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Eastern District Of New York Dismisses Putative Class Action Against Telecommunications Company For Failure To Adequately Allege Misrepresentations, Scienter
03/09/2021On March 1, 2021, Judge Ann M. Donnelly of the United States District Court for the Eastern District of New York dismissed with prejudice a putative class action asserting claims under the Securities Exchange Act of 1934 against a telecommunications company and certain of its executives. Salim v. Mobile Telesystems PJSC, No. 19-CV-1589 (AMD) (RLM), slip op. (E.D.N.Y. Mar. 1, 2021). Plaintiffs alleged that the company made misrepresentations with respect to an alleged scheme to bribe foreign officials. The Court held that plaintiffs failed to adequately allege any misrepresentations or scienter and therefore dismissed the complaint.
Plaintiffs alleged that the company made misrepresentations in connection with the alleged bribery scheme concerning (i) recording a reserve in connection with DOJ and SEC investigations, (ii) disclosures about the nature of the investigations, (iii) statements that the company was cooperating with the investigations, and (iv) statements regarding the company’s compliance with its code of ethics. Id. at 11.
With respect to recording a reserve, plaintiffs alleged the company could have made a reasonable and reliable estimate of its potential liability after each alleged bribe but failed to do so at the appropriate time. Id. at 12-13. The Court, however, determined that plaintiffs failed to allege that the company’s loss was probable or that it could be “reasonably estimated” at any time before the company ultimately recorded a reserve in November 2018. Id. at 13. The Court explained the company could not predict the investigations’ outcome or how the company would react to any charges brought by the government. Id. While plaintiffs asserted that the company could have estimated a reserve at an earlier point in time, the Court observed that plaintiffs could not fix the precise date on which the company could have estimated its losses, and noted that other companies that faced similar investigations paid a range of penalties making a prediction of liability even more difficult. Id. at 14. The Court went on to state that, because the decision to set aside a reserve requires an exercise of judgment, plaintiffs also needed to plead that the company’s subjective judgment was false, which plaintiffs could not do since they could not contend the company knew what their loss range would be at any time before November 2018. Id. at 15-16.
Plaintiffs further alleged that the company’s disclosures regarding the investigations were misleading because they did not specifically state that the company was facing a Foreign Corrupt Practice Act investigation. Id. at 16-17. The Court, however, concluded that the company’s disclosures were sufficient because the company had cautioned that it could incur significant fines and penalties, as well as FCPA liability, even though it had not specifically stated that the government was actively investigating the company for possible FCPA violations. Id. at 18. While plaintiffs also contended that the company failed to disclose the “rigid guidelines for penalties” under the FCPA, and that other peer companies entered into deferred prosecution agreements when facing accusations of similar misconduct, the Court held that this did not constitute an actionable omission; the FCPA’s penalty guidelines are publicly available and the Court noted that there was no authority requiring a company to disclose that other companies had entered into deferred prosecution agreements. Id. at 18-19.
With respect to statements concerning the company’s cooperation, the company noted in its securities filings that it was “cooperat[ing] with these investigations in good faith,” which plaintiffs alleged was false because the DOJ did not credit the company for “cooperation and remediation” under the FCPA Corporate Enforcement policy in the settlement the company ultimately reached. Id. at 19. The Court found this statement about cooperation was not false because the deferred prosecution agreement the company entered into reflected the company’s cooperation—in fact the DOJ gave the company a reduction in its calculation of the company’s U.S. Sentencing Guidelines score since the company “fully cooperated in the investigation and clearly demonstrated recognition and affirmative acceptance of responsibility for its criminal conduct.” Id. at 19-20. The Court concluded that the company’s failure to receive additional cooperation credit did not make its statements about cooperation false. Id. at 20.
The Court also held that the company’s statements that it “complies with legislation and generally accepted standards of business ethics” and that its internal code of conduct was a “fundamental document” that guides the company’s daily work and helps it to maintain a “competitive advantage” were not actionable. The Court concluded that those statements were the “broad, aspirational, and vague statements that are the hallmark of corporate puffery.” Id. at 20–22. The Court separately observed that plaintiffs’ allegations about the company’s internal controls were not sufficiently particularized to survive a motion to dismiss in any event. Id. at 22.
As an independent basis for dismissal, the Court additionally determined that plaintiffs failed to adequately allege scienter. The Court first concluded that plaintiffs failed to establish scienter through allegations of defendants’ motive and opportunity. Id. at 24-25. Although plaintiffs contended that the company had a motive to conceal the alleged anticorruption violations for as long as possible, the Court noted the company had not actually concealed the investigations and, in fact, provided regular updates concerning them. Id. The Court also concluded that plaintiffs failed to allege scienter based on conscious misbehavior or recklessness. Plaintiffs’ general claims about what company executives supposedly must have known based on their roles within the company did not include factual allegations suggesting the individual defendants had access to information that would have helped the company establish a reserve. Id. at 26. Although plaintiffs had suggested that an internal investigation yielded such information, the Court determined that the complaint merely alleged that the investigation took place and did not include any findings. Id. at 27. And the Court concluded that plaintiffs had not established corporate scienter, because plaintiffs failed to establish any individual defendant acted with the requisite scienter and failed to show the company made a statement so important and dramatic that it would have been approved by corporate officials sufficiently knowledgeable about the investigations to know the statement was false. Id. at 28.
Noting that plaintiffs had already been given two opportunities to amend their complaint and had not asked for another opportunity, the Court determined that further amendment would be futile. Id. at 29.
