United States District Court, D. Nevada
MINGBO CAI, Individually and On Behalf of All Others Similarly Situated, Plaintiffs,
SWITCH, INC., et al., Defendants.
C. MAHAN, UNITED STATES DISTRICT JUDGE
before the court is Magistrate Judge Cam Ferenbach's
report and recommendation. (ECF No. 88). Plaintiff Oscar
Farach filed an objection (ECF No. 89), to which defendants
Switch, Inc. (“Switch”); Rob Roy, Gabriel Nacht,
Zareh Sarrafian, Donald Snyder, Tom Thomas, and Bryan Wolf
(collectively “defendants”) responded (ECF No.
before the court is defendants' motion to strike. (ECF
No. 63). Farach filed a response (ECF No. 79), to which
defendants replied (ECF No. 85).
before the court is defendants' motion to dismiss. (ECF
No. 60). Farach filed a response (ECF No. 78), to which
defendants replied (ECF No. 84).
has brought forth this putative securities class action
challenging Switch's failure to include certain
information in the registration statement and prospectus that
Switch issued in connection with its initial public offering
(“IPO”). (ECF No. 58). The amended complaint
contains the following allegations:
is a Nevada corporation that hosts data centers and provides
to its customers colocation, telecommunications, cloud, and
content ecosystems services. Id. Most of
Switch's revenue comes from colocation services, which
amounted to 81.4% of total revenue in fiscal year 2016.
Id. Colocation services are rental agreements where
customers lease information technology infrastructure, such
as servers and storage hardware, to avoid the cost of
establishing and maintaining their own facilities.
at all relevant times to this lawsuit Switch's chief
executive officer (“CEO”) and chairman of the
board of directors. Id. In 2000, Roy founded Switch
and began building a data center in Las Vegas near another
data center that Enron Corporation (“Enron”) was
constructing. Id. In 2002, Enron declared bankruptcy
a week before it planned to open its data center.
Id. Roy subsequently acquired the state-of-the-art
facility at a steep discount, which allowed Switch to
transfer massive amounts of data at below market rates.
Switch established other data centers over the years, the Las
Vegas data center remained as the company's primary
source of revenue. Id. Several market advantages, in
addition to Roy's shrewd acquisition of the facility, are
responsible for this success. Id. The Las Vegas data
center is part of a fiber optic network that connects to
Switch's Tahoe/Reno data center, San Francisco, and Los
Angeles. Id. Switch also purchases power in Nevada
at low costs because it is authorized to directly deal with
the national power market. Id. Lastly, Nevada does
not impose a corporate income tax and is adjacent to
California, which has a large demand for information
technology services. Id.
2017, Switch began changing its sales strategy to focus on
selling hybrid cloud solutions, which would allow customers
to move larger technology operations to Switch's data
centers. Id. This new strategy presented a
significant risk of lengthening sales timelines because it
involved new complications and required engineering.
Id. Switch did not disclose this shift in strategy
and that it would likely have an adverse effect on revenue.
13, 2017, Switch registered as a corporation so that it can
issue class A common stock in an IPO. Id. On
September 8, 2017, Switch filed the registration statement
for its IPO with the Securities and Exchange Commission
(“SEC”) and, on September 25, 2017, Switch
amended the registration statement and the prospectus
therein. Id. The registration statement included
Switch's offer to sell 31, 250, 000 shares, with an
option for the underwriters to purchase an additional 4, 687,
400 shares, at $17.00 per share. Id.
discussed in the registration statement its growth strategy,
which involved developing new facilities in Grand Rapids,
Michigan and Atlanta, Georgia. Id. However, the
registration statement did not disclose facts explaining that
these new facilities lacked the unique market advantages that
made the Las Vegas data center successful. Id. The
registration statement also failed to disclose that Switch
had changed its sales strategy to focus on hybrid cloud
solutions. Id. Lastly, the registration statement
reported that Switch's recurring revenue for the first
six months of 2017 was $177, 213, 000.00. Id. This
figure included $9, 400, 000.00 for colocation services that
eBay would use in 2018. Id. Had Switch not including
this amount in the recurring revenue, Switch's revenue
growth would have been 13% rather than 20%. Id.
October 6, 2017, shares in Switch began trading on the New
York Stock Exchange. Id. Six days later, Switch
announced the closing of its IPO and that the underwriters
executed their option to purchase an additional 4, 687, 400
shares. Id. In total, Switch sold 35, 937, 500
shares of class A common stock and received $577, 300, 000.00
in proceeds. Id. Switch also incurred $4, 100,
000.00 in offering expenses. Id.
August 13, 2018, Switch issued a press release in which the
company lowered its revenue guidance for the rest of the
year. Id. Switch attributed this decrease in
expected revenue to its shift in sales strategy towards
selling hybrid cloud solutions. Id. Switch's
chief financial officer (“CFO”) and president,
Nacht and Thomas Morton respectively, also stated that Switch
had been working on hybrid cloud solutions for a while and
that the company was not actually changing its sales
approach. Id. Analysts critiqued the sales strategy
for not being as presented in the IPO materials and that the
deviation in sales figures was unexpected. Id. The
next day, Switch's stock dropped 22.3%-from $13.98 per
share to $10.85 per share. Id.
the alleged misleading statements and omissions in the
registration statement allowed Switch to sell its class A
common stock at $17.00 per share. Id. Since the IPO,
Switch's stock price has decreased to approximately $9
per share, over a 47% drop. Id. Farach alleges that,
had Switch filed a registration statement with adequate
disclosures, the purported class would not have incurred
substantial losses in the form of decreased stock prices.
11, 2018, plaintiff Mingbo Cai initiated this action. (ECF
No. 1). In the amended complaint, lead plaintiff Farach
alleges two causes of action: (1) violation of section 11 of
the Securities Act of 1933 (“Securities Act”), 15
U.S.C. § 77k, and (2) section 15 of the Securities Act,
15 U.S.C. § 77o. (ECF No. 58).
defendants move to dismiss the amended complaint under
Federal Rule of Civil Procedure 12(b)(6) and strike
paragraphs 45, 46, 56, and 65, and footnotes 4 and 7, from
the amended complaint. (ECF Nos. 60, 63). Magistrate Judge
Ferenbach recommends striking paragraphs 45 and 46, and
footnotes 3, 4, and 7. (ECF No. 88).