Sprout Social Didn't Disclose 'Material Adverse Facts' After Tagger Buy: Investor Suit
Sprout Social, a developer of social media management platforms, made materially false and misleading statements and failed to disclose “material adverse facts” from Nov. 2 to May 2, leading to “artificially inflated” stock prices, alleged a securities fraud class action (docket 1:24-cv-03867) Monday in U.S. District Court for Northern Illinois.
On Aug. 3, Sprout Social announced it had acquired Tagger Media, an influencer marketing platform for brands and agencies. The next month, at its investor day, it said it would be accelerating its “outbound marketing & sales motion in enterprise” to focus on mid-market and enterprise leadership, said the complaint.
In its Feb. 23 annual report for 2023, the company said it "may encounter difficulties integrating the businesses, technologies, products, personnel or operations of the acquired companies, particularly if key personnel of the acquired company choose not to work for us, the acquired platform, products or services are not easily adapted to work with our platform or products or we have difficulty retaining the customers of any acquired business due to changes in ownership, management or otherwise."
Acquisitions could "disrupt our business, divert our resources and require significant management and research and development attention that would otherwise be available for development of our existing platform and products," said the 10-K filing with the SEC. Also, it said, "The anticipated benefits of any acquisition, investment or business relationship may not be realized" and "we may be exposed to unknown risks or liabilities."
On its May 2 Q1 FY 2024 earnings call, after markets closed, Sprout disclosed it had missed revenue guidance for the quarter and revised full-year 2024 guidance downward by $20 million, the complaint said. Chief Financial Officer Joe Del Preto said the company “underestimated the magnitude of enterprise seasonality” and had “self-inducing sales execution headwinds,” it said.
Incoming CEO Ryan Barretto, due to take office Oct. 1, said the company made strategic decisions heading into Q1 that it thought it could handle “without disruption, but they collectively set us back,” the complaint said. Commenting on the sales team, Barretto said the company did "a lot of enablement in Q1" to make sure it was "up to speed" with influence marketing and the Tagger platform, the complaint said. On the news, Sprout’s stock price fell 40% to close at $28.82 on May 3 “on unusually heavy trading volume,” the complaint said.
Defendants Sprout Social, Barretto, current CEO Justyn Howard and Del Preto failed to disclose to investors that the company’s sales and revenue growth weren’t “indicative of the Company’s growth as it transitioned to an enterprise sales cycle”; that it faced integration challenges with the Tagger buy; that it was “self-inducing sales headwinds” and would revise full-year revenue guidance; and that its positive statements about business, operations and prospects “were materially misleading” or “lacked a reasonable basis,” the complaint alleged.
As a result of the defendants’ wrongful acts and omissions, and “the precipitous decline in the market value” of Sprout’s stock, plaintiff Richard Munch and class members have suffered “significant losses and damages,” the complaint said. They bring claims under the Exchange Act and seek compensatory damages plus legal fees. Sprout didn’t comment Tuesday.