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Delaware court denies Fitbit's motion to dismiss insider trading suit

By Charmaine Little | Dec 31, 2018

WILMINGTON, Del. (Legal Newsline) – A handful of Fitbit stockholders’ breach of fiduciary duties case against members of the company’s board of directors survived dismissal in the Court of Chancery of the State of Delaware on Dec. 14.

Vice Chancellor Joseph R. Slights wrote in his decision that he was "satisfied" the plaintiffs stated viable claims and pleaded demand futility over allegations of breach of the fiduciary duty of loyalty in connection with the PurePulse technology, initial public offering, lock-up waivers and subsequent secondary offering. He denied the defendants' motion to dismiss.

Stockholders for the popular fitness tech company claimed members of the board and its chief financial officer infringed on the fiduciary duties when they allegedly used insider knowledge of a bad product to make more money from the company’s stock.

"As Fitbit touted the promise of its new technology, behind the scenes, PurePulse consistently failed accuracy tests and caused ‘paranoia’ among Fitbit management,” according to the court's ruling.

As a result, the members of the board allegedly falsified Fitbit’s initial public offering in June 2015 and its second offering in November 2015 to boost trading. The board also allegedly waived the lock-up agreements that were designed to block insiders from selling more shares for a time frame following the IPO.

The court evaluated the second amended complaint, which states the defendants allegedly let the selling defendants sell stock in the offerings based on insider information, and that the director defendants waive lock-up agreements. It first determined that the SAC sufficiently pleaded that there was knowledge of the PurePulse issues and that Fitbit’s trials to fix them were not an issue open to the public. 

The plaintiffs provided internal documents that proved PurePulse’s issues were so problematic the company couldn’t fix them after creating a new algorithm or software, the ruling states. Plus, board members allegedly went as far as telling workers to get rid of all documents that showed management recounting the issues and the failed attempts to fix them. Meanwhile, Fitbit put out public statements that touted the positive aspects of PurePulse.

The court also determined the second amended complaint sufficiently pleaded that the selling defendants used scienter when they sold their Fitbit shares. Considering the fact that the plaintiffs pointed out that four of the seven demand board members sold their stock during the offerings (after some got word of the issues with PurePulse), the court said this was enough to prove the plaintiffs’ point.

“Plaintiffs have adequately pled facts that raise a reasonable doubt as to whether the demand board was disinterested with respect to the waiver of the lock-up agreements for designated employees and consultants,” the ruling states.

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