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December 6, 2012

LITIGATION AND ENFORCEMENT

FRAUD AND MANIPULATION-NDCal: Investor Failed to Show Conference Call Statements Were False

By Rodney F. Tonkovic, J.D.

An institutional investor's Exchange Act fraud claim was dismissed after a district court found that the complaint failed to allege falsity, loss causation, and scienter. The investor claimed that the stock price of a corporation providing data centers had been artificially inflated as a result of alleged false and misleading statements made by the company and two of its chief officers. A number of the statements at issue were made during a conference call discussing pricing strategies and assessing the integration of a recently-purchased competitor. The investor claimed that these statements were shown to be false and misleading when compared to later statements and allegations by confidential witnesses. (Cement Masons & Plasterers Joint Pension Trust v. Equinix, Inc., December 5, 2012, Conti, S.)

The court first concluded that the company's statements regarding the integration of the acquired company were not protected under the PSLRA safe harbor for forward-looking statements. According to the court, the challenged statements were descriptions of the present. The statements, the court explained, did not fall under the safe harbor merely because, as the company argued, they were made on the same call during which that the company released its financial projections.

Next, later statements did not show that statements made during the conference call were false. In this case, a July 2010 conference call made positive statements about the integration of the acquired company's sales organization while statements made in October indicated that there had been some difficulties. The court concluded that the plaintiffs pleaded only that the company was at first optimistic about the integration of the acquired company's sales force, but later discovered that the integration did not proceed as smoothly as had hoped and that the earlier goals were not achieved. The later statement and confidential witness allegations were not inconsistent with the earlier statement, the court stated.

Confidential witness allegations were also unable to raise a strong inference of scienter as to the conference call statements. The confidential witnesses stated that the company favored its own sales representatives over the representatives coming from the acquired company and that this practice ultimately harmed the integration and cross-selling efforts. This, the court observed, was not inconsistent with the statements that the sales forces were integrated. Further, to the extent that the investor alleged that the company knew or should have known about problems with the new sales representatives, the court determined that these problems were actively concealed from company management and could not have been immediately discovered and that the complaint failed to plead when the problems came to light.

The court then found that the complaint failed to adequately allege the falsity of the statements on pricing strategy. According to the court, the company "maintained a consistent position on pricing throughout the class period" and acted consistently with its statements. The court remarked that the "investors and analysts expected one thing and got another" and that the company "cannot be held liable for thwarting investor expectations."

Finally, the court found that the investor failed to adequately allege loss causation. A confidential witness alleged that the company's sales representatives offered customers substantial discounts without supervisory approval. The court found, however, no indication that this discounting was ever disclosed to the market. Accordingly, the discounting practices could not have caused the investor's alleged loss.

Shawn A. Williams (Robbins Geller Rudman & Dowd LLP) for Cement Masons & Plasterers Joint Pension Trust. Catherine Duden Kevane, Kevin Peter Muck, Marie Caroline Bafus (Fenwick and West LLP) for Equinix, Inc.

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