— Johnson Fistel, LLP (@JF_LLP) July 12, 2019
This week, a Ninth Circuit three-judge panel overturned most of an Arizona district court’s dismissal of a securities fraud class action brought by two Oklahoma public pension funds against Defendants-Appellees Todd Davis (founder and CEO), Hilary Schneider (former President), and LifeLock, Inc. (“LifeLock”). The case is Oklahoma Police Pension and Retirement System et al., v. LifeLock, Inc. et al., No. 17-16895 (9th Cir. July 10, 2019). The pension funds alleged the defendants covered up weeklong delays with the Company’s credit check alerts, which LifeLock advertised as being sent in “real time.” In response, defendants claimed that the risk factors discussed in LifeLock’s financial filings were enough to warn investors despite the company speaking positively about the alerts. The Ninth Circuit disagreed, finding that the Oklahoma funds adequately alleged falsity: “LifeLock’s risk disclosures only discussed the possibility of future problems. They did not warn investors that any of the Credit Check Alerts were stale, let alone close to 70% of them. Consequently, they did not negate LifeLock’s earlier misstatements.”
The three-judge panel also concluded that defendants Davis, Schneider, and LifeLock acted with the requisite scienter necessary under the Private Securities Litigation Reform Act, 15 U.S.C. § 78u-4(b)(2)(A). Citing Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 324 (2007), the judges conducted an “inherently comparative” analysis “considering the allegations in the complaint holistically.” The judges found that the inference that Schneider intentionally or recklessly misled investors was at least as compelling as any competing inference: “[t]aken together, those allegations undercut the only plausible nonculpable explanation for Schneider’s conduct – that she did not discover the full extent of the problems affecting the Credit Check Alerts – because they suggest that Schneider both paid attention to the stale alerts and received detailed information about them.” With respect to CEO Davis, the Ninth Circuit found that “his involvement with the promotion of LifeLock’s identity theft products, the 2010 consent decree with the FTC concerning LifeLock’s misrepresentations of its alert-based products, the complaints filed by former employees identifying problems with LifeLock’s real-time alerts, and the overall importance of real-time Credit Check Alerts to LifeLock’s business model” supported a finding that the inference that the CEO recklessly failed to discover that a high percentage of Credit Check Alerts were stale was at least as compelling as any competing inference.
Accordingly, this securities fraud suit will get another day in district court after the Ninth Circuit panel found that the investors properly argued LifeLock, Davis, and Schneider, recklessly or on purpose made false representations concerning its product.