On March 18, 2024, Judge Rachel P. Kovner of the United States District Court for the Eastern District of New York dismissed with prejudice a putative shareholders’ class action against a mobile game development company (the “Company”), its officers and directors, and its underwriters, alleging violations of Sections 11 and 15 of the Securities Act of 1933 (the “Securities Act”). In re Playtika Sec. Litig., No. 21-CV-06571-RPK-SJB (E.D.N.Y. Mar. 18, 2024). Plaintiff alleged that the Company failed to disclose an infrastructure overhaul of two of its most popular mobile games in its initial public offering (“IPO”) registration statement even though the overhaul was in progress at the time of the Company’s IPO. The Court held that plaintiff failed to adequately allege that omissions rendered the registration statement misleading, and that Item 105 did not impose a duty to disclose specific infrastructure projects that allegedly were omitted. Accordingly, the Court dismissed the action with prejudice.
The Company, which launched its IPO on January 15, 2021, develops free-to-play mobile games. The Company’s two most successful games were casino games that allegedly generated approximately half of the Company’s revenue in 2018, 2019, and 2020 through user purchases of in-game items such as chips or tokens. The registration statement allegedly indicated that the Company generated almost all of its revenue through users’ in-game purchases and that “players’ willingness to consistently make in-app purchases is impacted by [the Company’s] ability to deliver engaging content and personalized user experiences.” The Company further disclosed that “[its] ability to anticipate or respond to changing technology and evolving industry standards and to develop and introduce improvements and enhancements to games on a timely basis is a significant factor affecting [its] ability to remain competitive.” The Company noted that necessary “systems integration or migration work” could result in disruptions to service. In November 2021, the Company allegedly released its financial results for the third quarter of 2021 and disclosed that its revenue had decreased. The Company allegedly attributed the decline in revenue in part to lower-than-expected revenue from its two most popular casino games, possibly a result of “comparatively fewer new promotions and features as a result of some of the infrastructure enhancements we’re making.” After these announcements, the Company’s share price allegedly dropped.
Plaintiff alleged that the Company had already begun implementing infrastructure changes to its casino games before the registration statement and IPO and that those infrastructure changes should have been, but were not, disclosed in the registration statement. The Company moved to dismiss the complaint for failure to state a claim.
The Court held that plaintiff failed to plausibly state a Section 11 violation against defendants under either of the two theories alleged. First, the Court held that the registration statement’s existing disclosures adequately covered the risks posed by the specific infrastructure changes such that plaintiff failed to allege the Company omitted any material fact. The Court found it particularly significant that the Company “expressly disclosed that whether it could maintain a constant cadence of feature deployment was uncertain,” including because of “systems integration or migration work.” While plaintiff argued that this disclosure concerned only “potential risks” and thus did not cover risks that had already materialized, the Court found that plaintiff did not sufficiently allege that the risks associated the infrastructure changes to the Company’s casino games had materialized at the time of the IPO.
Second, the Court held that Item 105, which requires that a registration statement include “a discussion of the most significant factors that make the offering speculative or risky,” did not obligate the Company to disclose specific infrastructure changes. In particular, the Court held that the language provided in the registration statement that the Company “would engage in systems migration and upgrades that could disrupt the flow of new content” was sufficiently broad to cover the specific risks posed by the alleged infrastructure changes and that Item 105 did not require a more granular disclosure. The Court further held that Item 105 did not require the Company to disclose why it pursued specific infrastructure changes because the registration statement included sufficient disclosures regarding the Company’s need to “constantly” optimize new technologies and enhance and upgrade its games.
The Court also dismissed the Section 15 claim based on plaintiff’s failure to adequately plead a predicate Section 11 violation. The Court dismissed the action with prejudice on the basis that amendment would be futile.
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In re Playtika Sec. Litig.
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