16

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Stadnick v. Vivint Solar, Inc., et al.

1



## In the 2



# United States Court of Appeals

3



## For the Second Circuit 4

________ 5

6

A UGUST T ERM

, 2016 7

8

A RGUED : A UGUST 25, 2016 9

D ECIDED : J UNE 21, 2017 10

11

No. 16

‐ 65

‐ cv 12

13

R OBBY S HAWN S TADNICK

, individually and on behalf of all others 14

similarly situated, 15

Plaintiff

‐ Appellant, 16

17

B RENNEN H YATT

, 18

Plaintiff

, 19

20

v. 21

22

T HOMAS L IMA

, individually and on behalf of all others similarly 23

situated, 24

Consolidated Plaintiff

, 25

26

v. 27

28

V IVINT S OLAR

, I NC

., T HE B LACKSTONE G ROUP L.P., G REGORY S. 29

B UTTERFIELD

, D ANA C. R USSELL

, D AVID F. D’A LESSANDRO

, A LEX J. 30

D UNN

, B RUCE M C E VOY

, T ODD R. P EDERSEN

, J OSEPH F. T RUSTEY

, P ETER 31

F. W ALLACE

, J OSEPH S. T IBBETTS

, G OLDMAN

, S ACHS & C O

., M ERRILL 32

L YNCH

, P IERCE

, F ENNER & S MITH I NCORPORATED

, C REDIT S UISSE 33

S ECURITIES (USA) LLC, C ITIGROUP G LOBAL M ARKETS I NC

., D EUTSCHE 342 16

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B ANK S ECURITIES I NC

., M ORGAN S TANLEY & C O

. LLC, B ARCLAYS 1

C APITAL I NC

., B LACKSTONE A DVISORY P ARTNERS L.P., 2

Defendants

‐ Appellees. 3

________ 4

5

Appeal from the United States District Court 6

for the Southern District of New York. 7

No. 14 Cv. 9283

– Katherine B. Forrest, District Judge

. 8

________ 9

10

Before: W ALKER

, C ABRANES

, and L OHIER

, Circuit Judges

. 11

________ 12

13

Plaintiff

‐ Appellant Robby Shawn Stadnick appeals from a 14

judgment of the United States District Court for the Southern 15

District of New York (Forrest, J. ) dismissing his securities class 16

action complaint pursuant to Federal Rule of Civil Procedure 17

12(b)(6). Stadnick’s claims arise out of the October 1, 2014 Initial 18

Public Offering (“IPO”) for shares of Vivint Solar, Inc., a residential 19

solar energy unit installer. Stadnick principally argues on appeal 20

that Vivint was obligated to disclose financial information for the 21

quarter ending one day before the IPO because Vivint’s performance 22

during that quarter constituted an “extreme departure” under Shaw 23

v. Digital Equipment Corp.

, 82 F.3d 1194 (1st Cir. 1996). He also argues 24

that Vivint misled prospective shareholders regarding the 25

company’s opportunities for expansion in Hawaii by failing to 26

disclose the potential impact of the state’s evolving regulatory 27

regime. We conclude that the “extreme departure” test of Shaw is not 283 16

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the law of this Circuit and that Vivint’s omissions were not material 1

under the test set forth in DeMaria v. Andersen

, 318 F.3d 170 (2d Cir. 2

2003), to which we adhere. We further conclude that Vivint did not 3

mislead shareholders regarding the company’s prospects in Hawaii. 4

We therefore AFFIRM the judgment of the district court. 5

________ 6

N ICHOLAS I AN P ORRITT (Adam M. Apton on the 7

brief ), Levi & Korsinsky LLP, Washington, DC, for 8

Plaintiff

‐ Appellant

. 9

10

J AY B. K ASNER (Scott D. Musoff on the brief ), 11

Skadden, Arps, Slate, Meagher & Flom LLP, New 12

York, NY, for Defendants

‐ Appellees Vivint Solar, 13

Inc., The Blackstone Group L.P., Gregory S. 14

Butterfield, Dana C. Russell, David F. 15

D’Alessandro, Alex J. Dunn, Bruce McEvoy, Todd 16

R. Pedersen, Joseph F. Trustey, Peter F. Wallace & 17

Joseph S. Tibbetts. 18

19

Paul Vizcarrondo, Jr., Carrie M. Reilly & Steven 20

Winter on the brief

, Wachtell, Lipton, Rosen & 21

Katz, New York, NY, for Defendants

‐ Appellees 22

Goldman, Sachs & Co., Merrill Lynch, Pierce, 23

Fenner & Smith Incorporated, Credit Suisse 24

Securities (USA) LLC, Citigroup Global Markets 25

Inc., Deutsche Bank Securities Inc., Morgan 26

Stanley & Co. LLC, Barclays Capital Inc. & 27

Blackstone Advisory Partners L.P. 28

________ 294 16

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J OHN M. W ALKER

, J R

., Circuit Judge : 1

Plaintiff

‐ Appellant Robby Shawn Stadnick appeals from a 2

judgment of the United States District Court for the Southern 3

District of New York (Forrest, J. ) dismissing his securities class 4

action complaint pursuant to Federal Rule of Civil Procedure 5

12(b)(6). Stadnick’s claims arise out of the October 1, 2014 Initial 6

Public Offering (“IPO”) for shares of Vivint Solar, Inc., a residential 7

solar energy unit installer. Stadnick principally argues on appeal 8

that Vivint was obligated to disclose financial information for the 9

quarter ending one day before the IPO because Vivint’s performance 10

during that quarter constituted an “extreme departure” under Shaw 11

v. Digital Equipment Corp.

, 82 F.3d 1194 (1st Cir. 1996). He also argues 12

that Vivint misled prospective shareholders regarding the 13

company’s opportunities for expansion in Hawaii by failing to 14

disclose the potential impact of the state’s evolving regulatory 15

regime. We conclude that the “extreme departure” test of Shaw is not 16

the law of this Circuit and that Vivint’s omissions were not material 17

under the test set forth in DeMaria v. Andersen

, 318 F.3d 170 (2d Cir. 18

2003), to which we adhere. We further conclude that Vivint did not 19

mislead shareholders regarding the company’s prospects in Hawaii. 20

We therefore AFFIRM the judgment of the district court. 21

22

235 16

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BACKGROUND 1

For purposes of this appeal we must accept the facts as they 2

are alleged in the complaint and draw all reasonable inferences in 3

Stadnick’s favor. See Ashcroft v. Iqbal

, 556 U.S. 662, 678 (2009). 4

Stadnick argues, in essence, that the registration statement Vivint 5

issued in conjunction with its IPO misled prospective shareholders. 6

Defendant

‐ Appellee Vivint Solar is a residential solar energy 7

unit installer that leases solar energy systems to homeowners. 1 8

During the relevant period, Vivint was the second largest installer of 9

solar energy systems in the U.S. residential market, with 10

approximately an 8% market share in 2013 and a 9% share in the 11

first quarter of 2014. Vivint operated in a number of states, but as of 12

June 30, 2014 more than 50% of its installations were in California 13

and 15% in Hawaii. Twenty

‐ one of its thirty

‐ seven offices were 14

located in those two states. 15

Vivint’s business model is predicated upon its continued 16

ownership of the solar energy equipment it installs, which allows 17

Vivint to qualify for various tax credits and other government 18

incentives. Customers pay no up

‐ front costs and instead enter into 19

1 The individual defendants are: Gregory S. Butterfield, at the time of Vivint’s IPO

the CEO, President, and a director of Vivint; Dana C. Russell, Vivint’s CFO at the time of

the IPO; and the remaining Vivint directors at the time of the IPO. The complaint also

names the following underwriter defendants: Goldman, Sachs & Co.; Merrill Lynch,

Pierce, Fenner & Smith, Inc.; Credit Suisse Securities (USA) LLC; Citigroup Global

Markets Inc.; Deutsche Bank Securities Inc.; Morgan Stanley & Co. LLC; Barclays Capital

Inc.; and Blackstone Advisory Partners L.P.6 16

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twenty

‐ year leases by which they purchase solar energy in monthly 1

payments at approximately 15% to 30% less than they would pay for 2

utility

‐ generated electricity. These monthly payments are Vivint’s 3

primary revenue stream. Because Vivint incurs significant up

‐ front 4

costs, it has operated at a loss from its inception. 5

To fund its operations, Vivint secures financing from outside 6

investors. Pursuant to contractual arrangements, these outside 7

investors periodically make cash contributions into investment 8

funds jointly owned by the investors and Vivint. Each investment 9

fund then finances Vivint’s purchase and installation of a particular 10

tranche of solar energy systems. Once a system is installed, its title is 11

transferred to the fund that contributed the capital, which allows the 12

fund to benefit from the relevant tax credits. The fund also receives 13

most of the customer’s monthly payments until either the fund 14

achieves a targeted rate of return or the recapture period associated 15

with certain tax credits expires. At that time, Vivint begins to receive 16

a majority of the revenues. 17

Given the investment funds’ role, Vivint allocates its income 18

between (i) its public shareholders and (ii) the outside investors, the 19

latter of whom Vivint refers to variously as non

‐ controlling interests 20

or redeemable non

‐ controlling interests (“NCIs”). Vivint thus 21

calculates the income available to public shareholders by first 227 16

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determining the company’s overall income and then subtracting the 1

portion allocated to NCIs. 2

Vivint utilizes an equity accounting method known as 3

Hypothetical Liquidation at Book Value (“HLBV”). Under HLBV, 4

the value of an individual’s portion of a business is determined by 5

hypothetically liquidating the business at book value, i.e.

, the value 6

at which its assets are carried on a balance sheet. If the calculation is 7

performed at the end of two successive quarters, the difference in 8

the amount an individual would receive from the first quarter to the 9

second represents his or her net gain or loss over the course of the 10

second quarter. 11

Due to Vivint’s business model and the HLBV method, the 12

allocation of income (a net loss in each quarter during the relevant 13

period) between shareholders and NCIs may vary substantially 14

from one quarter to the next depending upon (1) contributions by 15

investors and (2) transfers of title to the funds that provided the 16

requisite capital. For example, if a fund provided capital to Vivint 17

but did not receive title to the systems until after the quarter ended, 18

HLBV would show a loss being allocated to NCIs. If title were 19

transferred before the quarter ended, however, the loss would be 20

allocated to shareholders. Because the income allocated to NCIs was 21

a net loss during every quarter, subtracting NCI income from 22

Vivint’s overall income had the effect of recognizing increased 238 16

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income to shareholders. NCI losses were occasionally larger than the 1

amount lost by the company as a whole, resulting in the recognition 2

of a net positive amount of income to shareholders. 3

In 2014, Vivint sought capital on the public equity markets. 4

On October 1, 2014, Vivint issued the IPO at issue on appeal, in 5

which it sold 20,600,000 shares of common stock at $16 per share, 6

raising $300.8 million in net proceeds. In the accompanying 7

registration statement, Vivint disclosed financial results for the six 8

quarters immediately preceding the third quarter of 2014. These 9

results revealed ever increasing overall net losses and fluctuating 10

NCI losses, income available to shareholders, and earnings

‐ per

‐ 11

share. Vivint also warned of the impact its business model and 12

accounting practices could have on the allocation of income between 13

NCIs and shareholders. The registration statement identified certain 14

“key operating metrics” for assessing the company’s performance: 15

(1) system installations, (2) megawatts and cumulative megawatts 16

installed, (3) estimated nominal contract payments remaining, and 17

(4) estimated retained value. Vivint also identified Hawaii as a target 18

for expansion while warning that changes in regulatory limitations, 19

particularly in concentrated markets such as Hawaii, could hinder 20

the company’s growth. 21

On November 10, 2014, Vivint issued a press release that 22

disclosed its financial results for the quarter ending September 30, 239 16

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2014, the day before the October 1 IPO. The net loss attributable to 1

NCIs decreased from negative $45 million in the second quarter to 2

negative $16.4 million in the third—a decrease of $28.6 million. This 3

change contributed substantially to a decrease in net income for 4

shareholders, from positive $5.5 million in the second quarter to 5

negative $35.3 million—a decline of $40.8 million. Earnings

‐ per

‐ share 6

fell from $0.07 per share to negative $0.45, resulting in Vivint 7

missing analyst projections by 143%. 8

The press release reported, however, that Vivint’s third 9

quarter 2014 results surpassed analyst expectations as measured by 10

the “key operating metrics” referred to above: (1) 6,935 new 11

installations, up 137% year

‐ over

‐ year; (2) 49 megawatts installed, up 12

196% year

‐ over

‐ year; (3) remaining contract payments from 13

customers increased by $195 million, up 175% year

‐ over

‐ year; and 14

(4) estimated retained value increased by $89 million, up 172% year

‐ 15

over

‐ year. The company’s overall market share also increased from 16

approximately 9% in the first quarter to 16% in the third quarter. 17

On November 12, forty

‐ three days after the IPO, Vivint 18

released its Form 10

‐ Q for the third quarter of 2014. The company 19

specified that the “the decrease in net loss attributable to [NCIs] was 20

primarily due to the timing of our sale and subsequent installation 21

of solar energy systems into certain investment funds.” J.A. 96. The 22

10

‐ Q also revealed that Vivint’s solar installations in Hawaii had 2310 16

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decreased from 15% of Vivint’s total installations as of June 30, 2014 1

to 12% as of September 30, 2014. 2

From November 10 to November 11, 2014, the price of Vivint’s 3

stock declined from $14.74 to $11.42 per share, a decrease of 4

approximately 22.5%. On November 13, 2014, the day following the 5

release of the 10

‐ Q, Vivint’s stock declined to $11.70 per share from 6

$12.33 per share on November 12, a decrease of approximately 5%. 7

On February 13, 2015, Stadnick filed the first amended 8

complaint alleging violations of Sections 11, 12(a)(2) and 15 of the 9

Securities Act of 1933, 15 U.S.C. §§ 77k(a), 77l(a), and 77o(a), which 10

was later superseded by a second consolidated amended complaint 11

substantially repeating the allegations. On December 10, 2015, the 12

district court granted the defendants’ motion to dismiss the 13

complaint for failure to state a claim. Stadnick timely filed this 14

appeal challenging the dismissal of his claims under Sections 11 and 15

15. 16

DISCUSSION 17

We review de novo a district court’s dismissal for failure to 18

state a claim under Rule 12(b)(6), “accepting all factual allegations as 19

true, but ‘giving no effect to legal conclusions couched as factual 20

allegations.’” Starr v. Sony BMG Music Entm’t

, 592 F.3d 314, 321 (2d 2111 16

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Cir. 2010) (quoting Port Dock & Stone Corp. v. Oldcastle Ne., Inc.

, 507 1

F.3d 117, 121 (2d Cir. 2007)). 2 2

On appeal, Stadnick argues that the district court erred in 3

determining that the second amended complaint failed to state a 4

claim under Section 11 when it alleged that Vivint failed to disclose, 5

first, the financial information from the third quarter of 2014 and, 6

second, the material adverse effect on its business of the evolving 7

regulatory regime in Hawaii. Stadnick further argues that, because 8

his Section 11 claims were improperly dismissed, so too were his 9

claims under Section 15. We address each of these arguments in 10

turn. 11

Section 11 of the Securities Act of 1933 imposes liability on an 12

issuer of a registration statement in three circumstances: if (1) the 13

statement “contained an untrue statement of a material fact,” (2) the 14

statement “omitted to state a material fact required to be stated 15

therein,” or (3) the omitted information was “necessary to make the 16

statements therein not misleading.” 15 U.S.C. § 77k(a); see also Litwin 17

v. Blackstone Grp., L.P.

, 634 F.3d 706, 715

‐ 16 (2d Cir. 2011) (specifying 18

the bases for liability under Section 11). 19

20

2 The parties also dispute whether Stadnick’s allegations are premised on fraud and

therefore must satisfy the heightened particularity requirements of Federal Rule of Civil

Procedure 9(b). See In re Morgan Stanley Info. Fund Sec. Litig.

, 592 F.3d 347, 358 (2d Cir.

2010). We decline to address this issue because Stadnick’s claims fail even under the

more lenient pleading standard of Federal Rule of Civil Procedure 8(a).12 16

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I. The Third Quarter 2014 Interim Information 1

Stadnick alleges that Vivint violated Section 11 in failing to 2

disclose the 2014 third quarter financial information in its 3

registration statement, which was issued the day after the third 4

quarter ended. Stadnick concedes, as he must, that Vivint did not 5

violate SEC Regulation S

‐ X, which requires only that a registration 6

statement include financial statements that are more than 135 days 7

old. 17 C.F.R. § 210.3

‐ 12(a), (g). But he argues that omitting the 8

financial information as alleged here rendered the information that 9

Vivint did disclose misleading. His argument, in substance, is that 10

Vivint’s third quarter performance, measured by income available to 11

shareholders and earnings

‐ per

‐ share, should have been disclosed 12

because it was an “extreme departure” from previous performance, 13

under the test articulated by the First Circuit in Shaw v. Digital 14

Equipment Corp.

, 82 F.3d at 1210. 15

In the Second Circuit, the long

‐ standing test for assessing the 16

materiality of an omission of interim financial information has been 17

that set forth in DeMaria v. Andersen

, where we held that a duty to 18

disclose such information arises if a reasonable investor would view 19

the omission as “significantly alter[ing] the ‘total mix’ of information 20

made available.” 318 F.3d at 180 (quoting TSC Indus., Inc. v. 21

Northway, Inc.

, 426 U.S. 438, 449 (1976)). We have carefully 22

considered Shaw ’s “extreme departure” test and decline to adopt it. 2313 16

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The defendant in Shaw

, Digital Equipment, prepared its 1

registration statement on SEC Form S

‐ 3, which required disclosure 2

of “any and all material changes.” 82 F.3d at 1205 (emphasis 3

omitted). The successful offering of preferred shares in Shaw 4

commenced eleven days, and closed four days, before the end of the 5

third quarter. Id. at 1200. Two weeks after the third quarter’s close, 6

the company announced an operating loss of $183 million for the 7

quarter, far greater than analysts had expected. Id. The price of the 8

common and preferred stock dropped approximately 20% below the 9

IPO offering price. Id. 10

The Shaw plaintiffs alleged that, as of the date of the IPO, the 11

defendants knew that the company’s third quarter performance 12

would be substantially worse than that of previous quarters and yet 13

failed to disclose it. Id. at 1206. Accepting the factual allegations as 14

true, the First Circuit concluded that Digital Equipment possessed, 15

at the time of the IPO, interim information that created a 16

“substantial likelihood” that Digital’s performance during the 17

quarter in question would represent an “extreme departure” from 18

its previous performance. Id. at 1211. The operating loss was 19

therefore material to the offering and disclosure was required. Id

. 20

A. DeMaria v. Andersen 21

As noted above, in assessing whether an omission of interim 22

financial information violated Section 11, the test in this Circuit has 2314 16

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been that set forth in DeMaria

. There, plaintiffs claimed that the 1

registration statement was materially false and misleading because 2

the defendant corporation, ILife, failed to include financial 3

information for the first quarter of 1999. DeMaria

, 318 F.3d at 173. On 4

May 24, eleven days after the IPO, ILife announced its first quarter 5

results, indicating that it had suffered a $6 million loss while 6

generating revenue of $2.2 million. Id. Three days later, the price of 7

the company’s stock had declined to $8.19, and the stock was 8

trading at approximately $0.67 by August. Id. Plaintiffs alleged a 9

violation of the third prong of Section 11: the omitted information 10

was necessary to make the publicly available information not 11

misleading. Id. at 178. 12

In assessing whether the omission violated Section 11, we 13

applied the traditional materiality test long employed by courts, 14

including the Supreme Court, in the omission context: “whether 15

there is ‘a substantial likelihood that the disclosure of the omitted 16

[information] would have been viewed by the reasonable investor as 17

having significantly altered the “total mix” of information made 18

available.’” Id. at 180 (alteration in original) (quoting TSC

, 426 U.S. at 19

449); see also Matrixx Initiatives, Inc. v. Siracusano

, 563 U.S. 27, 38, 44 20

(2011). We concluded that the omission did not violate Section 11 21

because, inter alia

, the company had disclosed its losses for every 22

quarter through the end of 1998 and had warned that it expected to 2315 16

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continue sustaining substantial losses. Id. at 181

‐ 82. The omission, 1

therefore, would not have caused the registration statement to 2

mislead a reasonable investor. 3

B. DeMaria Remains the Operative Test in This 4

Circuit 5

The district court, in dismissing Stadnick’s claim, applied the 6

“extreme departure” test of Shaw

. We use this occasion to re

‐ affirm 7

that the “extreme departure” test is not the operative test in this 8

Circuit. The operative test remains that set forth in DeMaria

. 9

Stadnick accurately notes that we have relied upon Shaw in 10

the past. Although we have relied upon some aspects of Shaw

, the 11

cases Stadnick cites lend no support to the proposition that we 12

adopted the “extreme departure” test. See Stratte

‐ McClure v. Morgan 13

Stanley

, 776 F.3d 94, 102 & n.5 (2d Cir. 2015) (citing Shaw in finding 14

that statutes and regulations can give rise to disclosure obligations); 15

Iowa Pub. Emps.’ Ret. Sys. v. MF Glob., Ltd.

, 620 F.3d 137, 141 (2d Cir. 16

2010) (citing Shaw for the proposition that courts must consider 17

statements and omissions in context); In re Morgan Stanley

, 592 F.3d 18

at 360 n.8 (citing Shaw to demonstrate differences between Sections 19

11 and 12 of the Securities Act of 1933); Rombach v. Chang

, 355 F.3d 2016 16

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164, 170 n.5 (2d Cir. 2004) (citing Shaw for the notion that the Rule 1

9(b) pleading standard applies to allegations sounding in fraud). 3 2

There is good reason not to adopt the “extreme departure” 3

test when assessing the materiality of a registration statement’s 4

omissions. First, DeMaria rests upon the classic materiality standard 5

in the omission context, with which we and most other courts are 6

familiar. Second, upon close examination, Shaw ’s “extreme 7

departure” test leaves too many open questions, such as: the degree 8

of change necessary for an “extreme departure”; which metrics 9

courts should look to in assessing whether such a departure has 10

occurred; and the precise role of the familiar “objectively reasonable 11

investor” in assessing whether a departure is extreme. And third, in 12

some situations the “extreme departure” test can be analytically 13

counterproductive. 14

This very case illustrates the unsoundness of the “extreme 15

departure” test. Stadnick argues that changes in two metrics— 16

income available to shareholders and earnings

‐ per

‐ share—over just 17

three quarters represent an “extreme departure.” To be sure, these 18

traditional metrics, standing alone, lend support to Stadnick’s claim. 19

But the two metrics identified by Stadnick are not fair indicators of 20

3 The same holds true as to Stadnick’s claim that other circuits utilize Shaw ’s

“extreme departure” test. In every case he cites, the court similarly relied upon Shaw for

other aspects of that opinion. See Pension Fund Grp. v. Tempur

‐ Pedic Int’l, Inc.

, 614 F. App’x

237, 242 (6th Cir. 2015); Schmidt v. Skolas

, 770 F.3d 241, 249 (3d Cir. 2014); Livid Holdings

Ltd. v. Salomon Smith Barney, Inc.

, 416 F.3d 940, 947 (9th Cir. 2005).17 16

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Vivint’s performance. Their fluctuation is attributable to the normal 1

operation of the company’s business model, in which the allocation 2

of income, as determined by HLBV, is subject to the vagaries of the 3

timing of transactions between Vivint and the NCI funds. The 4

“extreme departure” test makes little sense in this context and 5

confuses the analysis, while the DeMaria test, which examines 6

omissions in the context of the total mix of available investor 7

information, does not. 8

C. DeMaria Did Not Require Vivint to Disclose its 9

Third Quarter Interim Information 10

Stadnick has failed to satisfy the test articulated in DeMaria 11

because a reasonable investor would not have viewed Vivint’s 12

omission as “significantly alter[ing] the ‘total mix’ of information 13

made available.” DeMaria

, 318 F.3d at 180 (quoting TSC

, 426 U.S. at 14

449). Stadnick’s view is too myopic, both temporally and with 15

regard to the number of relevant metrics. The materiality of an 16

omission must be assessed in light of the total mix of information in 17

the public domain. For Vivint’s registration statement, therefore, we 18

assess the materiality of the omissions by taking into account: (1) the 19

performance of all five metrics disclosed by Vivint (2) from the first 20

quarter of 2013 through the second of 2014 and (3) the disclosures 21

regarding Vivint’s unique business plan and the HLBV accounting 2218 16

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method. When viewed in this context, it is plain that the omissions 1

relating to income and earnings

‐ per

‐ share for the third quarter of 2

2014 did not render the publicly available information misleading. 4 3

Stadnick focuses solely on income available to shareholders 4

and earnings

‐ per

‐ share. A more accurate indicator of the company’s 5

performance, however, is Vivint’s total revenue and total income 6

(available to both shareholders and NCIs), neither of which are 7

affected by the HLBV method. Prior to the third quarter of 2014, 8

during every quarter but one, the company’s total revenue increased 9

from the previous quarter, and in every single quarter its net losses 10

became larger, which comported with the successful 11

implementation of its business model. Both of these trends 12

continued through the third quarter of 2014. 13

It is clear, moreover, that the omission was not material even 14

according to the variables identified by Stadnick if we examine them 15

over the entire period for which Vivint disclosed information. 16

Stadnick accurately notes that income available to shareholders and 17

earnings

‐ per

‐ share decreased sharply from the second through the 18

third quarter of 2014. But this was consistent with a pattern of 19

fluctuation that began with the first quarter of 2013. Not only was 20

the fluctuation substantial but, prior to the third quarter of 2014, 21

4 We reproduce in the Appendix a chart from the defendants’ brief detailing the

pertinent metrics, displayed, except for per

‐ share data, in thousands of dollars, that

Vivint disclosed in its registration statement and in subsequent filings.19 16

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neither variable fluctuated in the same direction for two successive 1

quarters; in other words there was never a trend of the shareholders’ 2

income increasing or decreasing. A reasonable investor, therefore, 3

would not have harbored any solid expectations based on prior 4

performance as to Vivint’s third quarter 2014 performance as 5

measured by the two metrics identified by Stadnick. 6

Also, and critically, Vivint’s registration statement contained 7

ample warnings and disclosures that explained shareholder revenue 8

and earning fluctuations, namely that: (1) the peculiarities of its 9

business model and the HLBV method render the metrics identified 10

by Stadnick less probative of Vivint’s performance; (2) as a result, 11

the income available for shareholders would likely fluctuate from 12

quarter to quarter; and (3) Vivint anticipated its substantial 13

operating losses to continue. 14

Finally, we are persuaded that a reasonable investor would 15

not consider the omission of the third

‐ quarter results to be material 16

in light of Vivint’s self

‐ described “key operating metrics.” Each of 17

them increased substantially from the second quarter of 2014 to the 18

third and had more than doubled since the second quarter of 2013. 19

II. Evolving Regulatory Regime in Hawaii 20

Stadnick tacks onto his complaint an allegation that Vivint 21

violated Section 11 by failing to adequately warn prospective 2220 16

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shareholders of the evolving regulatory regime in Hawaii, in 1

violation of an affirmative duty of disclosure imposed by Item 303 of 2

Regulation S

‐ K. 3

In relevant part, Item 303 of Regulation S

‐ K requires the 4

disclosure of “any known trends

. . . the registrant reasonably 5

expects will have a material

. . . impact on net sales or revenues or 6

income.” 17 C.F.R. § 229.303(a)(3)(ii). Disclosure is required where 7

the trend is both (1) known to management and (2) “reasonably 8

likely to have material effects on the registrant’s financial condition 9

or results of operations.” Litwin

, 634 F.3d at 716 (citation omitted). 10

Stadnick’s argument is unavailing because (1) he has failed to 11

allege that Vivint’s operations in Hawaii were negatively affected by 12

the regulatory changes and (2) Vivint’s registration statement 13

included ample warning that its business could be affected by 14

evolving regulatory regimes, and named Hawaii in particular. 15

Stadnick focuses on the fact that, from the second to the fourth 16

quarters of 2014, installations in Hawaii comprised a smaller portion 17

of Vivint’s total installations. Stadnick does not allege, however, that 18

this decline was material to Vivint’s revenue or operations. He has 19

not alleged, for instance, that the actual number of installations in 20

Hawaii decreased or even increased at a slower pace. Given the 21

rapid increase in Vivint’s total installations during this period, as 22

reported in both the prospectus and the press release regarding the 2321 16

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third quarter 2014 results, it would not be unreasonable to infer that 1

the number of installations simply increased at a greater rate in 2

geographic regions other than Hawaii. There is thus no basis to 3

disturb the district court’s conclusion that the percentage drop in 4

Hawaii was not a material fact that needed to be disclosed. 5

Stadnick’s claim also fails because Vivint’s registration 6

statement included repeated warnings that its business was 7

generally vulnerable to changing regulations, and particularly so in 8

Hawaii. We thus find no basis for holding that Vivint failed to fulfill 9

its affirmative disclosure obligation under Item 303 of Regulation S

‐ 10

K regarding the evolving regulatory regime in Hawaii. 11

III. Stadnick’s Section 15 Claims 12

Because we affirm the district court’s dismissal of Stadnick’s 13

Section 11 claims, we also affirm the dismissal of his claims under 14

Section 15. See In re Morgan Stanley

, 592 F.3d at 358. 15

CONCLUSION 16

For the reasons stated above, we AFFIRM the judgment of the 17

district court. 18

19

20

21

22

2322 16

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1

APPENDIX 2

Vivint Quarterly Results 3

Displayed in Thousands of Dollars, Except Per Share Data 4

1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15

Total

Revenue 592 1,333 2,274 1,971 3,507 6,558 8,333 6,860 9,545

Net Loss (10,780) (11,961) (14,993) (18,736) (36,543) (39,611) (51,693) (38,072) (59,975)

NCI Loss (2,121) (186) (37,848) (21,953) (43,584) (45,104) (16,415) (31,933) (72,124)

Net Income

Available to

Shareholders (8,659) (11,775) 22,855 3,217 7,041 5,493 (35,278) (6,139) 12,149

Earnings Per

Share (0.12) (0.16) 0.30 0.04 0.09 0.07 (0.45) (0.06) 0.11

5

6

7

8

9