On 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.
Originally published November 14, 2023.
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