On March 25, 2022, Judge Mary Kay Vyskocil of the Southern
District of New York granted in part and denied in part a motion to
dismiss a putative class action asserting claims under the
Securities Exchange Act of 1934 against a telecommunications
company and certain of its executives. Solomon v.
Sprint Corp., 1:19-cv-05272 (MKV) (S.D.N.Y. Mar. 25,
2022). Plaintiffs primarily alleged that the company made
misrepresentations regarding its reporting of new phone
subscriptions and its participation in a government-subsidized
discounted phone program. The Court held that plaintiffs
adequately alleged misrepresentations and scienter with respect to
statements regarding new subscriptions but held that plaintiffs
failed to adequately allege scienter with respect to statements
regarding the discounted phone program and concluded that certain
other challenged statements were mere puffery.
Plaintiffs alleged two primary categories of
misrepresentations. First, plaintiffs alleged that the
company's reporting of the number of postpaid phone lines added
by subscribers was misleading, including because the company had
increased the number of subscriptions by offering customers a
bundled free line with a purchased line. Slip op. at
2-4. Second, plaintiffs alleged that the company made
misrepresentations regarding its participation in a
government-subsidized program that provided discounted phone and
internet services to low-income customers, which were allegedly
false and misleading because the company failed to deactivate lines
that were inactive for 30 days as required under the terms of the
program. Id. at 5-6. Plaintiffs
alleged that these statements were made in the context of a
prospective merger to increase the likelihood that the merger would
be consummated. Id. at 7.
The Court held that plaintiffs had adequately alleged
misrepresentations with respect to the company's reporting of
added postpaid phone lines. The Court rejected the
company's arguments that its statements were "technically
true" and accompanied by other disclosures that explained that
the company used promotions and included non-phone devices in its
reporting of postpaid numbers. Id. at
13. The Court noted that, once a company chooses to speak on
an issue, it must disclose sufficient information so that its
statements are not misleading. Id. at
11. While the Court agreed that the statements were
technically true, it explained that the additional disclosures
"do not defeat the clear impression generated by the
company's other statements about the strength of the business
overall." Id. at 13. In
particular, the Court noted that the company had "painted such
an optimistic picture of the company's postpaid sales that it
left investors with no other possible inference than that the
company's postpaid net additions continued to grow," even
as the company's board had allegedly been informed that the
number of added lines had decreased, that the company's
performance was worse than other phone carriers, and that growth
was not expected to continue. Id. at
12-13.
With respect to the company's participation in the discounted
phone line program, the company admitted that its financial
statements were incorrect because they "claimed income that
they wrongly acquired" with respect to the program and because
"internal controls in the company had failed to ensure
compliance." Id. at 14.
Similarly, the Court explained that alleged misrepresentations
regarding financial performance and revenue were actionable because
the company "did not disclose that a sizeable portion of its
revenue was wrongfully received as a result of failures within [the
company's] controls." Id. at
15.
However, the Court held that challenged statements regarding the
company's "corporate goals and competitive
advantages" were non-actionable
puffery. Id. at 15-16. The Court
observed that the statements such as "whether we do the
merge[r] ... or stay standalone ... we would have a terrific
platform from a network point of view" were
"forward-looking statements of optimism" that constituted
mere puffery. Id. at 16. Thus, the
Court dismissed any claims relying on those statements to the
extent they are "devoid of any connection to the statements
the Court has found to be
actionable." Id.
Turning to scienter, the Court explained that plaintiffs argued
"almost exclusively" for an inference of scienter based
on a theory of recklessness, pointing to an alleged
"discrepancy between statements made internally at the company
and statements released to the
public." Id. at 17-18. The
Court held that plaintiffs adequately alleged scienter with respect
to the added postpaid subscriptions, based on allegations that the
company "publicly discussed only [the company's] success
from postpaid additions," even though the company's board
was allegedly informed of a "drastic reduction[] in postpaid
net additions" and the company subsequently stated in a letter
to a regulator that this reporting was "incomplete" and
"not a substitute for a realistic analysis of the key factors
that are most probative of [the company's] overall competitive
position and prospects." Id. at
18. The Court stated that these allegations raised a
sufficient inference of scienter at the motion-to-dismiss stage
that defendants "either knew of the statements' falsity or
were reckless when making their
statements." Id. at 18-19.
The Court held that plaintiffs had not adequately alleged scienter,
however, with respect to statements regarding the discounted phone
program or related alleged inaccuracies in the company's
financial statements. While plaintiffs argued that an email
allegedly sent by a "senior lawyer" at the company
explained that the company had a "systemic" failure with
respect to keeping track of subscribers in the government program,
the Court emphasized that plaintiffs provided no other facts
indicating that individuals at the company were aware of problems
with internal controls. Id. at 19.
Moreover, the Court observed that plaintiffs had given no reason
why that email, sent in 2014 to a utility commission in Oregon,
should be interpreted as relating to a "nationwide
problem" or to the allegedly improper reimbursements disclosed
five years later. Id. at 19-20. The
Court also rejected plaintiffs' argument that defendants had
"motive and opportunity to commit fraud" based on an
alleged "desire to maximize the merger price" and to
"induce the merger to
occur." Id. at 20. The Court
explained that this argument amounted to a "generalized
desire" to achieve a profitable outcome and was not supported
by allegations of a "concrete and personal benefit" for
the company's executives, as would be required to support an
inference of scienter. Id. at 20-21.
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