EXHIBIT a Case 3:17-Cv-01617-VAB Document 167-1 Filed 05/10/19 Page 2 of 165
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Case 3:17-cv-01617-VAB Document 167-1 Filed 05/10/19 Page 1 of 165 EXHIBIT A Case 3:17-cv-01617-VAB Document 167-1 Filed 05/10/19 Page 2 of 165 UNITED STATES DISTRICT COURT DISTRICT OF CONNECTICUT No. 3:17-cv-01617-VAB IN RE FRONTIER COMMUNICATIONS JURY TRIAL DEMANDED CORPORATION STOCKHOLDERS LITIGATION ECF CASE [PROPOSED] AMENDED CONSOLIDATED CLASS ACTION COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS Case 3:17-cv-01617-VAB Document 167-1 Filed 05/10/19 Page 3 of 165 TABLE OF CONTENTS I. INTRODUCTION .............................................................................................................. 2 II. JURISDICTION AND VENUE ......................................................................................... 7 III. PARTIES ............................................................................................................................ 7 A. Lead Plaintiffs ......................................................................................................... 7 B. Defendants .............................................................................................................. 8 IV. SUBSTANTIVE ALLEGATIONS .................................................................................... 9 A. Before The Class Period, Defendants Announce The CTF Acquisition ................ 9 B. The Class Period Begins As Defendants Falsely Claim That Service Issues Only Affected 1% Of CTF Customers........................................................................... 12 1. Former Employees Confirm That Defendants’ 1% Claims Wildly Understated Service Issues By Well Over 400% ...................................... 15 2. Frontier Senior Management Knew The True Scope Of Service Issues .. 20 C. Defendants Continue To Misrepresent The Status Of The CTF Acquisition ....... 26 1. Billing Issues ............................................................................................. 26 2. Video-on-Demand Issues .......................................................................... 28 3. Progress of the CTF Integration ................................................................ 30 V. THE TRUTH GRADUALLY EMERGES ....................................................................... 33 A. Frontier’s Third Quarter 2016 Results Exposes For The First Time Negative Consequences Of The Concealed Service Interruptions ....................................... 34 B. Defendants Blame, For the First Time, Undisclosed “Clean Up” Of “Non-Paying Accounts” From The CTF Acquisition As Frontier’s Year-End 2016 Results Disappoint ............................................................................................................. 39 C. CTF Operations Drive More Decline and Force Frontier To Cut Its Dividend.... 44 D. Defendants Unexpectedly Announce That Frontier Will Miss Its EBITDA Target Due Largely To CTF Losses ................................................................................. 47 VI. POST CLASS PERIOD EVENTS.................................................................................... 50 VII. DEFENDANTS’ MATERIALLY FALSE AND MISLEADING STATEMENTS ........ 51 A. Defendants’ Claim That Service Problems Following The CTF Flash Cut Affected Only 1% Of CTF Customers .................................................................. 51 B. Defendants’ Claims Regarding The Status Of The CTF Acquisition ................... 53 C. Defendants’ Claim That “Non-Paying Accounts” Acquired From Verizon Are To Blame For Severe Revenue Decline ..................................................................... 58 Case 3:17-cv-01617-VAB Document 167-1 Filed 05/10/19 Page 4 of 165 D. Defendants’ Claim To Have Prepared Frontier’s Financial Statements In Accordance With Generally Accepted Accounting Principles ............................. 61 VIII. LOSS CAUSATION ......................................................................................................... 62 A. Corrective Event #1: Frontier Discloses Significant Revenue Decline, Driven by the CTF Regions, and Ballooning Integration Costs (November 1, 2016) ........... 63 B. Corrective Event #2: Frontier Discloses Worsening Revenue Decline, Driven by Purported “Cleanup” of “Non-Pay” Accounts Acquired in the CTF Acquisition (February 27, 2017) .............................................................................................. 65 C. Corrective Event #3: Frontier Discloses that Worsening Declines, Primarily Related to CTF Operations, Forced the Company to Cut its Dividend (May 2, 2017) ..................................................................................................................... 67 D. Corrective Event #4: Frontier Discloses that Unexpectedly Slow Stabilization After the CTF Acquisition Prevented the Company From Meeting its Consistently Affirmed EBITDA Guidance (October 31, 2017) ................................................ 69 IX. PRESUMPTION OF RELIANCE .................................................................................... 71 X. INAPPLICABILITY OF STATUTORY SAFE HARBOR ............................................. 73 XI. SUMMARY OF SCIENTER ALLEGATIONS ............................................................... 73 XII. TIMELINESS OF PLAINTIFFS’ EXCHANGE ACT CLAIMS .................................... 78 XIII. CLASS ACTION ALLEGATIONS ................................................................................. 84 XIV. PRAYER FOR RELIEF ................................................................................................... 86 XV. JURY DEMAND .............................................................................................................. 86 ii Case 3:17-cv-01617-VAB Document 167-1 Filed 05/10/19 Page 5 of 165 1. Lead Plaintiffs Arkansas Teacher Retirement System (“ATRS”) and Carlos Lagomarsino (“Lagomarsino,” with ATRS, “Lead Plaintiffs” or “Plaintiffs”), by and through their counsel, bring this action individually and on behalf of all persons and entities who purchased the publicly traded common stock and Mandatory Convertible Preferred Stock (referred to herein as “preferred stock”) of Frontier Communications Corporation (“Frontier” or the “Company”) between April 25, 2016 and October 31, 2017, inclusive (the “Class Period”), and were damaged thereby. Lead Plaintiffs allege the following upon information and belief, except as to those allegations concerning Lead Plaintiffs, which Lead Plaintiffs allege upon personal knowledge. Lead Plaintiffs’ information and belief are based upon Lead Counsel’s investigation, which included review and analysis of, inter alia: (i) regulatory filings made by Frontier with the United States Securities and Exchange Commission (“SEC”); (ii) press releases and public statements by the Company; (iii) analyst reports concerning Frontier; (iv) interviews with former Frontier employees and contractors; (v) documents prepared by governmental and regulatory agencies concerning the Company, including the January 4, 2019 report by the Minnesota Department of Commerce concerning its investigation into Frontier’s service quality, customer service, and billing practices; and (vi) other public information regarding the Company. Lead Counsel’s investigation into the factual allegations contained herein is continuing, and many of the relevant facts are known only by Defendants or are exclusively within their custody or control. Lead Plaintiffs believe that substantial additional evidentiary support will exist for the allegations set forth herein after a reasonable opportunity for further investigation or discovery.1 1 Unless otherwise noted, all emphasis is added, and references to “¶__” are to paragraphs in this [Proposed] Amended Consolidated Class Action Complaint For Violations Of The Federal Securities Laws (the “PAC”). In accordance with the Court’s Ruling and Order on Motions to Dismiss, 2019 WL 1099075 (D. Conn. Mar. 8, 2019), Plaintiffs only seek to amend claims Case 3:17-cv-01617-VAB Document 167-1 Filed 05/10/19 Page 6 of 165 I. INTRODUCTION 2. This case arises from Frontier’s disastrous April 2016 acquisition of the California, Texas, and Florida wireline operations of Verizon Communications Inc. (“Verizon”) for $10.5 billion (the “CTF Acquisition”). After closing the CTF Acquisition, Defendants told investors that widely reported service disruptions had been resolved quickly and, in any event, only impacted less than 1% of the acquired customers. In fact, Defendants’ statements concealed a truth that investors did not begin to learn until months later: the CTF Acquisition was a disaster, plagued by service issues that drove customers away, caused revenue to plummet, and propelled acquisition and integration costs to nearly $1 billion—twice the estimate given to investors. 3. At all relevant times Frontier was a provider of wireline (or “landline”) telecommunications services that historically had principally served rural communities. In 2015, Defendants announced the “transformational” CTF Acquisition, which would not only would double the size of the Company (increasing its customer base by millions) but would also fundamentally alter the Company by bringing the Company into urban markets for the first time. Defendants also announced that the Company would undertake this transformation overnight, using a technique known as a “flash cut” (the “CTF Flash Cut”). In a flash cut, the acquiring company transfers the acquired assets in one immediate—and irreversible—“cutover” that is complete in a matter of hours. As