CHRISTIAN v. BT GROUP PLC et al
OPINION. Signed by Judge Kevin McNulty on 4/24/2020. (dam, )
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UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF NEW JERSEY
JAMES CHRISTIAN, individually
and on behalf of all others similarly
Civ. No. 17–497 (KM) (JBC)
BT GROUP PLC, GAVIN E.
PATTERSON, IAN LIVINGSTON,
TONY CHANMUGAM, LUIS ALVAREZ,
and NICK ROSE
KEVIN MCNULTY, U.S.D.J.:
Plaintiffs bring a putative securities class action under Section 10(b) of
the Securities Exchange Act and Rule 10b-5 against BT Group PLC and several
high-ranking individuals associated with that company. Plaintiffs allege that
defendants were knowledgeable—or reckless in their ignorance of—fraudulent
practices in one of BT Group PLC’s many subsidiaries, BT Italy. According to
Plaintiffs, Defendants made materially false or misleading statements; Plaintiffs
relied on those statements when investing in BT Group securities; and
Plaintiffs allegedly were damaged as a result. Now before the court is
Defendants’ motion to dismiss the fourth amended complaint for failure to
state a claim. (DE 68). 1 See Fed. R. Civ. P. 12(b)(6). Defendants argue that
Plaintiffs have failed to plead scienter and that the individual defendants did
not make misleading statements.
For the reasons stated below, Defendants’ motion to dismiss the
complaint is GRANTED.
“DE __” refers to the docket entries in this case.
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I write for the parties; familiarity with the matter, and particularly with
my earlier opinion (DE 40) dismissing the first amended complaint, is
assumed. I will, however, summarize the developments between the first and
fourth amended complaints, including the procedural history and the new
On August 1, 2018, this Court issued an opinion and order dismissing
Plaintiffs’ first amended complaint for failing to meet the heightened pleading
standard required by the Private Securities Litigation Reform Act of 1995
(“PSLRA”), 15 U.S.C. § 78u-4(b). (DE 40 & 41).
On October 1, 2018, Plaintiffs filed a second amended complaint. (DE
47). Defendants moved to dismiss that complaint. (DE 48). On December 28,
2018, with the parties’ consent, Plaintiffs filed a third amended complaint,
which added BARC Chairman Nick Rose as an individual defendant, but was
otherwise substantially identical to the second amended complaint. (DE 54).
Defendants moved to dismiss that complaint as well. (DE 55).
After that motion to dismiss was fully briefed, Plaintiffs filed several
letters with the Court that “purport[ed] to supplement the complaint’s
allegations.” (Memo & Procedural Order, DE 64 at 1). Although the Court found
that Defendants’ motion to dismiss could not “be defeated by the belated
submission of additional facts and evidence outside the four corners of the
complaint,” the Court found it likely that “even if the third amended complaint
were dismissed on an as-is basis, the plaintiffs would move to amend it to
incorporate their supplemental allegations.” (Id.). To avoid “wast[ing] the
resources of the parties or the court,” the Court administratively terminated
defendants’ motion to dismiss and granted Plaintiffs leave to file another
amended complaint within thirty days. (Id. at 1–2.)
On August 16, 2019, Plaintiffs filed a fourth amended complaint, which
added new allegations and Section 10(b) claims against Luis Alvarez and
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Richard Cameron.2 (DE 65). The new allegations of the fourth amended
complaint are as follows.
1. “[A]t the start of 2016, [BT Group] received reports of bullying cases at
BT Italy, in response to which senior Human Resources officials visited
the Italian offices and investigated,” and despite this, individual
defendant Rose “stated in BT Group’s 2016 Annual Report [that it]
continued to monitor [its] operations in Italy and progress has been
made to improve the control environment” (DE 65¶¶ 11, 83, 273 &
2. Anonymous BT Italy sources told Reuters that “it would be impossible
that London had no way of realizing what was happening in Italy and
. . . for an auditor not to realize that something was amiss” (DE 65 ¶¶ 5,
93, 270 & 280(f));
3. According to news articles, BT Italy’s former CEO and CFO announced
that BT Italy financial transactions were verified and authorized by BT
Group (DE 65 ¶¶ 5, 92 & 266);
4. Italian prosecutors identified defendants Alvarez and Cameron as
“suspects in the criminal case” and accused them of “setting
unrealistically high business targets and of complicity in false
accounting at BT Italy” (DE 65 ¶¶ 98–99 & 253); and
5. An internal report by KPMG shows that “executives at BT global services
did not sufficiently challenge numbers submitted by Italian staff,”
“inquiries from London were ignored or met by [unsatisfactory]
responses,” and “global services staff often failed to follow through to get
answers” (DE 65 ¶¶ 12 & 113).
Also newly alleged is the scienter of two individual defendants:
Cameron is a new defendant. Alvarez has been a defendant from the outset, but
Plaintiffs had not previously alleged a Section 10(b) claim against him.
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6. Plaintiffs reiterate their earlier claim that “BT Group applied the malus
provisions to all of [former BT Group CFO Tony] Chanmugam’s Deferred
Bonus Plan (‘DBP’) awards.” (DE 65 ¶ 7; see also DE 35 at 1–2).
7. Plaintiffs also allege that “Chanmugam was either fired or preemptively
quit in July 2016 in connection with BT Group’s internal investigation of
BT Italy.” (DE 65 ¶¶ 7, 128–31, 272 & 280(g)).
8. Plaintiffs allege that Alvarez sold BT Group shares worth approximately
£675,000 in December 2016. (DE 65 ¶¶ 101 & 254).
The fourth amended complaint relies on six news articles which,
according to Plaintiffs, demonstrate Defendants’ scienter. They are:
1. Reuters, “EXCLUSIVE - BT Italia, from the ‘sink’ to ‘double billing’ on its
balance sheets. First Sos [sic] in November 2015” (September 27, 2018)
(translated from Italian) (DE 65-1). The article cites a KPMG report of BT
Group and anonymous sources who questioned BT Italy’s accounting
practices and discusses
2. Reuters, “Exclusive: BT executives knew of accounting fraud in Italy unit
– prosecutors” (undated). (DE 65-2). The article describes a report
produced by Italian prosecutors investigating BT Italy.
3. The Telegraph, “Former BT bosses named as suspects in Italian fraud
scandal” (February 13, 2019). (DE 65-3). The article alleges that Alvarez,
Cameron, and non-defendant Corrado Sciolla—the Global Services
officer who oversaw operations on the continent—knew of the ongoing
fraud at BT Italy.
4. Reuters, “Exclusive: British Telecom’s Italian job had London roots, say
investigators” (undated). (DE 65-4). The article describes the Italian
prosecutors’ report and emails from non-defendant Brian More
O’Ferrall—BT Wholesale’s finance director—that Plaintiffs allege
demonstrate Defendants’ knowledge of ongoing fraud.
5. Reuters, “BT Italia inquiry, former CFO and email point to top
management” (April 23, 2019) (translated from Italian). (DE 65-5). The
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article describes the accusations of Luca Sebastiani, BT Italy’s former
6. Daily Mail, “British chiefs in firing line over BT accounting fraud scandal
in Italy” (April 28, 2019). (DE 65-6). The article describes BT Group’s
internal review of the fraud scandal that was memorialized, but never
published, in a report by KPMG.
A. Standard of Review
Federal Rule of Civil Procedure 12(b)(6) provides for the dismissal of a
complaint, in whole or in part, if it fails to state a claim upon which relief can
be granted. The moving party bears the burden of showing that no claim has
been stated. Hedges v. United States, 404 F.3d 744, 750 (3d Cir. 2005). In
deciding a motion to dismiss under Rule 12(b)(6), a court must take all
allegations in the complaint as true and view them in the light most favorable
to the plaintiff. See Warth v. Seldin, 422 U.S. 490, 501 (1975); Phillips v. County
of Allegheny, 515 F.3d 224, 231 (3d Cir. 2008).
A plaintiff asserting securities-fraud claims pursuant to Section 10(b) of
the Securities Exchange Act and Rule 10b-5 must meet the heightened
pleading standard as set forth in the Private Securities Litigation Reform Act of
1995 (“PSLRA”). 15 U.S.C. § 78u-4(b). Under the PSLRA, a complaint alleging a
false or misleading statement must: “(1) ‘specify each statement alleged to have
been misleading [and] the reason or reasons why the statement is misleading,’
15 U.S.C. § 78u-4(b)(1), and (2) ‘state with particularity facts giving rise to a
strong inference that the defendant acted with the required state of mind,’ Id.
§ 78u-4(b)(2).” Rahman v. Kid Brands, Inc., 736 F.3d 237, 241-42 (3d Cir. 2013)
(quoting Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 321 (2007))
(internal quotations omitted). The required state of mind is “scienter,” which is
defined as “a mental state embracing intent to deceive, manipulate, or
defraud.” Tellabs, 551 U.S. at 319.
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That PSLRA “particularity” standard has elements in common with the
pleading requirements for fraud set forth in Federal Rule of Civil Procedure
9(b). See Institutional Investors Group v. Avaya, Inc., 564 F.3d 242, 253 (3d Cir.
2009); see also Fed. R. Civ. P. 9(b) (“In alleging fraud or mistake, a party must
state with particularity the circumstances constituting fraud or mistake.”).
Rule 9(b), however, is both subsumed and supplemented by the requirements
of Section 78u-4(b)(1) of the PSLRA. Id. (citing Miss. Pub. Emps. Ret. Sys. v.
Boston Scientific Corp., 523 F.3d 75, 85 n.5 (1st Cir. 2008)). Like Rule 9(b), the
PSLRA requires that a plaintiff plead the “who, what, when, where and how.”
Id. Section 78u-4(b)(1) adds a specialized requirement, however, where “an
allegation regarding [a defendant’s] statement or omission is made on
information or belief.” Id.; see also 15 U.S.C. § 78u-4(b)(1). In such a case, a
plaintiff must “state with particularity all facts on which that belief is formed”;
that is, the complaint must “describe the sources of information with
particularity, providing the who, what, when, where and how of the sources, as
well as the who, what, when, where, and how of the information those sources
The PSLRA also exceeds the requirements for pleading scienter contained
in Rule 9(b), which permits such mental states to be alleged generally. Id. As
interpreted by the Supreme Court, the PSLRA requires that the facts pled give
rise to a “strong inference” of scienter. A court considering a motion to dismiss
for failure to plead scienter must weigh the “plausible, nonculpable
explanations for the defendant’s conduct” against the “inferences favoring the
plaintiff.” Tellabs, 551 U.S. at 323–24. A “strong inference” of scienter must
thus be “cogent and at least as compelling as any opposing inference of
nonfraudulent intent.” Id. at 314; see also id. at 324. “The inference that the
defendant acted with scienter need not be irrefutable, i.e., of the ‘smoking-gun’
genre, or even the most plausible of competing inferences.” (internal quotation
marks omitted)). The pertinent question is “whether all of the facts alleged,
taken collectively, give rise to a strong inference of scienter, not whether any
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individual allegation, scrutinized in isolation, meets that standard.” Id. at 322–
23; see also id. at 325 (“[T]he court’s job is not to scrutinize each allegation in
isolation but to assess all the allegations holistically.”). Omissions and
ambiguities “count against inferring scienter.” Id. at 326.
Those PSLRA pleading requirements apply whether the alleged
fraudulent statement at issue is an assertion of current fact or a prediction of
the future. Avaya, 564 F.3d at 253–54. However, when an allegation involves a
prediction, the safe-harbor provision of the PSLRA immunizes from liability any
forward-looking statement that “is identified as such and accompanied by
meaningful cautionary language; or is immaterial; or [where] the plaintiff fails
to show the statement was made with actual knowledge of its falsehood.” Id. at
254; see also 15 U.S.C. § 78u-5(c).
B. Section 10(b) and Rule 10b-5
Scienter of the Individuals Defendants
To state a claim for securities fraud under Section 10(b) of the Exchange
Act and Rule 10b-5, a plaintiff must allege: (1) a material misrepresentation or
omission; (2) scienter; (3) a connection between the misrepresentation or
omission and the purchase or sale of a security; (4) reliance upon the
misrepresentation or omission; (5) economic loss; and (6) loss causation. City of
Edinburgh Council v. Pfizer, Inc., 754 F.3d 159, 167 (3d Cir. 2014). As
discussed in detail above, the element of scienter must be pled with
particularity. Institutional Investors Group v. Avaya, Inc., 564 F.3d 242, 253 (3d
Defendants’ motion to dismiss the fourth amended complaint focuses on
the scienter element. As I must, I discuss the allegations one at a time. I have
considered them together, and in the context of the entire complaint. The
upshot is this:
The first amended complaint relied on three sets of scienter allegations.
First, Plaintiffs asserted that the Board Audit and Risk Committee knew of BT
Italy’s sustained problems but failed to stop the fraud and concealed the true
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extent of the problems. (DE 26 ¶ 193). Plaintiffs did not allege facts to support
this, and the committee’s disclosures do not support that assertion. Plaintiffs
also cited a March 2017 media report that in November 2015, BT Italy
employees told Jacinto Cavestany, BT Global Services’ Vice President of Iberia
and Head of Sales in Europe and Latin America, that BT Italy’s financial results
were being improperly calculated. (DE 26 ¶ 62). Factual substantiation of this
belated hearsay account was lacking; Cavestany denied it, and in any event
there is no allegation that he made any misleading public statement or
reported the conversation to anyone who did. Plaintiffs’ third approach was to
impute Defendants’ scienter from the undisputed fact that BT Italy had
engaged in intentional misconduct. (DE ¶¶ 65 & 68). This theory was undercut
by Plaintiffs’ other allegations that the fraud was conducted in secret.
Now, the fourth amended complaint supplements the scienter allegations
from several different angles, largely drawing on media accounts. Plaintiffs
again note that BT Group investigated reports of bullying and allege that this
demonstrates fraud. Plaintiffs also repeat the opinion of a “source” in a media
account that it would have been impossible for the parent company not to
know of the fraud at BT Italy. Plaintiffs rely on general statements of the
fraud’s perpetrators that transactions were approved by BT Group. Next,
Plaintiffs claim that a report by Italian prosecutors, which identified pressure
to meet high earnings goals, constructively alerted BT Group to the fraud.
Finally, Plaintiffs allege, based on public reporting of BT Group’s internal
review, that the parent company’s negligence and mismanagement
Concededly there was fraudulent conduct at the Italian subsidiary.
Indeed, the company’s public statements and accounting write-downs,
following investigation, admitted as much. The allegation here, however, is that
management, far from investigating and disclosing the misconduct, knew about
and purposely concealed the misconduct in order to defraud investors. There,
the allegations are lacking.
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“Bullying” and constructive awareness allegations
Plaintiffs’ allegations of bullying at BT Italy do not support a strong
inference of scienter, because they are not indicative of fraud. In any event,
they essentially recast the allegations already dismissed in the first amended
Bullying in the workplace bespeaks mismanagement, not fraud as such.
“[A]n allegation of mismanagement on the part of a defendant will not alone
support a claim under § 10(b) or Rule 10b–5.” Hayes v. Gross, 982 F.2d 104,
106 (3d Cir. 1992); see also In re Hertz Glob. Holdings, Inc. Sec. Litig., No. 137050, 2017 WL 1536223 at *16 (D.N.J. Apr. 27, 2017), aff’d, 905 F.3d 106 (3d
Cir. 2018). The cited bullying allegations are taken from a written statement
that BT issued to Reuters:
“Separately, [i.e., separate from the financial irregularities
discovered at BT Italy] we received reports of bullying cases at BT
Italy at the start of 2016. Senior Human Resources officials visited
the Italian offices and investigated. BT does not tolerate bullying or
violations of our policies and, as announced previously, a number
of senior managers at BT Italy have consequently left the group.”
[quoting BT Group statement.]
The investigators, say two sources with knowledge of the case, first
obtained the report assigned by BT to KPMG, which allegedly
evidenced the accounting irregularities and then the result of the
internal audit compiled by the London inspectors, who arrived in
Milan last summer for the alleged bullying cases.
Two different sources with direct knowledge of the case stated that
in the 42-page report, many episodes are cited in which [Cimini’s]
name appears. The report, one of the two sources confirms,
concludes with the finding of cases of “bullying and inappropriate
behavior” by the Italian management.
(DE 65-1 at 2 & 4). At most, these allegations suggest that BT Group had
received reports of bullying in 2016 and that it investigated them. The sense of
the Reuters item is that BT Group “separately” received reports of bullying—i.e.,
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that the bullying, whatever it consisted of, was distinct from any allegation of
financial irregularities. Thus, BT Group’s investigation of bullying at its
subsidiary does alone not suggest that any individual defendant was aware of
Indeed, even when tied to allegations of fraud, the launching of an
investigation is not sufficient to suggest scienter, and indeed may suggest the
opposite. Pertinent to that point is the discussion in my earlier opinion
dismissing the first amended complaint:
“Knowing enough to launch an investigation,” the Seventh Circuit
has written, “is a very great distance from convincing proof of
intent to deceive.” Higginbotham v. Baxter Int’l, Inc., 495 F.3d 753,
758 (7th Cir. 2007). “[F]raud cannot be inferred simply because
[the parent corporation] might have been more curious or
concerned about the activity at [its subsidiary].” In re Stonepath
Grp., Inc. Sec. Litig., No. 4-cv-4515, 2006 WL 890767, at *12 (E.D.
Pa. Apr. 3, 2006), aff’d sub. nom. Globis Capital Partners, L.P. v.
Stonepath Grp., Inc., 241 F. App. 832 (3d Cir. 2007); see Chill v.
Sen. Elec. Co., 101 F.3d 263, 270 (2d Cir. 1996) (same); see also In
re Comshare, Inc. Sec. Litig., 183 F.3d 542, 554 (6th Cir. 1999)
(holding that courts “should not presume recklessness or
intentional misconduct from a parent corporation’s reliance on its
subsidiary’s internal controls”). The issue, after all, is not
negligence, but scienter.
(DE 40 at 12–13).
Plaintiffs rely on the same Reuters article to argue that Defendants were
constructively aware of the ongoing fraud at BT Italy:
Another internal source adds that he considers it “impossible” that
London had no way of realizing what was happening in Italy,
noting that the accounting software system at BT Italia is “open” to
the parent company and it is possible to conduct checks by logging
into the system at any time.
Plaintiffs’ current bullying allegations are also not novel, having been addressed
in this Court’s earlier opinion. (DE 40 at 5).
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The latter source lastly claims that it would have been practically
impossible for an auditor not to realize that something was amiss,
(DE 65-1 at 1–2). Plaintiffs insist that these reports establish Defendants’
scienter because the claims “rely on allegations from reputable reporting” and
“clearly identify the media sources upon which they rely.” (DE 70 at 35–36). It
is true of course that Reuters is a reputable newsgathering organization.
Plaintiffs’ allegations, however, fail to establish the “who, what, when, where,
and how” that the PSLRA requires. Indeed, Plaintiffs do not at all allege that
Defendants ever accessed or reviewed the Reuters article or the information
cited in it. As with the bullying allegations, these speculative claims establish,
at most, negligence—not scienter.
“Verified and authorized by BT Group” allegations
Plaintiffs allege that BT Group knew of the fraud because Gianluca
Cimini, BT Italy’s former CEO, told Reuters that “the financial transactions . . .
were properly verified and authorized by the parent company and by the audit
units and firms.” Plaintiffs also note that Luca Sebastini, BT Italy’s former
CFO, told Italian prosecutors that “[a]ll the main economic and financial
transactions carried out by BT [Italy] were shared with the heads of the
European Region [and] with Luis Alvarez (Global Service CEO) and Richard
Cameron (Global Service CFO).” However, these allegations do not establish
To begin with, the statements are not particularly reliable. Cimini and
Sebastini were on bad terms with BT Group, having been suspended from their
roles at the subsidiary, and had every incentive to shift blame. Moreover, the
statements are quite general—they refer, for example, to the “main economic
and financial transactions” being “shared”— and they are not accompanied by
the particularized allegations that the PSLRA requires. Cimini’s statements do
not specify what transactions were verified, or who authorized them, or how, or
when; moreover, the statements seem to signify at most that auditing controls
were in place, not that they had uncovered any misconduct. Likewise,
Sebastini’s statements do not identify the economic and financial transactions
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to which he referred, let alone the who, what, when, where, and how. Because
of these shortcomings, the allegations are insufficient to demonstrate
Defendants’ scienter regarding fraudulent transactions.
The Italian prosecutors’ report and the KPMG report
Plaintiffs also claim that separate reports by Italian prosecutors and
KPMG both establish Defendants’ scienter. However, these reports, described
by Reuters and The Telegraph, do not bolster Plaintiffs’ earlier attempts to
establish Defendants’ scienter.
This Court has already considered the Italian government’s investigation
of BT Italy:
The existence of an investigation by the Italian government does
not support a strong inference of scienter on the part of BT Group.
[C]ourts have considered a governmental investigation as one
piece of the puzzle when taking a ‘holistic’ view of the
purported facts as they relate to scienter.... [W]hile the
existence of an investigation alone is not sufficient to give
rise to a requisite cogent and compelling inference of
scienter, it may be considered by the Court as part of its
In re Gentiva Sec. Litig., 932 F. Supp. 2d 352, 380 (E.D.N.Y. 2013).
I consider the Italian investigation, but in context with the other
facts it does not support a strong inference of scienter.
(DE 40 at 16). The articles now cited by Plaintiffs do not rise above the
speculative level of the allegations that were already dismissed:
In the document, prosecutors name Luis Alvarez and Richard
Cameron, respectively former chief executive and former chief
financial officer of BT Global Services - one of the biggest divisions
of BT Group - and Corrado Sciolla, formerly BT’s head of
continental Europe, among an expanded list of 23 suspects.
Alvarez and Cameron were based in London, while Sciolla was in
The three are accused of setting unrealistically high business
targets and of complicity in false accounting at BT Italy, which
formed part of the Global Services division, according to the
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(DE 65-2 at 1). Plaintiffs also rely on allegations connected to BT Group’s
internal review of the Italian fraud scandal. That internal review was produced
for the company by KPMG in January 2017 but was never published:
The report said staff at BT Italia sought to artificially inflate the
subsidiary’s earnings with a complex web of fraudulent
transactions. Italian staff made ‘misrepresentations’ to BT Group
and its auditors at the time, PwC, it added.
But it also revealed executives at BT global services did not
sufficiently challenge numbers submitted by Italian staff. Initial
inquiries from London were ignored or met by responses that were
‘not satisfactory’ or lacking in detail, it said, but global services
staff often failed to ‘follow through’ to get answers.
(DE 65-6 at 2). The allegations that rely on these articles lack sufficient detail
to plead scienter, because they do not drive these conclusory statements to the
standard of likelihood that the PSLRA requires.
Specifically, the allegations concerning Italian prosecutors do not
connect Defendants’ pursuit of these targets with evidence of fraud. While
some individual defendants are accused “of complicity in false accounting at
BT Italy,” neither the article nor the fourth amended complaint provides any
factual substantiation for the scienter theory. Simply stating that persons are
on a list of “suspects” being investigated is insufficient. Likewise, Plaintiffs’
reliance on the KPMG report gets them nowhere, because the fourth amended
complaint’s description of the article describing the report does not establish a
factual basis for the fraud. Again, at best it is consistent with negligence.
Chanmugam and Alvarez
Plaintiffs also claim that Defendants’ conduct with respect to individual
defendants Chanmugam and Alvarez are indicative of scienter. Plaintiffs note
that in May 2018 BT Group clawed back Chanmugam’s pay, attributing that
action, without foundation, to the fraud that had occurred at BT Italy. Plaintiffs
also allege that Alvarez’s sale of £675,000 worth of BT Group stock in
December 2016 demonstrates his scienter. Neither of these allegations is
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This Court has already addressed the issue of Chanmugam’s clawback:
BT Group’s reduction of the pay of executives to reflect actual
performance does not give rise to a compelling inference of
scienter. No facts are pled to suggest that the reduction in pay was
due to their participation in any fraud. Cf. City of Roseville [Emps.
Ret. Sys. v. Horizon Lines, LLC], 713 F. Supp. 2d [378,] 398 [(D.
Del. 2010)]. The complaint alleges that the Remuneration
Committee recalculated the bonuses to reflect the actual financial
results of BT Italy’s business.
(DE 40 at 16). When Plaintiffs raised these allegations before, BT Group replied
that the clawback did not indicate that Chanmugam was “personally
implicated in or culpable for either issue.” Plaintiffs have not provided any new
allegations tending to demonstrate that the clawback constituted punishment
for fraudulent acts, as opposed to poor financial performance. The evidence, as
described in the complaint, assumes the fact it is offered to prove.
With respect to Alvarez, Plaintiffs claim that his stock sale is “probative
of his consciousness of wrongdoing.” Plaintiffs theorize that Alvarez sold shares
because he anticipated that BT Group’s initial disclosure of fraud at its
subsidiary would be followed by an even greater write-down. No facts, however,
support the claim that Alvarez knew at the time of the sale that the fraud at BT
Italy was larger than initially reported. Accordingly, Plaintiffs’ allegations
concerning Chanmugam and Alvarez are insufficient to support a strong
inference of scienter.
Plaintiffs attempt to invoke the “corporate scienter” doctrine to impute
scienter to BT Group. Other courts have permitted plaintiffs to plead “corporate
scienter” without successfully pleading scienter against any individual
defendant. See, e.g., City of Monroe Emps. Ret. Sys. v. Bridgestone Corp., 399
F.3d 651, 656–59 (6th Cir. 2005). Such decisions require a strong inference
that someone in the corporation—who is not, but could have been, an
individual defendant—must have acted with scienter in making materially false
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or misleading statements. See id.; see also Makor Issues & Rights, Ltd. v.
Tellabs Inc., 513 F.3d 702, 710 (7th Cir. 2008).
The Third Circuit has “neither . . . accepted nor rejected the doctrine of
corporate scienter in securities fraud actions.” Rahman v. Kid Brands, Inc., 736
F.3d 237, 246 (3d Cir. 2013); see also City of Roseville Emps. Ret. Sys. v.
Horizon Lines, LLC, 442 F. App’x 672, 676–77 (3d Cir. 2011) (declining to
decide “if . . it were possible to plead scienter against a corporation without
pleading scienter against an individual”). In City of Roseville, however, the
Third Circuit suggested that plaintiffs might invoke the corporate-scienter
doctrine in unique and extraordinary circumstances. 442 F. App’x at 676–76.
Roseville pointed to Bridgestone Corp., where a tire manufacturer and its
subsidiary Firestone had information that their tires were rupturing and
causing problems, including a significant number of rollover accidents. City of
Roseville, 442 F. App’x at 676–76 (citing Bridgestone Corp., 399 F.3d at 656–
59). Bridgestone and Firestone allegedly engaged in a variety of tactics,
including a large-scale secret settlement with State Farm Insurance Co., to
keep news of the scope of the problem from reaching safety regulators and
investors. Bridgestone Corp., 399 F.3d at 690–91. After the truth was revealed,
plaintiffs filed a securities-fraud action. The Sixth Circuit affirmed dismissal of
the claims against the individual defendants but held that the facts supported
corporate scienter. Id.
In Roseville, the Third Circuit cited a hypothetical posited by the Seventh
Circuit to explain when an inference of corporate scienter might be appropriate:
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
announcement was false.
City of Roseville, 442 F. App’x at 676–77 (citing Tellabs, 513 F.3d at 710).
In the Tellabs case, the corporate defendant announced that its principal
product, accounting for more than half its sales, was being replaced by a
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successor product. 513 F.3d at 706. The corporate defendant asserted that the
successor product was “available now,” that “customers [we]re embracing” it,
and that Sprint had signed a multiyear $100 million contract to buy it. Id. The
product was not actually sold at all during the class period. Id. The Seventh
Circuit inferred corporate scienter because it was highly implausible that key
executives in the corporation would not have known whether its principal
product was currently being sold. Id.4
Plaintiffs now rely on the statements of several individual defendants—
specifically, Cavestany, Alvarez, and Cameron—to plead the scienter of BT
Group as a whole. However, the Third Circuit has not explicitly adopted this
doctrine and has cautioned that only extraordinary circumstances would
trigger its application. In the opinion dismissing the first amended complaint,
this Court considered the hypothetical application to this case of the corporate
“[T]aken collectively,” as called for by Tellabs, 551 U.S. at 323, the
facts and allegations presented by plaintiffs are not so
fundamental and pervasive as to support an inference of corporate
scienter, as in the Bridgestone case (rupturing tires, followed by a
coverup) or the General Motors hypothetical (nonexistent SUV
sales). There, it was inconceivable that the corporation lacked
scienter, even if a particular individual with scienter was not
identified and sued. Here, the control issues at BT Italy did not
implicate such fundamental corporate matters. Here, based on the
allegations, it is at least as likely that key individuals at BT Group
were unaware of the fraud, were not reckless in ignoring it, and
reacted appropriately when the relevant facts came out. Even if the
corporate-scienter doctrine was permitted in this Circuit, these
acts would not satisfy that doctrine.
The Second Circuit has placed more emphasis on the identification of an
individual whose scienter can be imputed to the corporation—i.e., when “the pleaded
facts . . . create a strong inference that someone whose intent could be imputed to the
corporation acted with the requisite scienter.” Teamsters Local 445 Freight Div. Pension
Fund v. Dynex Capital Inc., 531 F.3d 190, 195 (2d Cir. 2008).
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The fourth amended complaint does not contain any allegations that
move the needle towards the extraordinary circumstances required to show
corporate scienter. Instead, Plaintiffs have concentrated their efforts on
allegations against individuals that fall flat nonetheless, see Section II.B.1,
supra. Plaintiffs’ Section 10(b) and Rule 10b-5 claims are thus dismissed for
failure to adequately plead corporate scienter.
C. Section 20(a) Allegations
Since Plaintiffs fail to adequately state Section 10(b) and Rule 10b-5
claims, the Section 20(a) claims against the individual defendants fail as well.
Liability under Section 20(a) is predicated upon an independent violation of
“this chapter or the rules or regulations thereunder.” 15 U.S.C. § 78t-1(a);
Greebel v. FTP Software, Inc., 194 F.3d 185, 207 (1st Cir. 1999). Claims under
Section 20(a) therefore, are “derivative—requiring proof of a separate
underlying violation of the Exchange Act.” In re Milestone Scientific Sec. Litig.,
103 F. Supp. 2d 425, 474 (D.N.J. 2000). Because the plaintiffs have not pled a
predicate violation of Section 10(b) or Rule 10b-5, the Section 20(a) claim is
For the foregoing reasons, Defendant’s motion to dismiss the fourth
amended complaint (DE 68) is GRANTED.
A separate order will issue.
Dated: April 24, 2020
/s/ Kevin McNulty
Hon. Kevin McNulty
United States District Judge
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