In re Actions, Case No. 13-cv-03889-WHO

In re VELTI PLC SECURITIES LITIGATION

This Document Relates To:
All Actions

Case No. 13-cv-03889-WHO

UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF CALIFORNIA

October 1, 2015

ORDER ON MOTIONS TO DISMISS SECOND AMENDED CONSOLIDATED COMPLAINT

Re: Dkt. Nos. 210, 212

INTRODUCTION

This is a securities class action brought on behalf of a putative class of persons who purchased or otherwise acquired Velti plc ("Velti") securities between January 27, 2011 and August 20, 2013. On the last day of the putative class period, Velti announced its Q2 2013 financial results and disclosed that it had decided to write off approximately $111 million in outstanding accounts receivable. Plaintiffs¹ allege that Velti's bad debt reserves were materially understated throughout the putative class period and bring claims against Velti's accounting firm - Baker, Tilly, Virchow & Krause, LLP ("Baker Tilly") - and the underwriters of Velti's initial and secondary public offerings - Jefferies LLC, RBC Capital Markets, LLC, Needham & Company, LLC, and Canaccord Genuity Inc. (collectively, the "Underwriters") - under Sections 11 and

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12(a)(2) of the Securities Act of 1933 (the "Securities Act") and Section 10(b) of the Securities Exchange Act of 1934 (the "Exchange Act").²

Baker Tilly and the Underwriters (collectively, "defendants") move to dismiss plaintiffs' second amended consolidated complaint ("SACC"). I previously dismissed plaintiffs' amended consolidated complaint ("ACC"), principally on the ground that plaintiffs had not adequately alleged under Federal Rule of Civil Procedure 9(b) and the Private Securities Litigation Reform Act ("PSLRA") how or why Velti's bad debt reserves were understated at the relevant times. Dkt. No. 205 ("Prior Order"). Defendants argue that the SACC should be dismissed on the same ground, and that plaintiffs' Section 11 claims are additionally flawed because no named plaintiff can plausibly establish both standing and loss causation under Section 11.

While I find that plaintiffs' Securities Act claims against the Underwriters are now subject to Federal Rule of Civil Procedure 8(a), not Rule 9(b), I agree with defendants that the Securities Act claims against both Baker Tilly and the Underwriters remain deficient. Plaintiffs do not adequately allege any materially misleading misstatement or omission in either of Velti's registration statements, and, moreover, the only two named plaintiffs that have sought to establish standing under Section 11 have loss causation and other threshold problems. In addition, although the new allegations in the SACC advance the ball on plaintiffs' Section 10(b) claims, those claims still fail to satisfy Rule 9(b) and the PSLRA's exacting pleading requirements.

Accordingly, the motions to dismiss are GRANTED, and the SACC is DISMISSED. Given the detailed nature of my Prior Order, the unusual access plaintiffs have had to Velti's documents and directors/officers, and the deficiencies I identify in the SACC, I am skeptical that plaintiffs can successfully plead claims against these defendants. However, I will allow leave to amend if plaintiffs so choose.

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BACKGROUND

I. FACTUAL BACKGROUND

A. Velti's Business Model

Velti was founded in Athens, Greece in 2000. SACC ¶ 5. It was a provider of "mobile marketing and advertising technology and solutions" for businesses around the world. Id. Specifically, Velti "claimed that its products and services allowed customers to create targeted, interactive, and measurable marketing and advertising campaigns directed to consumers via their mobile devices." Id. As a regular part of its business, Velti entered contracts pursuant to which it provided services but did not get paid until its work had been completed, the customer had been invoiced, and the customer had delivered payment. Id. ¶ 6. Between the time the work was completed on a contract and the time the customer delivered payment, the amount due on a contract was an account receivable. Id.

Velti classified its accounts receivable in two key ways. Id. ¶ 7. From the time a receivable was booked as revenue to the time the customer was invoiced, Velti classified it as an "accrued contract receivable" or "accrued receivable." Id. From the time the receivable was invoiced to the time the customer delivered payment, Velti classified it as a "trade receivable." Id. "Days sales outstanding" ("DSO") is a metric that measures the length of time it takes to collect a receivable. Id. ¶ 15 n.5. From the start of the putative class period until May 2012, Velti calculated its reported DSO figures only on the basis of its trade receivables, thereby excluding from the calculation the period of time between when a receivable was booked as revenue and when the customer was invoiced.³ Starting in May 2012, Velti began reporting "comprehensive" DSO figures, or DSO figures that accounted for both accrued and trade receivables.

From its inception in Greece, Velti maintained a significant portion of its customer base in Greece and Southeastern Europe. Id. ¶ 9. Its contracts in these markets "typically had much longer payment terms than those in other geographic regions," especially as compared to the

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United States and Western Europe. Id. Plaintiffs allege that because Velti operated heavily in Greece, it was particularly impacted by the Greek economic crisis beginning in April 2010 through substantial delays in the already slow payment cycles and increasing numbers of unpaid invoices. Id. ¶¶ 9-10. They allege that "[w]hile [Velti] continued to report robust revenue growth . . . , the truth was that . . . it was unclear that [Velti] would ever be paid on many [of its] accounts." Id. ¶ 10.

B. Initial Public Offering

Velti's registration statement and prospectus for its initial public offering ("IPO") was declared effective by the SEC on January 27, 2011. SACC ¶ 87; Baker Tilly RJN Ex. A (Dkt. No. 211-1) ("IPO Reg. Stmt.").⁴ The IPO registration statement included Baker Tilly's August 3, 2010 "Report of Independent Registered Public Accounting Firm" on Velti's 2008 and 2009 financial statements. IPO Reg. Stmt. at F-2. The August 3, 2010 report included the following statement regarding Velti's financial reporting:

We have audited the accompanying consolidated balance sheets of Velti plc and subsidiaries . . . as of December 31, 2009 and 2008, and the related consolidated statements of operations, changes in shareholders' equity and comprehensive income (loss), and cash flows for each of the three years in the period ended December 31, 2009 . . . In our opinion, the consolidated financial statements . . . referred to above present fairly, in all material respects, the consolidated financial position of Velti plc and its subsidiaries as of December 31, 2009 and 2008, and the results of their operations and cash flows for each of the three years ended December 31, 2009, in conformity with accounting principles generally accepted in the United States of America.

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SACC ¶ 117; IPO Reg. Stmt. at F-2.⁵

The accompanying consolidated balance sheets included the following information regarding Velti's balance of receivables:

September 30, 2010 (unaudited)	December 31, 2009	December 31, 2008
Trade receivables, net of allowance for doubtful accounts (in thousands)	$41,395	$32,505	$11,013
Accrued contract receivables (in thousands)	$20,988	$15,342	$8,560

IPO Reg. Stmt. at F-3. Following the consolidated balance sheets, Velti reported that "as of September 30, 2010 and December 31, 2009 and 2008, the allowance for doubtful accounts was $135,000 (unaudited), $135,000 and $131,000, respectively." SACC ¶ 104; IPO Reg. Stmt. at F-14. With respect to DSOs, Velti reported that "[d]uring 2009, [its] DSOs on trade receivables increased from 65 days to 131 days before improving to 77 days at the end of June 2010," and that its DSOs "declined in the nine months ended September 30, 2010 to 110 days." IPO Reg. Stmt. at 78.

Elsewhere in the IPO registration statement, under the heading, "Revenue Recognition," Velti stated that it "recognize[s] revenue when all of the following conditions are satisfied: (i) there is persuasive evidence of an arrangement; (ii) the service has been rendered or delivery has occurred; (iii) the fee to be paid by the customer is fixed or determinable; and (iv) collectability of the fee is reasonably assured." SACC ¶ 100; IPO Reg. Stmt. at 56, F-9.

Under the heading, "Use of Estimates and Judgment," Velti stated the following about its financial reporting:

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The preparation of financial statements in accordance with [GAAP] requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities, the

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