Cement Masons & Plasterers Joint Pension Trust v. Equinix, Inc.: A Sudden Decrease in Stock Price Alone Does Not Equal Securities Violations

In Cement Masons & Plasterers Joint Pension Trust v. Equinix, Inc., No. 11–01016 SC, 2012 WL 6044787 (N.D. Cal. Dec. 5, 2012), the U.S. District Court for the Northern District of California dismissed the plaintiffs’ claims, for a second time, for failure to plead actionable conduct pursuant to Section 10(b) of the Securities Exchange Act of 1934 (the “Exchange Act”).

Plaintiffs, Cement Masons & Plasterers Joint Pension Trust and the International Brotherhood of Electrical Workers Local 697 Pension Fund (collectively, the “Plaintiffs”), brought an action against Equinix, Inc. (“Equinix”), and Equinix’s CEO, Stephen Smith, and CFO, Keith Taylor (collectively, the “Defendants”), for violations of Sections 10(b) and 20(a) of the Exchange Act and Securities and Exchange Commission (“SEC”) Rule 10b–5. Plaintiffs alleged that the Defendants artificially inflated Equinix’s stock price by issuing false and misleading statements concerning: (i) financial forecasts, (ii) integration efforts between Equinix and recently acquired Switch & Data Facilities Company, Inc. (“Switch & Data”), and (iii) pricing strategy. The court dismissed the claim associated with financial forecasts in a prior motion to dismiss.

Section 10(b) makes it unlawful to “use or employ, in connection with the purchase or sale of any security registered on a national security exchange . . . any manipulative or deceptive device or contrivances in contravention of such rules and regulations as the [SEC] may prescribe.” Rule 10b–5 prohibits persons from “engag[ing] in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security.” Courts require five elements to establish Rule 10b–5 violations: “(1) a material misrepresentation or omission of fact, (2) scienter, (3) a connection with the purchase or sale of a security, (4) transaction and loss causation, and (5) economic loss.” Plaintiffs must also satisfy Fed. R. Civ. P. Rule 9(b), requiring a heightened standard of pleading for claims alleging fraud or mistake.  

Plaintiffs challenged statements made by the Defendants in mid-2010 where Defendants represented that integration efforts with Switch and Data were ahead of schedule and that their sales organizations were completely integrated. Subsequently, Equinix disclosed that it had not met fourth quarter projections and that “it still [had] work to do to realign the combined sales organization.”

Plaintiffs also alleged that Defendants stated in July that Equinix would stay true to its pricing parameters and would not chase business in light of the competitive market. In its October statements, however, the Defendants admitted to Equinix having to discount prices to extend long-term contracts with strategic customers. Moreover, a confidential witness claimed that Equinix “regularly” approved discounts between ten and thirty percent during the period the Defendants averred the pricing was stable.

The court found that the statements concerning integration were not “forward looking” and therefore not covered by the safe harbor projections in the PSLRA.  The court agreed, however, that the Defendant’s October statements failed to satisfy the scienter and falsity elements. The alleged misstatements “merely show that Equinix was unable to achieve the revenue synergies that Equinix sales teams had been focused on in July” and that “the integration did not proceed as smoothly as they hoped.”

In addressing the statements concerning pricing strategy, the court explained that the Defendants maintained a consistent position on pricing through the period at issue. The court further noted that there was no indication that the widespread discounting was disclosed to the market. Emphasizing the absence of an economic loss, the court held that “[b]ecause the widespread discounting described by [the confidential witness] was never revealed to the market, it could not have caused Equinix’s stock price to drop . . . or otherwise caused Plaintiffs’ alleged loss.”

Finally, the court explained that absent an underlying violation of the Exchange Act, there could be no Section 20(a) liability for control persons. Thus, the court granted the Defendants’ motion to dismiss with leave to the Plaintiffs to amend for a second time.             

The primary materials for this case may be found on the DU Corporate Governance website.