In re Synchronoss Techs., Inc. Sec. Litig.

IN RE SYNCHRONOSS TECHNOLOGIES, INC. SECURITIES LITIGATION

THIS DOCUMENT RELATES TO: ALL ACTIONS

Civil Action No. 17-2978 (FLW) (LHG)

UNITED STATES DISTRICT COURT DISTRICT OF NEW JERSEY

June 28, 2019

*NOT FOR PUBLICATION*

AMENDED OPINION

WOLFSON, Chief United States District Judge:

Presently before the Court is a motion by Defendants Synchronoss Technologies, Inc. ("Synchronoss" or the "Company"), Stephen G. Waldis ("Waldis"), and Karen L. Rosenberger ("Rosenberger") (collectively, "Defendants"), to dismiss Lead Plaintiff Employees Retirement System of the State of Hawaii's ("Plaintiff") Amended Class Action Complaint pursuant to Federal Rules of Civil Procedure 9(b) and 12(b)(6). In this putative class action securities litigation, Plaintiff alleges that it, and other similarly situated investors, purchased Synchronoss's stock between October 28, 2014 and June 13, 2017 (the "Class Period"), and that Defendants have violated Section 10(b) of the Securities Exchange Act of 1934 (the "Exchange Act"), 15 U.S.C. § 78j(b), and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5; in addition, Plaintiff avers that Defendants Waldis and Rosenberger (collectively, "Individual Defendants") have violated Section 20(a) of the Exchange Act, 15 U.S.C. § 78t(a). Specifically, Plaintiff asserts that Defendants fraudulently inflated Synchronoss's stock by knowingly falsifying the Company's publicly reported revenues, and that Plaintiff and other investors relied on these material misrepresentations and omissions to their detriment. Defendants move to dismiss the Amended Complaint on the basis that Plaintiff has failed to plead with particularity that Defendants acted with scienter, an element of a Section 10(b) claim, and because any forward-looking misstatements are protected by the Private Security Litigation Reform Act's ("PSLRA") Safe Harbor provision, 15 U.S.C. § 78u-5(c). For the reasons stated herein, Defendants' motion is granted, and Plaintiff's claims are dismissed without prejudice; however, Plaintiff is given leave to amend its Amended Complaint consistent with this Opinion within 30 days from the date of the Order accompanying this Opinion.

I. FACTUAL BACKGROUND AND PROCEDURAL HISTORY

A. Defendants

The following allegations are taken from the Amended Complaint ("AC") and are assumed true for the purposes of review under Rule 12(b)(6). Synchronoss, a publicly traded mobile technology services company,¹ principally located in Bridgewater, New Jersey, specializes in providing "Activation" and "Cloud" services to commercial mobile carriers, including AT&T and Verizon. AC at ¶¶ 6, 31, 38, 40. Waldis founded Synchronoss and has served as its Executive Chairman since 2000. Id. at ¶ 33. In addition, Waldis was the Company's CEO from its inception in 2000 until January 18, 2017, when he resigned as CEO. Id. Waldis was reappointed as CEO on April 27, 2017, when his successor resigned as CEO. Id. He resigned as CEO for a second time on November 13, 2017. Id. Rosenberger is the former Chief Financial Officer and Executive Vice President of Synchronoss. Id. at ¶ 34. Rosenberger was the Company's CFO from April 2014 until April 1, 2017. Id. Prior to her appointment as CFO,Rosenberger was the Company's Chief Accounting Officer and Senior Vice President from January 2012 until April 2014. Id.

B. Synchronoss's Business

Synchronoss was founded in 2000 by Waldis, a former AT&T executive. Id. at ¶ 37. Waldis established an ongoing relationship between the company and AT&T to provide activation services to consumers who bought new mobile devices with AT&T as service provider. Id. at ¶¶ 38-40. Synchronoss provided software licenses to AT&T that enabled the consumer to simply open the box, automatically activate the cell phone and troubleshoot issues using a Synchronoss customer service call center. Id. at ¶ 38. Synchronoss enjoyed considerable success from this "Activation" business through 2012 and into 2013-2014. Id. at ¶¶ 38-39.

Beginning in 2013, the Activation business began to deteriorate, and the Company looked for other areas of growth, especially because one customer, AT&T, accounted for an exceedingly large amount of its revenues (80% at one point). Id. at ¶¶ 39-40. To offset slowing growth, the Company created a "Cloud" business. Id. at ¶ 40. The "Cloud" is a network of Internet servers used to store and process data after a device is activated and in use, and provides "back-up" for cell phone and personal computer data. Id. at ¶¶ 40-43, 60-64. Similar to "Activation," revenue for the "Cloud" business was generated primarily via software licensing agreements between the Company and service providers such as Verizon. Id. at ¶¶ 44-52. Along with AT&T, Verizon became, by far, one of Synchronoss's two largest customers, which were responsible for more than 60% of the Company's revenues. Id. at ¶¶ 55-56. By 2015, the Cloud business generated greater revenues than the Activation business. Id. at ¶ 54. However, by 3Q2015, Cloud revenue growth slowed. Id. at ¶ 77. Faced with slowing growth, a slumping stock price, and morepressure to produce revenues, Plaintiffs allege that Defendants fraudulently booked revenues in order to artificially inflate the stock price.

C. Allegedly Fraudulent Transactions

Plaintiff relies on the allegations of three Confidential Witnesses ("CW") regarding several allegedly fraudulent transactions into which Synchronoss entered. First, according to CW2, a Synchronoss employee from 2008-16 at the Vice-President level, who was responsible for overseeing contracts with the Company's largest customers, id. at ¶ 10, Synchronoss booked revenues of approximately $7 million in connection with two purported AT&T purchase transactions in late 2015 that did not occur. Id. at ¶¶ 174-75. CW2 stated that he was then "expressly tasked by Company management in 2016 with finding a way to retroactively justify the revenue numbers that had already been reported in 2015." Id. at ¶ 10. "[A]ccording to CW2, the practice [of booking revenues early and seeking to justify them later] also repeatedly caused Synchronoss to scramble to make [its] financial reports seem legitimate to auditors." Id. at ¶ 11. The Amended Complaint alleges that the recognition of this $7 million in AT&T revenue enabled Synchronoss to falsely meet its guidance in 4Q2015. Id. at ¶¶ 180-81.

Second, CW1 was a former Synchronoss financial analyst, CPA, and certified fraud examiner, who worked at the company from December 2015 to May 2016 with responsibility for revenue forecasting. Id. at ¶¶ 9, 163. CW1 claimed that he had personal knowledge that Synchronoss improperly and prematurely recognized $5 million in revenue from a purported contract with Verizon in 1Q2016 (ending Mar. 31, 2016), id. at ¶ 163, even though "this Verizon deal was only in initial discussion phases in March 2016, and was still unsigned in April 2016, after the quarter closed." Id. at ¶ 165. CW1 attended an April 2016 meeting in Bridgewater—which occurred after the close of Synchronoss's 2016 first quarter—where he saw Rosenbergerask Synchronoss's Executive VP and General Manager Joel Silverman whether the Verizon contract had been signed. Id. The allegedly improper recognition of this $5 million in revenue from an unsigned contract with Synchronoss's largest customer apparently enabled the Company to meet its guidance when it reported its 1Q2016 results. Id. at ¶ 164. A short time later, the SEC requested, twice, that Synchronos attach its written contracts with Verizon to its SEC filings, but Synchronoss allegedly refused both times. Id. at ¶¶ 167-73.

Third, CW3, a former Synchronoss accountant who worked at the company from 2011 to April 2017, and had certain expense accounting functions, id. at ¶ 93, recalled that he witnessed a Senior Accountant at Synchronoss vehemently protest a directive from management to book $25 million in revenue from a transaction with Verizon in 3Q2016— "kicking and screaming," according to CW3—because the Company lacked substantiation for the deal. Id. at ¶ 94. According to CW3, the Senior Accountant protested that the decision to book the revenue went "against procedures" that stated Synchronoss had to have "x, y, and z, signed and sealed and delivered before" revenue could be recognized. Id. CW3 reported that executive management, including Rosenberger, instructed the Senior Accountant to book the revenue despite these objections. Id.

In addition to these three allegedly fraudulent transactions, Plaintiff alleges, based on the testimony of CW3, that Rosenberger personally directed manipulation of financial results every quarter during her tenure as CFO (Apr. 2014 to Apr. 2017). Id. at ¶¶ 13, 149, 231-39. This alleged scheme involved the misclassification of expenses and other financial metrics in order to avoid having to report a decrease in profit margins. Id. at ¶¶ 231-36. According to CW3, Andrew Latyszonek, a Synchronoss financial analyst, prepared a "flash file" on a weekly basis for the purpose of listing which expenses to bury or remove "down below the line" so as to showattractive, but false, margins in Synchronoss's financial reports. Id. at ¶ 233. Latyszonek would then send this "flash file" to Rosenberger via email, who would approve the reclassified expenses in emails. Id. The allegedly manipulated entries ranged from a few hundred thousand dollars to $1 million each and, according to CW3, were "enough to move the needle and be material from an audit standpoint." Id. at ¶ 234. CW3 allegedly had access to the relevant information in the Company's Oracle financial system, and used that system to compare the "actual" figures against the "adjusted" figures that were publicly reported after Latyszonek, allegedly with Rosenberger's approval, "massaged, reclassified, and otherwise manipulated them." Id. at ¶ 233.

As one example, in connection with Synchronoss's March 2016 acquisition of Openwave Messaging ("Openwave"), a messaging, security, and...