Solomon v. Sprint Corp.

ISAAC SOLOMON and FRANCINE CANION, individually and on behalf of all others similarly situated, Plaintiffs, v. SPRINT CORPORATION, MICHAEL COMBES, ANDREW DAVIES, MARCELO CLAURE, and TAREK ROBBIATI, Defendants.

No. 1:19-cv-05272 (MKV)

United States District Court, S.D. New York

March 25, 2022

OPINION AND ORDER GRANTING IN PART AND DENYING IN PART MOTION TO DISMISS

MARY KAY VYSKOCIL, UNITED STATES DISTRICT JUDGE

This is a putative class action asserting violations of the federal securities laws in connection with Defendant Sprint Corporation's financial statements in advance of its 2020 merger with T-Mobile. In particular, Plaintiffs alleges that Sprint and its executives misled the markets when reporting about Sprint's “postpaid net additions” and with regard to Sprint's internal controls connected to its involvement in the federal “Lifeline” reduced price phone lines program. After the Lead Plaintiff was appointed and an Amended Complaint was filed, Defendants moved to dismiss the complaint. For the reasons discussed herein, the motion is GRANTED IN PART and DENIED IN PART.

FACTUAL BACKGROUND

The facts as stated herein are drawn from Plaintiffs' Amended Class Action Complaint [ECF No. 29] (“AC”), the allegations of which are taken as true for the purposes of the motion to dismiss. See Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009).

This case relates to financial statements Sprint made before its April 2020 merger with T-Mobile. Amended Complaint, ECF No 29 (“AC”) ¶ 2. Prior to the merger, in 2013 Softbank Corporation (“Softbank”) first merged with Sprint and acquired a 78% interest in the company. AC ¶ 3. According to Plaintiffs, Softbank had an immediate appetite to merge “with another telecommunications company to take market share from Verizon . . . and AT&T Inc.” AC ¶ 3. Despite this interest, merger discussions between Sprint and T-Mobile apparently failed in both 2014 and 2017. AC ¶ 3. As alleged by Plaintiff, the failure of the first two rounds of merger talks led Sprint to begin disseminating false and misleading statements intended to artificially increase the value of Sprint in the eyes of the market. The misrepresentations allegedly were only revealed by disclosures and due diligence in connection with the eventually successful merger. Plaintiffs' complaint alleges misrepresentations regarding two topics: Sprint's reported net “postpaid additions” and its involvement in and controls regarding the federal “Lifeline” program.

P. Postpaid Additions

One of the principal methods through which Solomon alleges Sprint increased its apparent value was by misreporting Sprint's so-called “postpaid additions.” AC ¶ 4. Before the T-Mobile merger, Sprint “offered wireless service on a postpaid and prepaid payment basis to customers ” both consumers and businesses. AC ¶ 57. Sprint “told investors that wireless service revenue represented the most significant contributor to its earnings and was mostly driven by the number of postpaid subscribers and average revenue per user.” AC ¶ 59; see also Opposition to Motion to Dismiss., ECF No. 45 (“Opp.”) at 1. In other words, Sprint claimed that its growth largely was based on increasing postpaid phone lines and increasing revenue per customer. To keep up this narrative, Sprint allegedly included phone lines added free of charge to its sales quota in representations to the FCC, increasing the apparent success of its sales and products. AC ¶ 60. And between August 2018 and January 2019, Sprint “repeatedly touted” its postpaid subscriber additions, including that they expected to see “continued acceleration” in subscribers. AC ¶ 61. Behind the scenes, however, Sprint may have been less enthusiastic.

Before April 2018, Defendants in this action purportedly told the Audit Committee of Sprint's Board that “postpaid handset gross and net adds were declining, with postpaid phone churn expected to be down [year over year] for all national carriers except Sprint.”^[1] AC ¶ 85 (emphasis in original). As alleged in the complaint, this representation means that rather than a “continued acceleration” that had been represented publicly, the opposite was actually true, and postpaid additions were expected to decrease. Further statements to the Audit Committee accentuated Sprint's negative outlook, including reports that Sprint's “EBITDA was flattening” and that Sprint's “free cashflow had turned negative.” AC ¶ 85. This trend continued until at least January 2019, when the Audit Committee was again told that “net adds decreased year-over-year, postpaid handset churn rose, and service revenue, EBITDA, operating income, and free cashflow had all declined from the prior quarter.” AC ¶ 86.

In March 2019, Defendant Michel Combes, then-Chief Executive Officer of Sprint, privately told the company's Board that Sprint was “losing relevance with customers . . . resulting in drastic reductions in postpaid [net adds] in [the] last three years.” AC ¶ 87. A few weeks later, Sprint finally made this statement and the representations it contained public, when it filed a letter with the Federal Communication Commission (“FCC”) stating that any of its positive statements about postpaid additions were “incomplete and none are a substitute for a realistic analysis of the key factors that are most probative of Sprint's overall competitive position and prospects.” AC ¶¶ 60, 158.

The Amended Complaint also contains information apparently obtained by five confidential witnesses at Sprint. See AC ¶¶ 62-81. These confidential witnesses worked as sales managers, wireless specialists, and financial analysts. See id. According to the information they have provided, Sprint over-counted postpaid lines by as many as 100, 000 lines, AC ¶ 63, and offered a bundled free line with a purchased line in an effort to increase the overall line addition numbers, AC ¶ 77, all with the apparent knowledge of senior executives at Sprint. AC ¶ 81.

Despite the apparent knowledge of the Sprint Board, its executives, and employees at the company, the reality of Sprint's perilous financial situation was not known until Sprint filed its letter with the FCC in April 2019 in connection with seeking approval for the T-Mobile merger (the “April 2019 FCC Letter”). The letter reported that Sprint's “current performance would be unsustainable without the merger due to weak network infrastructure and a customer base prone to leave in search of better deals.” AC ¶ 159. The letter went on:

despite minor improvements in a few financial metrics relative to its own historic performance, Sprint is not performing well when compared to other wireless companies. Sprint continues to have the lowest wireless service revenue and postpaid service revenue of any major carrier, and its total company service revenue continues to decline. Sprint's operating income has been boosted by the Company's shift to handset leasing, and other short-term, nonrecurring factors, such as lower customer acquisition costs resulting from attracting fewer new customers. Operating income has also benefitted from Sprint's decision to raise prices for its plans, which is likely to continue. Sprint's free cash flow, which is a much better indicator of its ability to fund its operations and network investments, has been overwhelmingly negative.

AC ¶ 158 (emphasis in complaint). Specific to Sprint's reported figures related to postpaid additions, the April 2019 FCC Letter continued:

Sprint's postpaid net additions recently have been driven by “free lines” offered to Sprint customers and the inclusion of less valuable tablet and other non-phone devices, as well as pre to post migrations that do not represent “new” Sprint customers. Sprint lost [BEGIN HIGHLY CONFIDENTIAL] [REDACTED] [END HIGHLY CONFIDENTIAL] postpaid handset subscribers for all of FY2018 when excluding these pre to post migrations. While these public statements and the individual metrics cited are all accurate, they are incomplete and none are a substitute for a realistic analysis of the key factors that are most probative of Sprint's overall competitive position and prospects.

AC ¶ 158 (emphasis in complaint). The April 2019 FCC Letter and a Wall Street Journal article discussing the article, see AC ¶¶ 14, 159, are alleged to be the first public disclosures of the Company's purported misrepresentations about its postpaid additions. In light of them, Sprint common stock fell $0.37 (6.2%) between April 16 and 17, 2019: from $6.01 per share to $5.64 per share. AC ¶ 160.

B. Lifeline Program

In addition to their allegations of misrepresented postpaid additions, Plaintiffs allege that Sprint's involvement with the federal “Lifeline” program, and an admitted failure of Sprint's internal controls, further affected the value of its stock. The Lifeline program is a federally sponsored program that lowers the monthly costs for phones and internet to qualifying low-income consumers. AC ¶ 46. Those who are eligible receive a $7.25 discount on their phone bill or a discount of $9.25 on their Internet bill, with any qualifying customers who reside on federally recognized Tribal lands receiving an additional discount. AC ¶¶ 47. Participants are eligible for the Lifeline program if their income is equal to or lower than 135% of the federal poverty guidelines or if the person or a member of his or her household qualify for a federal assistance program such as the Supplemental Nutrition Assistance Program Supplemental Security Income, or any of a number of other programs. AC ¶ 48. Sprint participates in the Lifeline program through an affiliated Sprint brand, Assurance Wireless. Sprint properly provided Lifeline-qualifying consumers with lower priced services, and subsequently sought reimbursement from a federally sponsored fund. AC ...