Legislation & Litigation , Standards, Regulations & Compliance

IronNet Settles Securities Fraud Class Action Suit for $6.6M

Settlement Addresses Claims of False Revenue Forecasts, Investor Misrepresentation
IronNet Settles Securities Fraud Class Action Suit for $6.6M

IronNet agreed to pay $6.6 million to resolve a class-action lawsuit accusing the company and former executives of misleading investors about the firm's financial health.

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The proposed settlement covers roughly 15% of the $44.4 million in estimated class-wide damages, with plaintiffs arguing it's an excellent outcome given IronNet's Chapter 11 bankruptcy and the complexities involved in proving their case. The plaintiffs said IronNet, former CEO Keith Alexander and others made false and misleading statements that inflated the company's stock price and led to big financial losses (see: Why IronNet Ran Out of Cash, Filed for Chapter 11 Bankruptcy).

"This case, which survived a motion to dismiss, was far from over, and if it did not settle now would have continued to pose many risks and would have continued to incur substantial costs that could have jeopardized the class’s ability to recover anything in this action," counsel for the plaintiffs wrote in a Sept. 23 motion for preliminary approval of the class action settlement.

Why Both Plaintiffs and Defendants Opted for a Settlement

The settlement represents a major cost for the Washington D.C.-area network detection and response firm, which emerged from bankruptcy in February as a shell of the company that had once been valued at $1.2 billion and led by a retired four-star Army general. Alexander - who is a named defendant in the class action suit - stepped down as IronNet's CEO in July 2023 and as chairman of the board in February.

In addition to Alexander, the lawsuit also names co-CEO William Welch and Chief Financial Officer James Gerber - both of whom left in company in September 2022 - as defendants. The defendants are accused of misleading investors about IronNet's financial health and business projections, particularly regarding public sector deals that didn't materialize. IronNet didn't immediately respond to requests for comment.

In the settlement agreement, IronNet denies all allegations against the company of fraud, liability, wrongdoing or damages, and said the company is entering into the settlement to avoid and eliminate the burden, expense, uncertainty and risk of further litigation, as well as the associated business disruption. Alexander, Welch and Gerber similarly continue to deny all allegations of wrongdoing or liability.

"Defendants further have asserted and continue to assert that, at all times, they acted in good faith and in a manner they reasonably believed to be in accordance with applicable rules, regulations and laws," counsel wrote. "Nonetheless, defendants have determined that it is desirable and beneficial to them that the action be settled … to avoid the further expense, uncertainties, inconvenience and burden of this action."

Counsel for the plaintiffs said that proving intent and materiality of IronNet's misrepresentations could be challenging and make it difficult to achieve a favorable outcome if the case proceeded to trial. And even if the plaintiffs were successful, counsel said there would be significant costs, delays and potential challenges in collecting damages from a company like IronNet that recently emerged from bankruptcy.

"This case involves forward-looking projections where actual knowledge is required to prove fraud," counsel for the plaintiffs wrote. "Although plaintiffs are confident in this case, proving – not merely pleading – actual knowledge in securities fraud cases is always a challenging and difficult task."

How the Settlement Compares to Other Securities Fraud Cases

Proving that defendants acted with intent to mislead is often difficult in securities fraud cases since the company can argue its statements were forward-looking or based on assumptions. In addition, IronNet's Chapter 11 bankruptcy could have limited the company's liability or made collecting any judgment more difficult had the case gone to trial.

The size of the settlement is three times the median recovery for similar securities fraud cases, particularly given IronNet's recent bankruptcy, plaintiffs said.

"The settlement is over three times larger than the median 4.2% recovery for similarly situated 2023 securities class actions that settled after a ruling on a motion to dismiss but before the filing of class certification," counsel for the plaintiffs wrote. The settlement class includes everyone who acquired IronNet's stock between Sept. 14 and Dec. 15, 2021, excluding the company's officers and directors.

The settlement provides equitable treatment to everyone in the protected class, plaintiffs said, ensuring that all members receive a pro-rate distribution of the settlement funds based on recognized claims that have been reviewed by experts. The settlement emerged from extensive arm's-length negotiations involving a mediator, with both sides filing statements and engaging in multiple mediation sessions.

IronNet has been led since July 2023 by former Houghton Mifflin Harcourt CEO Linda Zecher, with ex-Fidelis Cybersecurity President Cameron Pforr serving as president and chief financial officer since September 2022. Former Fidelis CEO Eric Moseman joined IronNet as chief revenue officer in January 2024. IronNet employs roughly 80 people, down from a staff of 250 as recently as September 2022.


About the Author

Michael Novinson

Michael Novinson

Managing Editor, Business, ISMG

Novinson is responsible for covering the vendor and technology landscape. Prior to joining ISMG, he spent four and a half years covering all the major cybersecurity vendors at CRN, with a focus on their programs and offerings for IT service providers. He was recognized for his breaking news coverage of the August 2019 coordinated ransomware attack against local governments in Texas as well as for his continued reporting around the SolarWinds hack in late 2020 and early 2021.




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