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

May 29, 2020

*NOT FOR PUBLICATION*

OPINION

WOLFSON, Chief Judge

Lead Plaintiff, the Retirement System of the State of Hawaii ("Plaintiff"), brings this putative securities class action, on behalf of itself and all other similarly situated individuals, against Synchronoss Technologies, Inc. ("Synchronoss" or the "Company"), a company involved in licensing software to cell phone service providers, as well as Synchronoss's former CEO, Stephen G. Waldis ("Waldis"), and its former CFO, Karen L. Rosenberger ("Rosenberger") (collectively "Defendants"), alleging violations under the Securities Exchange Act of 1934, 15 U.S.C. § 78a, et seq., and the rules promulgated thereunder. The Court previously dismissed Plaintiff's Amended Complaint without prejudice on June 28, 2019, based on Plaintiff's failure to adequately plead scienter. See In re Synchronoss Techs., Inc. Sec. Litig., No. 17-2978, 2019 WL 2849933 (D.N.J. July 2, 2019). In accordance with that Opinion, Plaintiff filed a Second Amended Complaint (the "SAC") on August 14, 2019. (See ECF No. 81.)

Presently before the Court is Defendants' motion to dismiss the SAC on the grounds that the additional allegations in the SAC remain deficient under Plaintiff's burden of pleading scienter. For the reasons set forth below, Defendants' Motion to Dismiss is denied in part and granted in part. Plaintiff's Section 10(b) and Rule 10b-5 and Section 20(a) claims against Rosenberger are limited to the alleged improper recognition of revenue absent signed contracts. Plaintiff's claims based upon the alleged manipulation of expenses and alleged improper accounting for acquisitions and divestures are dismissed. Plaintiff's claims based on Defendants' forward-looking statements are also dismissed. Furthermore, because Plaintiff has not adequately alleged facts suggesting a strong inference of scienter as to Waldis, the claims against him are dismissed without prejudice.

I. BACKGROUND

A. Factual Background

The Court set forth the facts underlying this matter at length in its prior Opinion. For the sake of brevity, the Court recounts only those facts necessary for the resolution of the instant motion. Synchronoss, a publicly traded mobile technology services company, principally located in Bridgewater, New Jersey, specializes in providing "Activation" and "Cloud" services to commercial mobile carriers, including AT&T and Verizon. See SAC ¶¶ 6, 31, 44. Waldis founded Synchronoss and has served as its Executive Chairman since 2000. Id. ¶ 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. ¶ 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.

Synchronoss was founded in 2000 by Waldis, a former AT&T executive, who established an ongoing relationship between the Company and AT&T to provide activation services toconsumers who bought new mobile devices with AT&T as service provider. Id. ¶¶ 37-40. 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 call center. Id. ¶ 38. The Company's "Activation business" enjoyed success through 2012 and into 2013 to 2014. Id. ¶¶ 38-39. However, in 2013, the Activation business began to deteriorate and the Company looked for other areas of growth, especially because AT&T's account constituted a significant amount of its revenues (80% at one point). Id. ¶ 39-40. The Company thus created a "Cloud" business, for which revenue was generated primarily via software licensing agreements between the Company and services providers such as Verizon. Id. ¶¶ 44-52. Verizon and AT&T were the Company's two largest customers and represented more than 60% of the Company's revenues. Id. ¶¶ 55-56. While the Cloud business generated more revenue than the Activation business, such revenue began to slow by the third quarter of 2015. Id. ¶¶ 54, 77. According to Plaintiff, faced with this slow growth, slumping stock price, and pressure to generate revenue, Defendants began fraudulently booking revenue in order to artificially inflate the stock price.

Ultimately, in July 2018, Synchronoss filed restated financials for 2014 to 2016 (the "Restatement"). Id. ¶ 3. According to Plaintiff, the Company admitted in the Restatement, inter alia, that: (1) it "book[ed] revenues relating to a transaction in a period prior to having sufficient documentation of an agreement with the customer about the transaction," id. ¶ 144; (2) "licensing fees were improperly accounted for on a gross basis as revenue, id.; (3) its quarterly and annual financial reports for 2014 to 2016 and its communications from 2014 to 2017 were false and/or materially misstated and should no longer be relied upon, id. ¶¶ 241-43; (4) it had "pervasive material weaknesses" in internal controls from 2014 to 2017, id. ¶ 242; and (5) it fired threeemployees "for cause," id. ¶ 243. As a result of the Restatement, revenue for 2014 to 2016 was restated down from $1,212,168,000 to $1,032,271,000, a reduction of nearly $180 million (or more than 14.8%), id. ¶ 247, and net income of $93.5 million for 2014 through 2016 was restated to a cumulative loss of $40 million (a difference of $134 million, representing a 143% decrease in income). Id. ¶ 249.

The putative class period is from October 28, 2014 and June 13, 2017. Id. ¶ 25. During that time, Plaintiff alleges that Defendants fraudulently inflated Synchronoss 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. Relying on the testimony of eight confidential witnesses, Plaintiff points to certain deals that were improperly recognized as revenue before the contracts were executed: (1) two AT&T purchase transactions that were booked as revenue in late 2015 that allegedly never occurred, SAC ¶¶ 174-75; (2) a $5 million Verizon contract that was recognized as revenue in the first quarter of 2016, when the deal was apparently only in the initial discussion phase, id. ¶¶ 163-65, 413; and (3) a $25 million deal with Verizon that was recognized as revenue in the third quarter of 2016 before the contract was signed, id. ¶¶ 177-79.

Moreover, Plaintiff claims that Defendants improperly accounted for acquisitions and divestures. Specifically, in 2016, the Company announced it would divest 70% of its Activation business in a deal with a small, privately held company known as Sequential Technology International, LLC ("Sequential"). SAC ¶¶ 14-16, 97-103. In connection with this transaction, Synchronoss and Sequential entered into a software license agreement under which Sequential obtained a perpetual license for certain analytics software products owned by Synchronoss, which was valued at $9.2 million by the Company. Id. ¶ 108. Synchronoss booked the $9.2 millionlicensing fee as revenue in the fourth quarter of 2016 but did not disclose that booking until months later. Id. ¶ 110. Further, Plaintiff alleges that Defendants violated certain generally accepted accounting principles ("GAAP") by recognizing as revenue a $10 million patent-dispute settlement payment by Openwave as standalone license revenue when it should have treated this $10 million as a reduction of the purchase price Synchronoss paid to acquire Openwave. SAC ¶¶ 207-10.

Finally, Plaintiff alleges that Defendants utilized a "flash file" to "determine which expenses to bury or remove 'down below the line' so as to show attractive, but false, margins in the Company's financial reports." Id. ¶ 233. This alleged misclassification of expenses allegedly included reclassifying employee salaries as "research and development" costs. Id. ¶ 235.

As these allegations are central to the Court's analyses, the Court will discuss them in more detail below.

B. Procedural History

On Monday, May 1, 2017, two business days after the Company announced lower than expected financials, Plaintiffs filed this action, alleging that the Company's miss of its Q12017 projections was the result of an alleged fraud perpetrated by the Company and its senior executives. ECF No. 1. Following the consolidation of numerous similar complaints, but before any consolidated complaint was filed, Synchronoss announced that it would be restating certain prior financial results for the years 2014 through 2016. SAC ¶¶ 3, 5. Plaintiffs then filed a Consolidated Complaint on November 30, 2017. ECF No. 37. Defendants moved to dismiss the Consolidated Complaint in February 2018, ECF No. 45, which was pending when Synchronoss filed the Restatement on July 9, 2018. Lead Plaintiff filed its Amended Complaint on August 24, 2018. ECF No. 61. Defendants thereafter moved to dismiss the Amended Complaint. ECF No. 66. In an Opinion dated July 2, 2019, this Court dismissed the Amended Complaint without prejudice,finding that Plaintiff failed to sufficiently allege that Defendants acted with the requisite scienter. See In re Synchronoss, 2019 WL 2849933.

Plaintiff filed the SAC on August 14, 2019, adding information obtained from five additional confidential witnesses that Plaintiff claims support an inference of scienter. See SAC ¶¶ 362-423. Thereafter, Defendants filed the present motion, arguing that the SAC should be dismissed for failure to,...