leave to amend.

2. Statements Regarding the Enterprise Segment

The heart of plaintiff's theory with regard to statements about Nimble's enterprise segment is thus: defendants knew throughout the Class Period that fibre channel was not effectively penetrating the enterprise segment, but concealed this fact by touting the growth of its enterprise customer base while at the same time relabeling commercial accounts as enterprise accounts. (See id. ¶ 12; see also id. ¶¶ 215, 222, 224, 226, 232, 234, 238, 240, 242, 250, 252, 254, 259, 261, 263, 272, 275, 277, 279, 281, 290, 293.) Specifically, plaintiff now alleges that these relabeled customers were not true enterprise customers because they did not "meet the revenue requirements to be members of the Global 5000 enterprise list." (Id.)5 According to plaintiff, defendants' use of "enterprise" both externally and internally referred exclusively to clients listed in the Global 5000, i.e., the largest 5,000 companies in the world by revenue. In support of such allegations, plaintiff cites to statements from several confidential witnesses: For instance, CW 3 attests that Nimble began relabeling commercial accounts as enterprise accounts beginning in December 2014 and stated that the "reason behind the re-labeling of the accounts was ultimately to make enterprise sales look like they were doing better than they actually were." (Id. at ¶ 180; see also id. ¶¶ 181-187.) Additionally, CWs 8 and 9 identified seven clients that were reclassified as enterprise, but did not appear on the list of Global 5000 companies during the Class Period.

Defendants do not dispute that such reclassifications occurred. Rather, defendants' argue that plaintiffs have not alleged particularized facts demonstrating that the internal reclassifications were disclosed to the investing public and that numbers disclosed to the public were false.6

The Court agrees. Importantly, throughout the Class Period, defendants provided to the public updates on the growth of its Global 5000 customer base: At the start of the Class Period, Nimble announced that it had 260 Global 5000 customers, fifteen of which were also within the Global 100. (SAC ¶ 188 n.15.) In Q4 2015, Nimble announced that it added forty-one new Global 5000 customers to the installed base, including dozens of Global 500 companies. (Id.) And finally, in Q3 2016, Nimble announced that it had over 400 global enterprises, including seventy-eight of the Global 500. (Id.) Thus, defendants informed the public that its Global 5000 customer base had grown by approximately 140 clients throughout the Class Period.

Plaintiff has not alleged that such numbers that were disclosed to the public were false. In its opposition, plaintiff argues that it does so in paragraph 252, which quotes a statement plaintiff alleges is misleading. Though the statement cited in paragraph 252 does include a reference to Nimble adding "41 new G5000 customers to [its] installed base during the quarter," plaintiff does not allege that it was misleading because Nimble did not actually add forty-one new Global 5000 customers. Rather, plaintiff alleges:

(Id. ¶ 253.) Such is not an allegation that the "forty-one" number itself was misleading because it included customers that were fraudulently relabeled as enterprise customers.7

In any event, plaintiff has not alleged particularized facts supporting plaintiff's argument that any commercial clients that were allegedly fraudulently relabeled as enterprise clients were incorporated into these publicly disclosed numbers. While plaintiff's new focus on the Global 5000 companies and new allegations that non-Global 5000 clients were reclassified from commercial to enterprise may support an inference that defendants mislabeled certain clients, plaintiff's complaint lacks allegations connecting such reclassifications to any numbers actually disclosed by defendants. Absent such allegations and allegations that the disclosed numbers were false, plaintiff's claims with regard to statements about Nimble's enterprise segment are not actionable. Based on such numbers, the market and investors can assess for themselves defendants' statements regarding Nimble's penetration of the enterprise segment. See In re Verifone Sec. Litig., 784 F.Supp. 1471, 1481 (N.D. Cal. 1992) ("[Sales and profit data], when accurately reported, [are] rarely subject to misinterpretation, even if the disclosure is accompanied by generally optimistic statements about the future by corporate officers. Professional investors, and most amateur investors as well, know how to devalue the optimism of corporate executives, who have a personal stake in the future success of the company.") The Court finds, however, that plaintiff may yet be able to plead adequate facts to satisfy their pleading burden with regard to such claims. See In re LeapFrog Enters., Inc. Sec. Litig., 527 F.Supp.2d 1033, 1052 (N.D. Cal. 2007) (granting leave to amend despite previous attempts to cure deficiencies, noting that allowing leave to amend is "especially important in the context of the PSLRA").

Accordingly, the Court DISMISSES WITHOUT PREJUDICE plaintiff's claims with respect to defendants' statements about its enterprise segment. The Court grants plaintiff leave to amend but only to the extent that plaintiff can adequately allege that the reclassifications were fraudulent and such fraudulent reclassifications were disclosed to the public.8

B. Section 20(a) Claim

Defendants do not contest that Vasudevan and Singh are "controlling" individuals under the statute. Thus, section 20(a) claims against the same are dependent on whether plaintiff's section 10(b) claims survive. The Court has found that plaintiff has failed to allege adequately any predicate violations of section 10(b). Accordingly, the Court GRANTS defendants' motion to dismiss plaintiff's section 20(a) claim with leave to amend.

II. CONCLUSION

For the foregoing reasons, the Court GRANTS defendants' motion to dismiss as follows: The Court DISMISSES WITH PREJUDICE plaintiff's claims relating to statements regarding the commercial segment prior to August 25, 2015. The Court DISMISSES WITHOUT PREJUDICE plaintiff's remaining claims, granting leave to amend as outlined herein. By May 19, 2017, plaintiff must file a notice of intent advising the Court and parties whether it intends to rest on the SAC or attempt a third amended complaint. If the latter, the amended pleading shall be filed no later than June 12, 2017. Defendants shall respond within twenty-eight (28) days of filing.

This Order terminates Docket Number 123.

IT IS SO ORDERED.