The District Court for the Northern District of California found in favor of Freshworks in a motion for summary judgment in this Section 11 matter.
Retained by Cooley
Freshworks, a SaaS company, filed a registration statement in 2021 in connection with its initial public offering (IPO). The plaintiff alleged that the registration statement failed to disclose deceleration in certain financial metrics and asserted violations of the Securities Act of 1933. Counsel for Freshworks retained Cornerstone Research to support Steven R. Grenadier of the Stanford Graduate School of Business.
In granting the motion for summary judgment for the defense, the court cited Professor Grenadier’s testimony in its decision.
Professor Grenadier analyzed whether Freshworks’s publicly listed stock traded in an efficient market and how long it took the stock price to absorb the information disclosed following an earnings announcement containing the alleged corrective information. Based on his analysis, Professor Grenadier opined that any decline in the company’s publicly listed stock that was causally linked to the disclosure containing alleged corrective information was fully reflected in the stock price well before the stock price fell below the IPO price.
In granting the motion for summary judgment for the defense, the court cited Professor Grenadier’s testimony in its decision, stating:
“Defendants’ argument for summary judgment proceeds in two steps. First, they assert that, under the language of the statute, [Plaintiff] cannot recover for losses sustained above the IPO price of $36 per share. Second, they contend that analysis done by their expert, Dr. Steven Grenadier, demonstrates that any losses in Freshworks’s stock value below [the IPO price] were not caused by the alleged omissions leading up to the IPO. Thus, Defendants say, the losses traceable to their alleged omissions are not recoverable, and any losses that might be recoverable are not traceable to their alleged omissions. Defendants are correct on both counts, so summary judgment is appropriate.
. . .
Defendants contend, relying heavily on the expert report of economist Steven Grenadier, that Freshworks stock traded in an efficient market, meaning that the market absorbed any impact from the release of the Q3 2021 numbers before the stock price first dropped below [the IPO price] on November 15. This is a viable method of establishing negative causation.”
The court order also ruled:
“[A] securities defendant may establish negative causation by showing that a decline was caused by something ‘other than’ an alleged misstatement or omission. . . . Nowhere in the statute or the case law is there a requirement that the defendant affirmatively prove what caused the decline; all a defendant must show is that the decline was not caused by the alleged misstatement or omission. . . . Defendants have met their burden to show that any recoverable loss was not caused by their alleged omissions; they do not need to do more and ascertain the actual cause.”