ROBINSON v. SYNCHRONOSS TECHNOLOGIES, INC.

*NOT FOR PUBLICATION*

UNITED STATES DISTRICT COURT

DISTRICT OF NEW JERSEY

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IN RE SYNCHRONOSS : Civil Action No. 17-2978 (FLW) (LHG)

TECHNOLOGIES, INC. SECURITIES :

LITIGATION : OPINION

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THIS DOCUMENT RELATES TO: :

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ALL ACTIONS :

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WOLFSON, Chief Judge

Lead Plaintiff, the Retirement System of the State of Hawaii (“Plaintiff”), brings this

putative securities class action, on behalf of itself and all other similarly situated individuals,

against Synchronoss Technologies, Inc. (“Synchronoss” or the “Company”), a company involved

in licensing software to cell phone service providers, as well as Synchronoss’s former CEO,

Stephen G. Waldis (“Waldis”), and its former CFO, Karen L. Rosenberger (“Rosenberger”)

(collectively “Defendants”), alleging violations under the Securities Exchange Act of 1934, 15

U.S.C. § 78a, et seq., and the rules promulgated thereunder. The Court previously dismissed

Plaintiff’s Amended Complaint without prejudice on June 28, 2019, based on Plaintiff’s failure to

adequately plead scienter. See In re Synchronoss Techs., Inc. Sec. Litig., No. 17-2978, 2019 WL

2849933 (D.N.J. July 2, 2019). In accordance with that Opinion, Plaintiff filed a Second Amended

Complaint (the “SAC”) on August 14, 2019. (See ECF No. 81.)

Presently before the Court is Defendants’ motion to dismiss the SAC on the grounds that

the additional allegations in the SAC remain deficient under Plaintiff’s burden of pleading scienter.

For the reasons set forth below, Defendants’ Motion to Dismiss is denied in part and granted in

part. Plaintiff’s Section 10(b) and Rule 10b-5 and Section 20(a) claims against Rosenberger are

limited to the alleged improper recognition of revenue absent signed contracts. Plaintiff’s claims

based upon the alleged manipulation of expenses and alleged improper accounting for acquisitions

and divestures are dismissed. Plaintiff’s claims based on Defendants’ forward-looking statements

are also dismissed. Furthermore, because Plaintiff has not adequately alleged facts suggesting a

strong inference of scienter as to Waldis, the claims against him are dismissed without prejudice.

I. BACKGROUND

A. Factual Background

The Court set forth the facts underlying this matter at length in its prior Opinion. For the

sake of brevity, the Court recounts only those facts necessary for the resolution of the instant

motion. Synchronoss, a publicly traded mobile technology services company, principally located

in Bridgewater, New Jersey, specializes in providing “Activation” and “Cloud” services to

commercial mobile carriers, including AT&T and Verizon. See SAC ¶¶ 6, 31, 44. Waldis founded

Synchronoss and has served as its Executive Chairman since 2000. Id. ¶ 33. In addition, Waldis

was the Company’s CEO from its inception in 2000 until January 18, 2017, when he resigned as

CEO. Id. Waldis was reappointed as CEO on April 27, 2017, when his successor resigned as

CEO. Id. He resigned as CEO for a second time on November 13, 2017. Id. Rosenberger is the

former Chief Financial Officer and Executive Vice President of Synchronoss. Id. ¶ 34.

Rosenberger was the Company’s CFO from April 2014 until April 1, 2017. Id. Prior to her

appointment as CFO, Rosenberger was the Company’s Chief Accounting Officer and Senior Vice

President from January 2012 until April 2014. Id.

Synchronoss was founded in 2000 by Waldis, a former AT&T executive, who established

an ongoing relationship between the Company and AT&T to provide activation services to

consumers who bought new mobile devices with AT&T as service provider. Id. ¶¶ 37–40.

Synchronoss provided software licenses to AT&T that enabled the consumer to simply open the

box, automatically activate the cell phone and troubleshoot issues using a Synchronoss customer

call center. Id. ¶ 38. The Company’s “Activation business” enjoyed success through 2012 and

into 2013 to 2014. Id. ¶¶ 38–39. However, in 2013, the Activation business began to deteriorate

and the Company looked for other areas of growth, especially because AT&T’s account

constituted a significant amount of its revenues (80% at one point). Id. ¶ 39–40. The Company

thus created a “Cloud” business, for which revenue was generated primarily via software licensing

agreements between the Company and services providers such as Verizon. Id. ¶¶ 44–52. Verizon

and AT&T were the Company’s two largest customers and represented more than 60% of the

Company’s revenues. Id. ¶¶ 55–56. While the Cloud business generated more revenue than the

Activation business, such revenue began to slow by the third quarter of 2015. Id. ¶¶ 54, 77.

According to Plaintiff, faced with this slow growth, slumping stock price, and pressure to generate

revenue, Defendants began fraudulently booking revenue in order to artificially inflate the stock

price.

Ultimately, in July 2018, Synchronoss filed restated financials for 2014 to 2016 (the

“Restatement”). Id. ¶ 3. According to Plaintiff, the Company admitted in the Restatement, inter

alia, that: (1) it “book[ed] revenues relating to a transaction in a period prior to having sufficient

documentation of an agreement with the customer about the transaction,” id. ¶ 144; (2) “licensing

fees were improperly accounted for on a gross basis as revenue, id.; (3) its quarterly and annual

financial reports for 2014 to 2016 and its communications from 2014 to 2017 were false and/or

materially misstated and should no longer be relied upon, id. ¶¶ 241–43; (4) it had “pervasive

material weaknesses” in internal controls from 2014 to 2017, id. ¶ 242; and (5) it fired three

employees “for cause,” id. ¶ 243. As a result of the Restatement, revenue for 2014 to 2016 was

restated down from $1,212,168,000 to $1,032,271,000, a reduction of nearly $180 million (or more

than 14.8%), id. ¶ 247, and net income of $93.5 million for 2014 through 2016 was restated to a

cumulative loss of $40 million (a difference of $134 million, representing a 143% decrease in

income). Id. ¶ 249.

The putative class period is from October 28, 2014 and June 13, 2017. Id. ¶ 25. During

that time, Plaintiff alleges that Defendants fraudulently inflated Synchronoss stock by knowingly

falsifying the Company’s publicly reported revenues, and that Plaintiff and other investors relied

on these material misrepresentations and omissions to their detriment. Relying on the testimony

of eight confidential witnesses, Plaintiff points to certain deals that were improperly recognized as

revenue before the contracts were executed: (1) two AT&T purchase transactions that were booked

as revenue in late 2015 that allegedly never occurred, SAC ¶¶ 174–75; (2) a $5 million Verizon

contract that was recognized as revenue in the first quarter of 2016, when the deal was apparently

only in the initial discussion phase, id. ¶¶ 163–65, 413; and (3) a $25 million deal with Verizon

that was recognized as revenue in the third quarter of 2016 before the contract was signed, id. ¶¶

177–79.

Moreover, Plaintiff claims that Defendants improperly accounted for acquisitions and

divestures. Specifically, in 2016, the Company announced it would divest 70% of its Activation

business in a deal with a small, privately held company known as Sequential Technology

International, LLC (“Sequential”). SAC ¶¶ 14–16, 97–103. In connection with this transaction,

Synchronoss and Sequential entered into a software license agreement under which Sequential

obtained a perpetual license for certain analytics software products owned by Synchronoss, which

was valued at $9.2 million by the Company. Id. ¶ 108. Synchronoss booked the $9.2 million

licensing fee as revenue in the fourth quarter of 2016 but did not disclose that booking until months

later. Id. ¶ 110. Further, Plaintiff alleges that Defendants violated certain generally accepted

accounting principles (“GAAP”) by recognizing as revenue a $10 million patent-dispute settlement

payment by Openwave as standalone license revenue when it should have treated this $10 million

as a reduction of the purchase price Synchronoss paid to acquire Openwave. SAC ¶¶ 207–10.

Finally, Plaintiff alleges that Defendants utilized a “flash file” to “determine which

expenses to bury or remove ‘down below the line’ so as to show attractive, but false, margins in

the Company’s financial reports.” Id. ¶ 233. This alleged misclassification of expenses allegedly

included reclassifying employee salaries as “research and development” costs. Id. ¶ 235.

As these allegations are central to the Court's analyses, the Court will discuss them in more

detail below.

B. Procedural History

On Monday, May 1, 2017, two business days after the Company announced lower than

expected financials, Plaintiffs filed this action, alleging that the Company’s miss of its Q12017

projections was the result of an alleged fraud perpetrated by the Company and its senior executives.

ECF No. 1. Following the consolidation of numerous similar complaints, but before any

consolidated complaint was filed, Synchronoss announced that it would be restating certain prior

financial results for the years 2014 through 2016. SAC ¶¶ 3, 5. Plaintiffs then filed a Consolidated

Complaint on November 30, 2017. ECF No. 37. Defendants moved to dismiss the Consolidated

Complaint in February 2018, ECF No. 45, which was pending when Synchronoss filed the

Restatement on July 9, 2018. Lead Plaintiff filed its Amended Complaint on August 24, 2018.

ECF No. 61. Defendants thereafter moved to dismiss the Amended Complaint. ECF No. 66. In

an Opinion dated July 2, 2019, this Court dismissed the Amended Complaint without prejudice,

finding that Plaintiff failed to sufficiently allege that Defendants acted with the requisite scienter.

See In re Synchronoss, 2019 WL 2849933.

Plaintiff filed the SAC on August 14, 2019, adding information obtained from five

additional confidential witnesses that Plaintiff claims support an inference of scienter. See SAC

¶¶ 362–423. Thereafter, Defendants filed the present motion, arguing that the SAC should be

dismissed for failure to, again, adequately allege scienter because the new allegations fail to

properly cure the deficiencies highlighted by the Court in the Opinion dismissing the Amended

Complaint.

II. LEGAL STANDARDS

A. Rule 12(b)(6)

Under Federal Rule of Civil Procedure Rule 12(b)(6), a complaint may be dismissed for

“failure to state a claim upon which relief can be granted.” Fed. R. Civ. P. 12(b)(6). When

reviewing a motion to dismiss on the pleadings, courts “accept all factual allegations as true,

construe the complaint in the light most favorable to the plaintiff, and determine whether, under

any reasonable reading of the complaint, the plaintiff may be entitled to relief.” Phillips v. Cty. of

Allegheny, 515 F.3d 224, 231 (3d Cir. 2008) (quotations omitted). Under such a standard, the

factual allegations set forth in a complaint “must be enough to raise a right to relief above the

speculative level.” Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555 (2007). Indeed, “the tenet

that a court must accept as true all of the allegations contained in a complaint is inapplicable to

legal conclusions.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). “[A] complaint must do more

than allege the plaintiff’s entitlement to relief. A complaint has to ‘show’ such an entitlement with

its facts.” Fowler v. UPMC Shadyside, 578 F.3d 203, 211 (3d Cir. 2009).

However, Rule 12(b)(6) only requires a “‘short and plain statement of the claim showing

that the pleader is entitled to relief’ in order to ‘give the defendant fair notice of what the . . . claim

is and the grounds upon which it rests.’” Twombly, 550 U.S. at 555 (alteration in original) (quoting

Conley v. Gibson, 355 U.S. 41, 47 (1957)). The complaint must include “enough factual matter

(taken as true) to suggest the required element. This does not impose a probability requirement at

the pleading stage, but instead simply calls for enough facts to raise a reasonable expectation that

discovery will reveal evidence of the necessary element.” Phillips, 515 F.3d at 234 (citation and

quotations omitted); Covington v. Int’l Ass’n of Approved Basketball Officials, 710 F.3d 114, 118

(3d Cir. 2013) (“[A] claimant does not have to set out in detail the facts upon which he bases his

claim. The pleading standard is not akin to a probability requirement; to survive a motion to

dismiss, a complaint merely has to state a plausible claim for relief.” (citations and quotations

omitted)).

In sum, under the current pleading regime, when a court considers a dismissal motion, three

sequential steps must be taken: first, “it must take note of the elements the plaintiff must plead to

state a claim.” Connelly v. Lane Constr. Corp., 809 F.3d 780, 787 (3d Cir. 2016) (quotations

omitted). Next, the court “should identify allegations that, because they are no more than

conclusions, are not entitled to the assumption of truth.” Id. (quotations omitted). Lastly, “when

there are well-pleaded factual allegations, the court should assume their veracity and then

determine whether they plausibly give rise to an entitlement to relief.” Id. (quotations and brackets

omitted).

B. Rule 9(b) and the Private Securities Litigation Reform Act

“Independent of the standard applicable to Rule 12(b)(6) motions,” Fed. R. Civ. P. 9(b)

“imposes a heightened pleading requirement of factual particularity with respect to allegations of

fraud.” In re Rockefeller Ctr. Props. Secs. Litig., 311 F.3d 198, 216 (3d Cir. 2002); see also Fed.

R. Civ. P. 9(b) (“In alleging fraud or mistake, a party must state with particularity the

circumstances constituting fraud or mistake. Malice, intent, knowledge, and other conditions of a

person’s mind may be alleged generally.”). To satisfy this heightened pleading standard, a plaintiff

must state the circumstances of his alleged cause of action with “sufficient particularity to place

the defendant on notice of the ‘precise misconduct with which [it is] charged.’” Frederico v. Home

Depot, 507 F.3d 188, 200 (3d Cir. 2007) (alteration in original) (quoting Lum v. Bank of America,

361 F.3d 217, 223–24 (3d Cir. 2004)). Specifically, the plaintiff must plead or allege the “date,

time and place of the alleged fraud or otherwise inject precision or some measure of substantiation

into a fraud allegation.” Id. at 200 (citing Lum, 361 F.3d at 224). Indeed, the Third Circuit has

advised that, at a minimum, Rule 9(b) requires a plaintiff to allege the “essential factual

background that would accompany ‘the first paragraph of any newspaper story’—that is, the ‘who,

what, when, where and how’ of the events at issue.” In re Suprema Specialties, Inc. Sec. Litig.,

438 F.3d 256, 276-77 (3d Cir. 2006) (quoting In re Rockefeller, 311 F.3d at 217).

In addition to Rule 9(b)’s heightened pleading requirements, Congress enacted the Private

Securities Litigation Reform Act (“PSLRA”), 15 U.S.C § 78u, et seq., to require an even higher

pleading standard for plaintiffs bringing private securities fraud actions. In re Suprema, 438 F.3d

at 276. This heightened pleading standard is targeted at preventing abusive securities litigation.

See Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 313 (2007) (“Private securities

fraud actions . . . if not adequately contained, can be employed abusively to impose substantial

costs on companies and individuals whose conduct conforms to the law.”); Merrill Lynch, Pierce,

Fenner & Smith Inc. v. Dabit, 547 U.S. 71, 81 (2006) (identifying “ways in which the class-action

device was being used to injure the entire U.S. economy” and listing examples such as “nuisance

filings, targeting of deep-pocket defendants, vexatious discovery requests, and manipulation by

class action lawyers of the clients whom they purportedly represent”) (quotes and citations

omitted).

The PSLRA provides two distinct pleading requirements, both of which must be met in

order for a complaint to survive a motion to dismiss. Institutional Investors Group v. Avaya, Inc.,

564 F.3d 242, 252 (3d Cir. 2009). First, under 15 U.S.C. § 78u-4(b)(1), the complaint must

“specify each allegedly misleading statement, why the statement was misleading, and, if an

allegation is made on information and belief, all facts supporting that belief with particularity.”

Winer Family Trust v. Queen, 503 F.3d 319, 326 (3d Cir. 2007) (construing 15 U.S.C. § 78u-

4(b)(1)). Second, the complaint must, “with respect to each act or omission alleged to violate this

chapter, state with particularity facts giving rise to a strong inference that the defendant acted with

the required state of mind.” 15 U.S.C. § 78u-4(b)(2).

Both provisions of the PSLRA require facts to be pled with “particularity.” Avaya, 564

F.3d at 253. This particularity language “echoes precisely Fed. R. Civ. P. 9(b).” In re Advanta

Corp. Sec. Litig., 180 F.3d 525, 534 (3d Cir. 1999); see Fed. R. Civ. P. 9(b) (“[A] party must state

with particularity the circumstances constituting fraud or mistake.”). Although the PSLRA

replaces Rule 9(b) as the pleading standard governing private securities class actions, the rule’s

particularity requirement “is comparable to and effectively subsumed by the requirements of [§

78u-4(b)(1) of] the PSLRA.” Avaya, 564 F.3d at 253 (citations omitted). This standard “requires

plaintiffs to plead the who, what, when, where and how: the first paragraph of any newspaper

story.” In re Advanta, 180 F.3d at 534 (quotations marks omitted).

III. DISCUSSION

A. Claims under Section 10(b) of the Exchange Act

Plaintiff asserts claims against Defendants under Section(b) of the Exchange Act. The

private right of action under Section 10(b) and Rule 10b-5 “creates liability for false or misleading

statements or omissions of material fact that affect trading on the secondary market.” In re

Burlington Coat Factory Sec. Litig., 114 F.3d 1410, 1417 (3d Cir. 1997). In relevant part, Rule

10b-5 makes it unlawful for an individual “[t]o make any untrue statement of material fact or to

omit to state a material fact necessary in order to make the statements made, in the light of the

circumstances under which they were made, not misleading . . . in connection with the purchase

or sale of any security.” 17 C.F.R. § 240.10b-6(b). To state a claim under section 10(b) of the

Exchange Act and Rule 10b-5, a plaintiff must allege “(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.” Gold v. Ford Motor Co., 577 F. App’x 120, 122 (3d Cir.

2014) (citing Dura Pharms., Inc. v. Broudo, 544 U.S. 336, 341–42 (2005)).

In their motion to dismiss the SAC, Defendants only contend that Plaintiff has failed to

sufficiently allege one element of its 10b-5 claim—scienter. “Scienter” is the “mental state [of]

intent to deceive, manipulate, or defraud.” Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193 n.12

(1976). Under the PSLRA pleading requirements, a plaintiff must “state with particularity facts

giving rise to a strong inference that the defendant acted with the required state of mind.” Fan v.

StoneMor Partners LP, 927 F.3d 710, 715 (3d Cir. 2019) (quoting 15 U.S.C. § 78u-4(b)(2)). The

scienter standard requires a plaintiff to allege facts giving rise to a strong inference “of either

reckless or conscious behavior.” Advanta, 180 F.3d at 534–35. Courts must weigh the “plausible,

nonculpable explanations for the defendant’s conduct” against the “inferences favoring the

plaintiff.” Tellabs, 551 U.S. at 324. A “strong inference” of scienter “must be cogent and at least

as compelling as any opposing inference of nonfraudulent intent.” Fan, 927 F.3d at 718 (quoting

Tellabs, 551 U.S. at 319); see also Tellabs, 551 U.S. at 324 (“The inference that the defendant

acted with scienter need not be irrefutable, i.e., of the ‘smoking gun’ genre, or even the most

plausible of competing inferences”). Scienter may “be shown by a ‘knowing or reckless statement

of mind,’ which in this securities context would be demonstrated by pleading ‘an extreme

departure from the standards of ordinary care.’” Fan, 927 F.3d at 718 (quoting Avaya, 564 F.3d

at 252, 267 n.42). However, “it is not enough for plaintiffs to merely allege that defendants ‘knew’

their statements were fraudulent or that defendants ‘must have known’ their statements were

false.” GSC Partners CDO Fund v. Washington, 368 F.3d 228, 239 (3d Cir. 2004). Rather, a

plaintiff must, at least, specifically allege facts constituting strong circumstantial evidence that

“defendants knew or, more importantly, should have known that they were misrepresenting

material facts related to the corporation.” In re Campbell Soup Co. Sec. Litig., 145 F. Supp. 2d

574, 599 (D.N.J. 2009) (quoting Novak v. Kasaks, 216 F.3d 300, 308 (2d Cir. 2000)).

“[I]n determining whether the pleaded facts give rise to a ‘strong’ inference of scienter, the

court must take into account plausible opposing inferences . . . . A plaintiff alleging fraud in a §

10(b) action . . . must plead facts rendering an inference of scienter at least as likely as any plausible

opposing inference.” Tellabs, 551 U.S. at 323, 28–29 (emphasis in original). “While [courts] will

aggregate the allegations in the complaint to determine whether [they] create[] a strong inference

of scienter, plaintiffs must create this inference with respect to each individual defendant in

multiple defendant cases.” Winer Family Trust, 503 F.3d at 337 (quoting Makor Issues & Rights,

Ltd. v. Tellabs, Inc., 437 F.3d 588, 603 (7th Cir. 2006), rev’d on other grounds, 551 U.S. 308

(2007)).

In conducting the scienter analysis, “[t]he inquiry . . . is whether all of the facts alleged,

taken collectively, give rise to a strong inference of scienter, not whether any individual allegation,

scrutinized in isolation, meets that standard.” Tellabs, 551 U.S. at 322–23 (emphasis in original).

However, the Third Circuit has “explicitly approved of scienter analyses that assess individual

categories of scienter allegations individually when it is clear, as it is here, that a district court

ultimately considered the allegations as a whole.” In re Hertz Glob. Holdings Inc., 905 F.3d 106,

155 (3d Cir. 2018) (citing OFI Asset Mgmt. v. Cooper Tire & Rubber, 834 F.3d 481, 493 (3d Cir.

2016) (concluding that just because a court is “thorough in explaining why it found scienter lacking

as to each asserted misrepresentation does not suggest that it did not consider the allegations as a

whole”)); see also Avaya, 564 F.3d at 280 (“Although we have discussed each of the alleged facts

bearing on defendants’ scienter one at a time, we have heeded Tellabs’s command to evaluate [the

plaintiffs’] allegations collectively rather than individually.”).

Defendants divide their briefing into parts: (1) that Plaintiff has failed to sufficiently plead

facts giving rise to a strong inference of scienter for Plaintiff’s claims based on historical financial

results affected by the 2018 Restatement; and (2) that Defendants’ forward-looking revenue

projections are protected by the PSLRA safe harbor provision.

1. Historical Claims

a. Confidential Witnesses

Plaintiff attempts to establish scienter through the testimony of eight confidential

witnesses. Confidential witness statements can support an inference of scienter only where: (1)

“the complaint sets forth other factual allegations, such as documentary evidence, which are

sufficient alone to support of a fraud allegation,” or (2) “when the confidential sources are

described in the complaint with sufficient particularity to support the probability that a person in

the position occupied by the [confidential] source would possess the information alleged.” In re

Intelligroup Sec. Litig., 527 F. Supp. 2d 262, 290 (D.N.J. 2007) (internal citations omitted). While

Plaintiff relies on a number of documents that purportedly corroborate the statements of the

confidential sources, Plaintiff does not appear to suggest that those documents, standing alone, can

support a fraud allegation. Accordingly, the Court will analyze Plaintiff’s allegations concerning

the confidential witnesses under the second method. To satisfy its burden under that method, “the

complaint must disclose: (1) the time period that the confidential source worked at the defendant-

company, (2) the dates on which the relevant information was acquired, and (3) the facts detailing

how the source obtained access to the information.” Id. (citing Cal. Pub. Employees’ Ret. Sys. V.

Chubb Corp., 394 F.3d 126, 146 (3d Cir. 2004) (“Chubb”)). Moreover, “allegations attributed to

the information obtained from a confidential source must contain specific details regarding the

basis for the source’s personal knowledge and describe support events in detail.” Id. (citing

Chubb, 394 F.3d at 146.) Where these requirements are not met, courts must ignore insufficiently

described witness statements for the purposes of evaluating the plaintiff’s allegations. Id.; Avaya,

564 F.3d at 263 (“If [confidential] source allegations are found wanting with respect to these

criteria, the [courts] must discount them steeply.”).

Plaintiff refers to testimony from eight confidential witnesses in the SAC: (1) CW1, a

former Synchronoss financial analyst who was responsible for revenue forecasting, SAC ¶¶ 9, 365;

(2) CW2, a long-time Synchronoss employee at the Vice President level, id. ¶ 174; (3) CW3, an

accountant who worked at Synchronoss from 2011 to April 217, id. ¶ 93; (4) CW4, a financial

analyst who was employed by Synchronoss from 2012 to 2015, id. ¶ 371; (5) CW5, who was

employed by Synchronoss as director of sales from February 2017 to January 2018, id. ¶ 374; (6)

CW6, who worked at Synchronoss as a consultant for the 2016–2017 time period and was later

employed by the Company as a Vice President from November 2017 to November 2018, id. ¶ 376;

(7) CW7, who was the Company’s Internal Controls Manager for approximately one year and left

the Company in March 2017, id. ¶ 379; and (8) CW8, who was an account director for the

Company from 2008 to 2018, id. ¶ 381.

Defendants argue that the information provided to Plaintiff by these confidential witnesses

does not give rise to any inference of scienter because (1) Plaintiff fails to cure the deficiencies

highlighted by the Court in its prior Opinion with respect to CW1, CW2, and CW3; and (2) that

the new confidential witnesses “are not alleged to have any personal knowledge regarding what

the Individual Defendants knew about the truth or falsity of any challenged statement.” Defs.’

Moving Br., at 15. Plaintiff, however, maintains that the statements of the confidential witnesses

establish scienter with respect to the Company’s improper recognition of revenue and the

manipulation of expenses. Because the testimony of the confidential witnesses often overlaps and

is used to corroborate the testimony of other confidential witnesses, the Court will discuss the

confidential witnesses’ statements in two factual categories.

i. Confidential Witnesses – Manipulation of Expenses

Plaintiff relies on certain confidential witnesses’ information to demonstrate that

Rosenberger was involved in the manipulation of the Company’s accounting; specifically, that she

knew of, and used, “a weekly ‘flash file’ to identify expenses to improperly reclassify or otherwise

manipulate, including the improper reclassification of sales employee salaries as research and

development expenses.” SAC ¶ 415. In the Amended Complaint, Plaintiff had provided

information from CW3 on the “flash file” that the Court found to be too broad and general to

support an inference of scienter. Specifically, the Court highlighted that the “flash file” refers to

a wide array of Company financial information and that Plaintiff did not allege that any specific

“flash file” contained pertinent facts contradicting any particular public statement and that Plaintiff

did not allege that any of the reclassification of salaries were included in the flash files. See In re

Synchronoss, 2019 WL 2849933, at *10. To cure these deficiencies, Plaintiff adds new

information from CW1, CW3, and CW4 that purportedly show that Rosenberger and Waldis took

part in the scheme to intentionally misclassify expenses to meet revenue and profit guidance.

According to CW3, during Rosenberger’s tenure as CFO of the Company (April 2014 to

April 2017), she was involved in the manipulation of financial results that misclassified expenses

and other financial metrics in order to avoid having to report a decrease in profit margins. SAC ¶

231–36. CW3 states that Andrew Latyszonek, a financial analyst at the Company, would prepare

a “flash file” each week for the purpose of listing which expenses to bury or remove “down below

the line” so as to show attractive, but false, margins in Synchronoss’s financial reports. Id. ¶ 233.

The flash file would then be sent to Rosenberger via email, who would approve the reclassified

expenses. Id. ¶ 416. CW3 states that Latyszonek would regularly ask CW3 to reclassify certain

expenses and CW3 would “regularly decline and point out that the reclassifications contravened

GAAP rules.” Id. ¶ 416. When CW3 would refuse, Latyszonek would allegedly contact

Rosenberger by email, who would email CW3 and direct CW3 to make the reclassifications. Id.

According to CW3, this process occurred so frequently that Latyszonek began bypassing CW3

and “went to Rosenberger first who then emailed CW3 with instructions to reclassify the expenses

at issue.” Id.

As one example, CW3 states that s/he was personally tasked with “pushing” salaries of

Openwave, which Synchronoss acquired in 2016, from sales to research and development. Id. ¶

235. According to Plaintiff, this reclassification was significant because R&D expenses are tax-

deductible whereas sales costs are not and, in addition, R&D expenses are viewed more favorably

by investors because they signal investment in future growth, whereas sales costs erode current

margins without future benefit. Id. at ¶ 235. CW3 allegedly confirmed with an Openwave Senior

Vice President that the employees whose expenses were being reclassified were not part of

Openwave’s R&D team, and then objected to the reclassification of these expenses. Id.

Plaintiff alleges that the testimony of CW4 corroborates that of CW3. CW4, a financial

analyst who was employed by the Company from July 2012 to August 2015, states that

reclassifications were discussed at the weekly flash meetings and the “flash file” was used to

identify expenses to be reclassified. Id. ¶ 417. According to CW4, “one subject of discussion was

the reclassification of salaries from service-related to research and development (which improved

the Company’s margins).” Id. In that connection, CW4 states that Latyszonek instituted a

workforce tracking system to keep track of time that the Company’s software staff spent on

different projects. Id. Data from that spreadsheet would be included in the flash file and would

be discussed in the context of reclassifying salary expenses. Id. CW4 further states that

Rosenberger attended the weekly flash meetings, and “thus was aware of the contents of the flash

files, the discussions at the weekly flash meetings, and the Company’s repeated reclassification of

salaries.” Id.

Finally, Plaintiff alleges that CW1 also attended the weekly flash meetings and states that

the meetings’ attendees were “constantly” focused on shortfalls between the Company’s financial

condition and what the Company had represented to the market, and how to close that gap. Id. ¶

418. For example, CW1 recalled that in the second quarter of 2016 there was a $30 million

shortfall about which Rosenberger asked, “what can we do?” Id. CW1 states that s/he witnessed

Latyszonek manipulate the flash file, including reclassifying salaries from cost of sales to research

and development. Id. ¶ 419. According to CW1, after Latyszonek would reclassify expenses, the

meeting attendees would reconvene to confirm that the reclassification of expenses helped close

the gap between the Company’s financial condition and the guidance it reported to the market. Id.

Despite these expanded allegations, Plaintiff’s attempt to show scienter through

confidential witnesses’ information regarding the alleged improper classification of expenses

remains deficient. Most critical to these allegations is Plaintiff’s failure to connect the alleged

reclassification of expenses to any allegedly misleading public statement. See Novak, 216 F.3d at

309 (“Where plaintiffs contend defendants had access to contrary facts, they must specifically

identify the reports or statements containing this information.”); see also Intelligroup, 527 F. Supp.

2d at 286. Here, Plaintiff’s claims are based on alleged public statements made that misrepresented

the Company’s true financial condition. Plaintiff, however, fails to point to any public statement

that was specifically undermined by the alleged manipulation of expenses. While the confidential

witnesses have provided detailed allegations regarding the alleged practice of manipulating

expenses through the use of the “flash file,” there are no particular allegations that any “flash file”

document contained specific facts that contradicted any identified public statement. Because

Plaintiff fails to provide the requisite link between the alleged improper reclassification of

expenses and any particular public statements, no inference of scienter can be made from these

allegations at this point.

ii. Confidential Witnesses– Improper Recognition of Revenue

Plaintiff next points to information from confidential witnesses to establish scienter with

respect to Defendants’ alleged improper recognition of revenue on unsigned deals. See SAC ¶¶

344–46, 383–414. Plaintiff asserts that information from CW1, CW2, CW3, CW5, CW6, and

CW7, and CW8 demonstrates that, most notably, Rosenberger was aware of, and involved in, the

fraudulent recognition of deal revenue before a contract was signed. See id.

First, Plaintiff relies on the testimony of CW3 to establish that Rosenberger made an

“infamous” decision to recognize $25 million in revenue on a licensing deal with Verizon without

having a signed contract, in violation of Company policy and GAAP regulations. SAC ¶¶ 94, 410.

Plaintiff states that CW3 spoke with the Company’s controller, who told CW3 that she had “put

up a fight” with Rosenberger in an attempt to avoid booking the $25 million deal,” but eventually

“threw up her hands” because “Rosenberger was the one on the line signing the financials.” Id. ¶

411. CW3 also states that the senior accountant expressed a similar response; that though she was

uncomfortable booking the revenue, she told CW3 “What do I care?” because the ultimate

responsibility lay with Rosenberger. Id 1 CW3 further stated that after Rosenberger became CFO,

she “never really relinquished her control” of the accounting function and, further, that

Rosenberger “micromanaged” the accountants. Id. ¶ 395.

Plaintiff next alleges that CW1, a financial analyst, CPA, and certified fraud examiner, has

personal knowledge that the Company improperly and prematurely recognized $5 million in

revenue from a contract with Verizon in the first quarter of 2016, even though the contract in

question was not signed until April 2016, after the quarter had closed. SAC ¶ 9. CW1’s knowledge

is based on a meeting in April 2016 at which CW1 overheard Rosenberger discuss with other

1 The Court previously found that the information from CW3 was an insufficient basis from

which to infer scienter because Plaintiff did not allege that CW3 was involved in the $25 million

Verizon transaction or that CW3 had first-hand knowledge of the alleged booking of the deal. See

In re Synchronoss, 2019 WL 2849933, at *10. The SAC has now added more details about the

conversations CW3 had with members of the accounting department regarding this deal.

Nevertheless, Defendants argue that Plaintiff’s allegations from CW3 is more of the same “second-

hand retelling” that I previously deemed insufficient in dismissing the Amended Complaint. See

id. I do not agree. Plaintiff has proffered additional details with respect to how CW3 received the

information regarding the “infamy” of the $25 million Verizon transaction, which shores up

CW3’s knowledge of the $25 million Verizon deal. The information newly provided by CW3 is

not the type of generalized rumor or second-hand retelling that courts routinely dismiss, but rather

CW3 provides particularized details of conversations that occurred with members of the

accounting team specifically about the transaction at issue. Moreover, CW3, as an accountant,

was in a position to have personal knowledge of the Company’s revenue booking procedures.

Indeed, the information provided by CW3 is more substantial than that rejected by the Intelligroup

court for being nothing more than rumor. See Intelligroup, 527 F. Supp. 2d at 360–61 (discounting

allegation that it was “common knowledge” that defendants were “cooking the books” because it

was not based on personal knowledge but repeated statements the witness heard). Accordingly,

the court declines to discount the information provided by CW3.

Company executives whether the Verizon contract had been signed. See id. Plaintiff alleges that

CW1 is aware that cloud software licensing revenue derived from this agreement with Verizon

was included in the revenue results for the first quarter of 2016. SAC ¶ 412. This knowledge is

based on weekly meetings attended by CW1, during which there were discussions regarding

getting the $5 million Verizon deal signed and which Rosenberger attended. Id. Indeed, CW1

states that in the weekly revenue meetings, which Rosenberger attended, leading up to March 31,

2016, there were discussions regarding “getting the $5 million Verizon deal signed.” Id. ¶ 413.

CW1 further states that at a closing meeting that occurred after the quarter ended, Rosenberger

asked about the status of the Verizon deal and, the Company’s Executive Vice President and

General Manager responded that he was “working” on getting the contract signed. Id. Finally,

with respect to the execution of the Verizon deal, CW1 states that “during the series of first quarter

closing meetings attended by CW1, Rosenberger made a statement along the lines of ‘if we book

revenue, we have to have signed contracts,’ acknowledging the applicability of the accounting

standards requiring Synchronoss to acquire signed contracts before recognizing revenue.” Id. ¶

414.

Plaintiff further points to the testimony of CW2, a long-time Synchronoss employee at the

Vice President level, who Plaintiff alleges was tasked with justifying $7 million in revenue in

connection with two AT&T transactions in late 2015 that did not occur. SAC ¶¶ 174–75.

According to CW2, the Company’s Senior Vice President and General Manager Andrew Wilmott

tasked CW2 with justifying $7 million in revenue from the AT&T transactions. Id. ¶ 367. Plaintiff

asserts that CW6’s experience corroborates that of CW2. CW6 worked as a consultant at

Synchronoss through McKinsey & Company in the 2016–2017 period and, later, became a Vice

President for the digital business-to-business product management strategy from November 2017

to November 2018. Id. ¶ 376. Both in his role as a consultant and as a direct employee, CW6 was

tasked with “straighten[ing] out the Company” and determining what additional products

Synchronoss should develop. Id. ¶ 399. Plaintiff alleges that at some point during CW6’s

employment, CW6 began reviewing deal data in the Company’s SalesForce system to help

determine optimal pricing for its products and specifically investigated the Company’s deals

completed or forecasted for completion from 2014 to 2022. Id. ¶ 403. While CW6 was conducting

this investigation, CW6’s SalesForce access was revoked without explanation. Id. ¶ 404. After

his access was revoked, CW6 received information from a customer support team employee who

identified the deals for which the Company had in fact received revenue. Id. Once this information

was collected, CW6 created a pro forma analysis that examined the deals that had been

characterized as completed and estimated that as much as 50% of the deals that were reported as

completed lacked substantiation. Id. ¶ 406. This investigation revealed a series of deals with

AT&T totaling approximately $7 million for which there was no evidence AT&T agreed to the

deals. Id. ¶ 406.2 Based on CW6’s relationship with AT&T personnel, CW6 was apparently able

2 Defendants argue that the information provided by CW6 regarding this analysis should be

discounted because it does not demonstrate any accounting irregularities and, further, because the

information does not implicate whether either Individual Defendant knew about the booking of

any particular transaction. Defs.’ Moving Br., at 24–25. First, with respect to the question of

accounting irregularities, it is difficult for the Court to accept that CW6’s information does not

demonstrate any accounting irregularities occurred. CW6 conducted an analysis that revealed that

a number of deals were recognized without proper substantiation. That information relates directly

to the question of whether revenue was being improperly recognized and, further the information

provided by CW6 lines up with that of CW2, who was tasked with justifying revenue that CW6

found was unsubstantiated. Moreover, there is no requirement that confidential witness

information be directly linked to an individual defendant as the Court’s assessment of confidential

witness testimony “rest[s] not on the presence or absence of certain types of allegations but on a

practical judgment about whether, accepting the whole factual picture painted by the Complaint,

it is at least as likely as not that defendants acted with scienter.” Avaya, 564 F.2d at 269. I find

that the information from CW6’s analysis is illustrative of the Company’s fast and loose approach

to revenue recognition and, therefore, I will not discount the information on this basis.

to cross-reference Synchronoss’s records with those of AT&T and was unable to locate evidence

that the deals had been agreed to by AT&T. Id. Further, personnel at AT&T apparently informed

CW6 that it had no intention of completing the deals with Synchronoss. Id. Plaintiff avers that

CW6’s statements with respect to AT&T bolsters CW2’s recollection of being tasked with

retroactively justifying two deals with AT&T in 2016 that totaled $7 million, and that did not occur

but were recognized as revenue in the fourth quarter of 2015. Id.3

Plaintiff asserts that CW7, who was the Company’s Internal Controls Manager for

approximately one year, until March 2017, has also provided reliable information with respect to

the alleged improper recognition of revenue. SAC ¶¶ 379–80. CW7 provided Plaintiff with

information regarding the company’s revenue recognition practices, which CW7 was in the

position to know about because he was responsible for reviewing, testing, and improving the

Company’s internal controls regarding, among other things, revenue recognition. Id. ¶ 380.

According to CW7, the Company’s accounting department prepared “accounting memos” to

support revenue recognition, which would include financial analysis of the deal and supporting

documentation. Id. ¶ 391. The accounting memos would be reviewed with the contract in question

by either Rosenberger, the controller or the assistant controller. Id. According to CW7,

3 Plaintiff also alleges that CW6 participated in weekly, monthly, and quarterly sales calls,

which were attended by about forty people. SAC ¶ 401. During the quarterly sales calls,

Rosenberger would participate and tell sales representatives that they “are missing this much

revenue” and “we need to figure out how we are going to get there.” Id. On those calls, CW6

explained that sales representatives would describe some deals as being in revenue recognition

status, even when the deal had not been completed. Id. ¶ 402. According to CW6, some members

of the sales team described as “rev rec” proposed deals in which a client simply told a

representative that the client was going to give the representative the client’s business. Id. These

allegations are too broad and general to support an inference of scienter. Besides identifying that

revenue recognition was discussed on these sales calls, CW6 fails to provide sufficient details

regarding any specific deal that was improperly recognized as revenue.

Rosenberger would sign these memos to document her review. Id. Moreover, while CW7 could

not recall the specific threshold, s/he believed that Rosenberger was responsible for reviewing “the

multi-million-dollar deals with the Company’s two most significant clients that were ultimately

affected by the Restatement,” i.e., the $25 million Verizon deal and the $7 million AT&T deal. Id.

CW7 further “stated that specifically with respect to Verizon and AT&T, . . . the Company’s

procedures required a contract signed by the customers before revenue could be booked on any

deal. In fact, according to CW7, after a sales representative made a deal, the procedure called for

Synchronoss’s Revenue Recognition & Billing Manager . . . to contact the client to confirm the

deal and obtain proof of deal approval—that is, specifically for Verizon and AT&T, a signed

contract.” SAC ¶ 390.4

Finally, though the parties do not dedicate any significant portion of their briefing to the

information provided by CW5 and CW8, both additionally provide information regarding the

Company’s revenue recognition practices. CW5, a former director of sales at the Company, states

that his/her offer letter “which was standard for new sales hires at that time, described [the

Company’s revenue recognition] rules, including the requirement that contracts had to be signed

before revenue could be recorded and the associated commission awarded to the salesperson.”

SAC ¶ 393. CW8, a sales representative, alleges that a signed contract was required for revenue

to be recognized on the deal. SAC ¶ 394. Plaintiff avers that CW8 had this knowledge because

he would only receive a bonus based “on those customer agreements for which Synchronoss had

4 Defendants argue that the information provided by CW7 is “internally inconsistent” and

must therefore be disregarded. Defs.’ Moving Br., at 34–37. Specifically, Defendants argue that

If there was already a signed contract, it would make little sense for the Company to contact AT&T

or Verizon to obtain further proof of deal approval. See SAC ¶ 390. The Court will not ignore

CW7’s information on this basis because it is plausible that the Company could have taken extra

steps to ensure that a deal had been reached by contacting the client to confirm the contract had

been signed.

received a signed contract.” Id. CW8 further purports to have reviewed a quarterly spreadsheet

created by the Company’s Revenue Recognition and Billing Manager that showed that “revenue

was recognized only for those deals for which there was proper documentation, and only

recognized in the period in which the documentation was dated and executed.” Id. While this

information does not necessarily implicate Rosenberger, it is crucial to the factual picture painted

by the Complaint, which suggests that there existed a Company-wide understanding that revenue

should not be recognized before a signed contract was obtained.

Considering the above confidential witness information collectively, the Court finds that

the SAC sets forth particularized allegations that the Company and, notably, Rosenberger,

improperly recognized revenue on contracts before they were signed. These particularized

allegations provide, at the very least, strong circumstantial evidence that Rosenberger “knew or,

more importantly, should have known that [she] was misrepresenting material facts related to the

Company,” see In re Campbell Soup, 145 F. Supp. 2d at 599, and thus, acted recklessly. What is

clear from the information provided by the confidential witnesses is that Rosenberger knew that

revenue had been recognized on certain deals, notably the $25 million and $5 million Verizon

contracts, before the contracts were signed. Moreover, the SAC demonstrates that Rosenberger

was heavily involved in the revenue recognition process. See, e.g., SAC ¶ 395 (setting forth

information from CW3 that Rosenberger “‘micromanaged’ the accountants”). Moreover, the

confidential witnesses all gave similar statements with regard to the Company’s practice of

requiring a signed contract for revenue to be booked, evidencing that such a practice was in place

at the Company. That the confidential witnesses did not specifically allege that Rosenberger knew

of that policy does not inhibit an inference of scienter—Rosenberger was the CFO of the Company

and, previously the Controller, and actively participated in discussions regarding revenue

recognition, and was responsible for approving such decisions. Looking to this evidence as a

whole, Plaintiff has sufficiently shown that Rosenberger “knew or, more importantly, should have

known that” that revenue was being recognized prematurely. See Novak, 216 F.3d at 308.

Accordingly, I find that scienter can be inferred from the confidential witness testimony pertaining

to the improper recognition of revenue as to Rosenberger.

b. GAAP Violations

Allegations of GAAP violations “present nothing but a sub-group of the inaccurate public

statement category of securities cases.” Intelligroup, 527 F. Supp. 2d at 286. In that regard,

allegations of scienter based on GAAP violations do not create the requisite inference of scienter

unless the plaintiff alleges “more.” See Christian v. BT Grp. PLC, No. 17-497, 2018 WL 3647213,

at *8 (D.N.J. Aug. 1, 2018) (“GAAP violations do not themselves create a strong inference of

scienter. Courts have found that GAAP violations can support an inference of scienter, but do not

independently create such an inference.”); Nat'l Junior Baseball League v. Pharmanet Dev. Grp.

Inc., 720 F. Supp. 2d 517, 55657 (D.N.J. 2010); see also Wyser-Pratte Mgmt. Co. v. Telxon Corp.,

413 F.3d 553, 563 (6th Cir. 2005); Ferris, Baker Watts, Inc. v. Ernst & Young, L.L.P., 395 F.3d

851, 855 (8th Cir. 2005); In re Saxton, Inc. Sec. Litig., 156 F. App’x 917, 920 (9th Cir. 2005);

Pirraglia v. Novell, Inc., 339 F.3d 1182, 1192 (10th Cir. 2003); Abrams v. Baker Hughes, Inc.,

292 F.3d 424, 432 (5th Cir. 2002); Ziemba v. Cascade Int'l, Inc., 256 F.3d 1194, 1208–09 (11th

Cir. 2001); Stevelman v. Alias Research, Inc., 174 F.3d 79, 84–85 (2d Cir. 1999); Malone v.

Microdyne Corp., 26 F.3d 471, 479 (4th Cir. 1994). The decisions in this Circuit are no exception.

In re Westinghouse Sec. Litig., 90 F.3d 696, 712–13 (3d Cir. 1996). “[T]he ‘more’ envisioned by

the courts consists of the panoply of such facts which could sufficiently indicate that defendants

had clear reasons to doubt the validity of the issuer’s financials but, nonetheless, kept turning a

blind eye to all such factual ‘red flags.’” Intelligroup, 527 F. Supp. 2d at 287.

i. ASC 985-605-25-16

Plaintiff first argues Defendants violated two accounting standards set forth in ASC 985-

605-25-16 and -17, by recognizing revenue prior to execution of the contracts in connection with

the Verizon and AT&T transactions. These accounting standards provide that revenue from

software agreements “shall not be recognized on any element of the arrangement unless persuasive

evidence of an arrangement exists,” and where a vendor “has a customary business practice of

using written contracts, evidence of the arrangement is provided only by a contract signed by both

parties.” SAC ¶ 155–56. In my Opinion dismissing the Amended Complaint, I found that scienter

could not be inferred from the alleged violation of these accounting standards, because Plaintiff

failed to allege the existence of a customary business practice of requiring signed contracts before

recognizing revenue from a deal and, further, because the Complaint was devoid of any allegations

that reflected the Company’s revenue recognition practices for AT&T or Verizon contracts. In re

Synchronoss, 2019 WL 2849933, at *11–13.

To cure these deficiencies, Plaintiff alleges in the SAC that it has reviewed the Company’s

internal documents which establish that Synchronoss had a company business practice of using

written contracts to sell or license software and, as a result, the Company was required to have a

written contract in hand before recognizing revenue in connection with these transactions. Plaintiff

first points to a document from 2015, referred to as the 2015 Revenue Policy, that “provides details

on the Accounts Receivable and Revenue process in place at Synchronoss Technologies, Inc.”

SAC ¶ 384. The 2015 Revenue Policy, according to Plaintiff, required that “[a] Revenue

Recognition memo [be] written for agreements that generate over 500K USD in revenue for the

quarter” and requires that such memo “provide[] a summary of the contract terms” and be

reviewed and approved by the Controller and the CFO. Id. (emphasis in original). Moreover,

Plaintiff contends that the 2015 Revenue Policy required contracts be signed by both parties prior

to recognizing revenue as it explicitly requires that “[f]or all invoices, the AR Senior Accountant

and AR Accountant reconcile the pricing information to the customer contract,” showing that “all

invoices” are pursuant to contracts. Id. ¶ 385 (emphasis in original). Finally, Plaintiff submits

that the 2015 Revenue Policy shows that “top management,” including Waldis and Rosenberger,

were involved in the process of contract execution as “[a]n Officer of the Company or a designated

individual executes . . . contracts” on behalf of the Company,” and that the Finance and Legal

departments held quarterly meetings “to review new contracts that have been executed” and

“upcoming contacts that are soon to be completed.” Id. ¶ 386.

Plaintiff next points to procedures adopted in 2016, which are set forth in a document

referred to by Plaintiff as the “Transactional Revenue Process.” Id. ¶ 387. The Transactional

Revenue Process provides that “[r]evenues are based on a contractual price per transaction,” which

Plaintiff alleges makes clear that contracts are a prerequisite to revenue recognition. Id. Further,

Plaintiff alleges that the document states that “[f]or all transactional revenue recorded greater than

$500,000 for any given quarter, AR team prepares a technical memo to consider revenue

recognition criteria in accordance with ASC 605-25, Revenue Recognition – Software.” Id.

According to Plaintiff, the Transaction Revenue Process states that after all approvals are received

for a deal, the sales team “will provide the contract to the CEO or COO to sign and execute,” and

the final contract is thereafter stored in SalesForce. Id. ¶ 388.

The final document relied upon by Plaintiff is the Company’s Accounts Receivable-

Revenue Recognition Risk Control Matrix for 2016 (the “2016 RCM”), which is an Excel

spreadsheet setting forth internal controls relating to the Company’s accounting. Id. ¶ 389.

According to Plaintiff, the 2016 RCM required that “[c]ontracts cannot be executed prior to

obtaining required approval.” Id. Plaintiff alleges that the 2016 RCM requires that contracts “go

through a formal review process prior to execution” and that the contract management software

used by the Company “requires Legal and Finance approval before releasing the contract to be

executed by the CEO or COO.” Id.

While these documents appear to demonstrate the procedures followed in executing a

contract, the portions provided by Plaintiff in the SAC provide little information as to when

revenue of a deal could be recognized. The portions quoted by Plaintiff, which are the only

excerpts in the SAC, do not state explicitly that a contract was required to be signed in order for

revenue to be recognized. However, when considered in conjunction with the confidential witness

testimony recited above, the Court is satisfied that Plaintiff has demonstrated the “more” required

for a GAAP violation to support an inference of scienter. Despite Defendants’ assertions to the

contrary, the allegations of the SAC suggest that the Company did have a policy of using written

contracts and, further, that it required signed contracts for revenue to be recognized. See, e.g. SAC

¶ 390 (“CW7 stated that, specifically with respect to Verizon and AT&T, the Company’s two

largest customers, the Company’s procedures required a contract signed by the customers before

revenue could be booked on any deal.”). Thus, the provisions of ASC 985-605-25-16 and -17

applied to the Company. These added allegations support a finding of scienter based on the GAAP

violation. See, e.g., In re Ravisent Techs., Ins. Sec. Litig., No. 00-1014, 2004 WL 1563024, at *9

(E.D. Pa. July 13, 2004) (finding GAAP violation supported inference of scienter where defendants

recognized revenue in violation of both GAAP standard and clear company policy).

Defendants, nevertheless, argue that Plaintiff has failed to show that revenue recognition

is so “simple” that violation of the standard gives rises to an inference of scienter and further points

to the Restatement as evidence that the Company did not always require a signed contract for

revenue to be recognized. First, in support of its argument that revenue recognition standards are

not “simple,” Defendants refer to Ernst and Young (“EY”) Guidelines and FASB guidance that

they allege demonstrate the complexity of determining when to recognize revenue.5 See Defs.’

Moving Br., at 28. The Court’s review of that guidance demonstrates that recognizing revenue

may sometimes be a complex process, however, both the GAAP standard and the EY Guidelines

are clear that where a company has a practice of using signed contracts, a signed contract must be

in hand before revenue is recognized. See EY Guidelines, at 75, Frank Decl., Ex. J, ECF No. 84-

12. In other words, once a company adopts such a practice, the question of whether revenue can

be recognized appears to become more straightforward—if there is a signed contract, the revenue

may be recognized and where there is not, the revenue cannot be recognized. Plaintiff, as set forth

above, has sufficiently alleged that such a practice existed at Synchronoss.

Nor does the Restatement negate any inference of scienter. Defendant asserts that the

Restatement, which stated that “[i]n certain cases, the Company historically formed a view that

persuasive evidence of an arrangement existed” contradicts Plaintiff’s allegations that the

Company employed a practice of requiring written, signed contracts for deal revenue to be

recognized. See 2017 10-K/A, at 3, Frank Decl., Ex. 5, ECF No. 84-5. Plaintiff alleges that,

despite what is stated in the Restatement about the Company’s historic practices, Defendants knew

5 Defendants additionally point to this Court’s prior Opinion as supporting its argument that

recognizing revenue from software agreements is not simple. See In re Synchronoss, 2019 WL

2849933, at *12. Defendants misconstrue on the Court’s reasoning. Previously, Plaintiff failed to

sufficiently allege that the Company required a signed contract before revenue could be

recognized. Absent such particularized allegations, the Court found that Plaintiff could not

demonstrate a breach of the GAAP standard supported an inference of scienter. Now, however,

Plaintiff has made such a showing, making it possible to infer scienter based on Defendants’

recognition of revenue without signed contracts.

at the time the deals in question were recognized that they should not have been recognized as

revenue because the contracts were not signed. The Restatement does not negate those allegations.

In sum, Plaintiff has adequately demonstrated on this motion (1) the Company had a

practice of requiring written signed contracts before revenue was recognized, (2) that the Company

recognized certain deals as completed before the contracts were signed, and (3) that Rosenberger

was aware that such deals were recognized without a signed contract. This is sufficient to allege

violations of the GAAP standard in question and, further, sufficient grounds from which to infer

scienter as to Rosenberger.

ii. ASC 985-605-55-4

Next, Plaintiff maintains that Defendants violated ASC 985-605-55-4, which addresses the

recognition of revenue when a software vendor has multiple software contracts with a single

customer that amount to a single arrangement. See ASC 985-605-55-4. Specifically, the standard

provides that:

Software vendors may execute more than one contract or agreement

with a single customer. However, a group of contracts or

agreements may be so closely related that they are, in effect, parts

of a single arrangement and should be viewed as one multiple-

element arrangement when determining the appropriate amount of

revenue to be recognized in accordance with this Subtopic.

Id. Plaintiff asserts the Defendants violated this standard by improperly recognizing as revenue (1)

a $9.2 million licensing fee paid as part of the sale of the Activation business to Sequential, and

(2) a $10 million patent-dispute settlement payment by Openwave as standalone license revenue

when it should have treated the $10 million as a reduction of the purchase price Synchronoss paid

to acquire Openwave. The Court previously determined that this alleged GAAP violation could

not support an inference of scienter because Plaintiff did not show that the decision of whether

several contracts are so closely related that they must be treated as a single agreement is a decision

that is “obvious to a business—rather than an accounting—mind.” In re Synchronoss, 2019 WL

2849933, at *14 (quoting Intelligroup, 527 F. Supp. 2d at 352). Because this GAAP violation

involved a complex rule, mere error in its application could not support an inference of scienter.

Id.6

In the SAC, Plaintiff adds new allegations that it argues demonstrates that Rosenberger

acted with scienter with respect to the Company’s improper accounting for the Openwave

acquisition and the divestiture of the Company’s Activation business to Sequential. See SAC ¶¶

420–422. Plaintiff reasons that in the Restatement, Synchronoss admitted that its internal controls

deficiencies included the failure to “ensur[e] transactions are appropriately accounted for from a

substance over form perspective.” Id. ¶ 420. Moreover, Plaintiff claims that “[i]n light of

Rosenberger’s long experience at the Company, as well as her CPA expertise, she should have

been aware that the failure [to treat the Sequential divestiture as a single deal] was inappropriate.”

Id. ¶¶ 422. Plaintiff alleges that when Rosenberger was asked about the Sequential transaction by

analysts, neither she nor Waldis mentioned the $9.2 million-dollar fee. Id. And, while the $9.2

million was “hidden,” Rosenberger sold 14,000 shares of Company stock for more than $550,000,

exceeding the amount of shares that she sold in December of each of the prior four years. Id.7

6 Plaintiff again argues that the Company’s alleged violation ASC 605-25-3 by recognizing

funds from the Openwave settlement as revenue supports an inference of scienter. However,

Plaintiff fails to address how an alleged violation of an accounting principle that requires the

application of reasonable judgments could possibly give rise to a strong inference of scienter. See

In re Synchronoss, 2019 WL 2849933, at *13 n.9. Indeed, as the Court noted in its prior Opinion,

SEC guidance provides that application of this accounting standard is a “challenge” that “requires

judgment” and that the SEC is “willing to consider reasonable judgments” in the application of the

standard. Id. Plaintiff fails to address this question posed by the Court and, therefore, the Court

again declines to find that any apparent violation of ASC 605-25-3 supports any inference of

scienter.

7 Plaintiff once again argues that scienter is reinforced because Waldis and Rosenberger

allegedly failed to disclose that, in connection with the Sequential deal, the Company provided a

Putting aside the timing of Rosenberger’s stock sales, which the Court addresses infra,

Plaintiff has not demonstrated that scienter can be inferred from the Company’s misapplication of

this complex accounting standard. Plaintiff merely alleges that, based on Rosenberger’s

experience and training as a CPA, she must have known that the Company’s revenue recognition

of these two transactions was improper. However, such statements that a defendant “must have

known” that the Company’s actions were improper are not sufficiently particularized to provide

an inference of scienter. See Advanta, 180 F.3d at 539 (“Likewise, allegations that a securities-

fraud defendant, because of his position within the company, ‘must have known’ a statement was

false or misleading are ‘precisely the types of inferences which [courts], on numerous occasions,

have determined to be inadequate to withstand Rule 9(b) scrutiny.’” (alteration in original)

(quoting Maldonado v. Dominguez, 137 F.3d 1, 10 (1st Cir. 1998)). Thus, even if Plaintiff is

correct that Defendants violated this GAAP standard, it fails to plead the “more” required to

support any inference of scienter from that violation.

c. Magnitude of Restatement/Core Business

In this Court’s prior Opinion, I found that the magnitude of the Company’s 2018

Restatement, which set forth that the Company’s revenues were overstated by $180 million or

14.8%, and that the previously reported net income of $93.5 million was restated to a cumulative

$30 million guarantee to Goldman Sachs and entered into the $9.2 million licensing fee. See SAC

¶ 321. First, to the extent Plaintiff relies on the alleged concealment of the licensing fee in

connection with the Sequential deal, the Court has already rejected its position. See In re

Synchronoss, 2019 WL 2849933, at *12 n.7. Plaintiff’s argument that the failure to disclose that

the Company provided a guarantee to Goldman Sachs in connection with this deal is similarly

unavailing. Plaintiff again cites to comScore, in which that court found that scienter was reinforced

where a defendant “sp[eaks] extensively” about an issue and knows it is “a subject about which

investors and analysts often inquire[],” in support of this argument. Fresno Cty. Emps. Ret. Ass’n

v. comScore, 268 F. Supp. 3d 526, 552–53 (S.D.N.Y. 2017). As the Court noted in its prior

Opinion, that case is distinguishable because there, it was “undisputed that [defendants] were

aware of and made statements about comScore’s revenue recognition practices.” See id.

loss of $40 million, provided “some inference of scienter,” but not a strong inference. In re

Synchronoss, 2019 WL 2849933, at *14. I additionally found that scienter could not be inferred

based on the size of the contracts at issue and their relative importance to Synchronoss’s business

because Plaintiff failed to demonstrate that Defendants acted with the requisite fraudulent intent

with respect to the Verizon and AT&T contracts. Id. at *15. In other words, Plaintiff’s restatement

magnitude and core business allegations failed to support a substantial inference of scienter

because Plaintiff failed to allege that Defendants knew that their statements were false.

The Court finds that both these theories now support a stronger inference of scienter, as

Plaintiff has sufficiently alleged that Rosenberger knew that the Company had improperly

recognized certain revenue without obtaining signed contacts. This allegation of knowledge is

enough to meet the “more” required for a restatement of financial results “to support a strong

inference of scienter.” See In re Bio-Tech Gen. Corp. Sec. Litig., 380 F. Supp. 2d 574, 588 (D.N.J.

2005) (“Although a restatement of financial results is probative of scienter, more is needed to

support a strong inference of scienter.”). It is similarly sufficient for the Court to infer scienter

from the size of the contracts involved. “[U]nder the core operations doctrine, misstatements and

omissions made on ‘core matters of central importance’ to the company and its high-level

executives gives rise to an inference of scienter when taken together with additional allegations

connecting the executives’ positions to their knowledge.” See In re Urban Outfitters, Inc. Sec.

Litig., 103 F. Supp. 3d 635, 653–54 (E.D. Pa. 2015). The confidential witness allegations with

respect to revenue recognition demonstrate that Rosenberger knew that the Company had

improperly recognized revenue on its two biggest accounts—Verizon and AT&T. That knowledge

is sufficient to support an inference of scienter under this theory. See City of Roseville Employees’

Retirement Sys. v. Horizon Lines, Inc., 686 F. Supp. 2d 404, 423 (D. Del. 2009) (“While it is true

that false or misleading statements by key executives regarding a company’s lead product or core

business practices will weigh in favor of finding a strong inference of scienter, [courts] will not

make such an inference ‘absent particularized allegations showing that defendants had ample

reason to know of the falsity of their statements.’”).

d. Resignations

Despite not adding any new allegations regarding the circumstances surrounding the

resignations of Rosenberger and Waldis, Plaintiff again argues that the resignation of the

Individual Defendants supports an inference of scienter. Courts in the Third Circuit have found

resignations of key officers to be insufficient to show that they acted with the requisite scienter to

commit the alleged fraud. See In re The Great Atl. & Pac. Tea Co., Inc. Sec. Litig., 103 F. App’x

465, 470 (3d Cir. 2004) (finding that personnel changes did not support an inference of scienter

where it was unclear whether the resignation was related to the alleged fraud); In re Hertz Global

Holdings, Inc. Sec. Litig., No. 13-7050, 2017 WL 1536223, at *20–21 (D.N.J. Apr. 27, 2017); In

re Interpool, Inc. Sec. Litig., No. 04-321, 2005 WL 200037, at *17 (D.N.J. Aug. 17, 2005).

The Court previously found that this theory of scienter failed because Plaintiff failed to

allege any specific connection between the resignation of the Individual Defendants and the

alleged fraud. Plaintiff again fails to connect the resignations of Rosenberger and Waldis to the

alleged fraud. Indeed, Plaintiff again merely states, without support, that the timing of their

resignations was unusual. This is insufficient, in and of itself, to raise any inference of scienter.

e. Motive and Opportunity

In my prior Opinion, I held that the allegations in the Amended Complaint regarding insider

stock trading by the Individual Defendants and the Company’s incentive compensation program

did not support an inference of scienter.8 See In re Synchronoss, 2019 WL 2849933, at *15–18.

The SAC adds limited new allegations with this respect. Specifically, Plaintiff newly alleges that

Waldis sold 569,800 shares for net proceeds of $18,086,40.09 before Defendants’ alleged fraud

was revealed. SAC ¶ 423. Plaintiff alleges that this sale was unusual in timing and amount

because, notably, in 2016, Waldis reduced his holdings in the Company by 30% throughout the

year, making over 69% of the sales, or 204,799 shares, in the first quarter of 2016. Id. Plaintiff

asserts that Waldis’s first quarter 2016 stock sales were exponentially larger than stock sales he

previously made in the first quarter for the years 2015, 2014, 2013, and 2012. Id. Plaintiff alleges

that the unusual nature of these sales is evidenced by the fact that

Waldis made these sales: (i) just two weeks after the end of the

fourth quarter of 2015, a period for which the Company wrongly

booked $7 million in ghost revenue on two AT&T purchases that

did not occur (revenue that CW2 spent most of 2016 trying to

retroactively justify on the instructions of Company management);

(ii) during the quarter in which Synchronoss recognized $10 million

in revenue from the Openwave settlement agreement that the

Company later conceded was improper, and (iii) as the Company

resolved to improperly recognize $5 million in cloud software

licensing revenue from Verizon despite not having a signed contract

in hand, clearly contravening accounting standards [and] the

Company’s internal policies.

Id.

8 While the SAC again alleges that the Individual Defendants had a motive to act

fraudulently because of the Company’s incentive compensation system, SAC ¶ 356, Plaintiff does

not address these allegations in its briefing, nor did Plaintiff add any new factual allegations in

support of theory that the incentive compensation system motivated the Individual Defendants’

fraudulent behavior. As this Court stated in its prior Opinion, courts in the Third Circuit have

previously rejected such allegations as a basis for an inference of scienter. See In re Bio Tech, 380

F. Supp. 2d at 581 (observing that allegations of incentive compensation systems provide nothing

more that “generalized motives that would be possessed by most corporate directors or officers

[and] do not establish scienter”); see also In re Dig. Island Sec. Litig., 357 F.3d 322, 331 (3d Cir.

2004) (“[A]n allegation that defendants were motived by a desire to increase executive

compensation was insufficient because such a desire can be imputed to all corporate officers.”

(alteration in original) (quoting Kalnit v. Eichler, 264 F.3d 131, 139 (2d Cir. 2001)).

Particularized allegations regarding motive and opportunity may, in combination with

other allegations, support a strong inference of scienter, but “‘motive and opportunity’ may no

longer serve as an independent route to scienter.” Avaya, 564 F.3d at 277; see also Tellabs, 551

U.S. at 323–25. Thus, courts “will not infer fraudulent intent from the mere fact that some officers

sold stock.” Burlington Coat Factory, 114 F.3d at 1424. If the stock sales are, however, unusual

in scope and timing, they may support an inference of scienter. See id. The question of whether

a sale is unusual in scope depends on factors such as “the amount of profit made, the amount of

stock traded, the portion of stockholdings sold, or the number of insiders involved.” In re Suprema,

438 F.3d at 277 (citing Wilson v. Bernstock, 195 F. Supp. 2d 619, 635 (D.N.J. 2002)). Other

factors relevant to scope and timing are whether the sales were “normal and routine,” and whether

the profits were substantial relative to the seller’s ordinary compensation. Id. (citing Burlington

Coat Factory, 114 F.3d at 1423).

These new allegations do not cure the deficiencies previously identified by the Court with

respect to the trading activity of Rosenberger and Waldis. As the Court previously identified,

Plaintiff does not dispute that all of Rosenberger and Waldis’s trading activity was pursuant to

SEC Rule 10b5-1 plans, which “are of minimal value in establishing an inference of scienter.”9

See Lovallo v. Pacira Pharm., Inc., No. 14-06172, 2015 WL 7300492, at *13 (D.N.J. Nov. 18,

2015) (citing Avaya, 564 F.3d at 279); In re Synchronoss Sec. Litig., 705 F. Supp. 2d 367, 410 &

n.56 (D.N.J. 2010) (evidence of trading under 10b5-1 trading plans “largely irrelevant” to

9 A Rule 10b5–1 plan is a written plan that allows corporate insiders to make prearranged

stock transactions. See 17 C.F.R. § 240.10b5–1(c). The Court may consider such documents on a

motion to dismiss because they are publicly filed SEC documents. In re Hertz, 2017 WL 1536223,

at *22 n.10; see also In re Nutrisystem, Inc., Derivative Litig., 666 F. Supp. 2d 501, 518 n.11 (E.D.

Pa. 2009) (“The Court finds that it can take judicial notice of the public filings showing that the

challenged sales by [defendants] were made pursuant to 10b5–1 plans.”) (citing Oran v. Stafford,

226 F.3d 275, 289 (3d Cir. 2000)).

demonstration of scienter”).10 Nevertheless, Plaintiff speculates that the Individual Defendants’

trading activity demonstrates that the SEC plans were adopted or amended during the Class Period.

The Court rejected this argument in its prior Opinion as it is Plaintiff’s burden to allege when the

Plan was adopted or amended. See In re Synchronoss, 2019 WL 2849933, at *17 (citing In re

Nutrisystem, 666 F. Supp. 2d at 518 n.11). Plaintiff has offered the Court no reason to revisit this

determination, as the SAC contains no new allegations regarding Rosenberger’s stock sales that

would necessitate reconsidering my finding that Plaintiff has failed to sufficiently plead that

Rosenberger’s sale of stocks during the Class Period and shortly before her resignation support an

inference of scienter. See id. at *15–18.

Moreover, the new allegations provided by Plaintiff regarding Waldis’s trading activity are

not suggestive of scienter. In sum, Plaintiff alleges that Waldis’s stock sales during the first quarter

of 2016 “were exponentially larger than the stock sales he made during the first quarter of any of

the previous five years.” SAC ¶ 423. Defendants argue that Plaintiff’s focus on the first quarter

of 2016 is unavailing because Waldis’s annual trading for the four years prior to the Class Period

was generally higher than the Class Period, with his largest proceeds occurring in 2013 when his

stock sales yielded proceeds of more than $15 million. Indeed, Waldis’s annual trading history is

consistent, with his highest annual trading occurring in 2010 (400,000 shares sold for $10,160,000

aggregate proceeds) and 2013 (489,760 shares sold for aggregate $15,105,577 aggregate

10 Relying on case law from outside this circuit, Plaintiff argues that a 10b5-1 plan is an

affirmative defense and, thus, Defendants’ argument that the stock sales were made pursuant to

such a plan cannot be properly considered on a motion to dismiss. Courts in this Circuit, however,

have regularly considered whether stock sales were made pursuant to Rule 10b5-1 plans on a

motion to dismiss when considering whether insider sales support an inference of scienter. See In

re Egalet Corp. Sec. Litig., 340 F. Supp. 3d 479, 512–13 (E.D. Pa. 2018) (finding that fact that

defendants’ stock trades were made pursuant to Rule 10b5-1 plans “weighs heavily against an

inference of scienter” on motion to dismiss); Nutrisystem, 653 F. Supp. 2d at 517–18.

proceeds), before any allegedly fraudulent activity occurred. See ECF No. 84-10, at 2. And, as

the Court previously determined, the fact that Waldis retained 510,929 shares at the end of the

Class Period, at which time the Company’s shares had declined from a Class Period high of $53,67

to $12.13, tends to negate any suggestion of scienter. See Advanta, 180 F.3d at 541 (“Far from

supporting a ‘strong inference’ that defendants had a motive to capitalize on artificially inflated

stock prices, these facts [i.e., defendants’ retained holdings] suggest they had every incentive to

keep Advanta profitable.”); In re Party City Sec. Litig., 147 F. Supp. 2d 282, 313 (D.N.J. 2001)

(“Low aggregate sales and large retained aggregate holdings rebut an inference of motive, even

where some defendant have sold significant percentages.”).

For these reasons, Plaintiff’s allegations with respect to the stock sales of Rosenberger and

Waldis fail to support a strong inference of scienter.

f. Opposing Inferences

Taken together, the Court finds that Plaintiff’s allegations with respect to Rosenberger are

“as compelling as any opposing inference of nonfraudulent intent.” Tellabs, 551 U.S. at 314.

Plaintiff has sufficiently pled that, at a minimum, Rosenberger was aware that certain contracts,

most notably the $25 million and $5 million Verizon contracts, were recognized prior to receipt of

a signed contract on each deal. Plaintiff has further sufficiently alleged that recognition of those

deals was in violation of Company policy, which required a signed contract for deal revenue to be

recognized and in violation of GAAP standards. This, taken together with the large magnitude of

the Restatement and the size of the contracts at issue, is sufficient to support a substantial inference

of scienter as to Rosenberger.

Plaintiff has not, however, made such a showing with respect to Waldis. Unlike

Rosenberger, Plaintiff fails to allege that Waldis was involved in the improper recognition of

revenue, which are the only allegations presented by Plaintiff that support a substantial inference

of scienter. Accordingly, the claims against Waldis will be dismissed.11

2. Forward Looking Claims

In addition to arguing that Plaintiff’s Restatement-related claims must be dismissed based

on Plaintiff’s failure to adequately plead scienter, Defendants further argue that Plaintiff’s claims

related to false or misleading forward-looking statements made by Defendants, i.e., Defendants’

“guidance statements projecting revenue” for the third quarter of 2016 and the full year of 2017,

are protected by the PSLRA safe harbor for forward-looking statements.12 Specifically, Plaintiff

alleges that Defendants made knowingly false statements on three 2016 earnings calls. See SAC

¶¶ 322–27. First, Plaintiff alleges that on an August 3, 2016 earnings call, Rosenberger stated that

the Company expected “[n]on-GAAP revenues . . . to be in the range of $175 million to $180

million.” Id. ¶ 322. Plaintiff asserts that this statement was false or misleading “because it

included $25 million in revenue related to a contract with Verizon that, according to CW3, was

not executed prior to the close of the third quarter of 2016.” Id. ¶ 324. Plaintiff further points to

a December 6, 2016 call to discuss the Company’s acquisition of IntraLinks Holdings, Inc., in

which Rosenberger stated that “we are giving initial 2017 total revenue guidance of between $810

million to $820 million.” Id. ¶ 327. Finally, Plaintiff identifies a February 8, 2017 earnings call

11 Discovery may reveal information that indicates Waldis knew that revenue was being

improperly recognized before signed contracts were received. If such information is discovered,

Plaintiff may move to amend the complaint.

12 From the outset, the Court finds that Plaintiff has not demonstrated that Waldis had actual

knowledge that any of the guidance statements was false. While the SAC contains sufficient

statements that Rosenberger was involved in the revenue recognition process and allegedly knew

that the Verizon deal was improperly booked, there are no such allegations connecting Waldis to

that transaction. Accordingly, all forward-looking statement claims against Waldis will be

dismissed.

in which Rosenberger repeated the 2017 guidance, stating that “[f]or 2017, non-GAAP revenues

are expected to be in the range of $810 million to $820 million, unchanged from our initial

guidance given on December 6 for the combined company.” Id. ¶ 328. Plaintiff asserts that

statements made regarding the 2017 revenue guidance were false or misleading because “the

guidance for 2017 was undergirded by years of reported historical revenue figures that Defendants

knew were false,” including the $25 million contract with Verizon. Id. ¶ 329.13

The PSLRA Safe Harbor provision, 15 U.S.C. § 78u-5(c), “immunizes from liability any

forward-looking statement, provided that: the statement is identified as such and accompanied by

meaningful cautionary language; or is immaterial; or the plaintiff fails to show the statement was

made with actual knowledge of its falsehood.” Avaya, 564 F.3d at 254. In other words, under the

PSLRA, “forward-looking” statements are not actionable if they are “(1) identified as such, and

accompanied by meaningful cautionary statements; or (2) immaterial; or (3) made without actual

knowledge that the statement was false or misleading.” In re Aetna, Inc. Sec. Litig., 617 F.3d 272,

278–79 (3d Cir. 2010). The PSLRA's definition of “forward-looking statement” includes, inter

alia, “projections of future performance, plans and objectives for future operations, and

assumptions underlying statements about future financial, economic or operational

13 In its briefing on this issue, Plaintiff refers to a false statement allegedly made by Waldis

on a November 7, 2016 earnings call in which he stated that the $25 million Verizon contract had

been signed during the third quarter of 2016. See Pls.’ Opp., at 59; SAC ¶ 308. Plaintiff argues

that this statement was a statement of present fact and does not fall under the safe harbor. The

Court agrees that this statement is not forward-looking and, thus, is not protected by the safe

harbor. In any event, the Court also notes that Plaintiff cannot rely on this statement as “plainly

false” because Plaintiff has failed to allege that Waldis had knowledge that the $25 million Verizon

contract was, in fact, unsigned when it was recognized as revenue. The SAC only alleges that

Rosenberger knew that the $25 million Verizon deal was improperly recognized as revenue before

it was signed. Accordingly, even if Plaintiff sought to rely on Waldis’s statement in support of its

historical claims, it cannot, as it has failed to sufficiently plead Waldis’s knowledge that the

statement was false.

performance.” Id. at 279 (citing 15 U.S.C. § 78u–5(i)(1)). The parties do not appear to dispute

that the three statements made by Rosenberger with respect to the projected revenue for the third

quarter of 2016 and the revenue guidance for 2017 are forward-looking statements. And, indeed,

Plaintiff cannot dispute these statements are forward-looking as they related to “projections of

future performance.” Aetna, 617 F.3d at 279.

This Court first addresses whether Defendants’ forward-looking statements where

appropriately accompanied by cautionary language. The Third Circuit has explained that “[a]

vague or blanket (boilerplate) disclaimer which merely warns the reader that the investment has

risks will ordinarily be inadequate to prevent misinformation.” Avaya, 564 F.3d at 256. Rather,

“[t]o suffice, the cautionary statements must be substantive and tailored to the specific future

projections, estimates or opinions in the prospectus which the plaintiffs challenge.” Id. (internal

citation omitted). Here, each of the forward-looking statements challenged by Plaintiff was made

on a call with analysts and investors. See SAC ¶¶ 322–29. Each call was preceded with a statement

from the Executive Vice President of Finance & Corporate Development advising that forward-

looking statements would be made during the call and that the statements “are subject to a variety

of risks and uncertainties that could cause actual results to differ materially from expectations.”

See Frank Decl., Exs. D, E, F. In each call, the Company further identified its most recent Form

10-K and Form 10-Q as further setting forth “a discussion of material risks and other important

factors that could affect [its] actual results.” Id.

Plaintiff argues that the cautionary language set forth in the SEC forms is insufficient

because it does not “disclos[e] the risks surrounding improper revenue recognition practices and

the more fundamental issue of weak controls.” Pls.’ Opp., at 58. The Court agrees. Defendants

do not highlight any specific guidance in the SEC forms that applies to the forward-looking

statements at issue. Instead, Defendants appear to argue that it is sufficient that the Company

identified its guidance statements as forward looking and incorporated the list of risk and

uncertainties that could cause its future results to differ from the predictions set forth in its most

recent SEC filings. See Defs.’ Moving Br., at 56. A review of those risks demonstrates that

perhaps the only cautionary language regarding accounting issues is the following boilerplate

statement:

We prepare our consolidated financial statements in conformity with

U.S. Generally Accepted Accounting Principles. These principles

are subject to interpretation by the SEC and various bodies formed

to interpret and create appropriate accounting principles. A change

in these principles, or their interpretation, could have a significant

effect on our reported results and may even retroactively affect

previously reported results. Our accounting principles that recently

may have been or may be affected by changes in accounting

principles are: (i) accounting for stock-based compensation; (ii)

accounting for income taxes; (iii) accounting for business

combinations and goodwill; (iv) revenue recognition guidance; and

(v) accounting for foreign currency translation.

See 2015 Form 10-K, at 26, Frank Decl., Ex. A, ECF No. 84-3. In In re Hertz, the court found

similar language did not constitute a meaningful cautionary statement where the complaint

contains “[a]llegations of accounting manipulations.” 2017 WL 1536223, at *14. The same holds

true here. This language, stating that revenue may be retroactively affected based on changes in

accounting principles fails to provide meaningful warning of alleged improper accounting that was

ongoing at the Company or that there was risk that the Company’s accounting procedures could

affect its revenue results and/or projections.14 Accordingly, the Court finds that Defendants failed

to provide meaningful cautionary statements.

14 The cases relied on by Defendants do not alter the Court’s analysis. For example,

Defendants argue that in Hooey v, Insmed Inc., No. 16-4323, 2018 WL 902266, at *20 (D.N.J.

Feb. 15, 20180, the court found that the defendant’s extensive list of risk factors in its Form 10-K

report was sufficiently meaningful to warrant protection under the safe harbor. However, what

The next step in determining whether the safe harbor applies is assessing whether the

forward-looking statements were made with actual knowledge that the statement was false or

misleading. Aetna, 617 F.3d at 285. To meet this exacting pleading standard, “the PSLRA directs

plaintiffs to specify the reason or reasons why the statement is misleading.” Williams v. Globus

Med., Inc., 869 F.3d 235, 244 (3d Cir. 2017) (quoting Chubb, 394 F.3d at 145). Thus, the Third

Circuit has instructed that “it is not enough merely to identify a forward-looking statement and

assert as a general matter that the statement was made without a reasonable basis.” Id. (quoting

Burlington Coat Factory, 114 F.3d at 1429). Rather, a plaintiff must plead factual allegations “that

show the projects were ‘made with either (1) inadequate consideration of the available data or (2)

the use of unsound forecasting methodology.” Id.

Plaintiff has not made the requisite showing of actual knowledge. First, with respect to the

August 2016 earnings call in which Rosenberger provided revenue guidance for the third quarter

of 2016, Plaintiff does not suggest that Rosenberger knew that the $25 million Verizon deal would

not be signed in projecting that it would be counted as revenue in the third quarter of 2016. The

revenue guidance provided on the August 2016 earnings call was just that however—a projection

of the revenues expected by the Company for that quarter. While the SAC alleges that the $25

million Verizon deal was eventually improperly booked as revenue, it fails to allege that the

Company improperly included that deal in its forward-looking guidance. The historic claim based

Defendants do not highlight is that in Hooey, a number of warnings were specifically tailored to

the concerns that impacted the regulatory approval process for a drug trial. See id. Indeed, the

cautionary statements provided by the Hooey defendant specifically addressed potential issues that

could have prevented the drug in question from receiving regulatory approval. See id. Similarly,

in Aetna, the Third Circuit determined that while there was no specific warning with respect to

Aetna’s underpricing of premiums, which was the misleading practice at issue, the company’s

warning of the risks related to medical cost projections was sufficiently tailored. See 617 F.3d at

282. The language in Aetna was not boilerplate and “provided meaningful, extensive, and specific

cation directly related to the statements concerning ‘disciplined’ pricing.” Id.

on the improper booking of that revenue is distinct from the question of whether Rosenberger

reasonably expected that the contract would be signed during the third quarter of 2016. Because

the SAC does not consider this distinction or otherwise allege that Rosenberger did not, in fact,

expect the contract to be signed that quarter, the Court finds that this statement is protected by the

safe harbor.

Plaintiff has similarly failed to allege actual knowledge with respect to the 2017 revenue

guidance that was put forth on the December and February calls. Plaintiff asserts that the 2017

guidance was false because it “was undergirded by years of reported historical revenue figures that

Defendants knew were false.” SAC ¶ 329. Specifically, Plaintiff alleges that “[t]his false revenue

included the $25 million contract with Verizon that was improperly booked as revenue in the third

quarter of 2016; and the $9.2 million Sequential licensing fee that was booked revenue in the fourth

quarter of 2016.” Id. Here, again, the question of whether revenue was historically recognized

without proper documentation fails to demonstrate that the forward-looking statements are false.

Indeed, Plaintiff does not explain what revenue the 2017 revenue guidance was based upon, let

alone that it was based on revenue that the Company did not, in fact, expect would come to fruition.

Absent these particularized allegations, the safe harbor covers the 2017 revenue projections made

on the December and February calls.

Accordingly, Plaintiff’s forward-looking claims will be dismissed.

B. Claims under Section 20(a) of the Exchange Act

Plaintiff additionally alleges that the Individual Defendants are liable under Section 20(a)

of the Exchange Act, which provides, in pertinent part:

Every person who, directly or indirectly, controls any person liable

under any provision of this chapter or of any rule or regulation

thereunder shall also be liable jointly and severally with and to the

same extent as such controlled person to any person to whom such

controlled person is liable.

15 U.S.C. § 78t(a); see also Suprema, 438 F.3d at 285. Liability under Section 20(a), however,

“is derivative of an underlying violation of Section 10(b) by the controlled person.” Avaya, 564

F.3d at 252 (citing In re Alpharma Sec. Litig., 372 F.3d 137, 153 (3d Cir. 2004)). As the Court

has found that Plaintiff has sufficiently pled a Section 10(b) claim against Rosenberger, the Section

20(a) claim against Rosenberger will proceed. The Section 20(a) claim against Waldis will be

dismissed.

IV. CONCLUSION

For the foregoing reasons, Defendants’ Motion to Dismiss is denied in part and granted in

part. Plaintiff’s Section 10(b) and Rule 10b-5 and Section 20(a) claims are limited to claims

against Rosenberger based upon the alleged improper recognition of revenue absent signed

contracts. Plaintiff’s claims based upon the alleged manipulation of expenses and alleged

improper accounting for acquisitions and divestures are dismissed. Plaintiff’s claims based on

Defendants’ forward-looking statements are also dismissed. Furthermore, because Plaintiff has

not adequately alleged facts suggested a strong inference of scienter as to Waldis, the claims

against him are dismissed without prejudice. To the extent Plaintiff seeks to cure any of the

deficiencies in its pleadings highlighted in this Court’s Opinion, it must file a motion to amend.

Dated: May 29, 2020 /s/ Freda L. Wolfson

Freda L. Wolfson

U.S. Chief District Judge