United States District Court, D. New Jersey
JAMES CHRISTIAN, individually and on behalf of all others similarly situated, et al., Plaintiffs,
BT GROUP PLC, GAVIN PATTERSON, IAN LIVINGSTON, and TONY CHANMUGAM, Defendants.
MCNULTY UNITED STATES DISTRICT JUDGE
bring a putative securities class action against BT Group PLC
and three 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 complaint for
failure to state a claim. See Fed. R. Civ. P.
12(b)(6). Defendants argue that plaintiffs have failed to
plead scienter. For the reasons stated below, the
defendants' motion to dismiss the complaint is granted.
lead plaintiffs, Plumbing & Mechanical Contractors
Association of Hawaii-United Association
("PAMCAH-UA") Local 675 Pension Fund, Gary Classen,
Alice Korenblat, Robert Korenblat, and Pierre-S. Lefebvre
(collectively, "plaintiffs") pursue a putative
securities class action against BT Group PLC ("BT
Group") and individuals associated with BT Group. (AC UK
1, 18-24). The individual defendants are Ian Livingston, the
CEO and a member of the Board from 2008 until September 2013;
Gavin E. Patterson, the CEO and a member of the Board from
September 2013 to the present; and Tony Chanmugam, the Group
Finance Director and a member of the Board from 2008 until
July 2016. (AC Tin 20-22, 24).
purchased BT Group American Depositary Receipts
("ADRs")- i.e., certificates issued by a U.S. bank
representing a specified number of shares in a foreign stock
traded on a U.S. exchange. (AC K 17). Plaintiffs argue that
defendants engaged in securities fraud from May 10, 2013 to
January 23, 2017, inclusive (the "Class Period").
(AC ¶ 1). They pursue claims under Sections 10(b) and
20(a) of the Securities Exchange Act of 1934 (die
"Exchange Act") and Rule 10b-5. (AC ¶ 1).
BT Group and BT Italy
BT Group, formerly known as British Telecom, is a provider of
communication services and solutions serving customers in 180
countries. (AC K 37). BT Group has six customer-facing
business lines; one of them is BT Global Services. (AC
% 38). BT Global Services provides technology
consulting, outsourcing, and communications systems for more
than 10, 000 organizations and governments worldwide. (AC H
38). Defendant Alvarez became CEO of BT Global Services in
2012. (AC 38). Corrado Sciolla was President of BT Global
Services in Continental Europe, which includes BT Italy. (AC
allege that defendants knew that BT Group's operations in
Italy suffered from control problems at least from the
beginning of the Class Period-i.e., May 10, 2013. (AC ¶
40). Since fiscal year 2013, which ended on March 30, 2013,
BT Group's Audit 8& Risk Committee ("Audit
Committee") had been assessing die "control
environment" in Italy. (AC ¶ 40). Plaintiffs claim
that defendants Livingston, Patterson, and Chanmugam
certified the efficacy of BT Group's internal controls
despite rampant fraud at BT Italy. (AC ¶ 40).
allege that BT Group's annual reports evince
defendants' knowledge of control problems at BT Italy.
The Audit Committee stated in BT Group's 2014 annual
report that, "This year the Audit 8b Risk Committee paid
special attention to several overseas locations that are
important to BT Global Services, including Italy and Brazil
.... We have received detailed presentations from key
personnel in each of these areas and reviewed
management's mitigation plans." (AC ¶ 42). Nick
Rose, Chairman of die Audit Committee, noted, "I
reported last year that the committee had given particular
focus to BT's operations in Italy. We have continued to
monitor the position there and significant progress has been
made to improve the control environment." (AC ¶
43). Rose made a similar statement in the 2015 annual report.
(AC ¶ 44). The 2015 annual report also stated that the
Audit Committee "asked management to provide us with
greater detail on the governance and control in relation to
... operations in Italy." (AC ¶ 45). BT Group's
2016 annual report stated that the Audit Committee has
"continued to monitor our operations in Italy and
progress has been made to improve the control
environment." (AC ¶ 47). HSBC Global Research noted
that the Audit Committee had an unusual,
"sustained" level of review regarding BT
Group's control environment in Italy. (AC ¶ 48).
Disclosures in 2016 and 2017
Group reported on October 26, 2016 that it had to take a
write-down of £145 million (approximately $191 million)
due to "certain historical accounting errors" at
its BT Italy division. (AC m 49-50). BT Group's press
release stated, "Following allegations of inappropriate
management behaviour in our BT Italia operations, we have
conducted an initial internal investigation [and ...]
identified certain historical accounting errors and
reassessed certain areas of management judgment." (AC
¶ 50). On October 27, 2016, the price of BT Group ADRs
fell $0.57, or 2.4%, to close at $23.25 per ADR. (AC ¶
press release on January 24, 2017, BT Group announced that it
would increase the write-down regarding its Italian
operations to £530 million (approximately $700
million)-a nearly four-fold increase. (AC ¶ 52).
Additionally, BT Group stated it no longer expected revenue
growth for the next two years. (AC ¶ 52). The company
also estimated its 2016-2017 free cash flow at £2.5
billion, about £700 million lower than the original
forecast. (AC ¶ 52).
Group explained that its investigations had revealed that
"the extent and complexity of inappropriate behaviour in
the Italian business were far greater than previously
identified" and had revealed "improper accounting
practices and a complex set of improper sales, purchase,
factoring and leasing transactions," resulting in the
"overstatement of earnings in our Italian business over
a number of years." (AC ¶ 53). BT Group suspended
members of BT Italy's senior management team and
appointed a new Chief Executive of BT Italy. (AC ¶ 53).
The new Chief Executive was told to review the Italian
management team and improve the governance, compliance, and
financial safeguards of the Italian business. (AC ¶ 53).
conference call around this time, Simon Lowth, the
company's Group Finance Director, made the following
The majority component [of unwinding the improper working
capital transactions] was to repay essentially working
capital loans to factoring companies where loans had been
taken against receivables and, indeed, had been taken to pay
suppliers. Those working capital loans [were] clearly
improper and we are unwinding them, and that is
overwhelmingly the most significant contributor to the
onetime cash unwind in the 2016/2017.
(AC ¶ 55). Lowth also identified "additional
smaller contributors" to BT Italy's woes, such as
"sale and leaseback transactions." (AC ¶ 55).
January 24, 2017, media outlets reported that BT Group
suspended a number of senior executives in Italy, including
the BT Italy CEO. (AC ¶ 58). They also reported that
Corrado Sciolla, the President of BT Global Services in
Continental Europe, was expected to resign shortly. (AC
¶ 58). Sciolla had previously been the BT Italy CEO from
2006 until January 2013. (AC % 58). On January 24,
2017, the price of BT Group ADRs fell $5.05, or approximately
21%, to close at $19.38 per ADR. (AC ¶ 9). On January
28, 2017, a media outlet reported that a KPMG LLP
investigation found that the misconduct had been ongoing at
BT Italy for most of the past ten years. (AC ¶ 61).
Report to BT Group Vice President in 2015
March 30, 2017, Reuters reported that, in November
2015, three BT Italy employees warned their Madrid-based
supervisor Jacinto Cavestany about this potential fraud. (AC
¶ 62). Jacinto Cavestany was BT Global Services'
Vice President of Iberia and Head of Sales in Europe and
Latin America. (AC H 62). The source claimed that the BT
Italy employees met with Cavestany on the sidelines of a
Company gathering to express concern over the unit's
financial results, bullying by local management, and intense
pressure to meet difficult bonus targets. (AC ¶ 62). The
source added that Cavestany had replied that the three BT
Italy employees should help him steer Cimini, the then-BT
Italy CEO, "in the right direction." (AC ¶
Group claimed that it launched an internal investigation in
January 2017-almost a year after the BT Italy employees met
with Cavestany about the BT Italy fraud. (AC ¶ 63).
According to Reuters, a network of people at BT
Italy had exaggerated revenues from certain BT-installed
phone lines, faked contract renewals and invoices, and
invented bogus supplier transactions to meet bonus targets
and disguise the unit's true financial performance. (AC U
65). These practices had allegedly been ongoing since at
least 2013. (AC ¶ 65).
instance, BT Italy's purchasing office made fake purchase
orders to suppliers with no intention of receiving goods; the
office would cancel the order and ask the supplier to issue a
credit note by way of refund, and the bogus credit notes were
then sold to a factoring company for cash. (AC ¶ 68). BT
Italy also had multiple internal-accounting systems that
enabled staff to inflate revenues by entering duplicate
invoices for die same client. (AC ¶ 69).
Criminal Complaint, Italian Government Investigation
April 21, 2017, Reuters reported that BT Group filed
a criminal complaint with Italian prosecutors on March 21,
2017 over the accounting scandal. (AC Â¶ 72). BT Group accused
several former BT Italy executives and other employees of
breaking company rules and committing unlawful conduct. (AC
BT Group is being investigated by the Guardia di Finanza, an
Italian law-enforcement agency responsible for prosecuting
financial crimes. (AC 1 76). The Guardia di Finanza has
raided BT Italy offices, interviewed employees, and collected
records. (AC ¶¶ 76-78).
BT Group's ...