In re Twitter, Inc., Sec. Litig.
| Decision Date | 10 December 2020 |
| Docket Number | Case No. 19-cv-07149-YGR |
| Parties | IN RE TWITTER, INC. SECURITIES LITIGATION |
| Court | U.S. District Court — Northern District of California |
ORDER GRANTING DEFENDANTS’ MOTION TO DISMISS THE CONSOLIDATED CLASS ACTION COMPLAINT
Re: Dkt. No. 53
Lead plaintiffs the Weston Family Partnership LLLP and the Twitter Investor Group bring this consolidated securities class action litigation alleging false and misleading statements and omissions between July 26, 2019 and October 23, 2019 (the "Class Period") against defendants Twitter, Inc. ("Twitter" or the "Company"), chief executive officer Jack Dorsey ("Dorsey"), and chief financial officer Ned Segal ("Segal"). Specifically, plaintiffs raise two causes of action, namely, violation of (1) Section 10(b) of the Securities Exchange Act ("Exchange Act") and Rule 10b-5 against all defendants, and (2) Section 20(a) of the Exchange Act against the individual defendants.
All defendants move to dismiss pursuant to Federal Rules of Civil Procedure 9(b) and 12(b)(6) and the Private Securities Litigation Reform Act of 1995 ("PSLRA"). Defendants challenge plaintiffs’ Section 10(b) and Rule 10b-5 claim on three grounds: plaintiffs fail to (i) allege statements that are materially false or misleading, or otherwise actionable; (ii) establish a strong inference of scienter; and (iii) establish loss causation. Without a primary violation of Section 10(b), defendants argue plaintiffs’ Section 20(a) claim similarly fails.
Having considered the papers submitted and the pleadings in this action, the hearing held on November 10, 2020, and for the reasons set forth below, the Court hereby GRANTS the motion to dismiss WITH LEAVE TO AMEND 1
Relevant facts based on judicially noticeable documents and allegations from plaintiffs’ Consolidated Class Action Complaint ("CCAC") are set forth below:
A. TWITTER'S ADVERTISING BUSINESS AND THE MAP PRODUCT
Twitter is a "global platform for public self-expression and conversation in real time" centered around short-form text, image, and video content. (CCAC ¶¶ 4, 39, 41.) Users can "tweet" their thoughts to which other users can reply, "like," or "retweet." (Id. ¶ 39.) Available in more than 40 languages, Twitter can be accessed on the Internet via twitter.com, by mobile device, and through text messages. (Id. )
Twitter generates the majority of its revenue from the sale of advertisements.
(Id. ¶¶ 5, 43 (citing the 2018 and 2019 Form 10-K's, each reporting that the Company received approximately 86% of its revenue from advertising).) The interactive platform enables Twitter to collect data about its users, which it shares with advertisers to target users with focused advertisements. (Id. ¶¶ 5, 42.) Twitter collects this data in two ways. First, Twitter compiles a set of inferences about the user based on their tweets, Likes, Retweets, and accounts the user follows, which helps "determine what topics the user is interested in, the user's age, the languages the user speaks and other signals." Second, it accesses users’ data and device setting, which provides "critical insight regarding other websites that the device visits." (Id. ¶¶ 48–51.) Twitter shares this personalized information with advertisers and "measurement partners" who then tailor specific advertisements for the user. (Id. ¶ 53.)2
To purchase an advertisement, Twitter's customers place bids on a continuous and automated real-time bidding auction platform. (Id. ¶ 44.) The bidding process begins when a user logs-in to Twitter. (Id. ¶ 45.) After being provided with data about the user, advertisers who have a matching advertisement submit their bids and are entered into the auction. (Id. ) The personalized advertisement of the highest bidder is then shown to the user at the exact moment that it is relevant. (Id. ) This process happens in less than a second. (Id. ) According to discovery produced in an unrelated litigation involving the Company, for a period in 2015, Dorsey, the then-chief financial officer (not Segal), and other senior executives at Twitter received daily reports about certain key metrics (as defined in Twitter's SEC filings), including cost per ad engagement ("CPE"). (Id. ¶¶ 13–14, 46, 88; May 2019 Discovery Responses (Response to Interrogatory No. 17).) CPE measures demand for Twitter's advertising products on the auction platform. (CCAC ¶ 46.)
One such advertising product is the Mobile Application Promotion ("MAP"), which, rather than simply generating brand awareness, prompts users to install an advertiser's mobile application on their devices, or re-engage with a mobile application that the user has already downloaded. (Id. ¶¶ 8, 56–58.) As a "direct-response" advertisement, MAP is most effective when an advertiser knows information about the user's device settings. (Id. ¶ 8.) Advertisers only pay for each click on the "install" or "open" buttons in the advertisement. (Id. ¶¶ 47, 59.) To evaluate the product's performance, Twitter tracks various MAP-specific metrics. (Id. ¶¶ 60–61.)
According to the declaration of one of Twitter's sales finance managers filed in another unrelated litigation, new direct-response products like MAP were "the primary source of expected revenue growth" for Twitter in 2015. (Id. ¶ 62; Nierenberg Decl. ¶ 13.) Further, a confidential witness ("CI-1"), "a former AdOps Specialist for Twitter from 2014 through 2018[,] who worked with Twitter's advertising customers[ ] during 2014 [through] 2016," claims that MAP itself accounted for approximately 20% of the Company's global revenue. (CCAC ¶ 63.) At various times prior to the Class Period, defendants represented that they planned to improve the MAP product given that such direct-response advertisements were viewed as revenue drivers for the Company. (Id. ¶¶ 9, 64, 74.)
Even though its ability to generate advertising revenue relies heavily on sharing user data with advertisers, Twitter permits its users to opt-out of the data sharing program. (Id. ¶¶ 5, 7, 54–55, 65–71.) Users are also able to opt-out of receiving targeted advertising. (Id. )
B. EVENTS DURING THE CLASS PERIOD
On July 26, 2019, the start of the Class Period, defendants disclosed Twitter's financial results for the quarter ended June 30, 2019 in a letter to shareholders. (Id. ¶¶ 10, 104.) Both in the letter and during a same-day conference call with investors, Dorsey and Segal represented that improvements to MAP's stability, performance, and scale were ongoing and would have a positive gradual impact on revenue. (Id. ; see also Q2 2019 Shareholder Letter.) The Company's Q2 2019 Form 10-Q dated July 31, 2019 repeated the substance of these statements. (CCAC ¶ 107; Q2 2019 Form 10-Q.) In the Q2 2019 Form 10-Q, both Segal and Dorsey certified the following risks: "Our products and services may contain undetected software errors, which could harm our business and operating results[ ]"; "If new or enhanced products, product features or services fail to engage users, content partners and advertisers, we may fail to attract or retain users or to generate sufficient revenue or operating profit to justify our investments, and our business and operating results could be affected[ ]"; and "[C]hanges to existing products, services and initiatives could fail to attract users, content partners, advertisers and platform partners or generate revenue." (CCAC ¶¶ 109, 111; Q2 2019 Form 10-Q.)
On August 6, 2019, Twitter announced to its users that it had "recently discovered and fixed issues related to your setting choices for the way we deliver personalized ads, and when we share certain data with trusted measurement and advertising partners." (Id. ¶¶ 15, 113; see also August 6 Tweet.) More specifically, the Company explained:
(CCAC ¶ 79; see also id. ¶¶ 72–73; August 6 Blog Post.) Twitter stated that it had "fixed these issues on August 5, 2019," referring to the two aforementioned issues. (CCAC ¶¶ 80–81, 113; August 6 Blog Post.) According to CI-1, the former AdOps specialist, "these were fundamental bugs that would have taken at least 3 to 6 months to isolate and fix." (CCAC ¶ 82.)
One month later, on September 4, 2019, Segal attended the Citi Global Technology Conference in New York City. (Id. ¶¶ 17, 115.) At the conference, when asked why it was "taking so long to roll [the improved MAP] out" and "[w]here [Twitter was then] in that initiative," Segal stated that "MAP work is "ongoing," that Twitter had made improvements to MAP, and that it "continued to sell the existing MAP product." (Id. ; CGTC Tr. at 7.) In addition, when asked "why [the Company has] particular strength in monetization outside the US," Segal stated, in part, that Twitter's "strength just varies from one geography to another" and "Asia, for example, has tended to be more MAP-focused historically." (CCAC ¶ 118; CGTC Tr. at 9.)
During the Class Period, Segal did not purchase any Twitter shares on the open market but sold approximately 10% of his holdings (excluding restricted stock). (CCAC ¶ 32; Form 4s.)
C. END OF CLASS PERIOD DISCLOSURE
On October 24, 2019, before the market opened, Dorsey and Segal conducted an investor conference call regarding Twitter's financial results for the quarter ended September 30, 2019. (CCAC ¶¶ 19, 89–91, 120, 146.) During the call, Segal disclosed that the changes implemented to address the privacy violations—i.e. , turning off user data...
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