Case Name: In re FireEye, Inc. Securities Litigation
Case No.: 2014-1-CV-266866

This is a consolidated securities putative class action against defendant FireEye, Inc. (“FireEye”), its top executives and directors, and the underwriters of FireEye’s second public offering of securities on March 6, 2014 (the “Second Offering”), in which FireEye sold 14 million shares. The lead case (1-14-CV-266866) is brought by plaintiffs IBEW Local Union 363 – Money Purchase Pension Plan, IBEW Local Union 363 – Pension, IBEW Local Union 363 – Welfare Plan, IBEW Local Union 363 – Supplemental Unemployment Benefit Fund, and IBEW Local Union 363 – Joint Apprenticeship Training Fund (collectively “IBEW 363”) on behalf of a class of those who purchased FireEye’s common stock pursuant to or traceable to its Offering and Registration Statement in connection with the Secondary Offering. Another consolidated case (1-14-CV-268110) is brought by Steven Platt (“Platt”) on behalf of the same class of purchasers or acquirers of FireEye common stock pursuant/traceable to the Registration Statement and Prospectus in connection with the Second Offering. Both actions allege violations of the Securities Act of 1933, 15 U.S.C., §§ 77k, 77l(a)(2), and 77o (the “Securities Act”) based on materially misleading statements and omissions in the Registration Statement and Prospectus regarding the true state of FireEye’s business, its decelerating revenue growth, and problems FireEye was having with acquisitions and its securities breach detection software.

On January 30, 2015, the Court granted institutional investor DeKalb County Employees Retirement Plan (“DeKalb”) leave to file a Complaint in Intervention. On March 4, 2015, IBEW 363, DeKalb and Platt (collectively “Plaintiffs”) filed a Consolidated First Amended Class Action Complaint for Violations of the Securities Act of 1933 (the “First Amended Complaint” or “FAC”).

In the FAC, Plaintiffs allege that FireEye is a security company providing automated threat forensics and dynamic malware protection against cyber threats. According to Plaintiffs, FireEye’s September 20, 2013 initial public offering price was $20 per share, trading up to $36 per share by the close of its first day. After going public, FireEye allegedly made several positive statements about its technology in a November 7, 2013 announcement of record financial results for the third quarter of 2013, a November 14, 2013 Form 10-Q, a January 2, 2014 announcement of the acquisition of cybersecurity software firm Mandiant Corporation (“Mandiant”), and a February 11, 2014 announcement of record financial results for the fourth quarter of 2013, all of which caused the price of FireEye shares to rise until it reached a record-closing high of $95.63 on March 5, 2014.

Plaintiffs allege, however, that FireEye’s top executives and directors were planning to dump over eight million shares of their personal holdings of FireEye shares into the market through a secondary offering in order to reap nearly $700 million in resulting insider selling proceeds. On February 3, 2014, FireEye filed an initial registration statement on Form S-1 to register a large block of additional FireEye shares for sale to the public in a secondary public offering. After two subsequent amendments dated March 3 and 6, 2014, the final terms of the Second Offering were for 14 million shares at $82.00 per share (which Plaintiffs allege was an 8.5% discount compared to the closing market price of $88.19 earlier that day). Only 5.58 million of these shares (valued at $460 million) were to be sold by FireEye itself to raise funds for the company, with the remaining 8.417 million shares (valued at roughly $690 million) to be sold by and for the exclusive benefit of existing FireEye insiders and other large shareholders, including the Individual Defendants.

Plaintiffs allege that the March 6, 2014 Registration Statement continued to tout the company’s business, products and performance, including claims that FireEye’s platform provided a “comprehensive” and “complete” solution for cybersecurity threats with “negligible” false-positive rates, and that FireEye’s software has the ability to “identify and block” known and previously unknown cybersecurity threats. The Registration Statement also contained representations concerning the purported benefits of Mandiant as a “significant opportunity [for FireEye] to leverage the inherent synergies between products and services.” Plaintiffs allege that these representations were materially misleading in the following ways:

• FireEye’s “virtual machine” was not a “complete solution” because it was not as capable as more traditional signature-based Intrusion-Prevention Systems (“IPS”) software at detecting known threats, so customers would have to use FireEye and IPS;
• FireEye products generated numerous “alerts” that were false or which failed to contain enough information to help customers identify the problem;
• FireEye software was likely to perform poorly in head-to-head testing by an influential and well-regarded independent software testing company NSS Labs;
• FireEye was experiencing difficulties integrating Mandiant into FireEye’s business;
• The implementation of FireEye’s business plans would require it to increase its expenditures, particularly on research and development, at a tremendous rate, with the result that the Registration Statement’s claim that “profitability was becoming more achievable” was materially incorrect and misleading;
• The Second Offering was timed to occur just before FireEye would have to disclose a significant slowdown in product revenue growth, a significant increase in operating costs, and significantly diminished prospects for profitability in the foreseeable future.

Plaintiffs allege that a March 13, 2014 Bloomberg Businessweek magazine article exposed FireEye’s involvement in the Target Corporation (“Target”) data breach that occurred in late November 2013 and resulted in roughly 40 million credit card numbers being stolen from Target’s computer systems. According to the Businesweek report, FireEye’s “complete solution” had been installed at Target, but Target had “turned off” the automatic “kill” features because of concerns about the technology’s ability to identify and attack only dangerous malware without inadvertently shutting down important computer systems that were not being attacked or that were otherwise not at risk. Similarly, on March 13, 2014, Reuters reported that the “vast majority” of FireEye’s customers had turned off the automatic kill function because of such concerns. In response to the Target data breach and media coverage, FireEye’s share price fell over $4.00 from $79.93 on March 13 to $75.87 on March 14.

Plaintiffs further allege that on April 2, 2014, NSS Labs reported that FireEye’s threat-detection products had scored “below average” in security effectiveness compared to five other security companies and received the worst score of all systems tested in overall breach detection. In response, FireEye shares fell $10.14 to close at $54.86.

On May 6, 2014, FireEye announced its first quarter results for 2014, with revenue far below analysts’ estimates, and slowing demand for core products, forcing it to rely on its lower margin, service-based offerings, which could not provide the same level of profitability. In response to further disclosures of significant weaknesses in FireEye’s business, shares fell sharply, closing at $28.65 on May 7, 2014.

The FAC asserts causes of action for violations of Sections 11, 12(a)(2), and 15 of the Securities Act. The first and second causes of action are brought against FireEye, its top executives and directors David DeWalt (“DeWalt”), Michael J. Sheridan (“Sheridan”), Ashar Aziz (“Aziz”), Enrique Salem, Gaurav Garg, Promod Haque, Ronald E. F. Codd, William M. Coughran Jr. (“Coughran”), and Robert F. Lentz (the “Individual Defendants”) (collectively the “FireEye Defendants”), and the underwriters of the Second Offering, including Morgan Stanley & Co. LLC, Barclays Capital Inc., J.P. Morgan Securities LLC, Goldman, Sachs & Co., UBS Securities LLC, Deutsch Bank Securities Inc., Citigroup Global Markets Inc., Pacific Crest Securities LLC, and Nomura Securities International, Inc. (the “Underwriter Defendants”). The third cause of action is brought against the Individual Defendants.

Plaintiffs seek to represent a putative class “consisting of all those who purchased FireEye’s common stock pursuant or traceable to the Company’s Offering and Registration Statement and who were damaged thereby (the ‘Class’). Excluded from the Class are Defendants; the officers and directors of the Company at all relevant times; members of their immediate families and their legal representatives, heirs, successors or assigns; and any entity in which Defendants have or had a controlling interest.”

On August 11, 2015, the Court overruled demurrers brought by the FireEye Defendants (with the exception of defendant Coughran on the Section 12(a)(2) claim) and the Underwriter Defendants.

The FireEye Defendants now move for judgment on the pleadings on the ground that this Court has no subject matter jurisdiction.

The FireEye Defendants assert that the original Securities Act of 1933 (the “Securities Act”) granted federal and state courts concurrent jurisdiction over claims arising under the Securities Act. The FireEye Defendants argue that the Securities Litigation Uniform Standards Act of 1998 (“SLUSA”) divested state courts of jurisdiction over class actions, such as this one, in which Plaintiffs assert purely federal claims involving nationally traded securities under the Securities Act. The FireEye Defendants acknowledge that courts are split on this issue, but contend that this Court should follow decisions such as Knox v. Agria Corp. (S.D.N.Y. 2009) 613 F.Supp.2d 419 that have ruled that SLUSA eliminated state court jurisdiction over Securities Act covered class actions.

Section 22(a) of the Securities Act states, in relevant part:

The district courts of the United States and the United States courts of any Territory shall have jurisdiction of offenses and violations under this subchapter and under the rules and regulations promulgated by the Commission in respect thereto, and, concurrent with State and Territorial courts, except as provided in section 77p of this title with respect to covered class actions, of all suits in equity and actions at law brought to enforce any liability or duty created by this subchapter.

(15 U.S.C. § 77v(a).)

Section 16 of the Securities Act, to which Section 22(a) refers, has several sections concerning “covered class actions.” Subdivision (b) states:

(b) Class action limitations

No covered class action based upon the statutory or common law of any State or subdivision thereof may be maintained in any State or Federal court by any private party alleging–

(1) an untrue statement or omission of a material fact in connection with the purchase or sale of a covered security; or

(2) that the defendant used or employed any manipulative or deceptive device or contrivance in connection with the purchase or sale of a covered security.

(15 U.S.C. § 77p(b).)

Subdivision (c) states:

(c) Removal of covered class actions

Any covered class action brought in any State court involving a covered security, as set forth in subsection (b), shall be removable to the Federal district court for the district in which the action is pending, and shall be subject to subsection (b).

(15 U.S.C. § 77p(c).)

Subdivision (d) states, in relevant part:

(d) Preservation of certain actions

(1) Actions under State law of State of incorporation

(A) Actions preserved
Notwithstanding subsection (b) or (c), a covered class action described in subparagraph (B) of this paragraph that is based upon the statutory or common law of the State in which the issuer is incorporated (in the case of a corporation) or organized (in the case of any other entity) may be maintained in a State or Federal court by a private party.

(B) Permissible actions

A covered class action is described in this subparagraph if it involves–

(i) the purchase or sale of securities by the issuer or an affiliate of the issuer exclusively from or to holders of equity securities of the issuer; or

(ii) any recommendation, position, or other communication with respect to the sale of securities of the issuer that–

(I) is made by or on behalf of the issuer or an affiliate of the issuer to holders of equity securities of the issuer; and

(II) concerns decisions of those equity holders with respect to voting their securities, acting in response to a tender or exchange offer, or exercising dissenters’ or appraisal rights.

(15 U.S.C. § 77p(d).)

Lastly, subdivision (f) defines “covered class action” as follows:

(2) Covered class action–

(A) In general

The term “covered class action” means–

(i) any single lawsuit in which–

(I) damages are sought on behalf of more than 50 persons or prospective class members, and questions of law or fact common to those persons or members of the prospective class, without reference to issues of individualized reliance on an alleged misstatement or omission, predominate over any questions affecting only individual persons or members; or

(II) one or more named parties seek to recover damages on a representative basis on behalf of themselves and other unnamed parties similarly situated, and questions of law or fact common to those persons or members of the prospective class predominate over any questions affecting only individual persons or members; or

(ii) any group of lawsuits filed in or pending in the same court and involving common questions of law or fact, in which–

(I) damages are sought on behalf of more than 50 persons; and

(II) the lawsuits are joined, consolidated, or otherwise proceed as a single action for any purpose.

(15 U.S.C. § 77p(f)(2)(A).)

The FireEye Defendants argue that Section 22(a) of the Securities Act, specifically the language “except as provided in section 77p of this title with respect to covered class actions,” indicates that all covered class actions are excluded from concurrent jurisdiction with state courts. The FireEye Defendants contend that the reference to “covered class actions” necessarily refers to subdivision (f) of Section 16 (15 U.S.C. § 77p(f)(2)(A)) which defines “covered class actions.” In making this argument, the FireEye Defendants rely on most heavily on the case of Knox v. Agria Corp., supra.

The Knox court found the following:

The exception in the jurisdictional provision of Section 22(a) exempts covered class actions raising 1933 Act claims from concurrent jurisdiction. By excluding these covered class actions from concurrent state and federal jurisdiction, federal courts alone have jurisdiction to hear them. After SLUSA, state courts were no longer “court[s] of competent jurisdiction” to hear covered class actions raising 1933 Act claims.

(Knox v. Agria Corp., supra, 613 F.Supp.2d at p. 425.)

This statement was based on the conclusion that “[t]he reference to Section 16 does not add a substantive limitation to the exception to concurrent jurisdiction in Section 22(a); rather, it simply points the reader to the definition of a ‘covered class action.’” (Knox v. Agria Corp., supra, 613 F.Supp.2d at p. 424.)

While there have been courts that agree with Knox, other courts have held otherwise. In Luther v. Countrywide Financial Corp. (2011) 195 Cal.App.4th 789, the court specifically disagreed with the analysis and holding of Knox. The Luther court stated:

[W]hen it interpreted section 77v, Knox, like defendants here, deemed the statutory reference to section 77p to be a reference to definition of “covered class action” in section 77p(f)(2). Rather than analyzing the application of the other parts of section 77p, Knox found that those subsections were irrelevant to the analysis because they dealt exclusively with state law claims. Then, based merely on the definition of “covered class action,” Knox concluded that all covered class actions are exempted from concurrent jurisdiction. (Id. at p. 425.) In other words, Knox ignored the verb in the statute, and reached its conclusion by looking only at the noun.

Whatever merit Knox may have with respect to removal issues, we cannot agree with its reading of sections 77v in other respects. Section 77v does not say “except as provided in section 77p(f)(2),” the definition of covered class action. Instead, it refers to all of section 77p, not just the definitional provision.

(Luther v. Countrywide Financial Corp., supra, 195 Cal.App.4th at pp. 797-798.)

The Luther court ultimately held: “We conclude that concurrent jurisdiction of this case survived the amendments to the 1933 Act. We are not persuaded otherwise by defendants’ citation to Knox v. Agria Corp. (S.D.N.Y.2009) 613 F.Supp.2d 419, or to several federal trial court opinions.” (Luther v. Countrywide Financial Corp., supra, 195 Cal.App.4th at p. 797.)

The FireEye Defendants contend that Luther is not relevant because the securities in that case were not traded on a national exchange. The analysis in Luther, however, did not depend on the nature of the securities. The Luther court simply examined the language of the relevant statutes. This Court finds Luther persuasive and agrees with its reading of the statutes. The Court notes that Luther is not alone in its interpretation. (See, e.g., Niitsoo v. Alpha Natural Resources, Inc. (S.D.W. Va. 2012) 902 F.Supp.2d 797, 805, fn. 4; see also Rajasekaran v. CytRx Corp. (C.D. Cal. 2014) 2014 WL 4330787, *5; see also West Palm Beach Police Pension Fund v. Cardionet, Inc. (S.D. Cal. 2011) 2011 WL 1099815, *2; see also West Virginia Laborers Trust Fund v. STEC Inc. (C.D. Cal. 2011) 2011 WL 6156945, *5, fn. 5.)

The FireEye Defendants’ reading of the statutory language ignores the fact that the reference to covered class actions in Section 22 does not limit itself to the definitional portion of Section 16 (i.e. subdivision (f)). As explained in Luther, because Section 22 incorporates Section 16 in its entirety, the Court must also look at all subdivisions of Section 16 that relate to “covered class actions,” including subdivision (b) that actually places a limit on the ability to maintain certain covered class actions (e.g. those based on state law claims involving an untrue statement or omission of a material fact in connection with the purchase or sale of a covered security or the use of a manipulative or deceptive device or contrivance in connection with the purchase or sale of a covered security).

In their reply papers, Defendants cite to the recent case of Hung v. Idreamsky Technology Limited (S.D.N.Y. 2016) 2016 WL 299034, in which the court stated:

Defendants interpret “except as provided in section 77p with respect to covered class actions” to mean “except with respect to covered class actions, as defined in section 77p.” The statutory language is amenable to this reading, and the phrase “covered class action” is a term of art with no meaning absent a reference to some definition.

(Hung v. Idreamsky Technology Limited, supra, 2016 WL 299034, *2.)

The Hung court’s reading of Section 22 requires the addition of language that was not put there by Congress – “as defined in.” There is no basis for the Court to add nonexistent language to a statute that could have been included when the statute was written. Rather, the absence of such language supports Plaintiffs’ view that Section 22 refers to all of Section 16, not just the definitional portion. Moreover, the language “except as provided in section 77p with respect to covered class action” must be read in the context of the entire section, which concerns the conferring of jurisdiction on the courts; the exception more logically refers to the limitations in Section 16 on the maintenance of covered class actions, not just the definition. Such a conclusion does not require the alteration or addition of language to the statute.

The FireEye Defendants argue that the legislative history of these statutes supports their interpretation. In light of the fact that the plain statutory language supports Plaintiffs’ position, however, there is “no need for recourse to legislative history.” (Luther v. Countrywide Financial Corp., supra, 195 Cal.App.4th at pp. 799.)

The instant action is not based on state law and therefore does not fall within the exception to concurrent jurisdiction in Section 22(a). Accordingly, the FireEye Defendants motion for judgment on the pleadings is DENIED.