[00:00:02] Speaker 01:
Thank you.

[00:00:04] Speaker 01:
The next case on our docket is ENRI ON24, Inc., Securities Litigation, Leader Cell, Enotech ESG versus ON24.

[00:00:17] Speaker 01:
Maybe come forward.

[00:00:29] Speaker 04:
May I please deploy?

[00:00:31] Speaker 04:
Tom Hoffman of Labaton Keller on behalf of plaintiff appellant.

[00:00:37] Speaker 04:
Your honors, we submit that under Macquarie, Alphabet, and Facebook, the offering documents were required to say enough here to dispel the false impression that the risk of material churn was merely a hypothetical future prospect.

[00:00:56] Speaker 04:
For example, they could have said,

[00:00:59] Speaker 04:
They could have disclosed that material churn was occurring and was reasonably likely to increase.

[00:01:07] Speaker 04:
Just as a reset and a palate cleanser, Your Honors, here we are under Rule 8, Iqbal and Twombly.

[00:01:14] Speaker 01:
Unlike the prior cases that Your Honors heard, we are not in the land of— Does it matter how much churn was occurring as it relates to those cases that you cited and then to this case here?

[00:01:28] Speaker 04:
It does matter that there was a risk of material churn, Your Honor.

[00:01:32] Speaker 04:
The precise number does not matter.

[00:01:35] Speaker 04:
And we submit that the district court erred by misreading the various churn estimates across different customer segments as fatal inconsistencies, when in fact, they just had to do with different customer segments that naturally experienced different levels of churn.

[00:01:53] Speaker 04:
As a matter of fact, it would be unusual if different salespeople with different books of business were experiencing the exact same level of churn.

[00:02:02] Speaker 01:
So what do you think was happening here?

[00:02:05] Speaker 01:
I mean, because I'm trying to determine if that was sufficient to be a material.

[00:02:12] Speaker 04:
We believe it was.

[00:02:13] Speaker 04:
So our primary CW allegations about this from FE2, the district court, I think, misunderstood FE2's allegations.

[00:02:22] Speaker 04:
FE2's statement about a 40% to 50% churn level, we believe that applied to his entire book for 2020, whereas there was a higher 80% level that FE2 discussed.

[00:02:37] Speaker 04:
And that was the new business, which of course, during the COVID-19 pandemic,

[00:02:42] Speaker 04:
We allege and was well understood within the company that it was Going more towards the one-time event customers and the small and medium-sized business customers instead of the more reliable and profitable enterprise customers that were on 24 customers prior to It seems that the district court

[00:03:06] Speaker 01:
made some assessments here and that those statements offered in support of the churn and whether it was material, I think she found them to be either inconsistent or contradictory.

[00:03:21] Speaker 01:
I don't remember what the language was right now.

[00:03:24] Speaker 01:
And between that and the ARR, I think is kind of what she primarily relied on.

[00:03:30] Speaker 01:
in saying that the complaint was implausible.

[00:03:33] Speaker 01:
So that is what I wanted to ask you to address both of those.

[00:03:37] Speaker 01:
It sounds like you're starting to address the one.

[00:03:40] Speaker 04:
Absolutely.

[00:03:40] Speaker 04:
So let me first square the CW allegations and then absolutely address the post IPO growth that the court talked about.

[00:03:49] Speaker 04:
So number one, we just talked about FE2.

[00:03:52] Speaker 04:
There are three CWs that have these churn estimates.

[00:03:56] Speaker 04:
It's FE2 and then FE7 and 8.

[00:04:00] Speaker 04:
There are other FEs or CWs.

[00:04:02] Speaker 04:
Sometimes they're called alleged in the complaint.

[00:04:05] Speaker 04:
But the court saw inconsistencies where there really are none.

[00:04:09] Speaker 04:
Number one, FE7 actually closely corroborated FE2's churn estimate, stating that for his team, the atypical pandemic customers churned at a rate of 75 to 80%, which is almost exactly what FE2 said about the new business generated in 2020.

[00:04:25] Speaker 04:
This is the atypical business.

[00:04:28] Speaker 04:
FE8 also corroborates

[00:04:31] Speaker 04:
and does not contradict what FE's two and seven say.

[00:04:35] Speaker 04:
FEA estimated 43% of his accounts from 2020 would churn or downsell, and 50% of new accounts up for renewal would likely to churn.

[00:04:46] Speaker 04:
The district court focused on a different number, the 30% renewal rate, but that's actually,

[00:04:55] Speaker 04:
very consistent with FE2 and FE7, because that's the inverse of the churn rate, is the renewal rate.

[00:05:03] Speaker 02:
I'm sorry to interrupt, but I had a bit of a different reaction to the weighing through the inconsistencies, and it seemed not appropriate to do this on a motion to dismiss, that this was about weighing different kinds of evidence.

[00:05:18] Speaker 02:
And I do see potential inconsistencies between the FE's.

[00:05:21] Speaker 02:
But I wonder if you can speak to why that is something that a district court should be allowed to address at a motion to dismiss stage, especially under Rule 8, as opposed to at a later stage of the litigation proceedings.

[00:05:34] Speaker 04:
Well, you're preaching to the choir.

[00:05:36] Speaker 04:
Certainly, we believe that it should be held, that level of scrutiny anyway, should be held until a later stage of the litigation, particularly here, where all of the FEs

[00:05:48] Speaker 04:
are singing from the same hymnal when it comes to the fact that there was material churn, particularly in the one-time and SMB business segments, which was the real problem here in advance of the IPO.

[00:06:04] Speaker 04:
And so, Your Honor, we certainly agree that at this procedural stage, given rule eight, Iqbal and Twombly, we have definitely plausibly alleged that there was

[00:06:15] Speaker 04:
a risk of material churn.

[00:06:19] Speaker 02:
Whether it was 50% or 80% or what have you.

[00:06:22] Speaker 02:
That's correct, Your Honor.

[00:06:23] Speaker 02:
Let me ask this.

[00:06:24] Speaker 02:
The court below also seemed to rely on these financial documents that it took judicial notice of.

[00:06:30] Speaker 02:
And I understand that this was not objected to.

[00:06:33] Speaker 02:
And I'm wondering why.

[00:06:35] Speaker 02:
Because again, this has a flavor that it seems evidence weighing to me.

[00:06:41] Speaker 02:
But why was there no objection to that here?

[00:06:44] Speaker 04:
Your Honor, and this is getting to the Chief Judge's comment about the post-IPO growth, and that's why the defendants put in the request for judicial notice.

[00:06:56] Speaker 04:
So, number one, you have to look at the

[00:07:04] Speaker 04:
the registration statement and the offering documents at the time of the IPO.

[00:07:09] Speaker 04:
And so we do allege that the post IPO growth, or we do argue, I should say, that the post IPO growth is irrelevant for that same, for that reason.

[00:07:20] Speaker 04:
But even if you look at the post IPO growth, those arguments still fail.

[00:07:27] Speaker 04:
Because if you look, I believe it's page eight,

[00:07:31] Speaker 04:
in the defendant's opposition brief, there's a chart that shows the post-IPO growth.

[00:07:39] Speaker 04:
And we believe that this supports our allegations rather than defendants, frankly, because it does show that year over year growth, while at the quarter of the IPO, it was a robust 102%, it fell off a cliff after that.

[00:07:54] Speaker 04:
The very next quarter, it was 43%.

[00:07:56] Speaker 04:
A few months later, it turns negative.

[00:07:58] Speaker 04:
It is negative 2%, which is absolutely consistent with our story and our allegations about the churn in this case.

[00:08:08] Speaker 04:
Moreover, their argument completely ignores the stock price, which we did allege in the complaint.

[00:08:14] Speaker 04:
The complaint alleges that the company's stock price plummeted as a result of the revelation of the allegedly concealed information, specifically

[00:08:24] Speaker 04:
Paragraph 27, we allege that as a result of the undisclosed adverse facts alleged herein that existed at the time of the IPO, on 24, common stock plummeted, falling from the IPO price of $50 per share to close at $18.86 per share on November 3rd, 2021, the date the action was filed.

[00:08:46] Speaker 04:
A stock drop of that magnitude shows that investors were surprised.

[00:08:52] Speaker 04:
And importantly, this was not a stock that was up and down, up and down.

[00:08:57] Speaker 04:
The stock price never recovered.

[00:08:59] Speaker 04:
The complaint further alleges, at paragraph 27, on 24, stock prices never recovered and has continued to significantly decline, closing at 683 on September 1, 2023.

[00:09:12] Speaker 04:
Your Honor, as yesterday, it closed at $5.50 a share.

[00:09:15] Speaker 04:
That means that a $1,000 investment in this IPO is worth $110 today.

[00:09:21] Speaker 04:
So if we are to consider the company's post IPO performance, I think we have to consider the totality of the circumstances here, including the stock price performance, which we think belies the defendant's growth story completely.

[00:09:38] Speaker 04:
And importantly, it's not for defendants to tell investors what metrics they should care about.

[00:09:42] Speaker 04:
When it came to light that the company was experiencing this material churn, the stock price plummeted and never recovered.

[00:09:50] Speaker 01:
So let me ask you, why statement?

[00:09:52] Speaker 01:
I'm kind of focused on statement four.

[00:09:54] Speaker 01:
Sure.

[00:09:55] Speaker 01:
And why wasn't statement four sufficient to inform any potential?

[00:10:04] Speaker 01:
So statement?

[00:10:05] Speaker 01:
The stockholders and any potential.

[00:10:06] Speaker 04:
Statement four is one of the three risk disclosures that we allege to be deficient.

[00:10:14] Speaker 01:
And I'm just trying to figure out, is it really deficient?

[00:10:17] Speaker 01:
I mean, it says.

[00:10:19] Speaker 01:
We may not be able to sustain our recent revenue growth rate in the future.

[00:10:23] Speaker 01:
Our recent revenue growth has been significantly impacted by an increasing demand.

[00:10:28] Speaker 01:
for our platform and products following the onset of the COVID-19 pandemic and resulting precautionary measures.

[00:10:36] Speaker 01:
As the impact of COVID-19 lessens, there may be reduced demand for our platform and our revenue growth may decline.

[00:10:45] Speaker 01:
If these new customers elect not to continue their subscriptions, as the impact of COVID-19 lessens, our business financial condition and results of operation would be harmed.

[00:10:58] Speaker 04:
That's right.

[00:10:59] Speaker 04:
And the

[00:11:01] Speaker 04:
the this court's decisions in alphabet and facebook are just squarely on point and show that that uh... type of disclosure which talks about may and would be harmed is uh... not sufficient whereas here uh... uh... they're they're misleading because the risk of material churn had already come to fruition and this is important i think for your honor's consideration of this case is when when does it

[00:11:31] Speaker 04:
come to fruition.

[00:11:32] Speaker 04:
And here, I think the alphabet court's reasoning is right on point, where it says, here the complaint plausibly alleges that these risks of harm ripened into actual harm when the privacy bug was detected

[00:11:53] Speaker 04:
by the company and created the new risk that this discovery would become public.

[00:11:58] Speaker 04:
So it's when the company detects the risk, that's when it ripens into actual harm.

[00:12:03] Speaker 04:
That's Alphabet 1F4 at 703.

[00:12:06] Speaker 04:
And I think

[00:12:09] Speaker 04:
useful to step back and talk about alphabet.

[00:12:12] Speaker 04:
In alphabet, this court held that risk disclosures that speak entirely of as yet unrealized risks and contingencies and do not alert the reader that some of these risks may have already come to fruition can mislead reasonable investors.

[00:12:25] Speaker 04:
That's exactly what Your Honor is asking about.

[00:12:28] Speaker 04:
In a key passage of its order, the district court reasoned that at the time of the IPO, defendants could not have known that the customers who still had time left in their one-year subscription were not going to renew.

[00:12:40] Speaker 04:
The problematic part about that is that the district court stated, in other words, even if plaintiff was able to demonstrate there was high churn from customers who subscribed in the three quarters prior to the IPO, that churn would not be felt until post IPO.

[00:12:58] Speaker 04:
But in Facebook,

[00:12:59] Speaker 04:
This court held that a risk warning, quote, could be misleading even if the magnitude of the ensuing harm was still unknown and is plausibly materially misleading even if defendant did not yet know the extent of the harm it would suffer.

[00:13:16] Speaker 04:
So the risk has.

[00:13:19] Speaker 04:
It has come to fruition.

[00:13:21] Speaker 04:
There is a material risk.

[00:13:23] Speaker 04:
Even though they don't know, to your honor's point, precisely what the churn rate is going to be or the impact of the financials on the company, these disclosures are still materially misleading.

[00:13:34] Speaker 00:
Can you take a moment and address statements one and three?

[00:13:37] Speaker 00:
I mean, particularly as to statement one, the highly engaged and loyal customer base.

[00:13:42] Speaker 00:
I mean, what about that?

[00:13:43] Speaker 00:
is misleading.

[00:13:45] Speaker 00:
I mean, how is that at all subject to some kind of objective verification?

[00:13:50] Speaker 04:
Yeah, well, of course, when the company puts at issue the source of its revenues, that is the hook for liability to talk about the loyal customer base while not disclosing that all of this new business that the company has been writing throughout 2020, which is leading to this impressive growth, those customers have told you that they're not going to renew their contracts.

[00:14:14] Speaker 04:
We believe that's a material omission.

[00:14:15] Speaker 04:
And importantly, Your Honor,

[00:14:17] Speaker 04:
You have to read all of these statements together and the prospectus because together they create a misleading impression that this is merely something that might happen or would have an impact on the company if it does come to light.

[00:14:30] Speaker 04:
But when you read them all together and in context,

[00:14:34] Speaker 04:
They said they have this highly engaged and loyal customer base.

[00:14:37] Speaker 04:
Statement one, statement two, they're acquiring new customers and expanding subscriptions.

[00:14:42] Speaker 04:
Their growth has accelerated in 2020, partly in response to the COVID-19 pandemic.

[00:14:46] Speaker 04:
So they're touting this new customer growth, and specifically in statement two, the new growth from 2020 and the pandemic era customers.

[00:14:57] Speaker 04:
And then you have the risk factor saying things like may and would, but never do they tell investors that this is actually happening.

[00:15:05] Speaker 04:
It's happened before the IPO.

[00:15:07] Speaker 04:
It has already come to fruition in the words of the alphabet court.

[00:15:12] Speaker 04:
And that is materially misleading.

[00:15:15] Speaker 04:
That would be material to a reasonable investor, which is how we have to judge this entire case is according to what a reasonable investor would think.

[00:15:23] Speaker 04:
That's highly material, quantitatively

[00:15:25] Speaker 04:
and qualitatively to a reasonable investor.

[00:15:28] Speaker 04:
And I see I'm out of time.

[00:15:30] Speaker 04:
I'll reserve the two seconds.

[00:15:32] Speaker 01:
A minute or two.

[00:15:49] Speaker 03:
May it please the court, Brian Matsui, for defendants.

[00:15:52] Speaker 03:
The district court correctly dismissed plaintiff's amended complaint for three reasons.

[00:15:56] Speaker 03:
First, plaintiff has at best allege a risk of post-IPO non-renewals.

[00:16:02] Speaker 03:
And even assuming that risk exists, ON24 fully disclosed it, including the very reason why that risk existed, the uncertainty related to COVID-19 in February 2021.

[00:16:15] Speaker 03:
Second, the district court correctly recognized that the complaint undermined the existence of actual non-renewals.

[00:16:21] Speaker 03:
including because On24's actual financial performance showed there was no material churn at the time of the IPO.

[00:16:31] Speaker 03:
And third, the first three challenge statements are mere corporate optimism.

[00:16:36] Speaker 03:
When you have a statement like a highly engaged and loyal customer base or forward-looking statements where the company says, we believe, those simply are not actionable.

[00:16:47] Speaker 03:
So I'd like to start where

[00:16:49] Speaker 03:
with the risk disclosures and the notion that there was actual churn at the time of the IPO.

[00:16:57] Speaker 03:
There wasn't actual churn.

[00:16:59] Speaker 03:
There are no allegations to support actual churn of the IPO, the actual non-renewal of accounts at the time of the IPO.

[00:17:06] Speaker 03:
Plan F really has mostly walked away from that, in part because the financial metrics in the offering documents themselves show that

[00:17:14] Speaker 03:
NRR and ARR were increasing, and the number of customers was increasing.

[00:17:19] Speaker 01:
So there aren't actually- I'm trying to figure this out.

[00:17:24] Speaker 01:
Given that we're operating under the lower pleading standard, I mean, we heard, if you were here for the last case, under full 9B, but this is Rule 8, and that's not disputed, is that correct?

[00:17:35] Speaker 01:
That's correct.

[00:17:35] Speaker 01:
Okay.

[00:17:36] Speaker 01:
Why aren't the six-month contracts enough to allege that a material amount of-

[00:17:43] Speaker 01:
of churn happened before the February 2021 IPO, I guess, along with what these CWs were saying.

[00:17:51] Speaker 03:
So that wouldn't be material, just the six-month contracts.

[00:17:54] Speaker 03:
If you look at the allegations in the complaint, like at ER 53, paragraph 161, FE 7 basically says there's a handful of six-month contracts.

[00:18:06] Speaker 03:
Realistically,

[00:18:07] Speaker 03:
These contracts, which were being signed in 2020 after March of 2020, in fact, some of the FEs say that these didn't really start getting signed until November 2020.

[00:18:18] Speaker 03:
That's FE2 at ER 45 to 47.

[00:18:22] Speaker 03:
They wouldn't come up into renewal until sometime in 2021 after the date.

[00:18:27] Speaker 02:
Council, I guess the trouble I have with that is that if the allegations say that there's a certain amount of customer base, I think to me there are two principal allegations.

[00:18:37] Speaker 02:
One is that the customer base for the company started to shift into a more risky

[00:18:43] Speaker 02:
SMB model.

[00:18:45] Speaker 02:
And so there's a significant number of clientele that are not the legacy steady customers.

[00:18:52] Speaker 02:
And then the second one is that the company knew that a big chunk of those customers were not planning to renew or were planning to downsell.

[00:19:00] Speaker 02:
And so whether that materializes later is different than whether the company was aware of and had a material obligation to disclose those risks.

[00:19:10] Speaker 02:
And I see from FE2 and FE1 and others that those have been adequately alleged.

[00:19:19] Speaker 02:
And why is that not the case?

[00:19:20] Speaker 03:
So I'd like to address the second point that you made first with respect to the notion that this was going to happen in effect.

[00:19:31] Speaker 03:
That's this court's precedent in stack.

[00:19:34] Speaker 03:
What this court's precedent in stack makes clear is that when there is a risk of something happening, even when the company in stack was told

[00:19:42] Speaker 03:
by Microsoft that it was going to release a competing product, it still was just a risk.

[00:19:49] Speaker 03:
And then it was still sufficient for the company to say there was no assurance, that it was something that could happen.

[00:19:55] Speaker 03:
And the reason why is because that depends upon the actions of a third party.

[00:19:59] Speaker 03:
And that's precisely what we have here.

[00:20:01] Speaker 03:
Whether or not these customers would actually not renew, which would be after the IPO,

[00:20:07] Speaker 03:
would depend upon the actions of a third party.

[00:20:09] Speaker 03:
And that's what this court's decision in stack makes clear.

[00:20:12] Speaker 03:
Now Facebook and Alphabet, what the plaintiff is doing here is clever.

[00:20:18] Speaker 03:
It says that the risk materialized.

[00:20:21] Speaker 03:
But the risk materialized isn't that the risk of something happening in the future became more concrete.

[00:20:26] Speaker 03:
It's that the actual event the company was worried about actually occurred.

[00:20:31] Speaker 03:
And in Alphabet, the actual event that they were worried about was that there would be a privacy bug.

[00:20:36] Speaker 03:
And there was a privacy bug.

[00:20:37] Speaker 01:
But we have to take this in the light most favorable to the plaintiff, do we not?

[00:20:41] Speaker 03:
Of course we do.

[00:20:42] Speaker 03:
But the problem with plaintiffs' allegations are is that there is no allegations, plausible allegations, to show that there was actual non-renewals at the time of the IPO.

[00:20:53] Speaker 03:
That's what they basically would need to show.

[00:20:55] Speaker 01:
But they were tracking this specific information because it seemed like they were concerned.

[00:21:00] Speaker 01:
about the non-renewals.

[00:21:03] Speaker 03:
As all companies would be, Your Honor.

[00:21:04] Speaker 03:
Right.

[00:21:04] Speaker 03:
Certainly, they would be concerned about that, and they fully disclosed this risk in the risk disclosure.

[00:21:10] Speaker 03:
These aren't generic disclosures, as Clinton said.

[00:21:13] Speaker 01:
So what do you think they would have needed to have to really be obligated, I guess, under your view, to disclose?

[00:21:22] Speaker 03:
I think in a situation like this, had there been

[00:21:26] Speaker 03:
an actual material number of customers that canceled their contracts, that their contracts expired before the IPO, which would have shown up in the metrics, then that would be something that would show that there could be.

[00:21:41] Speaker 01:
And so in your view, the handful plus the FE's or CW's that we're saying, looks like 20% to 80% are not going to renew, or there's a risk of not renewing.

[00:21:55] Speaker 01:
When they know that, when they're seeing that, they're hearing that, that's not enough?

[00:22:01] Speaker 01:
You do it in the light most favorable to the plaintiff.

[00:22:03] Speaker 03:
It is, Your Honor, because we're taking those allegations in the light most favorable to the plaintiff.

[00:22:07] Speaker 03:
I'm going to set aside the inconsistency point, but the light most favorable to the plaintiff, what you have is that there are customers that are at a risk of not renewing their contract after February of 2021.

[00:22:19] Speaker 03:
That's precisely what this court stack decision said.

[00:22:22] Speaker 03:
you don't need to say that that's something that's asserting you.

[00:22:25] Speaker 02:
Are we splitting hairs?

[00:22:26] Speaker 02:
The allegations are that the company was tracking it very carefully and color coding each customer.

[00:22:32] Speaker 02:
And a certain number of them were, I guess, red, for lack of a better.

[00:22:36] Speaker 02:
I don't know what the actual colors were, saying these customers are not planning to renew.

[00:22:41] Speaker 02:
And so you may call it a risk, and it's still a future event, but it's a pretty concrete one that the company is asserting.

[00:22:50] Speaker 02:
And so at the very least, let me go back to my first main allegation point.

[00:22:56] Speaker 02:
Why wouldn't the company have been required to disclose that its customer base had completely shifted into a more risky group?

[00:23:04] Speaker 02:
And I take the point that you may not agree with it or not, but why isn't that a material disclosure that needed to have happened?

[00:23:11] Speaker 03:
Because there's nothing in the documents themselves.

[00:23:14] Speaker 03:
There's no challenge statement they're talking about which says that there's something about the type of customer base.

[00:23:19] Speaker 03:
But regardless, even setting that aside, the company said that at SER111 that it never exclusively had any certain type of customer.

[00:23:29] Speaker 03:
And the fact of the matter is that from the offering documents themselves at SER69, 66% of the AR came from large companies.

[00:23:39] Speaker 03:
And so you have,

[00:23:41] Speaker 03:
financial metrics.

[00:23:44] Speaker 02:
But you also have a stock price that dove based on the fact that it didn't meet expectations of the growth and plaintiffs are tying it to the type of customer base and the churn and that it came in less than what was expected.

[00:24:01] Speaker 03:
Of course, Your Honor, but if I can just point to what this court said in Stack.

[00:24:05] Speaker 03:
It said, even assuming, as we must, that Microsoft had informed Stack that it planned to introduce a data compression product, Stack could not have known whether or not Microsoft would truly do so.

[00:24:18] Speaker 03:
So that's a situation where Microsoft tells Stack that it's going to introduce a competing stock product, which is the thing that ended up taking the company's stock price.

[00:24:29] Speaker 03:
And the court says, you still can't say, you can't predict.

[00:24:33] Speaker 03:
I mean, to think a step back, the problem here is that companies in On 24 Shoes, they can't predict the future in February 2021 as to what's going to happen with the pandemic, what's going to happen with respect to customer renewals.

[00:24:48] Speaker 03:
All we have are allegations that say that customers were

[00:24:52] Speaker 03:
uh... indicated that they might not renew or they would not renew and the company was working to try to fight against that and then it fully disclosed that this was an issue that it was that that it was concerned about what it's not just sorry your honor it's close issue they're concerned about it

[00:25:08] Speaker 01:
It seems like if you apply alphabet, maybe you don't think we should here.

[00:25:13] Speaker 01:
If they have some actual data, don't they have an obligation to disclose that?

[00:25:20] Speaker 01:
It seems like this was occurring during COVID, and don't we have to take that fact into account?

[00:25:30] Speaker 01:
Or I guess let me ask you, don't we take that fact into account when we are considering what a reasonable investor would think is material?

[00:25:37] Speaker 03:
but that fully supports on twenty four if if your if the court is wrong but that was that

[00:25:43] Speaker 01:
That was a time of very high uncertainty, and investors in the stock market focused on the effects of the lockdowns and how businesses were adjusting in that kind of environment.

[00:25:58] Speaker 01:
I'm just questioning, and I wanted to hear your answers to why a handful was inconsequential, especially if you take into account what

[00:26:09] Speaker 01:
the lowest percentage that any one of the CWs put forward?

[00:26:15] Speaker 03:
Well, I think the problem, though, is, Your Honor, that it puts companies in an untenable situation of not knowing what they need to disclose beyond the actual risk itself.

[00:26:26] Speaker 03:
Here, the company said, our recent revenue growth was a challenge statement for.

[00:26:32] Speaker 03:
you know, has been significantly impacted by the increasing demand for our platform products at the outset of COVID-19.

[00:26:39] Speaker 03:
And then it said as the impact of COVID-19 lessens, there may be reduced demand.

[00:26:44] Speaker 03:
And so that right there is addressing the uncertainty and telling the reasonable investor that if COVID-19 goes down, then there may not have the same financial, you know,

[00:26:57] Speaker 03:
sort of great financial success.

[00:27:00] Speaker 03:
But Your Honor, on Alphabet, we totally think that Alphabet and Facebook should apply, but we think that plaintiff is misreading those decisions because what's being talked about there in Alphabet and Facebook is not the existence of a risk deal.

[00:27:14] Speaker 03:
In Facebook, it was that Cambridge Analytica was using the data, and then they disclosed that they were worried that someone was going to use the data.

[00:27:23] Speaker 03:
So the concern that the company was worried about, the misuse of customer data, actually had occurred and wasn't disclosed.

[00:27:32] Speaker 03:
In Alphabet, it was that there would be some sort of privacy bug that actually occurred and was not disclosed.

[00:27:38] Speaker 01:
But the disclosure saying nothing about

[00:27:41] Speaker 01:
non-ideal customers or atypical customers.

[00:27:45] Speaker 01:
You're saying that the statement, which the one I read, I think it was statement four, you know, trying to figure out is that sufficient.

[00:27:55] Speaker 01:
They had knowledge of non-ideal customers or atypical customers, and the disclosures don't say anything about it.

[00:28:01] Speaker 01:
Those were the terms allegedly used by, I think, my aunt's executives after the IPO to describe the customers signed up during the pandemic.

[00:28:13] Speaker 01:
It seems like what Leader Cell is alleging that there was no warning before the IPO that ON24 itself thought its customer base was non-ideal.

[00:28:27] Speaker 01:
I'm just trying to figure out why, and you can see I'm drilling down on this.

[00:28:31] Speaker 01:
Why wouldn't Exclusion?

[00:28:33] Speaker 01:
of that information be considered a violation of Section 11?

[00:28:38] Speaker 01:
I think that's kind of really the crux of what we're trying to figure out.

[00:28:42] Speaker 01:
I'm trying to figure out.

[00:28:43] Speaker 03:
The ultimate issue here is that they're concerned that there would be non-renewals.

[00:28:46] Speaker 03:
And now we're talking about the customer-based transition allegations they're talking about.

[00:28:54] Speaker 03:
But again, those are just inconsistent.

[00:28:56] Speaker 03:
with the actual offering documents which were incorporated by reference into the complaint.

[00:29:02] Speaker 03:
Because when you look at the offering documents, they make clear that at SCR 108, the number of multi-year subscriptions was increasing each year during the 2019 versus 2020.

[00:29:16] Speaker 03:
In SCR, at the same page, it also said the number of customers that had two or more subscriptions

[00:29:25] Speaker 03:
increase from 15% to 29% in September 2020.

[00:29:29] Speaker 03:
So what you're talking about here is

[00:29:32] Speaker 03:
a customer.

[00:29:33] Speaker 03:
And to take a step back, they also never said, and this is SCR 111, that they had any particular type of customer.

[00:29:43] Speaker 03:
They said they take large companies, small companies.

[00:29:45] Speaker 03:
So the reasonable investor was disclosed that there was not just one type of customer that they were taking.

[00:29:53] Speaker 01:
Well, wait, just a second.

[00:29:54] Speaker 01:
I mean, their customer base before COVID was not

[00:29:58] Speaker 01:
the short-term customers.

[00:30:00] Speaker 01:
It was these people who would be, at least, it was global, it seemed like, and they were trying to get people for long-term contracts.

[00:30:08] Speaker 01:
and seemed like they had a certain type of customer before COVID.

[00:30:12] Speaker 01:
Are you saying that's not the case?

[00:30:14] Speaker 03:
I'm just saying that their statements are inconsistent with the actual metrics that are disclosed.

[00:30:22] Speaker 03:
But ON24 did disclose that it got more additional customers because during the pandemic, which is all that they needed to say.

[00:30:33] Speaker 01:
And so I don't.

[00:30:37] Speaker 01:
I mean, there's still, I think, there would be a lot of questions and issues for the plaintiffs if this case is able to proceed.

[00:30:45] Speaker 01:
But I'm just looking at it at the Rule 8, a motion to dismiss stage and trying to figure out this, you know.

[00:30:52] Speaker 03:
I completely understand.

[00:30:54] Speaker 03:
But I think that what this court were to basically say that the mere risk that these customers were not going to renew, which is basically the whole premise of the argument they've made, that would basically extend both Facebook and Alphabet to something that was not an actual event that occurred.

[00:31:11] Speaker 03:
And it would be inconsistent with this course decision in stack.

[00:31:14] Speaker 03:
It would effectively overrule that decision.

[00:31:17] Speaker 03:
And I think that the way you reconcile stack.

[00:31:20] Speaker 02:
So even if suppose suppose you had customers 100% of them say we're not going to renew and the company was holding on to that information.

[00:31:29] Speaker 02:
under your argument, that would still not be a disclosable fact until it actually occurs.

[00:31:37] Speaker 02:
You're saying no matter how certain the customers are, a company would never have to disclose that.

[00:31:45] Speaker 03:
Because you don't know it would occur, and that's what this court's case in Stack said.

[00:31:50] Speaker 03:
It was assumed that Microsoft would introduce a competing product, and it told Stack that it was going to introduce a competing product.

[00:31:59] Speaker 03:
It was assumed because allegations have to be assumed as true.

[00:32:02] Speaker 03:
And the court said that when it depends upon a third party, you can't say that that's going to be an absolute certainty.

[00:32:10] Speaker 03:
And so that's the problem the plaintiff's allegations have.

[00:32:13] Speaker 02:
Can I ask just as a final question from me at least, the district court engaged in finding the witnesses and whether they were inconsistent and relying on some documents that took judicial notice of that weren't incorporated and drawing facts from that.

[00:32:32] Speaker 02:
Why was that appropriate at a motion to dismiss stage?

[00:32:35] Speaker 03:
So it was because, well, one, it's doubly forfeited because they didn't raise the issue before the district court and they didn't challenge it in this court.

[00:32:44] Speaker 03:
But beyond that fact, it's entirely appropriate to have the documents that were incorporated by reference to basically have those facts in them to be accepted as true and for the court not to accept

[00:32:56] Speaker 03:
allegations that are inconsistent.

[00:32:58] Speaker 03:
That's what Stack says, that's what Steckman says.

[00:33:01] Speaker 03:
So this court's precedent is entirely consistent with that.

[00:33:04] Speaker 02:
But that's only a portion of the documents.

[00:33:05] Speaker 02:
There were other words that were taken in footnote one of the district court's order that they were judicially noticed, not by incorporation.

[00:33:14] Speaker 02:
And as to those, you're not supposed to take them, the statements within as true.

[00:33:20] Speaker 02:
And yet it seemed as if the district court was taking certain

[00:33:23] Speaker 02:
pieces of evidence from those statements in order to draw conclusions from them.

[00:33:27] Speaker 03:
So that's all the post-IPO financials that we're talking about here.

[00:33:30] Speaker 03:
All the offering documents are the pre-IPO stuff that basically show that there was no actual loss of customers at that point.

[00:33:37] Speaker 03:
But for the post-IPO stuff, plaintiff has never challenged the sort of the veracity of that.

[00:33:45] Speaker 02:
But on de novo review, we're looking at this afresh and seeing if there was any error by the district court, don't we?

[00:33:50] Speaker 03:
I think what that goes to, though, ultimately, is that if we take their premise, which I don't believe is true, that there would be sort of like 100% certainty that there would be all this sort of loss of renewals after the IPO, the fact of the matter is that those post-IPO documents show that that's not the case.

[00:34:08] Speaker 03:
But the point is that you shouldn't be in a situation

[00:34:11] Speaker 02:
I guess what I'd say is I'm not sure where it's the case or not.

[00:34:15] Speaker 02:
We're wading into what seems like tribal questions.

[00:34:19] Speaker 02:
You had growth, but was that growth commensurate with what was projected by the company?

[00:34:30] Speaker 03:
I mean, I think that at the end of the day, none of that is really necessary to resolve this case, because what they can't show is that there was this material loss of customers before the time of the IPO.

[00:34:46] Speaker 03:
And that's what they would need to show under Stack, Alphabet, and Facebook.

[00:34:50] Speaker 03:
And they simply can't show that.

[00:34:53] Speaker 03:
And so that's sort of the fundamental flaw with their complaint.

[00:34:58] Speaker 01:
Thank you very much.

[00:35:00] Speaker 03:
Thank you, Your Honor.

[00:35:01] Speaker 03:
We ask support to affirm.

[00:35:02] Speaker 01:
Thank you.

[00:35:05] Speaker 01:
I'll give you two minutes.

[00:35:07] Speaker 04:
Your Honor, as I know, I pretty much exhausted my time, but just a couple of quick points.

[00:35:11] Speaker 01:
I've given you two minutes.

[00:35:12] Speaker 04:
Thank you, Your Honor.

[00:35:13] Speaker 04:
So first of all, just to go to, let's go right to stack.

[00:35:18] Speaker 04:
Council said something about we're putting companies in a position of not knowing what to disclose, but we are not asking for an extension of the alphabet in Facebook here.

[00:35:26] Speaker 04:
We are asking for a straightforward interpretation of this court's prior authority stack.

[00:35:31] Speaker 04:
Their reliance on stack is misplaced for a number of reasons.

[00:35:34] Speaker 04:
We discussed this in our brief, but just briefly, the case is not about predicting this case.

[00:35:39] Speaker 04:
It's not about predicting uncertain future events.

[00:35:43] Speaker 04:
Here, On24 had concrete data about customer intentions through direct

[00:35:49] Speaker 04:
customer communications, about non-renewal plans, systematic tracking in a couple of different databases, internal reports, quantifying expected churn, and management discussions confirming the risk.

[00:36:02] Speaker 04:
Also, you have to take a look at, I can't believe I didn't mention this, but CEO Charan at the beginning of the case saying, these are not our ideal customers.

[00:36:10] Speaker 04:
The court brought this up.

[00:36:11] Speaker 04:
And then at the end of the case, Sharon acknowledges that it was the very non-ideal customers, the SNB and one-time customers that accounted for the high churn.

[00:36:20] Speaker 04:
This was picked up by the analysts, JP Morgan and Canaccord.

[00:36:23] Speaker 04:
They downgraded on 24 after identifying the very churn issues that are

[00:36:28] Speaker 04:
at the heart of this case.

[00:36:30] Speaker 04:
And just a couple of miscellaneous points.

[00:36:32] Speaker 04:
We also do allege, we haven't talked about that yet, but omissions under item 303.

[00:36:38] Speaker 04:
So even if you don't like the misstatements, we have an omissions claim.

[00:36:42] Speaker 04:
Also, Your Honor has brought up the customer base shift, and I just wanted to note that in its first order on the motion to dismiss, the district court actually did hold that we had sufficiently alleged a claim based on that shift.

[00:36:54] Speaker 04:
Thank you.

[00:36:56] Speaker 01:
I just had a question on the ARR.

[00:36:57] Speaker 01:
You were going to make a statement on that.

[00:36:59] Speaker 01:
I don't know if you did.

[00:37:01] Speaker 04:
The statement on the ARR?

[00:37:04] Speaker 01:
Because that's what the district court relied on.

[00:37:07] Speaker 04:
Yeah.

[00:37:07] Speaker 04:
So here I talked before when I was discussing revenue, I was talking about the revenue growth, not the ARR.

[00:37:15] Speaker 04:
The revenue growth is the one on page eight of defendant's brief that shows it turned negative.

[00:37:18] Speaker 04:
The thing about ARR, it's a lagging indicator because of course you're going back, you're analyzing the revenue.

[00:37:25] Speaker 04:
So it's including that frothy period where they were writing all this new business during the pandemic.

[00:37:31] Speaker 04:
So, what you really want to look at is the, you know, at least the year-over-year, if not quarter-over-quarter, revenue growth.

[00:37:38] Speaker 04:
The ARR is just irrelevant.

[00:37:40] Speaker 01:
Thank you.

[00:37:41] Speaker 04:
Thank you.

[00:37:43] Speaker 01:
All right.

[00:37:44] Speaker 01:
Mr. Hoffman, Mr. Matsui, thank you very much.

[00:37:46] Speaker 01:
I know we asked a lot of questions of you.

[00:37:49] Speaker 01:
I appreciate your responses and very helpful for us.

[00:37:54] Speaker 01:
So, thank you.

[00:37:54] Speaker 01:
So the case of ENRI ON24, Incorporated Securities Litigation, Leader Cell Inotech ESG versus ON24 Inc.

[00:38:05] Speaker 01:
is now submitted.