district of connecticut subbloie jr., gary r....

Case 3:13-cv-00286-VLB Document 72 Filed 11/18/13 of 4

UNITED STATES DISTRICT COURT DISTRICT OF CONNECTICUT

LEWIS STEIN, individually and on behalf of all others similarly situated,

Plaintiff v.

TANGOE, INC., ALBERT R. SUBBLOIE JR., GARY R. MARTINO, and GARY P. GOLDING

Defendants.

CLASS ACTION

3:13-cv-00286-VLB

DEFENDANTS’ MOTION TO DISMISS

Pursuant to Fed. R. Civ. P. 12(b)(6), Fed. R. Civ. P. 9(b), Fed. R. Civ. P. 8(a),

and the Private Securities Litigation Reform Act, 15 U.S.C. § 78u-4(b), defendants

Tangoe, Inc., Albert R. Subbloie Jr., Gary R. Martino, and Gary P. Golding

(collectively, the “defendants”) hereby move to dismiss all claims brought

against them as set forth in plaintiff’s Amended Class Action Complaint for

Violations of Federal Securities Laws (Dkt. No. 66). In support of this Motion,

defendants state as follows:

1. The Amended Complaint challenges a number of statements made

by the defendants between July 27, 2011 and September 4, 2012. As a matter of

law, these statements are not actionable under the Exchange Act. Plaintiff has

failed to plead with particularized facts that any of the challenged statements

were materially false or misleading at the time they were made.

ORAL ARGUMENT REQUESTED


2. Plaintiff fails to plead any particularized facts that would support a

strong and cogent inference of scienter.

3. Plaintiff does not adequately plead loss causation.

4. Plaintiff’s control person claims are insufficient to state a claim.

The grounds for this Motion are set forth in detail in the accompanying

Memorandum of Law in Support of Defendants’ Motion to Dismiss, the

Declaration of Kerry C. Tipper (and all exhibits attached thereto), the Declaration

of Adam J. Hornstine (and all exhibits attached thereto), and all records in this

action.

WHEREFORE, defendants respectfully request that this Court:

(1) Enter an order dismissing this action with prejudice;

(2) Award defendants reasonable attorneys’ fees and expenses; and,

(3) Award any other relief that is fair and just.

REQUEST FOR ORAL ARGUMENT

Defendants respectfully request an oral argument pursuant to L.R. 7(a)(1).

Defendants make this request because they believe that oral argument may assist

the Court’s consideration of this Motion.

Respectfully submitted,


By their attorneys,

/s/ Glenn M. Cunningham Glenn M. Cunningham Fed. Bar No. ct09995 Katherine R. Husband

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Federal Bar No. ct28564 SHIPMAN & GOODWIN LLP One Constitution Plaza Hartford, CT 06103-1919 Tel.: (860)251-5722 Fax: (860)251-5218 [email protected]

William H. Paine, phv06001 Adam J. Hornstine, phv06000 Kerry C. Tipper, phv06002 WILMER CUTLER PICKERING HALE AND DORR LLP 60 State Street Boston, MA 02109 Tel: (617) 526-6000 Fax: (617) 526-5000

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CERTIFICATE OF SERVICE

I hereby certify that the foregoing document filed through the ECF system

will be sent electronically to the registered participants as identified on the Notice

of Electronic Filing (NEF) on November 18, 2013.

/s/ Glenn M. Cunningham

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Case 3:13-cv-00286-VLB Document 72-1 Filed 11/18/13 Page 1 of 53

UNITED STATES DISTRICT COURT DISTRICT OF CONNECTICUT

LEWIS STEIN, individually and on behalf of all others similarly situated,

Plaintiff v.


Defendants.

CLASS ACTION

3:13-cv-00286-VLB

MEMORANDUM IN SUPPORT OF MOTION TO DISMISS


TABLE OF CONTENTS

I. INTRODUCTION .................................................................................................. 1

II. ALLEGATIONS OF THE COMPLAINT ............................................................... 4

A. The Parties ............................................................................................... 4

B. Tangoe’s Acquisitions and Revenues ................................................... 5

1. Tangoe Acquired Several Companies During the Class Period 5

2. Tangoe’s Organic Recurring Revenue ........................................ 7

3. Plaintiff’s Baseless Conclusions About Organic Recurring Revenue....................................................................................... 10

a. Deals in the “Pipeline” of Acquired Businesses ........... 10

b. Up-Selling and Cross-Selling .......................................... 14

c. Platform Migration ............................................................ 15

4. Plaintiff’s Flawed and Irrelevant Deferred Revenues “Analysis”16

C. StreetSweeper and Copperfield Launch a “Short Attack” ................. 22

D. The Challenged Statements .................................................................. 24

III. ARGUMENT ....................................................................................................... 25

A. Plaintiff Does Not Adequately Plead That Any of the Challenged Statements Were Materially False or Misleading ................................ 27

B. Plaintiff Fails to Satisfy the Stringent Standards of the Reform Act for Pleading a Strong Inference of Scienter .............................................. 31

C. Plaintiff Fails to Plead Loss Causation ................................................ 40

D. Plaintiff’s Control Person Claim Must Be Dismissed ......................... 44

IV. CONCLUSION ................................................................................................... 46

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TABLE OF AUTHORITIES

Page(s) CASES

Acito v. IMCERA Grp., Inc. , 47 F.3d 47 (2d Cir. 1995) ........................................................................................ 36

AIG Global Sec. Lending Corp. v. Banc of America Sec. LLC , 254 F. Supp. 2d 373 (S.D.N.Y. 2003) ............................................................... 29, 30

Anschutz Corp. v. Merrill Lynch & Co. , 690 F.3d 98 (2d Cir. 2012) ...................................................................................... 26

Ashcroft v. Iqbal , 556 U.S. 662 (2009) ......................................................................................... passim

ATSI Commc’ns, Inc. v. Shaar Fund, Ltd. , 493 F.3d 87 (2d Cir. 2007) ................................................................................ 44, 45

Basic Inc. v. Levinson , 485 U.S. 224 (1988) ................................................................................................. 40

Bd. of Trs. of Ft. Lauderdale Gen. Emples. Ret. Sys. v. Oao , 811 F. Supp. 2d 853 (S.D.N.Y. 2011) ..................................................................... 42

Bell Atl. Corp. v. Twombly, 550 U.S. 544 (2007) ........................................................................................... 21, 25

Berkovich v. Hicks , 922 F.2d 1018 (2d Cir. 1991) .................................................................................. 34

S. Ferry LP, No. 2 v. Killinger , 542 F.3d 776 (9th Cir. 2008) ................................................................................... 37

Campo v. Sears Holding Corp. , 371 F. App’x 212 (2nd Cir. 2010) ..................................................................... 14, 33

City of Roseville Employees' Ret. Sys. v. Horizon Lines, Inc. , 713 F. Supp. 2d 378 (D. Del. 2010) ........................................................................ 38

Cohen v. Citibank, N.A. , 954 F. Supp. 621 (S.D.N.Y. 1996)........................................................................... 44

Dura Pharm., Inc. v. Broudo , 544 U.S. 336 (2005) ................................................................................................. 40

- ii -


NECA-IBEW Health & Welfare Fund v. Pitney Bowes Inc. , 2013 WL 1188050 (D. Conn. Mar. 23, 2013) (“ Pitney Bowes”) .................... passim

Friedman v. Rayovac Corp. , 291 F. Supp. 2d 845 (W.D. Wis. 2003) ................................................................... 38

Garber v. Legg Mason, Inc. , 537 F. Supp. 2d 597 (S.D.N.Y. 2008) ............................................................... 29, 30

Garvey v. Arkoosh , 354 F. Supp. 2d 73 (D. Mass. 2005) ....................................................................... 45

Harrison v. Enventure Capital Grp., Inc. , 666 F. Supp. 473 (W.D.N.Y. 1987) .......................................................................... 45

Ill. State Bd. of Inv. v. Authentidate Holding Corp. , 369 F. App’x 260 (2d Cir. 2010) ............................................................................. 27

In re Ceridian Corp. Sec. Litig. , 542 F.3d 240 (8th Cir. 2008) ................................................................................... 34

In re Dell Inc., Sec. Litig ., 591 F. Supp. 2d 877 (W.D. Tex. 2008) ................................................................... 43

In re Elan Corp. Sec. Litig. , 543 F. Supp. 2d 187 (S.D.N.Y. 2008) ..................................................................... 34

In re eSpeed, Inc. Sec. Litig. , 457 F. Supp. 2d 266 (S.D.N.Y. 2006) ..................................................................... 33

In re First Union Corp. Sec. Litig. , 128 F. Supp. 2d 871 (W.D.N.C. 2001) .............................................................. 39, 19

In re GeoPharma, Inc. Sec. Litig. , 399 F. Supp. 2d 432 (S.D.N.Y. 2005) ..................................................................... 36

In re Gildan Activewear, Inc. Sec. Litig. , 636 F. Supp. 2d 261 (S.D.N.Y. 2009) ..................................................................... 32

In re Hansen Natural Corp. Sec. Litig. , 527 F. Supp. 2d 1142 (C.D. Cal. 2007) ................................................................... 30

In re ICN Pharms., Inc. Sec. Litig. , 299 F. Supp. 2d 1055 (C.D. Cal. 2004) ................................................................... 29

In re IPO Sec. Litig. , 399 F. Supp. 2d 261 (S.D.N.Y. 2005) ..................................................................... 40

WE


In re Medtronic Inc., Sec. Litig. , 618 F. Supp. 2d 1016 (D. Minn. 2009) ................................................................... 37

In re Merck & Co. Sec. Litig. , 432 F.3d 261 (3d Cir. 2005) .................................................................................... 41

In re Metawave Communs. Corp. Sec. Litig. , 298 F. Supp. 2d 1056 (W.D. Wash. 2003) .............................................................. 14

In re Omnicom Grp., Inc. Sec. Litig. , 2005 WL 735937 (S.D.N.Y. March 30, 2005) (“ Omnicom I”) .................. 3, 8, 29, 30

In re Omnicom Group, Inc. Sec. Litig. , 541 F. Supp. 2d 546 (S.D.N.Y. 2008) (“ Omnicom II”) ........................................... 43

In re Omnicom Grp., Inc. Sec. Litig. , 597 F.3d 501 (2d Cir. 2010) (“ Omnicom III”) ............................................... 2, 40, 41

In re Prestige Brands Holding, Inc ., 2006 WL 2147719 (S.D.N.Y. July 10, 2006) ........................................................... 35

In re Rigel Pharm., Inc. Sec. Litig. , 697 F.3d 869 (9th Cir. 2012) ................................................................................... 29

In re SAIC, Inc. Sec. Litig. , 2013 WL 5462289 (S.D.N.Y. Sept. 30, 2013) ......................................................... 46

In re Travelzoo Inc. Sec. Litig. , 2013 WL 1287342 (S.D.N.Y. Mar. 29, 2013) ........................................................... 25

In re Trex Co., Inc. Sec. Litig. , 212 F. Supp. 2d 596 (W.D. Va. 2002) ..................................................................... 29

In re Vantive Corp. Sec. Litig., 283 F.3d 1079 (9th Cir. 2002) ................................................................................. 37

In re Visual Networks, Inc. , 217 F. Supp. 2d 662 (D. Md. 2002) ......................................................................... 39

In re Xerox Corp. Sec. Litig. , 935 F. Supp. 2d 448 (D. Conn. 2013) ............................................................... 29, 40

Kalin v. Xanboo, Inc. , 526 F. Supp. 2d 392 (S.D.N.Y. 2007) ..................................................................... 45

Kalnit v. Eichler, 264 F.3d 131 (2d Cir. 2001) .................................................................................... 35

- iv -


Katyle v. Penn Nat. Gaming, Inc. , 637 F.3d 462 (4th Cir. 2011) ................................................................................... 41

Kleinman v. Elan Corp., PLC, 706 F.3d 145 (2d Cir. 2013) .................................................................................... 26

Lapiner v. Camtek, Ltd. , 2011 WL 3861840 (N.D. Cal. Aug. 31, 2011) ......................................................... 29

Lattanzio v. Deloitte & Touche LLP , 476 F.3d 147 (2d Cir. 2007) .................................................................................... 43

Lentell v. Merrill Lynch & Co., Inc. , 396 F.3d 161 (2d Cir. 2005) .................................................................................... 40

Leventhal v. Tow, 48 F. Supp. 2d 104 (D. Conn. 1999) ....................................................................... 36

Leykin v. AT&T Corp. , 423 F. Supp. 2d 229 (S.D.N.Y. 2006) ..................................................................... 42

Lighthouse Fin. Group v. Royal Bank of Scot. Group , 2013 WL 4405538 (S.D.N.Y. Aug. 5, 2013) ............................................................ 42

Lormand v. US Unwired, Inc. , 565 F.3d 228, (5th Cir. 2009) .................................................................................. 42

Malin v. XL Capital Ltd., 499 F. Supp. 2d 117 (D. Conn. 2007) ......................................................... 34, 36, 37

Meyer v. Greene , 710 F.3d 1189 (11th Cir. 2013) ............................................................... 2, 40, 41, 43

Morse v. Weingarten , 777 F. Supp. 312 (S.D.N.Y. 1991)........................................................................... 45

N.J. Carpenters Pension & Annuity Funds v. Biogen IDEC, Inc. , 537 F.3d 35 (1st Cir. 2008) ..................................................................................... 13

Nathenson v. Zonagen Inc., 267 F.3d 400 (5th Cir. 2001) ................................................................................... 39

Novak v. Kasaks , 216 F.3d 300 (2d Cir. 2000) .................................................................................... 13

Osher v. JNI Corp. , 302 F. Supp. 2d 1145 (S.D. Cal. 2003) ................................................................... 37

- v -


Plevy v. Haggerty, 38 F. Supp. 2d 816 (C.D. Cal. 1998) ....................................................................... 39

Plumbers & Steamfitters Local 773 Pension Fund v. Canadian Imperial Bank of Commerce , 694 F. Supp. 2d 287 (S.D.N.Y. 2010) ..................................................................... 33

Pugh v. Tribune Co. , 521 F.3d 686 (7th Cir. 2008) ................................................................................... 38

R2 Invs. LDC v. Phillips , 401 F.3d 638 (5th Cir. 2005) ..................................................................................... 4

Rombach v. Chang, 355 F.3d 164 (2d Cir. 2004) .................................................................................... 27

SEC v. First Jersey Sec., Inc. , 101 F.3d 1450 (2d Cir. 1996) .................................................................................. 44

Slayton v. Am. Exp. Co. , 604 F.3d 758 (2d Cir. 2010) .................................................................................... 31

Teacher’s Ret. Sys. of La. v. Hunter , 477 F.3d 162 (4th Cir. 2007) ................................................................................... 41

Teamsters Affiliates Pension Plan v. Walgreen Co. , 2010 WL 3894149 (N.D. Ill. Sept. 29, 2010) ........................................................... 25

Teamsters Local 445 Freight Div. Pension Fund v. Dynex Capital Inc. , 531 F.3d 190 (2d Cir. 2008) .................................................................................... 39

Tellabs, Inc. v. Makor Issues & Rights, Ltd. , 551 U.S. 308 (2007) ........................................................................................... 26, 31

U.S. v. Winston, et al. , Docket No. 1:00-cr-01248-ILG (E.D.N.Y.) .............................................................. 22

Union Cent. Life Ins. Co. v. Ally Fin., Inc. , 2013 WL 2154220 (S.D.N.Y. Mar. 29, 2013) ........................................................... 34

United States v. Carneglia , 403 F. App’x 581 (2d Cir. Dec. 17, 2010) ............................................................... 23

STATUTES

Private Securities Litigation Reform Act of 1995 (the “Reform Act”), 15 U.S.C. § 78u-4(b) ............................................................................................ passim

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I. INTRODUCTION

This lawsuit was filed on the heels of a market manipulation scheme

orchestrated by short sellers who sought to profit – and did profit – by posting to

the internet sensational and flawed commentary about financial and other

information previously made available to investors by Tangoe, Inc. (“Tangoe” or

the “Company”). The attack began when one of the short sellers –

“StreetSweeper” – revealed in an internet post that it sought to suppress

Tangoe’s share price, supplied its own flawed and self-serving interpretation of

publicly available information, and disclosed its plan to put out another

disparaging release later. Later, another short seller – referred to only as

“Copperfield” – also published disparaging reinterpretations of Tangoe’s

disclosures for the same admitted goal.

StreetSweeper is the contrivance of a convicted felon who seeks to use the

First Amendment as a shield for unsavory conduct. Copperfield is an anonymous

person or group that tried to do the same. Neither short seller claimed to know

anything about Tangoe. Both were careful to say that they had no information

not previously disclosed by Tangoe. Thus, neither could (or did) reveal a truth

concealed from market participants. Quite to the contrary, what they published

were conclusions that any market participant could have considered and rejected

as part of his or her own review of the same Tangoe disclosures.

The fraud on the market theory upon which plaintiff relies (Compl. ¶ 167)

assumes that the market for Tangoe shares was capable of rapidly digesting and

assessing the same Tangoe public disclosures that the short sellers addressed


(long after Tangoe made them). The law is clear as a result that plaintiff could not

use market price declines coincident with even a reputable analyst’s

reinterpretation of earlier corporate disclosures to plead loss causation here. 1

The open market fraud theory precludes any assertion that the market price for

Tangoe stock, before the short attack, did not appropriately take into account

Tangoe’s earlier disclosures (including skepticism of the sort that the short

sellers later published). As a result, plaintiff cannot carry his burden of pleading

that any price decline caused by the short attack was due to correction of Tangoe

misstatements (as opposed, for example, to demand suppression by the short

sellers).

Plaintiff does not allege that Tangoe has acknowledged the falsity of any of

its disclosures. Nor did the short sellers pretend to know or substantiate that

Tangoe ever said anything false. The only “news” inherent in the short attack

that market participants had not known before was that Tangoe was and would be

subject to a concerted effort of uncertain duration to depress demand for its

stock. Because plaintiff has not adequately pleaded loss causation, the Amended

Complaint (“Complaint” or “Compl.”) must be dismissed.

The Complaint also must be dismissed because it lacks facts sufficient to

support a plausible claim that Tangoe ever made a materially false or misleading

statement, or to plead a strong inference of scienter. Plaintiff’s say-so allegations

1 See In re Omnicom Grp., Inc. Sec. Litig. , 597 F.3d 501, 512 (2d Cir. 2010) (“ Omnicom III”) (“negative characterization of already-public information” cannot constitute a corrective disclosure sufficient to plead loss causation); Meyer v. Greene, 710 F.3d 1189, 1199 (11th Cir. 2013) (“[T]he mere repackaging of already-public information by an analyst or shortseller is simply insufficient to constitute a corrective disclosure.”).

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about what constitutes “organic growth” are due no deference. He identifies no

source or basis to conclude that the definition of organic growth supplied in the

Complaint bears any relationship to the understanding that market participants,

or Tangoe itself, had about this term. Thus, he sets forth no well-pleaded factual

allegation permitting the inference that Tangoe ever made a material false

statement about organic growth. See In re Omnicom Grp., Inc. Sec. Litig. , 2005

WL 735937, at *1, *5 (S.D.N.Y. March 30, 2005) (“ Omnicom I”) (dismissing

challenge to statements about organic growth because there is no universal

definition of “organic growth”). The Complaint also should be dismissed

because plaintiff has not pleaded particular facts supporting the conclusion that

Tangoe’s organic growth was different than reported, or showing the extent of

any difference. See id. at *5 (dismissing challenge to organic growth disclosures

absent quantification).

As to scienter, plaintiff does not plead – nor could he – facts supporting a

strong, cogent, and compelling inference that defendants acted with an intention

to commit fraud. He does not suggest – nor could he – that defendants shared

his misunderstanding about the definition of “organic growth;” and plaintiff

provides no basis to conclude that defendants understood that market

participants shared plaintiff’s unreasonable understanding of the term. Rather

than pleading facts to show a strong inference that the defendants engaged in

conscious misbehavior or recklessness, plaintiff couples boilerplate conclusions

– “must have known” allegations of the kind that are uniformly rejected by the

courts – with internally inconsistent allegations based on statements of

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unreliable witnesses. He also makes allegations about the defendants’ trading in

Tangoe shares that lack the necessary context required to suggest motive. None

of this amounts to scienter. For these and other reasons explained below, the

Complaint must be dismissed.

II. ALLEGATIONS OF THE COMPLAINT2

A. The Parties

Plaintiff Lewis Stein alleges that he owns 500 shares of Tangoe common

stock (see Compl. ¶ 28), or about 0.00013 percent of the Company’s common

stock issued and outstanding at March 7, 2013. (Form 10-K Annual Report, filed

by Tangoe with the SEC on March 18, 2013 at cover page 2 (Hornstine Decl. Ex.

16)).

Tangoe provides subscription-based software solutions and services that

help companies manage their communications technology. 3 (Compl. ¶¶ 2, 29).

2 The Court need accept only plaintiff’s well-pleaded allegations for purposes of this motion. See Fed. R. Civ. P. 12(b)(6). Conclusions pleaded as if they were facts must be ignored. See Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). The Court may review the whole of the documents upon which plaintiff relies, as well as Tangoe’s SEC filings. See NECA-IBEW Health & Welfare Fund v. Pitney Bowes Inc. , 2013 WL 1188050, at *1 (D. Conn. Mar. 23, 2013) (“ Pitney Bowes”); see also R2 Invs. LDC v. Phillips , 401 F.3d 638, 640 n.2 (5th Cir. 2005) (courts may consider SEC filings on motion to dismiss). Such materials, which are referenced herein, are attached to the Declaration of Adam J. Hornstine (“Hornstine Decl.”) and the Declaration of Kerry C. Tipper (“Tipper Decl.”).

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This subscription-based software business model replaced an earlier model in

which Tangoe had sold software licenses to customers for the same purpose.

(See Hornstine Decl. Ex. 16 at 48). During the alleged Class Period, Tangoe’s

subscription-based software and services business was growing rapidly while its

license and maintenance business was not. ( Id. at 40).

B. Tangoe’s Acquisitions and Revenues

1. Tangoe Acquired Several Companies During the Class Period

Tangoe has long-term customer relationships. For example, a customer

might enter into a three year agreement billed monthly in arrears ( i.e. , where

billing takes place monthly after utilization of Tangoe’s solutions) or monthly in

advance ( i.e. , where billing takes place monthly before utilization). Tangoe refers

to this revenue, which is recorded in similar amounts over successive periods, as

recurring revenue. (Hornstine Decl. Ex. 16 at 2, 44).

Between January 2011 and February 2012, Tangoe acquired three of its

competitors (and the business assets of two other companies that had been used

in competition with Tangoe). In the first quarter of 2011, Tangoe purchased

assets of HCL and Telwares that permitted it to add more than 100 new telecom

3 Plaintiff describes Tangoe as a “SaaS” (Software as a Service) company (Compl. ¶ 7) and supplies a long and source-free description of a SaaS company’s business. He asserts, for example, that SaaS businesses scale “virtually without cost” and that “a large fraction of every new dollar in organic revenue growth [at a SaaS company] is pure profit.” (Compl. ¶ 7). Such conclusions are due no deference by the Court. See supra note 2 .There are many different types of SaaS businesses, and plaintiff does not provide any factual basis to conclude that there is any universal definition of that term. ( Compare SaaS Capital and DH Capital, What’s your SaaS Company Worth? (2012) at 3 (Hornstine Decl. Ex. 15) (cited Compl. n.18) ( e.g. , not all SaaS companies have low costs)). Tellingly, he does not assert that Tangoe has ever said it was a company that scaled “without cost” or that its “organic growth” delivers any particular amount of profit.

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expense management customers. (Form 10-K/A Amended Annual Report, filed by

Tangoe with the SEC on April 26, 2012 at 13 (Hornstine Decl. Ex. 8); Compl. ¶ 52).

In late 2011, Tangoe acquired ProfitLine, Inc., adding more than 50 telecom

expense management customers. 4 (Hornstine Decl. Ex. 8 at 13; Compl. ¶ 52). In

January 2012, Tangoe acquired Anomalous Networks, Inc., which brought to

Tangoe complementary new solutions that Tangoe previously had not offered

(real-time telecommunications expense management solutions and machine-to-

machine expense management capabilities) and another 55 enterprise customers.

(Hornstine Decl. Ex. 8 at 14; Compl. ¶ 52). In February 2012, Tangoe acquired

ttMobiles Limited, adding more than 50 enterprise customers. (Hornstine Decl.

Ex. 8 at 14; Compl. ¶ 52).

Plaintiff does not assert that Tangoe overstated its revenues – from these

or other customers at any time whatsoever – by as much as a single penny. He

does not assert that Tangoe’s financial statements filed with the SEC were wrong

in any way. Instead, he focuses exclusively on oral statements concerning the

extent to which Tangoe’s recurring revenues were “organic.” (Compl. ¶ 35). To

do so, like the short sellers, plaintiff presents a confusing array of arithmetic-

based arguments about Tangoe’s organic growth that rely upon apples-to-

oranges comparisons (e.g. , comparing recurring revenues to total revenues),

errors, supposition, and contrived metrics of his own devise. None of this

4 Plaintiff alleges that Tangoe never provided ProfitLine’s contribution to Tangoe’s revenues in its SEC filings. (Compl. n.4). This is not true. (Hornstine Decl. Ex. 8 at 88) (“The Company has included the operating results of ProfitLine in its consolidated financial statements since the date of acquisition, including revenue of $0.5 million through December 31, 2011.”)).

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presents a plausible factual basis to conclude that Tangoe’s organic growth

disclosures were materially misleading.

2. Tangoe’s Organic Recurring Revenue

Tangoe pursued an acquisition strategy to grow its business, increase its

customer base, and obtain access to new technology. (Compl. ¶ 10). Once it

began to consummate the acquisitions, it responded to questions by analysts

concerning the extent to which its recurring revenues were “organic.” 5 (Compl.

¶ 35). The Complaint relies on an attenuated chain of flawed logic and arithmetic

to assert that Tangoe’s answers to these questions were misleading. Plaintiff’s

flawed claims depend on three incorrect conclusions: (1) that there is a clear

consensus definition of the term “organic” (Compl. ¶¶ 5-6); (2) that the

Complaint’s definition is the only definition of the term ( id.); and (3) that Tangoe’s

method for determining organic recurring revenue was inconsistent with

plaintiff’s own definition (Compl. ¶ 54). None of these conclusions is supported

by well-pleaded factual allegations. Moreover, the Complaint lacks a factual basis

to assert that Tangoe’s organic recurring revenues as reported were inconsistent

with a reasonable understanding of that term. (Compl. ¶ 54).

5 Plaintiff ignores that the challenged disclosures make clear that they address recurring revenue not total revenue. (Compl. ¶ 153 (quoting September 10, 2012 Wedbush Report, which notes that Tangoe only “indicates organic recurring revenue”); Hornstine Decl. Ex. 8 at 44). Each of the statements challenged as false and misleading by plaintiff (Compl. ¶ 35) concern organic recurring revenue. Many of plaintiff’s allegations in the Complaint are flawed by erroneous analysis comparing the Company’s total revenue numbers with recurring revenue disclosures, as if they were the same. ( See, e.g. , Compl. ¶ 9 (discussing how plaintiff calculates “organic” revenue as a function of “revenue” instead of “recurring revenue”); ¶ 36 (calculating “implied growth rate” by utilizing “revenue” instead of “recurring revenue”)).

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Plaintiff does not allege that Tangoe ever supplied a definition of “organic”

recurring revenue, and therefore he does not allege that Tangoe’s disclosures

were inconsistent with such a definition. There is no GAAP definition of that term

– plaintiff does not suggest otherwise – and plaintiff’s definition is neither

reasonable nor canonical. Instead, his definition is as contrived as his term

“Core Subsidiary” (Compl. ¶ 11), which is also misleading by design. More

specifically, plaintiff declares without any factual support that organic revenue

necessarily means only revenue generated by a business as it “historically

exists.” There is no factual support for this claim. 6 (Compl. ¶ 5). Nevertheless,

based on his own say-so, plaintiff contrives even more nonsense. He defines

“Tangoe’s historical business” to be Tangoe’s “Core Subsidiary” (even though it

is not a subsidiary). (Compl. ¶ 11). Next, he characterizes the business assets

acquired from HCL, Telwares, and ProfitLine as if they were all legal entities with

their own financial statements (again incorrect). Then, he imagines (without

factual basis) that the only thing that the securities markets were interested in

after Tangoe acquired these businesses’ assets was by how much Tangoe’s

sales of the same solutions it offered before any of the acquisitions had

increased (what he calls the Core Subsidiary’s revenue). (Compl. ¶¶ 7-16).

6 As a recent case from a district court in this Circuit makes clear, there is no univocal definition of organic revenue outside of GAAP. See Omnicom I, 2005 WL 735937, at *1; see also Tangoe: Dancing on an Old Grave, Digging a New Hole? , THE STREETSWEEPER (Aug. 28, 2012), www.thestreetsweeper.org at 5 (“StreetSweeper Report”) (Hornstine Decl. Ex. 11) (noting that “[w]ithout the precise formula (and underlying numbers) that Tangoe uses to calculate its organic growth rate ... investors cannot monitor” organic growth).

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In fact, there is no factual basis in the Complaint supporting the conclusion

that Tangoe or market participants understood that if customers introduced to

Tangoe as a result of acquisitions made new agreements to buy Tangoe solutions

– regardless of whether they were solutions Tangoe offered before it bought any

other business or were solutions that Tangoe obtained the right to sell when it

completed an acquisition – that this was not “organic” growth. There is no

factual basis to conclude that market participants would not consider recurring

revenue to be organic when derived from a customer of an acquired entity who

after an acquisition bought solutions that Tangoe historically had sold. The same

is true if Tangoe’s pre-existing customers bought solutions that had been offered

by an acquired business pre-acquisition.

Because market participants who had any interest in organic growth most

plausibly were interested in how much Tangoe could grow recurring revenue

other than by buying pre-existing contracts, there was every reason to believe

that Tangoe and market participants thought that organic recurring revenue was

all recurring revenue except what was contracted for by acquired entities before

acquisitions. Tellingly, this is precisely consistent with the Complaint’s own

discussion of “inorganic” revenue in paragraph 6.

Plaintiff’s challenge to Tangoe’s statements about organic recurring

revenue fails because he has no factual basis to assert that Tangoe ever made a

statement inconsistent with a reasonable understanding of the term, or that

anyone other than he – or short sellers seeking to suppress demand – shared the

plaintiff’s understanding of the term. To be sure, plaintiff does assert

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conclusions to this effect. (Compl. ¶ 54). But because the Complaint lacks a

factual basis for such implausible conclusions, they must be ignored.

3. Plaintiff’s Baseless Conclusions About Organic Recurring Revenue

Plaintiff lacks facts to assert that Tangoe did three supposedly improper

things when it allocated organic revenue: (1) treating recurring revenue from

contracts signed by an acquired business before an acquisition as organic; (2)

treating new purchases post-acquisition – “up-sales” and “cross-sales” – of

Tangoe solutions by an acquired business’s former customers as organic, or

treating post-acquisition sales of the acquired business’s solutions to Tangoe’s

historic customers as organic, and (3) treating an acquired business’s pre-

acquisition recurring revenues from a customer as organic once Tangoe

transferred the customer from the acquired platform to Tangoe’s platform. 7

(Compl. ¶ 54). Plaintiff also lacks facts sufficient to quantify the impact of these

three practices, to the extent that they ever occurred.

a. Deals in the “Pipeline” of Acquired Businesses

The Complaint’s “pipeline” allegations are inconsistent, implausible, and

contain no factual basis upon which to estimate the alleged impact of revenue

from an acquired business’s pipeline on Tangoe’s organic recurring revenue.

(See, e.g. , Compl. ¶ 69). Plaintiff asserts that three businesses Tangoe acquired

had signed contracts with new customers “where the acquired company had not

begun performing.” ( Id. ¶ 12). Plaintiff claims that Tangoe treated these “existing

7 Plaintiff also alleges incorrectly that Tangoe “made an admission” that “suggests” it was inflating its organic growth rate. (Compl. ¶ 156). To the contrary, the quotation to which plaintiff refers merely states the obvious: that there are different ways to allocate revenue between organic and acquired.

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contracts ... that had been signed” as organic, inflating organic revenue by about

$4-6 million in three of the fiscal quarters within the Class Period. ( Id.). These

source-free pipeline allegations conflict with yet another conclusory paragraph of

the Complaint having no attributed source. (Compl. ¶ 55 (referring not to signed

contracts but to “customers which they had recently signed up”)). None of these

unsourced and inconsistent allegations are well-pleaded.

The inconsistency between these unsourced allegations is clarified by

another allegation actually attributed to a source. (Compl. ¶ 56 (alleging that “the

contracts with the new customers” – i.e. , those that Tangoe “had recently signed

up” (¶ 55) – “ closed within a quarter (at most) of Tangoe’s acquiring ” the

businesses) (emphasis added)). In other words, the source-attributed allegation

in paragraph 56 rebuts the unsourced allegations by asserting that these

contracts were not complete when the acquisitions closed. Thus, plaintiff has no

well-pleaded factual basis to assert that revenue from contracts signed by an

acquired business before an acquisition were considered organic.

Plaintiff refers to the very same contracts (those allegedly closed within a

quarter of an acquisition) in concluding without factual basis that specified

amounts of revenue were treated improperly as organic. ( Compare Compl. ¶ 12

(range of $4-6 million) with ¶ 55 (same range for HCL, Telwares, and ProfitLine)).

Thus, there is no factual basis to conclude that any pipeline revenue came from

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contracts executed before the acquisition of the businesses in question. 8 That is,

the Complaint lacks as a well-pleaded, plausible, or factual basis to assert that

Tangoe treated recurring revenue recognized by an acquired business pre-

acquisition as organic revenue post-acquisition – let alone that this was done in

any particular amount. This in turn makes clear, even without regard to the

obvious infirmities of the Complaint’s only source in this regard, that the

Complaint lacks a proper factual basis for its pipeline claims.

Of course, it cannot be overlooked that plaintiff’s sole source for these

allegations is inadequate, and that the only plausible reading of the information

this source allegedly supplied makes clear that he has no personal knowledge

about how Tangoe’s corporate finance staff allocated recurring revenue between

organic and inorganic. (Compl. ¶¶ 42-45). The Complaint supplies no plausible

factual basis to infer that a junior salesperson could have such personal

8 Paragraph 69 is consistent with the source-attributed allegation in paragraph 56, referring to the HCL piece of the supposed organic revenue inflation as “pipeline.” Pipeline is not contracted-for revenue, but rather is hoped-for revenue. See The Oxford Encyclopedic English Dictionary 1103 (Judy Pearsall & Bill Trumble eds., 3d ed. 1996) (defining “in the pipeline” as “awaiting completion or processing”).

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knowledge.9 To the contrary, it is clear that he did not. The Complaint asserts

that Guyotte told plaintiff that he was “skeptical” about the amount of organic

revenue because “[i]t seemed a little fishy” and “[t]he numbers seemed a little

off.” (Compl. ¶ 45). If Guyotte really knew how the finance department allocated

revenue, then he would not have expressed himself in terms so purely

speculative. 10

Whether information attributed to sources has any weight depends upon

the level of detail provided by the sources, the corroborative nature of the other

facts alleged, the coherence and plausibility of the allegations, the number of

sources, and their reliability. 11 Where a person in the source’s position would not

plausibly possess the information attributed to him, then the allegation has no

9 The few allegations in this regard that refer to a source are attributed to Josh Guyotte, an alleged low-level salesperson who left Tangoe in 2012. (Compl. ¶ 42). Guyotte was, consistent with the allegations in paragraphs 57 and 70 of the Complaint, a person responsible for making phone calls to generate prospects. Nowhere does the Complaint assert that Guyotte had access to Tangoe’s financial documents or accounting documents. Nor does the Complaint ever allege that Guyotte had personal knowledge about how Tangoe’s finance team accounted for recurring revenues or how they allocated organic revenues. Based on the allegations of the Complaint, Guyotte is a former employee who had personal knowledge, at most, of sales and pipeline (i.e. , hoped-for sales), not how the finance group allocated revenue between organic and inorganic. (Compl. ¶ 70). See infra Part III.B. Plaintiff’s other sources also did not even allegedly have responsibilities that plausibly would have given them personal knowledge of this information. ( Compare Compl. ¶¶ 38 (Becky Thompkins), 39 (Hugh Roger), 40-41 (Gina Oster), 46-48 (Chadd Bennett)). 10 Guyotte’s alleged perception that Tangoe was “gobbling up” revenue improperly is no more plausible. He lacks a factual basis to assert that the efforts of others, in another part of the Company, to allocate revenue constituted fraud. (Compl. ¶¶ 44-45). For example, the memoranda to which he allegedly had access that were highlighted in the Complaint do not even allegedly say anything about allocation of recurring revenue. See infra Part III.B. 11 See N.J. Carpenters Pension & Annuity Funds v. Biogen IDEC, Inc. , 537 F.3d 35, 51 (1st Cir. 2008); Novak v. Kasaks, 216 F.3d 300, 314 (2d Cir. 2000).

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more weight than a purely speculative allegation. 12 None of the information

attributed to Guyotte is of the kind that a junior salesperson – indeed any

salesperson – would be expected to have. Because Guyotte is the only source in

this regard; because the Complaint lacks facts showing why a person with his

responsibilities would know about organic revenue allocation; and because in

purporting to quote Guyotte the Complaint admits that he lacks hard information

about the extent of any impact from this supposed practice; the Complaint does

not have a factual basis to assert that this kind of recurring revenue allocation

occurred, or the amount of any such allocation.

b. Up-Selling and Cross-Selling

Plaintiff next contends that Tangoe improperly included “cross-sales” and

“up-sales” in organic revenue. (Compl. ¶¶ 57, 59). That is, he alleges that when

Tangoe sold its historic solutions to new customers introduced via an

acquisition, or when it sold an acquired business’s solutions to an historic

Tangoe customer, Tangoe included the sales in organic growth. (Compl. ¶ 54).

This cannot constitute fraud. Plaintiff does not contend that it was unclear to

market participants that Tangoe sought to “cross-sell and up-sell [its] broader

suite of solutions on [its] expanded customer base.” (Compl. ¶ 60). It makes no

12 See Pitney Bowes, 2013 WL 1188050, at *35 (Reform Act requires plaintiffs to plead specifics facts showing “the probability that a person in the position occupied by the source would possess the information alleged.”); Campo v. Sears Holding Corp. , 371 F. App’x 212, 216-17 (2nd Cir. 2010) (rejecting allegations where confidential witnesses had no personal knowledge of the individual defendants’ opinions or whether the individual defendants actually accessed and reviewed certain reports); In re Metawave Communs. Corp. Sec. Litig. , 298 F. Supp. 2d 1056, 1068 (W.D. Wash. 2003) (“The Court must be able to tell whether a confidential witness is speaking from personal knowledge, or merely regurgitating gossip...”) (internal quotation marks omitted).

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sense that either Tangoe or market participants would consider it unexpected for

the post-acquisition sales of the broader post-acquisition suite of Tangoe

solutions to be considered organic, particularly in light of Tangoe’s disclosed

interest in making such sales. ( Id.).

To the contrary, market participants had to be interested in the prospects

of the combined businesses to grow by making new sales of all solutions to all

customers – and not just the ability of Tangoe to sell its old solutions to

customers other than those introduced to Tangoe by acquisition. Because

treating revenue from up-selling and cross-selling as organic is consistent with

Tangoe’s disclosures, plaintiff’s conclusion that Tangoe allocated recurring

revenue in this manner does not state a claim.

Plaintiff also lacks factual support to contend that recurring revenue from

up-selling and cross-selling made a material difference. Plaintiff does not allege

that Tangoe actually sold a particular amount of an acquired company’s solutions

to Tangoe’s historic customers. (Compl. ¶¶ 57-60). Nor does plaintiff quantify

how much organic revenue was allegedly overstated due to allocating up-selling

and cross-selling to organic growth. ( Id.).

c. Platform Migration

Plaintiff has no plausible factual support to allege that after Tangoe

“migrate[d] customers from the acquired compan[ies’] to its platform,” it would

treat recurring revenue from these migrated customers as organic. (Compl. ¶ 61).

The Complaint identifies two sources for this conclusory allegation, neither of

which would be expected to have information about how the finance group

allocated the Company’s recurring revenue between organic and acquired. One

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source is the low-level salesperson (Guyotte) addressed above. Neither he nor

the other proffered source (Roger) allegedly participated in, saw, or otherwise

had personal knowledge about how Tangoe’s finance team allocated its recurring

revenues. (Compl. ¶¶ 39, 42-45, 62-64). Thus, they are both inadequate sources.

See supra Part II.B.3.a.

Roger allegedly worked at Telwares prior to Tangoe’s acquisition of a

portion of Telwares’ business, and later served as a “consultant” for Tangoe for a

few months. (Compl. ¶ 39). Roger did not allegedly have any role with Tangoe’s

finance team. ( Id.). He allegedly told plaintiff’s counsel no more than that after a

customer was migrated from the Telwares to the Tangoe platform, the Telwares

system no longer created the customer’s invoice. (Compl. ¶ 63-64). This says

nothing about how Tangoe’s finance team allocated Tangoe’s recurring revenue.

Thus, plaintiff’s claim reduces to nothing more than speculation (by Roger or

plaintiff himself) that Tangoe must have allocated recurring revenue by billing or

delivery platform. In addition, plaintiff does not even try to quantify how much

Tangoe allegedly overstated its organic revenues as a result of this supposed

practice.

4. Plaintiff’s Flawed and Irrelevant Deferred Revenues “Analysis”

Plaintiff’s deferred revenue allegations are a meaningless distraction.

(Compl. ¶¶ 86-106). Plaintiff’s premise is that Tangoe’s organic revenue numbers

must be wrong because, if they were not, Tangoe would have more deferred

revenue. This conclusion is derived from a series of assumptions that are

incorrect or lack a factual basis – a series of implausible allegations based on

assumptions for which there is no source. Despite their complexity, these

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baseless allegations – some of which are obviously wrong – are no more worthy

of deference on this motion than the conclusion the allegations seek to support.

According to Tangoe, its business model did not throw off significant

deferred revenue because its historic software licensing business model, which

did yield deferred revenue, was stagnant; and because Tangoe predominantly

billed its customers monthly, so new sales would not contribute much to deferred

revenue. (Transcript of the August 23, 2011 Tangoe Q2 2011 Earnings

Conference Call at 6-7 (Hornstine Decl. Ex. 3) (cited Compl. ¶ 35)). Plaintiff’s

absurd riposte is that: (1) the businesses Tangoe acquired to grow its new

business model did not generate significant deferred revenues; (2) Tangoe had

“many” contracts that conceivably could give rise to deferred revenue; and (3)

thus, the deferred revenue from new contracts of this sort had to have been

larger than any decline in deferred revenue associated with the old licensing

business model that was in decline (or any other factor depressing deferred

revenue that plaintiff does not mention). (Compl. ¶¶ 86-106). This obvious logical

fallacy makes no sense.

The Complaint’s accounting allegations make clear that whether a contract

to supply software and services over a term yields deferred revenue depends

17 -


upon how the customer is billed. (Compl. ¶¶ 87, 91). 13 Four examples help show

why plaintiff’s deferred revenue “analysis” is purely speculative.

First, consistent with the Complaint, if an annual contract commencing

January 1 permits up-front annual billing of $120, and the customer is billed on

January 1, and if the other factors necessary to record revenue are fulfilled, then

the biller should record deferred revenue in the full amount of the contract on

January 1 ($120). When it prepares its financial statements for the first quarter of

the year, however, the total amount of deferred revenue should decrease by one-

quarter ($30), which would be converted to revenue. Thus, the largest

contribution the contract could make to any quarter-end deferred revenue

balance would be $90 (at the end of the first quarter). At year-end, it would not

contribute to deferred revenue (which would be reduced to zero over the course

of the year as revenue in the amount of $120 is recorded).

Second, if the same contract allowed billing only for one-month in advance,

based on the same assumptions, there would be no deferred revenue at any

month or quarter end. Although a deferred revenue balance of $10 should be

booked at the beginning of each month, it would be fully converted to revenue

(amortized to zero) at the end of each month. Third, if the same kind of contract

13 See also Charles H. Meyer, Accounting and Finance for Lawyers in a Nutshell 128-29 (5th ed. 2012) (discussing accounting for deferred revenue generally); Joel G. Siegel & Jae K. Shim, Dictionary of Accounting Terms 17 (2d ed. 1995) (explaining that billing in advance creates deferred revenues); Compl. ¶ 88(b) (observing that no deferred revenues are generated where billing is not done in advance); Gary A. Porter & Curtis L. Norton, Financial Accounting: The Impact on Decision Makers 183 (7th ed. 2010) (“A deferred revenue means that cash has been received but the recognition of any revenue has been deferred until a later time.”).

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allowing billing monthly in advance was billed on the fifteenth of each month

(rather than the first), then at each month-end it would contribute $5 to deferred

revenue ($10 booked at mid-month and $5 converted to revenue by month end).

Fourth, if the same kind of contract was billed monthly in arrears ( e.g. , the first

bill was sent on February 1), the contract would yield no deferred revenue at all

(because when each bill was sent the revenue for the period being billed would

be fully earned).

What plaintiff perversely does to construct his deferred revenue allegations

is: first, to ignore that he has no basis in fact to model (1) the mix of contract and

billing terms that Tangoe experienced in any period; (2) the change in mix over

time; or (3) the impact of the actual or relative decline in deferred revenue from

the software license and maintenance business on overall deferred revenue; and

second, to illustrate the arithmetic result of assumptions that he has no basis to

conclude are true.

Plaintiff assumes no change in the mix of contract and billing terms over

time. (Compl. ¶¶ 89, 100-01). He has no factual basis for this assumption; and he

ignores both Tangoe’s disclosures that this is not true and the reality that a

different assumption would swamp his analysis. He also assumes without factual

basis that all new Tangoe contracts are billed in advance, and he assumes

erroneously that as a result all new contracts yield deferred revenue as of the last

day of each quarter in an amount equal to one full month’s billing. (Compl. ¶¶ 89,

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95, 98). He couples this speculative nonsense – all untethered to pleaded facts –

to other interpretive and analytical errors. 14 This does not state a claim.

If instead plaintiff had assumed, for example, that Tangoe historically had

contracts that billed in advance yearly, and others billed in advance monthly, but

that (as he alleges was true of the acquired businesses) most new business was

billed monthly in arrears (or even just that the percentage of contracts being

billed in advance was shrinking), then his conclusions about deferred revenue

and his fancy arithmetic would have to change markedly. These alternative

14 For example, plaintiff’s absurd assertion that Tangoe’s deferred revenue associated with recurring revenue should have been $18.5 million higher (Compl. ¶¶ 98-99) is not just the arithmetic representation of these many baseless assumptions; it suffers from a glaring logical error as well. Plaintiff’s syllogism is that Tangoe’s trailing twelve month recurring revenues increased by about $55.4 million from Q4 2010 through Q2 2012. (Compl. ¶¶ 93-94). Plaintiff then purports to calculate the amount of increase in recurring revenue each quarter. (Compl. ¶ 95). He then makes the admittedly speculative assumption (Compl. ¶ 100) that all increases in each quarter were from customers billed in advance; and as a result he assumes that Tangoe’s deferred revenue in each quarter should increase by one-third of the assumed quarterly increase in recurring revenue. (Compl. ¶¶ 95- 99). This ignores that the total alleged increase in recurring revenue (Compl. ¶¶ 93-94), and therefore the incremental quarterly increases (Compl. ¶ 95), includes recurring revenue from the businesses acquired by Tangoe. (Compl. ¶ 93 (referring only to Tangoe’s alleged “revenues”)). Thus, plaintiff’s deferred revenue “implied” shortfall allegations assume that the recurring revenue from the acquired businesses causes deferred revenue to increase to the tune of one-third of its contribution to the total increase in each quarter. This is an error because this assumption is inconsistent with plaintiff’s own allegation (Compl. ¶ 102) that the revenue from the acquired businesses throws off little deferred revenue. Because the contribution of the acquired businesses to recurring revenue was allegedly substantial (Compl. ¶ 102), plaintiff’s implied shortfall analysis is, even by his own account, substantially overstated. As another example, in paragraph 86, plaintiff incorrectly asserts that Tangoe’s “implementation fees” were recognized throughout half the life of its contracts. In fact, as Tangoe disclosed, Tangoe recognized these fees over two times the length of its contracts. (Form 424B1 Prospectus, filed by Tangoe with the SEC on July 27, 2011 at 46 (Hornstine Decl. Ex. 2)).

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assumptions are consistent with all of the Tangoe disclosures to which plaintiff

refers as he advances the contrary (but factually unsupported) assumptions

embedded in the Complaint. (Compl. ¶¶ 89, 100-01). Crediting any of these more

plausible assumptions – e.g. , growth in new recurring revenue contracts mostly

billed in arrears or replacement upon renewal of contracts previously billed in

advance – would lead to a deferred revenue balance that decreases or increases

in a small way over time. On these assumptions, Tangoe’s relatively flat deferred

revenue balance makes perfect sense. It also makes sense that where deferred

revenue from the waning licensing and maintenance business is in relative

decline, this would offset any increase in deferred revenue from new business.

It is not, of course, necessary to credit these assumptions to reject

plaintiff’s claim. It is not enough for plaintiff to posit a reality that conceivably

could be true. Indeed, the difference between possibility and plausibility is the

kind of factual assertions absent from the Complaint. Ashcroft v. Iqbal, 556 U.S.

662, 678 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)).

Because plaintiff lacks a non-speculative factual basis either to support his own

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assumptions or to rebut others that are plainly consistent with Tangoe’s

disclosures, plaintiff’s deferred revenue speculation must be ignored. 15

C. StreetSweeper and Copperfield Launch a “Short Attack”

On August 28, 2012, the sponsors of an internet website called

thestreetsweeper.org launched a short attack designed to depress the market

price of Tangoe stock. (Compl. ¶ 149). StreetSweeper is the contrivance of

Hunter Adams – who was convicted of securities fraud ( U.S. v. Winston, et al. ,

Docket No. 1:00-cr-01248-ILG (E.D.N.Y.)) and who has ties to the Gambino crime

15 Tangoe’s financial disclosures are consistent with the observation that the growing part of its business throws off little deferred revenue. In its IPO documents, Tangoe disclosed its deferred revenues for prior years. They were about $6.2 million in 2008 and $6.9 million in 2009 (an 11 percent increase). (Hornstine Decl. Ex. 2 at 41). Over this same timeframe, total revenues grew from about $37.5 million to $55.9 million (a 49 percent increase). ( Id. at 66). This is before the disclosed change in business model took hold. Because Tangoe’s deferred revenues did not rise much even before Tangoe began acquiring other companies, plaintiff’s deferred revenue allegations are implausible. In addition Tangoe disclosed a decline in the proportion of clients it billed in advance. In its 2011 Prospectus and quarterly SEC filings, Tangoe disclosed that it invoiced “a majority of [its] customers in advance;” but later reports (from 2012 and 2013) reflect that Tangoe invoiced “many of [its] customers in advance.” ( Compare Hornstine Decl. Ex. 2 at 43; Form 10-Q Quarterly Report, filed by Tangoe with the SEC on September 9, 2011 at 27 (Hornstine Decl. Ex. 4); Form 10-Q Quarterly Report, filed by Tangoe with the SEC on November 14, 2011 at 23-24 (Hornstine Decl. Ex. 6); with Form 424B1 Prospectus, filed by Tangoe with the SEC on March 29, 2012 at 39 (Hornstine Decl. Ex. 7); Form 10-Q Quarterly Report, filed by Tangoe with the SEC on May 15, 2012 at 29 (Hornstine Decl. Ex. 9); Form 10-Q Quarterly Report, filed by Tangoe with the SEC on August 14, 2012 at 30 (Hornstine Decl. Ex. 10); Form 10-Q Quarterly Report, filed by Tangoe with the SEC on November 14, 2012 at 32 (Hornstine Decl. Ex. 14); Form 10-Q Quarterly Report, filed by Tangoe with the SEC on May 10, 2013 at 27 (Hornstine Decl. Ex. 17); Form 10-Q Quarterly Report, filed by Tangoe with the SEC on August 9, 2013 at 31 (Hornstine Decl. Ex. 18)).This change of contract mix would depress deferred revenue growth (as would declines in deferred revenue from the software licensing and maintenance business). Moreover, as illustrated above and as disclosed by Tangoe, contracts billed in advance need not throw off much deferred revenue.

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family (see United States v. Carneglia , 403 F. App’x 581, 584 (2d Cir. Dec. 17,

2010)). 16 StreetSweeper itself emphasized that that the purpose of its report was

to depress demand for Tangoe’s stock so that those affiliated with StreetSweeper

could profit from a large short position they had taken in Tangoe stock. ( Tangoe:

Dancing on an Old Grave, Digging a New Hole? , The StreetSweeper (Aug. 28,

2012), www.thestreetsweeper.org at 8 (“StreetSweeper Report”) (Hornstine Decl.

Ex. 11)). As StreetSweeper admitted, before publishing the article it took a short

position in Tangoe to the tune of more than $2.5 million, and within nine days of

the attack StreetSweeper profited by approximately $475,000. ( Id.).

StreetSweeper also – presumably in an attempt to create further uncertainty in

the minds of investors – disclosed that it intended to publish another attack at an

undisclosed future time. ( Id. at 2). StreetSweeper made clear – through a number

of internet hyperlinks embedded in it its attack – that it had no information that

had not previously been made available to the public in SEC filings, press

releases, and other publicly available sources. ( Id. at 1-8).

16 See Clean Up Crew, THE STREETSWEEPER , http://thestreetsweeper.org/cleanupcrew.html (last visited Nov. 18, 2013) (Hornstine Decl. Ex. 19) (StreetSweeper acknowledges that Mr. Adams’s “career ended in 2001, when government investigators accused him of manipulating worthless penny stocks” and that he “pled guilty to two conspiracy charges -- for securities fraud and money laundering -- and served time in prison for his crimes. Years later, he pled guilty to racketeering charges...”).

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Nine days after the StreetSweeper article was published – and two days

after the end of the putative Class Period – another short seller attacked. 17

(Compl. ¶ 151). The author (who remains anonymous) – using the pseudonym

Copperfield Research – advanced opinions concerning organic growth and many

other issues based exclusively on information previously disclosed by Tangoe in

“SEC documents and other corporate filings.” ( Tangoe (TNGO) – The

Misrepresented Dance , Copperfield Research (September 6, 2012 ) at 2

(“Copperfield Report”) (Hornstine Decl. Ex. 12)). Copperfield quotes extensively

from actual analysts who disagreed with StreetSweeper’s similar assertions,

particularly as to organic revenue. For example, Copperfield cites one analyst

who opined despite the StreetSweeper report that Tangoe “maintains 20%-plus

organic growth,” and another who wrote that “the current 20% [organic growth]

ballpark looks achievable.” ( Id. at 6).

D. The Challenged Statements

Plaintiff challenges five statements he attributes to Tangoe, asserting

without factual basis that in various analyst calls Mr. Subbloie or Mr. Martino

“overstated the proportion of Tangoe’s revenue growth which is organic,” and

17 Because the authors of the Copperfield report stood to reap a financial windfall from this attack, another analyst cited in the Complaint (¶¶ 22, 153) called the StreetSweeper and Copperfield articles “biased.” (Scott Sutherland, Wedbush, Tangoe (TNGO - OUTPERFORM): Proceeding with Caution as Allegations Are a Concern, but Likely Overblown; Maintain OUTPERFORM and $28 PT (September 10, 2012) at 1 (“Wedbush Report”) (Hornstine Decl. Ex. 13)).

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that in one quarter they should have corrected an analyst who himself concluded

that Tangoe had favorable organic growth. 18 (Compl. ¶¶ 35, 37).

III. ARGUMENT

Under Rule 8, to “survive a motion to dismiss, a complaint must contain

sufficient factual matter, accepted as true, to ‘state a claim to relief that is

plausible on its face.’” Iqbal, 556 U.S. at 678 (quoting Twombly, 550 U.S. at 570).

“A pleading that offers ‘labels and conclusions’ or ‘formulaic recitation of the

elements of a cause of action will not do.’ Nor does a complaint suffice if it

tenders ‘naked assertion[s]’ devoid of ‘further factual enhancement.’” Id.

(quoting Twombly, 550 U.S. at 555, 557).

18 The transcript of a November 8, 2011 conference call reflects that an analyst – not a defendant here – asks: “I know you don’t provide an organic number, we make an attempt at that. And my math would suggest that this is the best organic growth quarter [3Q 2011] you’ve had on both the total revenue and recurring basis since the financial crisis started. So the question is with regards to the two most recent acquisitions, Telwares and HCL, what are do you finding [sic] on the migrations you have done? Is this a catalyst for up-selling? Is that part of the upticking organic growth? And how much of that base do you actually think you can migrate?” (Transcript of the November 8, 2011 Tangoe Q3 2011 Earnings Conference Call at 6 (Hornstine Decl. Ex. 5)). Plaintiff asserts that Tangoe should have “correct[ed]” the analyst. (Compl. ¶ 35). In addition to the lack of factual basis for the assertion that the analyst was wrong, defendants had no duty to do so and plaintiff fails to plead a factual basis otherwise. “[S]ecurities issuers are not liable for statements or forecasts disseminated by securities analysts or third parties unless they have sufficiently entangled [themselves] with the analysts’ forecasts [so as] to render those predictions attributable to [the issuers.]” Teamsters Affiliates Pension Plan v. Walgreen Co. , 2010 WL 3894149, at *3 (N.D. Ill. Sept. 29, 2010) (internal quotation marks omitted); see also In re Travelzoo Inc. Sec. Litig. , 2013 WL 1287342, at *7 (S.D.N.Y. Mar. 29, 2013) (“As Defendants did not ‘sufficiently entangle[ ] [themselves] with the analysts’ forecasts’ or ‘place its imprimatur, expressly or impliedly, on the analysts’ projections’, they did not owe a duty to correct or modify the analysts’ projections.”).

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A complaint alleging violations of Section 10(b) and Rule 10b-5 must also

meet the heightened pleading standard of Fed. R. Civ. P. 9(b) and the Private

Securities Litigation Reform Act of 1995 (the “Reform Act”), 15 U.S.C. § 78u-4(b).

See Tellabs, Inc. v. Makor Issues & Rights, Ltd. , 551 U.S. 308, 321 (2007). Under

Rule 9(b), a plaintiff “must state with particularity the circumstances constituting

fraud or mistake.” Fed. R. Civ. P. 9(b). “To satisfy this requirement the plaintiff

must (1) specify the statements that the plaintiff contends were fraudulent, (2)

identify the speaker, (3) state where and when the statements were made, and (4)

explain why the statements were fraudulent.” Anschutz Corp. v. Merrill Lynch &

Co., 690 F.3d 98, 108 (2d Cir. 2012); Pitney Bowes, 2013 WL 1188050, at *14.

The Reform Act requires a complaint to (1) “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 on information

and belief, ... shall state with particularity all facts on which that belief is formed;”

and (2) plead facts “giving rise to a strong inference that the defendant acted with

the required state of mind.” 15 U.S.C. § 78u-4(b)(1)(B), (b)(2)(A). See Tellabs , 551

U.S. at 321; Pitney Bowes, 2013 WL 1188050, at *14-15.

To state a claim under section 10(b) of the Exchange Act, plaintiff must

show: “(1) a material misrepresentation (or omission); (2) scienter, i.e. , a wrongful

state of mind; (3) a connection with the purchase or sale of a security; (4)

reliance; (5) economic loss; and (6) loss causation[.]” Kleinman v. Elan Corp.,

PLC, 706 F.3d 145, 152 (2d Cir. 2013).

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A. Plaintiff Does Not Adequately Plead That Any of the Challenged Statements Were Materially False or Misleading

The Complaint must be dismissed because it lacks particular facts showing

that any challenged statement was materially false or misleading. See Rombach

v. Chang, 355 F.3d 164, 174 (2d Cir. 2004) (to satisfy the Reform Act “plaintiffs

must do more than say that the statements ... were false and misleading; they

must demonstrate with specificity why and how that is so.”). As this Court has

held, plaintiff cannot plead fraud with conclusory allegations of falsity. See

Pitney Bowes, 2013 WL 1188050, at *27 (dismissing claim based on allegations of

falsity that were “conclusorily pled under Iqbal and far too bare to meet the

particularity requirements of the Rule 9(b) and the [Reform Act]”). Conclusory

allegations also are not “facts establishing the materiality” of allegedly false

statements. See Ill. State Bd. of Inv. v. Authentidate Holding Corp. , 369 F. App’x

260, 264 (2d Cir. 2010).

Plaintiff’s claim rests on two sets of factually unsupported conclusions: (1)

an unreasonable and unsupported definition of organic growth, and (2)

unreasonable inferences, based on deficient sources, to the effect that – in

amounts generally left to the imagination – Tangoe inflated organic recurring

revenue by allocating revenue inconsistently with plaintiff’s own definition.

Plaintiff’s definition (Compl. ¶ 5) is a conclusion without particular factual

support. So too are plaintiff’s allegations that Tangoe’s method of allocating

revenue differed from plaintiff’s conclusory definition, or that any such deviation

was in a particular or material amount. Plaintiff also fails to plead facts showing

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that Tangoe’s organic growth disclosures were inconsistent with a consensus, or

even a reasonable, definition of organic growth.

As shown above, there is no factual basis for plaintiff to assert that Tangoe

ever treated recurring revenue from contracts signed by an acquired business

before an acquisition as organic recurring revenue; or that it ever treated

recurring revenue of an acquired business as organic recurring revenue when

acquired contracts began to be serviced from Tangoe’s platform. See supra Part

II.B.2. Plaintiff does not hazard a guess as to the amount of supposed inflation

due to migration, and his allegations concerning the amount of pre-acquisition

revenue supposedly included in organic revenue have no source (for one of three

acquisitions) or the same inadequate source (for the other two). 19 See supra Part

II.B.3.a. Thus, neither of these sets of conclusions is sufficient to show a false

statement or that any material amount of inflation ever occurred. See supra Part

II.B.

Plaintiff’s allegations about how Tangoe treated revenue from contracts

signed after an acquisition, for upgrades or for new sales to acquired customers

of Tangoe solutions or to Tangoe customers of acquired solutions, are no more

factually well supported. See supra Part II.B.3.b-c. The Complaint in any event

lacks facts to quantify the effect of any such contracts on Tangoe’s disclosed

19 Plaintiff attributes the HCL and ProfitLine pipeline estimates to Guyotte, but Plaintiff does not attribute the Telwares estimate ($1-1.5 million in pipeline) to any source or provide any fact to substantiate this conclusory allegation. ((Compl. ¶¶ 72-77).

SKIM


organic revenue. Id. Accordingly, these allegations also do not state a claim. 20

Indeed, they make no sense (and they therefore are implausible).

Omnicom I supports dismissal. 2005 WL 735937, at *1, *5. Plaintiff there

alleged that Omnicom misled investors by calculating organic growth differently

than its competitors but nevertheless comparing its organic growth rate to that of

its competitors. The Court dismissed the complaint, noting that there was no

single definition of “organic growth” and holding that plaintiff had not shown that

Omnicom had done anything misleading by using its own definition. Id. at *5

(citing AIG Global Sec. Lending Corp. v. Banc of America Sec. LLC , 254 F. Supp.

2d 373, 385-86 (S.D.N.Y. 2003)).21 The Omnicom I court further held that because

20 See, e.g. , Garber v. Legg Mason, Inc. , 537 F. Supp. 2d 597, 613 (S.D.N.Y. 2008), aff’d, 347 F.App’x 665 (2d Cir. Sept. 30, 2009) (finding no materiality where allegations concerning certain expenses failed “to describe in any way the magnitude of the increase [in expenses], the initial projections, or by how much the actual costs exceeded the internal budget.”); Lapiner v. Camtek, Ltd. , 2011 WL 3861840, at *5 (N.D. Cal. Aug. 31, 2011) (dismissing complaint for failure to specify amount of improper sales that were allegedly not disclosed); In re Trex Co., Inc. Sec. Litig. , 212 F. Supp. 2d 596, 611 (W.D. Va. 2002) (dismissing allegations of improper revenue recognition where plaintiffs failed to identify “the amount or percentage of revenues” at issue); In re ICN Pharms., Inc. Sec. Litig. , 299 F. Supp. 2d 1055, 1065 (C.D. Cal. 2004) (no securities fraud claim where plaintiffs “do not specify the amount by which” assets were impaired). 21 In AIG, the court held it permissible for the defendant to compare itself to competitors who used different accounting conventions where plaintiffs had not shown the defendants’ own conventions were “not acceptable.” 254 F. Supp. 2d at 385-86. Consistent with Omnicom I and AIG, because plaintiff here has failed to show that there was an industry-wide understanding about “organic growth,” Tangoe could not commit fraud by using its own reasonable definition. See also In re Xerox Corp. Sec. Litig. , 935 F. Supp. 2d 448, 489 n.8 (D. Conn. 2013) (“A company has no duty to disparage its own competitive position in the market where it has provided accurate hard data from which analysts and investors can draw their own conclusions about the company’s condition and the value of its stock.”); In re Rigel Pharm., Inc. Sec. Litig. , 697 F.3d 869, 878-79 (9th Cir. 2012) (affirming dismissal of securities fraud suit where plaintiff disagreed with method of statistical analysis utilized by pharmaceutical company).

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the plaintiff failed to plead the extent of any overstatement of organic growth

using its preferred definition, and therefore why any overstatement of organic

growth was material in amount, the Complaint failed for a want of particularity. 22

Id.

Just as it is not enough under the Reform Act to allege that a company

inflated its organic growth rate by some indeterminate amount, Omnicom I, 2005

WL 735937, at *5; AIG, 254 F. Supp. 2d at 385, it also is insufficient to plead a

conclusion as to an amount that is not supported by well-pleaded facts. See

Iqbal, 556 U.S. at 678; Pitney Bowes, 2013 WL 1188050, at *13-14. Here, plaintiff

unsuccessfully tries both tactics. He says nothing at all about the numerical

impact of migration, up-selling, and cross-selling on the disclosed organic

growth rate; and he relies only on an inadequate source for the amount of

inflation he asserts with respect to contracts allegedly signed before an

acquisition. Thus, plaintiff has not provided a well-pleaded, factual basis for his

conclusions that a material false statement was ever made. 23

22 This result is consistent with a body of law holding that securities fraud allegations based on false or misleading sales, revenues, and other financial metrics must be quantified with reasonable particularity; otherwise, they do not establish materiality. See supra note 20. 23 See Garber, 537 F. Supp. 2d at 613 (dismissing for failure to plead materiality where plaintiff failed to describe magnitude of the increase in expenses); In re Hansen Natural Corp. Sec. Litig. , 527 F. Supp. 2d 1142, 1161 (C.D. Cal. 2007) (dismissing for “fail[ure] to quantify the financial impact of the alleged backdating or the alleged GAAP violations” because “[w]hen the financial import of alleged misstatements is de minimis , those alleged misstatements are immaterial as a matter of law”).

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B. Plaintiff Fails to Satisfy the Stringent Standards of the Reform Act for Pleading a Strong Inference of Scienter

The Complaint also must be dismissed because it fails to adequately plead

scienter. The Reform Act “requires plaintiffs to state with particularity both the

facts constituting the alleged violation, and the facts evidencing scienter, i.e. , the

defendant’s intention to deceive, manipulate, or defraud.” Tellabs, 551 U.S. at 313

(internal quotation marks omitted); see also 15 U.S.C. § 78u-4(b)(2). The

Complaint must be dismissed unless “a reasonable person would deem the

inference of scienter cogent and at least as compelling as any opposing inference

one could draw from the facts alleged.” Slayton v. Am. Exp. Co., 604 F.3d 758,

766 (2d Cir. 2010) (emphasis added); Pitney Bowes, 2013 WL 1188050, at *31.

After months of investigation, plaintiff’s best efforts have produced nothing

more than a series of conclusory and convoluted allegations that fail to articulate

any specific facts permitting a strong and cogent inference of scienter. As an

initial matter, for the same reason no statement was false or misleading, no

defendant could have acted with intent to deceive as to Tangoe’s organic revenue

growth. See Pitney Bowes , 2013 WL 1188050, at *33 (no intention to deceive

where plaintiff “failed to allege with particularity facts which if proved would

establish that the statements were false when made”). Plaintiff has no factual

basis to assert that Tangoe ever included in organic growth either post-migration

revenue or revenue from contracts signed with customers of acquired

businesses prior to an acquisition. It would have been perfectly reasonable for

Tangoe to include in organic revenue the recurring revenue obtained from new

contracts executed after an acquisition with old customers of Tangoe or an

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acquired business. Thus, plaintiff fails to show that any defendant intended to

defraud. Plaintiff’s other tired bases to allege scienter are no better:

Status Allegations . Plaintiff alleges that Mr. Subbloie and Mr. Martino, “[b]y

virtue of their positions at Tangoe” as “senior managers and/or directors,” must

have known – or were reckless in not knowing – that their statements were

materially false or misleading. (Compl. ¶ 173). Such “allegations fall far short of

pleading a compelling inference (indeed, any inference) of conscious

misbehavior or recklessness ...” Pitney Bowes , 2013 WL 1188050, at *34; see also

In re Gildan Activewear, Inc. Sec. Litig. , 636 F. Supp. 2d 261, 273 (S.D.N.Y. 2009)

(“general allegations that, by virtue of their senior positions at [the company], the

Individual Defendants necessarily had access to nonpublic information, are

insufficient to show recklessness under the law of this Circuit”). 24

Vague Descriptions of Documents. Plaintiff’s reference to sales and

pipeline reports does not support a strong inference of scienter. For example, he

asserts that Mr. Subbloie and Mr. Martino received weekly memoranda that “set

out every single contract in which Tangoe expected to earn revenue, and for each

contract provided the customer’s name, the revenue amount, the sales

representative, the sales representative’s manager, the date of the contract, and if

24 The mere fact that plaintiff alleges the conclusion that “organic growth” is an important metric to SaaS companies (Compl. ¶¶ 113-18) does not make it so. See supra note 3. In any event, such allegations are insufficient to show scienter by any defendant. See Pitney Bowes, 2013 WL 1188050, at *25 (rejecting “allegations with a host of facts about [company’s] business operations prior to and during the Class Period that are in large part anecdotal, localized and vague”). Even if this metric were important to Tangoe, plaintiff has not pleaded that Tangoe made unreasonable allocations to organic revenue or shown how much it was overstated in any way.

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it was closed or still pending.” (Compl. ¶ 124). This says nothing about scienter

(or falsity) because the documents are not alleged to discuss how much of this

revenue would later be determined by finance staff to be organic revenue. See

Pitney Bowes, 2013 WL 1188050, at *34 (“vague and generalized allegations of the

mere existence of reports” fails to establish scienter); In re eSpeed, Inc. Sec.

Litig. , 457 F. Supp. 2d 266, 292 (S.D.N.Y. 2006) (“fail[ure] to point to specific

reports contradicting defendants’ public statements” is “ordinarily fatal to”

allegations of scienter); Plumbers & Steamfitters Local 773 Pension Fund v.

Canadian Imperial Bank of Commerce , 694 F. Supp. 2d 287, 299 (S.D.N.Y. 2010)

(“Plaintiffs should, but do not, provide specific instances in which Defendants

received information that was contrary to their public declarations”). 25

Guyotte’s opinion that Tangoe must have “gobbled up” revenues of

acquired businesses (Compl. ¶ 128) also says nothing about scienter or falsity.

Guyotte does not even purport to have any information about the manner in

which organic revenue was determined by Tangoe finance staff. Moreover,

Guyotte’s alleged personal skepticism about the “claim that Tangoe’s organic

rate was above 20%” (Compl. ¶ 45) says something significant about Guyotte’s

lack of personal knowledge, but nothing about the good faith of the defendants.

See Campo, 371 F. App’x at 217 (rejecting sources because “they had no

25 The boilerplate allegation that “Defendants acted with reckless disregard for the truth in that they failed or refused to ascertain and disclose such facts as would reveal the materially false and misleading nature of the statements made, although such facts were readily available to Defendants,” is circular and inadequate. (Compl. ¶ 173). The Complaint lacks any information about what facts were known to Mr. Subbloie and Mr. Martino that were inconsistent with the disclosures.

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personal knowledge of [defendants’] opinions”); Malin v. XL Capital Ltd., 499 F.

Supp. 2d 117, 141-42 (D. Conn. 2007), aff’d, 312 F. App’x 400 (2d Cir. 2009)

(rejecting insufficiently particularized witness allegations); In re Elan Corp. Sec.

Litig. , 543 F. Supp. 2d 187, 220 (S.D.N.Y. 2008) (finding that witness’s statement

was “far too vague with respect to ... what conclusions any defendant actually

reached” to “support an inference of scienter, much less a ‘strong inference’”).

Settlement of Prior, Unrelated Litigation . The existence of a fourteen year

old settlement agreement as to a different company that employed two of the

defendants (Compl. ¶¶ 133-40) logically says nothing in this case about scienter.

See Union Cent. Life Ins. Co. v. Ally Fin., Inc. , 2013 WL 2154220, at *2 (S.D.N.Y.

Mar. 29, 2013) (“Plaintiffs’ citation to a number of lawsuits and government

investigations involving the ... Defendants provides no evidence of scienter” even

where company admitted liability). 26 Indeed, the predicate for the proposed

inference is inadmissible. See Berkovich v. Hicks , 922 F.2d 1018, 1022 (2d Cir.

1991) (“wrongful acts evidence may not be admitted merely to show the

defendant’s propensity to commit the act in question”).

Edison Ventures and Mr. Golding’s Relationship with Tangoe. Plaintiff next

alleges that Edison Ventures – an early investor in Tangoe – financially benefitted

from Tangoe’s IPO and by selling its stake in the Company (Compl. ¶¶ 141-43),

26 Even allegations concerning pre-class period events at the same company have been held irrelevant to scienter. See In re Ceridian Corp. Sec. Litig. , 542 F.3d 240, 247-48 (8th Cir. 2008) (rejecting pre-class period allegations where nothing tied problems the witness saw in 2001 to issues that arose in 2004 with the level of specificity required by the Reform Act); Malin, 499 F. Supp. 2d at 141 (rejecting pre-class period scienter allegations because “there is no allegation that these problems continued into the Class Period”).

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and that Mr. Subbloie said that he “loves” Edison’s investing philosophy and

that the Company had a “great relationship” with Mr. Golding. (Compl. ¶ 144).

This is irrelevant because it does not suggest that any defendant had a motive to

defraud. See Kalnit v. Eichler, 264 F.3d 131, 139 (2d Cir. 2001) (“[P]laintiffs must

assert a concrete and personal benefit to the individual defendants resulting from

the fraud.”); see also In re Prestige Brands Holding, Inc ., 2006 WL 2147719, at *7

(S.D.N.Y. July 10, 2006) (that an early investor “sold some of its stock in

connection with the IPO” is insufficient to plead fraud given that early investors

“routinely sell stock in IPOs, and such sales raise no inference of fraud”).

General Corporate Motivations . Plaintiff also asserts that Mr. Subbloie and

Mr. Martino were motivated to commit fraud so that Tangoe could use the

proceeds of an IPO to “pay down its debt.” (Compl. ¶ 129). Put differently, Mr.

Subbloie and Mr. Martino allegedly wanted to make Tangoe look “profitable”

(Compl. ¶ 3) so that the Company would get a good valuation in its public

offering. (Compl. ¶ 130). The desire to pay debt or succeed in business is

common to all corporate directors and executives of a company about to go

public. As plaintiff surely knows, the Second Circuit and this Court have rejected

such allegations. See Kalnit, 264 F.3d at 139 (listing the following motives as

insufficient to establish scienter: “(1) the desire for the corporation to appear

profitable and (2) the desire to keep stock prices high to increase officer

compensation,”); Pitney Bowes, 2013 WL 1188050, at *32 (rejecting allegations

that a defendant was motivated to overstate financial projections or make

material omissions “by a desire to reduce its debt burden, or otherwise reduce

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borrowing costs”) (quoting In re GeoPharma, Inc. Sec. Litig. , 399 F. Supp. 2d 432,

450 (S.D.N.Y. 2005)).

Stock Sales . The Complaint utterly fails to show that any of defendants’

stock sales reflect a motive to defraud. Neither the Complaint nor its convoluted

“Exhibit 1” provides the context required to assess whether defendants’ stock

sales were unusual. This is fatal to plaintiff’s attempt to plead scienter based on

stock sales because only “unusual” stock sales support an inference of scienter.

Acito v. IMCERA Grp., Inc. , 47 F.3d 47, 54 (2d Cir. 1995). Factors considered in

determining whether trading activity is unusual include “the amount of profit from

the sales, the portion of stockholdings sold, the change in volume of insider

sales, and the number of insiders selling.” Malin, 499 F. Supp. 2d at 133; see also

Leventhal v. Tow, 48 F. Supp. 2d 104, 114 (D. Conn. 1999) (stock sales allegations

are “of limited probative value without a description of how the shares sold relate

to: (1) the seller’s total holdings; (2) the total number of outstanding shares; and

(3) the effect of the sale on the market price of the securities.”).

Defying this well settled case law, plaintiff does not provide any details as

to defendants’ trading patterns, timing or sales, or total holdings, including

percentages of holdings sold or retained. Malin, 499 F. Supp. 2d at 151 (rejecting

insider stock sales allegations as insufficient where plaintiff provides no context

to evaluate sales). There is, of course, a reason for plaintiff’s omissions. An

appropriate analysis of the trading of the individual defendants in fact negates

any inference of scienter.

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Mr. Subbloie’s total holdings – his shares of Company stock plus vested

options to purchase Company stock – increased during the Class Period by

38,225 shares (a percent increase of about 1.76 percent). See Tipper Decl. ¶

100.27 This fact alone strongly suggests an absence of scienter. See Malin, 499

F. Supp. 2d at 152 (finding that an increase in total holdings is “a fact wholly

inconsistent with fraudulent intent”); In re Medtronic Inc., Sec. Litig. , 618 F. Supp.

2d 1016, 1037 (D. Minn. 2009) (allegations of suspicious insider trading are

weakened when insiders increase their stock holdings during the class period).

Mr. Martino’s stock trading also was not suspicious, and plaintiff supplies

no context to suggest otherwise. His total holdings in Tangoe declined by only

2.51 percent during the Class Period, and he sold less than 20 percent of his total

pre-Class Period holdings. See Tipper Decl. ¶¶ 55-56. Such percentages do not

give rise to an inference of scienter. See In re Vantive Corp. Sec. Litig., 283 F.3d

1079, 1094 (9th Cir. 2002), abrogation on other grounds recognized by S. Ferry

LP, No. 2 v. Killinger, 542 F.3d 776, 784 (9th Cir. 2008) (defendant’s sale of “26% of

his shares and vested options during the fifteen-month class period, for

approximately $900,000...[is not] “terribly ‘unusual’ or suspicious” in percentage

or amount); Osher v. JNI Corp. , 302 F. Supp. 2d 1145, 1165 (S.D. Cal. 2003) (sales

of 20.76%, 21.36%, 27.25% of holdings were not suspicious given broader

context).

27 It is appropriate for this court to consider on a motion to dismiss the defendants’ trading history, which is “documented in public filings required to be filed with the SEC.” See In re Medtronic Inc., Sec. Litig. , 618 F. Supp. 2d 1016, 1037 n.21 (D. Minn. 2009).

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People who are compensated with stock options must exercise the options

and sell shares in order to obtain the compensation they have earned. See City

of Roseville Employees' Ret. Sys. v. Horizon Lines, Inc. , 713 F. Supp. 2d 378, 396

(D. Del. 2010) aff’d, 442 F. App'x 672 (3d Cir. 2011) (“The mere fact that defendants

had access to stock options and were compensated according to the

performance of their company, both of which are ubiquitous in corporate

America, can hardly form the basis for a strong inference of scienter”); Pugh v.

Tribune Co. , 521 F.3d 686, 695 (7th Cir. 2008) (rejecting generalized allegations

“that stock sales, exercise of options, and receipt of bonuses” creates a strong

inference of scienter). This too is not unusual.

The Complaint also alludes to sales in connection with the initial and

secondary public offerings, but this too is insufficient to pass muster. See

Friedman v. Rayovac Corp. , 291 F. Supp. 2d 845, 856-57 (W.D. Wis. 2003) (sales of

36% and 52% made during offering not suspicious given that insiders were

contractually restricted from selling stock except during public offerings, sales

were similar to insiders’ sales during previous secondary offering, and insiders

retained a significant portion of their stock). 28

Plaintiff also pretends that Mr. Golding sold his own Tangoe stock. As the

SEC filings that are the basis for these allegations make clear, Mr. Golding held

no shares of the Company during the Class Period; he sold no shares of the

Company during the Class Period; and he disclaimed direct beneficial ownership

28 As noted in the StreetSweeper article, the insiders’ stock was also tied up for a lockup during part of the Class Period. (Hornstine Decl. Ex. 11 at 1). The lock-up lasted for nine months out of the approximately thirteen months of the Class Period. (Hornstine Decl. Ex. 2 at 162; Hornstine Decl. Ex. 7 at 147).

SOM


in Edison’s holdings in Tangoe. The fact that Edison held Tangoe stock that Mr.

Golding was required to refer to in his filings (despite a lack of beneficial

ownership) says nothing about his scienter.29 See Nathenson v. Zonagen Inc.,

267 F.3d 400, 421 n.19 (5th Cir. 2001) (rejecting insider trading allegations and

critiquing plaintiff’s attribution of sales to defendant “by virtue of his affiliation

with [the investment fund]” where defendant had “disclaim[ed] beneficial

ownership of the shares”). 30

Corporate Scienter. The absence of a basis to conclude that Mr. Subbloie

and Mr. Martino had scienter is fatal to the claim against Tangoe. Plaintiff does

not even attempt to allege that any other Tangoe official had scienter. See, e.g. ,

Pitney Bowes, 2013 WL 1188050, at *32 (rejecting allegation that corporation had

motive to commit securities fraud for same reason motive allegations against

individual defendants failed); Teamsters Local 445 Freight Div. Pension Fund v.

Dynex Capital Inc. , 531 F.3d 190, 196 (2d Cir. 2008) (complaint failed to raise

strong inference of scienter against corporate defendant based on claim that

individual defendants had access to unidentified “reports”).

29 As explained in Mr. Golding’s SEC filings, he had no direct holdings in Tangoe stock, but Edison, in which Mr. Golding has an interest, held stock. However, Mr. Golding disclaimed beneficial ownership in these shares. Tipper Decl. ¶¶ 6, 12. 30 See also In re Visual Networks, Inc. , 217 F. Supp. 2d 662, 669 (D. Md. 2002) (non-defendant executives’ stock sales “irrelevant'” to plaintiffs’ attempts to establish scienter); In re First Union Corp. Sec. Litig. , 128 F. Supp. 2d 871, 898 (W.D.N.C. 2001) (failure to allege non-defendant insider made any actionable misstatement rendered his trading “irrelevant'” as a basis for inferring scienter); Plevy v. Haggerty, 38 F. Supp. 2d 816, 835 (C.D. Cal. 1998) (declining to consider allegations of trading by “nondefendants that Plaintiff, for whatever reason, decided to include in the stock table in the CAC”).

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C. Plaintiff Fails to Plead Loss Causation

To state a claim under section 10(b) or Rule 10b-5, plaintiff must adequately

plead loss causation, the causal connection between the defendants’ alleged

misrepresentation and a loss. Dura Pharm., Inc. v. Broudo , 544 U.S. 336, 342

(2005); Lentell v. Merrill Lynch & Co., Inc. , 396 F.3d 161, 177 (2d Cir. 2005)

(affirming dismissal on loss causation grounds where plaintiff “offer[ed] no

factual basis to support the allegation that ... misrepresentations and omissions

caused the losses”). To do so, plaintiff must allege that a corrective disclosure

caused a significant decline in the market price of the issuer’s shares. In re

Xerox Corp. Sec. Litig. , 935 F. Supp. 2d at 493 (quoting Lentell, 396 F.3d at 173). 31

For a disclosure to be “corrective,” the disclosed fact must not only relate

to the subject matter of the alleged fraud, but also “must be new to the market.” 32

Id. at 493 (“[a] recharacterization of previously disclosed facts cannot qualify as a

corrective disclosure”); In re IPO Sec. Litig. , 399 F. Supp. 2d 261, 266 (S.D.N.Y.

2005) (distinguishing between “negative” and “corrective” news, noting that only

the latter suffices to show loss causation). Thus, even if the market reacted

negatively to the characterizations of prior disclosures set forth in the short

31 Although a plaintiff also can plead loss causation by pointing to a disclosure that reflected the materialization of a known risk, Xerox, 935 F. Supp. 2d at 493, plaintiff does not attempt to do so here. 32 This is because securities fraud cases like this rely on the “efficient market theory,” which “posits that all publicly available information about a security is reflected in the market price of the security.” Meyer, 710 F.3d at 1197; see also Basic Inc. v. Levinson , 485 U.S. 224, 246 (1988). Therefore, “any information released to the public is immediately digested and incorporated into the price of a security.” Meyer, 710 F.3d at 1197. “A corollary of the efficient market hypothesis is that disclosure of confirmatory information — or information already known by the market — will not cause a change in the stock price.” Id. ; see also See In re Omnicom Grp., Inc. Sec. Litig. , 597 F.3d 501, 510-11 (2d Cir. 2010) (“ Omnicom III”).

SHIM


sellers’ internet postings, this would be insufficient to plead loss causation. See

In re Omnicom Grp., Inc. Sec. Litig., 597 F.3d 501, 512 (2d Cir. 2010) ( “Omnicom

III”) (“negative characterization of already-public information” cannot constitute

corrective disclosure to satisfy loss causation requirement); Meyer, 710 F.3d at

1199 (affirming dismissal of securities fraud suit where alleged corrective

disclosure was a negative opinion of a short seller based on public information,

not disclosure of any new fact showing falsity of prior representation). 33

Based on these principles, the Second and Eleventh Circuits recently

rejected efforts to premise loss causation on reports by analysts or reporters

disclosing negative opinions but no new facts. See Omnicom III, 597 F.3d at 511-

12; Meyer, 710 F.3d at 1199 (rejecting argument that “expert analysis of source

material” was previously unavailable to the market and noting that “the mere

repackaging of already-public information by an analyst or short-seller is simply

insufficient to constitute a corrective disclosure.”) These holdings are consistent

with holdings of other courts. See Katyle v. Penn Nat. Gaming, Inc. , 637 F.3d 462,

473 (4th Cir. 2011) (“Corrective disclosures must present facts to the market that

are new, that is, publicly revealed for the first time ...”); In re Merck & Co., Inc.

Sec. Litig. , 432 F.3d 261, 270-71 (3d Cir. 2005) (holding that the Wall Street

33 See also Teacher’s Ret. Sys. of La. v. Hunter, 477 F.3d 162, 187 (4th Cir. 2007) (negative characterization of previously known information cannot constitute a corrective disclosure); In re Merck & Co. Sec. Litig. , 432 F.3d 261, 270-71 (3d Cir. 2005) (to similar effect).

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Journal’s analysis of previously available information was not a corrective

disclosure). 34

Application of these cases and principles here mandates dismissal.

Plaintiff here posits two corrective disclosures: (1) the August 28, 2012 short-

seller attack published by StreetSweeper (Compl. ¶¶ 120, 49), and (2) the

September 6, 2012 short-seller attack published by Copperfield Research.

(Compl. ¶ 151). 35 Both by their terms do nothing other than discuss previously

disclosed information. (Hornstine Decl. Ex. 12 at 2; see also Hornstine Decl. Ex.

11 at 1) (hyperlinking to SEC filings, court filings, and other public information)).

Thus, these reports did not disclose any new facts. Instead, they offered an

admittedly biased interpretation of what Tangoe had said previously for the

34 By contrast, in cases where analyst reports are treated as corrective disclosures sufficing to plead loss causation, they had revealed new facts. For example, in Lormand v. US Unwired, Inc. , analyst reports contained specific, previously undisclosed facts about weak demand for new services and high “churn” rates that squarely contradicted the defendant’s prior public statements that it was enjoying substantial financial success, “favorable increases in subscriber growth,” and “significant gains in subscriptions.” 565 F.3d 228, 259-60 (5th Cir. 2009). Far from interpreting an existing public statement – as the short sellers emphasize was the case here – analyst reports in Lormand were a conduit through which previously undisclosed factual information “leaked out.” Id. Unlike the analysts in Lormand, the analysts here unearthed no new facts. Instead, they supplied opinions of the sort that market participants are presumed under the fraud on the market theory to have considered and discounted. 35 The Copperfield report was published on September 6, 2012, after the close of the purported class period, so it cannot, in any event, plausibly establish loss causation. See Leykin v. AT&T Corp. , 423 F. Supp. 2d 229, 243-44 (S.D.N.Y. 2006) (finding that information cannot serve as a corrective disclosure if it was not disclosed during the class period); Bd. of Trs. of Ft. Lauderdale Gen. Emples. Ret. Sys. v. Oao , 811 F. Supp. 2d 853, 858 n.2 (S.D.N.Y. 2011) (noting that the complaint would fail to establish loss causation if the corrective disclosure occurred after the class period); Lighthouse Fin. Group v. Royal Bank of Scot. Group, 2013 WL 4405538, at *10 (S.D.N.Y. Aug. 5, 2013) (same).

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admitted purpose of suppressing demand for Tangoe stock. This does not plead

loss causation. See supra Part I. 36

Even if the two short seller reports had disclosed some new fact, they

could not establish loss causation for the theory of liability presented here.

Those reports address not just organic growth, but also a variety of other

unrelated purported problems with Tangoe’s business not at issue here. For

example, the reports charge (incorrectly) that Tangoe lacked “standard internal

controls” over its financial reporting; used a disreputable auditing firm;

improperly recognized expenses, and lost a “gigantic customer.” (Hornstine

Decl. Ex. 11 at 2, 4; Hornstine Decl. Ex. 12 at 2-3).

A plaintiff asserting that a disclosure is corrective must show that what

was corrected was the fraud complained of, and not something else. Thus, where

a disclosure addresses multiple subjects unrelated to any claimed fraud, a

plaintiff must establish – even at the pleading stage – that a loss was due to the

part of the disclosure revealing the fraud. See, e.g. , Lattanzio v. Deloitte &

Touche LLP, 476 F.3d 147, 158 (2d Cir. 2007) (plaintiff must “ascribe some rough

proportion of the whole loss” to the alleged misstatements); In re Dell Inc., Sec.

Litig., 591 F. Supp. 2d 877, 907 (W.D. Tex. 2008) (“When unrelated negative

36 Any market reaction to the disclosures could only have been to the opinions themselves, which as a matter of law are not “corrective,” or to the apprehension that market participants would react to the sort attack itself. See In re Omnicom Group, Inc. Sec. Litig. , 541 F. Supp. 2d 546, 552 (S.D.N.Y. 2008) (“ Omnicom II”) (“if markets react negatively to a characterization, the ‘loss is caused by the subsequent characterization of the transaction,’ not by the transaction itself.”); Meyer, 710 F.3d at 1199 (short sellers’ “opinions are exactly the type of confounding information ... that do not qualify as corrective disclosures for purposes of loss causation”).

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statements are announced contemporaneous of a corrective disclosure” a

plaintiff must sufficiently plead “that it is more probable than not that it was this

negative statement, and not other unrelated negative statements, that caused a

significant amount of the decline.”). Because the short attacks addressed much

more than organic growth, and plaintiff makes no attempt to disaggregate the

effects of these other statements, Plaintiff fails to establish loss causation for the

more narrow claims advanced here.

D. Plaintiff’s Control Person Claim Must Be Dismissed

The control person claims against the three individual defendants under

Section 20(a) of the Exchange Act, 15 U.S.C. § 78t(a), fail because Plaintiff has not

pleaded an underlying violation of the Exchange Act. See ATSI Commc’ns, Inc. v.

Shaar Fund, Ltd. , 493 F.3d 87, 108 (2d Cir. 2007); Pitney Bowes, 2013 WL 1188050,

at *37 (dismissing Section 20(a) claim where plaintiff pleaded no underlying

violation of the Exchange Act). Plaintiff also does not adequately allege that the

individual defendants exercised control over a “primary violator” or that these

individuals were in some meaningful sense culpable participants in the fraud

perpetrated by the controlled person. See SEC v. First Jersey Sec., Inc. , 101 F.3d

1450, 1472-73 (2d Cir. 1996); ATSI Commc’ns, 493 F.3d at 108 (articulating

elements of a control person claim).

Plaintiff’s boilerplate status allegations (Compl. ¶¶ 182-85) do not suffice to

plead control. See Cohen v. Citibank, N.A. , 954 F. Supp. 621, 629 (S.D.N.Y. 1996)

(“[A] bare allegation that a person is a corporate officer, director, or shareholder

is insufficient to allege ‘control.’”). The “control” allegations as to Mr. Golding

are particularly threadbare: the Complaint only states that he was a director of the

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Company (Compl. ¶ 33) and offers the conclusion that he had the ability to

“control” Tangoe’s affairs. (Compl. ¶¶ 184-85). This is no basis to conclude that

he had any role whatsoever, or any ability to control, the statements alleged to be

fraudulent. Id. (dismissing Section 20(a) claim where complaint offered

boilerplate conclusions of control against Citibank and explaining that “a bare

allegation that a person is a corporate officer, director, or shareholder is

insufficient to allege ‘control’”); Harrison v. Enventure Capital Grp., Inc. , 666 F.

Supp. 473, 479 (W.D.N.Y. 1987) (dismissing Section 20(a) claims where plaintiff

offered only “vague and conclusory” assertions of control); Garvey v. Arkoosh,

354 F. Supp. 2d 73, 86 n.18 (D. Mass. 2005) (dismissing Section 20(a) claims,

explaining that plaintiff must allege defendant “actually exercise[d] control” of

the alleged primary violator).

Plaintiff also does not plead culpable participation by any of the

individuals. As to Mr. Golding, plaintiff relies on allegations about Edison’s stock

sales and Mr. Golding’s status as a director. (Compl. ¶¶ 141-44). See ATSI

Commc’ns, 493 F.3d at 108 (explaining that plaintiff must allege that “defendant

was, in some meaningful sense, a culpable participant in the controlled person’s

fraud”); Morse v. Weingarten , 777 F. Supp. 312, 318 (S.D.N.Y. 1991) (requiring

plaintiff to plead “defendant’s knowledge of [primary] violation”). Of course, the

supposedly fraudulent activity was a series of statements in analyst calls about

organic growth in which Mr. Golding did not participate. See Kalin v. Xanboo,

Inc. , 526 F. Supp. 2d 392, 405-06 (S.D.N.Y. 2007) (granting motion to dismiss

because “Plaintiff has failed to plead sufficiently that [control person] was a

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culpable participant in the alleged fraudulent conversation”); In re SAIC, Inc. Sec.

Litig. , 2013 WL 5462289, at *16 (S.D.N.Y. Sept. 30, 2013) (granting motion to

dismiss as to 20(a) claims because plaintiffs failed to allege “particularized facts

of the controlling person's conscious misbehavior or recklessness”) (citations

omitted). Because Mr. Golding’s conduct is not challenged in the Complaint, he

cannot be a culpable participant in any fraud. Moreover, as set forth supra in Part

III.B, the Complaint does not allege scienter as to any defendant, and therefore

does not allege culpable participation by any individual defendant, including Mr.

Golding.

IV. CONCLUSION

For the foregoing reasons, the Court should dismiss the claims against

Tangoe and the individual defendants with prejudice.

Respectfully submitted,


By their attorneys,

William H. Paine, phv06001 Adam J. Hornstine, phv06000 Kerry C. Tipper, phv06002 WILMER CUTLER PICKERING HALE AND DORR LLP 60 State Street Boston, MA 02109 Tel: (617) 526-6000 Fax: (617) 526-5000

/s/ Glenn M. Cunningham Glenn M. Cunningham Fed. Bar No. ct09995 Katherine R. Husband Federal Bar No. ct28564 SHIPMAN & GOODWIN LLP One Constitution Plaza Hartford, CT 06103-1919 Tel.: (860)251-5722 Fax: (860)251-5218 [email protected]

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