On September 19, 2017, Judge Andrew L. Carter, Jr. of the United States District Court for the Southern District of New York allowed a putative securities fraud class action to proceed against VEON Ltd. (“VEON”), a telecommunications company formerly known as VimpelCom, and several of its current and former executives, denying in large part the company’s motion to dismiss. In re VEON Ltd. Sec. Litig., 15-cv-08672 (ALC) (S.D.N.Y. Sept. 19, 2017). Plaintiffs brought claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (“Exchange Act”) asserting that VEON’s failure to disclose in its SEC filings its admitted bribery scheme in Uzbekistan made the company’s statements about its growth materially misleading. While VEON argued that plaintiffs’ claims were an impermissible attempt to enforce the Foreign Corrupt Practices Act of 1977 (“FCPA”), for which there is no private right of action, the Court disagreed, holding that plaintiffs’ allegations were sufficiently distinct and sufficient to plead violations of Sections 10(b) and 20(a) of the Exchange Act.

In February 2016, VEON entered a deferred prosecution agreement (“DPA”) with the United States Department of Justice, pleading guilty to various provisions of the FCPA. Plaintiffs alleged that VEON, in the DPA, admitted to bribing the Uzbek President’s daughter in order to garner favorable treatment as the company entered the Uzbek telecommunications market, and also admitted that the company had failed to implement and enforce adequate internal accounting controls, lacked a process for reviewing and identifying conflicts of interest, and did not have a fully operational compliance function until 2013. Plaintiffs alleged that the conduct that formed the basis of VEON’s FCPA violations led to material misstatements and omissions in its SEC filings during the relevant time period. In particular, while plaintiffs did not take issue with the accuracy of the financial numbers reported by VEON, they argued that VEON’s reference to the increase in its broadband subscriptions, including in Uzbekistan, and the increase in its revenue more generally, required it to report that these increases were the results of the bribes paid, at least in part, because the company had put the cause of its financial success at issue. Plaintiffs also identified disclosures in VEON’s annual reports concerning its internal controls that were allegedly inaccurate, as well as certifications signed by its executives pursuant to the Sarbanes Oxley Act of 2002, attesting that the information in the company’s Forms 20-F was accurate.

In largely denying VEON’s motion to dismiss, the Court first addressed the issue of material misrepresentations and omissions. It held that statements that placed the source of the company’s revenues “at issue” (in other words, statements about increased subscriptions in Uzbekistan and increased revenue) were actionable misstatements, but held that pure statements of financial performance are not actionable unless the figures provided are alleged to be false. For example, VEON’s statement that its sales and marketing efforts in Uzbekistan resulted in increased subscribers and revenues, without disclosure of its bribery scheme, made those and similar statements actionable. By way of example, the company attributed its year-over-year growth rate of sales in Uzbekistan to “the improving macroeconomic situation, product quality and efficient sales and marketing efforts.” Further, concerning alleged misstatements regarding the governmental authorities in Uzbekistan, while the Court held that general disclosures about the relevant oversight bodies were non-actionable, true statements, it held that in light of the company’s bribes, its statement that “all owners of telecommunication networks have equal rights and enjoy equal protection guaranteed by the law” was materially misleading and actionable. In addition, the Court held that certain of VEON’s statements about its internal controls were actionable because plaintiffs alleged that those statements regarding the “existence and efficacy” of those controls were false, including that, based on VEON’s own admissions in the DPA, company management knowingly failed to implement adequate controls governing due diligence, contract approval, and internal audit, and, at the time, was aware that its internal controls were ineffective. Moreover, the Court concluded that many of the alleged misstatements concerning VEON’s internal controls “are backward, not forward, looking,” and as a result were not protected by the PSLRA’s safe harbor and the “bespeaks caution” doctrine. Notably, however, the Court found that to the extent plaintiffs’ claim is based on the failure to follow internal controls, without more, that aspect of the claim is dismissed because it constitutes “mismanagement” rather than giving rise to a Section 10(b) claim.

The Court separately held that plaintiffs sufficiently alleged scienter on the part of the VEON executives, such that their intent could be attributed to the company. The Court reasoned that plaintiffs alleged facts “constituting strong circumstantial evidence of conscious misbehavior or recklessness by VEON,” through VEON’s admissions in the DPA, including the admissions of its executives. The Court also found that plaintiffs had sufficiently alleged facts that allowed for the inference that individuals higher in the company also had some level of awareness of the bribery scheme, necessarily implicating those who would have had a role in approving VEON’s public filings. In that regard, the Court rejected VEON’s argument that plaintiffs must allege that the individuals whose state of mind is imputed to the corporate defendant are the same individuals who made the relevant misstatements or omissions. The Court concluded that these admissions, taken together with the other facts alleged by plaintiffs, were sufficient to give rise to a strong inference of corporate scienter. Further, while the Court noted that there was an issue with plaintiffs’ loss causation allegations (in particular, it agreed with the company’s argument that plaintiffs have not tied their losses to the misrepresentations and omissions as compared to the underlying conduct), the Court declined to dismiss the claims for failure to allege loss causation and instead reasoned that the “most efficient resolution” is to modify the proposed class definition to address that issue. Finally, the Court declined to dismiss plaintiffs’ Section 20(a) claim, as the arguments for dismissing that claim rested entirely on the insufficiency of plaintiffs’ Section 10(b) claim, which the Court allowed to proceed.

This case highlights that while FCPA violations by themselves cannot give rise to a private right of action, plaintiffs may be able to sustain securities claims based on the alleged criminal wrongdoing if they can sufficiently plead that the failure to disclose such criminal conduct made the company’s other disclosure material misleading.

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