Lefkowitz v. Synacor, Inc.

SCOTT D. LEFKOWITZ, et al., Plaintiffs, v. SYNACOR, INC., et al., Defendants.

18 Civ. 2979 (LGS)

UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK

August 28, 2019

OPINION AND ORDER

LORNA G. SCHOFIELD, District Judge:

Plaintiffs, individually and on behalf of others similarly situated, bring this putative class action against Defendants Himesh Bhise and William J. Stuart (the "Individual Defendants") and Synacor, Inc. ("Synacor"), alleging violations of § 10(b) and § 20(a) of the Securities Exchange Act of 1934 (the "Exchange Act"). Defendants move to dismiss the First Amended Complaint (the "Complaint") pursuant to Federal Rule of Civil Procedure 12(b)(6). For the reasons stated below, the motion is granted.

I. BACKGROUND

The following facts are taken from the Complaint and accepted as true only for the purpose of this motion. See Doe v. Columbia Univ., 831 F.3d 46, 48 (2d Cir. 2016).

A. Background

Defendant Synacor is headquartered in Buffalo, New York, and publicly traded on the NASDAQ. Defendant Synacor provides technology development and multiplatform services to communications providers. Defendant Bhise has served as Synacor's Chief Executive Officer since August 4, 2014. Defendant Stuart was the Chief Financial Officer from September 15, 2011, to August 2018.

On May 4, 2016, Synacor announced that it had secured a three-year contract to host web and mobile ("portal") services for AT&T. Prior to retaining Synacor, AT&T had partnered with Yahoo to provide similar services. Analysts estimated that Yahoo's contract with AT&T generated $100 million annually for Yahoo.

B. Events During the Class Period

The Complaint alleges that, from May 5, 2016, to March 15, 2018, (the "Class Period"), Defendants made material misstatements and omissions about Synacor's projected revenue from the AT&T contract; AT&T's control over generating revenue from ("monetizing") the portal; and Synacor's weaknesses in internal controls over financial reporting.

Synacor's annual revenue when it entered into the contract with AT&T was around $100 million. After partnering with AT&T, Defendants announced their goal of achieving $100 million in revenue after full deployment of the portal in 2017 and $300 million in annual revenue by 2019. On May 5, 2016, the day after Synacor announced its partnership and revenue projections, Synacor's stock price increased 158% to $3.64 per share.

On April 5, 2017, Synacor announced a secondary public offering of its common stock. Synacor completed the secondary offering on April 11, 2017, netting approximately $18.5 million.

On August 9, 2017, during the Q2 2017 earnings call, Bhise announced that AT&T and Synacor had decided to prioritize "engagement over monetization" and revised their 2017 financial projection from $170-$160 million to $150-$140 million. Following this statement, Synacor's share price fell 32.39% and closed at $2.40 per share on August 10, 2017.

On a March 15, 2018, Q4 2017 earnings call, Bhise stated that AT&T had chosen to prioritize consumer experience and engagement rather than fully monetize the portal throughsearch and advertising. Bhise announced that, in 2017, Synacor had generated approximately $25 million in revenue from AT&T, which was significantly "below the $100 million annual revenue target that AT&T and Synacor announced" when they first discussed their contract and which was a "critical element of Synacor's $300 million target." During the same call, Stuart disclosed material weaknesses in Synacor's internal controls over financial reporting.

C. Events After the Class Period

Following the March 15, 2018, earnings call, Synacor's share price fell 14.63% and closed at $1.75 per share on March 16, 2018. On August 30, 2018, Synacor filed a Form 8-K with the SEC stating that on August 24, 2018, AT&T had delivered a notice of non-renewal to Synacor to prevent automatic renewal of the contract.

D. The Alleged Material Omissions and Misrepresentations

The Complaint alleges material omissions and misstatements made during the Class Period in violation of § 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5. The Complaint's allegations of material omissions and misstatements fall into three categories. The first category is statements relating to revenue projections resulting from Synacor's contract with AT&T. The second category concerns statements and omissions about AT&T's control over monetizing the portal and the impact on Synacor's revenues. The third category relates to Synacor's failure to disclose weaknesses in the company's internal controls for financial reporting.

1. Financial Projections

The first category of alleged misstatements concerns Synacor's financial projections relating to its contract with AT&T. After Synacor announced its partnership with AT&T on May 4, 2016, Defendants repeatedly stated, from the signing of the contract in May through August2016, that Synacor expected revenues from the AT&T contract of around $100 million per year beginning in 2017, and revenues of $300 million by 2019. These statements were made in press releases filed with the SEC and during conference calls with investors.¹ The Q1 2016 Form 10-Q stated that revenue from the AT&T contract "will account for a substantial portion" of 2017 revenue. The Q2 2016 Form 10-Q stated, "We anticipate that search activity and search revenue will increase" due to the AT&T contract.

On November 14, 2016, Synacor announced during its third quarter earnings conference call that it was pushing back the official launch of the AT&T desktop and mobile web portal from Q4 2016 to the first half of 2017 and that their contract with AT&T remained "on track with expected full-year revenue of $100 million after deployment is complete." Synacor also filed a press release with the SEC announcing the Company's financial results for the third quarter and stating that they were "on track to deliver on [the] target of $300 million in revenue and $30 million in adjusted EBITDA in 2019." Bhise said during the conference call that he did not expect the delayed launch of the portal to impact the amount of anticipated revenues but suggested that the "$100 million run rate" might not be achieved until the end of 2017. The Q3 2016 10-Q reiterated Bhise's statements that Synacor "anticipate[s] that activity and search revenue will increase in the future due to our three-year portal services contract with AT&T."

On March 15, 2017, in connection with Q4 and 2016 year-end financial results, Synacor filed a press release with the SEC stating "we continue to make excellent progress toward thelaunch and deployment of the AT&T portal . . . . We expect accelerated revenue growth of about 30% this year, as we continue to progress on our Path to 3/30/300." On the earnings call the same day, Stuart stated that Synacor "remain[ed] on track with expected revenue of $100 million per year after full deployment." On the same call, Bhise stated, "We continue to make excellent progress with the ATT.net transition . . . . We remain on track to launch the new AT&T desktop and mobile web portal in the first half of this year and deployment will be completed through 2017." In response to a question as to how Synacor would achieve $300 million in revenue in 2019, Bhise stated, "[W]ith the 30% growth rate next year, we're looking at roughly 30% to 35% annual growth rate in the following two years to get to our $300 million target . . . starting in 2018, we'll see the full benefit of the AT&T portal revenue."

On May 10, 2017, in a press release Synacor filed with the SEC in connection with its Q1 2017 financial results, Bhise said, "We remain well positioned to deliver on our target of $300 million in revenue and $30 million in adjusted EBITDA in 2019." Bhise also repeated his estimate that annual revenue for 2017 "is projected to be in the range of $160 million to $170 million." In its Form 10Q filed with the SEC on May 15, 2017, with its Q1 2017 financial results, Synacor stated, "we anticipate that both search and digital advertising activity and revenue will increase substantially in future quarters due to our three-year portal services contract with AT&T."

On the August 9, 2017, Q2 2017 earnings call, Bhise informed investors that the joint AT&T and Syancor team had decided to prioritize user engagement over monetization, pushing the "ramp-up in revenues" from the second half of 2017 to 2018. He stated that "we remain committed to and we anticipate delivering on our 3/30/300 plan $300 million of revenue . . . in 2019" and that "the site has the potential to reach $100 million of [annual] revenue." Stuartprovided new projections of $35 to $40 million revenue for Q3 2017, and $140 to $150 revenue for the full year 2017. The same day, Synacor filed a press release with the SEC with the same information. In its Q2 2017 Form 10-Q, the company repeated, "We anticipate that both search and digital advertising activity and revenue will increase substantially in future quarters" due to the AT&T contract.

On November 14, 2017, during Synacor's Q3 2017 earnings call, Bhise stated, "3/30/300 still remains our goal . . . AT&T still has the potential to be $100 million opportunity." The Q3 2017 Form 10-Q stated, "We expect that both search and digital advertising activity and revenue will increase in future quarters due to our three-year portal services contract with AT&T."

2. Control Over Monetization

The second category of alleged misstatements or omissions concerns Synacor's failure to disclose AT&T's control over monetization.

On August 15, 2016, Synacor filed its Form 10-Q with the SEC for Q2 2017 and attached a redacted version of the AT&T contract, redacting almost all of the terms regarding monetization of the portal. The Complaint alleges that the redacted portions contained material omissions that AT&T, not Synacor, controlled monetization of the portal. The Complaint also alleges that, even if the...