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(Article from Securities Law Alert, January 2016) 

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On December 23, 2015, the Northern District of California declined to dismiss securities fraud claims brought against Rocket Fuel, an advertising solutions company, and three of its senior executives in connection with an allegedly misleading blog post on the company’s website. In re Rocket Fuel Sec. Litig., 2015 WL 9311921 (N.D. Cal. 2015) (Hamilton, J.). Plaintiffs did not claim that Rocket Fuel’s executives had authored or reviewed the blog post. Nevertheless, the court found that the executives could be deemed the “makers” of the blog post within the meaning of the Supreme Court’s decision in Janus Capital Group v. First Derivative Traders, 131 S. Ct. 2296 (2011)[1] because plaintiffs alleged that the executives had “ultimate authority” over that post.

Background

Rocket Fuel “claim[ed] that its technology [was] better than its competitors’ at detecting ‘digital ad fraud’ – including the viewing of ads by computer programs, such as ‘bots,’ rather than by real people.”

Plaintiffs brought suit alleging that “Rocket Fuel and its officers [had] made false and misleading statements (and omissions) regarding the technology’s effectiveness” and “failed to disclose that bots were actually causing some Rocket Fuel customers to stop using its service.” Among other statements, plaintiffs cited to a blog post on the company’s website representing that Rocket Fuel “‘uses real-time data points to recognize these bad actors and block them at the source,’ that it ‘undermines fraudulent practices and makes sure con artists always leave empty-handed’ and is ‘able to identify and eliminate all threats before serving a single ad’” (collectively, the “Blog Post Statements”).

Defendants moved to dismiss plaintiffs’ claims on the grounds that, inter alia, the Blog Post Statements were inactionable “product marketing statements.”

Court Finds the Blog Post Statements Actionable Because They Described “a Specific Level of Effectiveness” for Rocket Fuel’s Bot-Blocking Technology

The court found the Blog Post Statements actionable because they “describe[d] a specific” but allegedly inaccurate “level of effectiveness” with respect to Rocket Fuel’s bot-blocking technology. The court explained that “[t]he words ‘all’ and ‘always’ serve[d] to distinguish” the Blog Post Statements “from the remainder of the allegedly false/misleading statements contained in the complaint.”

The court rejected defendants’ contention that the Blog Post Statements were “mere ‘product marketing statements.’” The court found that the statements were “more properly characterized as ‘factual statements regarding Rocket Fuel’s efforts to combat bot fraud.’” 

The court also deemed meritless defendants’ claim that no “reasonable investor” would have “relied upon” the Blog Post Statements “‘as a guarantee that Rocket Fuel’s technology prevented literally every single instance of ad fraud in the billions of impressions Rocket Fuel considered per day.’” The court stated that it “[knew] of no authority for the proposition that a statement can be so clearly false that it should not be considered false or misleading.”

Court Finds Rocket Fuel’s Senior Executives Could Be Considered the “Makers” of the Blog Post Statements Within the Meaning of the Supreme Court’s Decision in Janus

In Janus, the Supreme Court defined what it means to “make” a statement for purposes of Rule 10b-5. The Janus Court held that “the maker of a statement is the person or entity with ultimate authority over the statement, including its content and whether and how to communicate it.” 564 U.S. 135. 

Defendants argued that the Blog Post Statements could not be attributed to the three senior executives named as defendants (Rocket Fuel’s CEO, President, and CFO) because there was no allegation that the executives had “‘authored, reviewed, or approved any portion’” of those statements. Rocket Fuel, 2015 WL 9311921. However, the court found that plaintiffs did “allege that the three [executives] ‘possessed the power and authority to control the contents of the [c]ompany’s press releases [and] investor and media presentations.’” Based on these allegations, the court held that plaintiffs had “adequately alleged” that the three executives “had ‘ultimate authority’ over” the Blog Post Statements within the meaning of Janus.

Court Relies on the “Core Operations” Theory to Find That Plaintiffs Had Adequately Alleged Scienter as to the Company’s Senior Executives

The court found that plaintiffs had adequately alleged scienter as to Rocket Fuel’s three senior executives based on the “core operations” theory, which “allows a court to infer[ ] that the facts critical to a business’s core operations or important transactions are known to a company’s key officers.” The court also determined that defendants’ own arguments indicated that they knew the Blog Post Statements were misleading. The court explained that “[t]o the extent that defendants impl[ied] that a reasonable investor would know that” the Blog Post Statements were not “literally true, that implication also supports a finding that the statements were made with scienter.”

Because the court found that plaintiffs had  “adequately alleged scienter” as to the three corporate executives, the court also held that plaintiffs had “adequately alleged corporate scienter.”

Court Rejects Plaintiffs’ Contention That the Blog Post Statements Should Be Considered Part of Rocket Fuel’s Registration Materials Under Omnicare

Plaintiffs also asserted Securities Act claims against Rocket Fuel’s underwriters, and contended that the Blog Post Statements should be considered part of the company’s registration materials for purposes of those claims. Plaintiffs relied on the Supreme Court’s recent decision in Omnicare v. Laborers District Council Construction Industry Pension Fund, 135 S. Ct. 1318 (2015)[2] to argue that Rocket Fuel’s registration materials “need to be considered in a ‘broader frame.’”

The court found that plaintiffs’ argument “stretch[ed] Omnicare too far, in an apparent attempt to shoehorn their strongest allegation . . . into all asserted claims.” The court explained that “Omnicare holds only that ‘an investor reads each statement within such a document, whether of fact or opinion, in light of all its surrounding text, including hedges, disclaimers, and apparently conflicting information’” (quoting Omnicare, 135 S. Ct. 1318). The court determined that “[n]othing in Omnicare endorses plaintiffs’ approach of importing statements into registration materials in order to state a Securities Act claim.”