WilmerHale recently achieved a victory for the former officers and directors of DataXu and the venture capital firms that invested in DataXu, following allegations that they violated federal securities laws in connection with the company’s sale to Roku Inc. in November 2019.
On September 30, 2022, United States District Judge Angel Kelley of the District of Massachusetts granted our motion to dismiss all claims, with prejudice, in an action alleging violations of Section 10(b) of the Securities Exchange Act of 1934 and its Rule 10b-5. The decision followed a July 25, 2022 hearing in which partner Drew Dulberg argued the motion on behalf of all defendants. Plaintiffs did not appeal.
Our clients, the defendants in this matter, included founders, directors, executive officers, and investors of DataXu, a privately held digital marketing company. While the company attracted a significant amount of investment over the years, its fortunes eventually declined, even as some of its investors extended bridge financing. In 2019, the company agreed to be acquired by Roku.
The sale price was not high enough to result in payment to DataXu’s common stockholders or holders of DataXu Series C-1 Preferred Stock. On October 21, 2021, plaintiffs—eight holders of DataXu common stock and one holder of DataXu Series C-1 preferred shares—filed suit.
Plaintiffs’ core allegation was that our clients failed to disclose certain “contribution-shifting devices”—namely certain convertible promissory notes, a retention plan, and a deemed liquidation clause in the company charter—that determined the order of priority of payment in the event of a merger. Significantly, all but one plaintiff acquired their securities more than five years before the complaint.
WilmerHale argued that plaintiffs’ claims failed on multiple grounds. First, because plaintiffs’ claim was fundamentally one for disclosure fraud under Rule 10b-5(b), it was subject to a five-year statute of repose that barred the claims of all but one plaintiff.
Although the plaintiffs attempted to recast their disclosure fraud claims as ones for “scheme” liability under Rule 10b-5(a) and (c) in their Opposition brief—which would circumvent the time-bar by starting the repose period on the merger date in 2019, rather than the date on which plaintiffs purchased their securities—the WilmerHale team argued that Judge Kelley should follow the lead of other courts around the country that had rejected similar attempts by other plaintiffs to recharacterize their disclosure fraud claims after the fact. Despite occasionally intoning the word “scheme,” the complaint explicitly set forth a claim for disclosure fraud—and therefore, the five-year statute of repose period barred the claims of all but one plaintiff.
WilmerHale also argued that the plaintiffs failed to allege a primary violation of the Exchange Act. In particular, the plaintiffs failed to adequately plead multiple elements of a securities fraud violation, including a false or misleading statement, reliance, and scienter.
Judge Kelley’s opinion endorsed our arguments across the board. The court rejected the plaintiffs’ attempts to refashion Rule 10b-5(b) disclosure fraud claims into scheme liability claims. The court found that the plaintiffs’ complaint set forth only claims for disclosure fraud under Rule 10b-5(b), and as such, the clams of all but one the plaintiffs were time-barred.
As to the final plaintiff, the court found that the complaint had failed to adequately plead scienter, reliance, or the existence of any duty to disclose the alleged omitted information. The court further noted that the plaintiffs had not sought leave to amend their complaint, and that it would be difficult to imagine that there were additional relevant facts not already set forth in the original complaint that would state a claim. Accordingly, the court dismissed all claims with prejudice. This is the first case arising under the federal securities laws that Judge Kelley—who served as a state court judge for more than a decade before joining the federal bench in 2021—decided.
The WilmerHale team included Partners Daniel Halston and Drew Dulberg, Special Counsel Peter Spaeth, Associate Chelsea Simpson and former Senior Associate Chris Hampson. The litigation team is indebted to corporate Partners Mick Bain and Joe Wyatt for their strategic advice.