Sterling Heights v. Vodafone Group Public Ltd. Co.

• Decision Date: 20 May 2009
• Docket Number: No. 07 Civ. 9921(PKC).,07 Civ. 9921(PKC).
• Citation: 655 F.Supp.2d 262
• Parties: CITY OF STERLING HEIGHTS PLICE & FIRE RETIREMENT SYSTEM, On Behalf of Itself and All Others Similarly Situated, Plaintiff, v. VODAFONE GROUP PUBLIC LIMIED COMPANY, Arun Sarin, Kenneth J. Hydon, Alan P. Harper, and Lord Ian MacLaurin, Defendants.
• Court: U.S. District Court — Southern District of New York

Page 262

655 F.Supp.2d 262

CITY OF STERLING HEIGHTS PLICE & FIRE RETIREMENT SYSTEM, On Behalf of Itself and All Others Similarly Situated, Plaintiff, v. VODAFONE GROUP PUBLIC LIMIED COMPANY, Arun Sarin, Kenneth J. Hydon, Alan P. Harper, and Lord Ian MacLaurin, Defendants.

No. 07 Civ. 9921(PKC).

United States District Court, S.D. New York.

May 20, 2009.

COPYRIGHT MATERIAL OMITTED

David Avi Rosenfeld, Coughlin Stoia Geller Rudman & Robbins, LLP (LI), Melville, NY, for Plaintiff.

Gandolfo Vincent Diblasi, Elizabeth Kayla Ehrlich, Jordan Tourney Razza, Theodore Edelman, Sullivan and Cromwell, LLP, New York, NY, for Defendants.

MEMORANDUM AND ORDER

P. KEVIN CASTEL, District Judge.

The plaintiff alleges in an Amended Class Action Complaint (the "Complaint") that the defendants violated federal securities laws, principally by failing to take timely impairment charges for the declining good will of defendant Vodafone Group Public Limited Company ("Vodafone," or the "Company") and by failing to disclose that Vodafone would likely incur $8.7 billion in tax obligations. The plaintiff asserts claims on behalf of all persons who purchased publicly traded securities of Vodafone between June 10, 2004 and February 27, 2006. (Compl. ¶ 1.) It alleges that all defendants violated section 10(b) of the Securities Exchange Act of 1934 (the "1934 Act"), 15 U.S.C. § 78j(b), and SEC Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5. The Complaint also asserts a claim of control-person liability under section 20(a) of the 1934 Act, 15 U.S.C. § 78t(a), against defendants Arun Sarin, Kenneth J, Hydon, Alan P. Harper and Lord Ian MacLaurin (the "Individual Defendants").

Defendants move to dismiss the Complaint. In a Memorandum and Order dated November 24, 2008, I held that the Court lacked subject matter jurisdiction over the claims of plaintiff The City of Edinburgh Council on Behalf of Lothian Pension Fund. See City of Edinburgh Council ex rel. Lothian Pension Fund v. Vodafone Group Public Co., 2008 WL 5062669 (S.D.N.Y. Nov. 24, 2008), reconsideration denied in part and granted in part, 2009 WL 980304 (S.D.N.Y. Apr. 9, 2009). The Court did not address the claims of plaintiff City of Sterling Heights Police & Fire Retirement System ("Sterling Heights") in its November 2008 decision. The caption is amended to reflect that Sterling Heights is the only remaining plaintiff. I now consider the defendants' motion to dismiss the claims of Sterling Heights pursuant to Rules 12(b)(6) and 9(b), Fed.R.Civ.P., and the Private Securities Litigation Reform Act of 1995, 15 U.S.C. § 78u-4(b)(1)-(3)(A) (the "PSLRA").

BACKGROUND

Vodafone is a telecommunications company with operations principally concentrated in Europe, the United States and the Asia Pacific. (Compl. ¶ 25.) During the Class Period, defendant Sarin was Vodafone's chief executive officer, MacLaurin was chairman of the board of directors, Harper held the title of group strategy and business integration director, and Hydon was chief financial officer, as well as a board member. (Compl. ¶ 26, 29, 34-36.)

Vodafone was formed in 1983. (Compl. ¶ 44.) According to the Complaint, the Company grew rapidly through a series of acquisitions, including the 2000 acquisition of a German telecommunications company, Mannesmann, and the acquisition of a separate network in Italy, Omnitel. (Compl. ¶¶ 44-45.) Vodafone purchased Mannesmann for $170 billion, a price that the Complaint characterizes as "one of the largest acquisitions in business history." (Compl. ¶ 45.) The Complaint asserts that, in all, Vodafone has spent more than $300 billion on corporate acquisitions. (Compl. ¶ 45.) In the plaintiffs view, the Company's ambitious expansions led to large, unlawfully concealed losses stemming from deteriorating corporate good will in the acquired companies. In fiscal year 2002—shortly after its acquisition of Mannesmann—Vodafone announced a $7 billion write-down on its Mannesmann assets; the write-down was directed only to Mannesmann's ground-line assets, and not to its mobile assets. (Compl. ¶¶ 6, 46.) Vodafone's share price dipped as a result. (Compl. ¶¶ 46-47.) At the time it wrote down the value of the Mannesmann ground-line assets, the Company indicated that no future asset-impairment write-downs would be required for its Mannesmann assets. (Compl. ¶ 6.)

Vodafone pursued another large telecom acquisition in 2004, this time of AT & T's wireless assets. (Compl. ¶ 7.) Vodafone's share price dipped, and according to the Complaint, the negative shareholder reaction prompted Company management to abandon the deal. (Compl. ¶¶ 7, 49, 50.) According to plaintiff, the price decline pressured Vodafone's management team to boost the Company's share value, including for reasons related to management's own enrichment. (Compl. ¶¶ 8, 50.)

Sterling Heights alleges that in order to maintain a high share value, Vodafone management began to assert that its operating units were performing profitably, and predicted "huge cash flow improvements" in coming years. (Compl. ¶ 9.) According to the Complaint, Vodafone then issued financial statements that falsely inflated the company's results and future business prospects, including the exaggeration of likely operating profits, EBITDA, assets and net worth. (Compl. ¶¶ 9-11.) The Complaint quotes a litany of statements by the Company concerning its robust financial health and strong prospects for success, including assertions made in public filings, analyst calls and statements to the media. (Compl. ¶¶ 51-105, 117-22.) Specifically, the plaintiff notes that Company management indicated to investors that Vodafone's operations in Germany and Italy were growing, and that its operations in Japan were improving. (Compl. ¶¶ 10-11.) The plaintiff also contends that defendants overstated the success of a so-called "One Vodafone" program (which was intended to integrate and streamline the company operations) and the success of new 3-G phones and services in Japan. (Compl. ¶¶ 10-11.) The plaintiff contends that these statements were fraudulent because they failed to alert the investing public to the deterioration of Company good will, which should have been recognized with a timely impairment charge. (Compl. ¶ 10.)

In late 2005, Vodafone and its management then made a series of disclosures that climaxed with a large impairment charge against the good will of Company assets. On November 15, 2005, Vodafone disclosed: (1) a 23-percent decline in operating profits; (2) $7 billion in cash-flow impairments stemming from tax obligations to government authorities; and (3) a sharp drop in the EBITDA of its Japanese operations. (Compl. ¶ 14.) On February 27, 2006, Vodafone announced that it would incur a $40-49 billion impairment charge associated with its German, Italian and Japanese operations. (Compl. ¶¶ 14, 124, 131.) According to news reports, the impairment charge arose from the Company's reduced growth assumptions for its 2007 budget, but the Complaint also asserts that the Company overrepresented its worth in financial statements filed in fiscal years 2004 through 2006. (Compl. ¶¶ 128, 131.)

The announcement of the impairment charge was followed by a decline in share price. (Compl. ¶¶ 14, 131.) Plaintiff alleges that prior to the Company's disclosures of loss, the individual defendants sold approximately 11.1 million shares of personally held Vodafone stock for proceeds of more than $29 million. (Compl. ¶ 153.) According to the Complaint, defendant Sarin later "admitted" that previous growth forecasts had proved inaccurate. (Compl. ¶ 132.)

STANDARD ON A MOTION TO DISMISS

"To survive a motion to dismiss, a complaint must plead `enough facts to state a claim to relief that is plausible on its face.'" ECA, Local 134 IBEW Joint Pension Trust of Chicago v. JP Morgan Chase Co., 553 F.3d 187, 196 (2d Cir.2009) (quoting Ruotolo v. City of New York, 514 F.3d 184, 188 (2d Cir.2008)). "A pleading that offers `labels and conclusions' or `a formulaic recitation of the elements of a cause of action will not do.'" Ashcroft v. Iqbal, 556 U.S. ___, 129 S.Ct. 1937, 1949, 173 L.Ed.2d 868 (2009) (quoting Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007)). The PSLRA has "imposed heightened pleading requirements and a loss causation requirement upon `any private action' arising from the Securities Exchange Act." Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc., 552 U.S. 148, 128 S.Ct. 761, 773, 169 L.Ed.2d 627 (2008) (quoting 15 U.S.C. § 78u-4(b)).

"Any complaint alleging securities fraud must satisfy the heightened pleading requirements of the PSLRA and Fed.R.Civ.P. 9(b) by stating with particularity the circumstances constituting fraud." ECA, Local 134, 553 F.3d at 196 (citing Tellabs, 127 S.Ct. at 2508). This pleading threshold gives a defendant notice of the plaintiff's claim, safeguards a defendant's reputation and protects against strike suits. See ATSI Communications, Inc. v. Shaar Fund, 493 F.3d 87, 99 (2d Cir.2007). "A securities fraud complaint based on misstatements must (1) specify the statements that the plaintiff contends were fraudulent, (2) identify the speaker, (3) state where and when the statements were made, and (4) explain why the statements were fraudulent." Id. at 99 (citing Novak v. Kasaks, 216 F.3d 300, 306 (2d Cir.2000)).

Rule 9(b), Fed.R.Civ.P., requires a party to "state with particularity the circumstances constituting fraud or mistake. Malice, intent, knowledge, and other conditions of a person's mind may be alleged generally." Rule 9(b), Fed.R.Civ.P. The PSLRA requires a complaint to "specify each statement alleged to have been misleading, the reason or reasons why the statement is misleading, and, if an allegation regarding the statement or omission is made on information and belief, the complaint shall state with particularity all facts on which that belief is formed." 15 U.S.C. § 78u-4(b)(1)....