[00:00:00] Speaker 01:
Good morning and may it please the court.

[00:00:01] Speaker 01:
I would like to reserve two minutes for rebuttal and I'll keep an eye on my own time.

[00:00:06] Speaker 01:
This is a pretty straightforward securities case that involves a series of misstatements by a company trying to skew the information presented to the market in advance of a SPAC merger that allowed management to cash out nearly a quarter billion dollars in shares in a secondary offering.

[00:00:24] Speaker 01:
The misstatements fall into four general categories that both overstate

[00:00:29] Speaker 01:
the company's technical capabilities in terms of what they were marketing, but also the revenue growth, user engagement, and other key business metrics by which they evaluated the company.

[00:00:43] Speaker 01:
The technical capabilities of the platform focused on a series of statements in which the company made unequivocal representations about its ability to host a very specific type of games.

[00:00:55] Speaker 03:
Tell me what the misstatement was.

[00:00:58] Speaker 03:
Your brief seems to only identify the statement that the platform enabled Sincron.

[00:01:06] Speaker 03:
However one pronounces it, pronounce it for me.

[00:01:09] Speaker 03:
Synchronous.

[00:01:10] Speaker 03:
Synchronous.

[00:01:10] Speaker 03:
Synchronous gaming.

[00:01:13] Speaker 03:
It did enable synchronous gaming, did it not?

[00:01:16] Speaker 01:
So in terms of enablement, and this is something the district court focuses on a lot, what the company actually enabled was rudimentary and non-robust features that were currently in testing.

[00:01:30] Speaker 03:
Well, but except, I'm trying to figure out that there's another statement that you're focusing on, because you say they represented all these things, but the only statement identified either below or in your briefing is that their platform enabled synchronous gaming.

[00:01:46] Speaker 03:
And it did.

[00:01:49] Speaker 03:
People competed against each other on the platform.

[00:01:52] Speaker 03:
So I'm trying to figure out why that statement is false.

[00:01:55] Speaker 01:
Sure.

[00:01:55] Speaker 01:
So synchronous gaming refers to a specific type of game that involves real-time interaction among

[00:02:01] Speaker 01:
There's three categories of games they represent, they enable asynchronous gaming, turn-taking gaming, and then full-on synchronous gaming, which is described in paragraph 85 of the complaint, which is excerpt number 43.

[00:02:14] Speaker 01:
That is where they start to describe the games themselves through specific examples.

[00:02:20] Speaker 01:
And what the company promotes publicly in its blog posts is that these are games that have strong social immediacy.

[00:02:26] Speaker 01:
engaging and immersive designs and then they give specific examples of the types of games they're talking about.

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First-person shooters, real-time strategy, racing games, content that is evocative of the engaging and immersive design that they're promoting to investors as key to holding users on the platform and

[00:02:45] Speaker 01:
increasing user engagement.

[00:02:47] Speaker 01:
What comes out through the corrective disclosures is that in reality that type of gaming is impossible.

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What the company can do is have very rudimentary early stage testing features that are at best in their infancy.

[00:03:01] Speaker 01:
It comes out later, CEO Defendant Paradise admits at the company's Q1 earnings call after he already cashed out almost $200 million in shares.

[00:03:10] Speaker 03:
I don't care about what he cashed out.

[00:03:11] Speaker 03:
It's a nice jury argument, but just

[00:03:13] Speaker 01:
What he admits later is that the technology is so early, it's not even factored into the company's revenue.

[00:03:20] Speaker 01:
They're not actually promoting these games.

[00:03:21] Speaker 01:
They're not making money off of it.

[00:03:23] Speaker 01:
It's brand new technology that they oversold by saying this was enabled and by tying it then to statements about the quality, the immersive and interactive nature of the games.

[00:03:32] Speaker 02:
So some of the comparisons, I mean, for example, Fortnite, that's your comparison, not theirs, right?

[00:03:36] Speaker 01:
That is an example of what we compared it to correct.

[00:03:39] Speaker 01:
They don't link it directly to Fortnite, but in promoting the games, they talk about these large existing player-based games that have real-time strategy, fighting, racing, first-person shooters, that are evocative of the games made by large gaming studios, which the Wolfpack report and our confidential witness

[00:03:58] Speaker 02:
When I hear the word evocative, I think puffery.

[00:04:03] Speaker 02:
What's the case?

[00:04:05] Speaker 02:
I mean, at best, this is incomplete.

[00:04:07] Speaker 02:
How is that false?

[00:04:09] Speaker 01:
Well, incomplete's not enough.

[00:04:12] Speaker 01:
How is it false materially?

[00:04:14] Speaker 01:
Well, misleading in the sense that it is tying the statement about

[00:04:18] Speaker 02:
Synchronous gaming to examples of specific types of games had they not drawn reference to these specific strategy games fighting games But you're saying specific strategy games They don't do what specific games are they talking about they could be talking about the games that you know I used to play on my Atari when I was a kid those were all interactive strategy

[00:04:37] Speaker 02:
sports games, racing games as well.

[00:04:40] Speaker 02:
They just weren't Fortnite, but they weren't promising Fortnite.

[00:04:43] Speaker 01:
But those types of games would not have been the types of games that have large existing user bases that they're referring to.

[00:04:50] Speaker 01:
That's the difference.

[00:04:51] Speaker 01:
We're not talking about tic-tac-toe going back and forth where two people compete against each other.

[00:04:56] Speaker 01:
They're specifically referencing large existing player bases, that's paragraph 85 in our complaint, with strong social immediacy and reciprocity that is necessary in order to

[00:05:08] Speaker 01:
keep users engaged and part of the platform.

[00:05:11] Speaker 02:
Could I ask you about the, I guess, the next, maybe previewing your next category, the user metrics?

[00:05:18] Speaker 02:
Sure.

[00:05:20] Speaker 02:
You discussed the first quarter 2021 earnings call and its alleged inconsistency with registration and other statements that the company made.

[00:05:32] Speaker 02:
Is that a standalone claim as you view it?

[00:05:37] Speaker 01:
You're asking about monthly active user quotes?

[00:05:40] Speaker 02:
Yeah, the monthly active user, the MAU compared to the May 4th discussion.

[00:05:46] Speaker 01:
Yeah, so the issue with the monthly active user disclosure is that the company promotes itself and ties revenue growth specifically to increases in monthly active users.

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which is a metric that the company later admits does not actually correlate to performance in its business.

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And it does not generate revenue for the company.

[00:06:08] Speaker 02:
Right.

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And is that a is standing alone?

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Is that a materially false or misleading statement that your claims rely upon?

[00:06:17] Speaker 01:
Yes, because in in

[00:06:19] Speaker 01:
describing revenue growth as primarily attributable to growth in monthly active users, what the company did was it concealed that the actual amount of money each paying user was generating.

[00:06:31] Speaker 01:
So the value of each user they were acquiring was in decline.

[00:06:34] Speaker 03:
Well, let me ask you a question about that because I'm having some trouble and you've got two separate arguments about that.

[00:06:41] Speaker 03:
One is that they didn't disclose how much revenue came from

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the few paying users and the other one is this argument about the metric in general.

[00:06:53] Speaker 03:
But there's a disclosure relatively early on that only about 10% of their users are paying users.

[00:07:04] Speaker 03:
and you get a monthly number of total users and you know revenue only comes from paying users.

[00:07:13] Speaker 03:
Isn't it a pretty simple mathematical calculation to figure out how much is coming from the paying users and how much is not?

[00:07:23] Speaker 01:
The 10% is an estimate.

[00:07:26] Speaker 03:
But we're talking about materially misleading.

[00:07:30] Speaker 03:
So you know that only 10% of their users are paying.

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You know how much comes in each month from revenues.

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And you know how many total users there are.

[00:07:42] Speaker 03:
Even a mathematically challenged judge could figure out how much each user is accounting for on the average.

[00:07:49] Speaker 03:
So what am I missing?

[00:07:51] Speaker 01:
Yes.

[00:07:51] Speaker 01:
Again, the issue with it is how it misleadingly presents what's driving the revenue growth.

[00:07:57] Speaker 01:
So the revenue growth is not actually tied to, or primarily, as the company says, based on increases in monthly active users.

[00:08:04] Speaker 01:
It turns on the number of paying users that actually pay money into the platform.

[00:08:07] Speaker 03:
But of course, but you know that.

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You know that from the very beginning that the only way the company makes money is from paying users.

[00:08:15] Speaker 03:
You know from the outset, or closely from the outset, that only about 10% of them are paying.

[00:08:20] Speaker 03:
And their business model, which seems maybe not to be a good one, is to sign up as many users as they can because you can't become a paying user.

[00:08:28] Speaker 03:
until you're a user and hope that that drives their paying user number.

[00:08:32] Speaker 03:
So I'm missing what's so misleading about this.

[00:08:35] Speaker 01:
Well, that's why it's even more important to disclose that the amount of money each paying user was generating was going down over time.

[00:08:42] Speaker 03:
Because if, as your honor is... But can't you figure that out?

[00:08:45] Speaker 03:
You get the monthly revenues.

[00:08:47] Speaker 03:
And you know, unless you think there's an increasing number of paying users, which no one tells you there is, you can see that if it's still at 10%, it's going down.

[00:08:56] Speaker 01:
If you had known all of the pieces of that information.

[00:09:00] Speaker 03:
But I knew all the pieces from just looking at the disclosures.

[00:09:02] Speaker 01:
But you don't know the number of paying users in order to do the calculation to know that that's going down.

[00:09:06] Speaker 03:
But do you agree with me if you apply the 10% number, the total number of users, and apply it across the board, you know the number of paying users?

[00:09:14] Speaker 02:
not necessarily because did that conversion rate change at all over the relevant period.

[00:09:20] Speaker 02:
I mean we say 10 percent it might be an estimate but did it vary materially over this period.

[00:09:25] Speaker 01:
I don't remember if it varied materially in terms of how much it changed.

[00:09:29] Speaker 02:
If it didn't, then I think you can do Judge Horowitz's math, can't you?

[00:09:33] Speaker 01:
The point is that even if it stayed at 10 percent, what you're missing is the information about the number of paying users to know that that revenue is in decline and why that is important.

[00:09:42] Speaker 03:
Again, use this 10 percent number.

[00:09:46] Speaker 03:
You have the total number of users.

[00:09:47] Speaker 03:
They disclose that every month.

[00:09:49] Speaker 03:
So if you apply 10% against that total number, you can, I assume, and then take a look and see whether that's bigger or lesser than the number of months before, you know whether or not the number of paying users is in decline or on the increase.

[00:10:03] Speaker 01:
But you don't know the value that the users are actually deriving.

[00:10:06] Speaker 01:
So in the formula and why analysts questioned

[00:10:10] Speaker 01:
after the company changed its metrics to reporting these paying user-focused statistics, what are the metrics we should focus on is because it even wasn't clear to them how the company was actually accounting for this in their reports.

[00:10:23] Speaker 02:
I guess that's where I want to come back to then in terms of this, the alleged disconnection on the MAU, paid MAU, the SEC disclosure in the first quarter call.

[00:10:35] Speaker 02:
Where's the loss causation on that particular claim?

[00:10:38] Speaker 02:
You talked about that as being an independent basis for this claim.

[00:10:41] Speaker 02:
That seems to be one of the areas where there seems to be maybe some disconnect between what they're saying to some people and what they're saying to another.

[00:10:53] Speaker 02:
But on May 4th, where's the loss?

[00:10:56] Speaker 01:
So the company changes the reporting metrics after the earnings call that takes place in March of 2021.

[00:11:05] Speaker 01:
So shortly after that, about almost two weeks later, they change the reporting to report paying user metrics.

[00:11:11] Speaker 03:
So there can't be any damage on discount after March 4th, right?

[00:11:16] Speaker 01:
Well, it depends.

[00:11:17] Speaker 01:
When they raise it for causation purposes, is that the next available call?

[00:11:21] Speaker 01:
So analysts bring up these questions about the change in reporting metric and ask management what they should look at in May of 2021.

[00:11:27] Speaker 03:
But you do agree that after March 4th, starting on March 4th, you knew the number of paying users.

[00:11:34] Speaker 01:
So they change the reporting to report the average revenue per paying user.

[00:11:40] Speaker 01:
That comes out in the change for that reporting period.

[00:11:43] Speaker 01:
Right.

[00:11:43] Speaker 03:
I'm just trying to figure out, this may not have anything to do with your claims up till March 4th, but I'm having a hard time seeing why after March 4th you have any claim relating to failure to disclose average revenue per paying user.

[00:11:57] Speaker 01:
Because that's when the change, it takes from March 4th to when the analysts are able to question the company at the May

[00:12:04] Speaker 01:
earnings call on Q1 2021 for that information to actually be incorporated and appreciated.

[00:12:10] Speaker 01:
That's when we see the questions come up where they ask management directly, what should we focus on?

[00:12:15] Speaker 03:
But you do agree that all shareholders were told on March 4th that we now change the metric and here's the metric.

[00:12:21] Speaker 01:
The metric changed, but in order for it to incorporate into the price of the stock, it would have taken that period of time.

[00:12:28] Speaker 01:
There are examples

[00:12:30] Speaker 01:
of where that kind of a disclosure, which is a change in metrics that was important, took the analysts to question the company in order to fully incorporate this into what happened.

[00:12:41] Speaker 02:
And I'm looking at your, I think this is in your complaint or briefing the stock chart.

[00:12:50] Speaker 02:
And with respect to the two third-party corrective disclosures that you've alleged, the Wolfpack and Eagle Eye, and they're kind of striking ups and downs.

[00:12:59] Speaker 02:
That might be a separate issue in terms of loss causation.

[00:13:03] Speaker 02:
When you look out at your alleged corrective disclosure for this MAU reporting question that there is an inconsistency between what was going on inside and outside,

[00:13:14] Speaker 02:
I don't see anything.

[00:13:17] Speaker 02:
What's your best case for loss causation resulting from the corrective disclosure on the May 4th call?

[00:13:22] Speaker 01:
There's an almost 9% stock drop that follows the May 4th call that's in the chart.

[00:13:29] Speaker 01:
And that is a result of what you see on the call and what we cite in the complaint is the vigorous questioning about what are the metrics we should rely on?

[00:13:39] Speaker 01:
What are the actual facts we should focus on here?

[00:13:42] Speaker 01:
And then the questions to

[00:13:44] Speaker 01:
management about what that means for the business.

[00:13:47] Speaker 01:
That's the first time that came up and that tie to analyst questioning is what precipitates the drop and connects the

[00:13:54] Speaker 01:
I can reserve the rest of my time unless you have other questions.

[00:13:57] Speaker 02:
Do you have any questions?

[00:14:00] Speaker 04:
I know you didn't get a chance to address the download rates and the bonus cash incentives.

[00:14:04] Speaker 02:
We can take a couple more minutes to get to those.

[00:14:07] Speaker 04:
Yeah, go ahead.

[00:14:08] Speaker 04:
Sure.

[00:14:10] Speaker 04:
So what's the falsity about the download rates and the bonus cash incentives?

[00:14:14] Speaker 01:
Sure.

[00:14:14] Speaker 01:
I can be quick with those.

[00:14:15] Speaker 01:
I mean, the download rates are very simply, if

[00:14:20] Speaker 01:
As we just discussed earlier, downloads are the method by which you get users on the platform that you then convert into paying users.

[00:14:26] Speaker 01:
Then downloads are an essential part to the business.

[00:14:28] Speaker 01:
The downloads in the top games that accounted for 88% of the revenue were in decline.

[00:14:33] Speaker 01:
And our CW stated that the downloads actually were in decline well before that, not just for those three games, but for all of the games.

[00:14:41] Speaker 01:
Knowing that there's less users downloading games would mean that there's less

[00:14:44] Speaker 01:
and they use, there's less people coming into the platform.

[00:14:47] Speaker 03:
Was revenue in decline over that period also?

[00:14:50] Speaker 01:
So defendants make a big deal about this too.

[00:14:52] Speaker 03:
I don't care whether they make a big deal.

[00:14:55] Speaker 03:
Was it in decline or not?

[00:14:57] Speaker 01:
So in terms of projections, I know that they claim to have met their projections.

[00:15:02] Speaker 03:
You've got actual revenue numbers.

[00:15:05] Speaker 03:
Did revenue decline over that period?

[00:15:07] Speaker 01:
Revenue does not seem to decline, but it is declining in the sense that the amount that they're making per person goes down over time, the amount of people they're getting onto the platform is going down over time, and the value of those users over time in terms of what they're spending is going down.

[00:15:24] Speaker 03:
So they're charging more per game?

[00:15:27] Speaker 03:
Is that what you think?

[00:15:29] Speaker 01:
No, I don't think they're charging.

[00:15:30] Speaker 03:
Revenue is not going down.

[00:15:32] Speaker 03:
You say the number of downloads is going down.

[00:15:34] Speaker 03:
So I'm trying to figure out how revenue is not going down.

[00:15:36] Speaker 01:
What starts to come out is that it is a non-sustainable business model, which turns to the bonus cash question of where revenue stays where it is, is because it involves a large percentage of non-cash revenue that they're counting from user incentives.

[00:15:50] Speaker 03:
But they're disclosing what portion of their revenue is incentive.

[00:15:55] Speaker 03:
They say 7% or so of our revenue comes from incentives, including bonus cash.

[00:16:00] Speaker 01:
Well, that's very different from what the chief revenue officer stated at the May 1, 2021 earnings call, that it was about 40 percent of the revenue was non-cash revenue, or what Eagle I found, which was higher, it was 50 to 70 percent.

[00:16:14] Speaker 01:
And so when you look at that aspect of the business, where so much of the revenue... There aren't incentives being disclosed in the financials.

[00:16:22] Speaker 01:
Other than knowing that the incentives exist, there's mention that they do engage in user incentives, right?

[00:16:27] Speaker 03:
But isn't the percentage of incentives as a proportion of the revenue being disclosed?

[00:16:32] Speaker 01:
Not in the way that discloses the non-cash revenue because, and again, this comes up from analyst questioning, the reason that analysts ask specifically for management to disclose that information at the earnings call was so that they could verify the

[00:16:47] Speaker 01:
these numbers that were coming out from the Eagle Eye report, they weren't able to do that based on the information that was disclosed.

[00:16:52] Speaker 01:
And when they asked for transparency, management refused, and Paradise, the CEO, told them that they had withheld that information to protect the business, so it wasn't disclosed.

[00:17:01] Speaker 03:
I'm sorry, Judge Morris, I may have cut a few questions.

[00:17:05] Speaker 02:
I think we segwayed into your final category, so if you have anything else to say there and we'll spot you two minutes on your rebuttal.

[00:17:12] Speaker 01:
Only that I think what has to, you have to look at that in the context of what we were talking about and that by creating a system where the bonus cash was really what was driving user growth, not great technology and matchmaking or content like they claimed.

[00:17:27] Speaker 01:
The company was hiding this outsized amount of non-cash revenue that was really a pay-for-play model in terms of their business.

[00:17:34] Speaker 01:
They were getting user engagement numbers because they were effectively giving people free money to spend on the platform that did create liability for them.

[00:17:42] Speaker 01:
Eagle Eye points this out that what happens is because bonus cash becomes redeemable once you use it, these incentives aren't, as defendants want to make it seem, things that can't be withdrawn that stay entirely within the platform.

[00:17:56] Speaker 01:
Once you spend that money to enter a game with free virtual dollars, it becomes something you can take out.

[00:18:02] Speaker 01:
The company's on the hook to actually pay people back for this.

[00:18:05] Speaker 01:
When you take that fact, which

[00:18:09] Speaker 01:
Chafkin, the chief revenue officer, admits is actually cannibalizing user cash spend on the platform.

[00:18:15] Speaker 01:
And you pair it with these other issues with decreasing downloads and decreasing spend per paying user, it's a very materially different perception of the business than what they sold to the market, which was this high-growth tech platform that was enabling all this great gaming content and pulling in users' hand over fist.

[00:18:34] Speaker 02:
Okay, thank you, Mr. Revis.

[00:18:35] Speaker 02:
We'll give you two minutes on Roboto.

[00:18:41] Speaker 02:
Ms.

[00:18:41] Speaker 02:
Blunci.

[00:18:49] Speaker 00:
Good morning, Your Honors.

[00:18:50] Speaker 00:
May it please the Court?

[00:18:51] Speaker 00:
I'm Melanie Blunci on behalf of the skills defendant appellees.

[00:18:55] Speaker 00:
Cases like this are exactly why the heightened pleading standards under the Private Securities Litigation Reform Act were enacted.

[00:19:01] Speaker 00:
We've got a grab bag of different statements across four different topics.

[00:19:05] Speaker 00:
And those statements are loosely tethered, if at all, to the information that we're hearing plaintiffs say that they've decided in hindsight based on some revelations of questionable provenance from self-interested short sellers that they would have liked to have learned earlier.

[00:19:21] Speaker 00:
So none of that information, when we look at the actual statements that skills made, none of the information you're hearing from

[00:19:30] Speaker 00:
my colleague renders those statements false or misleading.

[00:19:34] Speaker 00:
Much of it isn't even factual as opposed to negative spin delivered from the ANNA.

[00:19:38] Speaker 02:
What about the MAU?

[00:19:40] Speaker 00:
Absolutely.

[00:19:41] Speaker 00:
So when it comes to MAU, there's no allegation that any of the MAU numbers were incorrect.

[00:19:47] Speaker 00:
What council is focusing on is the allegation.

[00:19:49] Speaker 02:
I think it's probably maybe a more serious allegation that the MAU numbers were either relevant or irrelevant depending on who the company was talking to.

[00:19:58] Speaker 00:
So if we weren't disclosing MAUs, if Seals was the only tech company not disclosing MAUs, I think we'd be hearing plaintiffs complain that MAUs were not disclosed.

[00:20:10] Speaker 03:
Well, they're not complaining about the disclosure of MAUs.

[00:20:14] Speaker 03:
They're complaining about the nondisclosure of something else.

[00:20:18] Speaker 03:
And here's, I'm going to try to ask you to respond to this.

[00:20:23] Speaker 03:
It does seem to me from the early disclosures that MAUs are being pushed as

[00:20:29] Speaker 03:
some evidence that we're succeeding.

[00:20:30] Speaker 03:
We're increasing our MAUs.

[00:20:33] Speaker 03:
But there's a later statement to the SEC, and Skill says MAU is not a primary metric that we use to manage our business.

[00:20:43] Speaker 03:
And so I'm trying to figure out why that isn't sort of an admission that the earlier statements may be misleading.

[00:20:54] Speaker 00:
I'm actually really glad you asked that because it helps us focus on what the statements that were made actually were.

[00:21:00] Speaker 00:
So in the early days of skills business in the merger proxy when it's a growth business, it does emphasize that it is in growth mode because you can look at the number of MAUs and they're going up.

[00:21:13] Speaker 00:
And you need to get someone in the door before they can be a paying customer.

[00:21:17] Speaker 00:
So when we fast forward to the statements that plaintiffs are challenging, where they allege that Skills was claiming that revenue was driven by an increase in MAUs, we see the actual statement

[00:21:31] Speaker 00:
in the, at ER 29, paragraph 38, is that revenue is being driven by an increase in MAUs, driven by sales and marketing investment to acquire new paying users.

[00:21:45] Speaker 00:
So at all times, Skills was saying, you know, step one, we need to get new users, we need to drive MAU.

[00:21:50] Speaker 00:
And step two, we need to monetize those users.

[00:21:53] Speaker 00:
It was always clear that Skills was only making money from the users that were paying.

[00:21:59] Speaker 00:
And that percentage of users was always disclosed and stayed relatively constant.

[00:22:04] Speaker 00:
Was it always disclosed?

[00:22:05] Speaker 03:
It was.

[00:22:06] Speaker 03:
I found a 1920 statement that estimated it at 10%.

[00:22:10] Speaker 03:
Were there subsequent disclosures about the percentage of paying users?

[00:22:14] Speaker 00:
There sure were.

[00:22:15] Speaker 00:
In each of the SEC filings, they disclosed the percentage of paying users.

[00:22:19] Speaker 00:
So if we look at SER798, that's the 2020 10K, it discloses that paying users were at 10% in 2019.

[00:22:29] Speaker 00:
They climbed to 13% in 2020, and then ultimately get to 17% in the disclosure at the end of the first quarter of 2021.

[00:22:41] Speaker 00:
That's at SER 914.

[00:22:45] Speaker 00:
So throughout the class period, revenue is growing.

[00:22:49] Speaker 00:
And the percentage of paying users is growing.

[00:22:53] Speaker 03:
Yeah, and I am correct, I think, in assuming that if you know the total number of users and the percentage of paying users that you could figure out the average revenue for paying users.

[00:23:04] Speaker 00:
Yes.

[00:23:05] Speaker 00:
So if there's some modest estimation involved, it's certainly a material.

[00:23:11] Speaker 00:
So you multiply the total number of users by 10 or 13 or 17%.

[00:23:17] Speaker 00:
and then you divide revenue by the number of paying users.

[00:23:22] Speaker 02:
Ms.

[00:23:22] Speaker 02:
Blanchet, I guess I have a slightly different concern about the MAU going forward is just whether in fact it was a strategically important metric to the company and whether your answer to that is, well, that's not false or it's immaterial or there's no loss causation, how do you deal with that disconnect?

[00:23:45] Speaker 00:
Sure, I mean, I think it's all of the above because it was an important metric.

[00:23:49] Speaker 00:
You always have to start with users.

[00:23:51] Speaker 00:
I mean, that's the story of Silicon Valley.

[00:23:53] Speaker 00:
You got to get the users in the door and then you monetize them.

[00:23:57] Speaker 00:
So that was always important, but so was monetization.

[00:24:00] Speaker 00:
And as a company matures, it gets more, you know, as it goes public, it becomes more important to monetize.

[00:24:06] Speaker 00:
When you're a private company, which skills was right before the start of this class period, you can be solely focused on bringing eyeballs in the door.

[00:24:15] Speaker 00:
And as you are a public company, you get more focused on having to deliver shareholder value, more focused on monetization.

[00:24:22] Speaker 00:
So there's no inconsistency between being a private company that was just focused on growth and later becoming more and more focused on monetization.

[00:24:31] Speaker 00:
But at all times, you need to know how many users are coming in to be potential eyeballs, especially because Skills was highlighting that it eventually planned to monetize everyone.

[00:24:42] Speaker 00:
It eventually planned to and did move to a model that had advertising.

[00:24:47] Speaker 02:
So you're saying that the focus on MAU, the company did focus on MAU early on.

[00:24:54] Speaker 02:
That was true.

[00:24:55] Speaker 02:
Yes.

[00:24:56] Speaker 02:
The company no longer focused on MAU later on when it shifted more to paying MAU or these other things, which is what it told the SEC as well.

[00:25:06] Speaker 02:
That was true.

[00:25:07] Speaker 00:
Or perhaps focused a little less on it.

[00:25:09] Speaker 02:
I mean, I don't think… Well, no one on my team is optimizing the business for growing MAU.

[00:25:14] Speaker 02:
It is a vanity metric.

[00:25:17] Speaker 02:
Paying MAU is not a primary metric.

[00:25:20] Speaker 02:
It sounds like, unless that's misleading, that that's where the company has to be at the time it's making those statements in early 2021.

[00:25:30] Speaker 02:
So I guess my question for you is, where's the disclosure that reflects the switch so that investors know which metrics the company's paying attention to?

[00:25:40] Speaker 00:
Well, so I think that throughout, Skills is telling you that it's focused on MAUs, but the revenue is coming from

[00:25:49] Speaker 00:
the drive to acquire new paying MAUs.

[00:25:53] Speaker 00:
That happens organically throughout these disclosures.

[00:25:56] Speaker 00:
So there's never a time that Skilled says MAU is all we're focused on.

[00:26:02] Speaker 00:
It discloses MAU because the market is interested in that.

[00:26:06] Speaker 00:
But when we hear plaintiffs say that Skilled was touting MAU, it was disclosing it

[00:26:15] Speaker 00:
always in the same breath as paying users.

[00:26:19] Speaker 00:
There's never an isolated disclosure of MAU that doesn't also reflect that the company is making its money through paying users.

[00:26:26] Speaker 03:
Well, I'm trying to figure out whether something changed over time.

[00:26:29] Speaker 03:
And that may be the, I don't know if that was the focus of Judge Johnstone's question, but it seems to me that at some point, by Q1 2021, the co-founder says, it's a vanity metric.

[00:26:44] Speaker 03:
It doesn't correlate with our business performance.

[00:26:48] Speaker 03:
Nobody's told that earlier.

[00:26:50] Speaker 03:
Earlier, there's an emphasis on how we're growing our number of MAUs.

[00:26:56] Speaker 03:
Now, was there a time between those earlier statements and this statement when the founders knew that this was a vanity metric, but were just happy to keep reporting it because it made it look better?

[00:27:09] Speaker 00:
I mean, I'm not quite sure what vanity metric means, to be honest.

[00:27:12] Speaker 00:
It's not my turn.

[00:27:15] Speaker 00:
No, I don't.

[00:27:15] Speaker 00:
If I made it up, you could be confused about it, but your client made it up.

[00:27:18] Speaker 00:
No, no, no, to be fair.

[00:27:20] Speaker 00:
But I think vanity sort of falls in the bucket of evocative statements of sort of a corporate opinion.

[00:27:27] Speaker 03:
Well, to be more specific, he says it isn't a metric that correlates with our business performance.

[00:27:34] Speaker 03:
That's a pretty straightforward statement.

[00:27:37] Speaker 03:
Could people have been misled?

[00:27:40] Speaker 03:
Would a reasonable investor up until that point have been misled into the notion that MAUs were a metric that correlated with business performance?

[00:27:50] Speaker 00:
I mean, I don't think so.

[00:27:52] Speaker 00:
And the reason for that is because skills was never, there's no challenge statement that plaintiffs point to.

[00:28:00] Speaker 03:
Well, I guess their statement is you're disclosing MAUs, you're not disclosing

[00:28:05] Speaker 00:
I mean, we're disclosing a whole lot of stuff.

[00:28:08] Speaker 03:
Yeah, but you're not disclosing the average revenue per paying user.

[00:28:12] Speaker 03:
I know I can calculate it for the moment.

[00:28:14] Speaker 03:
But you're disclosing one thing and not the other.

[00:28:17] Speaker 03:
That leads the investor to think that the one thing you're disclosing is important.

[00:28:21] Speaker 03:
Then you later tell us it's not very important.

[00:28:24] Speaker 00:
So I think that we were disclosing that among other necessary metrics to figure out what the full picture of the business looks like.

[00:28:31] Speaker 00:
We disclose MIU.

[00:28:33] Speaker 00:
We disclose revenue.

[00:28:35] Speaker 00:
We disclose.

[00:28:36] Speaker 00:
the percentage of revenue that comes from particular games, we disclose the percentage of users that are paying, so that any reasonable investor can focus where they want to focus.

[00:28:46] Speaker 00:
They can focus on the future of the business growth, or they can focus on the particular ARPPU, which, as you know, was disclosed in March.

[00:28:57] Speaker 00:
And when we started disclosing that, the stock price went up.

[00:29:00] Speaker 02:
So the idea- So it sounds like the, okay, so wait, whether or not it's misleading, that's what we've been talking about so far, that sounds like a materiality argument.

[00:29:09] Speaker 02:
Let me take that.

[00:29:10] Speaker 02:
I know that Chief Judge Morris had a question.

[00:29:13] Speaker 04:
No, I want to get to the downloads question.

[00:29:16] Speaker 04:
And this encapsulates this whole case.

[00:29:19] Speaker 04:
You say, if our games became less popular, business and prospects could suffer without telling people that actually your downloads were dropping.

[00:29:27] Speaker 00:
The growth rate of downloads was dropping.

[00:29:31] Speaker 04:
But if the game became less popular, it seemed to be becoming less popular, but you're saying that's not true, that might happen eventually.

[00:29:37] Speaker 04:
If it's not misleading, it's certainly right up the line.

[00:29:41] Speaker 00:
I think this is another place where it's really important to focus on what was said.

[00:29:45] Speaker 00:
and then what the purported disclosure was.

[00:29:47] Speaker 00:
Skills disclosed, which games were the most popular.

[00:29:51] Speaker 00:
It disclosed that those games rotated over time, so you're not gonna download the same game 20 times.

[00:29:58] Speaker 00:
Once you download a game, you have it, you can play it forever, you can keep paying to enter content.

[00:30:04] Speaker 00:
contests, it makes perfect sense that over time those top games would be downloaded less frequently and replaced by other games that would be downloaded more frequently.

[00:30:14] Speaker 00:
There's no allegation that total downloads were declining.

[00:30:19] Speaker 00:
There's only the allegation that the most popular game downloads were declining, which again, makes sense.

[00:30:26] Speaker 00:
Once you download the Blackjack game, you don't have to download it again.

[00:30:33] Speaker 02:
We're switching from Judge Hurwitz's arithmetic to I think Chief Judge Morris's, I guess it would be calculus.

[00:30:39] Speaker 02:
We're talking about a change in the rate of change.

[00:30:48] Speaker 02:
If it's misleading, talking about the MAU piece, and let's just set materiality aside, do you have other, and this goes to, I think, some of the rest of the argument, but are there other grounds on which we could dismiss the claim around the centrality of MAUs or the alleged centrality of MAUs and that potential falsity?

[00:31:09] Speaker 00:
I mean, absolutely, because we do see the metric that plaintiffs allege would reveal the true financial state, the average revenue per paying users disclosed in March.

[00:31:22] Speaker 00:
And we see that when the market gets that picture, the price goes up.

[00:31:27] Speaker 00:
It pops immediately.

[00:31:28] Speaker 00:
And the idea that it took two months

[00:31:32] Speaker 00:
for the market to incorporate that information is completely contrary to the efficient market.

[00:31:36] Speaker 02:
What about the corrective, assuming the May call is the corrective disclosure and the 9% drop there, what's your response to that?

[00:31:44] Speaker 00:
Sure.

[00:31:44] Speaker 00:
I mean, the May call is cluttered with information.

[00:31:48] Speaker 00:
That call also discloses, of course, a restatement.

[00:31:53] Speaker 00:
But in any event, it doesn't

[00:31:55] Speaker 00:
undermine the truthful disclosures of what the actual number of MAU was throughout the time period.

[00:32:03] Speaker 00:
It doesn't undermine anything about the financial reporting throughout the time period.

[00:32:10] Speaker 03:
And when you say the time period, you mean March through May?

[00:32:12] Speaker 00:
March through May or the start of the class period through May.

[00:32:16] Speaker 00:
MAU was accurate throughout, so.

[00:32:19] Speaker 03:
Well, I'm not focusing.

[00:32:21] Speaker 03:
After March, you're disclosing average revenue per user.

[00:32:25] Speaker 03:
And nothing bad happens until, at least in the purpose of this case, nothing bad happens until some May disclosure.

[00:32:34] Speaker 03:
So your position is that it couldn't have been from March through May that the absence of disclosing average revenue per paying user cost any loss.

[00:32:45] Speaker 00:
Absolutely.

[00:32:45] Speaker 03:
But now work backwards.

[00:32:48] Speaker 03:
Why do you claim that it couldn't have caused any loss prior to that?

[00:32:53] Speaker 00:
Well, first of all, when the disclosure happens, the price goes up.

[00:32:56] Speaker 00:
So that doesn't suggest that skills was concealing.

[00:33:01] Speaker 00:
negative information.

[00:33:02] Speaker 00:
And there's nothing inconsistent with a company growing, focusing initially on getting people in the door and focusing over time, incrementally, on getting more dollars in the door.

[00:33:15] Speaker 00:
Especially when every time it talks about MAU, it always talks about

[00:33:20] Speaker 00:
paying users as well.

[00:33:23] Speaker 03:
Can you spend a moment on bonus cash before you have to sit down?

[00:33:26] Speaker 00:
Absolutely.

[00:33:27] Speaker 03:
First of all, I'm not sure I understand it, which is maybe the most basic question.

[00:33:33] Speaker 03:
I take it it is an incentive that you can use to play the games without paying in the future, right?

[00:33:40] Speaker 00:
It is, and it is given to a limited subset of Skills User Base, the subset that is making deposits.

[00:33:48] Speaker 00:
So, you know, 10% or 13%.

[00:33:50] Speaker 03:
Now, I'm an investor, and I want to try to figure out how much of what's reflected in revenue is bonus cash.

[00:33:59] Speaker 03:
Tell me how I can do that.

[00:34:01] Speaker 00:
Let's see.

[00:34:02] Speaker 00:
I have two.

[00:34:03] Speaker 00:
So there is a lengthy disclosure in the financial statements about how bonus cash

[00:34:10] Speaker 00:
is calculated.

[00:34:12] Speaker 00:
SER 1578 helps walk through that.

[00:34:18] Speaker 00:
Or you can also look at the particular excerpts of the financial statements that are in the Eagle Eye report.

[00:34:24] Speaker 03:
But what's really important... They disclose incentives, and I'm trying to figure out whether there's something in incentives besides bonus cash.

[00:34:32] Speaker 00:
Bonus cash is primarily, to the extent that incentives are monetary, they are bonus cash.

[00:34:39] Speaker 00:
But this is a place where it's really important to look at what plaintiffs are challenging.

[00:34:44] Speaker 00:
they are not challenging the accounting treatment for bonus cash.

[00:34:48] Speaker 00:
They actually did challenge that in the first complaint, and Judge Seaborg dismissed that.

[00:34:53] Speaker 00:
And in the second complaint, the bonus cash-related statements are all focused on what we would characterize as puffery, that user engagement is good, that it's sticky, that it's driven by these different things.

[00:35:05] Speaker 00:
Council is very focused now on sort of the financial amount of bonus cash, but that doesn't undermine the actual statements that are challenged, which are about sticky user engagement, which Judge Seaborg appropriately found were puffery.

[00:35:20] Speaker 00:
And in any event, there's no allegation that user engagement

[00:35:23] Speaker 00:
Wasn't good and those statements by the way refer to the total population of users Not just paying users only paying users were getting the bonus cash this blue sheet I guess maybe if you could spend 30 seconds or so.

[00:35:36] Speaker 02:
We haven't talked about science or yet and Maybe with particular reference to some of the centrality of the MA

[00:35:45] Speaker 00:
Yeah, absolutely.

[00:35:46] Speaker 00:
I mean, I think as the Dow Court and as Judge Seaborg noted, psychiatry is generally drawn from the same facts that we allege falsity.

[00:35:59] Speaker 00:
But under TEL Labs, the court has to consider not only plaintiff's perforated inferences, but the competing inferences that can be reasonably drawn about whether, you know,

[00:36:12] Speaker 00:
whether the defendants were actually drawing these nefarious intent out of the facts and actually trying to mislead the market.

[00:36:21] Speaker 02:
And you've talked about some of the third party reports.

[00:36:26] Speaker 02:
Do you think that the confidential witness statements are sufficiently reliable and based on personal knowledge to raise a question as a scientist?

[00:36:34] Speaker 00:
Absolutely not.

[00:36:35] Speaker 00:
Why not?

[00:36:36] Speaker 00:
Under ZUKO, we have to look at whether the

[00:36:41] Speaker 00:
whether there are sufficient indicia that the confidential witness and the facts that are being alleged in these anonymous short seller reports are sufficiently credible.

[00:36:52] Speaker 00:
We have a very vague reference to who this CW is.

[00:36:55] Speaker 00:
Apparently, he or she was in the marketing department for six months.

[00:36:59] Speaker 00:
Why that person would know about bug, or sorry, in the revenue department for a certain amount of time, why she would know about bugs is unclear.

[00:37:09] Speaker 00:
It makes perfect sense that someone in the revenue department might not have been initially aware of the focus on MAUs when MAUs were not directly tied.

[00:37:20] Speaker 00:
to payment.

[00:37:22] Speaker 00:
So it's a very sketchy basis for how this person would have known anything.

[00:37:28] Speaker 00:
And on top of that, we still don't have a particular fact that this person can point to that was in the minds of defendants that actually undermines, that actually falsifies the particular challenge statements.

[00:37:42] Speaker 03:
Can I ask two very quick factual questions?

[00:37:45] Speaker 03:
One is, did Judge

[00:37:47] Speaker 03:
Judge Seaborg rely on this argument you're just making?

[00:37:51] Speaker 00:
Judge Seaborg did not.

[00:37:53] Speaker 03:
Does not dismiss the confidential witness or the motives of the short sellers.

[00:38:01] Speaker 03:
He just finds that the statements aren't false and made without sentry.

[00:38:04] Speaker 00:
He finds that the statements are not false and that they are not made without sentry.

[00:38:08] Speaker 00:
But under Zuko, he certainly could have.

[00:38:11] Speaker 03:
I understand that he could have reached that conclusion, but he didn't expressly reach it.

[00:38:15] Speaker 00:
No, he expressly did rule on Cienter.

[00:38:18] Speaker 03:
Right, and that's my second question.

[00:38:21] Speaker 03:
On Cienter, did he find that all four of the challenged statements, if he put them into four categories, lacked the requisite Cienter, or did he limit that finding to less than the entire universe?

[00:38:35] Speaker 00:
So you see that finding in one of the four sections of the opinion, but the topics that he's dealing with in that section, the access to information,

[00:38:44] Speaker 00:
and the sort of broad invocation of core operations apply across the board.

[00:38:51] Speaker 00:
I mean, he did a holistic analysis.

[00:38:52] Speaker 03:
But he only rejected Syenter as to one of the four, correct?

[00:38:57] Speaker 00:
He only rejected it in that one section, but I would say- Yeah, and I understand your argument that his findings would carry over to the others.

[00:39:04] Speaker 03:
I was just trying to factually figure out what we're dealing with here.

[00:39:07] Speaker 00:
Absolutely.

[00:39:07] Speaker 00:
And he also talks more about Syenter in his first opinion, which he incorporates by reference in the second opinion.

[00:39:14] Speaker 02:
Neither of my colleagues have any other questions.

[00:39:17] Speaker 02:
Well, thank you, Ms.

[00:39:17] Speaker 02:
Blinchy.

[00:39:18] Speaker 00:
Thank you.

[00:39:28] Speaker 02:
Mr. Loves, we've given you two minutes for your rebuttal.

[00:39:41] Speaker 01:
Thank you.

[00:39:42] Speaker 01:
I'll be brief.

[00:39:44] Speaker 01:
I think the points that Your Honors highlighted with regard to the disconnect in the MAU reporting is spot on.

[00:39:52] Speaker 01:
It does not make sense to us either how the company could show up and report MAUs the way they did, touting them as this constantly increasing number that's primarily responsible for revenue growth, and then suddenly just make an about face and change and say, no, actually, the key metric is paying users.

[00:40:10] Speaker 01:
And to go so far at the May 2021 earnings call to tell investors not only that the prior reporting was confusing, which is what the chief revenue officer called their reporting around the time of the merger,

[00:40:23] Speaker 01:
but to then expressly tell investors to look at these other metrics they later reported.

[00:40:29] Speaker 01:
The only way that makes sense is if the earlier reporting about monthly active users that did not include the information that we say is material and should have been disclosed is misleading.

[00:40:39] Speaker 01:
That's what it means when it's confusing.

[00:40:41] Speaker 01:
That's what the chief revenue officer's admission stands for.

[00:40:44] Speaker 01:
It also does not fit with the statements that management made to the SEC where they disclaimed that the paying user numbers were not key metrics to the business, but then again, subsequently change and say, no, actually these are our key metrics.

[00:40:59] Speaker 01:
This vague idea that what the company was really doing is going back and forth between business models where it was focusing on getting users in the door.

[00:41:06] Speaker 01:
but then really focusing on how to monetize them later doesn't make any sense in light of what's alleged.

[00:41:12] Speaker 01:
Skills, the entire time, had one business model.

[00:41:15] Speaker 01:
Its business model was the monetization by getting users to become paying users that paid to play games.

[00:41:22] Speaker 01:
There's no indication it started or stopped selling advertising, introduced any new products during the class period, or did anything else that would otherwise support a change in reporting, unless it was misleading.

[00:41:33] Speaker 01:
To tie this back to some of the cnter questions your honors had,

[00:41:36] Speaker 01:
The CW here is perfectly well-pled in terms of being in meetings with management and had a responsibility for pulling download data that was discussed in these meetings.

[00:41:47] Speaker 01:
That's nothing like Zuko or any of the cases, and the role in those meetings and information discussed is enough to show that management knew from being in those meetings the actual numbers that they were disclosing of the market were false and misleading.

[00:42:00] Speaker 01:
Thank you.

[00:42:00] Speaker 01:
All right, thank you, Mr. Lettuce.

[00:42:01] Speaker 02:
Thank you, Council, for both parties, and that case will be submitted.

[00:42:06] Speaker 02:
We're going to take a five-minute recess before our next two cases.