Complete victory for BT Group in securities fraud lawsuit

On August 5, 2021, Davis Polk secured a victory in the U.S. Court of Appeals for the Third Circuit on behalf of BT Group plc, a multinational telecommunications company headquartered in London and formerly known as British Telecom, as well as several BT senior executives. The Third Circuit’s decision affirmed the dismissal of plaintiffs’ case against BT in its entirety, resulting in a complete victory for our clients.

The complaint, brought as a putative securities class action on behalf of BT ADR holders, alleged that defendants engaged in securities fraud in connection with an accounting scandal at BT’s Italian subsidiary. BT first disclosed the accounting problems to investors in late 2016 and early 2017 following an internal investigation based on a whistleblower complaint. In early 2017, BT revised downward its financial statements for several prior years and took a £530 million write-down in connection with these issues, which was followed by a 20% plunge in its share price.

The complaint, which was plaintiffs’ fourth amended complaint in the action, brought claims under sections 10(b) and 20(a) of the Exchange Act, alleging, among other things, that BT’s financial statements for 2013 through 2017 were materially misleading as a result of the financial revisions announced in early 2017 and that BT falsely stated that its internal controls over financial reporting were effective during those years.

In 2018, Judge Kevin McNulty of the U.S. District Court for the District of New Jersey dismissed plaintiffs’ first amended complaint on the basis that plaintiffs failed to adequately plead scienter, but he gave plaintiffs the opportunity to further amend the complaint. After that amendment, plaintiffs proceeded to amend their complaint two more times – first to add an additional defendant and then to add allegations to attempt to bolster their scienter arguments. Defendants then moved to dismiss the fourth amended complaint on the basis that it, like the first amended complaint, still failed to adequately plead scienter.

On April 24, 2020, Judge McNulty granted defendants’ motion to dismiss in full, adopting the arguments made by Davis Polk. He rejected plaintiffs’ argument that statements made by BT’s audit committee in its annual reports noting a focus on internal control problems and bullying at BT’s Italian subsidiary were sufficient to infer scienter. He also rejected plaintiffs’ reliance on statements in newspaper articles concerning BT’s awareness of accounting issues at BT’s Italian subsidiary as insufficiently specific to demonstrate scienter. Finally, Judge McNulty rejected plaintiffs’ attempt to rely on the “corporate scienter” doctrine while withholding decision on whether the doctrine is good law in the Third Circuit. The court found that none of the facts alleged by plaintiffs – the knowledge of lower-level executives or executives at the Italian subsidiary, clawback of executives’ pay, investigations by the Italian government, GAAP violations and employee resignations – were sufficient to create an inference that the fraud was “so fundamental and pervasive as to support an inference of corporate scienter.”

Plaintiffs appealed the dismissal and the Third Circuit affirmed the district court’s decision.

The Davis Polk team included partners James P. Rouhandeh and Brian S. Weinstein, counsel Mari Byrne and associates Daniel S. Magy and Jane E. Ramage. All members of the Davis Polk team are based in the New York office.