Federal Court Securities Action Targets Varonis Systems Over SaaS Transition Claims

Legal Action Overview

Investors in Varonis Systems (VRNS) now have the opportunity to participate in a federal securities fraud action filed in the U.S. District Court for the Southern District of New York. The case, Molchanov v. Varonis Systems, Inc. et al. (Case No. 1:26-cv-00117), was initiated on January 7, 2026, and covers securities purchases made during an eight-month window last year.

Those who acquired VRNS common stock between February 4 and October 28, 2025, may qualify for inclusion in this class action. The litigation names the cybersecurity company alongside two senior officers: Yakov Faitelson, who serves as Co-Founder, Chairman, CEO, and President, and Guy Melamed, the company’s CFO and COO.

The legal process follows a standard securities litigation timeline. Investors interested in serving as lead plaintiff must submit their applications by March 9, 2026. Following that deadline, the Court will designate lead counsel and a lead plaintiff to represent class members’ interests. Subsequent phases include class certification proceedings and the company’s anticipated motion to dismiss. To learn whether you may be eligible for a recovery under this class action, click here.

Understanding Varonis’ Business Transformation

Varonis operates in the cybersecurity sector, specializing in software solutions that help organizations protect sensitive data. Their technology identifies critical information assets, addresses security vulnerabilities, and detects potential threats using artificial intelligence. The company serves a global customer base through a subscription model, generating revenue from recurring contracts rather than one-time software purchases.

Like many enterprise software vendors, Varonis has been transitioning its delivery model. Historically, customers deployed Varonis products within their own data centers—the “on-premises” approach that dominated enterprise software for decades. More recently, the company has pushed toward Software-as-a-Service (SaaS), where Varonis hosts the application and customers access it via the internet.

This transformation carries strategic importance. SaaS arrangements typically generate more predictable revenue streams, reduce customer implementation burdens, and allow vendors to update products more efficiently. For investors, the key metric in subscription businesses is Annual Recurring Revenue (ARR)—the annualized value of all active subscription contracts. By the third quarter of 2025, Varonis reported approximately $718.6 million in ARR, with roughly three-quarters coming from SaaS arrangements.

However, moving existing customers from on-premises deployments to cloud-based SaaS presents execution challenges. Organizations must migrate their data, retrain users, and often renegotiate contract terms. Some customers resist change due to security concerns, regulatory constraints, or simple inertia. Successfully converting the existing install base while maintaining revenue growth requires careful management—a challenge at the heart of this litigation.

The Disclosure Timeline: What Management Told Investors

Throughout the class period, Varonis executives made a series of public statements characterizing the company’s conversion progress and growth prospects. These communications form the basis for investors’ legal claims.

In early February 2025, CEO Faitelson addressed investors during an earnings call, describing Varonis as advancing toward becoming a SaaS-focused enterprise. He emphasized the advantages the company would realize once the transition reached completion. That same day, CFO Melamed characterized the company’s success in moving self-hosted customers to the cloud platform as robust, noting that customers recognized substantial value in the SaaS offering and the company’s managed detection and response services. He projected that full-year 2025 ARR would reach between $737 million and $745 million, representing year-over-year growth of 15% to 16%.

Three months later, the tone grew more confident. On a May 6 earnings call, Faitelson told investors that the company had improved its effectiveness at converting existing customers during the first quarter, crediting lessons learned from earlier efforts and additional sales team investments. Melamed raised the full-year ARR guidance to a range of $742 million to $750 million—a 16% to 17% growth rate.

The momentum appeared to continue through summer. On July 29, Faitelson announced that Varonis had achieved FedRAMP Authorization, a critical credential for selling to U.S. government agencies. This milestone meant the company could now offer its complete SaaS platform to federal customers, opening what management described as a significant market opportunity. Faitelson characterized demand as inflecting positively and contributing meaningfully to results. Melamed again increased guidance, this time to $748 million to $754 million in ARR, maintaining the 17% growth target.

According to the complaint, this pattern of escalating optimism and successively higher projections continued even as underlying business performance deteriorated. Investors allege that management possessed information about weakening conversion rates and renewal challenges but failed to disclose these material facts, instead presenting an increasingly bullish narrative.

The Central Legal Claims

The lawsuit asserts violations of federal securities law, specifically Section 10(b) of the Securities Exchange Act of 1934 and related regulations. These provisions prohibit manipulative and deceptive practices in connection with securities trading, including making false statements or omitting material facts that investors need to make informed decisions.

Investors contend that defendants made specific misrepresentations about Varonis’ ability to migrate its on-premises customer base to SaaS while simultaneously achieving aggressive growth targets. The complaint alleges that management knew, or should have known, that actual conversion performance and renewal rates were falling short of the levels needed to support the guidance they were providing to the market.

The legal theory centers on a disconnect between management’s public optimism and the company’s actual business results. Despite consecutively raising annual projections and expressing confidence in conversion capabilities, the company was allegedly experiencing material weakness in both federal government renewals and non-federal on-premises subscription renewals—the very customer segments management had highlighted as drivers of growth.

By failing to disclose these adverse trends while continuing to raise guidance, investors argue, defendants created a false impression of the company’s trajectory. This allegedly artificial inflation of expectations meant that investors paid more for VRNS shares than they would have if they had known the true state of the business. Securities law requires companies to correct or update forward-looking statements when they know those statements have become materially misleading—an obligation plaintiffs claim Varonis failed to meet.

October’s Reckoning: When Projections Met Reality

The disconnect between management’s statements and business performance became undeniable on October 28, 2025, when Varonis released third-quarter results. The company disclosed that ARR had come in significantly below expectations and slashed its full-year projections.

In the earnings announcement, management acknowledged that “In the final weeks of the quarter, we experienced weaker-than-expected renewals in our federal business and in our non-federal on-prem subscription business, which resulted in Q3 coming below our expectations.” This admission directly contradicted the narrative of effective conversions and strengthening demand that executives had maintained throughout the preceding months.

The revelation that both federal and on-premises renewal rates were materially weaker than represented fundamentally undermined the growth story management had been telling. The federal business weakness was particularly notable given the July announcement of FedRAMP Authorization and management’s optimistic characterization of government sector opportunities.

Investors processed this corrective disclosure swiftly. VRNS shares had closed at $63.00 on October 28. When trading resumed the following day, the stock collapsed to $32.34—a decline of $30.66 per share, or 48.67%. This dramatic single-session drop reflects the market’s reassessment of the company’s value when the disconnect between guidance and reality became apparent.

The magnitude of the decline suggests investors viewed the disclosure as revealing not merely a single quarter’s disappointment, but a fundamental gap between what management had been telling them about conversion capabilities and the actual state of the business. When companies operating under aggressive growth expectations suddenly reveal material operational weakness, market reactions can be severe—as Varonis shareholders experienced firsthand.

Why This Matters: Disclosure Obligations in Growth Companies

This case illustrates core principles of corporate disclosure obligations under securities law. Public companies must provide investors with accurate, complete information material to investment decisions. This duty becomes especially critical when companies make forward-looking statements about future performance.

• When a company issues guidance—projections about future revenue, earnings, or other metrics—securities law doesn’t require that those projections prove perfectly accurate. Business conditions change, and unforeseen challenges arise. However, companies must have a reasonable basis for their projections when made, and they must update or correct those projections if they learn of material changes that make the original guidance misleading.

• Companies undergoing significant business model transitions face heightened disclosure challenges. When management tells investors about progress converting customers to a new delivery model, investors rely on those characterizations to assess execution risk. If management knows that conversion rates are falling short of the levels needed to support growth projections, continuing to raise guidance without disclosure creates potential liability.

• The materiality standard is key: would a reasonable investor consider the information important in making an investment decision? In Varonis’ case, investors will argue that the company’s ability to maintain renewal rates while converting on-premises customers to SaaS was central to the investment thesis. Information suggesting material weakness in these areas would clearly matter to investors evaluating whether VRNS shares were appropriately priced.

This litigation also highlights the particular risks associated with ARR-dependent businesses. Because subscription software companies generate revenue over time rather than upfront, visibility into renewal rates and conversion trends becomes critical. When management repeatedly raises ARR guidance throughout a year, then suddenly reveals that renewals were “weaker than expected,” investors naturally question whether earlier optimism was justified or whether management was aware of emerging problems but failed to disclose them.

Practical Information for Affected Investors

Investors who purchased VRNS common stock at any time from February 4, 2025, through October 28, 2025, may be eligible to participate in this action. Eligibility typically depends on demonstrating that you held shares during the class period and suffered losses.

The lead plaintiff appointment process allows investors to seek designation as the representative plaintiff who will oversee the litigation on behalf of all class members. Generally, courts favor plaintiffs with larger losses and no conflicts of interest with the class. The application deadline is March 9, 2026, and interested investors should consult qualified securities counsel about the requirements and process.

Even if you don’t seek lead plaintiff status, you may still participate in the class and potentially recover damages if the case succeeds. Most securities class actions do not require individual class members to take action during early litigation stages—participation is typically automatic for eligible investors unless they choose to opt out.

The litigation will proceed through several phases. After lead plaintiff appointment, defendants will likely file a motion to dismiss, arguing that the complaint fails to state a valid legal claim. If the case survives dismissal, plaintiffs will seek class certification, formally establishing the class of investors. Discovery follows, during which both sides exchange documents and take depositions. Many securities cases settle before trial, often after the court rules on key motions but before the expense and uncertainty of trial.

Investors with questions about their eligibility or the litigation process should consult experienced securities counsel. This alert provides general information but does not constitute legal advice, and outcomes in securities litigation are never guaranteed.

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Legal Disclaimer: This article is provided for informational purposes only and does not constitute legal advice or a solicitation. Investors should consult qualified legal counsel for guidance specific to their circumstances. No attorney-client relationship is created by reading this content, and no particular outcome is guaranteed in this or any litigation.