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In re Nimble Storage, Inc. Securities Litigation

United States District Court, N.D. California

May 10, 2017

In re Nimble Storage, Inc. Securities Litigation

          ORDER GRANTING DEFENDANTS' MOTION TO DISMISS RE: DKT. NO. 123

          Yvonne Gonzalez Rogers United States District Court Judge

         Plaintiff Arkansas Teacher Retirement System, as lead plaintiff, brings this consolidated second amended complaint against defendants Nimble Storage, Inc. (“Nimble”), Suresh Vasudevan, Anup Singh, Varun Mehta, and Dan Leary for alleged violations of federal securities laws. (Dkt. No. 121, “SAC.”) Specifically, plaintiff claims that all defendants violated section 10(b) of the Exchange Act and Rule 10-b5 promulgated thereunder for allegedly making fraudulent statements regarding Nimble's prospects and financial condition between November 24, 2014 and November 19, 2015 (the “Class Period”). Additionally, plaintiff brings claims against defendants Vasudevan and Singh under section 20 of the Exchange Act.

         The Court previously dismissed plaintiff's complaint, which focused on its allegations that defendants misled the public by failing to disclose Nimble's: (i) limiting its investments in Sales and Marketing (“S/M”); (ii) diversion of investments from its commercial segment to its enterprise segment; and (iii) failure to penetrate clients for its enterprise segment in a meaningful fashion.[1]Plaintiff's SAC now focuses on three other theories, namely that defendants misled the public by: one, failing to inform investors that Nimble's commercial segment was weakening throughout the Class Period; two, suggesting that Nimble's enterprise segment was growing while simultaneously misclassifying commercial clients as enterprise clients; and three, informing the public that Nimble remained on-track to “breakeven” while knowing that its commercial and enterprise segments were struggling.

         Now before the Court is defendants' motion to dismiss the SAC. Having carefully reviewed the pleadings, the papers and exhibits submitted on this motion, and oral arguments heard on April 18, 2017, and for the reasons set forth more fully below, the Court Grants defendants motion as follows: The Court Dismisses with Prejudice plaintiff's claims relating to statements regarding the commercial segment prior to August 25, 2015. The Court Dismisses without Prejudice plaintiff's remaining claims, granting leave to amend as outlined herein.[2]

         I. Discussion

         A. Section 10(b) and Rule 10b-5 Claim

         Defendants raise the following grounds upon which they argue plaintiff's claims should be dismissed: (i) plaintiff has failed to plead with particularity any false or misleading statements; (ii) certain statements are forward-looking and protected by the Private Securities Litigation Reform Act's (“PSLRAs”) safe harbor; and (iii) plaintiff has failed to plead a strong inference of scienter. Because, as discussed below, the Court finds that plaintiff has not adequately pled any false or misleading statements or omissions, the Court does not address defendants' alternative bases for dismissal.

         Generally, plaintiff has alleged three categories of false or misleading statements: first, the failure to disclose that the commercial segment was weakening throughout the Class Period; second, misleading the public about growth in the enterprise segment, which was based on fraudulent reclassifications of commercial clients as enterprise clients; and third, expressing sentiments that Nimble was “on track” to breakeven because it led investors to believe defendants' statements regarding growth in the commercial and enterprise segments.

         1. Statements Regarding the Commercial Segment

         By way of background, plaintiff previously articulated that defendants failed to disclose sufficiently the extent to which they were diverting S/M resources from commercial to enterprise, which ultimately resulted in weakness in the commercial segment. The Court previously rejected the same, explaining that defendants had disclosed the shift in investment and plaintiff had failed to identify any duty to disclose the exact extent to which defendants were shifting S/M resources. (Dkt. No. 113 at 11-13.) Plaintiff now alleges that certain statements relating to the commercial segment were misleading because at the times such statements were made, the commercial segment was already showing significant weakness. (See, e.g., SAC ¶ 215 (“So we feel very good about both the pace of new customer acquisition in the mid-sized enterprise segment as well as the fact that we are growing our base in large enterprises.”); ¶ 270 (“And we've been able to sustain our growth ramp based on our customer acquisition machine.”); ¶ 279 (“We are systematically expanding our customer base across the mid-sized enterprise, large enterprise and cloud service provider segments of the market.”); see also Id. ¶¶ 215, 226, 236, 268, 270, 279, 290, 293.)

         Defendants argue that plaintiff's allegations with regard to the commercial segment should be dismissed because plaintiff lacks particularized facts supporting claims that the commercial segment was weak throughout the Class Period and, given other allegations and uncontested facts in defendants' SEC filings, such claims are illogical. The Court agrees.

         Plaintiff simply cannot reconcile its allegations with the undisputed fact that Nimble consistently exceeded its revenue projections for each quarter during the Class Period, except for its last projection. (SAC ¶ 119.) Specifically: At the start of the Class Period, Nimble announced that its revenue for Q3 2015 was $59.1 million and projected that its Q4 2015 revenue would be between $65 and $67 million. Nimble reported $68.3 million in revenue for that quarter and projected revenue of $68 to $70 million for Q1 2016, during which Nimble earned $71.3 million in revenue. For Q2 2016, Nimble projected revenues of $77 to $79 million and ultimately reported $80.1 million in revenue. For the last quarter of the Class Period, Nimble projected revenue of $86 to $88 million, but reported only $80.7 million. (Id. ¶ 18.)

         It is illogical for plaintiff to allege that Nimble was failing to penetrate enterprise at the same time that its commercial segment was weakening, while also reporting record revenues each quarter. This is particularly so where plaintiff has alleged that deals in the commercial segment were generally completed within ninety days. (Id. ¶¶ 52, 177.) Therefore, any growing weaknesses would have become manifest throughout the Class Period rather than merely during the last quarter of the Class Period. See In re JDS Uniphase Corp. Sec. Litig., No. 02-CV-1486-CW, 2003 WL 26615705, at *4 (N.D. Cal. Nov. 3, 2003) (dismissing claims on grounds they were “simply illogical, ” as plaintiff failed to provide a “reasonable explanation” for how defendant could be experiencing uncontroverted growth without experiencing strong demand).[3]

         As defendants acknowledge, at some point during the final quarter of the Class Period, Nimble experienced a decline in both its commercial and enterprise segments, resulting in the missed revenue guidance. (See SAC ¶ 300 (“We believe that this decreased investment led to slower growth than we would have seen, had we maintained our previous pace of investment.”); ¶ 308 (“It was really pressure that we saw throughout Q3 . . . for us this quarter, throughout, we noticed that there was more competitive intensity, and certainly that carried on through month three.”).) The Court can foresee a claim surviving for that short window during Q3 2015 prior to ...


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