Saxena White Wins Motion to Dismiss Against Cerence Inc.

On March 25, 2024, Saxena White secured a major victory with a significant decision issued by the Honorable Allison D. Burroughs of the District of Massachusetts, in City of Miami Fire Fighters’ and Police Officers’ Retirement Trust v. Cerence Inc. et al, No. 1:22-cv-10321-ADB (D. Mass.), in which Judge Burroughs denied in part Defendants’ motion to dismiss Lead Plaintiff’s amended complaint. The case alleges that throughout the class period, Defendants made false and misleading statements about Cerence’s revenue and business operations, while concealing from investors that they were engaged in a revenue “pull-forward” scheme that inflated short-term revenues by cannibalizing long-term sales. When the truth was revealed over a series of three corrective disclosures, Cerence’s stock fell dramatically, wiping out a total of nearly $2 billion in market capitalization.

Cerence is a Massachusetts-based technology company that sells artificial intelligence-powered, voice-operated virtual assistant software primarily to automobile manufacturers. During the class period, Cerence sold its products through both “fixed contracts,” in which Cerence sold the customer a fixed number of software licenses up front for a fixed, discounted fee, and “variable” contracts, in which customers paid Cerence higher fees on a rolling basis as the customers used the licenses. Fixed contracts enabled Cerence to recognize revenue immediately, as soon as the contract was signed, whereas Cerence could not recognize revenue from variable contracts until the customer actually used each software license. Cerence’s reliance on discounted “fixed” contracts was generally disfavored by investors, as those contracts provided Cerence with higher revenues up front, but lower revenues in the long term.

The amended complaint alleged that, throughout the class period, Cerence misleadingly assured investors it was moving away from relying on fixed contracts and increasing its use of variable contracts. In reality, however, the opposite was true – Cerence was actively steering its customers into fixed contracts at heavily discounted rates and unfavorable terms so that it could misleadingly inflate its near-term revenue, all the while cannibalizing future sales from the very same customers. The amended complaint further alleges that the Individual Defendants profited handsomely from these fraudulent practices, receiving more than $31 million in “performance-based” compensation due to the Company just barely meeting certain revenue targets that it would not have met but for their fraudulent practices.

In denying Defendants’ motion to dismiss, Judge Burroughs sustained the full alleged class period and three key false statements, finding that facts from Saxena White’s investigation supported Plaintiffs’ allegations that Defendants “were engaged in a scheme to increase Cerence’s use of fixed contract arrangements,” and that Defendants’ statements to the contrary were thus false and misleading. Judge Burroughs further found that a finding of Defendants’ scienter was supported by facts provided by a key confidential witness, and by Defendants’ realization of tens of millions of dollars in incentive compensation by misleadingly inflating Cerence’s revenues.

The case will now proceed to the discovery phase.