United States District Court, D. Massachusetts
MARK HENSLEY, Individually and on Behalf of All Others Similarly Situated,  Plaintiff,
IMPRIVATA, INC., et al., Defendants.
AMENDED ORDER ON MOTIONS TO DISMISS (DOCS. 39,
SOROKIN, United States District Judge
Mark Hensley, on behalf of himself and a putative class of
shareholders, alleges multiple Defendants deceived investors
into buying Imprivata, Inc.'s (“Imprivata”),
stock at artificially high prices from July 30, 2015, through
November 2, 2015 (hereinafter, the “class
period”), by materially misrepresenting Imprivata's
sales outlook. See Doc. 33 at 1. For the reasons
that follow, the Court ALLOWS: (1) the Motion to Dismiss
filed by Defendants Imprivata, Omar Hussain, Jeffrey
Kalowski, David Orfao, David Barrett, and Paul Maeder (Doc.
39); and (2) the Motion to Dismiss filed by Defendants
General Catalyst Group II, L.P. (“GCG”), Highland
Capital Partners VI Limited Partnership (“Highland
Capital”), and Polaris Venture Partners III, L.P.
(“Polaris”) (Doc. 40).
Overview of Defendants
is an “IT security company that provides authentication
. . . technology solutions for the healthcare and other
industries in the United States” and internationally.
Doc. 33 at 6. It became a public company in June 2014.
Id. at 2. Its “flagship product” is
OneSign, an authentication system that helps companies manage
who can access computer servers and files. Id. at
12. Imprivata “sells its products and solutions”
to healthcare and non-healthcare organizations. Id.
Sales to large hospitals comprise 75 percent of
Imprivata's total sales, while “the small hospital
market and the non-healthcare market comprise 25% of [its]
total sales.” Id. at 14. In 2014, 88 percent
of Imprivata's “revenue from new sales were
attributable to sales to healthcare organizations, ”
Doc. 44-8 at 3, meaning 12 percent of that revenue was
attributable to sales to non-healthcare organizations.
Imprivata's first four quarters as a public company,
i.e., from the third quarter of 2014 through the second
quarter of 2015,  it exceeded its maximum revenue
projections. Doc. 44-3 at 2. Indeed, in three of those four
quarters, the company exceeded its maximum revenue
projections (all of which were under thirty-million dollars)
by over one million dollars, and in one of those three
quarters it exceeded the maximum by two-million dollars.
2015, however, the only full quarter during the class period,
the company underperformed its initial minimum revenue
projection: it initially projected it would earn at least $31
million, but only earned $29, 282, 000. Id.
least three straight quarters afterward, from Q4 2015 through
Q2 2016, Imprivata again exceeded its maximum revenue
projections. Id. For Q4 2015, the company projected
it would earn $32 million to $34 million, but it ultimately
earned $34.2 million. Id. For Q1 2016, it projected
it would earn $28.5 million to $30 million, but it ultimately
earned $31, 521, 000. Id. And for Q2 2016, the
company projected it would earn $32.5 million to $34 million,
but it ultimately earned over $36 million. Id.
The Remaining Defendants
was at all relevant times the CEO of Imprivata. Doc. 33 at 2.
Kalowski was at all relevant times the CFO of Imprivata.
Imprivata went public, GCG, Highland Capital, and Polaris
(collectively, “the Controlling Shareholder
Defendants”) each owned 19.6 percent of Imprivata
stock, meaning they collectively owned 58.8 percent.
Id. at 8.
was employed by GCG; Maeder was employed by Highland Capital;
and Barrett was employed by Polaris. Id. at 7. At
all relevant times, they were members of Imprivata's
board of directors and had “power and authority to
control the contents of [Imprivata's] public filings with
the SEC.” Id.
Relevant Information About the Healthcare Industry
August 4, 2014, the U.S. Department of Health and Human
Services issued a rule stating that, on October 1, 2015,
nearly all hospitals would need to switch from using codes in
the International Classification of Diseases 9
(“ICD-9”) to using codes in the ICD-10, for
purposes of medical billing. See 79 Fed. Reg. 45,
128 (to be codified at 45 C.F.R. pt. 162). This switch was a
“significant change” that was “well known
by those in the healthcare community for some time.”
Doc. 33 at 14. Indeed, well before the August 4, 2014, rule
was announced, “[a]ll segments of the health care
industry ha[d] invested significant time and resources in
financing, training, and implementing necessary changes to
systems . . . in order to prepare for ICD-10.” 79 Fed.
Reg. at 45, 129; see also Andrew Pollack, Who
Knows the Code for Injury by Orca?, N.Y. Times, Dec. 30,
2013, at ¶ 1 (article about hospitals' preparations
to switch to ICD-10).
Amended Complaint also alleges that the healthcare industry
was undergoing “consolidation (i.e., smaller hospitals
were getting bought by larger hospitals), ” Doc. 33 at
4, but does not state when this consolidation began.
Imprivata's Acquisition of HT Systems
April 30, 2015, Imprivata acquired the company HT Systems,
which makes a “palm-vein based identification
technology” called PatientSecure. Id. at 2.
PatientSecure “is able to distinguish vein patterns in
patients' hands and thereby retrieve their correct
medical records in a healthcare provider's electronic
health record system when a patient checks into a
hospital.” Id. at 13. “Imprivata
represented the acquisition of HT Systems . . . as an
opportunity for [it] to enter the emerging $2 billion patient
identification market.” Id. In 2014, HT
Systems' revenue was $6.1 million and it generated an
operating profit. Doc. 44-10 at 5. Imprivata paid $19.1
million for the acquisition, which was 16.2% of its assets as
of December 31, 2014. Doc. 33 at 13.
Amended Complaint relies, in part, on information from
various unnamed former employees (“FEs”) at
Imprivata. One such employee (“FE5” in the
Amended Complaint) was an Imprivata sales manager in Florida
from April 2015 through April 2016. Id. at 10. In
terms of seniority, FE5 was three levels down from CEO Omar
Hussain - such that she reported to someone who reported to
someone who reported to Hussain. Id. However, she
still “frequently interacted and met” with
Hussain. Id. According to FE5, Imprivata acquired HT
Systems “not simply for its PatientSecure product but
for the pipeline of HT's many sales prospects who were
supposedly interested in buying PatientSecure.”
Id. at 18. However, FE5 states, Imprivata eventually
discovered that “prospective customers had not even
seen the device, much less agreed to purchase it, ” so
“the sales pipeline was false.” Id.
According to the Amended Complaint, FE5 “had frequent
conversations with Hussain . . . and confirmed” that,
“at least by the beginning of July of 2015, ”
“all of the top executives at Imprivata were fully
aware, . . . that in acquiring HT [Systems, ] Imprivata had
spent a tremendous amount of cash in reliance on a sales
opportunity that did not exist and for a product that
customers were not interested in buying.” Id.
at 18-19; see also id. at 18 (“FE5 stated that
Defendant Hussain in particular was keenly aware that the
acquisition of HT Systems and PatientSecure was a disaster by
at least by the beginning of July of 2015.”). According
to FE5, “as of July 2015, Imprivata had not booked any
significant sales of PatientSecure.” Id. at
Other Allegations by FEs
to another FE (“FE1”), who worked as a Senior
Product Marketing Manager from November 2014 to April 2015,
id. at 9, “[b]y April 2015, only 25-30
units” of one of Imprivata's products, ConfirmID,
had been sold. Id.
worked as a sales representative from March 2013 to December
2015, and “was focused on sales to small hospitals and
health facilities.” Id. at 9. According to
FE2, “numerous potential Imprivata customers informed
sales representatives that as much as they might like to
invest in Imprivata's security products[, ] they would
simply have no money to buy them because their budgets were
consumed by the need to deal with the government's
mandate that [nearly] all . . . healthcare providers convert
their computer systems to use ICD-10 coding.”
Id. at 16. FE2 states that “when Defendants
issued their Q3 2015 sales forecast in July of 2015, there
was absolutely no sales backlog.” Id.
the Director of Government and Commercial Sales for Imprivata
between November 2013 and January 2016, and reported to the
Senior Vice President of World Wide Sales, who reported to
Hussain. Id. at 9. FE3 alleges Hussain and CFO
Jeffrey Kalowski were “hands-on managers who regularly
attended sales meetings and monitored sales by viewing the
Company's” sales database. Id. at 15. FE3
also states that it was “well-documented in” the
database that “non-healthcare sales were a complete
failure throughout all of 2015.” Id. at 17.
worked as a regional sales manager from January 2015 through
January 2016. Id. at 9-10. According to FE4,
“it was readily apparent” from Imprivata's
sales tracking software “that sales in the Company
overall were declining during 2015.” Id. at
15. FE4 reports that “Imprivata sales staff rarely
achieved their sales quotas.” Id. at 16. FE4
further states that “by the spring of 2015 half of the
sales force in the non-healthcare segment had left the
Company, frustrated with its lack of success and
sales.” Id. at 17.
Imprivata's 2014 10-K
March 11, 2015, Imprivata filed its 10-K for the fiscal year
ending December 31, 2014. See Doc. 44-8. The 10-K
- “We have a history of losses, we expect to continue
to incur losses and we may not be profitable in the future. .
. . [O]ur profitability will be affected by, among other
things, our ability to develop and commercialize new
solutions, and products for those solutions, and enhance
existing solutions and products.” Id. at 4.
- “We depend on sales of our Imprivata OneSign solution
in the healthcare industry for a substantial portion of our
revenue, and any decrease in its sales would have a material
adverse effect on our business, financial condition and
results of operation.” Id.
- “Healthcare organizations are currently facing
significant budget constraints . . . . Although [they] are
currently allocating funds for capital and infrastructure
improvements to benefit from governmental initiatives, they
may not choose to prioritize or implement access or
authentication management solutions as part of those efforts
at this time, or at all, due to financial and resource
- “In addition, our healthcare customers have been
experiencing consolidation in response to developments
generally affecting the healthcare industry. As a result, we
may lose existing or potential healthcare customers for our
solutions. If our existing customers combine with other
healthcare organizations that are not our customers, they may
reduce or discontinue their purchases of our
solutions.” Id. at 5.
- “We do not anticipate that sales of our solutions in
non-healthcare industries will represent a significant
portion of our revenue for the foreseeable future.”
Id.; see also Id. at 12 (“[W]hile
add-on sales to non-healthcare customers have continued to
increase, new sales to non-healthcare customers have been
- “Developments generally affecting the healthcare
industry, including new regulations[, as well as] changes in
pricing for healthcare services or impediments to third-party
reimbursement for healthcare costs, may cause deterioration
in the financial or business condition of our customers and
cause them to reduce their spending on information
technology.” Id. at 6.
- “Our revenue and operating results have fluctuated,
and are likely to continue to fluctuate, which may make our
quarterly results difficult to predict, cause us to miss
analyst expectations and cause the price of our common stock
to decline.” Id. at 7.
- “Industry consolidation or new market entrants may
result in increased competitive pressure, which could result
in the loss of customers or a reduction in revenue.”
Id. at 9.
- “If we do not achieve the anticipated strategic or
financial benefits from our acquisitions, or if we cannot
successfully integrate them, our business and operating
results could be adversely affected. We have acquired, and in
the future may acquire, complementary businesses,
technologies or assets that we believe to be strategic. We
may not achieve the anticipated strategic or financial
benefits, or be successful in integrating any acquired
businesses, technologies or assets.” Id. at
First Alleged Misrepresentation
29, 2015, after the close of trading, Imprivata issued a
press release announcing its earnings for Q2
2015. Doc. 44-12. The release also contained
“forward-looking statements . . ., including but not
limited to . . . [Imprivata's] expected financial results
for Q3 2015 and the full fiscal year 2015.”
Id. at 10. The release stated:
These forward-looking statements are made as of the date they
were first issued and were based on current expectations,
estimates, forecasts, and projections as well as the beliefs
and assumptions of management. Forward-looking statements are
subject to a number of risks and uncertainties, many of which
involve factors or circumstances that are beyond
Imprivata's control. Imprivata's actual results could
differ materially from those stated or implied in
forward-looking statements due to a number of factors,
including but not limited to . . . developments in the
healthcare industry or regulatory environment; seasonal
variations in the purchasing patterns of our customers; the
lengthy and unpredictable sales cycles for new customers; . .
. our ability to successfully integrate HT Systems and other
businesses and assets that we may acquire . . ., and the
other risks detailed in Imprivata's risk factors
discussed in filings with the U.S. Securities and Exchange