Securities Regulation Daily Wrap Up, FRAUD AND MANIPULATION—N.D. Ill.: Sprout Social will face fraud suit over ‘upmarket‘ shift, (Oct 7, 2026)

By Rodney F. Tonkovic, J.D.

The company attempted to pursue corporate and enterprise customers using the same products and services offered to small businesses.

The district court sitting in Chicago denied a motion to dismiss a securities fraud class action against Sprout Social, Inc. Investors alleged that Sprout misled the market about its ability to attract enterprise customers and whether its product was suitable for these larger clients while knowing that demand was weak and sales were a struggle. The court found that the plaintiffs plausibly alleged materially false or misleading statements, scienter, and loss causation. The court accordingly denied Sprout's motion to dismiss and set a status hearing (Employees' Retirement System of the City of Baltimore v. Sprout Social, Inc., No. 1:24-cv-03867 (N.D. Ill.)).

Moving upmarket. Sprout Social offers a subscription-based platform for businesses to manage their social media marketing. While it had previously served small-to-medium-sized businesses, in late 2021 the company decided to move "upmarket" and target larger business and more lucrative, longer-term annual contracts.

The complaint alleged that Sprout's public filings created an unrealistically positive assessment of its business that led to artificial inflation in its stock price. The alleged false statements, made between September 2021 and March 2024, generally touted Sprout's software product and sales model and claimed that they were adequate for larger clients.

Broadly, the company's products and approach in pursuing enterprise clients were essentially the same as those used for smaller businesses and were not competitive with true enterprise solutions. Many of these issues were highlighted by confidential witnesses and in a short-seller report (the "Razor Report") that said Sprout was struggling to land corporate clients and was unable to compete in that space. Rather than having a competitive product, the complaint maintained that Sprout generated enterprise business due to competitive pricing, but sales plummeted when prices increased in late 2022.

Lead plaintiff. Separate fraud actions were filed in May and July 2024, bringing substantially similar allegations. The actions were consolidated and, in November 2024, the court appointed the Employees’ Retirement System of the City of Baltimore as lead plaintiff.

Misrepresentations. Sprout argued that the complaint failed to plead that any statement was false when made (or ever). While Sprout argued that the plaintiff failed to plead that statements about its sales strategy were false with the required particularity, the court said that at this stage, the plaintiff adequately pleaded why the statements were false by offering contradictory information showing the shortcomings in its strategy. This was also the case for statements concerning the length of Sprout's sales cycles, which were similarly not up to the task of dealing with larger clients.

The court then concluded that the plaintiff adequately showed specific inadequacies with Sprout's product that undermined the company's statements about its suitability for enterprise clients. The court noted that Sprout urged that the facts be construed in a light most favorable to the defendants, but even if the company had some success, it was not implausible that there were crucial shortcomings in its ability to achieve upmarket growth.

The last category of misstatements involved a partnership with Salesforce via which users of a discontinued marketing tool would migrate to Sprout. While Sprout trumpeted a massive opportunity, the complaint said that there was, at most, a short-term boost to sales because the Salesforce customers, who had been using a free service, did not want to start paying for social media management. Many of the details here came from the Razor Report, which the court found to be reliable and corroborative.

The court also concluded that all of the alleged misstatements were actionable. Many of the challenged statements, for example, were made in response to direct questions by analysts and thus could not be immaterial puffery. The plaintiff plausibly alleged the existence of material misstatements by pointing to statements on which an investor would reasonably rely as reflecting consequential facts about Sprout's financial health, the court said.

Scienter. The court went on to find that these statements were made with scienter by the individual defendants. In this case, the core operations theory and statements by confidential witnesses all supported an inference of scienter, and so did the timing and volume of stock sales by certain defendants.

Loss causation. Finally, the court found that the plaintiff identified three corrective disclosures. Each disclosure revealed that Sprout's prior statements about its ability to pursue enterprise customers were false, and each led to a decline in share price.

The case is No. 1:24-cv-03867.

Judge: Cummings, J.

Attorneys: Carol V. Gilden (Cohen, Milstein, Sellers & Toll, LLP) for Employees' Retirement System of the City of Baltimore. Dane A. Drobny (Winston Taylor LLP) for Sprout Social, Inc.

Companies: Employees' Retirement System of the City of Baltimore; Sprout Social, Inc.

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