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CHRISTIAN v. BT GROUP PLC et al, Docket No. 2_17-cv-00497 (D.N.J. Jan 25, 2017), Court Docket
Multiple Documents
Part Description
1 3 pages
2 Brief
3 Text of Proposed Order
© 2019 The Bureau of National Affairs, Inc. All Rights Reserved. Terms of Service
// PAGE 1Case 2:17-cv-00497-KM-JBC Document 68 Filed 10/04/19 Page 1 of 3 PageID: 1604
OF COUNSEL: Kevin H. Marino, Esq.
James P. Rouhandeh, Esq. (pro hac vice) John D. Tortorella, Esq.
Brian S. Weinstein, Esq. (pro hac vice) MARINO, TORTORELLA &
DAVIS POLK & WARDWELL LLP BOYLE, P.C.
450 Lexington Avenue 437 Southern Boulevard
New York, New York 10017 Chatham, New Jersey 07928-1488
Tel.: (212) 450-4000 Tel.: (973) 824-9300
Fax: (212) 701-5800 Fax: (973) 824-8425
Attorneys for Defendants BT Group plc,
Ian Livingston, Gavin E. Patterson,
Tony Chanmugam, Nick Rose, Luis
Alvarez, and Richard Cameron
UNITED STATES DISTRICT COURT
DISTRICT OF NEW JERSEY
JAMES CHRISTIAN, Individually and on No. 2:17-cv-00497-KM-JBC
Behalf of All Others Similarly Situated,
CLASS ACTION
Plaintiff,
ORAL ARGUMENT
v. REQUESTED
BT GROUP PLC, IAN LIVINGSTON, RETURN DATE:
GAVIN E. PATTERSON, TONY JANUARY 6, 2020
CHANMUGAM, NICK ROSE, LUIS
ALVAREZ, and RICHARD CAMERON, NOTICE OF MOTION TO
DISMISS
Defendants.
To: James E. Cecchi
CARELLA, BYRNE, CECCHI,
OLSTEIN, BRODY & AGNELLO, P.C.
5 Becker Farm Road
Roseland, NJ 07068
Samuel H. Rudman
David A. RosenfeldCase 2:17-cv-00497-KM-JBC Document 68 Filed 10/04/19 Page 2 of 3 PageID: 1605
Alan I. Ellman
ROBBINS GELLER RUDMAN &
DOWD LLP
58 South Service Road, Suite 200
Melville, NY 11747
Corey D. Holzer
Marshall P. Dees
HOLZER & HOLZER, LLC
200 Ashford Center North, Suite 300
Atlanta, GA 30338
Attorneys for Plaintiffs
PLEASE TAKE NOTICE that at 9:00 a.m. on January 6, 2020, or such
other time and date as set by the Court, Defendants BT Group plc, Ian Livingston,
Gavin E. Patterson, Tony Chanmugam, Nick Rose, Luis Alvarez, and Richard
Cameron will move before the Honorable Kevin McNulty, Judge of the United
States District Court for the District of New Jersey, Martin Luther King Building
& U.S. Courthouse, 50 Walnut Street, Newark, New Jersey, for entry of an Order
granting Defendants’ Motion to Dismiss Plaintiffs’ Fourth Amended Complaint.
PLEASE TAKE FURTHER NOTICE that, in support of the within
motion, Defendants rely upon the accompanying memorandum of law and the
Declaration of James P. Rouhandeh.
PLEASE TAKE FURTHER NOTICE that a proposed form of Order is
being submitted herewith.
2Case 2:17-cv-00497-KM-JBC Document 68 Filed 10/04/19 Page 3 of 3 PageID: 1606
PLEASE TAKE FURTHER NOTICE that, pursuant to Local Civil Rule
78.1(b), Defendants request oral argument on this motion.
Dated: October 4, 2019 By: _________________________
Kevin H. Marino, Esq.
MARINO, TORTORELLA
& BOYLE, P.C.
437 Southern Boulevard
Chatham, New Jersey 07928-1488
Attorneys for Defendants BT Group plc,
Ian Livingston, Gavin E. Patterson,
Tony Chanmugam, Nick Rose, Luis
Alvarez, and Richard Cameron
3Case 2:17-cv-00497-KM-JBC Document 68-1 Filed 10/04/19 Page 1 of 48 PageID: 1607
UNITED STATES DISTRICT COURT
DISTRICT OF NEW JERSEY
JAMES CHRISTIAN, Individually and on No. 2:17-cv-00497-KM-JBC
Behalf of All Others Similarly Situated,
CLASS ACTION
Plaintiff,
ORAL ARGUMENT
v. REQUESTED
BT GROUP PLC, IAN LIVINGSTON, RETURN DATE:
GAVIN E. PATTERSON, TONY JANUARY 6, 2020
CHANMUGAM, NICK ROSE, LUIS
ALVAREZ, and RICHARD CAMERON,
Defendants.
MEMORANDUM OF LAW IN SUPPORT OF DEFENDANTS’
MOTION TO DISMISS PLAINTIFFS’ FOURTH AMENDED COMPLAINT
OF COUNSEL:
James P. Rouhandeh, Esq. (pro hac vice) Kevin H. Marino, Esq.
Brian S. Weinstein, Esq. (pro hac vice) John D. Tortorella, Esq.
DAVIS POLK & WARDWELL LLP MARINO, TORTORELLA
450 Lexington Avenue & BOYLE, P.C.
New York, New York 10017 437 Southern Boulevard
Tel.: (212) 450-4000 Chatham, New Jersey 07928-1488
Fax: (212) 701-5800 Tel.: (973) 824-9300
Fax: (973) 824-8425
Attorneys for Defendants BT Group plc,
Ian Livingston, Gavin E. Patterson,
Tony Chanmugam, Nick Rose, Luis
Alvarez, and Richard CameronCase 2:17-cv-00497-KM-JBC Document 68-1 Filed 10/04/19 Page 2 of 48 PageID: 1608
TABLE OF CONTENTS
PAGE
PRELIMINARY STATEMENT................................................................................. 1
STATEMENT OF FACTS .........................................................................................4
I. Background ......................................................................................................4
II. Procedural History and the Court’s Decision to Dismiss Plaintiffs’
First Amended Complaint ................................................................................ 6
III. Plaintiffs’ Second, Third, and Fourth Amended Complaints .......................... 9
LEGAL STANDARDS ............................................................................................12
ARGUMENT ...........................................................................................................13
I. Plaintiffs Fail to Plead Particularized Facts Giving Rise to a Strong
Inference of Scienter Required for a Section 10(b) Claim ............................13
A. Plaintiffs Fail to Plead Facts Supporting a Strong Inference of
Scienter Regarding the Individual Defendants ...................................14
1. Allegations of “Bullying” at BT Italy Are Not New and
Do Not Support a Strong Inference of Scienter ........................14
2. “Must Have Known” Allegations from Anonymous BT
Italy Sources in a Newspaper Article Are Legally
Insufficient to Plead Scienter ....................................................16
3. Statements Attributed to BT Italy’s Former CEO and
CFO in Newspaper Articles Are Not New Allegations,
and Are Legally Insufficient to Plead Scienter .........................19
4. Allegations Regarding the Italian Government’s
Investigation and KPMG Report Contained in News
Articles Are Legally Insufficient to Plead Scienter .................. 22
5. Plaintiffs’ Ancillary Scienter Allegations Relating to
Chanmugam and Alvarez Also Fail ..........................................27
6. Plaintiffs Make No New Scienter Allegations Against
Livingston or Patterson, and Plaintiffs’ Scienter
Allegations Against the Remaining Individuals Fail ................ 30
iCase 2:17-cv-00497-KM-JBC Document 68-1 Filed 10/04/19 Page 3 of 48 PageID: 1609
B. Plaintiffs Fail to Plead Corporate Scienter ..........................................32
1. The Third Circuit Has Not Adopted the Corporate
Scienter Doctrine.......................................................................32
2. Even if the Corporate Scienter Doctrine Could Apply,
Plaintiffs’ Allegations Do Not Give Rise to a Strong
Inference of Scienter as to BT Group .......................................34
(a) Plaintiffs’ Cavestany Allegations Do Not Give
Rise to a Strong Inference of Scienter ............................34
(b) Plaintiffs’ Alvarez and Cameron Allegations Do
Not Give Rise to a Strong Inference of Scienter ............ 37
II. Plaintiffs Fail to Allege that Alvarez and Cameron Made or
Disseminated Misstatements .........................................................................38
III. Plaintiffs Fail to Plead a Section 20(a) Claim ...............................................39
IV. Plaintiffs Should Not Be Granted Leave to File Another Amended
Complaint ......................................................................................................39
CONCLUSION ........................................................................................................40
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TABLE OF AUTHORITIES
CASES
PAGE(S)
In re Advanta Corp. Sec. Litig.,
180 F.3d 525 (3d Cir. 1999) ..........................................................................17, 30
In re Alpharma Inc. Sec. Litig.,
372 F.3d 137 (3d Cir. 2004) ....................................................................35, 36, 37
Ashcroft v. Iqbal,
556 U.S. 662 (2009) ............................................................................................12
Barrett v. PJT Partners Inc.,
No. 16-cv-2841, 2017 WL 3995606 (S.D.N.Y. Sept. 8, 2017)...........................38
Bartesch v. Cook,
941 F. Supp. 2d 501 (D. Del. 2013) ..............................................................20, 22
Cal. Pub. Emps.’ Ret. Sys. v. Chubb Corp.,
394 F.3d 126 (3d Cir. 2004) ..........................................................................17, 39
Chan v. New Oriental Educ. & Tech. Grp. Inc.,
No. 16-cv-9279, 2019 WL 2865452 (D.N.J. July 3, 2019) ..........................18, 22
Chill v. Gen. Elec. Co.,
101 F.3d 263 (2d Cir. 1996), aff’d sub. nom. Globis Capital Partners, L.P. v.
Stonepath Grp., Inc., 241 F. App’x 832 (3d Cir. 2007) ......................................15
City of Edinburgh Council v. Pfizer, Inc.,
754 F.3d 159 (3d Cir. 2014) ..................................................................................4
City of Roseville Emps.’ Ret. Sys. v. Horizon Lines, Inc.,
442 F. App’x 672 (3d Cir. 2011) ...................................................................33, 38
City of Roseville Emps.’ Ret. Sys. v. Horizon Lines, Inc.,
713 F. Supp. 2d 378 (D. Del. 2010) ............................................................ passim
In re Columbia Labs., Inc. Sec. Litig.,
No. 12-cv-614, 2013 WL 5719500 (D.N.J. Oct. 21, 2013) ................................39
iiiCase 2:17-cv-00497-KM-JBC Document 68-1 Filed 10/04/19 Page 5 of 48 PageID: 1611
In re Cybershop.com Sec. Litig.,
189 F. Supp. 2d 214 (D.N.J. 2002) .....................................................................40
Dura Pharms., Inc. v. Broudo,
544 U.S. 336 (2005) ............................................................................................12
In re Exxon Mobil Corp. Sec. Litig.,
387 F. Supp. 2d 407 (D.N.J. 2005) .....................................................................31
In re Gentiva Sec. Litig.,
932 F. Supp. 2d 352 (E.D.N.Y. 2013) ...........................................................22, 23
Globis Capital Partners, L.P. v. Stonepath Grp., Inc.,
241 F. App’x 832 (3d Cir. 2007) ...................................................................13, 15
Gold v. Ford Motor Co.,
577 F. App’x 120 (3d Cir. 2014) .........................................................................13
GSC Partners CDO Fund v. Washington,
368 F.3d 228 (3d Cir. 2004) ................................................................................12
In re Hertz Glob. Holdings Inc.,
905 F.3d 106 (3d Cir. 2018) .........................................................................passim
In re Hertz Glob. Holdings, Inc. Sec. Litig.,
No. 13-cv-7050, 2017 WL 1536223 (D.N.J. Apr. 27, 2017), aff’d sub. nom.
In re Hertz Glob. Holdings Inc., 905 F.3d 106 (3d Cir. 2018) .........16, 23, 24, 29
Higginbotham v. Baxter Int’l, Inc.,
495 F.3d 753 (7th Cir. 2007) .........................................................................15, 36
In re Intelligroup Sec. Litig.,
527 F. Supp. 2d 262 (D.N.J. 2007) .........................................................16, 17, 21
In re Interpool, Inc. Sec. Litig.,
No. 04-cv-321, 2005 WL 2000237 (D.N.J. Aug. 17, 2005) ...............................28
Janus Capital Grp., Inc. v. First Derivative Traders,
564 U.S. 135 (2011) ............................................................................................38
Kalnit v. Eichler,
264 F.3d 131 (2d Cir. 2001) ................................................................................37
ivCase 2:17-cv-00497-KM-JBC Document 68-1 Filed 10/04/19 Page 6 of 48 PageID: 1612
Lorenzo v. SEC,
139 S. Ct. 1094 (2019) ...................................................................................... 38
Mizzaro v. Home Depot, Inc.,
544 F.3d 1230 (11th Cir. 2008) ...........................................................................35
In re Nice Systems, Ltd. Sec. Litig.,
135 F. Supp. 2d 551 (D.N.J. 2001) .....................................................................31
Novak v. Kasaks,
216 F.3d 300 (2d Cir. 2000) ................................................................................21
In re Omnicare, Inc. Sec. Litig.,
769 F.3d 455 (6th Cir. 2014) ...............................................................................36
In re Optionable Sec. Litig.,
577 F. Supp. 2d 681 (S.D.N.Y. 2008) ...........................................................17, 18
Oran v. Stafford,
226 F.3d 275 (3d Cir. 2000) ................................................................................30
In re Party City Sec. Litig.,
147 F. Supp. 2d 282 (D.N.J. 2001) .....................................................................30
Rahman v. Kid Brands, Inc.,
736 F.3d 237 (3d Cir. 2013) ..........................................................................18, 36
In re Rockefeller Ctr. Props., Inc. Sec. Litig.,
311 F.3d 198 (3d Cir. 2002) ................................................................................17
In re Stonepath Grp., Inc. Sec. Litig.,
No. 04-cv-4515, 2006 WL 890767 (E.D. Pa. Apr. 3, 2006) ...............................15
Tellabs, Inc. v. Makor Issues & Rights, Ltd.,
551 U.S. 308 (2007) ......................................................................................12, 13
Wilson v. Bernstock,
195 F. Supp. 2d 619 (D.N.J. 2002) ...............................................................17, 21
vCase 2:17-cv-00497-KM-JBC Document 68-1 Filed 10/04/19 Page 7 of 48 PageID: 1613
STATUTES & RULES
15 U.S.C. § 78u-4(b) ............................................................................................1, 12
Fed. R. Civ. P. 9(b) .........................................................................................1, 12, 39
Fed. R. Civ. P. 12(b)(6) ........................................................................................1, 12
Sec. 10(b) of the Sec. Exch. Act of 1934 ..........................................................passim
Sec. 20(a) of the Sec. Exch. Act of 1934 .............................................................6, 39
viCase 2:17-cv-00497-KM-JBC Document 68-1 Filed 10/04/19 Page 8 of 48 PageID: 1614
Defendants BT Group plc (“BT Group” or the “Company”), Ian Livingston,
Gavin E. Patterson, Tony Chanmugam, Nick Rose, Luis Alvarez, and Richard
Cameron (the “individual defendants,” and together with BT Group, the
“defendants”) respectfully submit this memorandum of law in support of their
motion to dismiss the Fourth Amended Complaint, dated August 16, 2019,
pursuant to § 78u-4(b) of the Private Securities Litigation Reform Act of 1995 (the
“PSLRA”) and Federal Rules of Civil Procedure 9(b) and 12(b)(6).
PRELIMINARY STATEMENT
Plaintiffs’ Fourth Amended Complaint suffers from the same defects that
caused this Court to dismiss plaintiffs’ earlier complaint. Plaintiffs previously
alleged that defendants intentionally misled investors about misconduct at BT Italy,
one of BT Group’s 300 subsidiaries. The Court held that plaintiffs failed to plead
with particularity facts giving rise to a strong inference that any of the individual
defendants had acted with scienter, or that any other employees acted with scienter
that could be imputed to BT Group under a theory of “corporate scienter.” In so
doing, the Court held that plaintiffs had not even “raise[d] a plausible inference” of
scienter and that “[t]he more reasonable inference is that these individual
defendants were unaware of the fraud or other problems at BT Italy that later
emerged.” (Dkt. 40 at 13, Opinion Granting Defs.’ Mot. to Dismiss Pls.’ First Am.
Compl. (the “Order”).)
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In an effort to resurrect their baseless claims, plaintiffs return with an
amended complaint that fails to include any new or additional factual allegations
that could draw into question this Court’s previous conclusions. Notably, plaintiffs
do not attempt to plead anything new or different as to several of the individual
defendants and therefore had no colorable basis even to include them in their latest
complaint. Where plaintiffs do allege purportedly “new” facts, they still fail to
create a strong inference of scienter for the reasons set forth below.
First, plaintiffs emphasize that BT Group investigated reports of “bullying”
in 2016, but this was already alleged in the First Amended Complaint and rejected
by the Court as an inadequate basis to allege knowledge of fraud.
Second, plaintiffs allege that an anonymous BT Italy employee told Reuters
that it would have been “impossible” for “London” to have been unaware of the
BT Italy fraud, but courts have routinely held that such speculative “must-have-
known” allegations are insufficient under the PSLRA. That conclusion is
particularly appropriate here, where BT Italy only constituted one percent of BT
Group’s EBITDA and workforce.
Third, based again solely on news articles, plaintiffs allege that perpetrators
of the fraud—the ex-BT Italy CEO and CFO—claimed that transactions in Italy
were approved by BT Group. Plaintiffs ignore that these same articles (i) reflect
that the ex-officers denied knowledge of any wrongdoing, let alone fraud; and
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(ii) lack any details that would support a permissible inference that BT Group
knew about fraudulent activities. In the absence of any such details—the “who,
what, where, when, and how” required by the PSLRA—such allegations fall well
short of the requirement that defendants’ scienter be pled with particularity.
Fourth, plaintiffs allege that defendants Cameron and Alvarez are among 23
individuals being investigated by Italian authorities in connection with the BT Italy
fraud. Based on references to emails in news articles, plaintiffs allege that these
defendants “set unrealistically high earnings objectives that could not be met
absent accounting manipulations.” But the Third Circuit has made clear that
alleged pressure to meet high earnings objectives and investigations by
government authorities are not sufficient to plead scienter, and the articles and
emails upon which plaintiffs rely do not give rise to a strong inference that
defendants were aware of the fraud.
Finally, plaintiffs allege (again, based solely on news articles) that a report
prepared by KPMG found that BT Global Services executives were not sufficiently
zealous in scrutinizing BT Italy, but as this Court and the Third Circuit have made
clear, allegations of negligence or mismanagement do not equate to fraud.
In addition to failing to plead scienter against any individual defendants,
plaintiffs also fail to otherwise plead scienter against BT Group. Plaintiffs seek to
impute scienter to BT Group, but have not pleaded particularized facts supporting a
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strong inference that any of the alleged misstatements were made by an individual
with scienter. In an attempt to cure this deficiency, plaintiffs again seek to rely on
the so-called corporate scienter doctrine. In dismissing the First Amended
Complaint, however, this Court held that, even assuming the Third Circuit would
recognize the corporate scienter doctrine, it would do so only in “extraordinary”
circumstances that are not present here. The Fourth Amended Complaint simply
does not plead the type of extraordinary circumstances to which this Court
previously referred. Accordingly, plaintiffs’ scienter allegations regarding
individuals who were not responsible for the alleged misstatements—Alvarez,
Cameron, and Cavestany—are not only legally deficient but also cannot be
imputed to BT Group and cannot form the basis of a securities fraud claim.
STATEMENT OF FACTS
I. Background
BT Group is a multinational telecommunications company, headquartered in
London, and its American Depository Receipts (“ADRs”) trade on the New York
Stock Exchange. (Fourth Amended Complaint (“FAC”) ¶ 24.)1 BT Group has
several customer-facing lines of business, one of which is Global Services (“BT
1
The facts set forth herein are drawn from the Fourth Amended Complaint,
documents incorporated by reference therein, and matters of which judicial notice
may be taken. Cf. City of Edinburgh Council v. Pfizer, Inc., 754 F.3d 159, 166 (3d
Cir. 2014). Documents cited herein are attached as exhibits to the Declaration of
James P. Rouhandeh, dated October 4, 2019, and referred to by exhibit (“Ex. __”).
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Global Services”). (Id. ¶ 46.) The Continental Europe division of the BT Global
Services line of business includes BT Italia S.p.A. (“BT Italy”), a subsidiary of BT
Group in Milan. (See id. ¶¶ 2, 48, 54.) BT Italy is one of over 300 subsidiaries of
BT Group. (Ex. A, 2017 BT Group Annual Report at 238–48.) For the financial
year ending March 2016, BT Italy contributed approximately one percent to BT
Group’s EBITDA (FAC ¶ 69), and employed about one percent of BT Group’s total
workforce (see id. ¶ 54; Ex. B, 2016 BT Group Annual Report at 32).
On October 27, 2016, BT Group informed investors that it had learned of
“inappropriate management behaviour” at BT Italy, had conducted an internal
investigation, and was taking a £145 million write-down based on its “current best
estimate of the financial impact.”2 (FAC ¶¶ 65–66.) The same day, the price of BT
Group ADRs fell $0.57 per ADR. (Id. ¶ 67.) On January 24, 2017, BT Group
updated investors that further investigation had “revealed that the extent and
complexity of inappropriate behaviour in the Italian business were far greater than
previously identified,” resulting in an increase to the financial adjustments to
approximately £530 million. (Id. ¶¶ 68–69.) Following the announcement, the
price of BT Group ADRs fell $5.05 per ADR. (Id. ¶ 75.) As a result of the
“improper behaviour” at BT Italy, BT Group suspended members of BT Italy
2
Unless otherwise noted, emphasis and quotation marks in the complaint have
been removed throughout.
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senior management and appointed a new Chief Executive of BT Italy. (Id. ¶ 69.)
On May 25, 2017, BT Group filed its 2017 annual report, which disclosed that the
Company’s investigation had identified “collusion and override of controls within
[BT Italy],” and that BT Group’s controls were “ineffective” as of March 31, 2017,
due to a “material control weakness” with regard to BT Italy. (Id. ¶¶ 123–24.)
Following disclosure of the internal investigation, plaintiffs allege that
Italian authorities opened an investigation into BT Italy (id. ¶ 214); that BT Group
itself filed a criminal complaint with Italian prosecutors against former BT Italy
employees (who plaintiffs allege “were all fired”) for “breaking company rules and
unlawful conduct” (id. ¶¶ 115–17); and that the Italian prosecutors’ “preliminary
investigation” named defendants Alvarez and Cameron as “suspects” (id. ¶ 98).
II. Procedural History and the Court’s Decision to Dismiss Plaintiffs’
First Amended Complaint
Plaintiffs filed their initial complaint on January 25, 2017 (Dkt. 1), and their
First Amended Complaint on November 21, 2017 (Dkt. 26), pursuing claims under
Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5.
Plaintiffs alleged that defendants knowingly misled investors regarding the BT
Italy fraud and identified five categories of alleged misstatements between May 10,
2013, and January 23, 2017 (the “class period”): (1) statements regarding BT
Group’s quarterly and year-end financial results (First Amended Complaint ¶¶ 87,
93–96, 101–04, 110–13, 118); (2) statements that BT Group’s internal control over
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financial reporting was effective (id. ¶¶ 89, 97, 105, 114); (3) certifications by BT
Group’s CEO and CFO about the Company’s internal and disclosure controls (id.
¶¶ 90, 98, 106, 115); (4) reports on BT Group’s Board Audit and Risk Committee’s
(“BARC”) attention to BT Italy (id. ¶¶ 91, 99, 107–08, 116); and (5) BT Group’s
publicly filed financial statements, which plaintiffs allege were “presented in
violation of [International Financial Reporting Standards]” (id. ¶¶ 124–80).
In the First Amended Complaint, plaintiffs relied on three categories of
allegations in an attempt to establish scienter: (1) that the BARC was reviewing
BT Italy’s operations and control environment during the class period (see, e.g., id.
¶¶ 40–48, 193, 202(b)); (2) that unidentified BT Italy employees told BT Global
Services employee Jacinto Cavestany that “something” was “wrong with [BT
Italy]’s financial results” (see, e.g., id. ¶¶ 62, 194); and (3) that BT Italy employees
engaged in intentional misconduct (see, e.g., id. ¶¶ 192, 202(a)). Plaintiffs also
included a smattering of other scienter allegations (see, e.g., id. ¶¶ 25, 27, 46, 76–
78, 108, 124–52, 173, 181 195, 197, 202), including those related to employee
resignations (id. ¶¶ 4, 23, 58, 75) and clawbacks of remuneration (id. ¶¶ 4, 84–86).
Defendants moved to dismiss the First Amended Complaint on the basis that
plaintiffs had failed to allege facts giving rise to a strong inference of scienter.
(Dkt. 28-2.) On August 1, 2018, this Court granted defendants’ motion to dismiss
in full. (Order at 1.) In doing so, the Court addressed all of plaintiffs’ primary and
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ancillary scienter allegations, and held that none were sufficient to state a claim.
(See Order at 13, 17–18.)
First, with respect to plaintiffs’ allegations regarding the BARC and the
individual defendants, this Court held:
[T]he individual defendants had reports of internal-control problems at
one of BT Group’s 300 subsidiaries. The reports did not reveal fraud
or point out problems with the company’s core operations or products.
The warnings, such as they were, involved potential control issues; in
themselves, they did not alert these defendants that the company’s
public statements were incorrect. . . . [T]he mere fact that the Audit
Committee was looking into the management and accounting controls
in place at BT Italy was not enough to tip the balance, given the stiff
PSLRA pleading standard[.]
(Id. at 12.) Accordingly, the Court held:
The allegations in [the First Amended Complaint] do not raise a
plausible inference that the individual defendants turned a “blind eye”
to “red flags” or had “no reasonable basis” for certifying the Sarbanes-
Oxley reports. The more reasonable inference is that these individual
defendants were unaware of the fraud or other problems at BT Italy that
later emerged.
(Id. at 13.)
Second, in response to plaintiffs’ “corporate scienter” allegations, the Court
held that even “[a]ssuming arguendo that the Third Circuit would permit a
complaint to plead ‘corporate scienter,’” plaintiffs’ allegations “would not suffice.”
(Id. at 15–17.) Regarding plaintiffs’ allegations that BT Italy employees were
aware of the fraud, the Court refused to impute scienter to BT Group because the
fact “[t]hat BT Italy executives were allegedly knowledgeable about the fraud does
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not mean that the parent company’s executives from BT Group were aware.” (Id.
at 15.) Similarly, with respect to allegations of BT Global Services employee
Cavestany’s knowledge, the Court found that “[e]ven on the generous assumption
that Cavestany knew of fraud at BT Italy, his knowledge cannot be imputed to BT
Group.” (Id. at 15–16.) Regarding “BT Group’s reduction of the pay of
executives,” the Court found that this “does not give rise to a compelling inference
of scienter,” as “[n]o facts are pled to suggest that the reduction in pay was due to
their participation in any fraud.” (Id. at 16.) This Court held, in sum:
[B]ased on the allegations, it is at least as likely that key individuals at
BT Group were unaware of the fraud, were not reckless in ignoring it,
and reacted appropriately when the relevant facts came out. Even if the
corporate-scienter doctrine was permitted in this Circuit, these facts
would not satisfy that doctrine.
(Id. at 17.)
III. Plaintiffs’ Second, Third, and Fourth Amended Complaints
On October 1, 2018, plaintiffs filed a Second Amended Complaint (Dkt. 47),
which defendants moved to dismiss (Dkt. 48). With the consent of the parties, on
December 28, 2018, plaintiffs filed a Third Amended Complaint, which added
BARC Chairman Nick Rose as an individual defendant, but was otherwise nearly
identical to the Second Amended Complaint. (Dkt. 54.) Defendants moved to
dismiss this complaint as well. (Dkt. 55.)
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After that motion to dismiss was fully briefed, plaintiffs filed several letters
with the Court that “purport[ed] to supplement the complaint’s allegations.” (Dkt.
64 at 1.) Although the Court found that defendants’ motion to dismiss could not
“be defeated by the belated submission of additional facts and evidence outside the
four corners of the complaint,” the Court found it likely that “even if the Third
Amended Complaint were dismissed on an as-is basis, the plaintiffs would move to
amend it to incorporate their supplemental allegations.” (Id.) To avoid “wast[ing]
the resources of the parties or the court,” the Court administratively terminated
defendants’ motion to dismiss and granted plaintiffs leave to file another amended
complaint within 30 days. (Id. at 1–2.)
On August 16, 2019, plaintiffs filed the Fourth Amended Complaint, which
added Section 10(b) claims against Luis Alvarez and Richard Cameron.3 (Dkt.
65.) Attempting to bolster their previously rejected scienter allegations, plaintiffs
now assert the following: (1) “at the start of 2016, [BT Group] received reports of
bullying cases at BT Italy, in response to which senior Human Resources officials
visited the Italian offices and investigated,” and despite this, individual defendant
Rose “stated in BT Group’s 2016 Annual Report [that it] continued to monitor [its]
operations in Italy and progress has been made to improve the control
3
Cameron is a new defendant. Alvarez has been a defendant from the outset, but
plaintiffs had not previously alleged a Section 10(b) claim against him.
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environment” (FAC ¶¶ 11, 83, 273, 280(h)); (2) anonymous BT Italy sources
allegedly made conclusory and unsubstantiated statements to Reuters that “it
would be impossible that London had no way of realizing what was happening in
Italy and . . . for an auditor not to realize that something was amiss” (id. ¶¶ 5, 93,
270, 280(f)); (3) according to news articles, BT Italy’s former CEO and CFO
allegedly stated, without further specifics, that BT Italy financial transactions were
verified and authorized by BT Group (see, e.g., id. ¶¶ 5, 92, 266); (4) an
undisclosed document allegedly prepared by Italian prosecutors and reported on by
Reuters purportedly names defendants Alvarez and Cameron, who are not alleged
to have made or disseminated any of the alleged misstatements, as “suspects in the
criminal case” and accuses them of “setting unrealistically high business targets
and of complicity in false accounting at BT Italy” (id. ¶¶ 98–99, 253); and (5)
again, according to news articles, an internal report by KPMG shows “executives
at BT global services did not sufficiently challenge numbers submitted by Italian
staff,” “inquiries from London were ignored or met by [unsatisfactory] responses,”
and “global services staff often failed to follow through to get answers” (id. ¶ 12;
see also ¶ 113).
In addition to the above, plaintiffs also make ancillary allegations relating to
the alleged scienter of two individual defendants. First, plaintiffs repeat allegations
from their May 25, 2018 letter to the Court that “BT Group applied the malus
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provisions to all of [former BT Group CFO Tony] Chanmugam’s Deferred Bonus
Plan (‘DBP’) awards.” (Id. ¶ 7; Dkt. 35 at 1–2.) Relatedly, plaintiffs allege that
“Chanmugam was either fired or preemptively quit in July 2016 in connection with
BT Group’s internal investigation of BT Italy.” (FAC ¶ 7; see also id. ¶¶ 128–31,
272, 280(g).) Finally, plaintiffs allege that Alvarez sold BT Group shares worth
approximately £675,000 in December 2016 (id. ¶¶ 101, 254)—less than half of his
holdings—without any further allegations regarding these sales or any others.
LEGAL STANDARDS
A complaint must be dismissed under Rule 12(b)(6) unless it contains
“sufficient factual matter, accepted as true, to state a claim to relief that is plausible
on its face.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (internal quotation marks
and citation omitted). Plaintiffs must also satisfy Rule 9(b)’s and the PSLRA’s
heightened pleading requirements, which mandate that “the circumstances
constituting fraud . . . be stated with particularity.” GSC Partners CDO Fund v.
Washington, 368 F.3d 228, 236 (3d Cir. 2004); see also Order at 7–8.
The PSLRA requires that securities fraud complaints “state with particularity
facts giving rise to a strong inference that the defendant acted with the required
state of mind”—i.e., scienter. Dura Pharm., Inc. v. Broudo, 544 U.S. 336, 345
(2005) (quoting 15 U.S.C. §§ 78u-4(b)(1), (2)). Scienter is “a mental state
embracing intent to deceive, manipulate, or defraud.” (Order at 8 (quoting Tellabs,
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Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 319 (2007)).) To establish
scienter, plaintiffs must allege facts giving rise to a “strong inference” of “either
reckless or conscious behavior.” Gold v. Ford Motor Co., 577 F. App’x 120, 122–
23 (3d Cir. 2014) (internal quotations marks and citations omitted). Recklessness
is a state of mind “closely approach[ing] . . . conscious deception,” “not merely
simple, or even inexcusable negligence.” Globis Capital Partners, L.P. v.
Stonepath Grp., Inc., 241 F. App’x 832, 835 (3d Cir. 2007) (internal quotation
marks and citations omitted); see also Order at 13 (“The issue, after all, is not
negligence, but scienter.”). “[T]he inference of scienter must be more than merely
‘reasonable’ or ‘permissible’” and must be “at least as compelling as any opposing
inference of nonfraudulent intent.” Tellabs, 551 U.S. at 314, 324.
ARGUMENT
I. Plaintiffs Fail to Plead Particularized Facts Giving Rise to a Strong
Inference of Scienter Required for a Section 10(b) Claim
This Court dismissed plaintiffs’ First Amended Complaint for failure to
plead facts giving rise to a strong inference that any of the defendants acted with
scienter or that any other employee acted with scienter that can be imputed to the
Company. The Fourth Amended Complaint suffers from the same failure and
should be dismissed as well.
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A. Plaintiffs Fail to Plead Facts Supporting a Strong Inference of
Scienter Regarding the Individual Defendants
This Court, in dismissing the First Amended Complaint, determined that
plaintiffs had not even “raise[d] a plausible inference” of scienter and that “[t]he
more reasonable inference is that these individual defendants were unaware of the
fraud or other problems at BT Italy that later emerged.” 4 (Order at 13.) For the
reasons set forth below, plaintiffs’ purportedly “new” scienter allegations provide
no basis to disturb the Court’s previous conclusion.
1. Allegations of “Bullying” at BT Italy Are Not New and
Do Not Support a Strong Inference of Scienter
Plaintiffs claim to be making a new allegation that “at the start of 2016, the
Company received reports of bullying cases at BT Italy, in response to which
senior Human Resources officials visited the Italian offices and investigated” and
that, “[d]espite this,” individual defendant Rose, Chairman of the BARC, said in
BT Group’s 2016 Annual Report that “[w]e have continued to monitor our
operations in Italy and progress has been made to improve the control
environment.” (FAC ¶¶ 11, 83, 273, 280(h).) Despite plaintiffs’ renewed focus on
4
Plaintiffs’ failure to adequately plead scienter as to any defendant is further
demonstrated by their lumping the individual defendants together, including, for
example, by grouping Ian Livingston in allegations relating to the period after he
left the Company. (See FAC ¶ 25 (“Livingston . . . was the Company’s CEO and a
member of BT Group’s Board of Directors . . . from 2008 until September 2013.”
(emphasis added)); id. ¶ 1 (May 10, 2013 to January 23, 2017 class period).)
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“bullying,” this allegation is not new. In fact, the first word in the title of the
Reuters article plaintiffs relied on in the First Amended Complaint was “bullying.”
(Ex. C, March 30, 2017 Reuters Article (“English Reuters Article”) at 1; see, e.g.,
First Amended Complaint ¶ 62.) Plaintiffs raised these same 2016 BARC
disclosures (First Amended Complaint ¶¶ 47, 116, 174) and reports of bullying (id.
¶¶ 62, 64) in their First Amended Complaint. This Court already determined that
these facts do not raise a strong inference of scienter. (See Order at 11–13.)
Further, the fact that BT Group received and investigated reports of bullying
at BT Italy does not suggest that any of the defendants were aware of fraud there.
As the Court already recognized, knowing enough to launch an investigation is not
sufficient to show knowledge of fraud. See Order at 12–13 (“Knowing enough to
launch an investigation . . . is a very great distance from convincing proof of intent
to deceive.” (quoting Higginbotham v. Baxter Int’l, Inc., 495 F.3d 753, 758 (7th
Cir. 2007))); In re Stonepath Grp., Inc. Sec. Litig., No. 04-cv-4515, 2006 WL
890767, at *12 (E.D. Pa. Apr. 3, 2006) (finding “fraud cannot be inferred simply
because [the parent corporation] might have been more curious or concerned about
the activity at [its subsidiary]” (alterations in original) (quoting Chill v. Gen. Elec.
Co., 101 F.3d 263, 270 (2d Cir. 1996))), aff’d sub nom. Globis, 241 F. App’x 832.
Moreover, bullying at most reflects mismanagement, not fraud. See In re
Hertz Glob. Holdings, Inc. Sec. Litig. (“Hertz I”), No. 13-cv-7050, 2017 WL
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1536223, at *16–17 (D.N.J. Apr. 27, 2017) (finding allegations that senior
management of parent company set “inappropriate tone at the top,” resulting in
accounting violations, reflected inactionable “mismanagement”), aff’d sub nom. In
re Hertz Glob. Holdings Inc. (“Hertz II”), 905 F.3d 106, 117 (3d Cir. 2018).
Plaintiffs’ bullying allegations do not support a strong inference of scienter.
2. “Must Have Known” Allegations from Anonymous BT
Italy Sources in a Newspaper Article Are Legally
Insufficient to Plead Scienter
Plaintiffs next rely on conclusory and unsubstantiated statements in a March
30, 2017 Italian Reuters article (“March 2017 Article”), attributed to anonymous
BT Italy sources, that it is “impossible that London had no way of realizing what
was happening in Italy” and that “it would have been practically impossible for an
auditor not to realize that something was amiss.” (FAC ¶¶ 5, 93–94, 270, 280(f);
FAC Ex. A, March 2017 Article at 1–2.) These allegations are inadequate to plead
scienter as a matter of law.
As a threshold matter, the anonymous sources’ statements that it would be
“impossible that London had no way of realizing what was happening in Italy” and
that “it would have been practically impossible for an auditor not to realize that
something was amiss” (see, e.g., FAC ¶ 5) are nothing more than “bald
declaration[s]” that are “void of any factual basi[s].” In re Intelligroup Sec. Litig.,
527 F. Supp. 2d 262, 361–62 (D.N.J. 2007) (holding that statements by confidential
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witness that “there was outright fraud and there was outright incompetence” did
not “even add a credible circumstantial ‘piece to the scienter puzzle’”). As a
matter of law, these statements are too speculative to plead scienter. See, e.g., Cal.
Pub. Emps.’ Ret. Sys. v. Chubb Corp., 394 F.3d 126, 155 (3d Cir. 2004); In re
Advanta Corp. Sec. Litig., 180 F.3d 525, 539 (3d Cir. 1999).5
Even if such allegations were not per se insufficient to plead scienter, they
nonetheless fail to meet the heightened particularity requirements of the PSLRA.
Courts, including the Third Circuit, frequently find that news articles cannot
support a strong inference of scienter because they are insufficiently specific. See,
e.g., In re Rockefeller Ctr. Props., Inc. Sec. Litig., 311 F.3d 198, 220 (3d Cir. 2002)
(finding newspaper articles cited by plaintiffs failed to meet the PSLRA’s
“requisite specificity”); In re Optionable Sec. Litig., 577 F. Supp. 2d 681, 690
5
Plaintiffs’ allegations, based on the March 2017 Article, that “the accounting
software system at BT [Italy] is open to the parent company and it is possible to
conduct checks by logging into the system at any time” (FAC ¶ 93); that “on more
than one occasion, [factoring] transactions were recorded on the UK intranet” (id.
¶ 95); and that fraudulent billing by BT Italy “was rendered simpler by the fact that
at BT [Italy] there were dozens of different independent accounting software
systems” (id. ¶ 96) are similarly irrelevant because “[p]laintiffs do not allege that
[d]efendants either reviewed or had access to specifically identified documents or
memoranda discussing the [BT Italy fraud],” Wilson v. Bernstock, 195 F. Supp. 2d
619, 640 (D.N.J. 2002), and the “covert nature of [the fraud] distinguishes this case
from those where an executive-defendant’s examination of routine financial data or
other internal company information would have informed him of the falsity of his
statements,” City of Roseville Emps.’ Ret. Sys. v. Horizon Lines, Inc.
(“Roseville I”), 713 F. Supp. 2d 378, 400 (D. Del. 2010).
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(S.D.N.Y. 2008) (“[A]rticles should be credited only to the extent that other factual
allegations would be—if they are sufficiently particular and detailed to indicate
their reliability.” (internal quotation marks and citations omitted)).
As Judge Hayden recently explained in dismissing a securities fraud lawsuit,
“Reuters is not a securities fraud plaintiff, and while newspaper articles can
certainly alert investors to wrongdoing, the complaint must rise or fall on
allegations about defendant[’s] conduct and not on wide-eyed citation to the
gratuitous commentary of outsiders.” Chan v. New Oriental Educ. & Tech. Grp.
Inc., No. 16-cv-9279, 2019 WL 2865452, at *8 (D.N.J. July 3, 2019) (alteration in
original) (internal quotation marks and citation omitted). The allegations from
unnamed BT Italy sources in the March 2017 Article must be “steeply” discounted
because the article fails to provide any particularity regarding “the detail provided
by the confidential sources, the sources’ basis of knowledge, the reliability of the
sources, the corroborative nature of other facts alleged, including from other
sources, the coherence and plausibility of the allegations, and similar indicia.”
Rahman v. Kid Brands, Inc., 736 F.3d 237, 244 (3d Cir. 2013) (internal quotation
marks and citation omitted). The article does not indicate any of the sources’
positions at BT Italy, their dates of employment, or the bases for their knowledge,
and therefore lacks sufficient information for the Court to determine whether the
sources would have known about the BT Italy fraud, much less BT Group’s
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awareness of it. See id. at 240–41, 244–45 (discounting confidential witnesses’
allegations, even where plaintiff provided positions and employment dates,
because they “offer[ed] little more than generalized allegations with few specifics
and even less concrete support”). Accordingly, these allegations are legally
deficient because they lack the requisite specificity.
3. Statements Attributed to BT Italy’s Former CEO and
CFO in Newspaper Articles Are Not New Allegations,
and Are Legally Insufficient to Plead Scienter
Plaintiffs allege, also based on the March 2017 Article, that defendants were
aware of the BT Italy fraud because the ex-BT Italy CEO, Gianluca Cimini, told
Reuters that “the financial transactions . . . were properly verified and authorized
by the parent company and by the audit units and firms.” (FAC ¶ 92.) Plaintiffs
similarly allege that defendants were aware of the fraud because—again, according
to the Italian version of an April 23, 2019 Reuters article (“Italian April 2019
Article”)—the ex-CFO of BT Italy, Luca Sebastiani, supposedly made statements
to Italian prosecutors that “[a]ll the main economic and financial transactions
carried out by BT [Italy] were shared with the heads of the European Region [and]
with Luis Alvarez (Global Service CEO) and Richard Cameron (Global Service
CFO).” (Id. ¶109; FAC Ex. E, Italian April 2019 Article at 2–3.) These allegations
are insufficient to plead scienter on multiple grounds.
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First, these allegations are not new. Plaintiffs, in their First Amended
Complaint, relied on another Reuters article, written by the same author in March
2017, that included a nearly identical statement from Cimini. (See, e.g., First
Amended Complaint ¶¶ 62, 151; Ex. C, English Reuters Article at 2 (“In relation to
alleged financial irregularities, [Cimini] said [to Reuters that] he knew of no illegal
behaviour and that BT Italy’s accounts were verified by head office during his time
as CEO.”).) Plaintiffs’ allegations regarding the Sebastiani statements are
substantively identical and do nothing to bolster plaintiffs’ claim.
Second, vague, generalized references to BT Group having been aware of, or
having “verified and authorized,” “transactions” do nothing to support plaintiffs’
scienter allegations. The same individuals (Cimini and Sebastiani) who Reuters
says made these assertions never claimed that BT Group or the other individual
defendants were aware of anything fraudulent. See Bartesch v. Cook, 941 F. Supp.
2d 501, 507 (D. Del. 2013) (“Even if the article were sufficiently reliable and
independent, the article itself does not suggest that defendants knew and were
misrepresenting [the facts] and, therefore, is insufficient to support allegations that
defendants made fraudulent misstatements . . . .”). In fact, they do the opposite.
They deny the existence of any fraud whatsoever. Cimini told Reuters he was “not
personally aware of illegal conduct” and did not “have documents showing illegal
conduct.” (FAC Ex. A, March 2017 Article at 3 (emphasis added).) Sebastiani, for
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his part, claimed “the British office [was] informed [of and had] been aware of the
critical nature of some issues for some time,” but he too did not say that defendants
were aware of the fraudulent nature of any of these issues. (FAC ¶ 109.)
Third, Cimini’s and Sebastiani’s purported statements lack the particularity
required to allege scienter. Although Cimini allegedly told Reuters the financial
transactions were “verified and authorized” by BT Group (id. ¶¶ 92, 266, 280(e)),
he does not specify which financial transactions were verified or authorized, in
what documents they appeared, when they were reviewed, or by whom. Sebastiani
reportedly cited to “a series of filed internal documents” (id. ¶ 109), but there is
similarly no indication of what these documents were, what they said, or even if
they were ever actually received or reviewed by defendants. Without this
information, these statements are too vague to meet the particularity requirements
of the PSLRA. See, e.g., Novak v. Kasaks, 216 F.3d 300, 309 (2d Cir. 2000)
(“Where plaintiffs contend defendants had access to contrary facts, they must
specifically identify the reports or statements containing this information.”);
Intelligroup, 527 F. Supp. 2d at 286; Wilson, 195 F. Supp. 2d at 640–41.
Finally, Cimini’s and Sebastiani’s statements are not reliable. As plaintiffs
allege, Cimini himself was responsible for the “climate of terror” at BT Italy (FAC
¶ 78), and both Cimini and Sebastiani were suspended by the Company “[i]n
response to the inappropriate behaviours [the Company] identified in [its] Italian
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business” (id. ¶¶ 69, 74, 125). In light of these facts, these BT Italy employees’
self-serving statements are not sufficiently reliable to meet the pleading
requirements of the PSLRA. See Bartesch, 941 F. Supp. 2d at 506–07 (holding
article not sufficiently reliable to meet PSLRA’s pleading requirements where
“written by an executive at a company currently in litigation with [defendants’
employer] over the subject matter of the article,” which “might suggest that the
author has an incentive to disparage [the employer]”).
4. Allegations Regarding the Italian Government’s
Investigation and KPMG Report Contained in News
Articles Are Legally Insufficient to Plead Scienter
Plaintiffs also cite to a handful of news articles written after the Court
dismissed the First Amended Complaint that describe the Italian government’s
investigation of BT Italy and a report written by KPMG. (See FAC Exs. B–E.)
These recent articles too add nothing to alter the Court’s previous conclusion that
plaintiffs have failed to plead a strong inference of scienter. 6
First, as the Court already recognized, “[t]he existence of an investigation by
the Italian government does not support a strong inference of scienter on the part of
6
For example, plaintiffs allege, based on a February 13, 2019 Telegraph article
(“Telegraph Article”), that “Alvarez, Cameron, and Sciolla all knew about falsely
inflated sales figures at BT [Italy], according [to] documents issued by authorities
in Milan.” (FAC ¶ 100 (second alteration in original).) Yet, the article relied upon
by plaintiffs is entirely devoid of any specific facts (see FAC Ex. C, Telegraph
Article at 3), and is therefore insufficient to meet the PSLRA’s strict pleading
requirements. Chan, 2019 WL 2865452, at *8.
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BT Group.” (Order at 16 (quoting In re Gentiva Sec. Litig., 932 F. Supp. 2d 352,
380 (E.D.N.Y. 2013)).) Accordingly, plaintiffs’ allegation that Alvarez and
Cameron are “among an expanded list of 23 suspects” in the Italian government’s
investigation (FAC ¶¶ 99, 104, 122) is insufficient to support a strong inference of
scienter. The Third Circuit has affirmed that a government investigation that has
not resulted in any finding of wrongdoing does not support an inference of scienter.
See Hertz I, 2017 WL 1536223, at *17 n.6, aff’d sub nom. Hertz II, 905 F.3d 106.
Plaintiffs claim that “Reuters reviewed emails seized by Italian financial
police demonstrating that top BT Global Services executives, including Cameron,
were at the heart of the problem” (FAC ¶ 103), but as discussed below, these
emails do not contain the particularized facts necessary to support a strong
inference of scienter under the PSLRA. In the absence of such facts, allegations
that the Italian government is investigating Alvarez and Cameron are insufficient to
plead scienter. See Order at 16; Hertz I, 2017 WL 1536223, at *17 n.6.
Second, allegations that employees felt pressure to meet aggressive financial
targets, without more, fail to plead scienter. Here, relying on two 2019 Reuters
articles, plaintiffs allege that Alvarez and Cameron “set unrealistically high
earnings objectives that could not be met absent accounting manipulations” and
that these defendants asked BT Italy to “accommodate their requests for specified
amounts of additional profits that were needed to eliminate shortfalls.” (FAC ¶¶
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