Case 3:20-cv-02353-JD Document 86 Filed 02/16/22 Page 1 of 9
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`UNITED STATES DISTRICT COURT
`
`NORTHERN DISTRICT OF CALIFORNIA
`
`IN RE ZOOM SECURITIES LITIGATION
`
`
`
`Case No. 20-cv-02353-JD
`
`
`ORDER RE MOTION TO DISMISS
`
`Re: Dkt. No. 78
`
`
`
`
`
`This is a securities fraud class action against Zoom Video Communications, Inc., and its
`
`CEO, Eric Yuan, and CFO, Kelly Steckelberg. Court-appointed lead plaintiff Adam Butt filed a
`
`consolidated complaint on behalf of “all who purchased or acquired Zoom securities from April
`
`18, 2019 through April 6, 2020.” Dkt. No. 63 (Compl.) ¶ 2. Butt alleges that defendants violated
`
`Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78j(b) and 78t(a),
`
`and SEC Rule 10b-5, 17 C.F.R. § 240.10b-5, “by making false and misleading statements and
`
`omissions concerning the Company’s operations; the security capabilities, including the ability to
`
`use AES 256-bit end-to-end encryption, available in its main product offering, Zoom Meetings;
`
`and its collection and use of its users’ personal data.” Compl. ¶ 3. The consolidated complaint
`
`challenges fifteen statements and omissions identified in plaintiff’s summary chart attached to the
`
`complaint. Id., Ex. A.
`
`Defendants ask to dismiss the complaint under the Private Securities Litigation Reform
`
`Act of 1995 (PSLRA), 15 U.S.C. § 78u-4, and Federal Rule of Civil Procedure 12(b)(6), for
`
`failure to state a claim. Dkt. No. 78. The parties’ familiarity with the record is assumed, and the
`
`1
`
`2
`
`3
`
`4
`
`5
`
`6
`
`7
`
`8
`
`9
`
`10
`
`11
`
`12
`
`13
`
`14
`
`15
`
`16
`
`17
`
`18
`
`19
`
`20
`
`21
`
`22
`
`23
`
`24
`
`25
`
`26
`
`27
`
`28
`
`Northern District of California
`
`United States District Court
`
`

`

`Case 3:20-cv-02353-JD Document 86 Filed 02/16/22 Page 2 of 9
`
`
`
`motion is granted and denied in part. Plaintiff’s Section 10(b)/Rule 10b-5 claim against Yuan and
`
`Zoom for Statement No. 1 was adequately alleged and will go forward. All of the other statements
`
`and claims are dismissed with leave to amend.
`
`DISCUSSION
`
`I.
`
`LEGAL STANDARDS
`
`Under Section 10(b) of the Securities Exchange Act of 1934, it is unlawful for any person
`
`“[t]o use or employ, in connection with the purchase or sale of any security registered on a
`
`national securities exchange . . . any manipulative or deceptive device or contrivance in
`
`contravention of such rules and regulations as the Commission may prescribe as necessary or
`
`appropriate in the public interest or for the protection of investors.” 15 U.S.C. § 78j(b). One of
`
`those rules prescribed by the U.S. Securities and Exchange Commission is Rule 10b-5, which
`
`makes unlawful for any person to, inter alia, “make any untrue statement of a material fact or to
`
`omit to state a material fact necessary in order to make the statements made, in the light of the
`
`circumstances under which they were made, not misleading.” 17 C.F.R. § 240.10b-5(b).
`
`“To plead a claim under [S]ection 10(b) and Rule 10b-5, [plaintiff] must allege: (1) a
`
`material misrepresentation or omission; (2) scienter; (3) a connection between the
`
`misrepresentation or omission and the purchase or sale of a security; (4) reliance; (5) economic
`
`loss; and (6) loss causation.” Or. Pub. Emps. Ret. Fund v. Apollo Grp. Inc., 774 F.3d 598, 603
`
`(9th Cir. 2014) (citing Stoneridge Inv. Partners, LLC v. Scientific-Atlanta, Inc., 552 U.S. 148, 157
`
`(2008)). A complaint alleging claims under Section 10(b) and Rule 10b-5 must also “satisfy the
`
`dual pleading requirements of Federal Rule of Civil Procedure 9(b) and the PSLRA.” Zucco
`
`Partners, LLC v. Digimarc Corp., 552 F.3d 981, 990 (9th Cir. 2009).
`
`Under FRCP 9(b), the circumstances constituting the alleged fraud must be stated with
`
`particularity. “Rule 9(b) applies to all elements of a securities fraud action.” Or. Pub. Emps. Ret.
`
`Fund, 774 F.3d at 605. The PSLRA further imposes specific pleading requirements on securities
`
`fraud plaintiffs for falsity and scienter. Zucco Partners, 552 F.3d at 990-91. For falsity, the
`
`complaint must “specify each statement alleged to have been misleading, the reason or reasons
`
`why the statement is misleading, and, if an allegation regarding the statement or omission is made
`
`2
`
`1
`
`2
`
`3
`
`4
`
`5
`
`6
`
`7
`
`8
`
`9
`
`10
`
`11
`
`12
`
`13
`
`14
`
`15
`
`16
`
`17
`
`18
`
`19
`
`20
`
`21
`
`22
`
`23
`
`24
`
`25
`
`26
`
`27
`
`28
`
`Northern District of California
`
`United States District Court
`
`

`

`Case 3:20-cv-02353-JD Document 86 Filed 02/16/22 Page 3 of 9
`
`
`
`1
`
`2
`
`3
`
`4
`
`5
`
`6
`
`7
`
`8
`
`9
`
`10
`
`11
`
`12
`
`13
`
`14
`
`15
`
`16
`
`17
`
`18
`
`19
`
`20
`
`21
`
`22
`
`23
`
`24
`
`25
`
`26
`
`27
`
`28
`
`on information and belief, . . . state with particularity all facts on which that belief is formed.” 15
`
`U.S.C. § 78u-4(b)(1). For scienter, the complaint must “state with particularity facts giving rise to
`
`a strong inference that the defendant acted with the required state of mind.” Id. § 78u-4(b)(2)(A).
`
`“To adequately demonstrate that the ‘defendant acted with the required state of mind,’ a complaint
`
`must ‘allege that the defendants made false or misleading statements either intentionally or with
`
`deliberate recklessness.’” Zucco Partners, 552 F.3d at 991 (quotations and citation omitted).
`
`Section 20(a) of the Act makes certain “controlling persons” also liable for violations of
`
`Section 10(b) and its underlying regulations. Specifically, the statute provides that “[e]very
`
`person who, directly or indirectly, controls any person liable under any provision of this chapter or
`
`of any rule or regulation thereunder shall also be liable jointly and severally with and to the same
`
`extent as such controlled person to any person to whom such controlled person is liable . . . ,
`
`unless the controlling person acted in good faith and did not directly or indirectly induce the act or
`
`acts constituting the violation or cause of action.” 15 U.S.C. § 78t(a).
`
`II.
`
`CLAIMS AGAINST DEFENDANT STECKELBERG
`
`Defendant Kelly Steckelberg is barely mentioned at all in the complaint. This means that
`
`plaintiff has not adequately alleged scienter for the Section 10(b) claim against Steckelberg. The
`
`PSLRA requires that “the complaint shall, with respect to each act or omission alleged to violate
`
`this chapter, state with particularity facts giving rise to a strong inference that the defendant acted
`
`with the required state of mind.” 15 U.S.C. § 78u-4(b)(2)(A). Scienter must be alleged on a
`
`statement-by-statement, defendant-by-defendant basis.
`
`The complaint makes just one factual allegation against Steckelberg. Plaintiff says that
`
`“Defendant Steckelberg has served as the Company’s CFO since November 2017. Since
`
`becoming Zoom’s CFO, Steckelberg had the power to authorize or approve publicly disseminated
`
`information about the Company, regularly spoke on Zoom’s quarterly earnings calls with Wall
`
`Street analysts and investors, made live presentations at analyst-sponsored investor conferences
`
`and signed or authorized filings for Zoom with the SEC.” Compl. ¶ 23. This is little more than a
`
`generic job description that comes nowhere close to pleading scienter with the level of
`
`particularity required under the securities laws. Plaintiff’s summary chart further undermines any
`
`3
`
`Northern District of California
`
`United States District Court
`
`

`

`Case 3:20-cv-02353-JD Document 86 Filed 02/16/22 Page 4 of 9
`
`
`
`1
`
`2
`
`3
`
`4
`
`5
`
`6
`
`7
`
`8
`
`9
`
`10
`
`11
`
`12
`
`13
`
`14
`
`15
`
`16
`
`17
`
`18
`
`19
`
`20
`
`21
`
`22
`
`23
`
`24
`
`25
`
`26
`
`27
`
`28
`
`claim against Steckelberg by not individually naming her even once in the “scienter” column.
`
`Dkt. No. 63-1. Plaintiff’s opposition brief contains no discussion at all of Steckelberg’s individual
`
`scienter. Dkt. No. 80 at 9-13.
`
`Consequently, the Section 10(b) claim against Steckelberg is dismissed. The same goes
`
`for the Section 20(a) claim, which also lacks any allegations establishing Steckelberg’s control
`
`person liability. The Court declines to reach defendants’ other arguments for dismissal of the
`
`claims against Steckelberg.
`
`III.
`
`SECTION 10(b) CLAIM AGAINST YUAN AND ZOOM FOR STATEMENT NO. 1
`
`For plaintiff’s 10(b) claim against defendants Yuan and Zoom, dismissal is denied for
`
`Statement No. 1 in plaintiff’s summary chart. Dkt. No. 63-1 at 1-3. Plaintiff challenges this
`
`statement, which appeared in Zoom’s April 18, 2019 Registration Statement and Prospectus:
`
`“Security and disaster recovery. We offer robust security capabilities, including end-to-end
`
`encryption, secure login, administrative controls and role-based access controls.” Id. at 1
`
`(emphasis in original). Defendants do not contest that Yuan “made” this statement by signing the
`
`Registration Statement, Dkt. No. 82 at 3 n.2, and they challenge only the elements of falsity,
`
`scienter, and loss causation. Dkt. No. 78.
`
`A.
`
`Falsity
`
`Plaintiff has satisfied the falsity element for Statement No. 1 by alleging that defendants
`
`represented that Zoom offered “end-to-end encryption” when in fact it did not. Plaintiff alleges
`
`that “[w]hereas end-to-end encryption means that not even the company that runs the messaging
`
`service can access the cryptographic keys necessary to decrypt the end users’ communication, here
`
`Zoom secretly maintained access to the cryptographic keys that could allow Zoom to decrypt and
`
`decipher the communications between the end users.” Compl. ¶ 9(a). Among other things,
`
`plaintiff points to an article published on March 31, 2020, on The Intercept website titled, “ZOOM
`
`MEETINGS AREN’T END-TO-END ENCRYPTED, DESPITE MISLEADING MARKETING:
`
`The video conferencing service can access conversations on its platform.” Id. ¶ 56.
`
`Defendants say that plaintiff’s falsity allegations are lacking because the term “end-to-end
`
`encryption” can have different meanings, Dkt. No. 78 at 5-7, but defendants’ own statements,
`
`4
`
`Northern District of California
`
`United States District Court
`
`

`

`Case 3:20-cv-02353-JD Document 86 Filed 02/16/22 Page 5 of 9
`
`
`
`1
`
`2
`
`3
`
`4
`
`5
`
`6
`
`7
`
`8
`
`9
`
`10
`
`11
`
`12
`
`13
`
`14
`
`15
`
`16
`
`17
`
`18
`
`19
`
`20
`
`21
`
`22
`
`23
`
`24
`
`25
`
`26
`
`27
`
`28
`
`which are alleged in the complaint, demonstrate otherwise. Plaintiff alleges that on April 1, 2020,
`
`“Yuan published ‘A Message to Our Users’ on Zoom’s blog,” stating, “we recognize that we have
`
`fallen short of the community’s -- and our own -- privacy and security expectations.”
`
`Compl. ¶ 62. This blog post by Yuan further “referred and linked to a post of the same date by
`
`Oded Gal, Zoom’s Chief Product Officer, titled, ‘The Facts Around Zoom and Encryption for
`
`Meetings/Webinars.’” Id. ¶ 63. That linked post included these statements: “we want to start by
`
`apologizing for the confusion we have caused by incorrectly suggesting that Zoom meetings were
`
`capable of using end-to-end encryption. . . . While we never intended to deceive any of our
`
`customers, we recognize that there is a discrepancy between the commonly accepted definition of
`
`end-to-end encryption and how we were using it.” Id.
`
`These statements make this case very different from Wochos v. Tesla, Inc., 985 F.3d 1180,
`
`1194 (9th Cir. 2021), in which the circuit found that plaintiffs had failed to “plead sufficient facts
`
`to establish that the actual term used had the distinctive, and false, meaning that plaintiffs claim.”
`
`There, plaintiffs “pleaded no facts to support their premise that ‘production car’ would be
`
`understood as referring exclusively to the fully automated production of identical vehicles.” Id.
`
`(emphasis in original). That is not the situation here. Plaintiff has identified defendants’ express
`
`acknowledgement that they had “incorrectly suggest[ed] that Zoom meetings were capable of
`
`using end-to-end encryption,” and they had used the term “end-to-end encryption” differently
`
`from “the commonly accepted definition.” Compl. ¶ 63. Plaintiff has adequately alleged that
`
`defendants’ Statement No. 1 gave an “impression of a state of affairs that differs in a material way
`
`from the one that actually exist[ed].” Berson v. Applied Signal Tech., Inc., 527 F.3d 982, 985 (9th
`
`Cir. 2008) (quotations and citation omitted).
`
`B.
`
`Scienter
`
`Scienter is also satisfied by plaintiff’s allegations that Yuan -- who made the statement on
`
`April 18, 2019, that Zoom offers “end-to-end encryption” -- issued a public statement on April 1,
`
`2020, linking to a post that acknowledged and apologized for Zoom’s “incorrect” use of the term.
`
`Defendants’ suggestion that the later statement does not qualify as “a statement similar to ‘I knew
`
`it all along’” as required by Yourish v. Cal. Amplifier, 191 F.3d 983, 996 (9th Cir. 1999), see Dkt.
`
`5
`
`Northern District of California
`
`United States District Court
`
`

`

`Case 3:20-cv-02353-JD Document 86 Filed 02/16/22 Page 6 of 9
`
`
`
`1
`
`2
`
`3
`
`4
`
`5
`
`6
`
`7
`
`8
`
`9
`
`10
`
`11
`
`12
`
`13
`
`14
`
`15
`
`16
`
`17
`
`18
`
`19
`
`20
`
`21
`
`22
`
`23
`
`24
`
`25
`
`26
`
`27
`
`28
`
`No. 78 at 11, is not persuasive. The same kind of contemporaneous admission is not necessary
`
`because this is not a case where plaintiffs are trying to say “that a later, sobering revelation makes
`
`an earlier, cheerier statement a falsehood.” Yourish, 191 F.3d at 997 (cleaned up and citation
`
`omitted). Rather, plaintiff has pleaded that Yuan holds an advanced degree in engineering; was a
`
`“founding engineer” at “WebEx, a web conferencing and videoconferencing platform”; and he
`
`personally “led the effort to engineer Zoom Meetings’ platform and is named on several patents
`
`that specifically concern encryption techniques.” Compl. ¶¶ 22, 34(a). There simply is no factual
`
`basis here to believe that Yuan’s understanding of the term “end-to-end encryption” may have
`
`changed in a relevant way from the time he made the challenged representation in April 2019, to
`
`the time Yuan acknowledged just a year later, on April 1, 2020, that Zoom’s usage was
`
`inconsistent with “the commonly accepted definition.”
`
`Plaintiff has consequently pleaded facts giving rise to a strong inference that when he made
`
`the earlier statement, Yuan acted “either intentionally or with deliberate recklessness.” In re
`
`Verifone Holdings, Inc. Sec. Litig., 704 F.3d 694, 701 (9th Cir. 2012); see also 15 U.S.C. § 78u-
`
`4(b)(2). And because plaintiff has adequately pleaded Yuan’s scienter for Statement No. 1,
`
`plaintiff’s scienter allegations for defendant Zoom are also sufficient. See Glazer Capital Mgmt.,
`
`LP v. Magistri, 549 F.3d 736, 743-45 (9th Cir. 2008).
`
`C.
`
`Loss Causation
`
`The final challenged element of loss causation is also satisfied. That element requires a
`
`securities fraud plaintiff to “establish a causal connection between the defendant’s fraudulent
`
`conduct and the plaintiff’s economic loss.” In re BofI Holdings, Inc. Sec. Litig., 977 F.3d 781, 786
`
`(9th Cir. 2020). “One way to prove loss causation is to show that the defendant’s fraud was
`
`revealed to the market through one or more ‘corrective disclosures’ and that the company’s stock
`
`price declined as a result.” Id. “At the pleading stage, the plaintiff’s task is to allege with
`
`particularity facts ‘plausibly suggesting’ that both showings can be made.” Id. at 791.
`
`That is what plaintiff has done here. The complaint alleges that on March 31, 2020, the
`
`article in The Intercept revealed the truth about Zoom’s “end-to-end encryption” capabilities, and
`
`“[o]n this disclosure, Zoom’s stock price fell from a close of $150.88 on March 30, 2020 to close
`
`6
`
`Northern District of California
`
`United States District Court
`
`

`

`Case 3:20-cv-02353-JD Document 86 Filed 02/16/22 Page 7 of 9
`
`
`
`1
`
`2
`
`3
`
`4
`
`5
`
`6
`
`7
`
`8
`
`9
`
`10
`
`11
`
`12
`
`13
`
`14
`
`15
`
`16
`
`17
`
`18
`
`19
`
`20
`
`21
`
`22
`
`23
`
`24
`
`25
`
`26
`
`27
`
`28
`
`at $146.12 per share on March 31, 2020.” Compl. ¶¶ 103-04. On April 1, 2020, after Yuan
`
`admitted that Zoom had “fallen short” of “privacy and security expectations” and linked to Gal’s
`
`apology blog post admitting Zoom’s “incorrect[] suggest[ion]” that Zoom Meetings provided end-
`
`to-end encryption, Zoom’s stock price fell further from the close of $146.12 on March 31, 2020, to
`
`a close of $137.00 on April 1, 2020. Id. ¶¶ 105-06.
`
`These allegations “give the defendant ‘notice of plaintiffs’ loss causation theory’ and
`
`provide the court ‘some assurance that the theory has a basis in fact.’” BofI Holdings, 977 F.3d at
`
`794 (quoting Berson, 527 F.3d at 989-90). Defendants argue that “industry publications from
`
`December 2019 (and before) had already disclosed that ‘Zoom stores a copy of all users’ private
`
`keys on their server,’” Dkt. No. 78 at 15, but this is a factual argument which the Court declines to
`
`resolve at this stage. Pleading loss causation “should not prove burdensome,” BofI Holdings, 977
`
`F.3d at 794, and at this stage, plaintiff has pleaded enough.
`
`Plaintiff may proceed with his Section 10(b)/Rule 10b-5 claim against Yuan and Zoom for
`
`Statement No. 1. 1
`
`IV.
`
`SECTION 10(b) CLAIM AGAINST YUAN AND ZOOM FOR STATEMENT
`NOS. 2-15
`
`For Statement Nos. 2-15, plaintiff vaguely identifies the speaker only as “Zoom” (Nos. 2-
`
`12) or “defendants” (Nos. 13-15). Dkt. No. 63-1 at 3-14. Plaintiff concedes in his opposition
`
`brief that Statement No. 1 is the only statement that Yuan actually made. Dkt. No. 80 at 3 n. 5
`
`(arguing only that Yuan “signed the Registration Statement which made the claim that the
`
`Company offered robust security capabilities including end-to-end encryption”). The complaint
`
`contains no factual allegations adequately tying Yuan to any of Statement Nos. 2 through 15.
`
`
`1 Defendants requested consideration of several documents as incorporated by reference in the
`complaint, or subject to judicial notice. Dkt. No. 79. Plaintiff did not object to the Court’s
`consideration of Exs. 4, 8-10 and 15-18 as incorporated by reference. Dkt. No. 81 at 3.
`Defendants’ request is granted for those documents on that basis, but the Court does not take
`judicial notice of any disputed facts. See Khoja v. Orexigen Therapeutics, Inc., 899 F.3d 988, 999,
`1003 (9th Cir. 2018). Judicial notice is denied for Exs. 1-3, 5-7, 11-14, and 19-21, which were not
`germane to the Court’s resolution of this motion in any event.
`
`
`
`7
`
`Northern District of California
`
`United States District Court
`
`

`

`Case 3:20-cv-02353-JD Document 86 Filed 02/16/22 Page 8 of 9
`
`
`
`Because Yuan is not sufficiently alleged to have made Statement Nos. 2-15, plaintiff’s Section
`
`10(b)/Rule 10b-5 claim seeking primary liability against Yuan is dismissed for those statements.
`
`Defendant Zoom must also be dismissed for those statements. Plaintiff has not adequately
`
`alleged scienter for any individual “responsible for actually making the statements.” Glazer, 549
`
`F.3d at 745. Because there are no allegations suggesting that this is the exceptional case where “a
`
`company’s public statements were so important and so dramatically false that they would create a
`
`strong inference that at least some corporate officials knew of the falsity upon publication,” id. at
`
`744 (emphasis in original), without allegations of individual scienter, there can be no finding of
`
`corporate scienter.
`
`V.
`
`SECTION 20(a) CLAIM AGAINST YUAN
`
`All of this leaves the Section 20(a) claim against Yuan for Statement No. 1 only. See Or.
`
`Pub. Emps. Ret. Fund, 774 F.3d at 610 (Section 20(a) claim viable only to extent plaintiff has
`
`adequately pleaded a violation of Section 10(b) and Rule 10b-5).
`
`To establish controlling person liability under Section 20(a), the plaintiff “must show that a
`
`primary violation was committed and that the defendant directly or indirectly controlled the
`
`violator.” Paracor Finance, Inc. v. Gen. Elec. Capital Corp., 96 F.3d 1151, 1161 (9th Cir. 1996)
`
`(quotations omitted). For Statement No. 1, the Court has already found that plaintiff can pursue a
`
`primary liability claim against Yuan as a maker of that statement. It is duplicative and nonsensical
`
`to impose Section 20(a) secondary liability on Yuan for that statement on the theory that he
`
`“directly or indirectly controlled” himself. The Section 20(a) claim is dismissed on that basis.
`
`CONCLUSION
`
`Plaintiff is granted leave to amend all claims dismissed by this order, and if he wishes to
`
`do so, he may file an amended complaint that is consistent with this order by March 9, 2022.
`
`//
`
`//
`
`//
`
`//
`
`//
`
`8
`
`1
`
`2
`
`3
`
`4
`
`5
`
`6
`
`7
`
`8
`
`9
`
`10
`
`11
`
`12
`
`13
`
`14
`
`15
`
`16
`
`17
`
`18
`
`19
`
`20
`
`21
`
`22
`
`23
`
`24
`
`25
`
`26
`
`27
`
`28
`
`Northern District of California
`
`United States District Court
`
`

`

`Case 3:20-cv-02353-JD Document 86 Filed 02/16/22 Page 9 of 9
`
`
`
`No new claims or defendants may be added without prior approval of the Court. Plaintiff is
`
`advised that further opportunities to amend are not likely to be granted.
`
`IT IS SO ORDERED.
`
`Dated: February 16, 2022
`
`
`
`
`
`
`
`JAMES DONATO
`United States District Judge
`
`9
`
`1
`
`2
`
`3
`
`4
`
`5
`
`6
`
`7
`
`8
`
`9
`
`10
`
`11
`
`12
`
`13
`
`14
`
`15
`
`16
`
`17
`
`18
`
`19
`
`20
`
`21
`
`22
`
`23
`
`24
`
`25
`
`26
`
`27
`
`28
`
`Northern District of California
`
`United States District Court
`
`