PARK v. COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION et al

Filing 66

OPINION. Signed by Judge William H. Walls on 8/8/2018. (JB, )

NOT FOR PUBLICATION
UNITED STATES DISTRICT COURT
DISTRICT OF NEW JERSEY

N RE COGNIZANT TECHNOLOGY
SOLUTIONS CORPORATION SECURITIES
LITIGATION

OPINION

No. 2:16-cv-06509 WHW-CLW

Walls, Senior District Judge

Plaintiffs Union, Amalgamated, and Colorado Fire and Police bring this class action
against Defendants Cognizant Technology Solutions Corporation, Francisco D’Souza, Karen
McLoughuin, and Gordon Cobum alleging that they violated Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934 and Rule lOb-5, promulgated under Section 10(b),
by making
materially incomplete, false, and misleading statements that concealed a bribery scheme.
Defendants move to dismiss Plaintiffs’ amended complaint for failure to state a claim under
Federal Rule of Civil Procedure 12(b)(6). Defendants also move to strike certain allegations of
Plaintiffs’ amended complaint under Federal Rule of Civil Procedure 12(f). The Court decides
these motions without oral argument. Fed. R. Civ. P. 78. Defendants’ motion to strike is denied,
Defendants’ motion to dismiss is granted in part and denied in part.

NOT FOR PUBLICATION
PROCEDURAL AND FACTUAL BACKGROUND
Except where noted, all facts are taken from Plaintiffs’ amended complaint. ECF No. 38.
Defendant Cognizant Technology Solutions Corporation (“Cognizant”) is a multinational
corporation headquartered in Teaneck, New Jersey. Am. Compi.

¶ 22. Cognizant’s common

stock is listed and trades actively on the NASDAQ stock market under the ticker symbol
“CTSH.” Id. Cognizant is an outsourcing company that provides digital, technology, consulting,
and operation services around the world. Id.
D’Souza, McLoughlin, and Coburn (the “Individual Defendants”) were executives at
Cognizant. Defendant Francisco D’Souza was Chief Executive Officer (“CEO”) during the
relevant period, having taken the position in 2007. Id.

¶ 23. Defendant Karen McLoughlin served

as Chief Financial Officer (“CFO”) during the relevant period, having taken the position in 2012.
Id.

¶ 24. McLoughlin oversees, among other things, Cognizant’s Internal Audit and Enterprise

Risk Management functions. Id. Defendant Gordon Coburn served as President from February
2012 until his resignation on September 27, 2016. Id.

¶ 25.

Plaintiffs are Union Asset Management Holding AG (“Union”), Amalgamated Bank, as
Trustee for the LongView Collective Investment Funds (“Amalgamated”), and the Fire and
Police Pension Association of Colorado (“Colorado Fire and Police,” and with Union and
Amalgamated “Plaintiffs”). Id. at 1. Plaintiffs bring this class action on behalf of themselves and
on behalf of a class consisting of all persons and entities who purchased, or otherwise acquired,
the common stock of the Company from February 27, 2015, through September 29, 2016 (the
“Class Period”).1 Id. at 1—2.

Excluded from the class are: Defendants; members of the immediate families of the
Individual Defendants; the Company’s subsidiaries and affiliates; any person who is or was an
officer or director of the Company or any of the Company’s subsidiaries or affiliates during the
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I.

Cognizant’s India Operations

Although its current headquarters are located in New Jersey, Cognizant began as an
Indian company and maintains its principal operations there. Id.

¶ 27. During the operative

timeframe, close to 150,000 of Cognizant’s 200,000 employees were located in India, many of
whom were housed at its ten large IT campuses known as “global delivery centers.” Id.

¶ 27,

30. As part of its effort to lower cost, Cognizant obtained licenses from central and regional
Indian governments to construct and operate its facilities in designated Special Economic Zones
(“SEZs”). Id.

¶ 30. Companies operating within SEZs are entitled to favorable treatment

including tax exemptions and holidays, heightened access to credit, and relaxed customs and
labor regulations. Id.

¶J 3, 29—30. These tax breaks and other benefits helped lower operating

costs, and Cognizant reported that the tax benefits derived from SEZ licenses increased net
incomeby S201.4 million in 2015. Id.

¶J5, 111.

Although the $EZs were beneficial to the companies that operated within them, members
of the Indian government were becoming skeptical of their continued value, and in February
2015 the Finance Minister Arun Jaitley indicated that the Indian government might begin to limit
the tax benefits available to newly-constructed SEZs. Id.

¶ 35. Consistent with the plan of

limiting SEZ benefits, India’s Central Board for Direct Taxes issued a draft proposal that would
phase out SEZ tax benefits for new facilities commencing activities after April 2017. Id.

¶ 36. In

february 2016 Minister Jaitley presented a final budget plan implementing a policy for phasing
out SEZ benefits after April 1, 2020. Id.

¶ 36.

Class Period; any entity in which any Defendant has a controlling interest; and the legal
representatives, heirs, successors, and assigns of any such excluded person or entity. Am. Compl.
¶ 245.
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Cognizant continued to seek and obtain SEZ licenses after the February 2015
announcement, and constructed or expanded four SEZ-licensed global delivery centers during
the Class Period. id.

¶ 31.

In September 2015, Cognizant signed agreements to expand its global

delivery center in Coimbatore, and its Indian headquarters in Chennai, which together were
projected to have the capacity to accommodate approximately 17,000 to 20,000 professionals. Id.

¶ 37.

In March 2016, Cognizant received approval for an 8,500-employee facility in Hyderabad,

and in August 2016 it received approval to construct a SEZ facility on a fifteen-acre plot in
Kolkata. Id.

¶ 38. The land for the Kolkata facility was purchased from the state government’s

Housing Infrastructure Development Corporation, which reportedly waived its development fee
and ensured that the price of the land “would be ‘kept reasonable’ to sweeten the deal.” Id.
(quoting Mamata Government Allots New Town Plotfor Company ‘s Third Campus in Calcutta,
Telegraph (India) (Aug 3, 2016),
https://telegraphindia.coml 11 60803/j sp/calcuttalstory_1 002$ $ .j sp). Around the same time, the
state government refused to grant licenses to Cognizant’s competitors, Wipro and Infosys, which
had both been assured by the state’s previous administration that their projects would receive
SEZ status. Id.

¶ 39.

According to Plaintiffs, Cognizant acquired some of these SEZ licenses through a bribery
scheme involving members of Senior Management, including company President Defendant
Cobum.
II.

The Class Period
a. Cognizant’s Statements About SEZ Licenses, the Company’s Financial
Performance, and Internal Anticorruption Procedures

Cognizant made a series of public disclosures about its business strategy to leverage the
benefits of its low-cost Indian facilities. In its annual and quarterly SEC forms, Cognizant
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reported strong results, and quantified the benefits of utilizing SEZ licenses. As example, the
Company reported that the SEZ facilities “increase[d] net income by approximately $201.4
million.

.

.

and increase[d] diluted PES by $.033” in its 2015 form 10-K. Id.

¶ 111

(quoting

Cognizant, 2015 Annual Report, at 4, 92). The Company also made statements about its intent to
continue to build and operate its newer facilities in $EZs and continue to make capital
expenditures to grow those operations. Id.

¶ 42.

The company also made statements regarding the sources of its financial success during
those years, both in its SEC filings and in direct statements to investors. The Company listed
sources of its success such as “[s]olid performance across all of our business segments”;
“[s]ustained strength in the North American market”; “[c]ontinued penetration of the European
and Rest of World (primarily the Asia Pacific) markets”; “[ijncreased customer spending on
discretionary projects”; “[e]xpansion of our service offerings, including Consulting, IT IS, and
BPS services”; “[i]ncreased penetration at existing consumers”; and “[c]ontinued expansion of
the market for global delivery of IT services and BPS.” Id.

¶ 43.

In addition to the statements about its low-cost India facilities and overall financial
success, Cognizant also made public statements about its anticorruption controls and compliance
measures. Cognizant’s Code of Conduct stated: “We do not corruptly give or offer, directly or
indirectly, anything of value to a government official to obtain or maintain business or any other
advantage for the company,” and also specified procedures designed to vet payments to foreign
officials. Id.

¶ 52, 53

(citing Cognizant’s Core Values and Standards ofBusiness Conduct 9

(2015)). Similar statements appear it Cognizant’s Anticomiption Policy. Id.

¶ 54.

Cognizant publicly endorsed these anticorruption controls in a series of certifications by
Defendants D’Souza and McLoughlin stating that based on their evaluation, there were no

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“significant deficiencies and material weaknesses in the design or operation” of its internal
controls, and that based on their knowledge Cognizant’s SEC Filings were free from material
misstatements and omissions. Id.

¶IJ 61, 210. Cognizant also referred to its Code of Conduct in

its 2014 Annual Report and stated on its website that it “employs rigorous internal controls to
ensure our commitment to ethical behavior, proper risk management, and exemplary corporate
conduct.” Id.

¶J 56, 62.

One of the critical elements of accounting controls prescribed by the

FCPA is “tone at the top.” Id.

¶ 58. Tone at the top refers to senior management’s commitment to

legal and ethical compliance and accurate reporting. Id.
During this time and throughout these statements, Cognizant stated its earnings and
publicly filed financial statements providing capitalized expenses and expenses.
The amended complaint alleges that these statements drove Cognizant’s stock price up,
rising from $46.50 per share at the start of the Class Period to a Class Period high of more than
$68 per share. Id.

¶ 63.

b. Cognizant’s Alleged Bribery Scheme

The amended complaint alleges that Cognizant engaged in a long-standing bribery
scheme to secure SEZ licenses, making millions of dollars in improper payments to Indian
government officials. Id.

¶ 65. Plaintiffs allege that this scheme involved Defendant Coburn and

other senior management, who overrode the company’s internal controls to facilitate the bribery.
Id.

¶ 66. These payments were then booked as capital expenditures rather than operating

expenses, disguising the payments and inflating the reported investments in SEZ Facilities. Id.
The amended complaint provides statements from unidentified former employees in
support of its allegations. The amended complaint provides the statements of Former Employee 1
(“FE1”), Cognizant Manager, Internal Audit & Sox Compliance from November 2014 through

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December 2015. fE1 oversaw an audit of Cognizant’s India operations which ran from
September 2014 to May 2015, and reported that it was apparent that no F CPA compliance audit
had been performed in at least two years. Id.

¶ 6$.

According to FEY, the audit also found evidence that Cognizant was making improper
payments to Indian government personnel to acquire SEZ licenses. Specifically, FE1 discovered
invoices from a contractor seeking reimbursement for payments for SEZ licenses. These
payments were made to a private entity rather than the local government, and FE1 discovered
that government-affiliated individuals held key positions in this private entity. Although the
invoices showed that the payments were related to SEZ licenses, Cognizant recorded them as
“lease payments.” Id.

¶J 69—70.

fE1 discovered the payments “fairly easily,” but had difficulty

investigating them further because he was given inconsistent answers about their purpose when
he tried to speak about them with Cognizant personnel.
The audit also revealed deficiencies in Cognizant’s internal controls. Contrary to the
company’s Anticorruption Policy, transactions involving government personnel were not being
flagged for vetting or reviewed by the legal department. Id.

¶ 71. Further, Cognizant employees

were not receiving adequate training in FCPA compliance. FE1 found that training materials
were in English rather than in the employees’ native language and were not specific to the
trainee’s country or position. FE1 also reported that completion rates were low. Id.

¶ 72. The

amended complaint also has the statements of Former Employee 2 (“FF2”), a “highly placed
audit executive.” FF2 reported that his staff had no FCPA-specific training, and that no FCPA
training manuals even existed. Id.
FEY reported the findings of the 2015 audit to Abraham Verghese, Associate Vice
President of Audit for inclusion in a formal audit report. The findings were then sent in an email

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(on which FEY was copied) from Verghese to Misty Pederson, Assistant Vice President of
Global Compliance & Ethics. FE1 stated that the final audit report “would have been
disseminated to senior executives,” and that summary audit findings would have been distributed
to the Board’s Audit Committee as well as Defendants D’Souza and McLoughlin. Id.

¶ 73.

According to the amended complaint, company president Defendant Coburn was directly
involved in the bribery scheme. The amended complaint provides statements of Former
Employees 3 and 4 (“FE3” and “FE4”) to support this assertion. FE3, Cognizant’s
“Infrastructure Team Lead,” stated that Coburn was the “responsible authority” for overseeing
Cognizant’s India leases. FE4, Cognizant’s “Associate Director

-

Strategic Sourcing” stated that

Coburn “used to take a special interest” in real estate transactions. Id.

¶ 74.

Additionally, Coburn

resigned shortly before Cognizant announced that it was commencing an internal investigation.
c. Public Disclosure of Internal Investigation

On September 30, 2016, Cognizant filed an 8-K form with the SEC stating that it was
conducting an internal investigation regarding payments relating to facilities in India to
determine whether the payments were made improperly and in possible violation of the FCPA.
Id.

¶ 75 (quoting Cognizant Tech.

Sols. Corp., Current Report (Form 8-K), at Item 8.01 (Sept.

30, 2016)).
The form also announced the resignation of Defendant Coburn. Id. Analysts indicated
that they “believe[d] Cobum may have resigned as a direct result of this investigation,” and that
the “quick-handed nature of his dismissal seems to indicate a link to the FCPA investigation. Id.

¶J 79,

81. Analysts further speculated that they “d[id not] believe [Cobum] will receive any

severance.” Id.

¶ 78.

(some alterations in original).

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On September 30, 2016, following the public filing, Cognizant’s stock price fell 13%,
from $55.00 to $44.71. Id.

¶ 82.

Post-Class Period Developments

III.

Cognizant has made a series of public disclosures following the September 30, 2016 8-K
filing regarding the alleged bribery scheme. On November 7, 2016, Cognizant filed its third
quarter 10-Q, which stated that “senior management may have participated in or failed to take
action to prevent the making of potentially improper payments by either overriding or failing to
enforce the controls established by the Company relating to real estate and procurement
principally in connection with permits for certain facilities in India.” Id.

¶ 84. The

10-Q also

stated that because the payments had been booked as capital expenditures, “$5.0 million in
payments.

.

.

may have been recorded improperly.” Id.

¶ 86. The form also acknowledged that

the alleged bribery scheme rendered statements in Cognizant’s credit agreement incorrect, which
they were required to amend. Id.

¶ 89.

On an earnings call on November 7, 2016, Defendant D’Souza acknowledged that
members of senior management “may have been aware of or participated in the matters under
investigation,” but that “those who may have been involved are no longer with the company or in
the senior management position” Id.

¶ 87. According to the amended complaint, this statement

implicated Defendant Coburn as one of the perpetrators. Id.

¶ 88.

On an earning call on February 8, 2017, Cognizant disclosed that it had discovered
another $1 million in improper payments, bringing the total to $6 million. Id.

¶ 90.

In its 2016

10-K Annual Report, Cognizant disclosed that the bribery scheme had begun back in 2010, and
stated that “the members of senior management who may have participated in or been aware of

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the making of the identified potentially improper payments.

.

.

were no longer with the

Company... .“Id.J91.
IV.

The Complaint and Amended Complaint

Lead Plaintiffs claim that they purchased Cognizant common stock at artificially inflated
prices and were thereby damaged when the stock price declined after the truth was disclosed. Id.

¶J 19—21, 224—25. On October 5, 2016, original Plaintiff Shane Park, filed a class action
complaint against Cognizant, D’Souza, and McLoughlin, alleging that Defendants had engaged
in a scheme to commit securities fraud in violation of Section 10(b) of the Securities Exchange
Act of 1934 (“Exchange Act”), 15 U.S.C.

§ 78j(b), and SEC Rule lOb-5, promulgated under

Section 10(b), by making untrue statements of material facts and failing to disclose necessary
material facts regarding improper payments regarding Cognizant’s Indian facilities and the
effectiveness of Cognizant’s internal controls and financial reporting. Compi.

¶ 19, ECF No. 1.

The complaint also alleged that Defendants D’Souza and McLoughlin were jointly and severally
liable under Section 20(a) of the Exchange Act, 15 U.S.C.
and omissions. Id.

§ 7$t(a) for the material misstatements

¶J 47.

On February 3, 2017, the Court appointed Lead Plaintiffs and consolidated all related
actions under the current caption. ECF No. 20. On April 17, 2017, Plaintiffs filed an amended
complaint asserting claims against Cobum as a Defendant under Section 10(b) and 20(a), and
asserting additional factual claims. ECF No. 3$.
V.

The Statements at Issue

The amended complaint sets out a number of statements that Plaintiffs allege are false
and misleading. Those statements fall into five categories: a) statements highlighting the benefits
of SEZ licenses; b) statements emphasizing legal compliance and anti-corruption controls; c)

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statements touting Cognizant’s low-cost services and attributing its financial results to legitimate
business factors; d) overstatements of earning resulting from improperly recording bribes as
capital expenditures; and e) SOX certifications.
a. Statements highlighting the benefits of SEZ licenses

The amended complaint alleges that Defendants highlighted the tax benefits and
regulatory benefits they received from operating in SEZs. The complaint asserts that these
statements were materially false and misleading because those benefits were obtained in material
part through a bribery scheme. Id.

¶ 95.

In its Annual 2014 Form 10-K, filed February 27, 2015, Cognizant stated: “Our Indian
subsidiaries.. are primarily export-oriented and are eligible for certain income tax holiday
.

benefits granted by the Indian government for export activities conducted within Special
Economic Zones, or SEZs, for periods of up to 15 years.” Id.

¶ 96. This statement also appeared

in the company’s’ Qi 2015 Form 10-Q, filed May 4, 2015; Q2 2015 Form 10-Q, filed August 6,
2016; Q3 2015 Form 10-Q, filed November 5, 2015; 2015 Form 10-K, filed February 25, 2016;
Q1 2015 Form 10-Q, filed May 6, 2016; and Q2 2016 Form 10-Q, filed August 5, 2016. Id.

¶J

101, 104, 107, 110 115, 118. The amended complaint asserts that it was materially false and
misleading to tout the income and tax benefits received from the Indian government when those
benefits were obtained through a bribery scheme. Id.

¶ 99.

The 2014 Form 10-K also quantified SEZ benefits, stating that the effect of the tax
benefits in 2014, 2013, and 2012 was to “increase net income by approximately [in thousands]
$182,973, $146,326, and $151,789, respectively, and increase diluted EPS by $0.30, $0.24, and
$0.25, respectively.” Id.

¶ 97.

Substantially identical statements also appeared in Cognizant’s

2015 Form 10-K, filed February 25, 2016. Id.

¶ 110. The amended complaint alleges that it was
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materially false and misleading to state that the $EZ facilities increase net income and increase
diluted EPS when the benefits were obtained through a bribery scheme. Id.

¶ 99.

The 2014 form 10-K also reported Cognizant’s fixed capital investment in these projects,
stating that it “had outstanding fixed capital commitments of approximately $20,452 [in
thousands] related to our India real estate development program to build new Company-owned
state-of-the-art IT development and delivery centers.” Id.

¶ 98.

Substantially identical statements

also appeared in Cognizant’s 2015 Form 10-K, filed february 25, 2016; Q1 2016 form 10-Q,
filedMay6, 2016; andQ2 2016 Form 10-Q,filedAugust5,20l6.Id.J 112, 115, 118. The
amended complaint alleges that its reported fixed capital commitments were materially false and
misleading because the figure included at least $4.1 million in bribes paid to government
officials. Id.

¶ 99.

In its 2014 Form 10-K, Cognizant additionally stated “{w]e have constructed and expect
to continue to locate most of our newer development facilities in SEZs.” Id.

¶ 9$. This statement

also appeared in the company’s’ Ql 2015 form l0-Q, filed May 4, 2015; Q2 2015 Form 10-Q,
filed August 6, 2016; Q3 2015 Form 10-Q, filed November 5, 2015; 2015 Form 10-K, filed
February 25, 2016; Q1 2015 form 10-Q, filed May 6, 2016; and Q2 2016 Form 10-Q, filed
August 5, 2016. Id.

¶J 101,

104, 107, 112, 115, 118. The amended complaint alleges that it was

misleading for Cognizant to state that it would locate its newer development facilities in SEZs
when it was obtaining those licenses through a bribery scheme. Id.

¶

100.

b. Statements emphasizing legal compliance and anti-corruption controls

The amended complaint alleges that Defendants emphasized legal compliance and its
anti-corruption controls. The complaint asserts that these statements were materially false and

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misleading because Cognizant and its senior management were engaged in a bribery scheme at
the time the statements were made. Id.

¶ 95.

In its Anticorruption Policy, Cognizant stated that it would “never pay, promise, offer, or
authorize a briber or anything of value to a government official,” or “permit, allow, authorize, (or
turn a ‘blind eye’ to) a Company third party’s representative payment, promise, authorization of
a bribe or anything of value to a government official or any other individual in order to win
business or obtain improper advantages for the company.” Id.

¶ 123.

Substantially similar

¶ 134. The amended complaint

statements appear in its revised 2015 Code of Conduct. Id.

alleges that these statements were misleading because the Company and its representatives paid
bribes to Indian officials in order to secure SEZ licensing for its India operations, with the
knowledge and participation of senior management. Id.

¶ 52.

The Anticorruption Policy also states that Cognizant would “consult with our Legal
Department before offering or giving anything of value.

.

.

to a government official,” “ensure

that entries into the Company’s books and record are accurate, and that all Company internal
controls and procedures are maintained and followed when making payments from the
Company,” and “comply with, and enforce, all the Company’s requirements for documentation
of expenses and payment requests.” Id.

¶ 123. The amended complaint alleges that it was

misleading because (1) the company’s books and records were misstated; (2) senior management
actually overrode the Company’s internal controls; and (3) Company policies concerning
“documentation of expenses,” including flagging payments to foreign officials and vetting them
with the Legal Department were not followed. Id.

¶ 126.

Cognizant’s Anticorruption Policy also announced that its employees and business
partners and third-party representatives would “receive appropriate training from the Company”

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regarding compliance with anticorruption laws. Id.

¶ 124.

Similar statements appear in the 2014

and 2015 Sustainability Report, which quantified the hours of training and employees trained. Id.

¶ 129,

136. The amended complaint alleges that these statements were misleading because, as

reported by Cognizant’s former employees, adequate training was not provided. Id.

¶ 12$.

The Anticorruption Policy further provides that “periodic audits of compliance shall be
performed by each business unit in coordination with our legal department.” Id.

¶

124. The

amended complaint asserts that this was misleading because the Company failed to perform any
such audit before 2014 and failed to act when the 2014 audit uncovered evidence of bribes. Id.

¶

12$.
Cognizant’s 2014 and 2015 Sustainability Reports provide “no incidents [of corruption]
reported in 2014.” Id.

¶ 129,

136. The amended complaint asserts that this was misleading

because (1) the Company’s President and other members of senior management were involved in
the bribery scheme and thus, were aware of such corruption; (2) the 2015 audit findings
providing evidence of bribery had already been reported; and (3) senior management overrode
and/or failed to enforce the internal controls designed to detect and prevent such bribes. Id.

¶

130.2
The 2015 Sustainability Report also states that “Cognizant treats reports of misconduct
seriously,” Id.

¶ 136, which the amended complaint asserts is misleading because the Company’s

senior management overrode and/or failed to enforce Cognizant’s internal financial controls in
order to facilitate the bribery scheme. Id.

¶ 13$.

2

The 2015 Sustainability Report also provides “no incidents [of significant risk related to
corruption] reported in 2015,” which the amended complaint asserts is misleading for the same
reason. Id. ¶ 137.
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In its Code of Conduct, Cognizant states that it does not “[g]et involved with middlemen
and/or the bribing of government officials while procuring or leasing land and infrastructure.” Id.

¶ 132. The amended complaint asserts that this was misleading because Cognizant was engaged
in a scheme to bribe Indian government officials in exchange for SEZ licenses for the
Company’s facilities in India. Id.

¶ l35.

In a statement attached to the revised 2015 Code of Conduct, D’$ouza states that “[w]e
do not cut corners, bend the rules, or look for shortcuts—and we have a zero-tolerance policy
toward those who do.” Id.

¶ 133. The amended complaint asserts that this was misleading

because senior management officials overrode and/or failed to enforce Cognizant’s internal
financial controls in order to operate the bribery scheme. Id.

¶ 135.

c. Statements touting Cognizant’s low-cost services and attributing its
financial results to legitimate business factors

The amended complaint alleges that Defendants touted their ability to deliver low-cost
services through legitimate means, and attributed Cognizant’s financial success to legitimate
business factors and conditions. The complaint asserts that these statements were materially false
and misleading because Cognizant’s performance was driven, in material part, by its bribery
scheme. Id.

¶ 140.

In its 2014 Form 10-K, filed February 27, 2015, Cognizant stated its increase in revenue,
and stated that ‘key drivers of our revenue growth in 2014” were “[s]olid performance across all
of our business segments”; “[s]ustained strength in the North American market”; “[c]ontinued
penetration of the European and Rest of World (primarily the Asia Pacific) markets”;

The revised 2015 Code of Conduct also states that Cognizant complies with “all
applicable anti-corruption laws,” which “means, in part, that we comply with all applicable anti
corruption laws, rules, and regulations wherever we conduct business.” Id. ¶ 134. The amended
complaint asserts that this is misleading for the same reason. Id. ¶ 135.
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“[i]ncreased customer spending on discretionary projects”; “[e]xpansion of our service offerings,
including Consulting, IT IS, and BPS services”; “[i]ncreased penetration at existing customers”;
and “[c]ontinued expansion of the market for global delivery of IT services and BPS.” Id.

¶ 141.

Similar statements appear in Cognizant’s Qi 2015 Form 10-Q, filed May 4, 2015; Q2 2015 Form
10-Q, filed August 5, 2015; Q3 2015 Form 10-Q, filed November 5, 2015; 2015 Form 10-K,
filed February 25, 2016; Q1 2016 Form 10-Q, filed May 6, 2016; and Q2 2016 form 10-Q, filed
August 5, 2015. Id.

¶J 145,

162, 170, 179, 182, 196. The amended complaint asserts that this is

misleading because Cognizant’s financial performance was driven, in material part, by its bribery
scheme. Id.

¶ 142.

In a May 4, 2015 press release and Form 8-K, Cognizant stated that its “strong revenue
performance this quarter versus our guidance was driven primarily by organic growth of our core
business.

.

.

.“

Id.

¶ 143. Defendant D’$ouza made a similar statement on a Qi

Conference Call. Id.

2015 Earnings

¶ 149. The amended complaint alleges that this was misleading because the

Company’s financial performance was driven, in material part, by its bribery scheme. Id.

¶ 114.

Cognizant’s Ql 2015 Form l0-Q stated that “the revenue growth from our Rest of World
customers in 2015 was primarily driven by the Indian, Japan, Australia, Hong Kong, and
Singapore Markets.” Id.

¶ 146.

Similar statements appear in Cognizant’s Q2 2015 Form 10-Q,

Q3 2015 10-Q, 2015 form 10-K, Q1 2016 form 10-Q, Q1 2016 Earnings Call on May 6, 2016,
and Q1 2016 10-Q. Id.

¶

163, 171, 180, 183, 186, 197. The amended complaint alleges that this

was misleading because Cognizant’s financial performance was driven, in material part, by its
bribery scheme. Id.

¶ 147.

On an August 5, 2015 QI 2015 Earnings Conference Call, Defendant Cobum stated that
“[g]rowth was driven primarily by strength in key markets such as India and the Middle East.”

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Id.

¶

148. Defendant Cobum made a similar statement on the Q2 2015 Earnings Conference Call,

Q4 2015 Earnings Conference Call, and QI 2016 Earnings Conference Call.

¶J 157,

173. The

amended complaint alleges that this was misleading because Cognizant’s financial performance
was driven, in material part, by its bribery scheme. Id.

¶ 150.

In a November 4, 2015 Q3 2015 Earnings Conference Call, Defendant Cobum stated that
“{w]he continue to do very well and take market share on the maintenance side.

.

.

.

And we

—

Cognizant just has this incredible track record of delivering very high quality services, while
continuously delivering productivity and efficiency.” Cobum also stated that “we’re probably
better positioned than most others in the market in terms of lowering cost of ownership on
maintenance.”4 Id.

¶ 166.

Defendant D’Souza stated that “I would say that the bulk of the

productivity that we drive in the core business is through traditional means of driving
productivity and efficiency that includes process kinds of things like Lean and Six Sigma and so
on, and also more traditional tools in automation.” Id. The amended complaint alleges that this
was misleading because Cognizant’s efforts to lower costs were accomplished in part by bribes
paid to Indian government officials in exchange for SEZ licenses. Id. ¶168.
On the call, Defendant Cobum also stated that “we’re going to continue with the strategy
that we’ve been executing successfully on, which is making long-term organic investments is the
key

—

the core of our business.” Id.

¶ 167. The amended complaint alleges that this was

misleading because Cognizant’s performance was driven, in part, by bribes paid to Indian
government officials in exchange for $EZ licenses. Id.

¶ 169.

Coburn made a similar statement on May 24, 2016 at a J.P. Morgan Technology, Media
and Telecom Conference, stating that Cognizant responds to consumer demand by “bringing best
practices to our clients for our traditional services, constantly lower[ing] their cost of ownership
while maintaining our margin. So that’s one piece of work. We’re very good at that.” Id. ¶ 194.
‘

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On a May 6, 2016 Qi Earnings Conference Call, Defendant D’Souza described a
strategic initiative, stating that it is “to help clients achieve new levels of efficiency and
effectiveness in their core transaction processing operations by building platform-based solutions
and industry utilities

.

.

.

By applying a series of levers including process optimization,

digitization and large-scale efficiencies, we’re able to bring clients levels of effectiveness which
they would have been unable to reach on their own.” Id.

¶ 185.

The amended complaint asserts

that this was misleading because Cognizant’s ability to deliver cost savings was driven, in
material part, by its scheme to obtain SEZ licensing by bribing Indian government officials. Id.

¶

187.
On an August 5, 2016 Q2 2016 Earnings Conference Call, Defendant Coburn stated that:
[T]he drive for getting continued efficiencies from existing IT infrastructures to
be able to fund innovation projects remains absolutely essential to almost every
client.
Our strong vertical presence and investments in building sharply
focused industry-specific platforms allow clients to obtain these efficiencies by
shiffing from buying a service to buying an outcome. These trends will continue
to open opportunities for us over the coming years.
.

Id.

.

.

¶ 199. The amended complaint asserts that this was misleading because the Company’s

ability to deliver cost savings to its clients was driven, in material part, by Cognizant’s scheme to
obtain SEZ licensing by bribing Indian government officials. Id.

¶ 201.

On the same conference call, Defendant McLoughlin attributed Cognizant’s financial
success to “a slightly lower tax rate and stronger operating margins,” which the amended
complaint asserts was misleading because the Company’s financial performance was driven, in
material part, by its scheme to obtain SEC licensing by bribing Indian government officials. Id.

¶J 201, 202.
On September 6, 2016 at a Citi Global Technology Conference, Defendant Coburn stated
“I will reduce your cost of ownership, because I’m going to bring in automation. I’m going to
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bring in different tools of productivity, go more offshore whatever, pull the different levers,
clients are very open to that discussion.” Id.

¶ 207. He went on to say that “we’ve been very

successful at, while maintaining our margins, being able to achieve the cost of ownership that the
clients want.” Id. the amended complaint asserts that this was misleading because the Company’s
ability to deliver cost savings to its clients, while maintaining margins, was driven, in material
part, by Cognizant’s scheme to obtain SEZ licensing by bribing Indian government officials. Id.

¶ 208.
d. Overstatements of earnings resulting from improperly recording bribes
as capital expenditures

The amended complaint asserts that Cognizant overstated its earnings by incorrectly
booking the bribery payments as capital expenditures rather than booking them as expenses. Id.

¶

209. Of the $4.1 million of capitalized expenses, $1 million was expensed as depreciation and
amortization, leaving $3.1 million overstated on Cognizant’s earnings and investment in physical
assets, and understated in expenses. Id. The amended complaint asserts that Cognizant has
admitted these over- and understatements. Id.
SOX certifications

In connection with each quarterly and annual report filed by Cognizant, Defendants
D’$ouza and McLoughlin signed $OX Certifications, as required by Section 302 of SOX. In
them, Defendants D’Souza and McLoughlin certified that they had designed and evaluated
effective internal and disclosure controls:
The registrant’s other certifying officer and I have disclosed, based on our most
recent evaluation of internal control over financial reporting, to the registrant’s
auditors and the audit committee of the registrant’s board of directors (or persons
performing the equivalent function): a) All significant deficiencies and material
weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant’s ability to record,
process, summarize and report financial information and b) any fraud, whether or
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not material, that involves management or other employees who have a significant
role in the registrant’s internal control over financial reporting.
Id.

¶ 210. The amended complaint alleges that this was materially false and misleading when

made because Cognizant admitted material weaknesses existed in its internal controls, including
“tone at the top,” as senior management participated in making corrupt payments by overriding
and/or failing to enforce the Company’s internal financial controls. Id.

¶J 211.

Defendants D’Souza and McLoughlin also certified that “Based on my knowledge, this
report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this report.” Id.

¶

210. The amended complaint alleges that this was materially false and misleading when made
because the SEC filings to which the certifications were appended contained numerous
materially false and misleading statements and omissions. Id.
VI.

¶ 212.

Defendants’ Motions to Dismiss and Motion to Strike

On June 6, 2017, Defendant Coburn filed a motion to dismiss the amended complaint for
failure to state a claim under federal Rules of Civil Procedure 9(b) and 12(b)(6) and the Private
Securities Litigation Reform Act (“P$LRA”). Def. Coburns’ Mot. Dismiss, ECF No. 41-1.
Defendant Cobum argues that Plaintiffs failed to allege any material misstatement or omission,
failed to allege scienter, and failed to state a claim of control person liability under Section 20(a).
The same day, Defendants Cognizant, D’$ouza, and McLoughlin (“Cognizant
Defendants”) also filed a motion to dismiss the amended complaint under FRCP l2(b)(6).
Cognizant Mot. Dismiss, ECF No. 42. Cognizant Defendants contended that Plaintiffs failed to
allege material misrepresentations, scienter, or control person liability as to Defendants D’Souza
and McLoughlin.
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On July 21, 2017, Plaintiffs filed an onmibus motion opposing both motions to dismiss.
Pls.’ Opp., ECF No. 46. Defendant Cobum and Cognizant Defendants both filed replies on
September 5. Cobum Reply, ECF No. 50; Cognizant Reply, ECF No. 51.
On September 5, while the motions to dismiss were pending, Cognizant Defendants filed
a motion to strike the allegations attributed to Former Employee 1. Defs.’ Mot. Strike, ECF No.
52. Cognizant Defendants argued that they had identified FEI, and that he had disavowed the

allegations attributed to him. Cognizant Defendants provided a declaration of Grayson Stratton,
outside counsel for Cognizant. Plaintiffs filed an opposition on October 2, to which Cognizant
Defendants replied on October 10. Pls.’ Strike Opp., ECF No. 58; Defs.’ Strike Reply, ECF No.
595

MOTION TO STRIKE

Defendants move to strike paragraphs 68—73 of Plaintiffs’ Amended Class Action
Complaint because they are unreliable. Defendants argue that these paragraphs should be
stricken because they are based on statements of a former employee, Mr. Hawes, who has
repudiated the statements attributed to him in the amended complaint. Defs.’ Strike Br. at 2. In
support, Defendants have provided a declaration of Defendant’s counsel Mr. Grayson Stratton,
stating that he spoke with Mr. Hawes on the phone and Mr. Hawes disavowed certain statements
attributed to him, and stated that others were taken out of context. Stratton Decl. ECF No. 52-2.
The declaration also states that they attempted to meet with Mr. Hawes in person to execute his

To ease readability, the Court only distinguishes between Defendant Cobum and the
Cognizant Defendants when discussing arguments involving both Defendants separately.
Otherwise, Cognizant Defendants will be referred to simply as “Defendants.”
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own declaration regarding the allegations, but that Mr. Hawes changed his mind and declined to
meet.
In the alternative, Defendants move for an order granting limited discovery to allow them
to depose Mr. Hawes.
Under Federal Rule of Civil Procedure 12(f), a “court may strike from a pleading an
insufficient defense or any redundant, immaterial, impertinent, or scandalous matter.” Fed. R.
Civ. P. 12(f). “A court possesses considerable discretion in disposing of a motion to strike under
Rule 12(f).” Wiseberg v. Toyota Motor Corp., No. 11-3776 (JLL), 2012 WL 1108542, at *13
(D.N.J. Mar. 30, 2012) (quoting Kim v. Baik, No. 06-3604, 2007 WL 674715, at *5 (D.N.J. Feb
27, 2007)). Motions to strike are “disfavored and are usually denied ‘unless the allegations have
no relation to the controversy and may cause prejudice to one of the parties, or if the allegations

confuse the issues in the case.” Id. (quoting Kim, 2007 WL 674715, at *5); see Alan Wright,
Arthur Miller et al., Fed. Prac. & Proc. Civ.

§ 1382 (3d ed.) (“[T]here appears to be general

judicial agreement, as reflected in the extensive case law on the subject, that [motions to strike]
should be denied unless the challenged allegations have no possible relation or logical
connection to the subject matter of the controversy and may cause some form of
significant prejudice to one or more of the parties to the action.”).
Defendants argue that statements in the complaint attributed to Former Employee 1 (FE 1)
should be struck because they are unreliable. Defs.’ Strike Br. at 10. Defendants argue that
unreliable statements are “both ‘immaterial’ and ‘impertinent’ matter and, therefore, may be
stricken under Rule 12(f).” Id. (citing Porter v. Fairbanks Capital Corp., No. 01 C 9106, 2003
WL 21210115, at *7 (N.D. Ill. May 21, 2003)). Defendant claims that given the heightened
pleading requirements of the PSLRA, courts have found repudiated statements by confidential

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witnesses to be unreliable. Id. (citing City ofLivonia Emps. Ret. Sys. v. Boeing Co., No. 09 C
7143, 2011 WL 824604, at *5 (N.D. Ill. Mar. 7, 2011)).
In response, Plaintiffs counter that motions to strike “cannot be based on factual
assertions extraneous to the complaint,” and that Defendant impermissibly relies on matters
outside the pleadings. Pls.’ Strike Opp. at 26, ECF No. 58. Plaintiffs also asserts that the Third
Circuit “does not recognize ‘unreliability’ as a basis for striking allegations under Rule 12(f).”
Id. at28.
The Court finds that Defendants have not shown that the statements attributed to FE1
“have no relation to the controversy and may cause prejudice to one of the parties,” or that they
may “confuse the issues in the case.” Wiseberg, 2011 WL 1108542 (quotations omitted). FE1 is
alleged to have served as “Manager, Internal Audit & $OX compliance from November 2014
through December 2015.” Am. Coml.

¶ 6$.

Statements from an employee with oversight

capacity of internal audit and compliance during the Class Period would be particularly relevant
because this person would have access to information about Defendants’ internal controls and
reporting.
Further, the statements in the complaint attributed to FEY are central to Plaintiffs’ claims.
The complaint alleges that FF1 “reported that it was apparent based on the absence of priorperiod audit documentation that an FCPA compliance audit had not been performed in at least
two years prior to 2015.” Id. The complaint further alleged that FEY reported that “payments
related to procuring SEZ licensing were being made to Indian government personnel and that
these payments were being improperly classified in Cognizant’s internal systems.” Id.

¶ 69. The

complaint describes FE1’s involvement in an audit in 2015 which “turned up several ‘high risk’

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problems in Cognizant’s internal controls.” Id.

¶ 71. The 2015 audit provides the basis for much

of Plaintiffs scienter allegations, and is therefore not “immaterial” or “impertinent.”
In In re Par Pharmaceutical Securities Litigation, No. 06-cv-3226, 2009 WL 3234273, at
*11 (D.N.J. Sept. 30, 2009), the defendant moved to strike paragraphs of the complaint attributed
to a confidential witness, claiming that they misrepresented the witness’ statements. The
defendants provided a declaration of the witness claiming she had been misquoted by the
plaintiff. Id. The court denied the motion to strike, and instead struck the witness declaration,
expressing concern with the defendant’s tactics in contacting a witness despite the PSLRA’s
discovery stay. The court further stated that it “[did] not want to establish mechanisms whereby
discovery must be conducted every time confidential informants are utilized, forcing the Court to
reconcile competing facts to determine whether allegations in a complaint should be struck.” Id.
at 12. Other courts have similarly refused to strike allegations attributed to confidential witnesses
as the pleading stage when presented with declarations of those witnesses that are supposedly
inconsistent with the allegations in the complaint. See, e.g., Dep ‘t of Treasuty of the State ofNi
*4 (N.D. Ohio, Nov. 6,2015)
v. ChffsNat’lRes., Inc., No. 1:14 CV 1031, 2015 WL 6870110, at
(refusing to strike paragraphs attributed to confidential witnesses when defendant offered
declaration of witnesses repudiating the allegations); Halford v. ArtiCure, Inc., No. 1 :08cv867,
2010 WL $973625, at *3 (S.D. Ohio, Mar. 28, 2010) (“When presented with confidential
witnesses who were later identified and provided conflicting affidavits or declaration, court are
reluctant to strike the original statements by the confidential witness.”). Unlike in those cases,
Defendant here was unable to even produce a declaration from FE1, providing only an attorney
declaration.
Defendants’ claim that the Stratton Declaration renders the statements “immaterial” is

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unpersuasive. The Defendant relies on language in In re Millennial Media, Inc. Securities
*5 (S.D.N.Y. May 298, 2015), that
Litigation, No. 14-Civ. 7923(PAE), 2015 WI 3443918, at
that...
“tn]umerous reported decisions have recounted claims by [confidential witnesses]
complaints inaccurately attributed facts and statements to them.” That line is mere obiter dictum
because the plaintiffs had voluntarily dismissed their claims. See Id. (“Because plaintiffs have
elected to dismiss this lawsuit, the Court has no occasion to rule on the propriety of counsel’s
practice with respect to quoting persons designated as CWs.”). Further, the court there was
provided with affidavits by the confidential witnesses themselves, not the hearsay of defendant’s
attorneys. The other cases cited by Defendants are inapplicable because they involve either fraud
on the court, see City ofLivonia Emps. ‘Ret. Sys. v. The Boeing Co., No. 09 C 7143, 2011 WL
824604 (N.D. Ill. Mar. 7, 2011) affirmed in part and vacated in part by City ofLivonia Einps.
Ret. Sys. v. Boeing Co., 711 F.3d 754, 760 (7th Cir. 2013) (characterizing the lower court’s
finding as “fraud on the court”), or anonymous Internet comments that were prejudicial and
irrelevant, see Wiseberg, 2012 WI 11085742, at *13; Porter v. Fairbanks Capital Corp., No. 01
C 9106, at *7 (N.D. Ill. May 21, 2003).
In the alternative, Defendant moves for limited discovery to depose FE1. Def. Br. at 12.
Defendant relies on a footnote from an unpublished summary order from the Second Circuit,
Campo v. Sears Holding Corp., 371 F. Appx. 212, 216 n.4 (2d Cir. 2010), which noted
approvingly the district court’s order permitting the defendant to depose a confidential witness
referenced in the complaint.
Plaintiff responds that the footnote in Campo is dicta, because the plaintiff had waived
the argument that the order was improper. Plaintiff further argues that “Campo has never been

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cited by any court in this Circuit, has been criticized by other courts, and is contrary to the
bedrock principles repeatedly endorsed by the Third Circuit. See P1. Br. at 39.
Defendant has not cited any authority from within the Third Circuit endorsing the
practice of deposing certain witnesses during the pleading stage, but courts within this district
have rejected it. See Far Pharm., 2009 WL 3234273, at *12 (declining to allow plaintiff to
engage in limited discovery, striking affidavit provided by defendant, and noting that defendant
was free to file a Rule 11 motion if “discovery in the normal course reveals that factual
contentions have indeed been alleged in bad faith”); see also, e.g., In re Cell Therapeutics, Inc.,
No. C10-414MJP, 2010 WL 4791808, at *2 (W.D. Wash. Nov. 18, 2010) (collecting cases
rejecting the Campo approach, noting that the “neither the Federal Rules nor the [PSLRA]
supports the practice [endorsed in Campo]”). The Court similarly declines to endorse this novel
procedural mechanism.
The motion to strike is denied, and the court will not grant limited discovery to depose
FE 1.

MOTION TO DISMISS

Defendants argue that the Amended Complaint fails to adequately allege a violation of
Section 10(b) or 20(a). Defendant contends that Plaintiffs fail to allege any material false or
misleading statement, and further assert that the Amended Complaint fails to allege that any
Defendant acted with scienter.
Standard of Review

Under Federal Rule of Civil Procedure 8(a)(2), a pleading must contain a “short and plain
statement of the claim showing that the pleader is entitled to relief.” Fed. R. Civ. P. 8(a)(2). “To

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, accepted as true,
survive a motion to dismiss, a complaint must contain sufficient factual matter

662, 67$
‘to state a claim to relief that is plausible on its face.” Ashcroft v. Iqbat, 556 U.S.
is plausible
(2009) (quoting Belt Atlantic Corp. v. Twombty, 550 U.S. 544, 570 (2007)). A claim
reasonable
on its face “when the plaintiff pleads factual content that allows the court to draw the
offers
inference that the defendant is liable for the misconduct alleged.” Id. “A pleading that
will not do.
labels and conclusions or a formulaic recitation of the elements of a cause of action
Nor does a complaint suffice if it tenders naked assertions devoid of further factual
leaded facts
enhancement.” Id. (internal quotations and alterations omitted). “[W]here the well-p
complaint has
do not permit the court to infer more than the mere possibility of misconduct, the
alleged—but it has not ‘shown’—that the pleader is entitled to relief.” Id. at 679.
In considering the plaintiffs claims, the Court may consider the allegations of the
aint. See
complaint, as well as documents attached to or specifically referenced in the compl
Charles A.
Sentinel Trust Co. v. Universal Bonding ins. Co., 316 F.3d 213, 216 (3d Cir. 2003);
Wright, Arthur R. Miller & Mary Kay Kane, Federal Practice and Procedure

§ 1357 at 299 (3d

considered
ed. 2014). “A ‘document integral to or explicitly relied on in the complaint’ may be
v. Fed.
‘without converting the motion [to dismiss] into one for summary judgment.” Mete
Coat factory
Reserve Bank ofN Y., 359 F.3d 251, 256 n. 5 (3d Cir. 2004) (citing In re Burlington
Sec. Litig., 114 F.3d 1410, 1426 (3d Cir. 1997)).6
v.
A court may also consider and take judicial notice of matters of public record. Sands
F.3d 256,
McCormick, 502 F.3d 263, 268 (3d Cir. 2007); Buck v. Hampton Tp. School Dist., 452

“Plaintiffs camiot prevent a court from looking at the texts of the documents on which
e Bank oJN Y,
its claim is based by failing to attach or explicitly cite them.” Mele v. Fed. Reserv
359 F.3d 251, 255 n.5 (3d Cir. 2004).
6

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260 (3d Cir. 2006). Such matters of public record may include prior judicial proceedings,
McTernan v. City of York, Penn., 577 F.3d 521, 526 (3d Cir. 2009), filings with the SEC,
Schmidt v. Skolas, 770 f.3d 241, 249 (3d Cir. 2014), and other documents deemed to be public
records by law, Del. Nation v. Pennsylvania, 446 f.3d 410, 414 n.6 (3d Cir. 2006).
Fed. R. Civ. P. 9(b) requires that “[i]n all averments of fraud or mistake, the
circumstances constituting fraud or mistake shall be stated with particularity. Malice, intent,
knowledge, and other condition of mind of a person may be averred generally.” “The purpose of
Rule 9(b) is to provide notice of the ‘precise misconduct’ with which defendants are charged” in
order to give them an opportunity to respond meaningfully to a complaint, “and to prevent false
or unsubstantiated charges.” Rob v. City In vesting Co. Liquidating Trust, 155 F.3d 644, 65$ (3d
Cir. 1998), abrogation on other grounds recognized in Forbes v. Eagetson, 228 F.3d 471 (3d
Cir. 2000). To satisfy Rule 9(b), plaintiffs must “plead with particularity the ‘circumstances’ of
the alleged fraud.” Rob, 155 F.3d at 65$. Rule 9(b) “requires, at a minimum, that plaintiffs
support their allegations of securities fraud with all of the essential factual background that
would accompany ‘the first paragraph of any newspaper story’

—

that is, the ‘who, what, when,

where and how’ of the events at issue.” In re Suprema Specialties, Inc. Sec. Litig., 43$ F.3d 256,
276 (3d Cir. 2006) (quoting In re Rockefeller Center Prop. Sec. Litig., 311 F.3d 198, 217 (3d Cir.
2002)). Plaintiffs “need not, however, plead the ‘date, place or time’ of the fraud, so long as they
use an ‘alternative means of injecting precision and some measure of substantiation into their
allegations of fraud.” Rob, 155 F.3d at 658 (citing Seville Indus. Mach. v. Southmost Mach.,
742 F.2d 786, 791 (3d Cir.1984)). The Third Circuit has cautioned that courts should “apply the
rule with some flexibility and should not require plaintiffs to plead issues that may have been
concealed by the defendants.” Id. (citing Christidis v. First Pennsylvania Mortg. Trttst, 717 F.2d

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96, 99 (3d Cir. 1983)). A plaintiff who alleges securities fraud must “allege facts that give rise to
a strong inference of scienter.”Acito v. IMCERA Group, Inc., 47 f.3d 47,53 (2d Cir. 1995);
Burlington Coat factory, 114 F.3d at 1418. A plaintiff may establish this strong inference
“either (a) by alleging facts to show that defendants had both motive and opportunity to commit
fraud, or (5) by alleging facts that constitute strong circumstantial evidence of conscious
misbehavior or recklessness.” Burlington Coat factory, 114 F.3d at 1418 (quoting Acito, 47
F.3d at 52).
The Private Securities Litigation Reform Act (“PSLRA”), 15 U.S.C.
specifically addresses the scienter requirement of a
which asserts a

§ 78u-4(b)(2),

§ 10(5) claim. It requires that a complaint

§ 10(b) claim must “(1) ‘specify each statement alleged to have been misleading

[and] the reason or reasons why the statement is misleading’

.

.

.

and (2) ‘state with particularity

facts giving rise to a strong inference that the defendant acted with the required state of mind.”
Tettabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 321 (2007) (quoting 15 U.S.C.

§ 78u-

4(b)(2)). The plaintiff must plead facts demonstrating that defendants had “a mental state
embracing intent to deceive, manipulate, or defraud.” Rahman v. Kid Brands, Inc., 736 F.3d 237,
243 (3d Cir. 2013) (quoting Tellabs, 551 U.S. at 319). In determining whether the plaintiff has
established an inference of scienter “that is cogent and at least as compelling as any opposing
inference of nonfraudulent intent,” the Court must “weigh the plausible nonculpable explanations
for the defendant’s conduct against the inferences favoring the plaintiff’ and look at “whether all
of the facts alleged, taken collectively, give rise to a strong influence of scienter, not whether any
individual allegation, scrutinized in isolation, meets that standard.” Inst. mv. Group v. Avaya,
Inc., 564 F.3d 242, 267-68 (3d Cir. 2009) (quoting Tellabs, 551 U.S. at 323-24) (emphasis in
original). This scienter requirement mirrors the “strong inference” requirement of the Second

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Circuit under Rule 9(b), see Tellabs, 551 U.S. at 322; H.R. Conf. Rep. No. 104-369,
1St

Sess. 41, 41(1995), reprinted in 1995 U.S.C.C.A.N. 740, 740; 5. Rep. 98

104th

104th

Cong.,

Cong., 1st

nce:
Sess. 15 (1995), reprinted in 1995 U.S.C.C.A.N. 679, 694, but with one significant differe
under the PSLRA, “motive and opportunity’ may no longer serve as an independent route to
scienter.” Avaya, 564 F.3d at 277. Instead, “a plaintiff properly pleads scienter by alleging facts
that ‘constitute circumstantial evidence of either reckless or conscious behavior.” Gold v. Ford
is
,
Motor Co., 577 F. App’x 120, 123 (quoting Avaya, 564 f.3d at 276-77). Recklessness in turn,
“an extreme departure from the standards of ordinary care, and which presents a danger of
misleading buyers or sellers that is either known to the defendant or is so obvious that the actor
must have been aware of it.” Avaya, 564 F.3d at 267 n.42.
When considering the allegations of confidential witnesses, the Third Circuit has held
that a court must evaluate 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.” Avaya, 564 F.3d at 263 (quoting Catfornia Pub. Emps. ‘Ret. Sys. v. Chubb Corp., 394
F.3d 126, 147 (3d Cir. 2004)). If the allegations do not satisfy these “Chubb factors,” the Court
, they
must “discount them steeply.” Id. However, if the allegations are adequately particularized
will be considered. Id.
I.

Section 10(b)

Section 10(b) of the Exchange Act and the regulations promulgated under it “prohibit
fraud in connection with the sale of securities.” In re Aetna, Inc. Sec. Litig., 617 F.3d 272, 277
ons
(3d Cir. 2010). Rule lOb-S “provides the framework for a private cause of action for violati

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involving false statements or omissions of material fact.” Weiner v. Quaker Oats Co., 129 F.3d
310, 315 (3d Cir. 1997) (citing 17 C.F.R. 240.lOb-5). The Third Circuit has held that
Parties injured by securities fraud may bring a private cause of action under
[Section 10(b) and Rule lOb-5], which requires proof of six elements: “(1) a
material misrepresentation (or omission); (2) scienter, i.e., a wrongful state of mind;
(3) in connection with the purchase or sale of a security; (4) reliance, often referred
to in cases involving public securities markets (fraud-on-the-market cases) as
‘transaction causation;’ (5) economic loss; and (6) ‘loss causation,’ i.e., a causal
connection between the material misrepresentation and the loss.”
Aetna, 617 F.3d at 277 (quoting McCabe v. Ernst & Young, LLF, 494 F.3d 418, 424 (3d Cir.
2007)). When plaintiffs bring a claim under a “fraud on the market” theory, the court makes
rebuttable presumptions “(1) that the market price of a security actually incorporated the alleged
misrepresentations, (2) that the plaintiff actually relied on the market price of the security as an
indicator of its value, and (3) that the plaintiff acted reasonably in relying on the market price of
the security.” Semerenko v. Cendant Coip., 223 F.3d 165, 178-79 (3d Cir. 2000) (citing Ziotnick
v. TIE Communications, $36 F.2d 818, 822 (3d Cir. 1988)).
The Court will first consider whether the amended complaint sufficiently alleges a
material misrepresentation or omission. Then, if necessary, the Court will determine whether the
amended complaint alleges sufficient facts to give rise to a strong inference of scienter.
a. Material Misrepresentation or Omission

To state a claim under Rule lOb—5, “a plaintiff must show that the defendant made a
materially false or misleading statement or omitted a fact necessary to make a statement not
misleading.” 17 C.F.R.

§ 240.lOb—5(b)5; Marion v. TDI, Inc., 591 F.3d 137, 152 (3d Cir. 2010).

“Materiality depends on the significance the reasonable investor would place on the withheld or
misrepresented information.” Basic Inc. v. Levinson, 485 U.S. 224, 240 (1988). This requirement
is satisfied when there is “a substantial likelihood that the disclosure of the omitted fact would
have been viewed by the reasonable investor as having significantly altered the ‘total mix’ of
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information made available.” Matrixx Initiatives, Inc. v. Siracusano, 563 U.S. 27, 38 (2011)
(internal citations omitted).
Materiality requires a “delicate assessment of the inferences a ‘reasonable shareholder’
would draw from a set of facts.” TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 450 (1976);
EDMedsystems, Inc. v. EchoCath, Inc., 235 f.3d 865, 875 (3d Cir. 2000). In the Third Circuit,
“the materiality of disclosed information may be measured post hoc by looking to the movement,
in the period immediately following disclosure, of the price of the firm’s stock.” In re Merck &
Co., Inc. Sec. Litig., 432 F.3d 261, 269 (3d Cir. 2005). While fact-specific assessments of this
kind are “peculiarly ones for the trier of fact,” TSCIndus., Inc., 426 U.S. at 450, some statements
may be so facially insignificant to a reasonable investor that they are inactionable “puffery.” City
ofEdinborough Council v. Pfizer, Inc., 754 F.3d 159, 172 (3d Cir. 2014). For that reason, courts
have held that “vague and general statements of optimism ‘constitute no more than “puffery” and
are understood by reasonable investors as such.” In re Advanta Corp. Sec. Litig, 180 F.3d 525,
53 8—39 (3d Cir. 1999) abrogated on other grounds, as recognized in City ofEdinborough

Council, 754 F.3d at 172, (quoting Burlington Coat Factoiy, 114 F.3d at 1428 n.14).
Although omissions can give rise to liability, Section 10(b) and Rule 1 Ob—5 “do not
create an affirmative duty to disclose any and all material information.” Matrixx, 563 U.S. at 44.
Disclosure is required “only when necessary ‘to make.

.

.

statements made, in the light of the

circumstances under which they were made, not misleading.” Id. (quoting 17 C.F.R.

§ 240.1 Ob—

5(b)). Further, “[s]ome statements, although literally accurate, can become through their context
and manner of presentation, devices which mislead investors.” In re Merck & Co., Inc. Sec.,
Derivative, & ERISA Litig., Nos. 05-1 151(SRC), 05-2367 (SRC), 2011 WL 3444199, at *9
(D.N.J. Aug. 8, 2011) (quoting McMahon & Co. v. Wherehouse Ent’t, 900 F.2d 576, 579 (2d Cir.

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1990)). To ensure that investors are not misled by statements that are deceptive although literally
true, “[o]nce a defendant makes an affirmative statement or characterization about its business, it
puts that subject ‘in play’ and assumes a duty, under the securities laws, to speak truthfully about
that subject.” Id. (quoting Shapiro v. UJB Fin. Corp., 964 f.2d 272, 282 (3d Cir. 1992)); see
Matrixx 563 U.S. at 45 (“Even with respect to information that a reasonable investor might
consider material, companies can control what they have to disclose under those provisions by
controlling what they say to the market.”); In re Viropharma Inc. Sec. Litig., 21 F. Supp. 3d 458,
472 (E.D. Pa. May 15, 2014) (finding omission material when the information “bore directly” on
the issue about which the company made favorable public statements).
The Amended Complaint contains five categories of statements: a) statements
highlighting the benefits of SEZ licenses; b) statements emphasizing legal compliance and anti
corruption controls; c) statements touting Cognizant’s low-cost services and attributing its
financial results to legitimate business factors; d) overstatements of earning resulting from
improperly recording bribes as capital expenditures; and e) SOX certifications. The Court will
address them in turn.
i. Statements Highlighting the Benefits of SEZ Licenses
Defendants argue that the statements about the benefits of SEZ licenses and future
investment in SEZ licenses were not false and misleading. Cognizant Br., at 16, ECF No. 42-1.
Defendants contend that the amended complaint fails to allege the existence of the underlying
misconduct

—

a bribery scheme involving SEZ licenses. Defendants assert that Plaintiffs do not

allege facts showing that the “improper payments” referenced in Cognizant’s September 30,
2016 8-K were made to obtain SEZ licenses “as opposed to sewer permits, building permits,
occupancy permits, or other permits.” Cognizant Reply, at 4 ECF No. 51.

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Plaintiffs respond that the amended complaint sufficiently alleges a connection between
the “improper payments” and the SEZ licenses. Pis.’ Opp. at 44—45. Plaintiffs accordingly argue
that once Cognizant chose to tout the benefits of the SEZ licenses, it had a duty to disclose that
the licenses were the subject of bribery. Id. (quoting Schuenernan v. Arena Pharm., Inc., 840
F.3d 698, 705—06 (9th Cir. 2016)).
The Court finds that the amended complaint adequately alleges that Cognizant engaged in
a bribery scheme to acquire SEZ licenses. Cognizant stated in its third quarter 2016 10-Q that
senior management “failed to take action to prevent the making of improper payments.
principally in connection with permits for certain facilities in India.” Am. Compl.

¶ 84.

According to the amended complaint, Cognizant sought and obtained SEZ licenses for its global
delivery centers, which house thousands of employees and are central to Cognizant’s India
operations. Id.

¶J 31, 37—39. Plaintiffs allege with specificity that the SEZ licenses were key to

Cognizant’s India facilities because they increased revenue, reduced tax and operating cost, and
allowed it to compete more aggressively for new business. Id.

¶J 32—37. Further, Cognizant was

given favorable treatment by state government in obtaining $EZ licenses over its competitors. Id.

¶ 39. Moreover, FEY discovered certain red flag payments specifically involving SEZ license
acquisition during the 2015 audit. Id.

¶J 69, 70.

Considering the Chubb factors, FE1 ‘s report that he identified red flag payments related
to $EZ licenses will be credited. See Avaya, 564 F.3d at 263 (weighing confidential witness
statement by considering 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”). FE1 ‘s “basis of knowledge” was his employment as Manger of Internal Audit & SOX

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compliance. Am. Compl.

¶ 62. Further, FE1 ‘s statement that he discovered red flag payments

related to SEZ licenses is corroborated by Cognizant’s announcement that improper payments
were made in relation to permits. FE1 ‘s statements are also coherent and plausible. The amended
complaint alleges that Cognizant relied on $EZ licenses to keep operating costs down and,
therefore, would have a motive to acquire them quickly before the Indian government scaled
back their availability.
In light of these allegations, the Court finds that Plaintiffs have adequately alleged a
bribery scheme to acquire $EZ licenses. At the motion to dismiss stage, Plaintiffs “need only
allege ‘enough facts to state a claim for relief that is plausible on its face.” Matrixx, 563 U.S. at
45, n.12 (quoting Twornbly, 550 U.S. at 570). Taken together, the amended complaint plausibly

alleges that the “permits” referenced in Cognizant’s 2016 10-Q were SEZ licenses.
To the extent that the Cognizant Defendants contend that the improper payments are not
material because they involve only a “small number” of Cognizant’s Indian facilities and $6
million over six years, the argument is rejected. A bribery scheme involving Cognizant senior
management affecting its core India operations would “significantly alter the total mix of
information made available” to investors. liatrixx, 563 U.S. at 3$.
Having found that Plaintiffs have adequately alleged a material bribery scheme, the Court
also finds that Cognizant’s statements touting the benefits of SEZ licenses were misleading. By
highlighting the benefits of the SEZs, Cognizant put the underlying bribery at play. See In re Par
Pharm., Inc., Sec. Litig., 733 F. Supp. 668, 678 (S.D.N.Y. 1990) (finding statements touting
company’s ability to obtain FDA approval materially misleading because it failed to disclose that
the approvals were obtained through bribery). Cognizant stated in SEC disclosures that its
“Indian subsidiaries.

.

.

are eligible for certain income tax holiday benefits granted by the Indian

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government for export activities conducted within Special Economic Zones, or SEZs.” Am.
Compl.

¶J 101,

104, 107, 110 115, 118. It made statements quantifying the SEZ tax benefits on

the company’s net income, and indicating its intent to locate newer development facilities in
SEZs. Id. at ¶J 97, 101, 104, 107, 110, 112, 115, 118. A reasonable investor would view these
benefits differently if he was aware that they were obtained through illegal conduct that could
subject Cognizant to liability under the FCPA and the corresponding negative goodwill and cost
of an internal investigation. Even if the statements were literally true, they became “through their
context and manner of presentation, devices which mislead investors.” In re Merck & Co., 2011
WL 3444199, at *97
ii. Statements Emphasizing Legal Compliance and Anti-Corruption
Controls
The amended complaint alleges that Defendants made statements emphasizing their legal
compliance and anti-corruption controls. These statements appear in Cognizant’s Anticorruption
Policy, Code of Conduct, and 2014 and 2015 Sustainability Reports. The amended complaint
asserts that these statements were materially false and misleading because Cognizant and its
senior management were engaged in a bribery scheme at the time the statements were made. Id.

¶

95.
Defendants first argue that the none of the statements in the Anticorruption Policy, Code
of Conduct, and Sustainability Reports is actionable because they are “inherently aspirational.”

While the parties do not address them in their briefs, the same is true for Cognizant’s
statements about its outstanding capital commitments related to India real estate development.
Am Compl. ¶IJ 98, 112, 115, 112. Because the figures included approximately $4.1 million in
illegal payments, the statements are false. Further, the statements are misleading because they
fail to disclose that the supposedly beneficial capital commitments actually exposed Cognizant to
significant future expenses.
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Cognizant Br. at 17. Defendants further argue that even if they are actionable, the statements are
not false and misleading.
1. Code of Conditct and Anticorruption Policy
The Court finds that the statements in the Code of Conduct and Anticorruption Policy are
not materially false and misleading. “Because a code of ethics is inherently aspirational, it simply
cannot be that every time a violation of that code occurs, a company is liable under federal law
for having chosen to adopt the code at all.” In re Braskem S.A. Sec. Litig., 246 F. Supp. 3d 731,
755 (S.D.N.Y. 2017); see In re Banco Bradesco S.A. Sec. Litig., 277 F. Supp. 3d 600, 65 8—59
(S.D.N.Y. 2017) (quoting this passage); Lopez v. Ctpartners Exec. Search Inc., 173 F. $upp. 3d
12, 28—29 (S.D.N.Y. 2016) (same); see also Emps. Ret. Sys. ofthe City ofProvidence v.
*9 (S.D.N.Y. Mar. 30, 2018); In re
Embraer, No. 16 Civ. 5277 (RMB), 201$ WL 1725574, at
MytanN.V Sec. Litig., No. 16-CV-7926 (JPO), 2018 WL 1595985, at *lo(s.D.N.y. Mar. 28,
2018); fries v. Northern Oil, and Gas, Inc., 285 F. Supp. 3d 706, 717—18 ($.D.N.Y. 2018).
These statements were made in aspirational documents outlining the company’s policies for best
corporate practices, not as affirmative guarantees that every employee would adhere to these
practices in all cases. Therefore, the statements are not rendered false by the failure of certain
employees to adhere to company policy. As the Ninth Circuit explained, “[s]uch a code
expresses opinions as to what actions are preferable, as opposed to implying that all staff,
directors, and officers always adhere to its aspirations.” Retail Wholesale & Dept. Store Union
Local 388 Ret. fund v. Hewlett-Packard Co., 845 F.3d 1268, 1276 (9th Cir. 2017) (citing
Andropolis v. Red Robin Gourmet Burgers, Inc., 505 F. Supp. 2d 662, 686 (D. Cob. 2007)); see
Bondali v. YumA Brands, Inc., 620 F. App’x 483, 490 (6th Cir. 2015) (“[The defendant’s]
statement is not actionable because it was a statement of aspiration made in [the defendant’s]

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or
corporate Code of Conduct rather than an assertion of objective fact made in a public filing
404,
press release.”); City ofRoseville Emps. ‘Ret. Sys. v. Horizon Lines, Inc., 686 F. Supp. 2d
415 (D. Del. 2009), aff’d 442 F. App’x 672 (3d Cir. 2011) (finding statements contained in Code
of Ethics cannot be materially false and misleading).
As the court in Andropolis v. Red Robin Gourmet Burgers, Inc., 505 F. Supp. 2d 662,
685—86 (D. Cob. 2007) explained, corporations are effectively required to adopt a code of
conduct under SEC regulations and NASDAQ rules. See 17 C.F.R.

§ 229.406(a)—(b) (2012)

(requiring registrants to adopt a code of ethics or explain why they have not done so, and
requiring the code to promote “compliance with applicable governmental laws, rules and
regulations”). Because adoption of a code of conducts is effectively mandatory, “all public
companies—whether run by crooks or angels—will adopt such a code.” Andropotis, 505 F.
Supp. 2d at 686. Investors therefore gain no information about a corporation by its adoption of
such a code.
Allowing claims to proceed on the basis of code of conduct violations would be
overbroad; any instance of corporate misconduct would violate a company’s compliance policy.
Given the near-universal adoption of codes of conduct, and the breadth their proscriptions,
allowing securities plaintiffs a cause of action every time a code of conduct is violated would
“turn all corporate wrongdoing into securities fraud.” Retail Wholesale & Dept. Store Union
Local 338 Ret. fund, $45 F.3d at 1276. This would essentially read out the requirement that
plaintiffs demonstrate a “material misrepresentation” in any case involving corporate
misconduct, which is clearly inconsistent with the heightened pleading standards of the PSLRA.
For these reasons, the Court rejects Plaintiffs’ argument that statements within
Cognizant’s Code of Conduct and Anticorruption Policy can be the basis for securities liability.

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Because these are internal documents directing employees about how they should aspire to
conduct themselves, rather than a guarantee that employees are in fact complying, they are
incapable of being false. Plaintiffs do not allege that Defendant made any public statements
ny
touting its Code of Conduct or ensuring investors that every employee within the compa was
adhering to their policies.8
Plaintiffs’ reliance on In re Eletrobras Securities Litigation, 245 F. $upp. 3d 450, 463
(S.D.N.Y. 2017) is unpersuasive. There, defendant corporation was facing extensive press
inquiries about alleged corruption. In response to these press inquiries, the corporation
tment to
“repeatedly emphasized and reasserted the strength of its internal controls and its commi
transparency and ethical conduct,” and made reference to its Code of Ethics. Id. The court held
that these statements were actionable, reasoning that these references were “made specifically in
response to damaging media reports about bribery and bid-rigging at [the corporation].” Id.; see
also Fetrobras Sec. Litig., 116 F. $upp. 3d 368, 381 ($.D.N.Y. 2015) (finding statements touting
code of conduct and emphasizing compliance actionable when “made repeatedly in an effort to
reassure the investing public about the Company’s integrity”).
The circumstances here are starkly different. First, the statements in Eletro bras were
public statements to investors about the Code of Ethics, not statements within the Code itself
Second, the statements were made in response to pointed press inquiries in an effort to assuage
investor concern about alleged bribery. Courts have consistently limited the reasoning of
*8 n.6
Eletrobras and Petrobras to their facts. See, e.g., Embraer, 2018 WL 1725574, at
(distinguishing Eletrobras because the statements there were made “repeatedly in an effort to

The reference in its 2014 Annual Report to the existence of a Code of Conduct, Am.
Compi. ¶ 56, does not bring this case within Eletrobras, 245 F. Supp. 3d at 463.
$

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reassure the investing public about the company’s integrity”); Fries, 285 F. $upp. 3d at 718
(distinguishing Petrobras because there were “no allegations in the [complaint] showing that
Defendants made such assurances [of general integrity]); In re Braskem S.A. Sec. Litig., 246 F.
Supp. 3d at 757 (distinguishing Petrobras). Here, there are no allegations that Defendant was
facing public scrutiny for the alleged bribery scheme, or that the statements were “made in an
effort to reassure the investing public about the [c]ompany’s integrity.” Eletrobras, 245 F. Supp.
3d at 463.
The other cases cited by Plaintiffs are also unpersuasive because they involve statements
about compliance made directly to investors, not statements appearing in an internal document
outlining company policy. See Richman v. Goldman Sac/is Grp., Inc., 868 F. Supp. 2d 261, 277
(S.D.N.Y. 2012) (statements appearing in Forms 10-K and Annual Reports); In re Moody’s
Corp. Sec. Litig., 599 F. Supp. 2d 493, 508 (S.D.N.Y. 2009) (statements in Code of Conduct as
well as Forms 10-K and Annual Reports); Lapin v. Goldman Sachs Grp., Inc., 506 F. Supp. 2d
221, 239 (S.D.N.Y. 2006) (statements appeared in “press release accompanying an
announcement of a new leadership team” and “announcing new co-directors”).9 Unlike those
cases, the statements at issue here were not representations about the current state of the
company’s compliance. Further, Plaintiffs have not alleged that the statements were made in an
effort by Defendant to gain a competitive advantage or otherwise “distinguish itself from other
institutions.” Lapin, 506 F. $upp. 2d at 240.

Plaintiffs also cite Glazer Capital Management, LP v. Magistri, 549 F.3d 736, 742 (9th
Cir. 200$). That case involved statements in a merger agreement that were attached to a Form
10-K, not statements in a code of conduct. More importantly, the Ninth Circuit has since held
that statements in a code of conduct are inactionable when squarely confronted with the question.
See Retail Wholesale & Dept. Store Union Local 338 Ret. Fund, 845 F.3d at 1276.
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Plaintiffs also argue that the statements are actionable because they are “particularized”
and “reflect the Company’s current state of affairs.” Pis.’ Opp. at 30. Plaintiffs point out that in
its Code of Conduct, Cognizant states “we do not corruptly give or offer.

.

.

anything of value to

a government official to obtain or maintain business,” and that “we comply with all applicable
anticorruption laws, rules, and regulations.” Id. (emphasis in original). However, those
statements are not any more particularized or specific than those held to be inactionable in by the
Sixth and Ninth Circuits. See Retail Wholesale & Dept. Store Union Local 338 Ret. fund, 845
F.3d at 1276 (“we ntake ethical decisions” (emphasis added)); Bondali, 620 F. App’x at 490
(“any product suspected to be unsafe must immediately be pulled from distribution” (emphasis
added)); see also Bras/cern S.A. Sec. Litig., 246 F. Supp. 3d at 755 (“[b]ribes, kickbacks and
payoffs to government officials, suppliers and otherts] are strictly prohibited,” and “[n]o waivers
of the provisions of the code of ethics are permitted”). Moreover, the purpose of a Code of
Conduct is to promote ethical conduct and legal compliance from within the company. Punishing
companies whose Codes are especially specific and concrete would make little sense, as it would
disincentivize compliance measures designed to prevent misconduct from occurring.
Consequently, the statements in the Code of Conduct and Anticomiption Policy are not
materially false and misleading.
2. Sustainability Reports
Unlike the Code of Conduct and Anticorruption Policy, the Court finds statements in the
Sustainability Reports to be materially false and misleading. The 2014 Sustainability Report
states that Cognizant “delivered 333,114 hours of Code of Ethics training through eLeaming in
2014,” and “delivered Code of Ethics trainings to targeted audiences of over 18,000 associates in
India and the Philippines.” Am Compi.

¶ 129. The 2014 Sustainability Report gave further detail
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about its training programs, and went on to state that “our Enterprise Risk Management group
conducts annual risk analysis surveys covering all business units and corporate functions to
assess the likelihood of various risks including corruption.” The 2014 Report also stated that
there were “no incidents [of corruption] reported.” Id.

¶J 129,

136. The 2015 Sustainability

Report also stated that there were “no incidents [of corruption] reported,” and additionally that
“no [significant risks related to corruption] reported.” Id.

¶ 136. These are not aspirational

statements of company policy, but statements of fact and representations about the current state
of affairs that are capable of falsity and upon which a reasonable investor may rely.
The Court finds that Plaintiffs have adequately alleged that the statements in the
Sustainability Reports about anticorruption training were materially false and misleading. At the
time that Cognizant was making statements highlighting its anticorruption training, it was
allegedly engaged in a bribery scheme involving members of senior management. These
statements are misleading for this reason alone. See Petrobras, 116 F. Supp. 3d at 380—81
(finding statements regarding effectiveness of internal controls misleading because company was
engaged in extensive corruption at the time of the statements).
Further, Plaintiffs have put forth additional allegations demonstrating the falsity of
specific statements in the Sustainability Reports. The Sustainability Reports reported that there
were “no incidents [of corruption] reported” and “no [significant risks related to corruption]
reported.” Am. Compl.

¶J 129,

136. These statements were made in August 2016 June 2015,

after the conclusion of the 2015 Audit wherein FEY discovered red flag payments made in
connection with SEZ licenses. fE1 considered the payments to be suspicious enough to warrant
further investigation, and upon such investigation, was met with unsatisfactory answers from
Cognizant employees. Id.

¶ 70. fE1

then reported the findings of the audit to his superior, and

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the information was further emailed to Misty Pederson (not a named Defendant), one of
Cognizant’s most senior compliance executives. Id.

¶ 73. It is plausible that these payments

constituted “corruption” or a “risk of corruption,” and that FE1 “reported” them to the person to
whom he was instructed to report. Because the 2015 Audit had been completed before either of
the Reports was published, it is plausible that this reporting occurred before the statements were
made.
Plaintiffs have also adequately alleged that the statements about anticorruption training
were false and misleading. Plaintiffs have provided the statements of two former employees,
both of whom experienced firsthand the alleged deficiencies in Defendant’s anticorruption
training. In the 2014 Report, Cognizant stated that it had “introduced role based anticorruption
training to supplement the anti-corruption provisions of the general ethics training.” In contrast,
FE1 stated that the training materials provided to Cognizant employees were not specific to the
positions they held. Id.

¶J 72,

129. Defendant also touted its extensive training programs,

referencing “live Code of Ethics trainings to targeted audiences of over 18,000 associates in
India and the Philippines.” Id.

¶ 129. However, FE1

stated that training materials were in English

rather than the employees’ native language, were not specific to their country, and that
completion rate for compliance training was low. Id.

¶ 72. FE2 stated that his staff had no FCPA

specific training, and that no FCPA training manuals even existed. Id.
These accounts by Cognizant’s former employees render Cognizant’s statements
misleading. Implicit in Cognizant touting of its training program was an assurance that the
training program could actually be effective at the ground level. Widespread training programs
will not help prevent misconduct if employees cannot understand the materials, or if materials

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are not being distributed at all. Similarly, the value of widespread training efforts would be
greatly diminished if employees were not actually completing the training.
Defendant argues that the “anecdotal experiences” offEl and FE2 do not contradict the
statements describing Cognizant’s training across all of its 260,000 employees. Defs.’ Br. at 18—
20. The Court rejects this argument because Plaintiffs have provided these former employee
statements to comply with the requirements of the PSLRA. It would be quite harsh to on the one
hand impose upon securities plaintiffs a heightened requirement of specificity, and on the other
disregard their allegations as overly idiosyncratic. The statements of the former employees
adequately demonstrate the alleged deficiencies in Defendant’s anticorruption training.
The Court must also consider “the detail provided by [FE2], 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.”Avaya, 564 F.3d at 263. Here, the basis of FE2’s knowledge is his position of
employment. The statements regarding training deficiencies are corroborated by fE1 ‘s similar
experiences, and by the existence of the alleged bribery scheme. While there is not a great
amount of detail in FE2’s statements, this Court still finds the statements reliable enough to be
considered. However, even without FE2’s statements, the Court would still find that the FE1 ‘s
statements alone are sufficient to render the statements about compliance training materially
false and misleading.
iii. Statements Touting Ability to Deliver Low-Cost Services Through
Legitimate Means, Attributing Financial Success to Legitimate
Business Factors and Conditions

The amended complaint alleges that Defendants touted their ability to deliver low-cost
services through legitimate means, and attributed Cognizant’s financial success and revenue

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growth to legitimate business factors and conditions. The amended complaint asserts that these
statements were materially false and misleading because Cognizant’s performance was driven, in
material part, by its bribery scheme. Id.

¶ 140.

Defendant Cobum argues that none of his statements is materially false or misleading.
Defendant Cobum contends that his statements did not trigger a duty to disclose the alleged
bribery scheme because he never made an affirmative statement about $EZ licenses, improper
payments to Indian officials, Cognizant’s policies for preventing such payment, or any related
topic. Cobum Br., at 18, ECF No. 41-1. Defendant Cobum further asserts that his statements
were inactionable puffery because they were vague, general, and expressions of opinion.
Cognizant Defendants argue that the amended complaint does not allege a relationship
between Cognizant’s revenue growth and any potentially improper means and any improper
payments. Cognizant Br. at 23. Cognizant Defendants similarly contend that statements about its
IT services are not misleading because the amended complaint does not allege any relationship
between the statements and any potentially improper payments.
Rule 1 Ob—5 requires disclosure of material information “only when necessary ‘to make.
statements made, in light of the circumstances under which they were made, not misleading.”
17 C.F.R.

§ 240.lOb—5(b)5. “Once a defendant makes an affirmative statement or

characterization about its business, it puts that subject ‘in play’ and assumes a duty.

.

.

to speak

truthfully about that subject.” In re Merck & Co., 2011 WL 3444199, at *9 Like any other
aspect of its business, a company may trigger a duty to disclose material facts by making
statements about its revenue and earnings. See Shapiro, 964 F.2d at 282.
However, “[fjactual recitations of past earnings, so long as they are accurate, do not
create liability under Section 10(b).” Galati v. Commerce Bancorp, Inc., 220 F. App’x 97, 102

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(3d Cir. 2007); Advanta, 180 F.3d at 538, abrogated on other grounds, as recognized in City of
Edinborough Council, 754 F.3d at 172 (citing Serabian v. Amoskeag Bank Shares, Inc., 24 f.3d
357, 361 (1st Cir. 1994)). Similarly, absent an allegation that the data are false, “a violation of
federal securities law cannot be premised upon a company’s disclosure of accurate historical
data.” In re Sanofi Sec. Litig., 155 F. $upp. 3d 386, 404 (S.D.N.Y. 2016) (quoting In re Sofamor
Danek Grp., Inc., 123 F.3d 394, 401 & n.3 (6th Cir. 1997)).
Plaintiffs contend that a company has a duty to disclose any improper or illegal
businesses that contribute to a company’s success “when a company puts at issue the cause of its
success.” Pls.’ Opp. at 33. In Plaintiffs’ view, by speaking about the source of its success, a
company triggers an obligation to disclose to avoid liability under Section 10(b). Id. at 36. While
certain district courts have articulated such a rule, see Steiner v. Medquist, Inc., No. 04-5487
(JB$), 2006 WL 2827740 (Sept. 29, 2006 D.N.J.); In re Van Der Moolen Holding N. V. Sec.
Litig., 405 F. Supp 2d. 388 (S.D.N.Y. 2005); In re Providan Fin. Corp. Sec. Litig., 152 F. Supp.
2d 814 (E.D. Pa. 2001), the Third Circuit has not. In Galati v. Commerce Bancorp, Inc., 220 F.
App’x 97, 101—02 (3d Cir. 2007), the defendant bank had stated that “the strong performance of
Commerce Capital Markets was led by the public finance division,” and that “the unique
Commerce business model continues to produce strong top-line revenue growth driven by strong
deposit growth which significantly increases our net interest income and net income.” Id. The
court found that this did not create a duty to disclose the alleged bid-rigging scheme which
fueled the growth of these deposits, reasoning that the statements did not put the integrity of the
bank’s practice “at play.” Instead, the statements were all unactionable “factual recitations of
past earnings” and puffery. Id.; see also Boca Raton Firefighters and Police Pension Fund v.
Bahash, 506 F. App’x 32, 37 (2d Cir. 2012) (“Whatever the scope of the responsibility not to

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make statements that constitute ‘half-truths,’ that surely does not apply to the reporting of
unmanipulated corporate earnings.”); Sanofi, 155 F. Supp. 3d at 404 (finding “accurate
statements of past earnings and growth” not actionable without a closer connection to the alleged
misconduct).
Not only is Plaintiffs’ proposed rule inconsistent with Third Circuit precedent, it is also
overbroad. Because every company will at some point publicly reference the sources of its
revenue, Plaintiffs’ approach would rewrite the statute to impose an affirmative duty to disclose
all material information that affects revenue. Such a duty runs counter to the clear command
from the Supreme Court that Section 10(b) and Rule 1 Ob—5 “do not create an affirmative duty to
disclose any and all material information,” Matrixx, 563 U.S. at 44—45, and that “[s]ilence,
absent a duty to disclose, is not misleading under Rule lOb—5,” Basic, 485 U.S. at 239 n.17. If
Congress wanted to create a regime of mandatory disclosure of all known misconduct, it would
have done so more clearly.
Like any other statement, public announcement of past earnings and sources of revenue
create a duty to disclose other material information to the extent necessary to make those
statements not misleading. 17 C.F.R.

§ 240.lOb—5(b)5. This is most likely to occur when the

public statement has a close connection to the underlying misconduct. See Sanofi, 155 F. Supp.
3d at 403 (“The critical consideration.

.

.

in determining whether a corporation must disclose

mismanagement or uncharged criminal conduct is whether the alleged omissions.. are
.

sufficiently connected to the defendants’ existing disclosures to make those public statements
misleading” (citations and internal quotation marks omitted)). As example, if a company
“address[es] the quality of a particular management practice” by characterizing it as “adequate,”
“conservative,” “cautious” and the like, the subject is in play and the defendant has a duty to

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speak truthfully. Shapiro, 964 f.2d at 282. Similarly, a statement crediting a company’s revenue
increase to its “customer-focused approach” is misleading if the revenue increase actually
reflected fraudulent practices wherein the customers were was truly increased by misleading and
defrauding customers. Providan, 152 F. Supp. 2d at 819, 824.
Plaintiffs allege three categories of statements; forms filed pursuant to SEC regulations,
statements by Defendant Coburn, and statements by Defendants McLoughlin and D’$ouza.
1. SEC forms
Cognizant’s statements in its SEC-required forms are inactionable puffery and statements
of accurate historical data. In its 2014 Form 10-K, filed February 27, 2015, Cognizant stated its
increase in revenue, and stated that ‘key drivers of our revenue growth in 2014” were “[s]olid
can
performance across all of our business segments”; “[s]ustained strength in the North Ameri
market”; “[c]ontinued penetration of the European and Rest of World (primarily the Asia
Pacific) markets”; “[i]ncreased customer spending on discretionary projects”; “[e]xpansion of
tion at
our service offerings, including Consulting, IT IS, and BPS services”; “[iJncreased penetra
existing customers”; and “[c]ontinued expansion of the market for global delivery of IT services
and BPS.” Am. Compi.

¶ 414; see id. ¶J 145,

162, 170, 179, 182, 196.

In a May 4, 2015 press release and Form 8-k, Cognizant stated that its “strong revenue
core
performance this quarter versus our guidance was driven primarily by organic growth of our
business.

.

.

.“

Id.

¶ 143.

Cognizant’s Qi 2015 Form 10-Q stated that “the revenue growth from

our Rest of World customers in 2015 was primarily driven by the Indian, Japan, Australia, Hong
Kong, and Singapore Markets.” Id.

¶ 146.

Plaintiffs do not allege that the statements are inaccurate, and the Court finds that they are
not adequately related to the bribery scheme to render them misleading. The statements do not

4$

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reference licenses, tax benefits, permits, or anything else related to the alleged bribery scheme
that would be rendered misleading by the omission. See Sanofi, 155 F. $upp. 3d at 403 (requiring
that the alleged omissions be “sufficiently connected to defendants’ existing disclosures to make
those public statements misleading”). The reference to India as one of several markets does not
put “at play” the propriety of Cognizant’s acquisition of government licenses.
As none of the statements triggered a duty to disclose anything about the alleged bribery
scheme, they are not false and misleading.
2. Statements by Defendant Cobttrn
Cobum’ s statements all constitute inactionable puffery, or accurate statements of
historical fact. As example, on an Earnings Call on November 4, 2015, Cobum stated “[w]e
continue to do very well and take market share on the maintenance side.

.

.

.

And we

—

Cognizant

just has this incredible track record of delivering very high quality services, while continuously
delivering productivity and efficiency.” Am. Compi.

¶ 166.

Similarly, on May 24, 2016 Coburn

stated at an investor conference that Cognizant would respond to customer demand by “bringing
best practices to our clients for our traditional services, constantly lower[ing] their cost of
ownership while maintaining our margin.” Id.

¶

194. Vague, general statements of this kind are

mere puffery. See Advanta, 180 F.3d at 538, abrogated on other grottnds, as recognized in City
ofEdinborough Cottncil, 754 F.3d at 172 (finding statements inactionbie because they were
“vague and general statements of optimism”).
Plaintiffs argue that statements such as “strong vertical presence and investments in
building sharply focused industry-specific platforms” are at least as material as “customerfocused approach” that was held to be materially misleading in Providan. Pis.’ Opp. at 40. But
the statement in Providan were false; the company was not engaged in a “customer-focused

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approach,” it was defrauding customers through illegal practices. 152 F. Supp. 2d at 825. By
contrast, Plaintiffs have not alleged that Cognizant did not have a “strong vertical presence.”
Plaintiffs, relying on Makor Issues & Rights, Ltd. v. Teltabs, Inc., 437 F.3d 588, 597—98
(7th Cir. 2006) vacated and remanded sub nom by Teltabs, Inc. v. Makor Issues & Rights, Ltd.,
551 U.S. 30$ (2007), argue that the statements are material because they were made “in direct
response to analyst questions.” Pis.’ Opp. at 41. The case is inapplicable and the argument is
rejected. The statements in that case were far more specific than here

—

the defendant stated that

a specific product would “maintain its growth rate,” when in reality, he knew sales were
declining. Further, the statement was made in response to a specific analyst question about the
growth rate of the product. Here, Plaintiffs have not pled any particular facts to support their
argument, including the basic fact of what question supposedly prompted the statement at issue.
Further, even if the statement were material, it was not misleading. Plaintiffs have not pled any
facts to show that analysts would draw any inferences about Cognizant’s acquisition of SEZ
licenses from its statement that it would bring “best practices to [its] clients,” and “lower their
cost of ownership.”
Plaintiffs’ argument that the statements are material because they “masked the existence
of a bribery scheme carried out by senior management” also fails. Pis.’ Opp. at 41. The question
is not whether the omitted information was material; it is whether Defendants had a duty to
disclose it. See Matrixx, 563 U.S. at 44 (“Even with respect to information that a reasonable
investor might consider material, companies can control what they have to disclose under these
provisions by controlling what they say to the market.”). Because Cobum’s statements consisted
only of puffery and accurate historical fact, such a duty did not exist. Plaintiffs’ argument that
the statements involved the “core of [Cognizant’s] business” fails for the same reason.

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3. Statements by Defendants D ‘Souza and McLough tin
The statements by Defendants D’$ouza and McLoughlin similarly constitute only
on a
inactionable puffery and accurate statements of historical fact. Defendant D’Souza stated
the core
November 4, 2015 earnings call that “the bulk of the productivity that we drive in
es process
business is through traditional means of driving productivity and efficiency that includ
ation.”
kind of things like Lean and Six Sigma and so on, and also more traditional tools in autom
Am. Compi.

ic initiative

¶ 166. D’Souza also stated on a May 6, 2016 earnings call that a strateg

tion
is “to help clients achieve new levels of efficiency and effectiveness in their core transac
processing operations by building platform-based solutions and industry utilities.

.

.

.

By

applying a series of levers including process optimization, digitization and large-scale
been
efficiencies, we’re able to bring clients levels of effectiveness which they would have
unable to reach on their own.” Id.

¶ 185. Terms like “productivity and efficiency” are general

ss
and therefore inactionable. As to the specific references to things like “automation,” “proce
that these
optimization,” and “Lean and Six Sigma,” Plaintiffs have not alleged any facts to show
statements are inaccurate, or that they would be rendered misleading by omitting facts of the
alleged bribery scheme.
Defendant McLoughlin also stated on an August 5, 2016 call that the Company’s
ng
financial success could be attributed “to a slightly lower tax rate and stronger operati
margins.” Id.

hat related to

¶ 201. Although the reference to a “lower tax rate” is arguably somew

and
SEZ licenses, this general statement is not enough to render the statement materially false
misleading.
Because all of the statements are either accurate statements of historical fact, or
ding.
inactionable puffery, Plaintiffs have not alleged that they were materially false or mislea

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iv. Overstated Earnings by Capitalizing Bribes that Should Have
Been Expensed
The amended complaint asserts that Cognizant overstated its earnings by incorrectly
booking the bribery payments as capital expenditures rather than booking them as expenses. Id.

¶

209. Of the $4.1 million of capitalized expenses, $3.1 million was overstated on Cognizant’s
earnings and investment in physical assets, and understated in expenses. Id. Plaintiffs contend
that the mis-classification was material because it was a deliberate effort by senior management
to conceal corrupt payment to Indian officials. Pls.’ Opp. at 47.
Defendants argue that the $3.1 million reclassification was immaterial because it
represented less than two tenths of one percent of annual net income during the relevant period.
Cognizant Br. at 26. Defendants argue that the immateriality of the reclassification is
demonstrated by Cognizant’s stock price, which rose 5% following the reclassification. Id.
The Court finds that the misstatement was material. SEC Staff Accounting Bulletin No.
99, 64 Fed. Reg. 45, 150 (1999), which has been recognized as persuasive authority in the
Second Circuit, provides a nonexclusive list of “qualitative factors” to consider when
determining materiality. One such factor is “[wJhether the misstatement involves concealment of
an unlawful transaction.” Consequently, courts have found financial misstatements to be
material, even if the misstatement would not have been independently significant to investors, if
the misstatement was a result of attempt to conceal misconduct. See Indian Public Ret. Sys. v.
SAIC, Inc., $18 F.3d 85, 89 (2d Cir. 2016); Eletrobras, 245 F. Supp. 3d at 464-65.
This Court agrees. The misstatement occurred because, according to the Amended
Complaint, agents of Defendant Cognizant engaged in improper transactions with Indian
government officials and concealed the bribes by misbooking the payments as capital
expenditures. Consequently, the Amended Complaint alleges that $4.1 million of corrupt
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payments were improperly reported as capital expenditures rather than expenses, thereby
overstating its earnings. These overstatements would have been important to investors not only
because they overstated earnings, but because of the alleged bribery scheme they concealed.
Defendants’ reliance on In re Westinghouse Securities Litigation, 90 F.3d 696, 714—15
(3d Cir. 1996) is unpersuasive. There, the Third Circuit held that a .54% overstatement was
immaterial as a matter of law. Defendants argue that because the overstatement here is less than
two tenths of one percent, it is immaterial as a matter of binding Third Circuit precedent. This
argument is rejected because in Westinghouse, 90 f.3d at 700, the misstatements concealed only
the company’s losses, and were not being used to disguise misconduct. Accordingly, investors
would only be misled if the financial condition was materially worse than the misstatement
represented. In contrast, the relevance of the misstatement was not only that it misrepresented
earnings, but also that it concealed misconduct. As this Court has already said, the alleged
bribery scheme would “significantly alter the total mix of information made available” to
investors. Matrixx, 563 U.S. at 3$.
The Court finds that the financial reports were materially false and misleading.
SOX Certifications
In connection with each quarterly and annual report filed by Cognizant, Defendants
D’Souza and McLoughlin signed SOX Certifications, as required by Section 302 of SOX. In
them, Defendants D’Souza and McLoughlin certified that “Based on my knowledge, this report
ary
does not contain any untrue statement of a material fact or omit to state a material fact necess
to make the statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this report.” Id.

J 210. The amended

complaint alleges that this was materially false and misleading when made because the SEC

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filings to which the certifications were appended contained numerous materially false and
misleading statements and omissions. Id.

¶ 212

For statements of opinion, “falsity of the statement is entirely dependent on what [the
certifier] knew, not what was objectively true at the time of the statement.” Sanofi, 155 F. Supp.
3d at 402; see Omnicare, Inc. v. Laborers Dist. Council Constr. Indus. Pension Fund, 135 S. Ct.
,
1318, 1326—27 (2015); In re VateantPharm. Int’l, Inc. Sec. Litig., No. 15-7658 (MAS) (LHG)
2017 WL 1658822, at *14 (D.N.J. Apr. 28, 2017).
The amended complaint does not allege that McLoughlin or D’Douza did not believe
these opinions, or that the statement of opinion contained any false embedded statements of
facts. Plaintiffs have not alleged that the certifications based on belief were false or misleading
when made.
Defendants D’Souza and McLoughlin also certified that they had designed and evaluated
effective internal and disclosure controls:
The registrant’s other certifying officer and I have disclosed, based on our most
recent evaluation of internal control over financial reporting, to the registrant’s
auditors and the audit committee of the registrant’s board of directors (or persons
performing the equivalent function): a) All significant deficiencies and material
weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant’s ability to record,
process, summarize and report financial information and b) any fraud, whether or
not material, that involves management or other employees who have a significant
role in the registrant’s internal control over financial reporting.
Am. Compl.

¶ 210.

The amended complaint alleges that this was materially false and misleading when made
because Cognizant admitted material weaknesses existed in its internal controls, including “tone
at the top,” as senior management participated in making corrupt payments by overriding and/or
failing to enforce the Company’s internal financial controls. Id.

54

¶ 211.

NOT FOR PUBLICATION
As with the statements of belief, this statement is preceded with a qualifier: “based on our
most recent evaluation of internal controls over financial reporting.” The Amended Complaint
does not allege that the disclosure was based on something other than the recent evaluation of
internal controls, and does not allege that either Individual Defendant had any reason to believe
that the statement was misleading when made.
The SOX certifications are not actionable.
vi. Conclusion

To resay, the Court finds that Plaintiffs have adequately alleged three sets of materially
misleading statements. The first is the statements touting the benefits of $EZ licenses. Am.
Compl.

¶J 96—99, 101, 104, 107, 110, 111, 115, 118. The second is the statements in the 2015

and 2016 Sustainability Reports touting anticorruption compliance and training and stating that
no significant risks of corruption were reported. Id.
that misstated bribes as capital expenditures. Id.

¶J 129, 136. The third is financial reports

¶ 209. The amended complaint fails to allege

that Defendant Cobum uttered any material misstatement, and the claims against him under
Section 10(b) are consequently dismissed.
b. Scienter

As explained, the PSLRA requires a complaint alleging a violation of Section 10(b) to
“state with particularity facts giving rise to a strong inference that the defendant acted with the
required state of mind.” Avaya, 564 F.3d at 253 (quoting 15 U.S.C.

§ 78u-4(b)(2)). A “strong

inference” of scienter is one “that is cogent and at least as compelling as any opposing inference
of nonfraudulent intent.” Tellabs, 551 U.S. at 324.
Defendants argue that the amended complaint does not plead particularized facts
supporting a strong inference of scienter. Cognizant Br. at 29.

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Plaintiffs respond that the Amended Complaint alleges scienter as to Individual
Defendants D’Souza and McLoughlin, the individuals responsible for the statements found to be
material misrepresentations. Plaintiffs further assert that the Amended Complaint charges
scienter to Defendant Coburn, and also alleges scienter to the corporate defendant independent of
any individual defendant.
The Court will address these arguments in turn and finds that, considering Plaintiffs
allegations “collectively rather than individually,” Avaya, 564 F.3d at 279—80, the facts alleged
give rise to a strong inference of scienter on the part of Defendant Cognizant.
i. Scienter Allegations as to Defendants D’Souza and McLoughlin

Plaintiffs argue that a strong inference of scienter arises because (1) Cognizant admitted
that senior management was involved in the bribery; (2) the fraud was easily detectible; (3) the
misconduct involved deliberate illegal behavior; (4) SEZ licenses were particularly important to
Cognizant; (5) the misconduct occurred over a long duration; (6) D’Souza and McLoughlin were
aware that Indian facilities face a high risk of corruption; and (7) D’Souza and McLoughlin
certified that they had “evaluated” the company’s internal controls. Taken together, these
allegations do not give rise to a strong inference of scienter.
Plaintiffs argue that an inference of scienter arises because Cognizant admitted that senior
management participated in the bribery. Plaintiffs’ rely on the November 7, 2016 Form 10-Q
wherein Cognizant acknowledged the involvement of senior management in the alleged bribery
scheme. The 10-Q reads:
During the closing process for the third quarter of 2016, based on the results of the internal
investigation to date, we concluded that as of December 3 1, 2015 and in subsequent interim
periods, we did not maintain an efftctive control environment. Specifically, we did not
maintain aim efftctive tone at the top as certain members ofsenior management may have
participated in or failed to take action to prevent the making of potentially improper
payments by either overriding or failing to enforce the controls established by the

56

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its
Company relating to real estate and procurentent principally in connection with perm
for certain facilities in India.
as of
As a result of the foregoing, we have determined that a material weakness existed
periods, in our internal
December 31, 2015, and continues to exist in subsequent interim
control overfinancial reporting.
Am. Cornpl. ¶84 (emphasis in original).
Plaintiffs state that it is “simply not credible for the Individual Defendants to claim that
they had no clue what Cognizant’s own senior management was doing

—

over the course of years

ffs do
in the heart of the Company’s business operations.” Pls.’ Opp. at 58—59. However, Plainti

—

,
not argue that “senior management” refers to Defendants D’Souza or McLaughlin. Instead
ated the
Plaintiffs ask the Court to infer that because one member of senior management perpetu
the PSLRA
bribery scheme, the rest of senior management must have been aware of it. However,
ible
requires the Court to consider the “complaint in its entirety” and take into account “plaus
opposing inferences. Winer Family Trust v. Queen, 503 F.3d 319, 327 (3d Cir. 2007). The
inference that all members of senior management were aware of the misconduct is less
compelling than the nonculpable inference

—

that rogue members of senior management

This
perpetuated misconduct and concealed their actions from D’Souza, McLaughlin, and others.
[ode] or
competing inference is bolstered by the statement in the l0-Q that perpetrators “overr
fail[edJ to enforce” internal controls that may otherwise have detected the misconduct. Am.
Compi.

¶ 84. The nonculpable explanation is also supported by Cognizant’s actions

following

gation.
discovery of the payments, by self-reporting to the SEC and initiating an internal investi
Id.

za and McLaughlin’s

¶ 226. Additionally, the nonculpable explanation is supported by D’Sou

e.
continued employment at the company after the discovery of the alleged bribery schem
Plaintiffs also argue that a strong inference of scienter arises because Cognizant in its 10-

Q admits that it engaged in “deliberate illegal behavior.” Pls.’
57

Opp. at 66. Plaintiffs rely on

NOT FOR PUBLICATION
Novak v. Kasaks, 216 F.3d 300, 311 (2d Cir 2000), which held that “a strong inference of
scienter arises where the complaint alleges that defendants ‘engaged in deliberately illegal
behavior.” (emphasis added). In that case, however, the inference was permissible because the
defendants themselves engaged in the illegal conduct. By contrast, Plaintiffs do not allege that
D’Souza or McLoughlin personally participated in the bribery scheme.
Plaintiffs next argue that scienter can be inferred from the Individual Defendants’ access
to information that would have exposed the bribery. Plaintiffs point to the 2015 audit in which
FEY “fairly easily” uncovered potential red flag payments. It is true that easily-discoverable
information can contribute to an inference of scienter. See George v. China Auto Sys., Inc., No.
11 Civ. 7533 (KBF), 2012 WL 3205062, at *14 (S.D.N.Y. Aug. 8, 2012). However, the
inference here is weak. The complaint alleges FE1 easily uncovered payments to an ostensiblyprivate entity with government affiliation that were related to SEZ acquisition. It does not allege
that there could be no proper reason for such payments, it does not describe the amount of the
payments, and it does not explain why D’Souza and McLoughlin would be looking for this type
of payment. Further, the nonculpable inference that the perpetrators prevented D’Souza and
McLoughlin from uncovering evidence of wrongdoing weighs against the inference that they
were aware of, or reckless with regard to, the misconduct.
Plaintiffs similarly argue that McLoughlin and D’$ouza had actual knowledge of
misconduct because they received a summary audit report detailing the red flag payments. This
argument also fails. FE1 does not claim to have any personal knowledge of what was actually
included in the final audit report or the summary report that would have been distributed to
D’Souza and McLoughlin. Instead, fE1 stated that the findings were emailed to another
employee “for inclusion” in the final audit report, which “would have been” disseminated to

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some senior executives,” and further that a summary report “would have been” distributed to
Defendants D’Souza and McLoughlin. Am. Compl.

¶J 68—74. This two-level “would have”

account is entirely speculative. Plaintiffs must plead “particularized facts” to support an
inference of scienter, not conclusory allegations that a single email would have ripened into a
final audit report and then into a summary audit. “[O]missions and ambiguities count against
inferring scienter,” and fE1 ‘s statement provides no particular facts about the summary audit.
See Tellabs, Inc., 551 U.S. at 326)°
Plaintiffs also contend that scienter can be inferred from the importance of SEZ licenses
to Cognizant’s business model. The Third Circuit has recognized that under the “core
operations” doctrine, material misrepresentation concerning “core matters” particularly
important to the corporate defendant may give rise to an inference of scienter. See Avaya, 564
F.3d at 271.
The Plaintiffs do not benefit from the “core operations” doctrine. Even if SEZ licenses
were utilized by some of Cognizant’s larger India facilities, the licenses themselves are not a
“core operation” of Cognizant’s business. In In re Campbell Soup Co. Securities Litigation, 145
F. $upp. 2d 574, 599 (D.N.J. 2001) the court held that “U.S. soup sales” was a “core operation”
of Campbells Soup. Here, the “core operations” would be Cognizant’s IT campuses, not the
licenses granting them tax and regulatory benefits. Further, the improper payments here involved
only “a small number of Company-owned facilities.” Brown DecI. Ex. B, ECF No. 42-4 (quoting
September 30, 2016 8-K).

Plaintiffs’ reliance on Eletrobras, 245 F. Supp. 3d at 468 and similar cases is
unavailing. In those cases, the plaintiffs alleged that the defendants had actually received an audit
report containing the pertinent information not that the defendants “would have” received a
summary of an audit report that “would have” included it.
10

—

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More importantly, this Court will not infer scienter under the “core operations” doctrine
without other particularized facts about specific information conveyed to management. See
Rahman v. Kid Brands, Inc., 736 F.3d 237, 246 (3d Cir. 2013) (emphasizing that Avaya had
“limited precedential value,” and rejecting “core operations” argument because the allegedly
misleading statements were not made in response to “pointed inquiries from analysts”). The
Amended Complaint does not allege that there were “pointed inquiries from analysts” about the
propriety of $EZ acquisitions, or that there was any specific information conveyed to D’Souza or
McLoughlin about the misconduct. See In re Amarin Corp. PLC, No. 13-cv-6663 (FLW)(TJB),
2015 WL 3954190, at *12 (D.N.J. Jun. 29, 2015) (“While it is true that false or misleading
statements by key executives regarding a company’s lead product or core business practices will
weigh in favor of finding a strong inference of scienter, tcourts] will not make such an inference
absent particularized allegations showing that defendants had ample reason to know of the falsity
of their statements.” (citations and internal quotation marks omitted)); Nat’l Junior Baseball
League v. PharmaNetDev. Grp., Inc., 720 F. Supp. 2d 517, 556 (D.N.J. 2010) (rejecting core
operations doctrine in the absence of “other individualized allegations”); cf In re Campbell Soup
Co. Sec. Litig., 145 F. Supp. 2d at 599 (discussing “core operations” doctrine, but going on to
state “[m]ore importantly, though, Plaintiffs identify specific circumstances under which
Defendants.

.

.

had access to and received [the pertinent] information”).

The six-year duration of the alleged bribery scheme also does not give rise to a strong
inference that D’Souza and McLoughlin were aware of the misconduct. Any inference that could
be drawn from the duration of the misconduct must be commensurate with its scope. See In re.
Dell Inc. Sec. Litig., 591 F. Supp. 2d 877, 894—95 (W.D. Tx. 2008) (“Th[e fact that the
accounting errors covered a four year period] would tend to weigh in favor of inferring scienter.

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However, the magnitude of the errors was quite small.”). Per Cognizant’s statements, only a
“small number” of facilities were affected, and the amended complaint does not contain any
specific allegations about the number of improperly-acquired $EZ licenses. Any inference that
Defendants D’Souza or McLoughlin would have discovered the bribery because of its duration is
further weakened by Cognizant’s statement that the perpetrators “over[ode] or fail[ed] to
enforce” the internal controls that may otherwise have uncovered the misconduct. Am Compl.

¶

84; Brown Deci. Ex. B; see City ofRoseville Emps. ‘Ret. Sys., 442 F. App’x 672, 675 (3d Cir.
2011) (finding no scienter as to senior management, even though the misconduct occurred over a
six-year period and involved an important aspect of the corporation’s business). Again, the
inference of scienter is outweighed by the nonculpable inference that the perpetrators
successfully concealed the misconduct until it was discovered and disclosed in September 2016.
The last argument concerning D’Souza and McLoughlin is that the SOX certifications
themselves give rise to an inference of scienter. Pls.’ Opp. at 75—76. Plaintiffs argue that scienter
can be inferred because the Individual Defendants certified that they had “evaluated the
effectiveness” of the company’s internal controls, which were ineffective. Again, this argument
fails in the overall context of the complaint. There are no particularized allegations about
D’$ouza or McLoughlin’s knowledge, and there is a strong competing inference that the
perpetrators of the bribery were successful in concealing their conduct from those who tried to
detect it

—

McLoughlin and D’ Souza included. There is an alternative theory to the one proposed

by Plaintiffs: “that Defendants undertook the design and evaluation of [the Company’s] control,
as they certified, and designed the system which, at the point of design and implementation,
appeared to be adequate but, eventually, proved to be insufficient.” In re Intelligroup Sec. Litig.,
527 F. Supp. 2d 262, 352 (D.NJ. 2007).

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Viewing the allegations of the Amended Complaint holistically, the facts alleged do not
give rise to a strong inference of scienter as to Defendants D’Souza and McLoughlin. The
Section 10(b) claims are consequently dismissed as to these two Individual Defendants.
ii. Additional Scienter Allegations
Having found that neither Defendant D’Souza nor Defendant McLoughlin have been
shown by the Amended Complaint to have had scienter at the time the statements were made, the
Court now turns to Plaintiffs’ additional arguments. Plaintiffs assert that scienter is adequately
pled as to Defendant Coburn because he resigned, possibly without severance, shortly after the
announcement of the internal investigation. Pls.’ Opp. at 59. Plaintiffs also contend that scienter
is adequately pled because the company admitted that members of senior management were
involved in the alleged bribery scheme, and that the Court may impute the scienter of senior
management to the corporation. Plaintiffs assert that there is “no requirement that the same
individual who made the alleged misstatement on behalf of a corporation personally possessed
the required scienter.” In re Marsh & Mclennan Cos., Inc. Sec. Litig., 501 F. Supp. 2d 452, 481
(S.D.N.Y. 2006).
Defendant Coburn argues that the Amended Complaint fails to adequately allege that he
participated in the alleged bribery scheme. Cobum Br. at 24. Cognizant Defendants argue that
even if Cobum had the requisite scienter, the amended complaint does not allege that he made
any material misstatements. Cognizant Br. at 38.
The Court will first consider whether Plaintiffs have adequately alleged that Defendant
Coburn had the requisite scienter. Next, the Court will consider whether the facts of the
complaint, taken together, give rise to a strong inference of scienter as to the corporation.

62

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1. Scienter as to Defendant Coburn
pant in
The Amended Complaint sufficiently alleges that Defendant Coburn was a partici
ents touting $EZ
the bribery scheme and, consequently, that he had actual knowledge that statem
were false and
licenses, touting compliance procedures, and misrepresenting financial statements
ant Coburn
misleading. The Amended Complaint contains various allegations regarding Defend
the PSLRA
which, taken together, are sufficient to meet the heightened pleading requirement of
and Rule 9(b) as set out by the Supreme Court in Tellabs, 551 U.S. 30$.
re as
The Amended Complaint contains a series of allegations regarding Coburn’s departu
Compl.
President immediately following the announcement of the bribery scheme. E.g., Am.

¶J

the corruption
76—81, 8$. These allegations say that Defendant Coburn abruptly resigned amidst
investigation. Id.

¶ 76.

Cognizant announced Coburn’s resignation in the same 8-K filing that

announced the internal investigation and the possible FCPA violations. Id.

¶ 75—76. Following

appeared to be
Coburn’s resignation, analysts commented that the departure was unexpected and
d
related to the internal investigation, and further noted that he did not appear to have receive
severance. Id.

re as

¶J 77—81; see Id. ¶77 (noting that analyst referred to Cobum’s departu

rs that
“blockbuster news”). Three days after Coburn resigned, Defendant D’Souza told investo
] are no
“those [members of senior management] who may have been involved [with the bribery
longer with the company.” Id.

¶ $7.

The Amended Complaint also contains statements by two additional confidential
ant’s
witnesses, FF3 and FE4. The Amended Complaint alleges that FE3 served as Cogniz
that
Infrastructure Team Lead from July 2015 through January 2016, and that he/she stated
Id.
Coburn was the “responsible authority” for overseeing Cognizant’s leases in India.
Amended Complaint alleges that FE4 served as Associate Director

63

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¶ 74. The

Strategic Sourcing from

NOT FOR PUBLICATION
September 2011 to March 2015, and that he/she stated that Coburn was “involved directly” in
real estate transactions, and that “[h]e used to take a special interest.” Id.
This Court finds that the facts alleged give rise to a strong inference of scienter. The
resignation of a member of senior management in the midst of an internal investigation can be
indicative of scienter. See Southeastern Pa. Transp. Auth. v. Orrstown fin. Servs., Inc., No. 12cv-00993, 2016 WL 466958, at *5 (M.D. Pa. Feb. 8, 2016); In re Par Pharm. Sec. Litig., 2009
WL 3234273, at *10.
To be sure, resignation of corporate officers around the time of an internal investigation
or the announcement of corporate misconduct alone is not sufficient to give rise to a strong
inference of scienter. In reHertz Global Holdings, Inc. Sec. Litig., No. 13-7050, 2017 WL
1536223, at *20 (D.N.J. Apr. 27, 2017) (“The Third Circuit and other courts have found
resignations of key officers to be insufficient to show that they acted with the requisite scienter to
commit the alleged fraud.” (citations omitted)). There are many possible motivations for
employees to resign in these circumstances that are not indicative of participation in wrongdoing.
Plaintiffs must therefore plead facts to “reflit[e] the reasonable assumption that [the defendant’s
employee] was simply fired because the errors.

.

.

occurred on his watch or because he

adequately failed to supervise his department.” In re US. Aggregates, Inc. Sec. Litig., 235 F.
Supp. 2d 1063, 1074 (N.D. Cal. 2002); see In re Great Atlantic & Pacific Tea Co., Inc. Sec.
Litig., 103 F. App’x 465, 470 (3d Cir. 2004) (“Other than a conclusory statement that nine
employees were fired as a result of the accounting irregularities, the complaint makes no specific
allegations regarding how these employees were involved in the accounting irregularities or
whether they knew that the accounting policies violated GAAP

64

.

.

.

NOT FOR PUBLICATION
Here, Plaintiffs have alleged specific facts to refute the nonculpable explanation. The
“reasonable assumption” that Coburn may have resigned because of his performance is rebutted
by Cognizant’s public admission that members of senior management participated in or failed to
uncover the bribery. Three days later, Defendant D’Souza stated that those senior-manager
participants had resigned. Further, the resignation was announced in the same public filing that
announced the misconduct, not weeks or months after. Cf In re Hertz Global Holdings, Inc.,
2017 WL 1536223, at *20 (finding resignations insufficient evidence of scienter when one
employee resigned the day before the announcement, and others resigned weeks or months later).
Former employees have also stated that Defendant Cobum had a special interest in real
estate. The Court will consider the statements of the former employees, but will discount them

greatly. Considering the Chubb factors, neither employee provided any detail about Cobum’s
involvement in SEZ procurement. There are no corroborative facts about Cobums’ involvement
or interest in Indian land acquisition, and moreover, nothing connecting his interest in Indian
land acquisition in general with the specific improper acquisition of $EZ licenses. Still, even
given this discount, the former employees’ statements provide further allegations that Defendant
Cobum was involved in real estate, adding to the inference that he was a participant in the
alleged bribery scheme.
As the District of Delaware has explained, to find a strong inference of scienter “there
must be some reason to believe that the resignation was actually connected to the fraud.” City of
RosevilleEmps. ‘Ret. Sys., 713 F. Supp. 2d 37$, 39$ (D. Del. 2010), aff’d 442 F. App’x 672 (3d
Cir. 2011). Here, that connection is provided by Cognizant’s public statements implicating senior
management in the bribery and announcing their departure three days after Defendant Cobum
resigned. Given these circumstances, the inference that Cobum was a participant in the bribery is

65

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e of poor
“cogent and at least as compelling” as the nonculpable inference that he resigned becaus
performance or unfortunately serendipitous timing. Tellabs, 551 U.S. at

324.11

2. Scienter as to Defendant Cognizant

ant
Having found that the Amended Complaint adequately alleges scienter as to Defend
in
Cobum, the Court must now determine what role, if any, his mental state may serve
when
establishing scienter as to the corporate defendant. Courts are divided on whether and
ions as to the
scienter is adequately alleged as to a corporation in the absence of scienter allegat

and Seventh
individual who made the material misstatement. Some courts, including the Second
that
Circuits, have held adopted a theory of “collective” or “corporate” scienter and held
if they do not
allegations can give rise to a strong inference of scienter as to the corporation even
tement.
give rise to an inference of scienter as to the individual who uttered the material missta
d 190, 195
See Teamsters Local 445 freight Div. Pension fund v. Dynex Capital Inc., 531 F.3
(“There are
(2d Cir. 2008); see In re Marsh & Mclellan Co., Inc. Sec. Litig., 501 F. Supp. at 482
avior of the
sufficient allegations regarding the pervasiveness of the fraud, the conscious misbeh
that [the
particular corporate employees, and the complicity of the corporate entities to find
duct.
corporate defendantj was aware of or recklessly disregarded the intentional miscon

.

.

collective
The Ninth Circuit has also acknowledged that “in some circumstances, some form of
(9th
scienter might be appropriate.” Glazer Capital Mgmt., LP v. Magistri, 549 F.3d 736, 745
Cir. 2008). The oft-cited example from the Seventh Circuit is:
Suppose General Motors announced that it had sold one million SUVs in 2006,
and the actual number was zero. There would be a strong inference of corporate
scienter, since so dramatic an announcement would have been approved by
corporate officials sufficiently knowledgeable about the company to know that the
l
Additionally, in City ofRoseville Emps. ‘Ret. Sys., 713 F. Supp. 2d at 398, the interna
even
not
investigation was covert at the time of the resignation. The court consequently did
consider the evidence of the resignation.
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announcement was false.

Makor Issues & Rights, Ltd. v. Tellabs Inc., 513 F.3d 702, 710 (7th Cir. 2008).
Other courts have held to the contrary, and require a strong inference of scienter as to
“the individual corporate official or officials who make or issue the statement.

.

.

rather than

generally to the collective knowledge of all the corporation’s officers and employees.” Soztthland
Sec. Corp. v. INSpire Ins. Solutions, Inc., 365 F.3d 353, 366 (5th Cir. 2004); see Phillips v.
Scient,flc-Attanta, Inc., 374 f.3d 1015, 1017 (11th Cir. 2004).
The Sixth Circuit has taken a “middle ground” approach, and will consider the mental
state of”a. the individual who uttered the misrepresentation; b. any agent who authorized,
commanded, furnished information for, prepared.

.

.

,

reviewed, or approved the statement; and

c. any high managerial agent or board member who ratified, recklessly disregarded, or tolerated
the misrepresentation after its utterance or issuance.” In re Omnicare, Inc. Sec. Litig., 769 F.3d
455, 476 (6th Cir. 2014).
The Third Circuit has not squarely decided the issue, but addressed it in City ofRosevitle
Employees ‘Retirement System. v. Horizon Lines, Inc., 442 F. App’x 672, 676 (3d Cir. 2011).
There, senior corporate executives had made material misstatements involved a price-fixing
scheme which was carried out by company managers in Puerto Rico. The court affirmed the
district court’s dismissal, reasoning that although “the Puerto Rico managers acted with scienter,
they did not make material false statements on which plaintiff relied.” Id. at 674, 676
(emphasis in original). The court went on to say that it need not consider whether scienter could
otherwise be pled against the corporation, because “the facts pled here are a far cry from those in
Bridgestone or in the Seventh Circuit’s hypothetical.” Id. at 676—77. It therefore did not reject or
adopt a theory of corporate scienter that would allow liability when scienter was not alleged as to

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an individual who made the material misstatement. The court indicated that if such a theory were
viable, it would be in an instance of pervasive corporate misconduct, or blatantly false
statements. See Id.; see also Rahman, 736 f.3d 237, 246 (3d Cir. 2013) (declining to accept or
reject “collective or corporate scienter” doctrine, finding standard was not met because plaintiffs
failed to allege widespread corporate misconduct or a corporate cover-up).
Under any approach, at the summary judgment stage, “[t]o prove liability against a
corporation, of course, a plaintiff must prove that an agent of the corporation committed a
culpable act with the requisite scienter, and that the act (and accompanying mental state) are
attributable to the corporation.” Dynex Capital Inc., 531 f.3d at 195. The primary difference
appears to be that in the narrower approach adopted by the Fifth Circuit, plaintiffs must identify
an individual in the complaint who was responsible for the misstatement and also had the
requisite mental state. See Southland Securities, 365 F.3d at 367 (noting that “the Complaint
does not assert that any particular individual INSpire director, officer, or employee” acted with
scienter). Under the “middle ground” Sixth Circuit approach, a plaintiff may plead scienter as to
the individual who made the statement, or an individual who was closely connected to the
statement (based on an enumerated list). In the broader approach adopted by the Second,
Seventh, and Ninth Circuits, plaintiffs may survive a motion to dismiss even if the individual
who acted with scienter remains identified if there is sufficient circumstantial evidence to create
a strong inference that such an individual exists.
The Court declines to adopt the narrow approach of the Fifth Circuit. The Fifth Circuit
approach allows corporations to “evad{e] liability through tacit encouragement and willful
ignorance,” Omnicare, 769 F.3d at 476, and fails to address instances “where widespread
corporate fraud cannot be connected to individual defendants at the pleading stage.” In re Marsh

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No. 15-703 (JLL),
& Mctellan Cos., Inc. Sec. Litig., 501 F. $upp. 2d at 481—82; see Sun v. Han,
As the Supreme
2015 WL 9304542, at *12 (D.N.J. 2015) (adopting Second Circuit approach).
come forward
Court has directed, “strong inference” of scienter does not require plaintiffs to
with a “smoking gun.” Tettabs. Inc., 551 U.S. at 324.
r
Under either the “middle ground” approach articulated in Omnicare, or the broade
Court finds that
“corporate scienter” approach adopted in the Second and Seventh Circuits, this
r as to the
Plaintiffs have alleged sufficient facts to give rise to a strong inference of sciente
corporate Defendant.
r
Under the “middle ground” approach of the Sixth Circuit, Defendant Coburn’s sciente
may be imputed to the corporation because he is a “high managerial agent.

.

.

who ratified,

ce.”
recklessly disregarded, or tolerated the misrepresentation after its utterance or issuan
stone Corp.,
Omnicare, 769 F.3d at 476; see City ofMonroe Emps. Retirement System v. Bridge
scienter as
399 F.3d 651 (6th Cir. 2005) (imputing knowledge of CEO to corporation and finding
misstatement).
to corporation, but dismissing claim against CEO because he had not uttered a

12

filings between
According to the Amended Complaint, Cognizant touted its SEZ licenses in SEC
ability
February 2015 and August 2016, touted its internal compliance measures in Sustain
the Class
Reports in June 2015 and August 2016, and misstated its earnings each year during
various public
Period. The misstatements were repeated over the course of multiple years in
nt of the
filings. While this was occurring, the Amended Complaint alleges that the preside
king bribes as
company was facilitating an ongoing bribery scheme in India, involving misboo

The Omnicare court limited the holding of Bridgestone, but upheld the decision
our rule.”
because “that case turned on the CEO’s knowledge, a person included in part C of
Coburn’s scienter may be
Omnicare, 769 F.3d at 476. The Court finds that the Defendant
are.
imputed to the corporate defendant under Bridgestone, even as limited by Omnic
12

69

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capital expenditures, and concealing his conduct from others within the company. There is a
strong inference that as President of the company, Defendant Cobum either had a role in
preparing the statements at issue or that, if he did not actually participate in their preparation, he
became aware that they misstated earnings and touted SEZ licenses and internal compliance
measures, but nevertheless “tolerated the misrepresentation.” Omnicare, 769 F. 3d at 476; see Li
v. Aeterna Zentaris, Inc., No. 3:14-7081, 2016 WL 3583821, at *4 (D.N.J. Jun. 30, 2016)
(imputing knowledge of CEO and President to corporation); In re NUISec. Litig., 314 F. Supp.
2d 388, 410—13 (D.N.J. 2004) (imputing knowledge of general counsel to corporation).
Furthermore, this Court finds that Plaintiffs have adequately alleged scienter under the
broader approach of the Second, Seventh, and Ninth Circuits. The alleged bribery scheme was
widespread throughout the company and involved multiple personnel. The Amended Complaint
alleges that the misconduct involved the company President, and by Cognizant’s own admission
it involved other members of senior management. See In re Braskem S.A. Sec. Litig., 246 F.
$upp. 3d at 765 & n.14 (citing In re Marsh & liclellan Cos., 501 F. $upp. 2d at 481) (finding
scienter as to corporate defendant when complaint alleged that corporate executives participated
in misconduct). The alleged bribery scheme did not involve a limited group of rogue employees
perpetuating fraud and concealing it from corporate management, but instead was a pervasive
operation extending from senior management itself.
The alleged involvement of senior management and the company President distinguish
this case from the cases in which the Third Circuit has declined to adopt or reject the corporate
scienter theory. City ofRosevitle Employees Retirement System, 442 F. App’x 672 involved a
‘

price-fixing scheme carried out by the corporation’s Puerto Rico division by three individuals
referred to by the court as the “Puerto Rico managers.” The material misstatements were made

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who were unaware of
by a different group of defendants referred to as the “senior executives”
237 (3d Cir. 2013),
the misconduct. Id. at 673. Similarly, Rahman v. Kid Brands, Inc., 736 F.3d
ate defendant’s whollyinvolved customs violation carried out by employees at one of the corpor
had not been adequately
owned subsidiaries. In both cases, the Third Circuit found that scienter
alleged, leaving open the question of “collective scienter.”
management that
Both City ofRoseville and Rahman involved statements made by senior
yees. Application of
were later discovered to be untrue because of the misconduct of rogue emplo
no sense to describe
collective scienter under those circumstances would be improper; it makes
r employee was aware
an officer’s innocently-made statement as “fraud” merely because anothe
of facts rendering the statement misleading.
inference that
On the other hand, when there is circumstantial evidence creating a strong
, the “collective
someone involved in the making of the misstatement was aware of its falsity
example, in the
scienter” theory is appropriate to allow plaintiffs to proceed to discovery. As
ted to the statement
Seventh Circuit hypothetical, it is permissible to infer that someone connec
e the statement is so
that General Motors sold “zero” $UVs was aware that it was false becaus
Glazer Capital Mgmt.,
obviously untrue. See Makor Issues & Rights, Ltd., 513 F.3d at 710; see
public statements were so
549 F.3d at 744 (“[T]here may be circumstances in which a company’s
ce that at least some
important and so dramatically false that they would create a strong inferen
l)). Similarly, in
corporate officials knew of the falsity upon publication.” (emphasis in origina
the statement would
cases of pervasive fraud, it may be proper to infer that someone making
nt throughout the
have been aware of the wrongdoing because it would be readily appare
at 482.
company. See In re Marsh & Mclellan C’o., Inc. Sec. Litig., 501 F. Supp. 2d

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circumstantial
Here the President’s alleged involvement in the misconduct provides such
g of the 10-K and the
evidence. There is a strong inference that someone involved with the makin
d multiple
Sustainability Reports knew of their falsity. The alleged bribery scheme require
of senior
employees across the globe and involved the President and other members
senior management
management. It is highly unlikely that not one of these multiple members of
al statements, SEC
or the President were aware of or participated in the preparation of financi
filings, or Sustainability Reports.
edge of
The Court emphasizes that corporations may not be held liable for the knowl
ering the
every employee, or even every member of senior management. However, consid
licenses to the
breadth and duration of the alleged bribery scheme, the importance of SEZ
ed members of
company, and the alleged involvement of Defendant Cobum and other unnam
ate defendant.
senior management, there is a strong inference of scienter as to the corpor
Defendant’s motion to dismiss as to Defendant Cognizant is denied.
II.

Section 20(a)

part of one
Section 20(a) of the Exchange Act “imposes joint and several liability on the
15 U.S.C.
who controls a violator of Section 10(b).” Suprema, 438 F.3d at 284 (citing
To maintain a claim under

§ 78t).

§ 20(a), the plaintiffs must establish (1) an underlying violation by

a

that they were “in
controlled person or entity, (2) that the defendants are controlling persons, and
lled persons.”
some meaningful sense culpable participants in the fraud perpetrated by contro
omitted))3
Rochez Brothers, Inc. v. Rhoades, 527 F.2d 880, 885 (3d Cir.1975) (citation

circuit as
The Court notes that there is disagreement between district courts within this
dismiss. Compare In
to whether “culpable participation” must be alleged to survive a motion to
ing that plaintiffs
re Cendant Corp. Sec. Litig., 76 F. Supp. 2d 539, 549 (D.N.J. 1999) (requir
145 F. Supp. 2d at 600
plead culpable participation), with In re Campbell Soup Co. Sec. Litig.,
Belmont v. MB mv.
(not requiring culpable participation allegations at pleading stage); see also
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Having found an underlying violation by Cognizant, the only question is whether the
Individual Defendants D’Souza, McLougfflin, and Cobum are “controlling persons” who were
“culpable participants” in the fraud.
The Court finds that the Amended Complaint adequately alleges that all three Individual
Defendants are “controlling persons” for purposes of Section 20(a) by virtue of their positions as
the highest ranking executives of Cognizant.
The Court also finds that the Amended Complaint adequately alleges that Defendant
Cobum was a culpable participant, for the reasons that gave rise to a strong inference of scienter.
However, the Amended Complaint fails to allege that Defendant D’Souza or McLoughlin were
culpable participants. See Lapin, 506 F. Supp. 2d at 248—49 (dismissing Section 20(a) claim
against individual defendants for failing to plead culpable participation). The Court therefore
grants the motion to dismiss the Section 20(a) claims against Defendants D’Souza and
McLoughlin, and denies the motion to dismiss as to Defendant Cobum.
III.

Plaintiffs are entitled to amend their complaint.

If a complaint fails to state a claim upon which relief can be granted, a plaintiff should
ordinarily be granted the right to amend his complaint. The Supreme Court has instructed that:
The grant or denial of an opportunity to amend is within the discretion of
the District court, but outright refusal to grant the leave without any
justifying reason. is not an exercise of discretion; it is merely abuse of
that discretion and inconsistent with the spirit of the Federal Rules.
.

.

Foman v. Davis, 371 U.S. 178, 182 (1962). In the Third Circuit, plaintiffs whose complaints fail
to state a cause of action are entitled to amend their complaint unless doing so would be
inequitable or futile. Fletcher-Harlee Corp. v. Pote Concrete Contrs., Inc., 482 F.3d 247, 252

Partners, Inc., 708 F.3d 470, 484 n.20 (3d Cir. 2013) (discussing the disagreement between
district courts on the requirement).
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(3d Cir. 2007). In Shane v. fauver, 213 F.3d 113 (3d Cir. 2000), the Third Circuit stated:
[W]e suggest that district judges expressly state, where appropriate, that the
plaintiff has leave to amend within a specified period of time, and that application
for dismissal of the action maybe made if a timely amendment is not forthcoming
within that time. If the plaintiff does not desire to amend, he may file an
appropriate notice with the district court asserting his intent to stand on the
complaint, at which time an order to dismiss the action would be appropriate.
Slzane, 213 F. 3d at 116 (citing Borelli v. City ofReading, 532 F.2d 950, 951 n.1 (3d Cir. 1976)).
Allowing Plaintiff to seek to amend the complaint in this case is appropriate. Plaintiffs
have adequately alleged violations of Section 10(b) and Rule 1 Ob-5 as to Defendant Cognizant
and Section 20(a) as to Defendant Cobum. Plaintiffs are granted forty-five (45) days to seek to
amend their complaint, if they wish.

CONCLUSION

The Court dismisses the claims based on Cognizant’s Code of Conduct and
Anticorruption Policy, the statements touting low-cost services and attributing the company’s
financial results to legitimate business factors, and the SOX certifications. Am. Compl.

¶ 122—

2$, 132—35, 140—208, 210—12. Further, because Plaintiffs failed to allege that Defendant Cobum
made any material misstatement, the claims against him under Section 10(b) are dismissed. That
dismissal is with prejudice.
Because Plaintiffs have failed to allege scienter or culpable participation on the part of
Defendants D’Souza and McLoughlin, the claims against them are dismissed without prejudice.
The Court denies Defendants’ motions to dismiss as to the balance of the claims.

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Plaintiffs are granted leave to seek to amend their complaint within 45 days of the date of
this opinion. An appropriate order follows.

DATE:

Senior United States District Court Judge

75