Court Opinion

ID: 5139772
Source: CourtListenerOpinion
Date Created: 2021-12-22 20:00:17.236361+00
Date Added: 2024-06-11T08:24:19.704973
License: Public Domain

United States Court of Appeals
                        For the First Circuit

No. 20-2110

     CONSTRUCTION INDUSTRY AND LABORERS JOINT PENSION TRUST,

                        Plaintiff, Appellant,

    RUBEN A. LUNA, individually and on behalf of all others
similarly situated; VALERIE COSGROVE, derivatively on behalf of
CARBONITE, INC.; WILLIAM FENG, individually and on behalf of all
  others similarly situated; MICHAEL RANDOLPH, derivatively on
                   behalf of CARBONITE, INC.,

                             Plaintiffs,

                                  v.

        CARBONITE, INC.; MOHAMAD S. ALI; ANTHONY FOLGER,

                        Defendants, Appellees,

 LINDA CONNLY; MARINA LEVINSON; TODD KRASNOW; SCOTT A. DANIELS;
        CHARLES F. KANE; STEPHEN MUNFORD; DAVID FRIEND,

                             Defendants.

          APPEAL FROM THE UNITED STATES DISTRICT COURT
               FOR THE DISTRICT OF MASSACHUSETTS

              [Hon. Leo T. Sorokin, U.S. District Judge]

                               Before
                     Kayatta, Selya, and Barron,
                           Circuit Judges.

     Andrew S. Love, with whom Samuel H. Rudman, David A.
Rosenfeld, Robert D. Gerson, Philip T. Merenda, Robbins Geller
Rudman & Dowd LLP, Theodore M. Hess-Mahan, and Hutchings Barsamian
Mandelcorn, LLP were on brief, for appellant.
     Alisha Q. Nanda, with whom James R. Carroll, Immanuel R.
Foster, and Skadden, Arps, Slate, Meagher & Flom LLP were on brief,
for appellees.

                        December 22, 2021
            KAYATTA, Circuit Judge.            Lead plaintiff Construction

Industry and Laborers' Joint Pension Trust ("plaintiff") and other

holders of common stock of defendant Carbonite, Inc. ("Carbonite")

brought this securities fraud class action alleging that Carbonite

and certain current and former officers misled investors by touting

a new product that they knew did not even work.                  The defendants

moved to dismiss the complaint, arguing both that it failed to

allege facts raising a strong inference of scienter and that it

alleged no actionable material misrepresentations or omissions.

The   district    court     agreed   that     plaintiff   had    insufficiently

pleaded scienter, so the court granted the motion to dismiss

without   reaching    the    defendants'      second   argument.       Plaintiff

appealed.    For the following reasons, we reverse the district

court's dismissal of the complaint.

                                       I.

            As this case comes to us on a motion to dismiss, we

accept the factual allegations set forth in the amended complaint,

as "supplemented by certain materials the defendants filed in the

district court in support of their motion to dismiss."                 Mehta v.

Ocular Therapeutix, Inc., 955 F.3d 194, 198 (1st Cir. 2020)

(internal quotation marks and alteration omitted) (quoting Brennan

v. Zafgen, Inc., 853 F.3d 606, 609–10 (1st Cir. 2017)).                    These

include "documents the authenticity of which are not disputed by

the   parties,"      "official       public     records,"       and   "documents

                                      - 3 -
sufficiently referred to in the complaint." Id. (quoting Brennan,

853 F.3d at 610).

           Carbonite is a software company headquartered in Boston

that offers cloud-based backup and data protection services.             The

events leading to this suit took place during a specified Class

Period, beginning with Carbonite's October 18, 2018 launch of a

new data-backup product called "Server VM Edition" ("VME") and

concluding with the July 25, 2019 announcement that VME was being

withdrawn from the market.

           In October 2018, Carbonite announced the release of VME,

which would "enable[] businesses to select, manage[,] and recover

their [virtual machine] data from a single location."1             Between

the October launch and the following July, Carbonite publicly

promoted VME, including through its CEO, defendant Mohamad S. Ali,

and its CFO, defendant Anthony Folger.

           For example, on November 1, 2018, Ali stated in a call

with   investors   and   analysts   that    "[VME],   which   includes   new

purpose-built server backup for virtual machines, is the first

Carbonite solution directly integrated into the new platform. This

significantly improves our performance for backing up virtual

1  A "virtual machine" is a digital computing environment that
replicates the functionality of a physical computer's operating
system. Virtual machines can be hosted on one physical computer
and operated remotely by a user of another physical computer.

                                    - 4 -
environments and makes us extremely competitive going after that

market."

           On November 15, 2018, CFO Folger spoke on behalf of

Carbonite at an investor conference, where he said:

           One of the products that we did deliver also
           that is integrated with the console is our
           [VME]. So think about this as protecting your
           server infrastructure, but it is specifically
           targeting virtual machines. This is a market
           that we haven't been particularly strong in,
           in the past, we've been okay. I think we have
           completely overhauled the product and we have
           put something out that we think is just
           completely competitive and just a super strong
           product in a streamline user management, it's
           got a ton of APIs for monitoring.

           On December 6, 2018, Folger told another conference,

"[VME is] a really important product for us, and I think it will

help us address a pretty big segment of the market."

           Contrary to the picture painted by senior management,

the complaint alleges that VME never worked. Prior to VME's launch

on October 18, 2018, several clients had tested VME on a trial

basis, and the complaint alleges that "there was not one successful

customer data backup before the product was released."      Also pre-

launch, Carbonite employees allegedly "reported internally that

the product was not ready and should not be running."   The software

failed to back up files as scheduled by clients, resulted in

corrupted files, and experienced difficulty identifying the target

virtual machines.

                               - 5 -
          In light of the issues with VME, the complaint alleges

that Carbonite set up an internal "tiger team" focused on fixing

the product in the months following the launch, and Carbonite

engineers,   software    architects,     and   development-operations

employees participated in a similarly focused internal group chat

called "Get VME Healthy."      Between the launch in October 2018 and

the eventual shelving of VME the following July, Carbonite put out

a "large patch" and "hundreds of bug fixes."

          Nonetheless,   VME    allegedly   "never   once   successfully

backed up a customer's data."       In early summer 2019, Carbonite

decided internally to stop selling VME, several weeks before it

publicly pulled the product. Then, on July 25, Carbonite announced

its second quarter 2019 financial results and its revised 2019

full-year revenue projections in a press release, which also

disclosed that Ali was resigning from his role as CEO, effective

immediately, to pursue other opportunities.2

          Later that day, Folger spoke on a call with analysts and

investors to explain the company's reduced financial projections.

During that call, he also announced that Carbonite was withdrawing

VME from the market because, "[t]owards the end of the quarter, we

determined that the virtual server edition of our server backup

product was not at the level of quality that customers have come

2  The same day, International Data Group, Inc., a large technology
media company, announced that Ali had been named its CEO.

                                 - 6 -
to expect from Carbonite."          Folger reminded the analysts and

investors that VME "was newly launched in Q3 of 2018 and [was]

something   we    expected   to   meaningfully   contribute   to   revenue

starting in the back half of 2019 and through 2020," and he

explained that "maybe a third" of the projections' reduction was

attributable to VME's withdrawal.          Analysts reacted negatively.

From July 25 to July 26, the price of Carbonite stock dropped more

than twenty-four percent -- from $23.90 per share to $18.01 per

share.

            The first complaint in this action was filed seven days

after the press release and announcement.         Several related suits

were consolidated below, and plaintiff, as the sole lead, filed a

consolidated amended complaint against defendants Carbonite, Ali,

and Folger.      Plaintiff seeks recovery under section 10(b) of the

Securities Exchange Act of 1934 ("the Exchange Act"), codified at

15 U.S.C. § 78j(b), as implemented by Securities and Exchange

Commission (SEC) Rule 10b-5, codified at 17 C.F.R. § 240.10b-5.

For ease of reference, we call this the "section 10(b)" claim.

Plaintiff also seeks recovery under section 20(a) of the Exchange

Act, codified at 15 U.S.C. § 78t(a).        Defendants moved to dismiss

the amended complaint. After a hearing, the district court allowed

the motion and dismissed the claims with prejudice.            Plaintiff

appealed.

                                   - 7 -
                                            II.

             This appeal turns on the viability of the section 10(b)

claim.      Plaintiff does not contend that its section 20(a) claim

survives even if the section 10(b) claim does not.                       See Mehta, 955

F.3d   at   210–11       ("A   claim   brought      under      section 20(a)    is . . .

derivative     of    a    claim    alleging        an    underlying     securities     law

violation.").         And      defendants     do    not       provide   any   basis   for

sustaining the dismissal of the section 20(a) claim should we

reverse the dismissal of the section 10(b) claim.

             To     successfully       make        out    a     section 10(b)    claim,

plaintiff was required to plead six elements: "(1) a material

misrepresentation or omission; (2) scienter; (3) a connection with

the purchase or sale of a security; (4) reliance; (5) economic

loss; and (6) loss causation."              In re Biogen Inc. Sec. Litig., 857

F.3d 34, 41 (1st Cir. 2017) (citing Fire & Police Pension Ass'n of

Colo. v. Abiomed, Inc., 778 F.3d 228, 240 (1st Cir. 2015)).                           Only

the first two elements of plaintiff's section 10(b) claim --

material misrepresentation or omission and scienter -- are at issue

in this appeal.

             A complaint must contain "sufficient factual matter,

accepted as true, to 'state a claim to relief that is plausible on

its face.'"         Mehta, 955 F.3d at 205 (quoting Ashcroft v. Iqbal,

556 U.S. 662, 678 (2009)).               And because it alleged securities

fraud, plaintiff was also required to satisfy several heightened

                                         - 8 -
pleading   requirements.       Federal      Rule    of    Civil    Procedure 9(b)

requires    that   a    plaintiff    claiming      fraud     "must    state        with

particularity the circumstances constituting fraud."                  The Private

Securities Litigation Reform Act (PSLRA) further requires that

plaintiffs claiming securities fraud in particular must "specify

each statement alleged to have been misleading, [and] the reason

or reasons why the statement is misleading."                     15 U.S.C. § 78u-

4(b)(1).    Additionally, as we will discuss, the PSLRA requires a

complaint brought under section 10(b) to allege particular facts

sufficient to give rise to a strong inference of scienter.                          Id.

§ 78u-4(b)(2)(A).

            In determining whether a securities fraud complaint

satisfies these requirements, "[w]e review de novo the district

court's    dismissal . . .     for   failure       to    state    a   claim    under

Rule 12(b)(6)."        Mehta, 955 F.3d at 205.           In so doing, we accept

well-pleaded factual allegations in the complaint as true and,

while cognizant of the requirements for pleading scienter, we view

all reasonable inferences in the plaintiff's favor. ACA Fin. Guar.

Corp. v. Advest, Inc., 512 F.3d 46, 58–59 (1st Cir. 2008).

                                     III.

            Plaintiff alleged that twelve statements made by the

defendants during the Class Period were "materially false and

misleading."       Most    prominently   on    appeal,      it    points      to    the

November 1 and November 15 statements made by Ali and Folger,

                                     - 9 -
respectively, as quoted above.   Otherwise, plaintiff mentions but

places less weight on an October 2018 statement and nine statements

made between February and June of 2019, each of which speak more

generally about Carbonite's products or financial prospects and do

not mention VME by name.   Plaintiff does not contend that the less

pointed statements might be actionable if the November statements

are not.   Nor do the parties describe any scenario in which the

less pointed statements might affect the extent of liability if

the November statements are sufficient to establish liability.

Like the parties, we therefore train our attention on the two

November statements that directly discuss VME.

           In contesting the adequacy of the complaint vis à vis

those statements, defendants advance three basic arguments, each

of which would independently support dismissal: (1) the challenged

statements were not material misrepresentations because they were

not false statements of fact; (2) any misrepresentations were not

material; and, (3) in any event, the complaint fails to allege

facts eliciting a strong inference of scienter.    We address each

argument in turn.

                                 A.

           Section 10(b) prohibits the use    of "manipulative or

deceptive device[s]" in connection with the purchase or sale of,

inter alia, registered securities.      15 U.S.C. § 78j(b).    SEC

Rule 10b-5 implements that prohibition by making it unlawful to

                               - 10 -
"make any untrue statement of a material fact or to omit to state

a   material    fact   necessary   in    order   to   make    the     statements

made . . . not misleading."        17 C.F.R. § 240.10b-5.            A violation

thus requires a false, or misleadingly omitted, statement of fact.

Defendants argue that the November 2018 statements were merely

optimistic     opinions   that   are    not   actionable     as    misstatements

because they may have been "genuinely held when made."

           The     Supreme   Court      has    explained     that     the   most

significant difference between statements of fact and expressions

of opinion is that "a statement of fact ('the coffee is hot')

expresses certainty about a thing, whereas a statement of opinion

('I think the coffee is hot') does not."                   Omnicare, Inc. v.

Laborers Dist. Council Constr. Indus. Pension Fund, 575 U.S. 175,

183 (2015).      Words like "I think" or "I believe" can play a role

in demonstrating a lack of certainty, id. at 187, but their use

does not preclude the possibility that the statement as a whole

may still mislead as to some fact, id. at 193.                    For example, a

statement in the form of an opinion ("I believe that the proposed

transaction is legal.") may convey three facts: that the speaker

has such a belief; that the belief fairly aligns with the facts

known to the speaker; and, if stated in the context of the

securities market, that the speaker has made the type of inquiry

that a reasonable investor would expect given the circumstances.

Id. at 188–89.

                                   - 11 -
          Ali's November 1, 2018 statement that VME "improves our

performance for backing up virtual environments and makes us really

competitive"   could   be   reasonably    construed    in   context     as   a

statement of fact, at least to the extent that it plainly implied

some better "performance for backing up virtual environments."               As

such, it would be false as compared to the complaint's contention

that as of November 1 VME could not back up virtual environments.

          Folger's     November 15     statement,     by    contrast,     was

presented in the form of a statement of belief:             "[W]e have put

something out that we think is just completely competitive and

just a super strong product." Nonetheless, the statement plausibly

conveyed at least three facts: first, that Folger actually believed

VME to be "completely competitive" and "super strong"; second,

that his opinion "fairly align[ed] with the information" that

Folger possessed at the time; and third, that his opinion was based

on the type of reasonable inquiry that an investor in context would

expect to have been made.    See id.     The complaint's description of

the state of the VME product plausibly alleges that at least one

and possibly all three of these facts must be false.            It thereby

sufficiently alleges that Folger misled investors.

          Defendants' fallback argument that investors would have

understood Folger's statement to be only "an opinion about future

potential," and thus not a statement of present or historical fact,

simply mischaracterizes the statement.        (Emphasis added.)         As we

                                - 12 -
discuss further in addressing the element of scienter, infra,

Folger used the present tense to describe Carbonite's beliefs about

the then-existing status of a product that the company had already

"put out" into the market.          Retrospectively asserting that this

was somehow a forward-looking statement does not make it so.

           Accordingly, the complaint adequately alleges that Ali

and Folger each made a misleading statement.

                                      B.

           Defendants argue that even if the challenged statements

made by Ali and Folger were misleading, they were not material.

This argument fares no better.

           A fact is material if it is substantially likely "that

the disclosure of the omitted [or misrepresented] fact would have

been viewed by the reasonable investor as having significantly

altered the 'total mix' of information made available."               Basic

Inc. v. Levinson, 485 U.S. 224, 231–32 (1988) (quoting TSC Indus.,

Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976)).            Here, we have

no trouble finding that the complaint adequately alleges facts

raising a reasonable inference that VME's ability to perform was

a   significant   part   of   the   mix    of   information   considered   in

evaluating Carbonite as an investment.

           As described in the complaint, VME was an important

product for Carbonite -- we need only take CFO Folger's word for

it:   "[W]e've got a new offering out, Carbonite Server Virtual

                                    - 13 -
Edition which I think is a really important product for us, and I

think it will help us address a pretty big segment of the market."

Carbonite described VME's simultaneous launch with Carbonite's

flagship console as "the culmination of one of our largest cross-

functional efforts."     CEO Ali bolstered the product's importance

by stating that VME "significantly improves our performance for

backing up virtual environments and makes us extremely competitive

going after that market."        And this is a market that Folger had

described as one "we haven't been particularly strong in, in the

past, we've been okay."         That Carbonite's most senior officers

promoted this new product to investors as shoring up one of the

company's weaker market segments further reinforces the conclusion

that the complaint adequately alleges that the product's basic

inability to function would have been viewed by investors as a

significant part of the total mix of                information in valuing

Carbonite.

                                    C.

            We turn finally to the element of scienter. To establish

scienter,    plaintiff   must    "show     either    that   the   defendants

consciously intended to defraud, or that they acted with a high

degree of recklessness."    Kader v. Sarepta Therapeutics, Inc., 887

F.3d 48, 57 (1st Cir. 2018) (quoting        Aldridge v. A.T. Cross Corp.,

284 F.3d 72, 82 (1st Cir. 2002)).          Recklessness in this context

requires "'a highly unreasonable omission' constituting '. . . an

                                  - 14 -
extreme departure from the standards of ordinary care, and which

presents a danger of misleading buyers and sellers that is either

known to the defendant or is so obvious that the actor must have

been aware of it.'"     Mehta, 955 F.3d at 206 (quoting Brennan, 853

F.3d at 613).

            The PSLRA's heightened pleading standards require that

complaints brought under section 10(b) "state with particularity

facts giving rise to a strong inference that the defendant acted

with   [scienter]."     15    U.S.C.      § 78u-4(b)(2)(A).        The   "strong

inference" for purposes of the PSLRA means that "an inference of

scienter must be more than merely plausible or reasonable -- it

must be cogent and at least as compelling as any opposing inference

of nonfraudulent intent." Mehta, 955 F.3d at 206 (quoting Tellabs,

Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 314 (2007)).

            Defendants argue, and the district court found below,

that plaintiff failed to meet this statutorily enhanced threshold

for successfully pleading scienter.              We disagree.

            Plaintiff's primary argument for a "strong inference" of

scienter is that the defendants "must have known that VME was not

functional," because the product's professed importance to the

company strongly implied that senior officers at the company were

following    it   closely    and   thus    were     aware   of   its   failings.

Relatedly,    plaintiff      advances      the     alternative    theory    that

defendants were at least highly reckless in promoting VME because,

                                   - 15 -
if defendants were not aware of VME's issues, then they repeatedly

and with apparent premeditation promoted it as important to the

company without at least checking that it had ever worked.             We

find that the complaint adequately alleges facts giving rise to

these alternative inferences.

            We have said that "the importance of a particular item

to a defendant can support an inference that the defendant is

'paying close attention' to that item," if "that close attention

would have revealed an incongruity so glaring as to make the need

for further inquiry obvious."        Loc. No. 8 IBEW Ret. Plan & Tr. v.

Vertex Pharms., Inc., 838 F.3d 76, 82 (1st Cir. 2016) (quoting

Institutional Invs. Grp. v. Avaya, Inc., 564 F.3d 242, 271 (3d

Cir. 2009)).       And as we have already explained, the complaint

certainly alleges sufficiently compelling facts showing that VME

was viewed by Carbonite as an important product.

            Defendants argue in response that the company did not

consider VME so critical because it was one of Carbonite's many

offerings, because the complaint does not allege that investors

"clamored for updates on VME," and because the withdrawal of VME

did   not   have    an   "outsized    impact   on   Carbonite's   revenue

projections."      But the relevant point here is not that VME was the

only or the most "outsized" Carbonite product.         Rather, the point

is that, as pleaded in the complaint, the company thought it

important enough to warrant two specific plugs from top management,

                                 - 16 -
thereby creating a very strong inference that the senior executives

who gave those apparently prepared remarks touting the product

would have paid at least some attention to the product's status.

This inference is cogent because a company certainly can consider

a   product     important    long    before    it    contributes      substantial

revenue, such as when a product has the potential to "make[] [a

company]   extremely    competitive      going      after   [a   weak]   market."

Similarly, the absence of express market "clamor" about a new

product does not preclude the inference that management thought

the product important; direct allegations in the form of their own

words can do the trick just as well.

              Of course, it is not enough to say that senior management

would have paid some attention to the product that they were raving

about;   the     complaint    must    allege    particular       facts   strongly

suggesting that that attention exposed them to information that

either   rendered    their    public   statements      false     or   necessarily

invited further investigation.          For example, in Vertex, we found

that the defendants' paying attention to a drug study would not

have revealed any obvious incongruity in the publicly announced

study results that turned out to be erroneous, in part because the

complaint did not allege that "scientists in general, much less

those at Vertex, regarded the reported results as implausible."

838 F.3d at 81–83; see also Metzler Asset Mgmt. GmbH v. Kingsley,

928 F.3d 151, 165 (1st Cir. 2019) (finding plaintiffs' theory for

                                     - 17 -
attributing knowledge to corporate officers was insufficient where

plaintiffs failed to allege        "that   anyone in the company had

knowledge regarding the drug's safety profile and sales that

contradicted    the   company's   public     representations"   (emphasis

added)).

            Here, we need not guess at the scientific community's

understanding    of   complex   biological    data   to   identify   a   red

flag -- it does not require a PhD to know that a product cannot be

"super strong" if it has never once done what it is supposed to

do.      Nor does the complaint leave open the possibility that

Carbonite management was somehow in the dark about VME's true

status.    The complaint states that Carbonite employees working on

VME had reported internally before the launch that the product was

not ready for market.     And the trial runs for VME, a data-backup

product, had allegedly produced not one successful backup.

            In sum, the complaint alleges facts raising a strong

inference that Ali and Folger either inquired about VME before

deciding to promote it to investors or were reckless in failing to

do so.     Further, the complaint alleges facts that, if true, make

it clear that the Carbonite employees familiar with the product

knew that it did not work yet.       Finally, nothing in the alleged

facts renders less than sufficiently compelling the conclusion

that Ali and Folger would have known of the product's status had

they inquired.

                                  - 18 -
             In an effort to undercut the legal significance of this

reasoning, defendants argue that a court cannot properly infer

that they paid some attention to a product simply because they

considered it important and chose to tout it to investors.                But

they cite only inapposite authority for this position.            They point

us   first    to   Maldonado   v.   Dominguez,     where   we   recited   the

uncontroversial proposition that "the pleading of scienter 'may

not rest on a bare inference that a defendant "must have had"

knowledge of the facts.'"           137 F.3d 1, 9–10 (1st Cir. 1998)

(quoting Barker v. Henderson, Franklin, Starnes & Holt, 797 F.2d

490, 497 (7th Cir. 1986)).          But the complaint in Maldonado had

failed to plead any "specific allegations of fact" that could give

rise to an inference of scienter and relied only on conclusory

allegations that the defendants "were aware of the risk of margin

calls." Id. at 10. Defendants' invocation of Metzler is similarly

misplaced.     As we have noted, supra, the complaint there failed to

allege that anyone in the company was aware of facts contrary to

the allegedly misleading public statements, so it could hardly

present a strong inference that the senior officer defendants

possessed such knowledge, regardless of the relevant product's

import.      See Metzler, 928 F.3d at 165.

             Defendants also urge us to adopt, as the district court

did, a competing, non-culpable inference from Carbonite's efforts

to remedy the issues with VME:               "[C]reating varied teams and

                                    - 19 -
rushing out software patches suggests a sincere belief that VME

could be made operational with enough work," such that "Carbonite

believed VME was fixable."    But both Ali's and Folger's statements

from this period were framed in the present tense:      "[W]e have put

something out that we think is just completely competitive and

just a super strong product"; "[VME] significantly improves our

performance . . . and makes us extremely competitive."       (Emphases

added.)    These     were   not   projections   of   hoped-for   future

performance.   Rather, they were flat-out claims about the product

as it then stood.3

                                   IV.

          For the foregoing reasons, we find that the complaint

sufficiently pleads that the statements of Ali and Folger on

November 1 and 15, 2018, were material misrepresentations made

with scienter.   There being no other claimed basis for dismissing

the complaint, we therefore reverse the judgment of the district

court granting the motion to dismiss, and remand for further

proceedings in accord with this opinion.

3  Plaintiff also argued that scienter could be inferred from Ali's
and Folger's sales of Carbonite stocks during the Class Period, as
well as from Ali's resigning simultaneously with the withdrawal of
VME from the market. Because we find that scienter was otherwise
sufficiently pleaded, we need not consider these additional
proffered bases.

                                  - 20 -