NOT PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
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No. 20-2106
______
PAMCAH-UA LOCAL 675 PENSION FUND; CLAYTON HOLLISTER,
Appellants
v.
BT GROUP PLC; IAN LIVINGSTON; GAVIN E. PATTERSON;
TONY CHANMUGAM; NICK ROSE; LUIS ALVAREZ; RICHARD CAMERON
____________
On Appeal from the United States District Court
for the District of New Jersey
(D.C. No. 2-17-cv-00497)
District Judge: Honorable Kevin McNulty
____________
Submitted Pursuant to Third Circuit LAR 34.1(a)
March 5, 2021
____________
Before: KRAUSE, PHIPPS, and FUENTES, Circuit Judges.
(Filed: August 5, 2021)
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OPINION*
___________
*
This disposition is not an opinion of the full Court and pursuant to I.O.P. 5.7 does not
constitute binding precedent.
PHIPPS, Circuit Judge.
In this putative class action, two investors – a pension fund and an individual – sue
BT Group along with several of its officers and directors for federal securities fraud. The
investors allege that BT Group, a multinational telecommunications company formerly
known as British Telecom, overstated profits for several years due to fraudulent
accounting at one of its subsidiaries, BT Italy. They bring claims under Sections 10(b)
and 20(a) of the Securities Exchange Act of 1934, see 15 U.S.C. §§ 78j(b), 78t(a), and
Securities and Exchange Commission Rule 10b-5, see 17 C.F.R. § 240.10b–5.
But securities fraud is not easy to allege: the Private Securities Litigation Reform
Act imposes a heightened pleading standard for such claims. Under that statute, a
complaint must “state with particularity facts giving rise to a strong inference that the
defendant acted with the required state of mind.” 15 U.S.C. § 78u-4(b)(2)(A); see also
id. § 78u-4(b)(1) (requiring the pleading to specify “each statement alleged to have been
misleading [and] the reason or reasons why the statement is misleading”). That required
state of mind is scienter – the intent to deceive, manipulate, or defraud either knowingly
or recklessly. See In re Hertz Glob. Holdings Inc., 905 F.3d 106, 114 (3d Cir. 2018);
Institutional Invs. Grp. v. Avaya, Inc., 564 F.3d 242, 252 (3d Cir. 2009). Thus,
allegations must support an inference of scienter that is “more than merely plausible or
reasonable—it must be cogent and at least as compelling as any opposing inference of
nonfraudulent intent.” Tellabs, Inc. v. Makor Issues & Rts., Ltd., 551 U.S. 308, 314
(2007).
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In exercising subject-matter jurisdiction over this case, see 15 U.S.C. § 78aa;
28 U.S.C. § 1331, the District Court dismissed the investors’ fourth amended complaint
for failure to state a claim for relief because their allegations of scienter did not meet the
heightened pleading standard. The investors filed a timely notice of appeal, invoking this
Court’s appellate jurisdiction. See 28 U.S.C. § 1291.
On appeal, the investors defend the sufficiency of their scienter allegations on two
grounds. First, they contend that the allegations as to the Chairman of BT Group’s Audit
Committee, Nick Rose, support a strong inference that he acted with scienter, and they
seek to impute his mental state to BT Group. Second, the investors argue that their
allegations regarding executives at BT Global Services and BT Italy, two other
components of the BT Group corporate family, also support a strong inference of
scienter. The investors then seek to impute the alleged mental states of those executives
to BT Group by urging this Circuit to adopt the so-called ‘corporate scienter doctrine.’
See, e.g., In re Omnicare, Inc. Sec. Litig., 769 F.3d 455, 474–76 (6th Cir. 2014). On de
novo review, see City of Edinburgh Council v. Pfizer, Inc., 754 F.3d 159, 166 (3d Cir.
2014), we reject the investors’ arguments and will affirm the judgment of the District
Court.
I.
The investors claim that BT Group overstated profits for several years, and when it
eventually reported its profits accurately, its share price fell. BT Group’s financial
statements reported profits from BT Italy and included notations that BT Group was
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examining the control environment at BT Italy. In an October 2016 press release, BT
Group identified prior overstatements of profits of approximately £145 million due to
“certain historical accounting errors” stemming from inappropriate management behavior
at BT Italy. Fourth Am. Compl. ¶ 66 (JA265). Later, through a January 2017 press
release, BT Group announced that the overstatement of profits had exceeded £530
million. After those revelations of accounting fraud, BT Group’s publicly traded
American Depositary Receipts (ADRs) lost more than 20% of their value (or
approximately £8 billion in market capitalization). But to state a claim for securities
fraud, the investors’ allegations must give rise to a strong inference that BT Group made
those false financial statements with scienter.
II.
Several of the investors’ allegations support an inference that Rose, the Chairman
of BT Group’s Audit Committee, made various assertions with scienter in BT Group’s
financial statements. As far back as 2013, the Audit Committee had concerns about BT
Italy. And BT Group’s SEC filings from 2013 and 2014 reported that the Audit
Committee was monitoring internal controls and risk management at BT Italy. The
investors also allege that in November 2015, BT Italy employees told a BT Global
Services executive about accounting irregularities. They further allege that the Audit
Committee knew in 2016 of a culture of bullying at BT Italy. Even with that cumulative
alleged knowledge, BT Group’s financial statements reported improvements in the
control environment at BT Italy in 2014, 2015, and 2016.
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The problem for the investors is that their allegations also support the inference
that BT Group intended to detect and prevent fraud. For example, at the Audit
Committee’s request, BT Group’s Board of Directors visited BT Italy to review
operations and meet with various personnel. BT Group also investigated the reports of
workplace bullying at BT Italy. In addition, BT Group repeatedly disclosed concerns
about BT Italy to the SEC, and it reported monitoring and investigating that situation and
responding to internal complaints. Finally, BT Group voluntarily disclosed its prior
inaccurate reporting, including the 2016 announcement of an approximately £145 million
write-down for historical accounting errors at BT Italy, and the 2017 follow-up
announcement that the write-down totaled £530 million. In sum, the investors offer
several allegations supporting an inference that Rose acted with scienter, but those
allegations are comparatively weaker than the contrary inference that he did not. See
Tellabs, 551 U.S. at 314.
III.
The investors’ remaining allegations of scienter similarly fail. The allegations
regarding executives at two other components of the BT Group corporate family – BT
Global Services and BT Italy – do not give rise to a strong inference of scienter.
In attempting to allege scienter for executives at BT Global Services, one of BT
Group’s lines of business, the investors rely on foreign news articles. As amended, the
complaint alleges that Italian prosecutors investigated and charged those executives, CEO
Luis Alvarez and CFO Richard Cameron, for complicity in false accounting at BT Italy.
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But the investors do not allege the crimes charged, the facts supporting the charges, or the
extent (if any) to which the Italian charges implicate BT Group’s securities filings in the
United States at the time of the charged conduct. The investors also rely on other news
articles quoting email correspondences. But they do not allege that Alvarez or Cameron
sent, received, or even knew about those emails. Nor do those emails mention Alvarez at
all. Instead, they concern Cameron’s financial goals for the company. Through a third
party, those emails report that Cameron wanted operating profit to increase by €700,000,
that he suggested capitalizing labor costs as a solution, and that he would not accept an
earnings estimate for an upcoming fiscal year below a certain amount. Additional articles
quoting BT Italy executives include the executives’ statements that they shared all
economic and financial transactions with Alvarez and Cameron. Taken cumulatively,
while also accounting for the vagueness of some allegations as well as the attenuation
inherent in the second- and third-hand nature of some of the other allegations, the
pleading is at most consistent with an intent to commit financial statement fraud. But that
does not suffice under the ordinary pleading standard of plausibility, much less the
heightened standard imposed by the Private Securities Litigation Reform Act. See Bell
Atl. Corp. v. Twombly, 550 U.S. 544, 557 (2007) (explaining “[t]he need at the pleading
stage for allegations plausibly suggesting (not merely consistent with) [liability]”); GSC
Partners, 368 F.3d at 239. Thus, even if the mental states for the BT Global Services
executives could be imputed to BT Group (an issue not addressed today), these
allegations would not support a claim for securities fraud.
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The allegations regarding executives at BT Italy fall short, too. Those executives,
CEO Giancarlo Cimini and CFO Luca Sebastiani, worked at BT Italy, a subsidiary of BT
Group. But “parent companies are not, merely by dint of ownership, liable for the acts of
their subsidiaries.” Fried v. JP Morgan Chase & Co., 850 F.3d 590, 595 n.2 (3d Cir.
2017). Even if our circuit embraced the corporate scienter doctrine, the investors would
still need to plead that BT Group participated in BT Italy’s alleged fraud – for example,
through a cover-up. See Rahman, 736 F.3d at 246. Here, the investors make no such
allegations.
***
Because the investors failed to plead that BT Group acted with scienter, they do
not state a claim under Section 10(b). And that shortcoming forecloses their derivative
claim under Section 20(a). See Avaya, 564 F.3d at 280. Accordingly, we will affirm the
judgment of the District Court dismissing the fourth amended complaint.
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