Hampton v. Root9B Techs., Inc.

• Decision Date: 30 July 2018
• Docket Number: No. 16-1417,16-1417
• Citation: 897 F.3d 1291
• Parties: David HAMPTON, Plaintiff-Appellant, and Ty Messerli, individually and on behalf of all others similarly situated, Plaintiff, v. ROOT9B TECHNOLOGIES, INC. ; Joseph J. Grano, Jr.; Kenneth T. Smith, Defendants-Appellees.
• Court: U.S. Court of Appeals — Tenth Circuit

897 F.3d 1291

David HAMPTON, Plaintiff-Appellant,andTy Messerli, individually and on behalf of all others similarly situated, Plaintiff,

v.ROOT9B TECHNOLOGIES, INC. ; Joseph J. Grano, Jr.; Kenneth T. Smith, Defendants-Appellees.

No. 16-1417

United States Court of Appeals, Tenth Circuit.

FILED July 30, 2018

Nicholas I. Porritt, of Levi & Korsinsky LLP, Washington, D.C. (Alexander A. Krot, III, of Levi & Korsinsky LLP, Washington, D.C., and Kip B. Shuman and Rusty E. Glenn, of The Shuman Law Firm, Denver, Colorado, with him on the briefs), for Plaintiff-Appellant.

Nina F. Locker, of Wilson Sonsini Goodrich & Rosati Professional Corporation, Palo Alto, California (Steven Guggenheim, Joni L. Ostler, Evan L. Seite, of Wilson Sonsini Goodrich & Rosati Professional Corporation, Palo Alto, California, and Holly Stein Sollod, Christina F. Gomez, Cici Cheng, of Holland & Hart LLP, Denver, Colorado, with her on the briefs) for Defendants-Appellees.

Before HARTZ, KELLY, and HOLMES, Circuit Judges.

HOLMES, Circuit Judge.

This appeal arises from the district court’s dismissal of Plaintiff-Appellant David Hampton’s securities-fraud class action against Defendants-Appellees root9B Technologies, Inc. ("root9B"), a provider of cybersecurity products and services, Joseph J. Grano, Jr., root9B’s Chief Executive Officer and Chairman, and Kenneth T. Smith, root9B’s former Chief Financial Officer (collectively, "Defendants"). Mr. Hampton brought this action pursuant to §§ 10(b) and 20(a) of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78j(b) & 78t(a), and Securities and Exchange Commission ("SEC") Rule 10b-5, 17 C.F.R. § 240.10b-5, claiming that root9B made false or misleading statements in connection with the purchase or sale of securities.

Mr. Hampton identified two statements that he alleges were false or misleading and material: (1) a letter from Mr. Grano to investors—language from which was repeated in a number of SEC filings—attesting that root9B was differentiated from competitors by its "proprietary hardware and software," Aplt.’s App. at 15 (Am. Class Compl., dated Jan. 4, 2016); and (2) a press release and associated report published by root9B in which the company claimed to have detected a planned cyber attack against a number of international financial institutions, id . at 30. He further alleges that the individual defendants—i.e., Mr. Grano and Mr. Smith—are jointly and severally liable under § 20(a).

The district court dismissed Mr. Hampton’s claims, finding that he had failed to sufficiently plead that the identified statements were false or misleading. Mr. Hampton appeals, and exercising jurisdiction pursuant to 28 U.S.C. § 1291, we affirm .

I

root9B provides "cybersecurity, regulatory risk mitigation, and energy and controls solutions" through three business lines: Cyber Solutions, Business Advisory Solutions, and Energy Solutions. Aplees.’ Resp. Br. at 1. In November 2013, Premier Alliance Group, Inc. ("Premier Alliance"), a publicly-traded company, acquired root9B LLC in exchange for cash and restricted shares of Premier Alliance common stock. On October 17, 2014, Mr. Grano, the Chief Executive Officer and Chairman of Premier Alliance, published a letter to shareholders announcing plans to rebrand Premier Alliance as root9B Technologies, Inc. The rebranding took place on December 1, 2014. Mr. Grano explained that the rebranding reflected a business strategy focused on growing the cybersecurity business.

A

Mr. Hampton alleges that root9B issued, during and after the rebranding, the two misleading statements underlying this dispute.

First, in the aforementioned October 17 letter to investors, Mr. Grano identified, as a competitive strength of root9B, its "proprietary hardware and software designed to combat the new methodologies being utilized by state-sponsored and sophisticated individual hackers." Aplt.’s App. at 23–24; id . at 241 (Form 8-K, dated Oct. 17, 2014 ("Grano letter") ). That statement was repeated in SEC filings on November 14, 2014, March 31, 2015, and May 15, 2015. Following Mr. Grano’s letter, root9B raised $11.5 million over three stock and option offerings in February and March of 2015. Defendants filed a post-effective amendment to the registration statement on May 1, 2015, pursuant to which Mr. Grano and other root9B "insiders" were able to sell shares to the public. Id. at 68–70.

Second, root9B announced, via a press release on May 12, 2015, that it had uncovered and defeated plans by a state-sponsored team of Russian hackers, known as Sofacy or APT28, to target several international financial institutions ("Sofacy statements"). Id. at 30–37, 249–50 (root9B Uncovers Planned Sofacy Cyber Attack Targeting Several International and Domestic Financial Institutions , PR NEWSWIRE , dated May 12, 2015). root9B claimed that this was "the first and only known Sofacy attack to be discovered, identified, and reported" before the attack began. Id. at 32 (emphasis omitted). root9B contemporaneously published a report entitled "APT28 Targets Financial Markets: Root9B Releases Zero Day Hashes" ("APT28 Report") explaining its basis for attributing the planned attack to Sofacy. Id. at 31, 251–59 (APT28 Targets Financial Markets: Root9B Releases Zero Day Hashes , ROOT9B.COM , dated May 10, 2015). Mr. Grano gave a televised interview on Fox Business on May 14, 2015, during which he discussed the Sofacy statements and said that he was aware of the evidence upon which root9B attributed the attack to Sofacy. Following the announcement, the price of root9B’s stock rose 42% between May 11, 2015 and May 19, 2015, to an "all-time trading high of $2.51." Id. at 37.

B

Mr. Hampton alleges that two subsequent articles that challenged root9B’s statements caused the company’s inflated share price to fall.

First, on May 20, 2015, "cybersecurity expert" and former reporter Brian Krebs published an article entitled "Security Firm Redefines APT: African Phishing Threat" ("Krebs article") on his security news blog, challenging root9B’s attribution of the attack to Sofacy. Id. at 44, 120–22 (Brian Krebs, Security Firm Redefines APT: African Phishing Threat , KREBS ON SECURITY , dated May 20, 2015). Mr. Krebs claimed that root9B had "scant evidence" to support its attribution of the attack to Sofacy. Id. at 45, 122. According to Mr. Krebs, root9B based the attribution in large part upon the use of a domain known to be used by Sofacy. However, based in part on his claim that this server was associated with a number of bad actors in the world of cyberattacks, Mr. Krebs concluded that the attack was more likely a "run-of-the-mill bank phishing scam[ ]" perpetrated by "Nigerian scammers." Id.at 45, 122. The article claimed that this conclusion was corroborated by the "chief scientist" of "one of the security firms that first published the initial findings on the Sofacy/APT28 group back in October 2014." Id. at 46, 122. Mr. Hampton claims that, as a result of the Krebs article, root9B’s share price fell by 8%, from $2.51 on May 19, 2015 to $2.32 on May 21, 2015.

Second, on June 15, 2015, an anonymous author known as Pump Stopper published an article entitled "ROOT9: -82.5% Downside [o]n Management Fraud Allegations, Cyber Failure [a]nd Bankruptcy—Strong Sell" ("Pump Stopper article") on the website SeekingAlpha.com. Aplt.’s App. at 46, 95–119 (Pump Stopper, Root9: -82.5% Downside On Management Fraud Allegations, Cyber Failure And Bankruptcy—Strong Sell , SEEKING ALPHA , dated June 15, 2015). In the article, the author claimed that the financial results reported for the Cyber Solutions sector of root9B’s business reflected "a one-time[,] low margin hardware installation," and the resale and installation of a product called Digital Shield.¹ Id. at 47. The author allegedly based his or her claims on an interview with Mr. Smith, root9B’s CFO. Mr. Hampton claims that, as a result of the Pump Stopper article, root9B’s share price fell by 9% on June 15, 2015 on heavy trading, from $1.87 to $1.70. The share price fell an additional 40%, to $1.02, by June 23, 2015.

II

Securities-fraud claims were first filed in the United States District Court for the Central District of California by Ty Messerli, on behalf of others similarly situated. Those claims were transferred to the District of Colorado on September 29, 2015. A magistrate judge granted Mr. Hampton’s motion for appointment as lead plaintiff, which was unopposed. See Hampton v. Root9B Techs., Inc. , Dist. Ct. No. 15-cv-02152-MSK-MEH, Doc. 18, at 1–2 (Order, dated Oct. 14, 2015).

Mr. Hampton filed an amended class-action complaint on January 4, 2016, alleging violations of Securities Exchange Act §§ 10(b) and 20(a), and SEC Rule 10b-5, and also purporting to represent a class of "all persons who acquired root9B securities between October 17, 2014 and June 15, 2015, inclusive." Aplt.’s App. at 13, 15. Defendants moved to dismiss the amended complaint on February 18, 2016. Mr. Hampton filed a brief in opposition to the motion to dismiss.

The district court, adopting in part and rejecting in part the magistrate judge’s recommendation, entered an opinion and final judgment on September 21, 2016 that granted Defendants’ motion to dismiss all claims. Aplt.’s App. at 404 (Op. & Order Granting Mot. to Dismiss, dated Sept. 21, 2016), 417 (Final J., dated Sept. 21, 2016). The district court held that Mr. Hampton had failed to state a claim under § 10(b) or § 20(a) because his "allegations [were] insufficient to allege that either [the proprietary-hardware statements or the Sofacy statements were] false." Id. at 410.

The court acknowledged that Mr. Hampton’s assertion of falsity with regard to the proprietary-hardware statements relied on the Pump Stopper article and Defendants’ deletion of the statements from subsequent SEC filings. The court found it "entirely unclear" how Mr. Hampton sought to equate the proprietary-hardware statements with the Pump Stopper article’s description of "a onetime low margin...