Securities Regulation Daily Wrap Up, ACCOUNTING AND AUDITING—N.D. Cal.: Shareholders—for the second time—lose scienter argument, defendants’ accounting mistakes apparently honest, (Oct 15, 2025)

By Jay Fishman, J.D.

The Ninth Circuit’s heightened “deliberate recklessness” standard doomed the plaintiffs’ scienter claim.

The California Northern District Court dismissed with prejudice the plaintiff shareholders’ amended complaint for fraud against a cryptocurrency company and its officers and directors. The court confirmed its initial dismissal for the same reason: the plaintiffs failed to prove the defendants acted with scienter and, thereby, could not overcome the sufficient pleading standards mandated by Federal Civil Procedure Rule 9(b) and the Private Securities Litigation Reform Act (PSLRA) for complaints alleging securities fraud under Exchange Act Section 10(b) and corresponding Rule 10b-5. The dismissal prompted the court to simultaneously dismiss the shareholders’ secondary claim for control person liability against the executive officers under Exchange Act Section 20(a) (In re SentinelOne, Inc. Securities Litigation, No. 23-cv-02786-HSG (N.D. Cal. Oct. 2, 2025)).

The company’s accounting trajectory. The cybersecurity company offered subscription products during the class period, from June 1, 2022, to June 1, 2023. For 2022, the company recognized revenue ratably over the course of the contract by following generally accepted accounting principles (GAAP). However, for 2023, the company additionally included in their accounting statements the financial results of a non-GAAP metric referred to as Annualized Recurring Revenue (ARR).

The plaintiffs, with confidential witness support, argued that ARR includes more than just the subscription product fee—it adds consumption and usage revenue to the calculation. By comparing the 2023 ARR-included calculation to 2022’s non-ARR calculation, the result showed an artificially inflated profit for 2023 that exceeded 2022. And by not disclosing to the shareholders the ARR addition, the plaintiffs were falsely led to believe the company was profiting in 2023 over 2022 by more than it really was. Further, the shareholders declared that when the individual defendants disclosed the truth by the end of the class period and subsequently corrected the books to reflect the true, lower profit, this admission proved they intended to hide the truth or were reckless in not admitting it when they secretly added ARR to the GAAP revenue calculation for 2023.

Court doesn’t buy it. The court concluded the plaintiffs’ second amended complaint did not sufficiently correct the ineffective scienter assertions of the first complaint and, therefore, failed again to overcome the Rule 9(b) and PSLRA burdens required for Section 10(b)/Rule 10b-5 fraud complaints. Pertaining to the recklessness alternative to proving scienter by intent to deceive, the court pointed to the Ninth Circuit’s mandate that “deliberate recklessness” be proven, which is more than “mere recklessness or a motive to commit fraud.”

The court then laid out the crux of the plaintiffs’ argument: that the defendants, in changing the way the company calculated ARR and then later acknowledging—and correcting—the errors from the ARR calculation, must have intended to mislead investors at the time they initially inserted the artificially inflated profits from the ARR calculations into the accounting statements—and without disclosing the calculations to the shareholders. But the court took a dim view of this argument, stating that instead of demonstrating scienter it more likely shows that the defendants admitted to an honest mistake and corrected it, which fails to prove deliberate recklessness. The court went on to say that plaintiffs “may not bootstrap defendants’ acknowledgment that the ARR figures turned out to be inaccurately determined into an inference that defendants deliberately tried to mislead investors or were deliberately reckless in making the original representations.”

This case is No. 23-cv-02786-HSG.

Judge: Gilliam, H.

Attorneys: Charles Henry Linehan (Glancy Prongay & Murray LLP) for Sakari Johansson. Cornelia J. B. Gordon (Scott+Scott Attorneys at Law LLP) for Amir Gupta. Dean S. Kristy (Fenwick & West LLP) for SentinelOne, Inc., Tomer Weingarten and David Bernhardt.

Companies: SentinelOne, Inc.

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