A California federal judge has permanently dismissed a shareholder class action alleging hyperlocal social networking service Nextdoor Holdings Inc. misled investors about its projected profitability when combining with a special purpose acquisition company, finding the investors failed to cure issues from a previous complaint.

U.S. District Judge Edward J. Davila issued an order on Thursday saying that, in addition to failing to address those issues, the investors also failed to plead scienter and loss causation.

Judge Davila previously dismissed the suit in May, finding, among other things, that the lead plaintiff never owned or sold the company's securities before the merger.

In the operative complaint, the investors once again challenged a statement made by Nextdoor CEO Sarah Friar on May 10, 2022, about the supposed growth in Nextdoor's active users, according to the order.

Investors' new argument regarding this statement was that it misled them about the proportion of on-platform active users — rather than about the definition of "active users." But Judge Davila said on Thursday this argument is "unsupported by the facts alleged."

"As discussed in the prior order, reasonable investors would have known that 'active user' includes both on- and off-platform users, and there are no statements in the [second amended complaint] that could reasonably be understood to imply how many of the 'active users' referenced … were on-platform users," the order states. "If any investor did in fact believe, as plaintiff contends, that 'the proportion of active users that were purely off-platform was negligible,' this belief is not sufficiently supported by these facts."

The judge further found the second amended complaint fails to plead knowledge of wrongdoing or loss causation.

According to the order, the investors argued that scienter by the defendants is proven in three ways — Friar received almost daily executive reports that included the percentage of users that were on-platform versus off-platform; Nextdoor employees allegedly voiced concern during company meetings, which Friar attended, that the inclusion of off-platform users in the definition of "active users" was problematic; and knowledge of how many "active users" were off-platform was "simply the knowledge of the core operations" of Nextdoor.

However, Judge Davila said the allegations about the executive reports received by Friar are insufficient to infer scienter, since, according to a former employee, all C-level executives received the reports, which included data regarding the percentage of on-platform versus off-platform users.

"But plaintiff does not allege any facts to show whether, and when, the reports revealed the alleged 50-50 split in users engaged with the platform, or whether Friar had access to any report revealing this information prior to her May 10, 2022, statement," the order states.

Additionally, the judge said there are no alleged facts showing that the ratio of on-platform versus off-platform users was materially significant to Nextdoor's operations.

On loss causation, the judge said that although the alleged corrective disclosures revealed that Nextdoor's users were, in large part, off-platform users, there are no allegations that anyone attributed Nextdoor's disclosures to issues with active user metrics, and there is no reason for the court to reach that conclusion.

"In other words, as pled, there is no indication that the stock drops following these two disclosures were 'caused by a revelation of fraudulent activity rather than by changing market conditions, changing investor expectations or other unrelated facts,'" the order states.

Nextdoor first launched in 2011 as a "neighborhood network" that operated a hyperlocal online social networking platform that "connected neighbors, public agencies and businesses with features such as a news feed where neighbors engage with posts, discussions and pictures," according to court filings.

The suit alleged Nextdoor lost 90% of its value during the proposed class period because the defendants misled investors about two aspects of the business: the company's definition of active users, and its portrayal of Nextdoor as "the next big thing."

The suit said a series of disclosures revealed Nextdoor's declining average revenue-per-user growth rates and weekly active user numbers, causing the company's value to plummet by the end of the proposed class period.

Counsel for Nextdoor and Friar declined to comment on Friday, and counsel for the investors did not immediately respond to requests for comment.

The investors are represented by Jeremy A. Lieberman, Austin P. Van and Jennifer Pafiti of Pomerantz LLP.

The defendants are represented by Patrick E. Gibbs, Shannon M. Eagan, Tijana M. Brien and Andrew C. Johnson of Cooley LLP.

The case is Adamo v. Nextdoor Holdings Inc. et al., case number 5:24-cv-01213, in the U.S. District Court for the Northern District of California.