In re Cognizant Tech. Sols. Corp. Secs. Litig.

IN RE COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION SECURITIES LITIGATION

Civil Action No. 16-6509 (ES) (CLW)

UNITED STATES DISTRICT COURT DISTRICT OF NEW JERSEY

June 5, 2020

Not for Publication

OPINION

SALAS, DISTRICT JUDGE

Plaintiffs bring a putative class action under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 against defendants Cognizant Technology Solutions Corporation, Gordon Coburn, and Steven E. Schwartz (collectively, "Defendants"). Before the Court are three motions to dismiss the Second Amended Class Action Complaint (D.E. No. 83 "SAC")) from the Defendants pursuant to Federal Rules of Civil Procedure 12(b)(6) and 9(b), and under the Private Securities Litigation Reform Act of 1995, 15 U.S.C. § 78u-4 ("PSLRA"). (D.E. Nos. 92, 93 & 94 (collectively, the "Motions")). The Court has considered the parties' submissions and decides the Motions after the extensive oral argument conducted on May 19, 2020, via videoconferencing due to the COVID-19 pandemic. (See D.E. No. 129 ("Tr.")); see also L. R. 78.1(b)(2). For the following reasons, the Motions are DENIED.

I. Background

This putative securities class action involves an alleged bribery scheme that, according to the SAC, a criminal indictment, and other court filings, was spearheaded by Cognizant Technology Solutions Corporation's ("Cognizant") former President, Gordon Coburn ("Coburn") and its Chief Legal and Corporate Affairs Officer, Steven E. Schwartz ("Schwartz"). (SAC ¶¶ 16 & 33-34). Coburn and Schwartz, among others, allegedly devised and implemented a scheme to bribe Indian government officials in order to secure permits that were necessary to operate Cognizant's facility known as the Knowledge Industry Township Campus (the "KITS Campus" or "KITS Facility") in Chennai, India. (Id. ¶¶ 19-20). The KITS Facility was built in one of India's Special Economic Zones ("SEZs") and was Cognizant's largest SEZ facility. (Id. ¶¶ 3 & 19). By locating the KITS Facility in an SEZ, Cognizant would gain several lucrative tax and labor benefits. (Id. ¶ 3).

At the core of the allegations, Plaintiffs contend that Cognizant touted the benefits of its SEZ licenses while failing to disclose the bribery scheme orchestrated in connection with the KITS Facility, which ultimately could not operate without the necessary underlying permits. (Id. ¶¶ 5 & 19). Coburn, Schwartz, and other members of senior management allegedly worked with the Indian-based construction company contracted to develop the KITS Facility to ultimately devise and implement the bribery scheme. (Id. ¶ 20). Under the scheme, Cognizant's contractor would facilitate payments to Indian government officials, and Cognizant would reimburse its contractor for these costs. (Id.) As such, the bribe payments appeared as legitimate reimbursement requests from Cognizant's contractor. (Id.). Consequently, Cognizant overstated its earnings to investors because it recorded the bribe payments as capital expenditures rather than expenses. (Id. ¶ 9). Cognizant's stock price dropped by more than 13%, or $7.29 per share, after it finally disclosed that it was "conducting an internal investigation into whether certain payments relating to facilities in India were made improperly and in possible violation of the U.S. Foreign Corrupt Practices Act and other applicable laws." (Id. ¶¶ 11-12).

Because this case involves an intricate procedural history, the Court first discusses the procedural posture as it relates to the present Motions before summarizing the key factual allegations included in the SAC.

A. Procedural History

i. Prior Opinion

The SAC comes before the Court following an opinion by the late Judge William H. Walls dated August 8, 2018, on motions to dismiss the consolidated First Amended Class Action Complaint (D.E. No. 38 ("FAC")). (D.E. No. 66 ("Prior Opinion" or "Op.")). In Count I of the FAC, Plaintiffs brought claims under the Securities Exchange Act of 1934 (the "Exchange Act") and Rule 10b-5 against Cognizant; Francisco D'Souza ("D'Souza"), Cognizant's former Chief Executive Officer; Karen McLoughlin ("McLoughlin"), Cognizant's former Chief Financial Officer; and Gordon Coburn, Cognizant's former President. (Id. at 1-2). In Count II of the FAC, Plaintiffs brought claims under Section 20(a) of the Exchange Act against D'Souza, McLoughlin, and Coburn. (Id. at 10).

As discussed more fully below, Plaintiffs' Section 10(b) and Rule 10-5 claims were initially premised on five categories of allegedly material misstatements, including: (i) statements highlighting the benefits of Cognizant's SEZ licenses; (ii) statements emphasizing legal compliance and anti-corruption controls; (iii) statements touting Cognizant's low-cost services and attributing its financial results to legitimate business factors; (iv) overstatements of earnings resulting from improperly recording bribes as capital expenditures; and (v) Cognizant's SOX certifications. (Id. at 10-11 & 33). Judge Walls found that Plaintiffs adequately pled materially misleading statements in three of the five categories, including: (i) statements highlighting the benefits of Cognizant's SEZ licenses; (ii) statements emphasizing legal compliance and anti-corruption controls, specifically limited to statements reporting no incidents of corruption and statements touting the effectiveness of anti-corruption training in Cognizant's 2014 and 2015 Sustainability Reports; and (iii) overstatements of earnings resulting from improperly recordingbribes as capital expenditures. (Id. at 33-36, 41-44 & 52-53). Thus, Judge Walls dismissed claims based on statements emphasizing legal compliance and anti-corruption controls, specifically those concerning Cognizant's Code of Conduct and Anticorruption Policy, statements touting the low-cost services and attributing the company's financial results to legitimate business factors, and statements contained in Cognizant's SOX certifications. (Id. at 74).

Because Judge Walls found that at least some categories of allegedly material misstatements survived the motions to dismiss, His Honor continued to evaluate the second element in contention: scienter. Judge Walls ultimately dismissed, without prejudice, Count I against D'Souza and McLoughlin for failure to plead scienter. (Id. at 62 & 74). Although Judge Walls held that Plaintiffs adequately pled scienter with respect to Coburn, His Honor dismissed Count I against Coburn because he did not make any of the allegedly material misstatements that survived dismissal. (Id. at 55). Critically, however, unlike D'Souza and McLoughlin, the dismissal of Count I against Coburn was with prejudice. (Id. at 74).

At the outset, it is unclear to this Court why Plaintiffs were permitted to reallege Count I against D'Souza and McLoughlin, but not Coburn. The parties previously stipulated to Plaintiffs' filing of the consolidated FAC (see D.E. No. 26), and there were no prior motions to dismiss the original complaint. Rather than amend allegations against D'Souza and McLoughlin, Plaintiffs confirmed their intent to preserve the right to appeal the Court's Prior Opinion as it relates to "all previously dismissed claims, [d]efendants, and statements." (SAC at 2 n.1, 12 n.3, 130 n.123 & 132 n.124 (citing U.S. ex rel. Atkinson v. PA Shipbuilding Co., 473 F.3d 506, 517 (3d Cir. 2007) (stating that "[i]f a party omits a claim from an amended complaint that it would not have been futile to replead, that party can still preserve the claim for appellate review by standing on the dismissed claim despite leaving it out of the amended complaint. . . . Adding a section to anamended pleading specifically preserving the claim certainly suffices.")); see Tr. at 32:24-33:7). At the present juncture, this Court must respect Plaintiffs' decision to stand on their prior allegations pertaining to all previously dismissed claims, defendants, and statements for purposes of appeal.¹ As such, the Court makes clear that it will not address the sufficiency of allegations raised by the SAC against (i) Coburn, D'Souza, or McLoughlin under Count I; (ii) D'Souza or McLoughlin under Count II; or (iii) Cognizant under Count I for the categories of alleged misstatements that were previously deemed non-actionable.

Next, Judge Walls was tasked, as this Court is again, to determine whether Plaintiffs pled scienter with respect to Cognizant as a corporate entity. Central to this issue was the fact that Judge Walls found, for pleading purposes, actionable misstatements; however, those statements were not made by Coburn, the only individual defendant that Judge Walls inferred had scienter at the pleading stage. (Op. at 55 & 63-66). As discussed in-depth herein, there are three approaches that divide the Circuit Courts of Appeals on the issue of "corporate scienter" or "collective scienter" when there is no identified individual responsible for making any of the alleged misstatements at issue who also possessed the requisite scienter. The Third Circuit has yet to weigh in on which approach it considers controlling. See, e.g., In re Hertz Glob. Holdings Inc., 905 F.3d 106, 121 n.6 (3d Cir. 2018) ("We have neither accepted nor rejected th[e] doctrine [of corporate scienter] and decline to do so here because the [] allegations would not give rise to corporate scienter under any recognized theory of that doctrine."). Ultimately, Judge Walls concluded that Coburn's scienter could be imputed to Cognizant under the broad and middleapproaches followed by various Circuit Courts of Appeals. (Op. at 66-72).

Accordingly, Count I of the FAC survived against Cognizant only. (Id. at 74). The Court also held that Count II survived against Coburn and allowed Plaintiffs to amend Count II against D'Souza and McLoughlin in a subsequent complaint. (Id.).

ii. Interlocutory Appeal

Approximately one month after Judge Walls issued the Prior Opinion, Cognizant moved for immediate appeal pursuant to 28 U.S.C. § 1292(b), so that the Third Circuit could resolve...