On March 25, 2022, Judge Mary Kay Vyskocil of the Southern District of New York granted in part and denied in part a motion to dismiss a putative class action asserting claims under the Securities Exchange Act of 1934 against a telecommunications company and certain of its executives. Solomon v. Sprint Corp., 1:19-cv-05272 (MKV) (S.D.N.Y. Mar. 25, 2022). Plaintiffs primarily alleged that the company made misrepresentations regarding its reporting of new phone subscriptions and its participation in a government-subsidized discounted phone program. The Court held that plaintiffs adequately alleged misrepresentations and scienter with respect to statements regarding new subscriptions but held that plaintiffs failed to adequately allege scienter with respect to statements regarding the discounted phone program and concluded that certain other challenged statements were mere puffery.

Plaintiffs alleged two primary categories of misrepresentations. First, plaintiffs alleged that the company’s reporting of the number of postpaid phone lines added by subscribers was misleading, including because the company had increased the number of subscriptions by offering customers a bundled free line with a purchased line. Slip op. at 2-4. Second, plaintiffs alleged that the company made misrepresentations regarding its participation in a government-subsidized program that provided discounted phone and internet services to low-income customers, which were allegedly false and misleading because the company failed to deactivate lines that were inactive for 30 days as required under the terms of the program. Id. at 5-6. Plaintiffs alleged that these statements were made in the context of a prospective merger to increase the likelihood that the merger would be consummated. Id. at 7.

The Court held that plaintiffs had adequately alleged misrepresentations with respect to the company’s reporting of added postpaid phone lines. The Court rejected the company’s arguments that its statements were “technically true” and accompanied by other disclosures that explained that the company used promotions and included non-phone devices in its reporting of postpaid numbers. Id. at 13. The Court noted that, once a company chooses to speak on an issue, it must disclose sufficient information so that its statements are not misleading. Id. at 11. While the Court agreed that the statements were technically true, it explained that the additional disclosures “do not defeat the clear impression generated by the company’s other statements about the strength of the business overall.” Id. at 13. In particular, the Court noted that the company had “painted such an optimistic picture of the company’s postpaid sales that it left investors with no other possible inference than that the company’s postpaid net additions continued to grow,” even as the company’s board had allegedly been informed that the number of added lines had decreased, that the company’s performance was worse than other phone carriers, and that growth was not expected to continue. Id. at 12-13.

With respect to the company’s participation in the discounted phone line program, the company admitted that its financial statements were incorrect because they “claimed income that they wrongly acquired” with respect to the program and because “internal controls in the company had failed to ensure compliance.” Id. at 14. Similarly, the Court explained that alleged misrepresentations regarding financial performance and revenue were actionable because the company “did not disclose that a sizeable portion of its revenue was wrongfully received as a result of failures within [the company’s] controls.” Id. at 15.

However, the Court held that challenged statements regarding the company’s “corporate goals and competitive advantages” were non-actionable puffery. Id. at 15-16. The Court observed that the statements such as “whether we do the merge[r] … or stay standalone … we would have a terrific platform from a network point of view” were “forward-looking statements of optimism” that constituted mere puffery. Id. at 16. Thus, the Court dismissed any claims relying on those statements to the extent they are “devoid of any connection to the statements the Court has found to be actionable.” Id.

Turning to scienter, the Court explained that plaintiffs argued “almost exclusively” for an inference of scienter based on a theory of recklessness, pointing to an alleged “discrepancy between statements made internally at the company and statements released to the public.” Id. at 17-18. The Court held that plaintiffs adequately alleged scienter with respect to the added postpaid subscriptions, based on allegations that the company “publicly discussed only [the company’s] success from postpaid additions,” even though the company’s board was allegedly informed of a “drastic reduction[] in postpaid net additions” and the company subsequently stated in a letter to a regulator that this reporting was “incomplete” and “not a substitute for a realistic analysis of the key factors that are most probative of [the company’s] overall competitive position and prospects.” Id. at 18. The Court stated that these allegations raised a sufficient inference of scienter at the motion-to-dismiss stage that defendants “either knew of the statements’ falsity or were reckless when making their statements.” Id. at 18-19.

The Court held that plaintiffs had not adequately alleged scienter, however, with respect to statements regarding the discounted phone program or related alleged inaccuracies in the company’s financial statements. While plaintiffs argued that an email allegedly sent by a “senior lawyer” at the company explained that the company had a “systemic” failure with respect to keeping track of subscribers in the government program, the Court emphasized that plaintiffs provided no other facts indicating that individuals at the company were aware of problems with internal controls. Id. at 19. Moreover, the Court observed that plaintiffs had given no reason why that email, sent in 2014 to a utility commission in Oregon, should be interpreted as relating to a “nationwide problem” or to the allegedly improper reimbursements disclosed five years later. Id. at 19-20. The Court also rejected plaintiffs’ argument that defendants had “motive and opportunity to commit fraud” based on an alleged “desire to maximize the merger price” and to “induce the merger to occur.” Id. at 20. The Court explained that this argument amounted to a “generalized desire” to achieve a profitable outcome and was not supported by allegations of a “concrete and personal benefit” for the company’s executives, as would be required to support an inference of scienter. Id. at 20-21.

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