Securities: Are Allegations of Loss Causation Subject to Rule 9(b)? — Circuit Split — Anyone Who Purchased and Sold in the Class Period Can’t Show Loss Causation
In re VEON Ltd. Secs. Litig., 2017 U.S. Dist. LEXIS 1522402017 U.S. Dist. LEXIS 152240 (S.D.N.Y. Sept. 19, 2017):
Lead Plaintiff Westway Alliance Corp. brings this putative class action on behalf of all those who purchased the securities of Defendant VEON Ltd. between December 2, 2010 and November 3, 2015, against VEON and a number of [*2] its executives. Plaintiffs allege violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, arising out of VEON's admitted bribery in Uzbekistan. Defendant VEON moves to dismiss the Amended Complaint in its entirety pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure. For the reasons that follow, the Court denies VEON's motion to dismiss in large part.
I. Factual Background
The following facts are taken from the allegations contained in the Amended Complaint, which are presumed to be true for purposes of this motion to dismiss. ECF No. 45 (Amended Complaint ("Am. Compl.")). The Court also takes judicial notice of VEON's public filings, many of which Plaintiffs quote from at length in the Amended Complaint. ATSI Communs., Inc. v. Shaar Fund, Ltd., 493 F.3d 87, 98 (2d Cir. 2007).
Defendant VEON is a "multinational telecommunications company headquartered in the Netherlands and incorporated in Bermuda." Am. Compl. at ¶ 11.1 Its securities are publicly traded in the United States. Id. Plaintiffs also named as Defendants certain of VEON's current and former executives. Id. ¶¶ 12-16.
On February 10, 2016, VEON entered into a deferred prosecution agreement ("DPA") with the United States Department of Justice, pursuant to which VEON pleaded guilty to a two-count criminal information charging [*3] the company with conspiracy to violate the anti-bribery and books and records provisions of the Foreign Corrupt Practices Act of 1977 ("FCPA") and a violation of the internal controls provision of the FCPA. Id. ¶¶ 2-3; see also Am. Compl., Ex. A (DPA). Pursuant to the DPA, VEON also agreed to pay more than $460 million in penalties and subject itself to outside compliance monitoring. Am. Compl. ¶ 5; DPA ¶¶ 7, 13-15.
In the Amended Complaint, Plaintiffs describe in detail the facts alleged in the criminal information against VEON and admitted by VEON in the DPA's Statement of Facts. See Am. Compl. ¶¶ 31-90. For present purposes, it suffices to say that, beginning in 2005, as VEON first looked to enter the Uzbek telecommunications market, through 2012, VEON made, or attempted to make, millions of dollars in improper payments to Gulnara Karimova, the eldest daughter of Uzbekistan's President, in an effort to achieve favorable treatment in Uzbekistan. Executives disguised these payments in VEON's books and records as legitimate transactions. Id. ¶¶ 88-90. One of the ways in which these payments were made was through a partnership between VEON and Takilant Limited, a company owned by Karimova. [*4] Id. ¶¶ 25, 39-41. This included a $25 million bribe paid in 2007 to secure certain 3G frequencies for VEON's wholly-owned subsidiary in Uzbekistan. Id. ¶¶ 45-48. VEON also entered into sham consulting agreements with Takilant in 2008 and 2011, through which it funneled $32 million to Karimova in exchange for certain telecommunications assets and continued access to the Uzbek market. Id. ¶¶ 49-65. VEON made an additional $10 million in payments to Karimova in 2011 and 2012, using a variety of sham transactions. Id. ¶¶ 66-74. Plaintiffs also describe contemplated bribes in 2012 and 2013 that apparently were not completed. Id. ¶¶ 75-77.
In addition to admitting much of the underlying conduct just described, in the DPA, VEON admitted that the company "failed to implement adequate internal accounting controls and failed to enforce the internal accounting controls it did have in place," thereby allowing the bribes to Karimova. Id. ¶ 78. It also identified problems with its internal audit function, including a knowing failure to have adequate processes for reviewing contracts and conflicts of interest. Id. ¶¶ 79-84. The company did not have a designated full-time compliance function until [*5] 2013, and compliance was treated as a mere formality prior to that time. Id. ¶ 86. Accordingly, VEON admitted that it had "little to no anticorruption compliance program." Id. ¶ 87. Consistent with these admissions, at VEON's plea proceeding, a Government attorney asserted that there was "high-level knowledge of the bribery" at VEON. Id. ¶ 91.
Plaintiffs allege that VEON's conduct that formed the basis of its FCPA violations led to material misstatements and omissions in its SEC filings during the relevant time period. In particular, Plaintiffs allege that, when VEON referred to the increase in its broadband subscriptions, including in Uzbekistan, and revenue in general, it "put the topic of the cause of its financial success at issue," thereby obligating the company to report that the increase in subscriptions in Uzbekistan was due, at least in part, to the bribes paid to Karimova. Id. ¶ 97; accord id. ¶ 98-103, 109-17, 123-33, 139-46, 156-59, 161-62, 167-70. Plaintiffs do not allege that the actual numbers reported were inaccurate.
Plaintiffs also allege that VEON misrepresented that "[t]he government authorities responsible for supervising the telecommunications industry in the Republic [*6] of Uzbekistan are the Republic of Uzbekistan Cabinet and a specially authorized telecommunications agency." Id. ¶ 104. Plaintiffs contend that this was a misrepresentation because it failed to disclose the role that Karimova played. Id. ¶ 105; accord id. ¶¶ 118-19, 134-35.
Finally, Plaintiffs identify a number of VEON's disclosures in its annual reports regarding the company's internal controls. In its annual reports for the calendar years 2010 and 2012, VEON stated that, "[b]ased on the assessment" of its "internal control over financial reporting," its management "believes our company maintained effective internal control over financial reporting" during the relevant calendar year. Id. ¶¶ 106, 136. Stated somewhat differently in its 2014 Form 20-F, the company disclosed that, "as a result of management's assessment of our internal control over financial reporting as of December 31, 2014, management concluded that that our internal control over financial reporting was effective." Id. ¶ 164. That year, VEON also assured the market that its "internal control system was designed to provide reasonable assurance regarding the reliability of financial reporting." Id. ¶; accord id. ¶ 120 (2011 Form [*7] 20-F). Plaintiffs also quote from VEON's website regarding the company's compliance program. Id. ¶ 147.
In a similar vein, between 2010 and 2014, VEON executives signed certifications pursuant to the Sarbanes Oxley Act of 2002 that the information in the company's Forms 20-F was accurate. Id. ¶¶ 108, 122, 138, 155, 165.
VEON later admitted in connection with its DPA that it:
(a) failed to implement adequate internal accounting controls; (b) failed to enforce the internal accounting controls it did have in place, which permitted the above-referenced bribe payments to occur without detection or remediation; (c) failed to implement a system for conducting, recording, and verifying due diligence on third parties, including joint venture partners, consultants, reseller companies, and suppliers to uncover their true nature, beneficial ownership, and possible corruption risks; and (d) failed to require that all consulting agreements be for bona fide services, that agreed-upon payments were commensurate with the services to be performed, and that services paid for were, in fact, performed.
Id. ¶¶ 107, 121, 137, 148.
Plaintiffs allege that, beginning with a Form 6-K disclosure on March 12, 2014, [*8] the truth began to emerge. Id. ¶ 149. VEON disclosed that it had been informed that the Securities Exchange Commission ("SEC") was conducting an investigation into the company and that its Amsterdam headquarters had been visited by Dutch law enforcement. The company stated that "[t]he investigations appear to be concerned with the Company's operations in Uzbekistan." That day, the price of VEON's American Depository Receipts ("ADRs") dropped 6.3%, from $8.85 the previous day to an intraday low of $8.29. Id. ¶ 150. The following week, VEON disclosed that the United States Department of Justice also was investigating the company, and the ADR price declined 5.6%, from an intraday high of $9.07 to a low of $8.57. Id. ¶¶ 151-52.
In VEON's 2013 Form 20-F filed on May 15, 2014, the company reiterated the existence of these investigations and provided more detail on the issues, which the company disclosed involved money laundering and bribery, and identified Karimova's company, Takilant. Id. ¶¶ 153-54. VEON also explained that, in 2013, the company began an internal investigation into its business in Uzbekistan and its relationship with Takilant, led by outside counsel with FCPA expertise. VEON [*9] made similar disclosures in its Form 20-F filed in 2015. Id. ¶ 163.
After the close of the market on August 13, 2015, there were reports that United States authorities had asked their European counterparts "to seize roughly $1 billion in assets related to a wide-ranging criminal probe of alleged corruption by [VEON], MTS, and TeliaSonera, for paying hundreds of millions of dollars to businesses controlled by Ms. Karimova to secure wireless spectrum in Uzbekistan." Id. ¶ 171. After that report, VEON's ADR price fell from $5.56 on August 13 to an intraday low of $5.305 the following day. Id. ¶ 172. Finally, on November 3, 2015, when VEON announced that it had reserved $900 million for litigation costs related to the ongoing investigations, the company's ADRs declined 5.0%, from the previous day's high of $3.665 to an intraday low of $3.48. Id. ¶¶ 173-74.
1 During the course of this litigation, Defendant VimpelCom, Ltd. changed its name to VEON Ltd. See ECF No. 51. For clarity, the Court will refer to the company by its new name throughout.
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