Christian v. PLC

JAMES CHRISTIAN, Individually and on behalfof all others similarly situated, Plaintiff, v. BT GROUP PLC, GAVIN PETERSON,IAN LIVINGSTON, and TONY CHANMUGAM, Defendants.

Civ. No. 2:17-cv-00497-KM-JBC

UNITED STATES DISTRICT COURT FOR THE DISTRICT OF NEW JERSEY

August 28, 2017

OPINION

MCNULTY, District Judge

Before the Court in this putative federal securities class action are competing motions of

(1) a group of individual plaintiffs consisting of Gary Classen, Alice Korenblat, Robert Korenblat, and Pierre-S. Lefebvre (collectively, the "Classen Plaintiffs") (ECF No. 11); and

(2) plaintiff PAMCAH-UA Local 675 Pension Fund (the "Pension Fund") (ECF No. 10).

Each seeks appointment as lead plaintiff and appointment of its counsel as lead counsel.¹

I. BACKGROUND

The underlying securities class action is brought on behalf of purchasers of the securities of defendant BT Group PLC ("BT Group") between May 24, 2012 and January 23, 2017 (the "Class Period"). The plaintiffs allege violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78j(b) and 78t(a), as amended by the Private Securities Litigation Reform Act of1995 (the "PSLRA"), 15 U.S.C. § 78u-4, et seq., and of the Securities and Exchange Commission (the "SEC") Rule 10b-5 promulgated thereunder, 17 C.F.R. §§ 240.10b-5.

BT Group is a communications services company whose securities are publicly traded on the New York Stock Exchange ("NYSE"). Named plaintiff James Christian, on behalf of a putative class, alleges that from 2012 through 2016 BT Group issued annual reports that summarized balance sheets of company operations. Those annual reports stated that the company maintained adequate internal controls over its financial reporting. Those reports also contained Sarbanes-Oxley Act ("SOX") certifications "attesting to the accuracy of the financial statements, the disclosure of any material changes to the Company's internal controls over financial reporting and the disclosure of all fraud." (Compl. ¶¶ 16-30)

The plaintiffs allege that statements made in BT Group's 2012-16 annual reports were materially false or misleading because they failed to disclose adverse facts known to or recklessly disregarded by BT Group and its officers at the time. More specifically, the plaintiffs allege that BT Group's 2012-16 annual reports misstated earnings, failed to disclose improper accounting practices, sales, and transactions in BT Group's Italian operations, and failed to disclose that BT Group's internal controls were ineffective. (Compl. ¶ 31). The plaintiffs say these truths first emerged through two press releases published in late 2016.

A. BT Group's First Corrective Disclosure

First, the plaintiffs cite an October 27, 2016 press release which announced BT Group's results for the second quarter and half year to September 30, 2016. That press release revealed a write-down of the value of items on its balance sheet by £145 million. The press release stated, in part:

Specific items

Specific items resulted in a net charge after tax of £151m (Q2 2015/16: £52m charge). See Note 4 for a breakdown.

BT Italia investigationFollowing allegations of inappropriate management behaviour in our BT Italia operations, we have conducted an initial internal investigation. This included a review of accounting practices during which we have identified certain historical accounting errors and reassessed certain areas of management judgement.

We have written down the value of items on the balance sheet by £145m. This is our current best estimate of the financial impact based on our internal investigation. The write down relates to balances that have built up over a number of years and our assessment is that the errors have not materially impacted the group's reported earnings over the previous two years. The amount has been charged as a specific item in our results for the quarter. As a non-cash item in the period it does not impact normalised free cash flow.

A full investigation of these matters is ongoing and we have appointed external advisers to assist with this. Appropriate action will be taken as the investigation progresses.

Our outlook is not affected.

(Compl. ¶ 32 (emphasis in Complaint)).

Following this press release, shares of BT Group fell $0.57 per share, representing a 2.39% drop from its previous closing price of $23.25 on October 27, 2016. (Id. ¶ 33; IM Opp. 5)

B. BT Group's Second Corrective Disclosure

Second, on January 24, 2017, BT Group issued a press release announcing an update on its investigation into its Italian operations. This press release stated, in part:

Update on investigation into BT's Italian business and on BT Group outlook

Update on investigation into BT's Italian businessBT previously announced on 27 October 2016 that an initial internal investigation of accounting practices in its Italian business had identified certain historical accounting errors and areas of management judgement requiring reassessment. At that time, we announced the write down of items on the balance sheet by £145m, being the then best estimate of the financial impact of these issues.

Since then we have progressed the investigation, which has included an independent review by KPMG LLP of the accounting practices in our Italian operations and our own comprehensive balance sheet review. These investigations have revealed that the extent and complexity of inappropriate behaviour in the Italian business were far greater than previously identified and have revealed improper accounting practices and a complex set of improper sales, purchase, factoring and leasing transactions. These activities have resulted in the overstatement of earnings in our Italian business over a number of years.

The investigation into the financial position of our Italian business is now substantially complete. The adjustments identified have increased from the £145m announced in our half-year update to a total of around £530m. We are still evaluating what proportion of the total adjustments should be treated as prior year errors, and what proportion should be treated as the reassessment in the current year of management estimates. Work is also ongoing to establish how these adjustments should be reflected in BT Group's financial statements for the current and previous periods in light of applicable accounting requirements.

In addition, we would expect the matters described above to result in a reduction in our Q3 adjusted revenue and adjusted EBITDA of around £120m, and in a reduction in Q3 normalised free cash flow of around £100m. For 2016/17 as a whole, relative to our prior outlook, we would expect a decrease in adjusted revenue of around £200m, in adjusted EBITDA of around £175m, and of up to £500m of normalised free cash flow due to the EBITDA impactand the one-off unwind of the effects of inappropriate working capital transactions. For 2017/18, we would expect a similar annual impact to adjusted revenue and adjusted EBITDA as in 2016/17, with the EBITDA impact flowing through to normalized free cash flow. An updated outlook for the Group reflecting the above and other matters is set out below.

The EBITDA contribution of the Italian business included in the Group's reported EBITDA for the financial year ended 31 March 2016 was around 1%.

The improper behaviour in our Italian business is an extremely serious matter, and we have taken immediate steps to strengthen the financial processes and controls in that business. We suspended a number of BT Italy's senior management team who have now left the business. We have also appointed a new Chief Executive of BT Italy who will take charge on 1 February 2017. He will review the Italian management team and will work with BT Group Ethics and Compliance to improve the governance, compliance and financial safeguards in our Italian business.

Further, we are conducting a broader review of financial processes, systems and controls across the Group. The BT Group Remuneration Committee will consider the wider implications of the BT Italy investigation.

Additionally, on January 24, 2017, Gavin Patterson, Chief Executive BT Group, stated:

We are deeply disappointed with the improper practices which we have found in our Italian business. We have undertaken extensive investigations into that business and are committed to ensuring the highest standards across the whole of BT for the benefit of our customers, shareholders, employees and all other stakeholders.

(Compl. ¶ 34)

Following this second press release, BT Group's stock price fell by $5.05 per share, or over 20%, from its previous closing price of $19.38 per share on January 24, 2017. (Id. ¶ 35)

The plaintiffs claim that they and other class members have suffered losses as the result of BT Group's fraudulent acts and omissions and the decline in the market value of BT Group's shares that resulted. (Id. ¶ 36)

II. LEGAL STANDARD

The PSLRA governs the appointment of the lead plaintiff in "each private action arising under the [Exchange Act] that is brought as a plaintiff class action pursuant to the Federal Rules of Civil Procedure." 15 U.S.C. § 78u-4(a)(1). The PSLRA directs courts to adopt a rebuttable presumption that "the most adequate plaintiff is the person or group of persons that has (1) either filed the complaint or made a motion in response to the notice to the class; (2) has the largest financial interest in the relief sought by the class; and (3) otherwise satisfies the requirements of Federal Rule of Civil Procedure 23." Lewis v. Lipocine Inc., No. CV 16-4009-BRM-LHG, 2016 WL 7042075, at *4 (D.N.J. Dec. 2, 2016) (citing Fields v. Biomatrix, Inc., 198 F.R.D. 451, 456 (D.N.J. 2000) and 15 U.S.C. § 78u-4(a)(3)(B)(iii)(I)).

Rule 23 requires that the party or parties seeking to represent a class (1) "have claims or defenses that are typical of the claims or defenses of the class," (the "typicality requirement") and (2) "be able to fairly and adequately protect the interests of the class," (the "adequacy...