In re Cable & Wireless, Plc

Decision Date15 June 2004
Docket NumberNo. 1:02CV1860 (GBL).,1:02CV1860 (GBL).
Citation321 F.Supp.2d 749
CourtU.S. District Court — Eastern District of Virginia
PartiesIn re CABLE & WIRELESS, PLC, SECURITIES LITIGATION

Harvey B. Cohen, Cohen, Gettings & Caulkin, Arlington, VA, Andrew M. Schatz, Esquire, Schatz & Nobel, Hartford, CT, Steven J. Toll, Cohen, Milstein, Hausfeld & Toll West Tower, Washington, DC, Douglas M. McKeige, Berstein Litowitz Berger & Grossman, New York, NY, for Plaintiff's.

Robert H. Cox, Howrey Simon Arnold & White, Washington, DC, for Defense.

MEMORANDUM OPINION

LEE, District Judge.

THIS MATTER is before the Court on three of Defendants motions to dismiss. The first, is Defendants' Motion to Dismiss the Claims of Foreign Purchasers for Lack of Subject Matter Jurisdiction. The second, is Defendant Cable and Wireless, PLC's Motion to Dismiss the Consolidated Class Action Complaint. The third, is the Individual Defendants' Motion to Dismiss the Consolidated Class Action Complaint. This case concerns a class action securities lawsuit filed against Cable & Wireless PLC ("C & W"). In addition to suing C & W, Plaintiffs are also suing two additional defendants in their individual capacities, Graham Wallace and Robert Lerwill.1 Defendants C & W, Wallace, and Lerwill all seek to Dismiss the Plaintiffs' Consolidated Class Action Complaint pursuant to Rules 9(b) and 12(b)(6) of the Federal Rules of Civil Procedure.

This case relates to a series of allegedly false and misleading statements made during the Class Period (August 1999 to December 2002) by C & W and its senior officers regarding the company's August 6, 1999 sale of One 2 One, a mobile telecommunications subsidiary, to Deutsch Telecom. Plaintiffs allege that the supposed actions of the Defendants artificially inflated the value of C & W securities.

The issues that exist before this Court are twofold. In analyzing Defendants' Motion to Dismiss the Claims of Foreign Purchasers for Lack of Subject Matter Jurisdiction, the issue is whether any alleged fraudulent conduct by Defendants committed abroad had either a significant effect on American investors or the American securities markets, or whether a substantial amount of Defendants' alleged conduct in furtherance of the allegedly fraudulent scheme occurred in the United States. The Court holds that it does have subject matter jurisdiction over the claims of the foreign purchasers, Plaintiff Ontario Teachers Pension Plan ("OTPP"), because Plaintiffs have successfully pled that a significant amount of allegedly fraudulent conduct occurred in the United States, and this alleged conduct was material to the entire fraud. This United States-based conduct was the alleged capacity swap transactions which Plaintiffs claim were negotiated and executed in Virginia.

In analyzing both the Motions to Dismiss by C & W and Messrs. Lerwill and Wallace, the issue before the Court is whether Plaintiffs Complaint adequately pleads a federal securities fraud claim, under 15 U.S.C. § 78u-4(b), to withstand Defendants' motions to dismiss for failure to plead fraud with particularity and failure to state a claim upon which relief can be granted. The Court holds that Plaintiffs Complaint does not adequately plead a federal securities fraud claim, as required under Federal Rule of Civil Procedure 9(b) and through the Private Securities Litigation Reform Act, for three reasons. First, the Complaint fails to specify each alleged misleading statement with particularity. Second, the Complaint fails to establish each allegation as a material fact. Third, the Complaint fails to raise a strong inference that Defendants acted intentionally, consciously, or recklessly.

Because Plaintiffs have failed to prove a primary violation of the securities laws, the Court holds that their Count II against the individual defendants asserting control person liability under § 20(a) of the Act also fails to state a claim. Regardless, of whether Plaintiffs had proven a primary violation or not, however, Plaintiffs Count II claim fails because they have failed to provide adequate facts to support their allegations of control person liability against the individual defendants.

I. BACKGROUND

This is a securities fraud case. Cable & Wireless, PLC is a British telecommunications company providing telephone, Internet cable television, multimedia, and data transmission services. This securities class action relates to a series of allegedly false and misleading statements made during the Class Period (August 1999 to December 2002) by C & W and its senior officers regarding the company's August 6, 1999 sale of One 2 One (a mobile telecommunications subsidiary) to Deutsch Telekom.

Plaintiffs Consolidated Class Action Complaint brings this action against C & W and three senior officers in the corporation. The senior officers originally involved in this lawsuit are Sir Ralph Robins, formerly a non-executive director and chairman of C & W's Board of Directors, Graham Wallace, formerly C & W's Chief Executive Officer, and Robert Lerwill, formerly Deputy Chief Executive of the Cable and Wireless Group and Executive Director of Finance. In an Order dated May 4, 2004, this Court granted Defendant Robins Motion to Dismiss for Lack of Personal Jurisdiction. This opinion therefore, only applies to Defendants C & W, Wallace, and Lerwill.

Plaintiffs allege that the Defendants inflated the value of C & W securities by making false statements during the class period, from August 6, 1999 to December 6, 2002. Specifically, Plaintiffs allege that Defendants' false and misleading statements concerned C & W's financial results and financial condition. Plaintiffs also claim that Defendants concealed billions of dollars of C & W's liabilities by overstating earnings and overstating assets.

Plaintiffs' claims arise from an aggressive growth strategy C & W embarked on to transform itself from a traditional telecommunications company into a self-proclaimed cutting-edge data and internet protocol provider. See Compl. ¶ 38. Plaintiffs allege that this growth strategy was predicated on large acquisitions, which required large amounts of cash. Id. ¶¶ 38-39. In furthering this strategy, in August 1999, C & W sold its interest in One 2 One to Deutsch Telecom ("DT") for <>3.45 billion in cash and the assumption by DT of <>1.5 billion of One 2 One's debts. Id. ¶ 41.

Plaintiffs allege that Defendants misrepresented its financial obligations to One 2 One. C & W, in connection with its sale of One 2 One, had agreed to pay all of the taxes assessed by the United Kingdom's Inland Revenue taxing authorities arising from its past 10-year ownership of One 2 One, as well as all taxes arising from the sale itself. Id. ¶¶ 45-47. Plaintiffs also allege that Defendants agreed that, should C & W's debt rating drop below investment grade, C & W would deposit in escrow, for the sole benefit of DT, <>1.5 billion in cash to cover any taxes assessed by the United Kingdom. Id. Plaintiffs allege that C & W's escrow obligation deprived the company of two-thirds of its cash. According to Plaintiffs, Defendants failed to disclose this information to its investors.

In August 2002, Moody's Investment Service ("Moody's") cut C & W's debt rating to A3, three levels above the trigger. Id. ¶ 50. Plaintiffs assert that Defendants should have disclosed its tax indemnity of One 2 One and the <> 1.5 billion trigger clause at this time. On December 6, 2002, C & W received another downgrade on its long-term rating by Moody's. This time, Moody's downgraded C & W's debt rating to junk status. Id. ¶ 54. This downgrade triggered C & W's obligation to place in escrow the previously undisclosed <>1.5 billion. Id. C & W made a disclosure of both its downgrade by Moody's as well as its obligation to place <>1.5 billion in escrow in a press release. As a result of this disclosure, the price of the C & W common stock, traded on the London Stock Exchange, fell from <>0.84 to <>0.48 on December 9, 2002. The price of the company's American Depositary Receipts ("ADRs") which are the equivalent of the ordinary shares in London, but trade on the New York Stock Exchange, also fell from $3.90 to $2.33 on December 9, 2002.

Plaintiffs also allege that the Defendants engaged in "sham capacity swap transactions," which supposedly resulted in an artificial inflation of C & W's earnings. Id. ¶ 63. These capacity swap transactions were both to purchase and sell the right to use fiber optic lines. Id. at 63-66. According to Plaintiffs, C & W neither needed or wanted these fiber optic lines. Id. Plaintiffs allege that these capacity swap transactions had no economic substance, and were conducted simply to artificially inflate C & W's earnings by, according to Plaintiffs, as much as 16 to 32 percent in fiscal year 2002, by over 10 percent in fiscal year 2001, and to account for nearly all the profit in C & W's IP and data services business during the Class Period. Plaintiffs allege that C & W inflated its earnings by immediately recording the sale of the capacity as revenue, but amortizing the purchase of matching capacity, thereby deducting it from income over several years instead of charging it against income in the year acquired. Id.

Plaintiffs also allege that Defendants understated C & W's existing obligations for future lease payments by concealing the true amount of the Company's lease liabilities. According to Plaintiffs, Defendants reported in C & W's Form 20-F to the Securities and Exchange Commission ("SEC") that the Company's future lease obligations were <>897 million when those obligations were <>2.2 billion. Id. ¶¶ 90-94.

Plaintiffs, a class of investors and pension funds, now sue. One of the groups of Plaintiff investors is the Ontario Teachers Pension Fund. The OTPP is a Canadian corporation that purchased C & W's securities on the London Stock Exchange. OTPP is seeking to represent a class...

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