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13 November 2024

Western District Of Louisiana Grants Motion To Dismiss Putative Federal Securities Class Action Against Telecommunications Company For Failure To Allege Falsity, Loss Causation, Or Scienter

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On October 30, 2024, Judge Terry A. Doughty of the United States District Court for the Western District of Louisiana adopted the September 30, 2024 Report and Recommendation...
United States Louisiana Corporate/Commercial Law

On October 30, 2024, Judge Terry A. Doughty of the United States District Court for the Western District of Louisiana adopted the September 30, 2024 Report and Recommendation of Magistrate Judge Kayla Dye McClusky and granted with prejudice a motion to dismiss a putative securities class action against a telecommunications company (the "Company") and certain of its officers (the "Individual Defendants"). In re Lumen Techs., Inc. Sec. Litig., No. 3:23-00286 (W.D. La. Sept. 30, 2024). Plaintiffs alleged that defendants violated Section 10(b) of the Securities Exchange Act of 1934, and Rule 10b-5 promulgated thereunder, by allegedly making false statements regarding the Company's fiber optics expansion project. The Court granted defendants' motion to dismiss with prejudice, holding that plaintiffs failed to adequately plead any actionable misstatements or omissions or loss causation and that plaintiffs failed to plead a strong inference of scienter as to any defendant.

Lead plaintiffs, representing a putative class of stockholders who allegedly purchased the Company's common stock between September 14, 2020, and February 7, 2023 (the putative "Class Period"), alleged that defendants made false and misleading statements and omissions regarding the Company's ability to complete its fiber optics expansion project, which allegedly caused the Company's shares to trade at artificially inflated prices. Specifically, plaintiffs alleged that defendants made false statements claiming that the Company's new fully digital platform received a high customer satisfaction score, as well as allegedly false statements about the Company's plan to build out its fiber network in a number of locations (i.e., to increase its "enablements"). According to the amended complaint, defendants' alleged "scheme to falsely inflate the growth" of the Company's expansion project "began to unravel" when the Company allegedly admitted to the existence of stressed supply chains and labor issues, followed by the Company's CEO and CFOs' abrupt departures. According to plaintiffs, the Company's new CEO issued a statement revising its enablements forecast to "8 million to 10 million" locations, down from the 14-23 million locations the Company initially anticipated. Plaintiffs alleged that, upon issuing this statement, the Company's stock price fell.

The Court first held that plaintiffs failed to plead any actionable material, misrepresentation, or omission. In so holding, the Court found that certain alleged statements about the Company's plans were merely optimistic language amounting to inactionable puffery, and that although the Company initially disclosed that it anticipated accelerating the fiber expansion project, plaintiffs failed to plead facts sufficient to show that any defendant knew, or was reckless in not knowing, that these plans would not come to fruition. The Court further found that the Company's disclaimers on continuing uncertainties regarding the impact of Covid-19 and other market disruptions were sufficiently detailed to constitute forward-looking statements that are protected under the PSLRA's safe harbor.

As to loss causation, the Court held that plaintiffs failed to allege any causal relationship between the purportedly false statements and plaintiffs' alleged economic loss, and specifically noted that plaintiffs failed to allege any "corrective disclosure" pertaining to several of the categories of alleged misrepresentations.

The Court then turned to the issue of scienter. Because the Court determined that plaintiffs did not adequately allege facts to plausibly demonstrate that defendants made any material, misstatement, or omission, the Court found that plaintiffs "have not alleged facts to support scienter either individually or holistically." Although the Court accepted at the pleading stage that the fiber optics expansion plan was an important aspect of the Company's future growth prospects, the Court found that plaintiffs failed to allege that any defendant made any statement that was inconsistent with the alleged importance of that plan. The Court also found unconvincing plaintiffs' arguments that executive officer departures or the alleged pressure that the Company was under to meet expectations during the Class Period were sufficient to create a strong inference of scienter.

For the same reasons that the Court found that plaintiffs failed to allege any actionable misrepresentation or scienter, the Court rejected plaintiffs' theories of scheme liability. Specifically, the Court held that plaintiffs did not allege any facts sufficient for the Court to draw a reasonable inference that the Company intentionally committed a deceptive or manipulative act in furtherance of the purported fraudulent scheme.

Finally, having found no primary liability under Section 10(b), the Court rejected plaintiffs' derivative control liability claim under Section 20(a).

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