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Eastern District Of New York Grants Motion To Dismiss Proposed Securities Class Action Against Russian Electronic Payments Company
11/14/2023On November 3, 2023, Judge Rachel P. Kovner of the United States District Court for the Eastern District of New York granted a motion to dismiss a proposed putative securities class action alleging that a Russian electronic payments company (the “Company”) and certain of its officers violated Section 10(b) and Section 20(a) of the Securities Exchange Act of 1934 (the “Exchange Act”). In re Qiwi PLC Sec. Litig., No. 1:20-cv-06054-RPK-CLP (E.D.N.Y. Nov. 3, 2023). Plaintiff alleged that the Company made false and misleading statements regarding its compliance with Russian regulations that prohibited the facilitation of payments to unsanctioned online gambling sites. The Court dismissed the complaint for failure to plead actionable misstatements or omissions and failure to plead facts that raise a strong inference of scienter.
The Company operates a network of digital wallets and physical terminals that allow merchants and customers to make instant payments in several Eastern European countries. According to the Complaint, users can create a digital wallet using the Company’s technology by registering with their phone number. The Company obtained a banking license from the Central Bank of the Russian Federation (“CBR”), which means the Company must comply with CBR’s rules and is subject to CBR audits. The Company is also licensed to facilitate certain online gambling transactions and, according to plaintiff, derives approximately a third of its total revenue from facilitating gambling transactions. Plaintiff alleges that the Company made a series of misstatements and omissions in its SEC filings concerning (1) its compliance with Russian banking and gambling laws and recordkeeping regulations, (2) the results of a 2020 audit by the CBR and the likely consequences the Company would face, and (3) the impact that new Russian regulations would have on the Company’s business.
The Court first held that plaintiff did not adequately plead that the Company made materially false misstatements or omissions regarding unlawful acts or recordkeeping deficiencies. With respect to plaintiff’s claim that the Company misled investors by failing to disclose that its profits were partially derived from violating Russian regulations, the Court held that plaintiff failed to identify specific legal violations, the substance of those violations, or the conduct that led to those violations. With respect to plaintiff’s allegations that the Company made misleading statements regarding the efficacy and remediation of its reporting and recordkeeping, the Court found that plaintiff did not plead with sufficient particularity “what reporting or recordkeeping requirements were violated, when, and in what ways.” The Court also addressed plaintiff’s allegation that the Company failed to disclose illegal gambling transactions by the Company’s customers. Here, the Court held that plaintiff’s allegations about illicit gambling were “at best, assertions of uncharged, unadjudicated wrongdoing.” Although plaintiff asserted that the Company had a duty to disclose uncharged wrongdoing because it “tout[ed] success but fail[ed] to disclose that improper practices contributed to that success,” the Court rejected this argument because plaintiff failed to allege with particularity the specific ways in which undisclosed activity was illegal or improper.
Second, the Court held that plaintiff failed to adequately allege that the Company made actionable misstatements relating to the CBR audit in 2020. While plaintiff alleged that the Company “misleadingly concealed the CBR audit’s existence,” the Court found that, because the Company was not obligated to disclose “uncharged, unadjudicated wrongdoing,” the Company was not required to inform investors that the CBR was performing a routine audit and had not yet charged the Company with misconduct.
Third, the Court held that plaintiff failed to adequately allege that the Company made actionable misstatements about the negative impacts of new regulations on the Company’s business. The Court found that plaintiff’s conclusory allegations that “new regulations” “heavily impacted” the Company’s business, fell short because plaintiff did not plead with particularity what new regulations were harmful to the Company’s business and how.
The Court next addressed plaintiff’s allegations of scienter. The Court found that plaintiff did not adequately allege motive to commit fraud, as no individual defendant was alleged to have sold any shares of the Company’s stock during the class period and therefore there was no allegation that any individual defendant received a concrete and personal benefit from the alleged misrepresentations. Additionally, the Court found that plaintiff did not adequately allege conscious misbehavior or recklessness because plaintiff did not specifically allege any defendant’s knowledge of facts or access to information that contradicted their public statements. The Court also found that plaintiff failed to plead corporate scienter, which requires that the pleaded facts show a strong inference that someone whose intent could be imputed to the corporation acted with scienter, for the same reasons that plaintiff’s complaint failed to allege scienter with respect to any individual defendant.
Finally, the Court addressed plaintiff’s claims for scheme liability under subsections (a) and (c) of Rule 10b-5. The Court found that these claims failed because plaintiff’s allegations of scienter were lacking and because plaintiff did not precisely articulate the alleged scheme to defraud investors.
