Case 2:17-cv-03679-SVW-AGR Document 67 Filed 11/01/17 Page 1 of 122 Page ID #:729 KESSLER TOPAZ 1 MELTZER & CHECK, LLP 2 JENNIFER L. JOOST (Bar # 296164) [email protected] 3 RUPA NATH COOK (Bar # 296130) [email protected] 4 One Sansome Street, Suite 1850 San Francisco, CA 94104 5 Telephone: (415) 400-3000 Facsimile: (415) 400-3001 6 -and- 7 SHARAN NIRMUL (Pro Hac Vice) 8 [email protected] NATHAN HASIUK (Pro Hac Vice) 9 [email protected] 280 King of Prussia Road 10 Radnor, PA 19087 Telephone: (610) 667-7706 11 Facsimile: (610) 667-7056 12 Attorneys for Plaintiffs Thomas DiBiase and David Steinberg, and Lead Counsel 13 for the Putative Class 14 UNITED STATES DISTRICT COURT CENTRAL DISTRICT OF CALIFORNIA 15 WESTERN DIVISION 16 IN RE SNAP INC. SECURITIES Case No. 2:17-cv-03679-SVW-AGR LITIGATION 17 CLASS ACTION 18 CONSOLIDATED AMENDED CLASS ACTION COMPLAINT FOR 19 VIOLATION OF THE FEDERAL SECURITIES LAWS 20 21 JURY TRIAL DEMANDED 22 Judge: Hon. Stephen V. Wilson This Document Relates to: All Actions. 23 24 25 26 27 28 CONSOLIDATED AMENDED COMPLAINT; Case No. 2:17-cv-03679-SVW-AGR Case 2:17-cv-03679-SVW-AGR Document 67 Filed 11/01/17 Page 2 of 122 Page ID #:730 1 TABLE OF CONTENTS 2 I. INTRODUCTION .................................................................................... 1 3 II. JURISDICTION AND VENUE ............................................................... 8 4 III. PARTIES TO PLAINTIFFS’ CLAIMS UNDER THE EXCHANGE 5 ACT ........................................................................................................... 8 6 A. Plaintiffs .................................................................................................... 8 7 B. Exchange Act Defendants ......................................................................... 9 8 1. Snap Inc. ......................................................................................... 9 9 2. Executive Defendants ..................................................................... 9 10 IV. RELEVANT NON-PARTIES TO PLAINTIFFS’ CLAIMS ................. 10 11 12 V. VIOLATIONS OF THE EXCHANGE ACT ......................................... 12 13 A. Snap’s Journey from Novelty to Multi-Billion Dollar IPO .................... 12 14 1. Venture Capital Firms Bankroll Snap’s Rise to Prominence ....... 12 15 2. The Importance of User Engagement Metrics ............................. 14 16 3. Snap’s Culture of Secrecy ............................................................ 16 17 4. Snap’s Rapid Growth is Marred by Allegations of Unreliable User 18 Metrics .......................................................................................... 18 19 5. Facebook Releases A Competing Product Six Months Before the 20 IPO Which, Undisclosed to Snap’s Investors, Has an Immediate 21 and Dramatic Impact on Snap’s Growth ...................................... 21 22 6. Faced with Declining User Growth and Engagement, Snap Rushes 23 to Go Public .................................................................................. 25 24 B. Snap’s IPO .............................................................................................. 26 25 1. The Registration Statement Falsely Touts Snapchat’s Rapid 26 Growth and Conceals the Known Impact Instagram’s Stories had on Snap’s User Growth and Engagement ..................................... 27 27 28 i CONSOLIDATED AMENDED COMPLAINT; Case No. 2:17-cv-03679-SVW-AGR Case 2:17-cv-03679-SVW-AGR Document 67 Filed 11/01/17 Page 3 of 122 Page ID #:731 1 2. The Registration Statement Conceals Credible Allegations that Snap’s User Metrics were Unreliable ........................................... 31 2 3. Snap’s Roadshow: The Underwriters Help Cement the Company’s 3 False Growth Narrative ................................................................ 34 4 4. As Snap Goes Public, Defendants and Other Insiders Cash Out, 5 and the Underwriters Reap Hefty Commissions .......................... 36 6 5. The Underwriter Banks Initiate Coverage with Price Targets Well 7 Above the IPO Price ..................................................................... 37 8 VI. THE TRUTH IS GRADUALLY REVEALED ...................................... 39 9 A. Pompliano Blows the Whistle on Snap’s Allegedly Unreliable User 10 Engagement Metrics ............................................................................... 39 11 B. Snap Denies All of Pompliano’s Allegations Prior to the IPO .............. 45 12 C. After the IPO, New Details About Pompliano’s Allegations Emerge ... 46 13 D. 1Q 2017 Results ...................................................................................... 48 14 E. The Exchange Act Defendants Attempt to Prop Up Snap’s Declining 15 Stock Price With Additional False and Misleading Statements ............. 50 16 F. Third-Party Data Suggests that the Exchange Act Defendants’ False 17 Assurances are Untrue ............................................................................ 53 18 G. Morgan Stanley Downgrades Snap’s Stock ........................................... 54 19 H. 2Q 2017 Results ...................................................................................... 55 20 21 I. Post-Class Period Developments ............................................................ 58 22 VII. ADDITIONAL ALLEGATIONS OF SCIENTER ................................ 60 23 VIII. EXCHANGE ACT DEFENDANTS’ MATERIALLY FALSE AND 24 MISLEADING STATEMENTS AND OMISSIONS OF MATERIAL FACT ...................................................................................................... 63 25 A. Snap’s Registration Statement ................................................................ 64 26 27 28 ii CONSOLIDATED AMENDED COMPLAINT; Case No. 2:17-cv-03679-SVW-AGR Case 2:17-cv-03679-SVW-AGR Document 67 Filed 11/01/17 Page 4 of 122 Page ID #:732 1 1. The Registration Statement Contained Materially False and Misleading Statements Regarding Snap’s User Growth and 2 Engagement .................................................................................. 64 3 2. The Registration Statement Contained Materially False and 4 Misleading Statements about Snap’s Restatement of its DAU Numbers and the Risk of Inaccurate User Metrics....................... 68 5 6 3. The Registration Statement Failed to Disclose Pompliano’s Allegations that Snap’s User Metrics were Unreliable, a Material 7 Omission and Violation of ASC 450 ............................................ 70 8 B. May 10, 2017 Conference Call ............................................................... 72 9 C. May 24, 2017 J.P.Morgan Conference ................................................... 74 10 IX. LOSS CAUSATION ............................................................................... 76 11 12 X. PRESUMPTION OF RELIANCE .......................................................... 84 13 XI. INAPPLICABILITY OF THE STATUTORY SAFE HARBOR OR BESPEAKS CAUTION DOCTRINE .................................................... 85 14 15 XII. CAUSES OF ACTION UNDER THE EXCHANGE ACT ................... 86 16 A. COUNT I: For Violation of §10(b) of the Exchange Act and Rule 10b-5 17 Against the Exchange Act Defendants ................................................... 86 18 B. COUNT II: For Violation of §20(a) of the Exchange Act Against the Executive Defendants ............................................................................. 87 19 20 XIII. VIOLATIONS OF THE SECURITIES ACT......................................... 88 21 A. Additional Parties .................................................................................... 89 22 1. Additional Plaintiff ....................................................................... 89 23 2. Additional Defendants .................................................................. 89 24 B. Factual Background ................................................................................ 92 25 1. Snap’s IPO .................................................................................... 92 26 27 2. The Securities Act Defendants Rushed to Bring Snap to Market In the Face of Rapidly Growing Competition from Facebook ......... 93 28 iii CONSOLIDATED AMENDED COMPLAINT; Case No. 2:17-cv-03679-SVW-AGR Case 2:17-cv-03679-SVW-AGR Document 67 Filed 11/01/17 Page 5 of 122 Page ID #:733 1 3. The Securities Act Defendants Conceal Pompliano’s Credible Allegations that Snap’s User Metrics were Unreliable ................ 95 2 4. The Underwriters Reap Enormous Profits in Snap’s IPO ............ 96 3 4 5. As Information Concealed in the Registration Statement Is Gradually Disclosed, the True Value of Snap Common Stock Is 5 Revealed ....................................................................................... 96 6 C. The Registration Statement Contained Untrue Statements of Material 7 Fact and Material Omissions in Violation of Section 11 of the Securities Act ........................................................................................................... 98 8 9 1. Failure to Disclose the Impact of Instagram “Stories” on Snap’s DAU .............................................................................................. 98 10 2. Failure to Disclose the Fact of and Nature of Allegations in the 11 Pompliano Complaint ................................................................. 104 12 D. The Registration Statement Failed to Disclose Information Required to 13 be Disclosed under SEC Regulations ................................................... 106 14 1. Item 503 ...................................................................................... 106 15 2. Item 303 ...................................................................................... 107 16 17 3. ASC 450...................................................................................... 109 18 XIV. CAUSES OF ACTION UNDER THE SECURITIES ACT ................ 110 19 A. COUNT III: For Violation of §11 of the Securities Act Against the 20 Securities Act Defendants ..................................................................... 110 21 B. COUNT IV: For Violation of §12(a)(2) of the Securities Act Against the Underwriter Defendants ........................................................................ 112 22 23 C. COUNT V: For Violation of §15 of the Securities Act Against the Executive and Director Defendants ...................................................... 113 24 XV. CLASS ACTION ALLEGATIONS APPLICABLE TO 25 ALL CLAIMS ....................................................................................... 114 26 XVI. PRAYER FOR RELIEF ....................................................................... 115 27 XVII. JURY DEMAND .................................................................................. 116  28 iv CONSOLIDATED AMENDED COMPLAINT; Case No. 2:17-cv-03679-SVW-AGR Case 2:17-cv-03679-SVW-AGR Document 67 Filed 11/01/17 Page 6 of 122 Page ID #:734 1 Lead Plaintiff Thomas DiBiase and named Plaintiff David Steinberg, 2 individually and on behalf of all others similarly situated (collectively, “Plaintiffs”), 3 allege the following upon personal knowledge as to themselves and their own acts, 4 and upon information and belief as to all other matters. Plaintiffs’ information and 5 belief is based upon, among other things, the ongoing independent investigation of 6 Court-appointed Lead Counsel, Kessler Topaz Meltzer & Check, LLP. This 7 investigation includes, among other things, a review and analysis of: (i) public filings 8 by Snap Inc. (“Snap” or the “Company”) with the Securities and Exchange 9 Commission (“SEC”); (ii) public reports and news articles; (iii) research reports by 10 securities and financial analysts; (iv) economic analyses of securities movements and 11 pricing data; (v) transcripts of investor calls and conferences with Snap senior 12 management; (vi) interviews with former Snap employees; and (vii) other publicly 13 available material and data identified herein. Counsel’s investigation into the factual 14 allegations contained herein is continuing and many of the facts supporting Plaintiffs’ 15 allegations are known only to Defendants (as defined herein) or are exclusively 16 within their custody or control. Plaintiffs believe that further substantial evidentiary 17 support will exist for the allegations contained herein after a reasonable opportunity 18 for discovery. 19 I. INTRODUCTION 20 1. This action arises from social media giant Snap’s initial public offering 21 (“IPO”) on March 2, 2017. The registration statement and prospectus incorporated 22 therein, issued in connection with the IPO (collectively, the “Registration Statement”) 23 presented Snap as having a fast-growing and highly engaged user base primed for 24 increasing monetization through advertising revenue. 25 2. The IPO was underwritten by some of Wall Street’s most prominent and 26 largest investment banks, including Morgan Stanley and Goldman Sachs, who served 27 28 1 CONSOLIDATED AMENDED COMPLAINT; Case No. 2:17-cv-03679-SVW-AGR Case 2:17-cv-03679-SVW-AGR Document 67 Filed 11/01/17 Page 7 of 122 Page ID #:735 1 as co-leads. In an unprecedented move, fueled by Snap’s demands for secrecy, other 2 members of the underwriting syndicate, a who’s who of Wall Street banks, including 3 J.P.Morgan, Deutsche Bank, Barclays Capital, Credit Suisse and Allen & Company, 4 dispensed with even receiving a draft of the Registration Statement until after it was 5 published. Road show presentations which began on February 17, 2017 amplified 6 Snap’s representations about its user growth and engagement, and reliability of its 7 user metrics. 8 3. The IPO raised $3.4 billion from public investors, of which $544 million 9 went directly to the pockets of Snap’s founders, Defendants Evan Spiegel and Robert 10 Murphy. Another $200 million went to other insiders who sold their shares in the 11 offering. The syndicate of underwriters, led by Morgan Stanley and Goldman Sachs, 12 collectively made approximately $85 million in fees, and millions more from sales of 13 shares held back in the offering. 14 4. Following the IPO, Snap’s stock price soared to a Class Period high of 15 $29.44 on the day after the IPO. As analysts initiated coverage of Snap’s fledgling 16 stock, the investment banks who underwrote the IPO issued price targets well above 17 the IPO price. Morgan Stanley initiated coverage of Snap on March 28, 2017 at 18 “overweight”—industry jargon for a recommendation to “buy”—with a one year 19 price target of $28. For a time, based on the Defendants’ market representations, it 20 seemed Snap was on track to become the next social media giant. 21 5. However, investors were in for a rude awakening as the Registration 22 Statement and statements made by Snap’s management after the IPO, concealed 23 material information concerning Snap’s actual risks. Many of Snap’s core 24 representations in the Registration Statement would be revealed to be materially 25 misleading. 26 6. At its core, the Registration Statement made numerous statements 27 concerning Snap’s continuing growth and user engagement as this was the central 28 2 CONSOLIDATED AMENDED COMPLAINT; Case No. 2:17-cv-03679-SVW-AGR Case 2:17-cv-03679-SVW-AGR Document 67 Filed 11/01/17 Page 8 of 122 Page ID #:736 1 growth and value premise that Snap and its underwriters were touting to the market. 2 Numerous graphs depicted continuous quarter-over-quarter growth through the end 3 of 2016. Although Snap’s user growth in the fourth quarter of 2016 had been 4 “relatively flat” according to the Registration Statement, this was to be expected as 5 Snap’s user growth was “lumpy,” and had to viewed in context with “the accelerated 6 growth in user engagement earlier in the year.” Snap omitted user data metrics for 7 the two months preceding the IPO. 8 7. In fact, what was actually going on with Snap’s user metrics and which 9 was abundantly clear to Snap’s management before the IPO, was that Snap’s 10 principal competitor Facebook had successfully mimicked Snapchat’s most popular 11 features through its own Instagram “Stories” function and, by the time of the IPO, 12 had eclipsed Snap’s Daily Active Users (“DAU”), the principal metric on which Snap 13 touted as fundamental to its valuation. 14 8. Facebook’s Instagram Stories function represented an existential threat 15 to Snap and prior to the IPO, as former employees interviewed by Plaintiffs 16 disclosed, there was widespread concern expressed by Snap’s sales force to senior 17 management that advertisers were skeptical of Snap’s continued value proposition 18 given Instagram’s growth. Indeed, by the time of Snap’s IPO, even though 19 Instagram’s Stories had been launched barely six months earlier, it had eclipsed 20 Snap’s user base and was on a trajectory to vastly outnumber Snap’s users within 21 months. Facebook’s competition was the focus of a company-wide meeting held in 22 January 2017 wherein an extensive Q&A session, Snap’s senior management fielded 23 numerous questions from Snap’s beleaguered sales team about Instagram’s 24 competition. The extremely adverse and highly negative trend to Snap’s user growth 25 and engagement caused by Instagram was not disclosed in the Registration Statement 26 and this omission rendered the Company’s statements about user growth and 27 28 3 CONSOLIDATED AMENDED COMPLAINT; Case No. 2:17-cv-03679-SVW-AGR Case 2:17-cv-03679-SVW-AGR Document 67 Filed 11/01/17 Page 9 of 122 Page ID #:737 1 engagement and the potential impact of competition from other products materially 2 false and misleading. 3 9. As would be revealed shortly after the IPO, Facebook was eviscerating 4 Snap’s user growth and Snap’s growth had effectively stalled. This revelation would 5 come only after another bombshell involving a Snap whistleblower. 6 10. On April 4, 2017, it was reported that a former Snapchat employee and 7 whistleblower, Anthony Pompliano, had moved to unseal a previously filed 8 complaint against the Company. The report revealed that according to newly- 9 released details about the complaint, the whistleblower alleged that Snapchat had 10 misrepresented details about the popularity of its application to investors in the IPO. 11 In response to this news, Snap’s share price fell approximately 7.3%. 12 11. Pompliano had been recruited from Facebook in September 2015 to help 13 lead Snap’s user growth. Upon joining the Company, he immediately set about 14 evaluating Snap’s user metrics and their reporting and, according to the allegations in 15 his complaint, found egregious deficiencies in the controls over Snap’s reporting of 16 user metrics. His analysis revealed that Snap’s 2015 metrics were overstated and he 17 brought this to senior management’s attention. He was then, reportedly, swiftly 18 terminated and after his departure, Snap’s senior management began to discredit him 19 in the industry. Pompliano filed a lawsuit against Snap in January 2017 in California 20 state court which was heavily redacted and largely under seal. Although the lawsuit 21 was reported in the press, Snap emphatically dismissed the lawsuit as that of “a 22 disgruntled employee fired for poor performance” and whose claims “were without 23 merit.” 24 12. An investor reviewing the Registration Statement would never have 25 known the existence of the Pompliano suit as it was not disclosed in the section of the 26 Registration Statement described “Pending Matters” even though that section 27 enumerated lawsuits against Snap that had been dismissed and were no longer 28 4 CONSOLIDATED AMENDED COMPLAINT; Case No. 2:17-cv-03679-SVW-AGR Case 2:17-cv-03679-SVW-AGR Document 67 Filed 11/01/17 Page 10 of 122 Page ID #:738 1 pending. And an investor trying to understand Snap’s risk disclosures, including the 2 disclosure that “real or perceived inaccuracies in [Snap’s user] metrics may 3 seriously harm and negatively affect our reputation and our business,” could never 4 have understood that risk to have already manifested in a filed whistleblower 5 complaint by Pompliano which both challenged the reliability of Snap’s reported 6 metrics but also claimed credit for requiring the restatement of Snap’s 2015 user 7 metrics. 8 13. Although silent about the Pompliano lawsuit, the Registration Statement 9 disclosed that it had restated Snap’s 2015 user growth data. As it would be later 10 revealed, once Pompliano’s lawsuit was unsealed after the IPO in April 2017, the 11 need to restate the 2015 metrics was among the numerous deficiencies that 12 Pompliano had brought to Snap’s attention. The revelation that Pompliano’s 13 allegations were grounded in fact, and not just the allegations of a former disgruntled 14 employee, shocked investors. As one market commentator noted, “for investors, 15 though whether or not Snap exaggerated the user number matters less at this point 16 than the fact that Pompliano’s lower number turned out to be right.” 17 14. Following on the heels of this revelation, the true impact of Instagram on 18 Snap’s growth began to be revealed to investors. On May 10, 2017, Snap reported its 19 first quarterly results as a public company, disclosing only modest growth in the key 20 performance metric, DAU, which it had touted as being vital to its success in its 21 Registration Statement. In response to this news, Snap’s stock dropped 22 approximately 21% in a single day. Market commentators uniformly attributed 23 Snap’s slowing user growth to direct competition from Instagram. As one 24 commentator wrote, “Compared to early 2016, this growth rate sucks, and the change 25 correlates with the rise of Instagram Stories.” 26 15. Despite its disappointing first quarter, as the truth about Instagram’s true 27 impact on Snap was being revealed and Pompliano’s allegations had become public, 28 5 CONSOLIDATED AMENDED COMPLAINT; Case No. 2:17-cv-03679-SVW-AGR