Cautionary Language is Key in Securities Litigation Dismissal

Investor claims were recently dismissed by a California district court against Mellanox Technologies Ltd. (“Mellanox”) for allegedly providing false or misleading statements related to the company’s prominence in the interconnect market and its prospects for future growth and revenue generation.  The Court found that Mellanox had adequately cautioned investors regarding the risks associated with the forward-looking language and that other language was simply corporate puffery that was not actionable.

The lawsuit alleged that Mellanox and several of the company’s current and former executives committed securities fraud in violation of sections 10(b) and 20(a) of the Security Exchange Act of 1934 and the Securities Exchange Commission’s (“SEC”) Rule 10b-5.  The class was defined as purchasers of Mellanox common stock between April 19, 2012, and January 2, 2013.  Plaintiffs provided five reasons why Mellanox knew their statements were false or misleading:

  1. The existing growth was short term and not sustainable.


  1. Tepid demand for certain products was making its growth projections unachievable.


  1. A current customer was developing its own product in house, which would detrimentally increase competition in the market where Mellanox had enjoyed a near monopoly.


  1. Mellanox was experiencing chronic delays in shipping cable orders to its largest customers, which would delay revenue recognition.


  1. Increasing inventory buildup at a key customer would lead to a decrease in sales and profit margins going forward.

In contrast, Mellanox argued that Plaintiffs’ allegations were insufficiently pled and did not meet the requirements of a securities fraud action because:

  1. Many of the allegedly false or misleading statements at issue on which Plaintiffs premise liability are vague and indefinite opinions that constitute non-actionable corporate “puffery” (forward-looking statements of optimism that are not objectively verifiable and do not provide a standard upon which a reasonable investor would rely).


  1. Many of the allegedly false or misleading statements at issue were forward-looking projections and were accompanied by sufficient cautionary language to bring them within the Private Securities Litigation Reform Act’s (“PSLRA”) safe harbor.


  1. They did not adequately allege loss causation with regard to four of Plaintiffs’ five offered corrective disclosures.

The Court agreed with Mallanox and dismissed the complaint (with leave to amend regarding improperly pled items).  Examples of allegations the court deemed “puffery” include assertions that Mellanox’s products have “continue[d] to gain traction in the marketplace,” have experienced “increased penetration . . . in new markets,” resulting in “significant . . . end-user demand” and “healthy growth in . . . revenue,” positioning Mellanox to “continue growing in the coming years at a pretty fast pace”.



The Court also found that alleged false or misleading projections fell within PSLRA’s “safe harbor” and are not actionable under the PSLRA and the “bespeaks caution” doctrine:

“The bespeaks caution doctrine provides a mechanism by which a court can rule as a matter of law (typically in a motion to dismiss for failure to state a cause of action or a motion for summary judgment) that defendants’ forward-looking representations contained enough cautionary language or risk disclosure to protect the defendant against claims of securities fraud.”


Despite Plaintiff’s claim that any cautionary statements were “hollow” “boilerplate statements” that are “plainly . . . inadequate”,  the Court’s assessment was that Mellanox either directly included sufficient cautionary language or directed investors to other documents which detailed risks in greater detail and thereby “immunize[d] the company’s forward-looking statements from securities liability”.   Examples of cautionary language cited by the Court included:

  • Mellanox’ 2012 10-K filing was prefaced with a “special note” regarding forward-looking statements, which included both general cautionary language about the nature of such statements, as well as ten specific factors that might cause the company’s performance to differ from its forward-looking statements.


  • Mellanox’s 10-K also contained a section called “Risk Factors,” which spanned eighteen pages and explained in great detail the specific risks Mellanox faced which could negatively impact its financial results.


  • Each of its 10–Q or 8–K reports contained similar language regarding forward-looking statements.


Each earnings call was begun with a forward-looking statement warning, and directed listeners to review its 10–K, its 10–Qs, 8–Ks, and its press releases for a discussion of risks facing the company.

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