Renner v. Sequans Communications S.A. et al

Filing 60

MEMORANDUM and ORDER: The defendants motion 50 to dismiss is granted with respect to the claims against Choate and otherwise denied. Ordered by Judge Frederic Block on 9/30/2019. (Innelli, Michael)

UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF NEW YORK
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IN RE SEQUANS
COMMUNICATIONS S.A.
SECURITIES LITIGATION

MEMORANDUM AND ORDER
Case No. 17-CV-4665 (FB) (SJB)

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Appearances:
For the Plaintiffs:
LAWRENCE M. ROSEN
PHILLIP KIM
The Rosen Law Firm, P.A.
275 Madison Avenue, 34th Floor
New York, New York 10016
LEAH HEIFETZ-LI
The Rosen Law Firm, P.A.
101 Greenwood Avenue, Suite 440
Jenkintown, Pennsylvania 19046

For the Defendants:
JAMES N. KRAMER
Orrick Harrington & Sutcliffe LLP
405 Howard Street
San Francisco, California 94105
WILLIAM J. FOLEY
Orrick Harrington & Sutcliffe LLP
51 West 52nd Street
New York, New York 10019

PATRIK V. DAHLSTROM
JOSHUA B. SILVERMAN
OMAR JAFRI
10 South La Salle Street, Suite 3505
Chicago, Illinois 60603
BLOCK, Senior District Judge:
The plaintiffs in this securities-fraud action claim that Sequans
Communication S.A. (“Sequans”), along with two of its officers, knowingly made
false statements in violation of the Securities Exchange Act of 1934 (“Exchange
Act”) and SEC Rule 10b-5.

The defendants move to dismiss pursuant to Federal

Rule of Civil Procedure 12(b)(6) on the grounds that the plaintiffs have not

adequately alleged falsity, scienter and loss causation. For the following reasons,
the motion is granted in part and denied in part.
I
The following facts are taken from the amended complaint.

For present

purposes, the Court accepts them as true and draws all reasonable inferences in favor
of the plaintiffs. See Hu v. City of New York, 927 F.3d 81, 88 (2d Cir. 2019).
Sequans is a French company whose shares trade on the New York Stock
Exchange.

Its chief executive officer (“CEO”) is Georges Karam.

Its chief

financial officer (“CFO”) is Deborah Choate.
Sequans designs integrated circuit modules and supplies them to companies
that manufacture cell phones and tablets.

In early 2016 it “booked at least $740,000

in revenues for a large tablet-related sale” to Yifang, a Chinese company that was
manufacturing tablets for sale to retailers such as Walmart and Best Buy.

Am.

Compl. ¶ 32. When those retailers cancelled their orders, Yifang reneged on the
sale.

Sequans agreed to accept the return of the unused modules and set about

finding a new buyer for them “beginning at the end of the second quarter of 2016.”
Am. Compl. ¶ 36.
In the meantime, on June 30, 2016, and September 30, 2016, Sequans issued
press releases regarding its earnings. The press releases did not note any reserves

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or expense reflecting the return from Yifang.
Then, on March 31, 2017, Sequans filed an annual report with the SEC. The
report stated in part that “[p]roducts are not sold with a right of return but are covered
by warranty.”

Am. Compl. ¶ 46. It further stated that the company had internal

controls in place to “[p]rovide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles.”

Am. Compl. ¶ 49.

Karam and Choate each

attested that, to the best of their knowledge, the information in the report was true
and accurate.
Finally, on May 2, 2017, Sequans estimated that its revenue for the upcoming
quarter would be “in the range of $13.5 to $15.5 million.”

Am. Compl. ¶ 51.

The

estimate did not mention the return from Yifang.
Sequans eventually found a buyer for the modules, but that buyer was unable
to take immediate delivery. Thus, Sequans announced on August 1, 2017, that its
revenue for the quarter was “$13.2 million, after a reduction of $740,000 related to
a product return from an early 2016 tablet-related sale.”

Am. Compl. ¶ 53. By

the end of that day’s trading, Sequans’s share price had fallen 18%.
followed.

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This lawsuit

II
Section 10(b) of the Exchange Act makes it unlawful to use “any manipulative
or deceptive device or contrivance in contravention of such rules and regulations as
the [Securities Exchange] Commission may prescribe as necessary or appropriate in
the public interest or for the protection of investors.” 15 U.S.C. § 78j(b).

Rule

10b-5, in turn, prohibits making “any untrue statement of material fact” or
“omit[ting] to state a material fact necessary in order to make the statements made,
in the light of the circumstances under which they were made, not misleading.” 17
C.F.R. § 240.10b-5(b).
“In a typical § 10(b) private action a plaintiff must prove (1) a material
misrepresentation or omission by the defendant; (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.” Stoneridge Inv. Partners, LLC v. Scientific-Atlanta, 552 U.S. 148, 157
(2008). The defendants argue that the plaintiffs have failed to adequately allege
elements (1), (2), and (6). The Court addresses each in turn.
A.

Falsity
Plaintiffs’ main theory of falsity is that the Yifang return belies the statement

in Sequans’s annual report that its products are not sold with a “right of return.”

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Am. Compl. ¶ 46. The factual dynamic described in the complaint sounds far more
like an agreement negotiated after the fact than a “right” existing at the time of the
sale.
Ultimately, however, the Court need not decide whether the facts alleged in
the complaint support a reasonable inference that Yifang always had the right to
return the modules.

This is because plaintiffs further allege that the handling of the

sale was inconsistent with Sequans’s representation that it followed generally
accepted accounting principles.

As elaborated in the complaint, one of those

principles is embodied in International Accounting Standard (“IAS”) 18, which
states that revenue from a sale of goods should be recognized when, inter alia, “it is
probable that the economic benefits associated with the transaction will flow to the
[seller].”

Am. Compl. ¶ 23 (quoting IAS 18 ¶ 14). It further requires that, “when

an uncertainty arises about the collectability of an amount already included in
revenue, the uncollectible amount or the amount in respect of which recovery has
ceased to be probable is recognized as an expense, rather than as an adjustment of
the amount of revenue originally recognized.” Id. ¶ 25 (quoting IAS 18 ¶ 18).
According to the complaint, Sequans began looking for a substitute buyer
“beginning at the end of the second quarter of 2016.”

Am. Compl. ¶ 36.

There is

certainly a reasonable inference that it did so because the sale to Yifang had fallen

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through by that point.

Yet it did not book the return until August 2017. In the

interim, leaving the revenue from sale on the books without accounting for the
likelihood that it would not be collected was at least misleading.
B.

Scienter
It is possible, of course, that Sequans did not book the return until August

2017 due to inadvertence or an honest but mistaken belief that Yifang would follow
through on the deal.

Thus, the plaintiffs must “state with particularity facts giving

rise to a strong inference that the defendant acted with the required state of mind.”
15 U.S.C. § 78u-4(b)(2)(A).

The required state of mind for securities fraud is an

intent to deceive or recklessness. See ATSI Comms., Inc. v. Shaar Fund, Ltd., 493
F.3d 87, 99 n.3 (2d Cir. 2007).

“The plaintiff may satisfy this requirement by

alleging facts (1) showing that the defendants had both motive and opportunity to
commit the fraud or (2) constituting strong circumstantial evidence of conscious
misbehavior or recklessness.”

Id. at 99.

The plaintiffs here rely on the second approach.

The defendants argue that

their allegations in that regard are “insufficiently particularized.”

Defs.’ Mem. of

Law at 10.
With respect to Karam, the Court disagrees.

The complaint specifically

alleges that Karam was personally involved in the attempt to find a new buyer for

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the modules, “regularly” telling a former vice president of sales “to find another
buyer for the modules sold to Yifang for the Best Buy tablets.” Am. Compl. ¶ 36.
That fact, if true, supports an inference that Karam was aware that the company
could no longer rely on the original buyer for payment.

And while there are

undoubtedly arcane accounting principles, the principle that revenue from a sale
should not remain on the books if the sale becomes uncertain is straightforward.
Cf. S.E.C. v. Espuelas, 579 F. Supp. 2d 461, 482 (S.D.N.Y. 2008) (“[I]t does not
require [specialized accounting] knowledge to know that the recognition of all the
revenue for sales that were entirely contingent on further approval of the buyer was
improper.”).

Since the plaintiffs have adequately alleged scienter as to Karam,

Sequans’s CEO, they have adequately alleged it as to Sequans itself.

See

Teamsters Local 455 Freight Div. Pension Fund v. Dynex Capital Inc., 531 F.3d
190, 195 (2d Cir. 2008) (“In most cases, the most straightforward way to raise such
an inference [of scienter] for a corporate defendant will be to plead it for an
individual defendant.”).
With respect to Choate, on the other hand, the complaint falls short. Her
alleged involvement in the Yifang return amounts to a single statement she made on
a conference call to investors after the return was announced: “When sales were
disappointing, our customer could not pay and we spent a long time trying to find a

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solution.”

Am. Compl. ¶ 55.

At most, that statement shows that Choate was

eventually made aware of the problem with Yifang; however, unlike Karam’s
alleged personal involvement in finding a new buyer, it does not support an inference
that she then consciously hid the problem from investors.

To the contrary, the

complaint alleges that Karam stated that Choate should not be told because she “may
object and prevent the Company from improperly delaying a major loss from quarter
to the next.”

Am. Compl. ¶ 38.

That allegation makes it even less likely that

Choate had the necessary intent. See Tellabs, Inc. v. Makor Issues & Rights, Ltd.,
551 U.S. 308, 328 (2007) (“A plaintiff alleging fraud in a § 10(b) action . . . must
plead facts rendering an inference of scienter at least as likely as any plausible
opposing inference.”).
C.

Loss Causation
“Loss causation . . . is the causal link between the alleged misconduct and the

economic harm ultimately suffered by the plaintiff.” Emergent Capital Inv. Mgmt.,
LLC v. Stonepath Grp., Inc., 343 F.3d 189, 197 (2d Cir. 2003). To satisfy that
element, a plaintiff must allege that “the misstatement or omission concealed
something from the market that, when disclosed, negatively affected the value of the
security.”

Lentell v. Merrill Lynch & Co., 396 F.3d 161, 173 (2d Cir. 2005).

The plaintiffs allege that Sequans’s share price fell significantly immediately

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after the disclosure of the Yifang return in August 2017. The defendants respond
that the return was actually first disclosed in a June 2017 report that “the Company
entered into negotiations with a distributor for the return of 24,000 units sold to the
distributor in 2016.”

Defs.’ Mem. of Law at 19.

Sequans’s share price rose by

five cents following that announcement.
As plaintiffs point out, the June 2017 report did not disclose the monetary
value of the return or its impact on Sequans’s revenue projections. The plaintiffs
will eventually have to prove how a $750,000 shortfall caused such a dramatic drop
in share price, but these competing theories raise issues of fact that cannot be
resolved on a motion to dismiss.

Cf. Emergent Capital, 343 F.3d at 197 (effect of

intervening event on plaintiff’s theory of loss causation “is a matter of proof at trial
and not to be decided on a Rule 12(b)(6) motion to dismiss”).
III
For the foregoing reasons, the defendants’ motion to dismiss is granted with
respect to the claims against Choate and otherwise denied.
SO ORDERED.
/S/ Frederic Block____________
FREDERIC BLOCK
Senior United States District Judge
Brooklyn, New York
September 30, 2019
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