On Appeal, Zendesk Beats Securities Fraud Suit

An unpublished opinion issued on Wednesday by the Ninth Circuit Court of Appeals disposed of a securities fraud class action brought by shareholders of Zendesk Inc. The panel ruled that the district court’s dismissal was well-founded as the plaintiffs’ second amended complaint failed to satisfy multiple elements of federal securities law claims.

The case dates to 2020 when disgruntled shareholders sued the San Francisco-based customer service software company and several of its executives. The complaint accused the defendants of making false and misleading statements relating to Zendesk’s data security, resulting in harm to investors after it became public that Zendesk had suffered a data breach that went undetected for nearly three years. 

Judge Charles R. Breyer dismissed the shareholders’ complaint twice, both times with leave to amend. They declined and instead appealed the dismissal.

In a six-page opinion, the appellate panel affirmed the district court’s findings. Though the plaintiffs specified five publicly filed statements, they did not supply facts supporting a reasonable inference that any of those statements were false or misleading, the court said. As to two of the statements, the panel reasoned that they were actually truthful and could not reasonably have created the impression that the company lied about when it implemented certain data security practices.

The opinion also cited insufficiently pleaded fraudulent intent. Owing to a lack of proof, the complaint did not persuade the court that the individual defendants either “knew” about or “recklessly disregarded” the company’s alleged cybersecurity shortcomings.

In addition, the court held that the plaintiffs failed to make a case for corporate scienter, addressing the argument even though the doctrine is not officially recognized within the Circuit. “[S]tatements that Plaintiffs cite to were not ‘so dramatically false’ that at least some corporate official must have known of their falsity upon publication,” the opinion said.

The plaintiff and putative class are represented by Robbins Geller Rudman& Dowd LLP and Zendesk by Sidley Austin LLP.