Software company fails to dismiss securities suit

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Where shareholders in a cybersecurity software company pleaded facts showing the company’s September 2021 forecasts did not include meaningful cautionary language about potential risks, and it was plausible the forecasts were made with “actual knowledge” of their falsity, the claims under § 10(b) of the Exchange Act and Rule 10b-5 survived the motion to dismiss.

Background

Plaintiffs assert a claim under § 10(b) of the Exchange Act and Rule 10b-5 against IronNet Inc., Keith B. Alexander, James C. Gerber and William E. Welch. Plaintiffs also bring a § 20(a) control person claim against the individual defendants and a § 20A insider trading claim against Alexander. Defendants have filed a motion to dismiss.

Safe harbor/falsity

The Private Securities Litigation Reform Act, or PSLRA’s, safe harbor provision provides that a defendant “shall not be liable” for any forward-looking statement that is either (1) “identified as a forward-looking statement, and is accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those in the forward-looking statement;” (2) “immaterial;” or (3) not “made with actual knowledge by [the speaker] that the statement was false or misleading.”

With respect to the first prong of the safe harbor, the court finds that the September 2021 forecasts were expressly identified as forward-looking. However defendants’ warnings about potential risks do not rise to the level of meaningful cautionary language.

Turning to the third prong of the safe harbor, the court considers whether defendants’ September 2021 forecasts were made with “actual knowledge” of their falsity. At this early stage of the proceedings, and even with the heightened pleading standards of Rule 9(b) and the PSLRA in mind, the court finds that defendants’ Dec. 15, 2021, press release sufficiently establishes an inference of actual knowledge on their part.

Next, plaintiffs challenge statements from IronNet’s Sept. 14, 2021, press release and Sept. 20, 2021, fireside chat (and the Aug. 6, 2021, prospectus incorporated by reference by each therein), Sept. 20 and 28, 2021, registration statements, and Sept. 30, 2021, prospectus about the current status and future prospects of customer acquisitions and negotiations. But plaintiffs do not allege any facts indicating that the first category of statements were false when made. Second, defendants’ statements referencing growing customer momentum are quintessential examples of puffery upon which a reasonable investor would not rely. These statements cannot form the basis of plaintiffs’ § 10(b) and Rule 10b-5 claim.

Finally, plaintiffs challenge defendants’ Sept. 22 and 28, 2021, registration statements that “w[e] expect that gross margins for the rest of [FY22] to improve slightly to achieve our full year guidance.” If defendants were referring to an increase in gross margins helping them achieve their revenue and ARR forecasts (which the court assumes at this stage of the proceedings), the cautionary language is not meaningful in that it fails to specifically mention that serious risks that could undermine the guidance were just days away from materializing.

And regarding the third prong of the safe harbor, plaintiffs sufficiently allege that defendants knew that the gross margins “were not the real impediment to IronNet achieving” its guidance, given their understanding of the government’s budgetary cycles. The court thus finds defendants’ statements regarding projected gross margins to be actionable at this dispositional stage.

Scienter

Plaintiffs’ allegations, taken collectively, raise a strong inference that defendants had actual knowledge that their September 2021 revenue and ARR forecasts lacked a reasonable basis. Defendants’ argument that they believed the September 2021 guidance was realistic due to the plethora of funds available from the ’21 NDAA is undermined by their own concession in the Dec. 15, 2021, press release that many of the deals that the guidance was based on hinged on future government funding.

Furthermore, plaintiffs sufficiently allege that, Alexander’s “knowledge of the inner workings of the government” and his “access to key decisionmakers within … government agencies,” he and his company understood that any deals funded by the December 2022 NDAA were unlikely to close by Jan. 31, 2022. This inference of actual knowledge on the part of defendants is further bolstered by plaintiffs’ allegations that Alexander sold a significant percentage of his available stock, amounting to $5.1 million, at suspicious times when IronNet’s stock price was artificially inflated.

Section 20(a) and section 20A claims

Defendants assert that because [p]laintiffs have not sufficiently stated a § 10(b) claim, their § 20(a) and § 20A claims must also fail. However, because this court holds that plaintiffs have adequately pleaded a primary violation of § 10(b), dismissal of the § 20(a) and § 20A claims is not appropriate here.

Defendants’ motion to dismiss denied.

In re IronNet Inc. Securities Litigation, Case No. 1:22-cv-449, Aug. 9, 2023. EDVA at Alexandria (Alston). VLW 023-3-467. 25 pp.