Pluralsight Litigation Ends in Significant Settlement and Good Precedent in the Tenth Circuit

Shareholder Advocate Spring 2024

May 2, 2024

After four years of hard-fought litigation, lead plaintiffs in a certified class action against Pluralsight, Inc. and two of its executives have filed for preliminary approval of a $20 million settlement. Cohen Milstein serves as court-appointed lead counsel in the case, representing lead plaintiffs Indiana Public Retirement System and Public School Teachers’ Pension and Retirement Fund of Chicago. The substantial settlement is a significant victory for lead plaintiffs and the class of investors, who overcame an initial order dismissing the case by successfully appealing to the Tenth Circuit, resulting in a landmark opinion on the application of scienter to Rule 10b5-1 trading plans.

In March 2020, the Court appointed lead plaintiffs to lead the case, which was originally filed in August 2019. Filing an amended complaint three months later, lead plaintiffs alleged that defendants misrepresented the size of the company’s sales force—the main driver of Pluralsight’s quarter-over-quarter billings growth and the key business metric by which Pluralsight attracted investors. The complaint also alleged that the company and its CEO and CFO knew that Pluralsight misrepresented the size of the sales force,intentionally withheld this pertinent information from investors, and reaped millions of dollars in profits by selling stock to unsuspecting investors.

Just over a year later, in August 2021, the U.S. District Court for the District of Utah dismissed the amended complaint, finding, among other things, that Pluralsight’s use of predetermined stock trading plans (established in 2000 by the Securities and Exchange Commission in Rule 10b5-1) automatically removed defendants’ motive to manipulate the company’s stock price. Lead plaintiffs appealed the case to the Tenth Circuit, presenting an emerging issue of first impression.

In the closely watched appeal, an amici curiae brief was filed by former SEC Commissioners Robert J. Jackson and Luis A. Aguilar, former SEC Chief Accountant Lynn Turner and Columbia Law Professor Joshua Mitts, along with other prominent academics, who urged reversal, explaining that the “text and history of Rule 10b5-1 shows that such plans can be manipulated easily for personal financial gain and thus cannot rebut the inference that personal financial gain was a motive for defendants’ material misrepresentations.”

In its August 23, 2022 opinion reversing the district court’s dismissal, the Tenth Circuit held, among other things, that the existence of a 10b5-1 trading plan does “not per se rebut an inference of scienter where … a defendant was allegedly motivated to misrepresent or withhold material information to affect a stock price.” In its ruling, the Tenth Circuit explained that these plans do not prevent officers from “making false statements to artificially inflate the stock price to trigger those automatic trades—and that is what Plaintiffs allege occurred here.”

Apart from its important scienter ruling, the Tenth Circuit also held that lead plaintiffs plausibly alleged that defendants made a false and misleading statement at the start of the class period, when Pluralsight’s Chief Financial Officer, James Budge, told investors that the company had “about 250” quota-bearing sales representatives. As the Tenth Circuit recognized, the complaint alleged that defendants later revealed that Pluralsight only had “about 200” quota-bearing sales representatives at the time, which strongly suggested that Budge’s statement was “objectively verifiable” and false. The complaint alleged that the truth was revealed six months later, when the Company reported that its billings growth had plummeted, stunning analysts and investors alike, and causing the stock price to plunge by nearly 40 percent.

While the Tenth Circuit’s decision was a significant and positive ruling for all investors, the ruling also limited the scope of the case to Budge’s single statement. Lead plaintiffs faced significant obstacles in their attempt to hold defendants liable for this statement, which was both false and misleading by omission. But after the Tenth Circuit’s reversal, lead plaintiffs continued to vigorously litigate the action, successfully moving for class certification, a motion the district court granted in late December 2023.

In early February 2024, the District Court granted lead plaintiffs’ motion to compel regarding the discovery period for the case, a critical ruling that significantly expanded the scope of discovery. About a month later, lead plaintiffs and defendants reached a settlement.

This case demonstrates the importance of institutional investors leading litigation, pressing forward on appeal, and having the ability to marshal support from leading experts on the stock market and federal securities laws, who submitted an amici brief to the Tenth Circuit. Lead plaintiffs’ advocacy resulted in helpful law and a significant recovery for the class.