UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK
Civil Action No: 02-CV-3013 (LAK) IN RE NTL, INC. SECURITIES LITIGATION RECD APR 15 2005 CONSOLIDATED AMENDED CLASS ACTION COMPLAINT THIS DOCUMENT RELATES TO : ALL ACTIONS JURY TRIAL DEMANDED
Lead Plaintiffs, individually and on behalf of all other persons similarly situated, by their undersigned attorneys, for their consolidated amended class action complaint (the
"Complaint"), make the following allegations upon information and belief, based upon the fact s set forth below, which were obtained through an extensive investigation made by and throug h their attorneys. Lead Plaintiffs' investigation included, among other things : a review and analysis ofvarious public statements and filings made by NTL, Inc . ("NTL" or the "Company") and its senior officers with the Securities and Exchange Commission ("SEC") and the Unite d
States Bankruptcy Court for the Southern District of New York; the reports of securities analysts concerning the Company; press releases, media reports, and other publicly available documents regarding the Company; and interviews with former employees of the Company knowledgeable of the conduct complained of herein . Except as alleged herein, the underlying information concerning Defendants ' misconduct, and the particulars thereof, are not available to Lead
Plaintiffs and lie within the possession and control of Defendants . Based on the evidence already developed, Lead Plaintiffs believe that additional evidentiary support will exist for the allegation s set forth herein after a reasonable opportunity for further discovery . NATURE OF THE ACTION
1 . Lead Plaintiffs bring this action on behalf of themselves and all persons wh o purchased or otherwise acquired the publicly-traded securities of NTL on the open market (th e
"Class") between August 3, 2000, and November 29, 2001 (the "Class Period"), inclusive ,
against NTL and certain of its officers an d directors for violations of the Securities Exchange Act
of 1934 (the "Exchange Act").
2. NTL is a corporation, based in New York, that provides telephone, cabl e
television, Internet, and broadband communications and services to the United Kingdom and the
Republic of Ireland, telecommunications services to Switzerland, France, and Australia, an d
made strategic investments in broadband cable operations in Germany and Sweden .
3. Since 1993, NTL has grown through acquisitions. Between 1998 and 2000, such
growth occurred at a breakneck pace . In that time, NTL acquired 11 companies, which
purportedly provided the Company with the scale necessary to operate a cost-effective and
efficient broadband communications company. Two of these acquisitions - the residential
business of Cable & Wireless Communications ("ConsumerCo") and Cablelink, Ireland's larges t
cable operator - alone gave NTL approximately three million customers and 16,000 associate s
in the UK.
4. Subscriber growth was critical to the Company's ability to grow its revenues and
EBITDA. The components of EBITDA, as defined by the Company, are revenues less costs and
expenses. Historically, NTL grew its revenues and EBITDA primarily through selling a bundled
package of analog pay TV and telephony. Following the foregoing acquisitions , NTL expected
to extract greater value from its enlarged customer b ase through continued migration to digital
TV, and the sale of premium packages and high speed Internet services. EBTTDA was expected
2 to grow as a result of integration and reduced operating costs .
5 . To finance its acquisitions, NTL needed to access the capital markets, namely th e debt market. Between 1999 and 2000, NTL's gross debt increased from $8 .9 billion to $15.1 billion. In 2000 alone, NTL raised over $14.8 billion in debt and equity financing . NTL began
2001 by raising an additional $335 million from a bond offering and Australian bank facility.
6 . In 2000, NTL generated "record" revenues of $2.8 billion and EBITDA of $344 million. Defendants stated that EBITDA growth and margin expansion would be generate d
from, among other things , increasing Average Revenue Per User ("ARPU") and cost reductions
associated with the integration of acquired businesses. ARPU is one of eight key metrics used by
the Company to determine its profitability . Among the metrics relevant to this action are :
customer base - the number of customers subscribing to NTL's services; revenue generating
units ("RGU") - each service taken by a customer is an RGU; ARPU; churn - the proportion
of customers leaving NTL's services due to customer move, dissatisfaction, and non-payment;
and EBITDA .
7. During the Class Period, Defendants made materially false and misleading
statements that they were exploiting NTL's scale to manage NTL's balance sheet to increase its
flexibility and liquidity. Additionally, Defendants represented that through the successfu l
integration of the acquired businesses , NTL would, among other things, increase its subscriber
base, generate more revenue, produce better margins, and lower costs and expenses .
8. At the time Defendants made these statements, however, they were aware that
NTL's aggressive growth strategy had caused a significant fi nancial strain on the Company,
thereby impairing its ability to service its debts . Moreover, contrary to Defendants' statements
concerning its exploitation of the economies of scale purportedly enjoyed as a result of the
3 myriad acquisitions, including ConsumerCo and Cablelink, the Company' s acquisition spree had not actually resulted in these purported efficiencies. First, NTL did not have the subsc riber base represented by Defendants . During the Class Period, Defendants were manipulating the size o f
NTL's customer base by, among other means, refusing to honor customer requests to terminate their accounts; acquiring new subscribers through false pretenses - that is, Defendants promised services that were not yet available to the customer and offered promotions that NTL later disavowed; reconnecting customers whose accounts were previously terminated for non- payment; recruiting customers with poor credit histories by waiving credit requirements ; and falsifying customer information to facilitate credit approval by frustrating the credit verificatio n process. Second, because subscriber growth was fictitious or otherwise manipulated, NTL did not, and, indeed, could not, generate sufficient revenue to support its purported growth an d expansion. Moreover, aside from inflating the customer base, many of NTL's subscribers were unlikely to contribute to NTL's revenue because they either subscribed to free services or were likely to default on their bills because of their poor financial condition. Third, NTL's debt burden and inability to generate meaningful revenue growth impaired Defendants' capacity t o refinance NTL's enormous debt at more favorable terms and/or access the capital markets t o secure additional financing . The Company's ability to attract this financing was premised upon
NTL's purported revenue and earnings growth, that could not be supported by existing operations and business conditions .
9. At the end of November 2001, investors learned that the actual state of th e
Company's operations and customer subscriber base deviated substantially from th e representations Defendants had issued earlier to investors, requiring a restructuring of NTL's operations. In response to this disclosure, on November 29, 2001, NTL's stock price tumbled
4 46% to $1 .60 per share.
10. Since the end of November 2001, the p rice of NTL's stock has never recovered.
On May 8, 2002, NTL and certain of its subsidiaries filed for Chapter 11 reorganization . NTL's stock now trades for pennies a share .
JURISDICTION AND VENUE
11 . Jurisdiction is conferred by Section 27 of the Exchange Act (15 U.S.C. § 78aa, and 28 U.S.C. § 1331). The claims asserted herein arise under Sections 10(b) and 20(a) of the
Exchange Act (15 U.S .C. §§ 78j(b) and 78t(a)), and Rule lOb-5 (17 C.F.R. § 240.1Ob-5) promulgated under Section 10(b) .
12. Venue is proper in this District pursuant to Section 27 of the Exchange Act and 2 8
U.S.C. § 1391(b) and (c) . Defendants transact business in this District, and many of the acts and transactions constituting the violations of law alleged herein, including the dissemination o f materially false and misleading statements to the investing public, occurred in this District . The
Company's principal executive offices are located in New York, NY, where the day-to-da y operations of the Company are directed and managed, and where certain key witnesses reside and/or are employed.
13. In connection with the acts, transactions and conduct alleged herein, Defendants , directly and indirectly, used the means and instrumentalities of interstate commerce, including the United States mails and interstate telephone communications and the facilities of nationa l securities exchanges and markets.
5 THE PARTIES
Lead Plaintiffs
14. Lead Plaintiffs Cheyne Fund LP and Fleck T .LM.E, LP purchased the common stock and debt securities of NTL at artificially inflated or distorted prices during the Class Period , as set forth in the certifications attached hereto and incorporated herein by reference, and were damaged thereby.
Defendants
15. (a) Defendant NTL is a Delaware corporation with its chief executive office s located at 110 East 59th Street, New York, NY 10022 . NTL describes itself as one of the largest providers of broadband communications services to residential and commercial customer s throughout the United Kingdom ("UK"), Ireland, Switzerland, France, Germany, and Sweden.
The Company is also one of the largest providers of broadcast transmission and tower service s throughout the UK, an d, until recently, Australia. The Company is also the largest cable television operator and a leading provider of business and broadcast services in the UK, and th e owner of Cablecom and Cablelink, the leading cable operators in Switzerland and Ireland , respectively. The Company also has significant equity stakes in various other European cabl e operators. During the Class Period, NTL's common stock successively traded in two efficient markets: (i) the Nasdaq National Market System ("NASDAQ"), until October 27, 2000, at which time NTL's common stock was delisted from that exchange ; and (ii) the New York Stoc k
Exchange ("NYSE"), until March 28, 2002, at which time NTL's common stock was deliste d from that exchange.
(b) The Company has relied extensively on access to the U .S. debt, equity, and credit markets to finance the development of its cable and broadband operations . In addition, the
6 Company has accessed these markets to finance its strategy of expanding into new geographic areas by acquiring existing businesses . Thus, NTL has financed a significant portion of its growth, including corporate acquisitions and purchases of fixed assets, through the issuance of high-yield debt securities and preferred and common stock offerings . For example, between
1993 and 2001, NTL issued approximately $11 .4 billion in senior and subordinated notes an d debentures. In addition, NTL has issued and outstanding approximately 280 million shares of common stock, as well as various series of convertible and non-convertible preferred stoc k having an aggregate liquidation preference of more than $5.25 billion.
16. (a) Defendant George S . Blumenthal (`Blumenthal") is, and throughout th e
Class Period was, Chairman and Treasurer of NTL. Together with Defendant Knapp,
Blumenthal founded the Company in 1993 . Blumenthal signed the Company's 2000 annual report on Form 10-K.
(b) Defendant J. Barclay Knapp ("Knapp") is, and throughout the Class Perio d was, President and Chief Executive Officer ("CEO") of the NTL . Together with Defend ant
Blumenthal, Knapp founded the Company in 1993. During the Class Period, Knapp issue d various false and misleading statements that were quoted frequently in the news media, press releases, and in other publicly disseminated materials, and signed all the annual and quarterl y reports that the Company filed with SEC .
(c) Defendant John F . Gregg ("Gregg") is, and throughout the Class Perio d was, Chief Financial Officer ("CFO") of NTL. During the Class Period, Gregg issued various false and misleading statements that were quoted in the news media, press releases, and in othe r publicly disseminated materials, and signed all the annual reports that the Company filed with the
SEC during the Class Period. (d) Defendant Stephen Carter ("Carter") is, and since September 2000 was,
Chief Operating Officer ("COO") of NTL . During the Class Period, Carter issued various false
and misleading statements that were quoted frequently in the news media, press releases, and in
other publicly disseminated materials about the Company.
17. Defendants Knapp and Blumenthal have extensive expe rience in the cable and
telephone industries.
(a) When the British Government allowed UK cable companies to install their
own telephone systems in the early 1990s, Knapp and Blumenthal acquired cable franchises i n
Scotland, Wales, and suburban London. Using experience gained in the United States cellular
mobile industry, Knapp and his management team began to market bundled cable television an d
telephone services to these regions. Under their management, NTL became a prime consolidator
of the fragmented United Kingdom industry, leading ultimately to its one-time position as th e
UK's largest operator.
(b) Both Knapp and Blumenthal were a part of the management team that founded Cellular Communications, Inc . ("CCI") in 1983 . CCI ultimately became one of the largest independent cellular system operators in-the US, growing from a start-up to over 1 .25 million customers by the time of its sale to Airtouch Communications, Inc. in 1996. In 1991,
CCI spun-off three of its subsidiaries to shareholders ; one of these entities was Ocom, a predecessor of NTL.
18. The individuals named as Defendants in paragraph 16(a)-(d) are referred to collectively herein as the "Individual Defendants ."
19. During the Class Period, the Individual Defendants, as NTL's officers and/or directors, were privy to confidential and proprietary information concerning NTL, its operations ,
8 and business prospects . By reason of their positions with NTL, th e Individual Defendants had
access to internal Company documents, reports, and other information, including, among other
things, material, adverse, non-public, information concerning the Company's subscriber base ,
churn rate, revenues, ability to service its debt obligations, and financial condition . As a result o f
the foregoing, they were responsible for the truthfulness and accuracy of NTL's public statement s
described herein.
20. The Individual Defend ants, as NTL's officers and/or directors, are "controlling
persons" of the Company within the meaning of Section 20(a) of the Exchange Act . By reaso n
of their positions with NTL, they were able to and did, directly or indirectly, in whole or in
material part, control the content of public statements issued by or on behalf of the Company,
including statements to securities analysts and financial reporters. They participated in and
approved the issuance of such statements made throughout the Class Period, including th e
materially false and misleading statements identified herein . As such, the Individual Defendants
are liable for the false statements pleaded at paragraphs 69-154, as those statements were eac h
"group-published" information, the result of the collective action of the Individual Defendants .
21 . NTL, and the Individual Defendants, as officers and/or directors of a publicly-hel d
company, had a duty to promptly disseminate truthful and accurate information with respect to
the Company, the Company's subscriber base, chum rate, revenues, ability to service its deb t
obligations, and financial condition, to promptly correct any public statements issued by or on
behalf of the Company that had become false and misleading, and to disclose any adverse trends
that would materially affect the present and future operating prospects of the Company .
22. The statements made by Defendants alleged below were materially false an d misleading when made. Defendants had no reasonable or adequate basis to justify or support th e
9 statements identified below concerning the Company's subscriber base, churn rate, revenues, ability to service its debt obligations, and financial condition . The truth about the Company's financial condition, key metrics, and business prospects, which were known or were recklessl y disregarded by Defendants, remained concealed from the investing public throughout the Clas s
Period. Defendants, who were under a duty to disclose those facts, misrepresented or concealed them during the Class Period .
23. Each of the Defendants knew that the misleading statements and omissions complained of herein would adversely affect the integrity of the market for NTL's securities and would cause the price of these securities to become artificially inflated . Each of the Defendants acted knowingly or recklessly in such a manner as to constitute a fraud and deceit upon Lead
Plaintiffs and the other members of the Class.
24. Defendants are liable as direct participants in, and co-conspirators of, the wrongs complained of herein .
CLASS ACTION ALLEGATIONS
25. Lead Plaintiffs bring this action as .a class action pursuant to Rule 23 of the
Federal Rules of Civil Procedure on behalf of all persons who purchased or otherwise acquired the publicly-traded securities of NTL on the open market during the Class Period (the "Class").
Excluded from the Class are Defendants, members of the immediate family of each of th e
Individual Defend ants, any subsidiary or affiliate of NTL and the directors and senior officers of
NTL or its affiliates, or any entity in which any excluded person has a controlling interest, and the legal representatives, heirs, successors, and assigns of any excluded person .
26. The members of the Class are so numerous that joinder of all members is impracticable. The disposition of their claims in a class action will provide substantial benefits
10 to the parties and the Court. During the Class Period, NTL had more than 276 million shares of
stock outstanding, owned by hundreds, if not thousands, of geographically dispersed securitie s
holders.
27. There is a well-defined community of interest in the questions of law and fac t
involved in this case. Questions of law and fact common to the members of the Class, whic h
dominate over questions that may affect individual Class members, include whether :
(a) Defendants violated the Exchange Act ;
(b) Defendants omitted and/or misrepresented material facts ;
(c) Defendants' statements omitted material facts necessary to make the
statements made, in light of the circumstances under which they were made, not misleading;
(d) Defendants knew or recklessly disregarded that their statements were
materially false and misleading;
(e) the prices of NTL's publicly- traded securities were artificially inflated;
and
(f) Lead Plaintiffs and the Class sustained damages, and, if so, the appropriat e measure of damages.
28. Lead Plaintiffs' claims are typical of those of the Class because Lead Plaintiffs and the Class sustained damages as a result of Defendants' wrongful conduct.
29. Lead Plaintiffs will adequately protect the interests of the Class and have retaine d counsel who are experienced in class action securities litigation. Lead Plaintiffs have no interests that conflict with those of the Class_
30. A class action is superior to other available methods for the fair and efficient adjudication of this controversy.
11 BACKGROUND
NTL's Acquisition Spree And Accumulation of Deb t
31 . Growth in the broadband, cable, and telephony industries depends upon th e
generation and/or infusion of capital to, among other things, maintain and improve infrastructure ,
connect customers to networks, and service any debt . This was particularly true for NTL, whos e
strategic plan had been based primarily on expansion into new geographic areas through the
acquisition of existing businesses .
32. According to NTL's annual report on Form 10-K for the period ending Decembe r
31, 2000, which was filed with the SEC on March 30, 2001 (the "2000 Form 10-K"), the
Company acquired at least seven companies from 1999 through 2000, valued at over $17 billion .
Specifically, from 1999 to the beginning of the Class Period, NTL acquired the followin g entities:
Company Date of Acquisition Purchase Price
Diamond Cable March 1999 $984,600,000 Communications plc
Australian National April 1999 $425,800,00 0 Transmission Network
Cablelink Limited July 1999 $700,500,000
1 G Networks August-December 1999 $61,900,000
Workplace Tech plc September 1999 $176,900,000
Cablecom Group March 2000 $3,528,700,000
ConsumerCo May 2000 $13,111,000,000
33. The Cablecom and ConsumerCo transactions alone cost over $16.5 billion and caused the Company to assume almost $5 billion in debt .
12 34. To help finance these transactions, NTL dramatically increased its debt, which reached over $17 billion in the first half of 2001 . Between 1999 and 2000, NTL's gross debt increased from $8.9 billion to $15.1 billion. In 2000 alone, NTL raised over $14. 8 billion in debt and equity financing. In addition to its enormous debt service requirements, NTL neede d significant amounts of capital to finance construction of its networks, connect customers t o networks, and integrate the acquisitions .
35. NTL's debt included the issuance of high-yield debt securities - approximately
$11 .4 billion in senior and subordinated notes and debentures - and approximately $6 billion in bank borrowings. NTL also had issued and outstanding nearly 280 million shares of commo n stock, as well as numerous series of convertible and non-convertible preferred stock .
36. As described above, both prior to and during the Class Period, NTL relied o n access to the United States debt, equity, and credit markets to finance its enormous debt burden , integration activities, and day-to-day operational expenses. Defendants' continued access to these critical sources of funding, however, was dependent upon their ability to reassure the capital markets that NTL's revenue growth would adequately cover integration and debt servicing costs.
37. The need to reassure the capital markets became even more pronounced following the general decline in the telecommunications market . In fact, without the liquidity from robust sales, a large customer b ase, and financial solvency, NTL's continued existence was in jeopardy.
38. NTL began 2001 with over $3 .2 billion in cash and undrawn bank facilities .
Access to these bank facilities was a critical component of NTL's survival, as it became increasingly more difficult throughout the Class Period for the Company to raise capital throug h debt offerings an d generate revenues sufficient to service its debt.
13 39. The loan facilities contained covenants that required NTL to maintain certain
levels of revenue and earnings. If the Company failed to meet these targets, the lenders coul d
call in the their debt. Consequently, the Company needed to show the market that subscriber
growth was expanding and would continue to do so, especially with regard to NTL's digital and
broadband services .
40. Under the credit facilities, NTL was required to provide, on a periodic basis ,
comprehensive financial reports to its lenders . Failure to comply with these reporting
requirements, after a cure period, constituted an event of default . Moreover, under certain credit
facilities, such as the one between NTL and General Electric Capital Corporation, an y
negotiation with NTL's creditors to re-adjust or re-schedule the Company' s indebtedness was an
event of default .
41 . NTL's liquidity and ability to service its enormous debt were two factors mos t
watched by investors and securities analysts. Historically, NTL grew its revenues and EBITD A
primarily through selling a bundled package of analog pay TV and telephony . With the
introduction of digital and broadband, Defendants expected to increase revenues by offerin g
these products and services to new and existing customers ("upselling"), by providing premium packages, and by offering high-speed Internet services .
NTL's Rapid Growth Caused An Increased Strain on NTL's Operations
42. NTL's rapid growth strained the Company's ability to provide technical services and customer support for its expanding subscriber base . For example,
(a) according to former sales and marketing employees, including Keit h
Bailey ("Bailey"), a former Sales Advisor employed'by the Company during the Class Period, as
14 NTL's subscriber base expanded through acquisitions, existing NTL customers were deprived of quality customer support;
(b) according to a former senior marketing executive employed by NTL during the Class Period, NTL installation technicians frequently failed to complete their scheduled appointments, and, as a result, customers frequently failed to receive services for which they were paying;
(c) according to Charles Darley ("Darley"), the Customer Marketing Director for NTL toward the end of the Class Period, promised customer service w as not forthcoming, and in fact, multiple visits by service technicians would often fail to repair the service to th e subscriber. Indeed, once a customer was visited by eight different engineers on eight occasions , and the problem was still never resolved; and
(d) according to Darley, the NTL customer service call centers were s o understaffed and poorly run that an NTL survey demonstrated that the average on-hold wait time was 25 minutes, and over 35% of those who were attempting to speak to a customer se rvice representative gave up and disconnected without ever speaking to someone .
43 . Customer service problems were exacerbated by the Company's failure t o integrate the myriad companies that it had acquired in its acquisition spree during the 18 month s preceding to the Class Period. According to a former telecommunications employee, employed at NTL through most of the Class Period, the rapid pace with which NTL made the acquisition s placed a heavy burden on the Company's ability to integrate them . In fact, according to this employee, NTL did not have sufficient time to conclude one integration before it had to begin with the next integration.
44. For example, NTL's attempts to integrate entities like ConsumerCo were largely
15 unsuccessful, as NTL found itself without the customer support and technical service resource s to manage so large a subscriber base . According to Bailey, customer service contracted following the acquisitions, making it impossible for some customers to reach support personnel.
NTL remained unconcerned by this problem, though, because many of its newer customers wer e defaulting on their monthly charges and thus were unlikely to complain about poor service (see discussion, infra).
45. NTL's effort to integrate ConsumerCo was further frustrated by cultural differences between the two entities, which created substantial integration problems ; at one point during the Class Period, according to Bailey, who, as a manager, monitored staff from bot h entities, employees from the two companies refused to speak to each other .
46 . Furthermore, following the acquisitions, according to one former NTL senio r marketing manager who was employed by NTL during the Class Period, the Company employed as many as ten customer billing systems , causing frequent billing problems and preventing NTL from adequately tracking its subscriber base.
47. All of the above service and support problems engendered customer complaints and requests to terminate service. These problems, in turn, materially undermined th e
Company's revenue and earnings and hampered its ability to pay-down its debt.
Defendants Engaged In A Number of Fraudulent Practices To Artificially Inflate NTL's Subscriber Base
48. In light of these serious customer service issues, which were causing huge migrations in the Company's subscriber base, NTL engaged in a number of undisclosed practice s to artificially maintain and increase the size of its subscriber base . According to a former senio r marketing executive knowledgeable about sales to new subscribers, who was employed by NTL
16 during the Class Period, NTL recorded as many as 75,000 more subscribers than it actually had .
NTL Refused to Honor Customer Requests to Terminate Their Accounts
49. According to former NTL sales and marketing managers, NTL refused to allo w thousands of customers to terminate their accounts, even those who had been promised that they were obligated only to maintain their accounts for a limited, three-month trial period .
50. One such customer, Jason Martson, was told that the agreement was a 3 month trial basis, but when he attempted to terminate his account due to poor service, he was told tha t he was "tied into a 12 month agreement ." Others were told by NTL that their accounts had bee n terminated, yet they were still billed for service. WhilfWharton, another NTL customer, wrote to NTL in an effort to cancel his subscription at the end of his 12 month contract; NTL kept sending him bills and threatening to disconnect his service for non-payment . Eventually
Wharton received several "threatening letters, including one from a company called Credi t
Solutions `who act[s] on behalf of NTL."' Still other customers, according to Bailey, had thei r subscription fees withdrawn from their bank accounts despite having notified NTL of their termination, and in some cases were offered rebates only if they re-subscribed .
51 . In a December 2000 meeting in NTL's London Headquarters, Scott Faulkner
("Faulkner"), former Managing Director of NTL's Consumer Business Unit, Eddie Buxton, head of NTL's United Kingdom Sales, Chris Stroud, head of Customer Service at NTL, John
Hamilton, an NTL Finance employee, and other NTL executives, discussed the Company' s widespread practice of failing to permit customers to terminate their accounts and th e corresponding impact of such practice on the Company's reported churn rates. During the high- level meeting, Faulkner even telephoned Defendants Knapp and Blumenthal to discuss th e practices with them.
17 NTL Artificially Boosted Subscriber Rates by Billing Terminated Customers
52. Ifcustomers were permitted to terminate their accounts, according to former NTL salesman David Sutcliffe ("Sutcliffe"), NTL continued to keep those customers on its subscription roles by sending them monthly bills with zero balances . According to a former senior marketing manager knowledgeable about subscriber acquisitions, and who was employe d by the Company during the Class Period, if a customer re-subscribed to NTL after terminatin g service, Defendants would count the former customer as a "new" subscriber, but would not report the prior termination of service as "chum," effectively counting the subscriber twice.
According to a former project manager, NTL staff would often continue to bill customers for months after their accounts terminated, often delaying cancellations merely to improve tha t month's churn figures .
NTL Acquired New Customers Through False Pretenses
53 . NTL promised free installation for which customers were later billed. According to former sales and marketing employees, NTL further enticed customers to join by offering services that they knew were unavailable and could not be provided in the near future, or coul d be provided but not to the customer's satisfaction . According to one former manager , requirements that cable be laid underground, and not on poles as is often done in the United
States, discouraged NTL from providing services to smaller communities where potential revenue would not adequately offset installation expenses . Nonetheless, customers were promised that high-speed Internet service and digital cable television was readily available and could be provided satisfactorily. Some users were induced to converse with NTL representative s by promises that service was available, only to find out that it was not when they attempted to subscribe. Gary Bartram from Whi ttlesey/Peterborough wrote on nthellworld.com that "quite
18 regularly [an] NTL sales `person' phones me up to ask me if I'd like to go digital . `Yes please' I
would say, at which point they'd check my postcode and inform me that actually I can't go digital because its not available in my area." Other users, though, were induced to contract fo r
service for several months before NTL- staff finally told them that the service problems they were experiencing were due to the fact that the product they had purchased was unavailable in thei r
area. Dan Robinson from Stoke on Trent , for example, wrote on nthellworld.com that he had
contracted with NTL for high-speed Internet service in June of 2000, and labored fruitlessly to
activate his service until August 2001, when NTL customer support staff informed him that th e service would not be available in his area until the following November. Dale from
Northampton wrote that his mother had been induced to sign up for telephone service, digital television, and high-speed Internet access, but that, four months later, NTL informed her that
service in her area was unavailable . As mentioned above, many customers were falsely told that they could cancel their accounts following a three-month trial period .
NTL Artificially Boosted Subscriber Rates By Acquiring Uncreditworthy Customer s
54. According to Sutcliffe, Bailey, and other former employees and managers, NT L acquired uncreditworthy customers it knew could not be retained. To replace customers lost du e to service complaints, Defendants implemented an accelerated effort to acquire new subscriber s by recruiting customers in low-income areas (like Northwest Manchester and Cardiff in th e
Whales District). Indeed, NTL regional directors were specifically given objectives and goals to target and sign up customers in low-income areas. In mid-2000, for example, NTL targeted low income (government assisted) residents in Glasgow, signing up thousands of customers known to be uncreditworthy and unable to pay for the services .
55. As NTL faced mounting pressure to grow its subsc riber base, NTL also weakened
19 credit requirements. Specifically, according to Sutcliffe, Bailey, and other former employees and managers, NTL lowered the credit requirements for prospective customers, rendering its credit check process almost non-existent_ Many of NTL's low income customers could not withstand the scrutiny of a credit check, and in all likelihood, would never pay their bills. NTL management, in fact, specifically ordered sales representatives to sign-up these customers knowing that they could not withstand the scrutiny of a credit check, and in all likelihood, woul d never pay their bills. According to Darley, NTL 's former Customer Marketing Director, NTL would not even initiate its collections process until after the subscriber account had been overdu e for 85 days. Even then, the subscriber continued to receive service, and was not disconnecte d until 150 days after the account had been overdue . NTL salesmen were also instructed to re- register former NTL customers who had previously defaulted on accounts, and who were known to be credit risks. Some of these customers had been previously disconnected for bad debt only a few weeks earlier.
56. To speed credit approval, Defendants also took advantage of various flaws in the credit verification process utilized in the United Kingdom. For example, according to former
NTL sales and marketing employees knowledgeable about subscriber sales who were employe d at the Company during the Class Period, including Bailey, NTL staff were directed to alter th e date of birth of prospective customers to frustrate the credit verification process . Additionally, employees were directed to seek the credit risk information for customers several times a week, to take advantage of the fact that a particular individual's credit rating would vary on a dail y basis. Several of these high-risk customers were enticed to sign up for accounts through an offe r of three-month, half-price subscriptions . As these customers began to default, according t o
Sutcliffe, NTL management ordered salesman to maintain their service for three months, or unti l
20 Knapp's promise to shareholders was fulfilled . These defaulting customers were among th e reasons for NTL's increasing accounts receivables. According to NTL's Third Quarter 10-Q for the period ending September 30, 2000, NTL's accounts receivable were $276 .6 million. By the time NTL filed its Third Quarter 10-Q for the following year, accounts receivable had steadily risen to $500.2 million.
NTL Temporarily Inflated its Subscriber Base by Offering Free Services
57. According to Sutcliffe and other former sales and marketing employees and managers, and a former sales and marketing manager responsible for and knowledgeable about sales corporate-wide, in the middle of 2000, a team was assembled to develop and implement a plan to induce customers to subscribe to NTL's services by offering a reduced-cost, three-mont h trial period, as well as free Internet services and free installation. This strategy was developed by
Defendant Knapp; many middle and senior NTL managers were opposed to it . By offering such free services, NTL increased the perceived size of its customer subscriber base, and, therefore, it s revenues. But, in reality, the Company received no additional revenue from these subscribers .
Once NTL stopped offering free services, the number of customer terminations increased ( as discussed above, even those NTL customers who were paying for their service, tried to disconnect because they weren't receiving an acceptable level of service) . Also, as discussed above, after inducing some customers to join with a three month trial pe riod, NTL often refused to release subscribers until their 12 month "contract" had expired, and often billed customers fo r their supposed "free installation ."
. 2 1 Defendants' Knowledge Of, or Reckless Disregard For, The Concealed Problem s
58. Defendants were aware that the Company's aggressive acquisition spree had caused a significant financial strain on the Company and that its ability to service its debt obligations was substantially impaired as a result . For example, in October 2000, Knapp held a high-level meeting at a hotel near Heathrow airport to discuss the Company's strategy of growth through acquisition. At that meeting, which was attended by nearly 100 of NTL's top managers,
Knapp reported that their aggressive acquisition strategy had caused the Company to accumulate excessive debt and that they were having difficulty integrating the acquired companies. A former
NTL Director of Customer Service who was at the meeting recalls that Knapp had stated that
"we're in trouble . . . we have got to cut back." The former NTL Director of Customer Service also recalls that Knapp, who he described to be in "panic" mode, instructed everyone at th e meeting to keep the briefing "confidential ."
59. Defendants were also well aware of the problems with NTL's .subscriber base.
According to former sales and marketing employees who were employed by NTL during th e
Class Period, NTL staff continuously informed upper management of NTL's stagnant or declining subscriber base and chronic customer retention problems through direc t communications, meetings, and in regularly-prepared reports forwarded to Defendants Knap p and Blumenthal . As many of NTL's customers lived in densely populated urban areas where address and name changes were frequent, monitoring churn consumed substantial resources .
According to one former sales trainer, department managers followed up on lost customers, and reported any increases in churn to more senior management . According to one former senior marketing executive responsible for and knowledgeable about the marketing of services to new
22 subscribers, Faulkner, a Managing Director of NTL, personally met with representatives o f
NTL's various divisions, and forwarded their reports to management, including Defendant s
Blumenthal, Knapp, Gregg, and Carter .
60. Moreover, NTL management monitored subscriber levels from all regions. NTL staff, for example, reported subscriber numbers to Faulkner both daily and weekly. John
Harrison and others from NTL's Consumer Finance and Financial Groups reported revenu e decline on a monthly basis to Faulkner. Faulkner forwarded that information to Defendants .
Customer service and information technology representatives held monthly meetings during which they reported their operating statistics and problems to Faulkner, while marketing an d integration reports were presented to him on a weekly basis.
61 . According to a former acquisitions manager and a former high-level financial officer employed by NTL during the Class Period, Defendant Blumenthal made frequen t telephone calls from the United States to NTL managers in Britain, often at odd hours of the morning and night, to monitor subscriber growth and attrition issues, and to discuss th e effectiveness of corrective measures. These calls increased in frequency as subscriber defectio n increased in the first half of 2001, and it was not uncommon for those receiving these calls , including Richard Harris, Michael Hounsell, and Jeremy Roest, to receive several calls form
Blumenthal during the course of a single day .
62. Regarding attrition rates, in October 2000 , NTL's Director of Customer Servic e personally approached Faulkner to inquire about material discrepancies in the churn numbers
(which measure the number of lost customers), but was told that the issue had "nothing to do with you." The Director of Customer Service understood that management was manipulating the churn rates and Faulkner was discouraging further discussion or investigation of the issue.
23 Nthellworld.com
63. By the end of the Class Period, several frustrated NTL customers had started
Internet websites to communicate their grievances about NTL's poor service and record their unsuccessful communications with NTL management . One of these sites, nthellworld.com, provided unofficial news and information about the Company, advice for dealing with NTL staff and with technical problems associated with NTL's services, and a bulletin board on which user s
- including NTL employees - posted comments about the Company. (At least one other user has created a similar site, www.ntl-swindon.com detailing his particular problems with NT L service.) On January 23, 2002, a Bloomberg columnist acknowledged how the Company' s widely disseminated statements and public filings lacked the candor of this amateur Internet site :
What the people who lent NTL that 12 billion pounds should have been reading was not its balance sheet, or its revenue forecasts, or any of the other guffthe company puts out, but a website called Nthellworld.com. This is a lovingly put together website that details the disasters that await anyone foolish enough to try to use any of NTL's products. It is rare to see a comp any that can inspire such a passionate response from its customers - and a shame for NTL's marketing department that the passion is quite so twisted and ugly. NTL's customers really hate the company.
64. Among the most common posts to nthellworld.com during the Class Period were statements made by current and former NTL customers that the Company failed to provide the m with promised cable, Internet, or digital television service even after the customers mad e repeated inquiries to Company technical support, and that the Company failed to bill properly for these services. Some users described a string of service-related problems dating continuously from July 2000 through November 2001 . Others claimed to have been deceived into purchasing products and service during the Class Period by NTL's false promises of quality service :
It is clear that NTL is thoroughly incapable of providing reliable
24 products, unable to support those services and incompetent in dealing with bills and payments ; in other words, failing in all areas of business with seemingly zero [endeavor] to improve. This is in direct contrast to all your advertising and marketing which is blatantly misleading and in my opinion this amounts to deception .
Eventually after several promotion telephone calls I was persuaded to go onto digital after being told that the cost would be the same within a few pence. Fat chance! ! . . . The cost was considerably more when the bill came. NTL admitted the error and refunded me the excess charge for one year. They refused to put the charges back to what they were originally and refused to put me back onto analogue. What a con !
The same experience with the internet. I have been told for over a year now that I would be able to access NTL World within two months once an upgrade had been completed. I am still waiting. They will not return telephone calls or numerous emails. . . . I have never experienced such a deceitful company.
. . . I am considering (not lightly) taking legal action against [NTL] [because] I believe that by their failure to provide a service "as billed" and then failing to respond to my requests for action, they are not fulfilling their part of our "agreement" . In effect they are stealing from me as I am obliged to pay for a service I am not getting with no recourse to help from them.
65. Other users, once selecting NTL as their provider, found that NTL either refused to permit them to terminate service even when NTL failed to provide it, or, alternatively , continued to bill customers after their accounts had been canceled:
The service I get from NTL is crap . None of the interactive services work . . . . I want to terminate my contract but I have got about another four months to run of the contractual 12 months. Do I have grounds for terminating the contract on the basis of failure to supply the agreed level of service? Every time I ask customer service for help they "obligingly" tell me that the matters are being looked into.
25 ** *
Enough was enough. I wrote to NTL on the 17th April, when my contract was due to expire, informing them that I was [canceling] my subscription and asked them to arrange collection of their equipment. . . .
NTL kept sending me bills and threatening to disconnect my service for non payment. . . . I today received yet another bill, with a refund for "disconnection credit" in July, but the monthly charge for August has been added on, after they seem to have finally [acknowledged] I do not use the service!!!
I am totally fed up with their amateurish and entirely pathetic service.
** *
. . . I was told that the agreement was a 3 month trial basis . . . I am now told that I am tied into a 12 month agreement;. . . my service has been suspended twice without prior notice from yourselves . . . . The most infuriating part of this whole situation is the inability to complain & have a solution suggested quickly, the automated [queuing] system you employ is terribly time-consuming & I am told that to complain I must write in to yourselves as this is not a facility that you can offer by telephone . . . surely this is not the case !
66. Others, identifying themselves as NTL customer support employees, described th e difficulties Company management imposed upon them in their efforts to provide service an d address customer difficulties :
I would just like to say that I have worked for NTL for a while now and at the start everything on the surface at lest was good. It has however gone down hill at a rapid speed since then. All the staff feel that they are there to get rid of customers and nothing else, more and more the emphasis is on call throughput and average handling time, the staff that once prided themselves with offering good technical support can no longer do this as great pressure is put onto them to get the customer off the call and move on to the next one.
26 As an employee of NTL (internet technical support). Ijust would like to say customers do get a bad deal as Company moral is terrible so staff [don't] care about customers (blame it on the management).
More often or not we are told to say one thing to consumers when we mean the complete opposite. You think its bad I have to work there.
67. The nthellworld.com website did not escape the notice of Comp any management ; according to one former NTL manager, throughout the Class Period, Defendants monitored the website and were extremely displeased by it . Indeed, on April 13, 2002, The Daily Telegrap h reported that NTL had purchased nthellworld.com and the services of its owner and operator,
Frank Whitestone. Recast as a consumer relations site called "NThelpworld.com," nthellworld.com would, in the future, serve the interests of the Company.
Misstatements and Omissions Regarding Fraudulent Practice s
68. Defendants' statements regarding subscriber and revenue growth comprised muc h of the Company's statements to the public during the Class Period . Defendants provided a steady stream of pronouncements that subscriber growth would generate sufficient revenue for th e
Company to meet, among other things, its debt service obligations . Defendants also conditioned investors to believe that NTL could use its acquisitions to provide its services and products - including bundled broadband cable and telecommunications services - to add new subscribers , reduce customer turnover i.e. chum), and increase revenue per customer i .e. ARPU).
Defendant Knapp even boasted during the Class Period that NTL soon would have mor e subscribers than the Company had shares. Defendants' statements, however, were false and misleading because they failed to disclose, among others, the following material adverse fact s that were known to Defendants or recklessly disregarded by them :
27 (a) the Company was unable to effectively integrate its acquisitions and, as a result, was experiencing substantial difficulties operating its business ;
(b) the Company would not be fully funded until 2003, and, as a result of its massive debt burden, would, by the end of 2001 and the beginning of 2002, have insufficien t cash to meet its debt service obligations;
(c) the Company was not meeting the needs of its customers by providing bundled broadband services on a consistent basis; that both prior to and throughout the Class
Period, as a result of Defendants inability to manage the Company's growth and integrate its acquired properties and diverse services, NTL was plagued with technical and customer service problems that caused higher than reported churn rates and dissatisfaction;
(d) the Company was not reducing chum rates, as represented by Defendants throughout the Class Period but, rather, was keeping churn rates artificially low by, inter alia, failing to report customer terminations and by continuing to bill customers for accounts that ha d been terminated, thereby creating the false impression that the Company was retaining customers longer and that migrations were decreasing ; and
(e) in addition to under-reporting churn rates, the Company had also materially mislead investors into believing that the Company was retaining customers by providing superior quality services, when, in fact, as soon as NTL stopped offering free Internet services, which the Company could not afford and which would never generate revenue s sufficient to justify providing such services, the number of defections skyrocketed.
MATERIALLY FALSE AND MISLEADING STATEMENTS ISSUED DURING THE CLASS PERIO D
69. On August 3, 2000, NTL announced over the PR Newswire its preliminary
28 operating statistics for its residential services for the quarter ended June 30, 2000. The Company
stated that it expected to rele ase its full quarter-end financial results on August 9, 2000, and
would host a conference call the following morning. In the release, Defendant Knapp stated :
We are extremely proud of this quarter's operating performance, particularly of the passing of yet another operating milestone . The second quarter was the most successful in our history for adding subscribers, with 74,200 net additions, in a period where NTL was launching a new digital service and preparing for the integration of ConsumerCo.
* * *
The roll-out of digital cable television continues to be a success. We are targeting approximately 500,000 subscribers by year-end, up from approximately 230,000 as of the close of the second quarter.
Another driver for the consumer business is ntlworld . Following our announcement in March, the request for service had been overwhelming and we are rapidly catching up with demand on this extremely popular service . As a result of the offer and proforma for our recently announced transaction with Virgin Net, NTL will be the 3rd largest ISP in the United Kingdom with more than l million subscribers .
With approximately 4.5 million cable telephony customers and over 8 million revenue generating units we are the largest broadband communications provider in the UK, Ireland and Switzerland. We believe tremendous opportunities await us as we apply our knowledge from previous acquisitions towards integrating recent and future acquisitions and from realizing economies as we expand our network across Europe. [Emphasis added.]
70. In response to the announcement, the price of NTL stock rose to $45 per share on
August 4th, the day it was widely read in the United States, from $42 .8125 on the prior day. The market's favorable reaction continued the next trading day with the stock closing at $48 .0625 per share on August 5, 2000.
29 71 . The statements in the August 3, 2000 press release concerning subscribe r additions, the success of subscriber rollout for NTL's digital television service, NTL's catch-up with demand for its dial-up ntlworld Internet service, and the economies of scale realized from
NTL's expansion across Europe were materially false and misleading. As alleged above,
Defendants knew that the economies of scale claimed to be realized from the Company' s acquisitions, in particular ConsumerCo, were hampered by NTL's inability to integrate that company's operations with those of the Company . See 11 43-46, 58-62. Defendants also knew that the Company was not meeting the needs of its customers by providing digital and broadband services on a consistent basis; that both prior to and throughout the Class Period, NTL was plagued with technical and customer service problems that caused higher than reported churn rates and dissatisfaction . See 11 42-47. As a consequence, throughout the Class Period ,
Defendants were keeping chum rates artificially low by failing to report terminations and by
continuing to bill customers for accounts that had terminated, thereby creating the fals e impression that the Company was retaining and/or increasing its customer base. See 1148-52.
Defendants further knew that the dem and for NTL's high-speed Internet service was due primarily to the fact that NTL was targeting customers who had poor credit histories and
otherwise unable to pay for the service once the free trial expired . See 1154-56.
72 . On August 10, 2000, NTL announced in two press releases, issued minutes apar t over the PR Newswire, its financial results for the quarter ended June 30, 2000 . For the second
quarter 2000 the Company reported revenue of £434.2m, a 93.8% increase over the same period the previous year, and earnings of £59.2m, a 156.9% increase. Commenting on the Company' s performance, Defendant Knapp described, in the first release, NTL's "tremendous amount o f
growth in the first half of 2000, both organically and as a result of acquisitions [of Cablecom and
30 CWC ConsumerCo] . Cablecom and CWC ConsumerCo, the two largest transactions in the
Company's history, have added significantly to our revenues, EBITDA and customer base."
New services, Knapp had been quoted in the earlier release, were driving much of NTL' s
subscriber growth:
Our 74,200 net additions this quarter were the most in any quarter in our history . . . . Two key products were launched during the quarter in our NTL consumer division : "ntlworld", our free Internet service, and digital cable television . Both are exhibiting very strong initial results . We received over 622,000 requests for our ntlworld service since its unveiling in March, and including ConsumerCo we have approximately 230,000 customers subscribing to digital television . . . . Digital cable with full web interactivity, cable modems, ntlworld and VOD form a quartet of unique services that will drive our consumer business for many quarters to come .
73. In the earlier of the two August 10, 2000 press releases, Defendant Knapp also described the impo rtance of NTL's integration of its recent acquisitions , and expressed confidence that it would be successful . "Our views of how quickly we can integrat e
ConsumerCo and BT Cable are shaped by our successes at both the `Original NTL' franchise and franchises we acquired from Comcast, ComTel and Diamond . In the past we have been able to increase penetration at approximately 5% per year, and would expect that trend to continue o r accelerate."
74. Additionally, in the earlier of the two August 10th rele ases, Defendant Knapp commented on NTL's market penetration and reduced churn rate: "During the past six months, each 100 additional homes marketed generated 215 addi tional RGUs, up from 70 RGUs in the equivalent period last year. We reduced chum in the markets by up to a full percentage point per month. The expertise we've gained from these acquisitions will be invaluable as we mov e forward with the integration of ConsumerCo."
31 75. In the second, longer release, Defendant Knapp, in what would become standar d practice during the Class Period, defined NTL's prosperity principally in terms of subsc riber growth, noting that :
The Company expects its consumer base to continue to increase which will drive further revenue growth as the Company completes the construction of its broadband network past the remaining homes in its franchise areas_ . . which will drive further revenue growth . . . . Revenue growth in carrier services is primarily dependent upon the Company's ability to continue to attract new customers and expand services to existing customers . . . .
76. Knapp's statement concerning NTL's customer base and the revenue figures reported on in the August 10, 2000 press releases were materially false and misleading . Knapp knew that the revenue figures reported were achieved through the wrongful practices complaine d of herein. Knapp also knew that, aside from the ConsumerCo acquisition, subscriber growth wa s attributable largely to the machinations described in paragraphs 48-57, above . Moreover, Knapp failed to disclose the difficulties NTL faced integrating ConsumerCo, and the financial burdens that the financing of this acquisition had placed on the Company's operations . See 11 42-47.
NTL could neither successfully integrate ConsumerCo's customer base and operations nor provide subscribers with the highly-touted digital services . As a result, Knapp had no basis to represent that ConsumerCo contributed to NTL's reported growth . Knapp also knew that his comments concerning the dem and for NTL's high-speed Internet service was due primarily to the fact that NTL was targeting customers who had poor credit histo ries and were otherwise unabl e to pay for the service once the trial period expired. As described above, these customers were induced to subscribe because the service was free, though unaware that they had in fact agreed t o a 12 month subscription. See 1153-57. Further, Knapp knew that any reduction in churn rat e was attributable to the machinations described above . See 1158-62.
32 77. As with the second quarter preliminary statistics announced only six days earlier, securities analysts reacted favorably to the earnings release. For example, on August 10, 2000,
Bloomberg news service quoted Aryeh Bourkoff, a high-yield bond analyst at UBS Warburg, as stating that NTL had "infused renewed confidence in their ability to m anage the integration of
Cable & Wireless Consumer assets and the growth of new services at its investor meeting . . .
78. Defendant Knapp was also quoted in the August 10th Bloomberg article as stating that, "[w]e have in the last two months gotten our hands on (the Cable & Wireless unit), and the news is good . . . . There are no surprises on the downside. The kinds of issues that they face are the ones we faced in other companies we acquired. . . . We're fully financed . . . ."
79. Knapp's comments were materially false and misleading; NTL was not "fully financed" and, as Defendants would later disclose, lacked the capital both to integrate it s acquisitions and service its debt obligations.
80. Also on August 10, 2000, Bloomberg carried an interview with Defendant Knapp, during which he announced that NTL had successfully integrated its recent acquisitions. "We've accomplished our three or four main objectives in a short amount of time . About 18 months ago we started out to go into Europe and we said we wanted to establish a major presence and w e have . . . . We wanted to leverage our capabilities and we are in a management or leading role in all of those situations." Knapp further stated that earnings would soon increase, because
"[c]ompanies like ours are valued on growth in revenues and growth in EBITDA and we are growing both of those quite sma rtly. . . . EBITDA should increase steadily this year and then probably start ramping up more significantly coming out of 2001 ." Knapp then insisted that
NTL's operations were "fully financed":
ti 33 Part of the presentation today is that we are fully financed in terms of all of our operations in the U .K., we have Switzerland and Germany fully financed, there is virtually no debt on our France operations so we believe we can acquire the necessary capital there. So all in all, except for some de minimis investments that we might make going forward - smaller transactions - we're fully financed.
81 . Knapp's comments concerning the successful integration of acquired companies and NTL being fully financed were false and misleading. As alleged above, NTL had failed to successfully integrate the acquired assets, and the Company's earnings were jeopardized b y rampant customer service problems, subscriber defections, and doubtful accounts . Moreover, as alleged above, NTL, as a whole, was not "fully financed" and, as Defendants would late r disclose; lacked the capital both to integrate its acquisitions and service its debt obligations .
82. On August 14, 2000, NTL filed with the SEC its Form 10-Q for the quarte r ending June 30, 2000 (the "August 14, 2000 Form 10-Q"). In the August 14, 2000 Form 10-Q,
NTL listed its 19 outstanding debt agreements and described its need - reiterated throughout th e
Class Period - for continued access to capital engendered by NTL's heavy reliance on debt financing:
Management does not anticipate that the Company and its subsidiaries will generate sufficient cash flow from operations to repay at maturity the entire principal amount of the outstanding indebtedness of the Company and its subsidiaries . Accordingly, the Company may be required to consider a number of measures, including: (a) refinancing all or a portion of such indebtedness, (b) seeking modifications to the terms of such indebtedness, (c) seeking additional debt financing, which may be subject to obtaining necessary lender consents, (d) seeking additional equity financing, or (e) a combination of the foregoing.
83. Defendants' statements were misleading, though, because the Company's supposed subscriber and revenue growth would not support the service of its monthly deb t
34 obligations even prior to refinancing, eventually forcing the Company to sell off portions of it s businesses just to pay the interest on its debt .
84. The market immediately reacted to Defendants' false statements, and shares o f
NTL rallied from an August 9, 2000 low of $42 .56 per share, the trading price of the Company's shares immediately prior to the release of its second quarter results, to a high of $48 .38 per share on August 18, 2000, after investors were able to fully digest the impact of Defendants ' statements. In fact, following the conference call hosted by Defendants on August 10, 2000, i n which they reiterated the Company's reported results and provided further guidance, shares of
NTL stock rose as much as 8.6%.
85. On October 24, 2000, the Company announced over the PR Newswire its preliminary operating statistics for its residential services for the quarter ended September 30,
2000. The Company stated that it expected to release its full quarter-end financial results on
November 9, 2000, and would host a meeting and a conference call at 10 :00 a.m. the same morning. Commenting on the Company's purported progress, Defendant Knapp stated :
We are extremely proud of this quarter's operating performance, having passed a number of operating milestones and obtaining solid initial operating results from ConsumerCo. The third quarter was extremely successful in terms of subscriber additions. We added 73,900 subscribers in the third quarter, with 62,600 net additions in the UK/Ireland and 11,300 in Continental Europe.
86. Knapp also described the supposed successful integration of the Company' s
recent acquisitions :
The integration of Cable & Wireless' ConsumerCo commenced last quarter and we have already witnessed some solid results . Prior to our acquisition of ConsumerCo, Cable & Wireless' cable telephony business had been losing customers on a quarterly basis. Under its first full quarter of NTL ownership , ConsumerCo began to report positive subscriber growth . . . . In addition, we have
35 already materially reduced monthly chum. While integration efforts continue at ConsumerCo, we are pleased with these initial results and remain confident that we will continue to be able to use the lessons that we learned in our prior acquisitions to make the integration of ConsumerCo proceed smoothly.
87. Knapp further described the demand for high speed Internet services a s
"substantial," and stated that NTL had increased its digital subscriber by almost 100,00 0 customers: "At the end of the third quarter we served approximately 325,000 digital subscribers , up from approximately 230,000 in the second quarter ." Consequently, based on these results ,
Knapp stated that NTL "remain[ed] confident that we will reach our goal of having 500,000 digital subscribers by the end of 2000."
88. Finally, Knapp stated that the Company's chum rate had declined to approximately 1 .0% at the end of the third quarter in the UK and Ireland .
89. The statements in the October 24th release, identified above, were materially false and misleading because they failed to disclose that, inter alia: (a) the Company's efforts to reduc e
"chum" entailed retaining customers on their records who had already requested termination o f their service, or who had already been terminated ; (b) the integration of ConsumerCo was not going well - in fact, as alleged above, the employees of the integrated companies refused to speak with each other; (c) any increase in the Company's customer base was based primarily on, among other things, the machinations described above in paragraphs 48-57; and (d) the Company was not meeting the needs of its customers ; NTL was plagued with technical and customer service problems that caused higher than reported chum rates and dissatisfaction
90. On October 25, 2000, Chase Hambrecht & Quist Inc. issued an analyst report in which it initiated coverage o€NTL with a "Buy" rating and a $60, 12-month share target price, praising the Company's recent expansion. Based upon Defendants' prior public statements ,
36 CH&Q wrote : "In our view, NTL is an opportunity to invest in one of Europe's leading
multi-platform convergence media companies, positioned to exploit rising consumer and
business demand for advanced communications services and their convergence with
entertainment and information services ." The report praised NTL's "growth rates" and the
supposed expansion of its customer base through the signing up of customers for free Internet
and digital cable service. It also noted that NTL's "successful integration of acquisitions and
growth management efforts, complemented by a commitment to quality customer service, should
ensure that NTL eventually achieves sufficient scale for a leading role in the European
convergence media sector." Lastly, the report declared that "NTL's strong investor backing helps
support NTL's short- and long-term funding position ."
91 . The statements identified above in the CH&Q report were materially false an d misleading. NTL could not provide service to those it had "signed-up," and thus expansion of
the Company's customer base would not translate into revenue or earnings growth ; NTL's
integration efforts were incomplete and unsuccessful ; NTL's customer support was
unsatisfactory and was causing customers to terminate their service ; and NTL was neither
fully-funded nor able to call upon sufficient funding in the short or long-term . See 1148-57, 81 .
92. On November 1, 2000, Defendants caused the Company to file a current report o n
Form 8-K for the purpose of complying with SEC Regulation FD . In the report, NTL discussed
the planned disclosure of information at a conference to be held on November 1, 2000, namely that the Company "expects to be free-cash flow positive by the end of 2003 or in the early part of
2004." Further, NTL stated that "its current EBITDA reflects substantial customer acquisition and integration costs" that are "expected to peak in the second half of 2000." NTL also stated that "most of those expenditures are customer led or discretionary."
37 93. Defendants had no adequate basis to represent that NTL would be "free-cash flow positive by the end of 2003 or in the early part of 2004." Defendants knew or recklessly disregarded that the Company was not generating sufficient revenues to support the state d expectation of being free-cash flow positive. Indeed, the costs to service the Company's deb t were undermining any real revenue growth. See 158. As alleged above, however, real revenue growth was de minimis; NTL was able to reach revenue goals only through the subscribe r machinations alleged above.
94. On November 2, 2000, the Company announced that it was cutting as many as
1,300 jobs in the U.K as part of the Company's "significant" cost savings efforts . According to a
Bloomberg report published on November 2, 2000, NTL stated that it expected "significant " savings by the second half of 2001 . According to NTL, the Company was "taking the inevitable duplications out of the system" and "shaping the business so that [NTL] can have faster growth , faster marketing position going forward." Bloomberg also reported that, when asked about whe n
NTL would provide more detail on the cost savings purportedly provided by these cuts, NTL' s spokesperson stated, "not in the short term ."
95. The foregoing statements concerning NTL's cost savings efforts were materially false and misleading because of, inter alia, the difficulties NTL was experiencing integrating its acquisitions. See ¶j 42-47, 58. Defendants also knew, but failed to disclose, that the workforc e reductions were driven by NTL's need to service its debt obligations rather than the removal of
"inevitable duplications" in NTL's operations. See 158. Consequently, NTL had no basis to claim that it was positioned for "faster growth . . . going forward."
96. On November 9, 2000, Defendants caused the Company to announce over the PR
Newswire NTL's reported results for the quarter ended September 30, 2000 . For the third
38 quarter of 2000, the Company reported revenue of £559 .6m, a 116.0% increase over the same period the previous year, and earnings of£62.2m, a 54 .0% increase. Commenting on th e
Company's reported performance, Defendant Knapp declared that NTL was "very proud of this quarter's financial results in light of our tremendous integration efforts ." Knapp measured this purported success chiefly in terms of the Company's quarterly subscriber growth, stating that th e
Company's "quarterly organic customer growth of 73,900 customers was extremely strong."
Knapp further described NTL's purported success in integrating its acquisitions, and, in particular, a "comprehensive cost analysis" and "consolidation review" in which the Compan y closely examined the efficiency of its integration efforts :
This quarter represented our first full reporting period following the acquisition of ConsumerCo . During the quarter we focused on integrating ConsumerCo while improving the quality of the ConsumerCo customer experience. These efforts have already proven effective. In only four months since our acquisition of ConsumerCo, we have reversed the trend of quarterly customer decline and reported net quarterly customer growth at ConsumerCo for the first time in 2000. In addition, we have reduced monthly churn from 2.5% at the time of the acquisition to 1 .9% at the end of the third quarter. . . . In addition, we have recently concluded a comprehensive cost analysis that will result in significant annual cost savings starting in the second half of 2001 as a result of organizational changes relating to the integration of the eleven acquisitions that we have closed during the last 18 months .
Our views of how quickly we can integrate ConsumerCo and BT Cable are shaped by our success at both the "Original NTL" franchise and franchises we acquired from Comcast UK, ComTel and Diamond.
We have made significant progress towards the integration of ConsumerCo during our first full quarter of ownership. We successfully stemmed the tide of consumer losses in the former
39 ConsumerCo franchises in the third quarter by dramatically reducing churn.
On November 2, 2000, the Company announced the completion of a consolidation review. Based on a comprehensive review of the combined company following the acquisition of ConsumerCo and the integration of several other acquired businesses over the last 18 months, the Company identified significant efficienc y improvements and cost savings . These include the elimination of duplicate technologies and processes, consolidation of support functions and reductions in levels of management . Approximately 1,300 roles will become redundant over the next 15 months as part of the cost savings. The Company expects to realize the cost savings beginning in the latter half of 2001 . . . .
97. On November 14, 2000, NTL filed with the SEC its Form 10-Q for the quarter
ending September 30, 2000 ("the November 14, 2000 Form 10-Q"), repeating the financia l results reported in the November 9th press release .
98 . The statements in the November 9th press release and revenue figures in th e
November 14, 2000 Form 10-Q, identified above, were materially false and misleading because
Defendants failed to disclose that, inter alia: (a) the Company's efforts to reduce "churn" entailed
retaining customers on their records who had already requested termination of their service, or
who had already been terminated; (b) the integration of ConsumerCo was not going well - i n
fact, as alleged above, the employees of the integrated companies refused to speak with eac h
other; (c) the Company was not meeting the needs of its customers ; NTL was plagued with
technical and customer service problems that caused higher than reported churn rates an d
dissatisfaction; (d) the increased subscriber growth and reported revenue was attributable largel y
to the machinations described in paragraphs 48-57 above ; and (e) the workforce reductions were ,
in fact, necessitated by NTL's need to service its massive debt obligations . See ¶ 58.
40 99. On December 1, 2000, based upon Defendants' prior Class Period statements ,
Merrill Lynch issued a favorable report initiating coverage of NTL with a "Buy" rating. Merrill
Lynch noted the Company' s descriptions of its large subscriber base, expansion efforts, and market penetration. Merrill Lynch also commented on NTL's efforts to integrate its acquisitions, describing them as having made "significant progress ." Merrill Lynch glowingly describe d
NTL's plans to increase the number of customers for digital services, and listed a 12-month stock price objective of $54 per share, nearly double the $27.25 per share price at which it closed on
November 30th. The day Merrill Lynch issued the report, the price of NTL's stock rose nearl y
3% to $28 .0625 per share.
100. On January 9, 2001, Defendants caused the Company to file a current report o n
Form 8-K for the purpose of complying with SEC Regulation FD. In the report, NTL discussed the planned disclosure of information at a conference to be held on January 1, 2000, namely that - the Company would "confirm that it expects to meet or exceed (pound) 60 million of EBITDA
(before corporate expenses) for each of the quarters ending December 31, 2000, March 31, 200 1 and June 30, 2001 ." In the filing, Defendants reiterated that "[t]his expectation is consistent wit h previous estimates made by the Company." Defendants stated that "[t]his period corresponds t o the period during which the Company expects to complete the initial stages of its integration o f the consumer business acquired from Cable and Wireless plc in 2000 ." The Company also said that it would discuss its installation of approximately 12,800 cable modems in the UK at the end of the fourth quarter, "more than tripling its cable modem subscribers in the fourth quarter."
101. Also on January 9, 2001, Bloomberg reported that NTL shares gained over 12% after the Company announced that it would "meet or exceed" its full-year earnings forecasts fo r
2000 and for the first half of 2001 . Based on the reiteration of Defendants' forecasts, shares of
41 NTL rose in intra-day trading nearly $4 per share from there opening price of $26 .75 per share, to close at $29.5625 per share.
102. The statements in the January 9th Form 8-K, identified above in paragraph 88 , concerning the integration of businesses and increases in Internet subscribers were materiall y false and misleading. Defendants knew, but failed to disclose, that (a) the integration o f
ConsumerCo was not going well - in fact, as alleged above, the employees of the integrate d companies refused to speak with each other; and (b) any increase in the demand for high spee d
Internet services was based primarily on practices that were designed to inflate artificially NTL' s customer base. See 11 44-57. Moreover, given the serious problems then-affecting th e integration of ConsumerCo with and into NTL, Defendants lacked a reasonable basis to state tha t they expected "to complete the initial stages of its integration of the consumer business acquire d from Cable and Wireless plc in 2000."
103. Defendants' statement in the January 9th Bloomberg article, that the Company would "meet or exceed" its earnings forecasts, was materially false and misleading . Defendants knew, but failed to disclose, that, inter alia. NTL's ability to meet or exceed earnings forecasts was predicated on the increase in subscribers caused by the machinations alleged above . See
1148-57. Defendants also knew that they lacked any basis to make this statement because NTL faced myriad problems with its integration of acquired businesses, satisfying its customers, an d maintaining its customer base - problems that would undermine the Company's revenue and earnings projections an d its ability to repay its debt. See 1148-62 .
104. On January 12, 2001 , Defendants caused the Company to announce over the PR
Newswire NTL's reported operating results for the fourth quarter and full year of 2000 .
Commenting on the Company's operating performance and integration of acquired entities ,
42 Defendant Knapp again emphasized the increasing customer base and declining churn rate:
2000 was another exciting year for the company and the fourth quarter was our Consumer Services Division's most impressive quarter to date. We are extremely proud of this quarter's operating performance, having passed a number of operating milestones while significantly improving the operating results at ConsumerCo . The fourth quarter was the most successful quarter in our history in terms of organic subscriber additions . . .
The integration of ConsumerCo continued to gain momentum this quarter and operating results have improved measurably. ConsumerCo has witnessed a dramatic turnaround from a declining customer base prior to our acquisition . . . . As we improved the quality of ConsumerCo customers' experience, the rate of churn has steadily declined from 2 .5% per month prior to our acquisition to 1 .9% per month at the end of the third quarter and to 1 .7% per month at the end of the fourth quarter . We continue to use the experience we gained in our prior acquisitions to make the integration of ConsumerCo proceed smoothly .
Following NTL's announcement, the,price of NTL's stock price rose again, closing on January
12th at $38.75 per share.
105. The statements in the January 12th press release, identified above, were materiall y false and misleading because Defendants failed to disclose that, inter alia: (a) the Company' s efforts to reduce "churn" entailed retaining customers on their records who had already requeste d termination of their service, or who had already been terminated; (b) the integration of
ConsumerCo was not going well - in fact, as alleged above, the employees of the integrate d companies refused to speak with each other ; (c) the Company was not meeting the needs of its customers; NTL was plagued with technical and customer service problems that caused higher than reported churn rates and dissatisfaction ; and (d) the purported organic growth in subscribers was attributable largely to the machinations described in paragraphs 48-57 above.
106. On January 25, 2001, Bloomberg reported that NTL had provided the market with
43 further near-term revenue guidance, with revenue expected to reach £2 .6 billion in 2001 and £3.3
billion in 2002. Most important, though, NTL had made various statements regarding the health
of its financing commitments, which the market accepted as true, concluding with Defendan t
Knapp's promise that the Company would be "free cash flow positive . . . by the end of 2003."
Bloomberg reported that NTL had "said it expects to raise -[$1 .31 billion] in the first six months
of this year and reduce costs and capital expenditure so that it won't need to borrow any mor e
money." The article quoted Defendant Knapp as insisting that, "[w]e don't need to raise exces s
capital and in today's environment that 's a very important message." Defendant Gregg added
that "[t]hings have never looked better from a financial prospective ."
107. The market accepted NTL's statements , driving the price of NTL stock fro m
$35.25 per share on January 24th to $37 .0625 per share on January 25th, and to $39.2 per share
by January 30th. Avnish Mehra, a high-yield debt analyst at CIBC World Markets in London,
was quoted as saying that, "[m]ost of the short-term targets are very realistic and I would not b e
surprised if they beat their own forecasts," and that he would be "very surprised" if Moody' s
Investors Services decided to lower its credit rating on NTL's bonds. Within six months, however, Moody's would do exactly that .
108. Defendants' statements concerning financing i .e., being free-cash flow positive) were materially false and misleading because, among other reasons, problems with th e integration of acquired businesses, as well as problems servicing and retaining paying subscriber s were threatening the revenue stream on which Defendants had based their positive statement s regarding the Company' s performance. See 1142-57.
109. On March 8, 2001, NTL announced, over the PR Newswire, its financial results for the fourth quarter and year ended December 31, 2000. The Company reported fourth quarter
44 revenue of £586m, a 5% increase over the same period the previous year, and earnings of £65m ,
a 5% increase. The Company reported year-end revenue of £1,886m, a 97% increase over th e previous year, and earnings of £229m, a 76% increase over the prior year . In the release,
Defendant Knapp commented favorably on the Company's recent acquisitions of ConsumerCo
and Cablecom, noting that "eve have been carrying out an extensive business review to reduc e
our cost base and ensure we're fully exploiting the assets .we have. Without doubt , the CWC
ConsumerCo acquisition has presented us with the greatest management challenges due to th e size of the transaction. However, after just a few months, we've been able to reduce churn
significantly from 2.5% to 1 .7% per month and add new customers by following the roadmap w e
created for past acquisitions." Knapp continued: "The integration of ConsumerCo remains on
track. We have reversed the outflow of subscribers . . . . Our efforts to combat chum have been
critical to the rapid turnaround, and we have successfully lowered monthly chum from 2 .5% at
the time of acquisition to 1 .7% just two quarters later." Knapp credited NTL's rapid growth for its success:
Our record growth has been made possible by the $11 billion investment we've made in our national, regional and most importantly local broadband networks throughout the UK. . . . The strength of our bundled packages has helped us achieve our industry-leading penetration and churn results . I am confident that no other company in the UK has the assets in place to compete with NTL to provide television, telephony and broadband intemet services to consumers at value-for-money prices .
110. The statements and revenue figures in the March 8th press release, identifie d above, were materially false and misleading because Defendants failed to disclose that, inter alia:
(a) the Company's efforts to reduce "chum" entailed retaining customers on their records wh o had already requested termination of their service, or who had already been terminated; (b) the
45 integration of ConsumerCo was not "on track ." As alleged above, the employees of the
integrated companies refused to speak with each other ; (c) the Company was not meeting the
needs of its customers; NTL was plagued with technical and customer service problems that
caused higher than reported churn rates and dissatisfaction ; and (d) the increased subscriber
growth and reported revenue was attributable largely to the machinations described in paragraphs
48-57 above.
111. On March 9, 2001, the Guardian published an article in which Defendant Carter
commented on NTL's acquisitions stating that NTL was "now a business of scale, with
customers and strong products." Carter also stated that NTL had now signed 600,000 homes to
its digital television service and had set a target of £1 .25m for the end of the year. The Guardian
also reported that NTL "expect[ed]" to have 100,000-plus customers using its broadband service
by the end of the year, up from the present 12,800 ."
112. Defendant Carter's statements were materially false and misleading because the
customers base on which NTL's scale was based was predicated largely on the ConsumerCo and
Cablecom acquisitions . As alleged above, NTL was facing myriad problems with the integration
of these businesses. Carter also knew, but failed to disclose, that the expected increase i n broadband subscribers was based on targeting customers who had poor credit histories and
otherwise unable to pay for the service once the free trial expired . As described above, thes e
customers were induced to subscribe because the service was free, though unaware that they had in fact agreed to a 12 month subscription. Carter also knew that the Company was not meeting the needs of its digital and broadband customers because it could not provide those services on a consistent basis. As alleged above, both prior to and throughout the Class Period, NTL was plagued with technical and customer service problems that caused higher than reported churn
46 I rates and dissatisfaction among these customers . Finally, Carter knew that any increase in subscriber growth was attributable largely to the machinations described in paragraphs 48-5 7 above.
113. Also on March 9, 2001, the Dow Jones News Service published an article commenting on the Company's year-end 2000 results . In the article, Knapp stressed that
Defendants intended to recommence NTL's acquisitive focus by the end of the year : "At the end of 2001 and the beginning of 2002 we'll be back on a shopping spree ."
114. On March 30, 2001, Defendants caused NTL to file with the SEC, its 2000 annual report on Form 10-K. The 2000 Form 10-K repeated the financial information announced on
March 8, 2001, and, therefore, is materially false and misleading for the same reasons. Under the section entitled "Liquidity and Capital Resources," NTL reiterated its continued need for capital :
The Company will continue to require significant amounts of capital to finance construction of its local and national networks, for connection of telephone , telecommunications, Internet and cable television customers to the networks, for other capital expenditures and for debt service. The Company estimates that these requirements, net of c ash from operations , will aggregate up to approximately $2,400.0 million in 2001 .
115 . On May 5, 2001, Defendants caused the Company to issue a release, published in full on Business Wire on May 10, 2001, in which NTL announced its reported results for the quarter ended March 31, 2001 . For the first quarter of 2001, the Company reported revenue o f
£622m, a 6% increase over the previous quarter and a 103% increase over the same period th e previous year, and earnings of £86m, a 32% increase over the previous quarter and a 100% increase over the same period the previous year . Commenting on these results, Defendant Knap p made numerous statements describing the Company's purported "excellent" performance , improved service, and full financing :
47 We are very pleased with our strong performance this quarter and believe that we have made an excellent start to achieve our goals for the year.
We are improving customer service and choice, enhancing revenue, cutting costs and increasing liquidity faster than anticipated .
Net of reductions in our existing credit lines, we now have excess funding through 2002 assuming we achieve the financial targets outlined at the beginning of this year.
Our success during the first quarter provides us with an increased level of confidence in our ability to meet or exceed our 2001 financial targets for revenue . . . and EBITDA . . . . We have set the company on the path to a successful future and are confident in our ability to achieve our goals .
Knapp added that, "the following sources of capital have already contributed approximately
£680m of total incremental liquidity, thereby financing NTL into 2003, based on our financial outlook:"
2001 Announced Financings Gross Proceeds Incremental (in millions) Liquidity
E300 million offering (pound)190 (pound) 95
Bank Financing (Australia) 135 135
GE Capital (committed) 270 135
Convertible Notes 700 31 5
TOTAL (pound) 1,295 (pound) 680
116. The statements and revenue figures in the May 5th press release, identified above , were materially false and misleading because Defendants failed to disclose that, inter alia: (a) revenue increases were attained largely through the subscriber machinations described above se e paragraphs 48-57); and (b) NTL's debt burden was overwhelming its financial condition .
48 117. On May 9, 2001, the Financial Times reported that the Company was planning to issue convertible notes to raise $500 million to help its balance sheet. As reported in the
Guardian on March 9th, NTL "rushed out highlights f ro m its first-quarter results . . . to support the issue." Including the new round of debt financing, NTL had raised almost £1 .2bn in 200 1 from bonds and vendor financing, which, according to the article, "should leave the company on target to have £l.5bn in cash and surplus debt facilities by the end of the year - enough to se e the business through to cash flow positive ."
118. In an article entitled "Costs overshadow NTL gains," published on May 11, 2001 in the Hollywood Report er, Knapp was quoted as stating: "We are improving customer service and choice, enhancing revenue, cutting costs and increasing liquidity faster than anticipated."
119. Knapp's statement quoted in paragraph 118 above was materially false an d misleading. Knapp knew, but failed to disclose, that NTL was not, as alleged above, "improvin g customer service." In fact, NTL' s failure to service its customers adequately resulted in enhanced dissatisfaction and customer churn, which NTL under-reported . See 11 42-47, 58-62.
120. On May 15, 2001 (amended on May 22, 2001), NTL filed with the SEC its Form
10-Q for the quarter ending March 31, 2001 (the "May 15, 2001 Form 10-Q") . The May 15 ,
2001 Form 10-Q repeated the financial information announced on May 5, 2001, and, therefore, i s materially false and misleading for the same reasons. In the May 15, 2001 Form 10-Q, NTL hinted how, contrary to Defendants' prior statements, the bulk of NTL's "growth" arose from th e sale of additional services to existing customers, not from the acquisition of new customers :
The Company's immediate goal is to drive the majority of revenue growth from average revenue per unit ("ARPU") increases rather than adding new customers. Achievement of this goal would allow the Company to achieve its revenue targets, have a lower capital requirement due to fewer installations, and improve EBITDA as
49 the Company reduces front-loaded costs such as customer acquisition costs and higher initial maintenance costs . In the first quarter of 2001, the Company increased revenues from existing customers as a result of migrating customers to digital television, price increases and upselling additional products and services . The Company expects this trend to continue in the second quarter of 2001-
121 . Defendants' statements were materially false and misleading, however, because
they failed to disclose, inter alia, the myriad problems NTL faced with servicing its existing
customers once the Company upsold digital and broadband products to these existing customers .
See 11 42-47. For example, as alleged above, many of these services, e.g., digital television and
high-speed Internet, were unavailable to large segments of NTL's customer base, while service
and support problems were causing many customers to attempt, unsuccessfully, to terminate
these services shortly after purchase. Once NTL had exhausted the supply of existing customers
willing to purchase additional features, NTL's "growth'Twould disintegrate .
122. In an effort to falsely reassure investors that the Company was on track to meet or
exceed earnings and revenue forecasts, on July 13, 2001, Defendants issued a press release over the Business Wire entitled, "NTL Continues to Reaffirm that it is on Track to Meet or Exceed its
Quarterly and Yearly Guidance," in which Defendant Knapp reportedly reaffirmed that NTL would "meet or exceed previously announced guidance for the second quarter," and was "on track to meet or exceed its 2001 financial targets in all respects." Knapp was quoted as saying that, "NTL remains pleased with its operational results so far this year and have every indication that we will meet or exceed our targets for the second quarter and full year . . . . We expect to reaffirm or revise guidance upwards for the remainder of 2001 at our second quarter results meeting." This was the second time in July that NTL reaffirmed that it would meet or exceed its previously announced guidance for the second quarter and year.
50 123 . Knapp's statements of reassurance were materially false and misleading.' Knapp
knew, but failed to disclose, that NTL could meet or exceed revenue guidance only through th e
machinations described above . See 1148-57.
124. On July 18, 2001 , Defendants announced second quarter earnings of £l 15m and
again reaffirmed that the Company was performing according to forec asts provided by
Defendants. Defendants also raised 2001 EBPTDA guidance by £100m to £485m, and 2002
EBITDA guidance of £825m upward . Defendant Knapp commented, "[o]ur current operatin g
results are very strong and we have always had great confidence in the future . In our upcomin g
presentation we will be describing how our increasingly strong performance will make our
current funding sufficient for us to reach free cash flow positive by the end of 2003 ."
125. Defendant Knapp's remarks were materially false and misleading, however ,
because he failed to disclose, inter alia, that NTL achieved the reported revenue through the
subscriber machinations alleged above. Knapp also knew, but failed to disclose, the problems
NTL faced with its subscriber base, which threatened future revenue. For example, as alleged
above, many of these services, e.g_, digital television and high-speed Internet, were unavailable to
large segments of NTL's customer base, while service and support problems were causing many
customers to attempt, unsuccessfully, to terminate these services shortly after purchase . Once
NTL had exhausted the supply of existing customers willing to purch ase additional features ,
NTL's "growth" would disintegrate. Moreover, given the adverse impact that NTL had with th e integration of acquired businesses and acquiring and maintaining customers, Knapp's assurances
concerning NTL's funding were also materially false and misleading . Further, Knapp knew, but failed to disclose, that the volatility in the equity and debt capital markets were materiall y limiting the sources of funding available to the Company . That problem was exacerbated by th e
51 increase in the costs necessary to service NTL's heavy debt burden.
126. Shares of NTL surged following Defendants' upward revision of NTL's EBITDA figures. Following this announcement, on July 19, 2001, shares of the Company traded up t o
$7.30 per share, an increase of 38% in the single trading day. As reported by Bloomberg , David
Brundish, an analyst at J.P. Morgan Securities in London, stated that the Company's upward revision was a "very timely reminder that the company' s going great guns . . . . In an environment of profit warnings, upward revisions differentiate it from the crowd." These comments, based upon Defendants statements, were materially false and misleading, as they failed to disclose the customer service problems and poor subscriber growth that were threatening NTL's revenue stream.
127. To assuage any fears that the Company's debt would continue to put pressure on the price of the Company's stock and bonds, on July 20, 2001, The Financial Times quoted
Defendants Knapp as stating: "Our increasingly strong performance will make our current funding sufficient for us to reach free cash flow positive by the end of 2003 ."
128. Defendant Carter carried the banner in his comments as reported by The Guardian on-July 20, 2001 . Carter denied that NTL was in crisis talks with its largest shareholder, France
Telecom. Neither, he added, were there crisis talks in New York ; it was simply a regular planning meeting arranged some time ago :
We had a good second quarter and there didn't seem any merit in hiding our light under a bushel . . . I look at our business in July 2001 and I compare it to July 2000 , and operationally it' s unrecognizable. That's visible in pretty much every way you measure it: earnings, revenues, number of customers, number of digital customers, but not ifyou look at the share price. We are in exactly the same funding position as we were at the first quarter. There is excessive pessimism out there.
52 There's an impatience out there . . . . There's nothing heroic about day-to-day operations but we just have to keep improving quarter after quarter. It's a combination of improving revenues and identifying further costs that can be taken out from using one technology platform, better set-top box purchasing, outsourcing IT, just the economies that scale brings. Doubling the performance next year doesn't seem that much of a challenge .
The market reacted favorably to Carter's statements; NTL stock continued its climb from $5 .29 per share on July 18th, to close at $7 .91 per share on July 20th.
129. Defendants' July 20th assurances concerning funding were materially false and misleading. Defendants knew, but failed to disclose, that NTL was not in the same fundin g position as in the prior quarter. Both Carter and Knapp knew that NTL was no longer organically growing such that revenues alone would be sufficient to fund NTL's funding gap . Indeed,
Defendants knew that the costs required to service NTL's heavy debt burden undermined an y revenue generated by the Company- whether generated from the manipulations alleged herei n or not. Moreover, Defendants knew that the volatility in the equity and debt markets wer e materially restricting the sources of funding available to the Company, which could be used t o fill any funding gap . That problem was exacerbated by the increase in the costs necessary t o service NTL's heavy debt burden.
130. Three days later, on July 23, 2001, Moody's announced that it was placing under review, NTL's debt for possible downgrade because, in its view , NTL "could face a substantial funding gap" if projected cash flow growth failed to materialize . Moody's made its decision
"notwithstanding [NTL's reported] strong EBITDA growth trends -" In a July 26, 200 1 conference call with analysts that followed NTL's announced second quarter results, Knapp trie d to assuage concerns that the Company was carrying an unsustainable debt burden. As reported
53 by AFX News on July 26th, NTL also confirmed that its current funding w as sufficient for it to reach free cash flow at the end of 2003.
131 . For the reasons alleged in paragraph 125, above, Knapp's statements concerning
NTL's ability to service its debt burden were materially false and misleading.
132. On July 26, 2001, Defendants caused the Company to announce over the Business
Wire its reported financial results for the period ended June 30, 2001 . For the second quarter o f
2001, the Company reported revenue of £634m, a 3% increase over the previous quarter and a
46% increase over the same period the previous year, and earnings of £115m, a 34% increas e over the previous quarter and a 95% increase over the same period the previous year .
Commenting on these results, Defendant Knapp congratulated the NTL "team on yet anothe r quarter of flawless execution" :
We are extremely pleased to be one of the very few companies able to announce both strong current results together with an increasingly positive outlook for the future. We have achieved many of our 2001 annual goals in the first six months, and we are now reaping the benefits .
We have improved service levels and lowered churn in the acquired companies and we now run them as integrated units within NTL . . . .
Taken together we can now project these improvements further and with more confidence into the future, resulting in substantial increases to Revenue, EBTTDA, and net funds flow [through] 2003.
The market reacted promptly to the news, with NTL's stock price climbing steadily from $6.98 per share on July 24th to $10 .10 per share on August 2nd.
133 . Defendants' remarks were materially false and misleading, however, because the y
54 knew, but failed to disclose, inter alia, the difficulties NTL faced in integrating its acquisitions,
NTL's mounting customer service problems, and the poor quality of its subscriber growth - problems that would undermine the Company's revenue and earnings projections . Indeed,
Defendants knew that NTL's reported revenue figures were achieved as a result of the manipulations and practices involving the foregoing issues - integration, service problems, and subscriber base . Defendants also knew, but failed to disclose, that the Company's ability t o service its massive debt obligations was in serious doubt. The problem was so serious that, according to a former finance executive, who was employed at the Company during the Clas s
Period, it caught the attention of some of NTL's secured creditors. A number of secured creditors had contacted senior management about NTL's ability to service the debt. Nigel
Roberts was designated to interact with these creditors .
134. On August 14, 2001, NTL filed with the SEC its Form 10-Q for the quarte r ending June 30, 2001 (the "August 14, 2001 Form 10-Q"). The August 14, 2001 Form 10-Q reiterated the financial results reported on July 26, 2001, and, therefore, is false and misleading for the reasons stated above.
135. On August 17, 2001, Dow Jones News Service quoted Defendant Gregg as statin g that NTL had approximately $2 .6 billion available in cash and undrawn bank facilities, which were sufficient sources of monies to "handle [NTL's] financing needs until it becomes free cash flow-positive in 2003." NTL estimated that it would require approximately $949 million in th e second half of 2001 for capital expenditures and debt service . In this regard, Gregg stated : "The important thing to note is that we have all this liquidity in the system ."
136. Gregg' statements were materially false and misleading. Gregg knew, but failed to disclose, that NTL's funding needs far exceeded the represented "liquidity in the system ." As
1. 55 revealed at the close of the Class Period, the Company's liquidity was dependent primarily upo n
significant growth in operating cash flows and significant reduction in operating costs and capita l
expenditures. Defendants knew that the Company was not generating the growth in subscriber s
and revenues to support the service of its heavy debt. Indeed, Gregg knew that NTL's focus wa s
no longer on organic growth but, rather, on growth through the sale ofdigital and broadband
products and services to existing customers . As alleged herein, given the customer servic e
problems and other machinations, such growth was ephemeral . Indeed, Defendants knew, bu t
failed to disclose, consumer spending on NTL's services and product was slowing dramatically .
137. On August 21, 2001, Moody' s announced that it was downgrading some of the
Company's outstanding senior unsecured bonds. Moody's stated that the "downgrades reflect
on-going concerns related to NTL's significant debt levels (on both an absolute basis and in
relation to cash flow), which have grown meaningfully beyond Moody's expectations (a s
considered at the time of Moody's upgrade in June of 2000); the substantial challenges facing the
company as it attempts to realize the considerable revenue growth and cost reductions required t o
offer the prospect of adequate debt serviceability over the next several years ; and heightened
liquidity concerns resulting from the absolute magnitude of the company's requisite growt h
requirements and the uncertainty regarding likely funding sources for potential shortfalls in the
company's business plan ." Moody's also stated that the "ratings continue to reflect on-goin g
integration risks; high capital expenditure requirements (albeit, increasingly success-based) ;
subordination issues relating to the consolidated capital structure of the company; and potentially
adverse currency exchange conditions."
138. Commenting on the downgrade, which was not as severe as bondholders ha d expected, Steve Schutzman, a fixed-income analyst at Salomon Smith Barney, told Dow Jones
56 News Service on August 21st : "What you're looking at is a very measured approach by a credi t
agency. They're not saying NTL's going out ofbusiness, instead it 's a very concerted shot acros s
bow saying, `Get it together, we need to see definitive steps by you to shore up your balanc e
sheet."' A spokesman for NTL told the news service that the Company was pleased tha t
Moody's acknowledged NTL's positive attributes, including its customer base, growth profile ,
and management team .
139. In response to the ratings cut, NTL's 11 .5% notes due 2008 recouped their losse s
to end at 60, up from 56 earlier in the day. Its 11 .875% notes due 2010 ended at 59 after being
down a couple of points earlier in the day
140. On September 20, 2001, NTL issued a press release in which it reaffirmed that i t
would "meet or exceed its EBITDA target of £130m for Q3 2001 and that it is in compliance
with all of its bank agreements and other covenants ." The market reacted positively to the news.
From September 21st to 24th , NTL stock nearly doubled from $2 per share to $3.99 per share.
141 . The September 20, 2001 press release was materially false and misleading for the
reasons stated at 168 above.
142. On October 4, 2001,. NTL announced that it received $250 million in vendo r
financing from Cisco Systems and Nortal Networks . The financing was linked to expected
equipment orders from NTL in the coming months.
DEFENDANTS CONTINUED EFFORTS TO MASK NTL'S CASH-FLOW PROBLEMS IN THE FACE OF MARKET INQUIRY
143. On November 7, 2001, Defendants caused the Company to issue a release over th e
Business Wire in which NTL announced its results for the quarter ended September 30, 2001 .
The Company reported third quarter revenue of £645m, a 2% increase over the previous quarter
ti 57 and a 15% increase over the same period the previous year, and earnings of £132m, a 15 % increase over the previous quarter and a 13% increase over the same period the previous year.
While the Company' s revenue had reportedly increased, earnings had declined, and the losses had increased by a third . What growth NTL had experienced, furthermore, was attributable only to sales of additional products to existing customers ; NTL's actual subscriber base had not meaningfully grown as reported.
144. Commenting on these results, Defendant Knapp described NTL management as
"pleased with our progress this quarter, especially since the third quarter is traditionally challenging in our industry" and described ongoing efforts aimed at "improving service levels , realizing better revenue potential in our products, reducing costs and increasing asset utilization ."
With regard to funding, Knapp reiterated that:
[t]he Company anticipates that its financing over the remainder of 2001 and 2002 will consist mainly of cash on hand and available bank lines in the UK, Switzerland and Australia . . . . We believe that, based on our financial outlook, we are funded up to the point where the Company becomes cash flow positive at the end of 2003 . The Company will cover net cash interest by the middle of 2002 and turn cash flow positive by the end of 2003 . [Emphasis added.]
145. Defendants' remarks were materially false and misleading, however, because they knew, but failed to disclose, that problems undermining the Company's operations woul d severely impact NTL's revenue and earnings projections and weaken its ability to repay its debt.
146. At about the same time, Defendants Knapp and Blumenthal conducted a conference call with analysts in which they discussed, among other things, the Company' s liquidity and ability to service its debt obligations . Following the teleconference, Charles Darley asked Defendant Carter, "How can you speak about the cash cap and persuade investors to believe that NTL is going to be okay when you know it isn't?" According to Darley, Carte r
58 responded by saying, "[w]hat I tell them is nine-tenths bulls[ ]t and one-tenth selected facts."
Further, according to Darley, senior management, including Blumenthal, Gregg, Knapp, and
Carter, knew that one of the factors that Moody's and the market were looking at with respect t o
the service of NTL's debt obligations - organic subscriber growth - was not supporting
Defendants' representations concerning debt management. Based upon monthly reports that
quantified the total number of subscribers against those who were paying subscribers, Defendant s
knew that NTL's "paying" subscriber base was, in fact, shrinking.
147. Also on November 8, 2001, an e-business news website www.silicon.com
reported in an article entitled "NTL losses spiral; U p by a third . . . can't be good can it . . ." that
NTL's huge debt was siphoning off revenue in an ever-increasing fashion. "NTL has admitted
it's losses have increased 33 per cent to £713m, blaming high interest payments on its £l2bn
debt. According to reports in the Financial Times, interest repayments jumped from £281m to
£356m quarter-on-quarter." In an effort to raise cash, www.silicon.com reported, NTL would try
to sell its broadcast business and its stake in the Swiss cable firm Cablecom . "However,"
www.silicon.com reported, "the telco remained tight-lipped on both areas, in spite of heavy
pressure to reduce its debt mountain ."
148. That same day, The Daily Telegraph reported that NTL's efforts to raise revenu e
by selling additional services to existing customers had caused some to believe that the Compan y was turning away new customers, because the cost of connecting them was too great for a
company already struggling under a "massive debt mountain." NTL had reportedly denied the claim, but The Daily Telegraph reported that "sources close to the company" had indicated that
NTL had begun to purposely limit subsc riber additions in favor ofmore cost-effective upselling.
149. By November 2001, NTL's problems delivering adequate customer service - and
59 the effect these problems would have on NTL's balance sheet - were beginning to come t o light. Many of these problems, according to present and former sales and market employees, had been driven by NTL's quest to expand its subscriber base, a problem with which NTL management was well aware . Many of these subscribers left NTL soon after joining, o r attempted to leave, but were maintained on NTL's customer roles . Other customers who were recruited signed with management's knowledge that they would not pay their bills . Poor service drove many paying customers away from NTL even as Company management claimed successful growth of its subscriber base.
150. Nonetheless, Defendants informed the market that they remained confident tha t
NTL could maintain its growth and high revenue . On November 9, 2001, an article published o n www.silicon.com entitled "NTL boss talks tough; Cableco confident despite tough times," noted that, "NTL may have £l2bn in debt and one or two disgruntled customers but Barclay Knapp, th e
CEO of the telecoms to TV to broadband company, has said he is confident the company will emerge strongly from the current downturn ."
151. The Wall Street Journal Europe reiterated Knapp's November 9, 2001 comments.
Finding that " all isn't well," however, Kay Larsen noted that NTL was negotiating to sell it s entire broadcast business - including 3,500 transmission towers located in the United Kingdo m and Australia. When challenged as to the Company's future should the sale be unsuccessful ,
Knapp had insisted that the "operating plan we have in place is sufficient." NTL, Larsen, noted, claimed itself to be "recession resistant."
152. On November 13, 2001, The Asian Wall Street Journal published an interview that Defendant Knapp had given during the prior week. Despite the fundamental decline in organic growth, a necessary component to filling NTL's funding gap, Knapp continued to
60 represent that NTL could manage its debt service obligations:
In the middle of the summer when we revised our guidance, we showed our liquidity situation from now to 2003 . It doesn't show a large surplus, but we did that to show that if there's a funding gap it isn't huge - it is manageable in any kind of environment . Some of the analysts had had us with very large funding gaps that were just unrealistic, so we thought it was prudent to demonstrate that whatever it is, it's relatively manageable and small.
The operating plan we have in place is sufficient. If we meet operating targets, we will have GBP 1 .5 billion in earnings before interest, tax, depreciation and amortization in 2003 . There aren't many companies in the world that have cash flow that high and I believe that will get us, by itself, into a more normal debt-cash flow structure. We would not be so comfortable about our operating plan if we didn't feel we would make the numbers.
153. Knapp's statements were materially false. Knapp knew, but failed to disclose,
that NTL was not managing its debt. In fact, without the sale of businesses, layoffs, and joint
ventures with competitor, bankruptcy would be only six months away .
154. On November 14, 2001, NTL filed with the SEC its Form 10-Q for the quarte r
ending June 30, 2001 (the "September 30, 2001 Form 10-Q"), reiterating the news of NTL' s
disappointing performance, and Defendants optimistic predictions of revenue and subscribe r
growth. For the reasons alleged, herein, those statements were materially false and misleading
THE TRUTH BEGINS TO EMERGE
155. On November 29, 2001, Moody's Investors Services cut its credit rating on NTL' s
senior unsecured notes, citing concerns that NTL would have to convert bonds into other
securities in order to pay back its massive debt. Specifically, Moody's downgraded NTL two
grades to "Caa2" from "B3, . . . just three above the lowest rating on the 21 -rung scale."
Moody's attributed the downgrade to, among other things, "heightened concerns regardin g
61 NTL's liquidity position and longer-term ability to adequately service its debt" and "minimal organic revenue growth ." As a consequence, Moody's opined "that a restructuring of th e company's balance sheet is a greater possibility as it appears increasingly likely that the compan y may be unable to grow into its highly leveraged capital structure." The press release stated, in pertinent part:
Today's downgrade reflects Moody's heightened concerns regarding NTL's liquidity position and longer-term ability to adequately service its debt, following the company's third quarter results announcement. While third quarter EBITDA growth was in line with expectations, the company demonstrated minimal organic revenue growth, capital expenditures exceeded Moody's expectations, one-off costs (which are not included in the company's liquidity forecasts) were meaningful, and overall cash burn was greater than expected by Moody's . While each of these issues alone are not significant, the aggregate affect of these factors in light of the company's need to achieve extremely aggressive growth targets and combined with the already weak positioning of the company's ratings, has resulted in today's rating actions . While continuing to acknowledge NTL's strong growth prospects, Moody's now believes that a restructuring of the company's balance sheet is a greater possibility as it appears increasingly likely that the company may be unable to grow into its highly leveraged capital structure.
Moody's also noted that:
potential revenue shortfalls are of particular concern given Moody's expectation that the company's longer-term cash flow growth is dependant on both margin expansion and significant revenue growth (the company forecasts incorporate a 50% EBITDA margin on incremental revenue growth for 2002 and 2003). Furthermore, given NTL's significantly weakened access to capital over the past year, the company has extremely limited financial flexibility and virtually no ability to absorb any shortfalls in its business plan.
156. Immediately upon this announcement, the price of NTL's common stock fell fro m its closing price of $2 .95 per share on November 28, 2001 to just $1 .60 per share on November
62 29, 2001, a 46% drop on heavy trading volume of over 5 .7 million shares. The average daily
trading volume during the Class Period was less than 2 .3 million shares.
157. On November 29, 2001, Bloomberg reported that "NTL's shares, which have los t more than 90 percent of their value this year, fell as much as $1 .31 to $1 .64," on the news,
"cutting the company's value to $567 million from more than $30 billion in January of last year ."
"Their projected revenue growth appears aggressive when compared to the quarterly growth rate s the company has achieved over the past year," Ted Barac, an analyst at Moody's, was quoted a s saying in an interview. "It's increasingly likely that an eventual restructuring may be required."
POST-CLASS PERIOD REVELATIONS
158 . On December 7, 2001, shares of NTL again fell as much as 22% after investors learned that the Company would probably have to convert more debt into other securities, after the Company was unable to find a buyer for its Towers Units - a division the Compan y previously stated it was going to sell for up to $2 .2 billion to reduce debt and fund operations .
This day, shares of NTL fell as low as $1 .01 per share, before closing trading at $ 1 .12 per share , a new 52-week low. As reported in Bloomberg, since the Moody's downgrade on November 29,
NTL had lost over two-thirds of its market capitalization, falling to $290.5 million from $677 .7 million the prior week, and from $30 billion in January 2000. Bloomberg also reported that, as of December 7, 2001, the Company had $17 .5 billion in debt .
159. Also on December 7, 2001, the Daily Telegraph, citing an unidentified Company spokesperson, reported that NTL would begin charging customers for its previously free Internet service, starting in January. According to the report, beginning in January 2002, the Company would begin charging customers between £7-£10 per month.
160. On December 10, 2001, shares of NTL traded below $1 per share for the first time
63 ever, after the Company announced that it would cut 2,000 jobs, or 12% of its workforce, in order to preserve cash to fund operations.
161 . On December 12, 2001, Bloomberg reported that shares ofNTL had fallen over
22% after Standard & Poor's cut the Company's credit rating to its seventh lowest level, "B-," citing concerns that with debt at 90 times its market value, NTL would need to borrow mor e money to continue operations. According to Bloomberg, the price ofNTL stock had reached a record low of $0.68 per share, giving the Company a market capitalization of less than $200 million. "There is a high probability that NTL may need to restructure . . . [due to] increasing concern about NTL's ability to service its extremely high levels of debt over the medium term, given the group's lower-than-expected" growth, Standard & Poor's stated.
162 . Defendants, though, continued to express confidence in the Company' s earnings potential - such statements were essential to the Company's survival, as its loan covenants required the Company to maintain certain levels of revenue and earnings. On December 13 ,
2001, the Financial Times reported that NTL was engaged in efforts to "calm fears it could run out of cash in its core business within six months." In an effort to stave off default, NTL ha d been struggling throughout the Class Period to "convince analysts and debt-holders that it ca n still meet the earnings targets in its bank covenants." These covenants required NTL to "keep within set ratios, for example , of debt to EBITDA (earnings before interest, taxation , depreciation and amortisation) - or the banks can call in their debt ." Failure to meet these covenants coul d
"cause the company to collapse with total debts of $20bn in bonds, bank debt and preferre d stock."
163 . On December 17, 2001, Bloomberg reported that the Company's major creditors were calling on NTL to file for bankruptcy protection so that it could conserve c ash and
64 renegotiate its massive debt . "It's not a functioning business," wrote Bloomberg, quoting asset manager Christine Johnson, "[ijt has run out of choices and it's now recognized as being a very serious situation." "The best outcome for NTL Communications Corp. bondholders may be fro m the auction of the company by its banks," added Kurt Klimenko, an analyst at Barclays Capita l
Group.
164. NTL management, however continued to insist that it could meet its debt servicing obligations. On December 17, 2001, in an article in the Yorkshire Post entitled "No cause to worry, NTL tells customers," reporter James Graham wrote that "NTL has reassure d customers that services will not be affected by its current financial crisis and has dismisse d speculation that it is on the verge of insolvency ." An NTL spokesperson, he wrote, had insisted in a telephone interview that there was "`no cause for customers to worry"' - that the Compan y
"`would be in profit by 2003 . "' "`A new business plan for 2002 that will increase our liquidity is currently being drawn up, but even without that, the company is fully financed until 2003 a t which point we will be in profit."'
165 . On January 23, 2002, Matthew Lynn, a Bloomberg columnist wrote a scathing analysis of NTL's financial troubles declaring that "Barclay Knapp, founder and chief executive of the British cable company NTL Inc., will need all his considerable rhetorical skills over th e next few weeks to save his comp any." Comparing NTL to failed energy-trading company Enron
Corp., Lynn wrote:
NTL has borrowed $17 .5 billion to finance an ambitious expansion program, which has so far yielded few tangible results . Now his bankers and borrowers are catching up with him .
Already, NTL's shares have fallen from almost $110 to just 43 cents. Now NTL looks set to become one of the biggest corporate failures of the current economic malaise. Like Enron in the U.S., it
65 will pose big questions about who investors give money to, and how closely they watch what happens to their money after they have parted company with it .
NTL investors will ask themselves this question: Have we only ourselves to blame? For NTL turns out to be a company that, so to speak, can't even tie its own shoelaces . That didn't stop it becoming one of the biggest borrowers in the U .K. over the past five years.
166. On March 27, 2002, Bloomberg reported that NTL had announced that it woul d
record a loss of $12 .8 billion, or an astounding loss of $46.46 per share, for the quarter ended
December 31, 2001, compared to a loss of $4.57 per share in the year-earlier period, and also
stated that it may run out of cash before completing talks with its lenders regarding th e
restructuring of its massive, $17.5 billion debt. According to Bloomberg, Defendant Knapp
stated in a conference call that the Company might go out of business unless it was able to find
new investors to keep it afloat through October :
"They don't have enough cash to support their business while the talks are ongoing," said Morten Andersen, an analyst at Deutsche Bank, which recommends selling the stock. "There's no value in the equity." The shares, which have lost 99 percent of their value in the past year, yesterday fell 4 .8 percent to 20 cents, leaving the Company with debt more than 316 times its market value . In addition, at this time the Company also reported that NTL lost 21 .3 percent of its customers on an annualized basis during the fourth quarter.
167. On April 1, 2002, NTL announced th at it would stop making payments on certain
bonds and that the Company was now in talks with its creditors about a strategy to restructure its balance sheet and reduce debt. According to an Associated Press report, the Company said it was responding to a request made by an unofficial committee of its bondholders . Nonetheless, as reported on May 29, 2002 by www.silicon.com, "NTL bosses paid themselves almost $2m in bonuses last year at the same time they were driving the cable company to the brink o f
66 bankruptcy."
168. By May 2, 2002, the Company announced that it reached an agreement with a
steering committee of its lending banks and an unofficial committee of its public bondholder s
implementing its recapitalization plan. On May 8, 2002, the Company announced that it had
filed a Chapter 11 "prearranged" Plan of Reorganization under U .S. law.
169. On June 12, 2002, www.silicon.com reported that NTL had lost 73,000 UK
customers - approximately 800 per day - during the three months ending March 2002.
FRAUDULENT SCHEME AND COURSE OF BUSINESS
170. Each Defendant is liable for: (i) making false statements; (ii) failing to disclos e
adverse facts known to him about NTL; and/or (iii) selling over one billion dollars of notes an d
debt, much of which was convertible into shares of the Company, at the time Defendant s
concealed the true financial and operational condition of NTL such that investors could not
adequately evaluate whether these convertible bonds represented -a sound investment at the tim e
of such offering.
171 . Defendants' fraudulent scheme and course of business that operated as a fraud o r
deceit on purchasers of NTL publicly traded securities was a success, as it (i) deceived the
investing public regarding NTL's prospects and business; (ii) artificially inflated the prices of
NTL's publicly traded securities; and (iii) caused Lead Plaintiffs and other members of the Cl ass
to purchase NTL publicly traded securities at inflated prices.
APPLICABILITY OF PRESUMPTION OF RELIANCE : FRAUD-ON-THE-MARKET DOCTRINE
172. At all relevant times, the market for NTL common stock was an efficient market for the following reasons, among others:
67 (a) NTL common stock met the requirements for listing , and (at separate times) was listed and actively traded , on the Nasdaq and the NYSE, two highly efficient markets;
(b) As a regulated issuer, NTL filed periodic public reports with the SEC ;
(c) NTL stock was followed by securities analysts employed by major brokerage firms who wrote reports that were distributed to the sales force and certain customer s of their respective brokerage firms . Each of these reports was publicly available and entered th e public marketplace.
(d) , NTL regularly issued press releases that were carried by national newswires. Each of these releases was publicly available and entered the public marketplace.
173 . As a result, the market for NTL securities promptly digested current information with respect to NTL from all publicly-available sources and reflected such information in NTL' s stock price. Under these circumstances, all purchasers of NTL common stock during the Class
Period suffered similar injury through their purchase of stock at artificially inflated prices and a presumption of reliance applies.
STATUTORY SAFE HARBOR
174. The statutory safe harbor provided for forward-looking statements under certai n circumstances does not apply to any of the allegedly false forward-looking statements pleaded in this Complaint. The safe harbor does not apply to NTL's allegedly false statements made during the Class Period because they were historical or present statements of fact . None of the written forward-looking statements made were identified as forward-looking statements, nor was i t stated that actual results "could differ materially from those projected." Nor did meaningfu l cautionary statements identifying important factors that could cause actual results to diffe r materially from those in the forward-looking statements accompany those forward- looking
68 statements. Each of the forward-looking statements alleged herein to be false was authorized by
an executive officer ofNTL and was actually known by each of the Individual Defendants to be
false when made.
ADDITIONAL SCIENTER ALLEGATIONS
175. As alleged herein, each Individual Defend ant had knowledge of NTL's problems
and was motivated to conceal such problems. Significantly, Defendant Knapp, as President and
Chief Executive Officer, and Defendant Blumenthal, as Chairman of the Board of Directors of
NTL, reviewed or were responsible for the preparation of many of the internal reports showing
NTL's forecasted and actual growth and thus Defendants Knapp and Blumenthal, as well as the other Defendants, including Defendant Gregg who served as the Company's CFO and Defendant
Carter, who served as its COO, were aware of the significant downturn in NTL's forecasted results, its asset and goodwill impairment and its inability to meet its debt obligations, prior to the disclosure to the Company's public shareholders . Defendants, by their public statements, also undertook studies and analyses relating to the integration of acquired Companies and were thereby aware of the difficulties and problems surrounding integration of those acquisitions .
Furthermore, the Individual Defendants, as directors and/or officers of NTL, were responsible for the financial results and press releases issued by the Company. Each Individual Defendan t sought to demonstrate that they could lead the Company successfully and generate the growth expected by the market . Each Individual Defendant was aware, through communications with
NTL staff and through weekly and monthly reports, that actual subscriber levels and revenue growth differed materially from that disclosed in public statements . See ¶159-62 .
176. Defendants knew or recklessly disregarded that the misleading statements and omissions complained of herein would adversely affect the integrity of the market for th e
69 Company's securities and would cause the prices of the Company's publicly-traded securities to
become artificially inflated. Defendants acted knowingly or in such a reckless manner as to
constitute a fraud and deceit upon Lead Plaintiffs and other members of the Class .
177. Defendants were also motivated to conceal their failure to successfully integrate
their acquisitions because their compensation was heavily dependent on the success of those
acquisitions. The purportedly phenomenal growth in the size of the Company as a result of the
CableCom and ConsumerCo acquisitions, which increased NTL's debt to well over $12 billion, had a substantial effect on the compensation of the Individual Defendants . As Bloomberg reported on April 25, 2001, the day that the Company completed its acquisition of ConsumerCo,
Defendants Blumenthal and Knapp had, on May 30, 2000, each received options to purchase 7 .25 million shares of NTL common stock . According to Bloomberg, these options were valued by the Company at up to $735 .3 million, assuming a 10% share price appreciation over the life of the options. Bloomberg also reported that Knapp and Blumenthal each received $510,846 in salary, bonuses and other benefits during 2000, down 7.4% from $551,833 received the prior year.
178 . On September 28, 2000, the Company announced that it had priced an additional
$500 million of senior notes, at least half of the proceeds of which would be used to pay down its
ConsumerCo acquisition credit facility. These notes, priced at 97.872% par, pay 11 .875% interest and mature in 2010 .
179. On January 13, 2001, the Company announced that it had sold an additional $187 million of high yield bonds, through its subsidiary NTL Communications, to refinance debt and fund investment (on February 5, 2001, this offering was increased by 33%, to approximately
$248 million). According to Bloomberg. the Company sold the seven-year senior notes at par
70 with a yield of 12.375%.
180. On May 15, 2001, the Company published a release on Business Wire that
announced that NTL had closed the sale of $1 billion of Convertible Senior Notes Due 2008, a s
well as an additional $150 million over-subscription allotment, at a conversion price of $32.728
per share. NTL, which claimed during the Class Period to be fully funded, wrote in a press
release issued on May 10 disclosing the sale that "[a) portion of the proceeds of the offering will
be used partially to fund the businesses' needs during the next three years."
FIRST COUNT
For Violation of Section 10(b) of the 1934 Act And Rule 10b-5 Against All Defendant s
- 181 . Lead Plaintiffs incorporate paragraphs 1-180 by reference .
182. During the Class Period, Defendants disseminated or approved the fals e
statements specified above, which they knew or recklessly disregarded were misleading in tha t
they contained misrepresentations and failed to disclose material facts necessary in order to mak e
the statements made, in light of the circumstances under which they were made, not misleading.
183. Defendants violated Section 10(b) of the Exchange Act and Rule I Ob-5 in that they:
(a) employed devices, schemes, and artifices to defraud;
(b) made untrue statements of material facts or omitted to state material fact s necessary in order to make the statements made, in light of the circumstances under which the y were made, not misleading; or
(c) engaged in acts, practices, and a course of business that operated as a frau d or deceit upon Lead Plaintiffs and others similarly situated in connection with their purchases o f
71 NTL publicly traded securities during the Class Period.
184. Lead Plaintiffs and the Class have suffered damages in that, in reliance on th e
integrity of the market, they paid artificially inflated prices for NTL publicly traded securities or
purchased notes from the Company at artificially inflated prices or with conversion prices tha t
were artificially inflated . Lead Plaintiffs and the Class would not have purchased NTL publicly
traded securities at the prices they paid, or at all, if they had been aware that the market price s
had been artificially and falsely inflated by Defendants' misleading statements.
185 . As a direct and proximate result of these Defendants' wrongful conduct, Lead
Plaintiffs and the other members of the Class suffered damages in connection with thei r
purchases of NTL publicly traded securities during the Class Period.
SECOND COUNT
For Violation of Section 20(a) Of the 1934 Act Against the Individual Defendants
186. Lead Plaintiffs incorporate paragraphs 1-185 by reference.
187. The Individual Defendants acted as controlling persons of NTL within th e
meaning of Section 20(a) of the Exchange Act. By reason of their positions as officers and/or
directors of NTL, and their ownership of NTL stock, the Individual Defendants had the power
and authority to cause, and did cause, NTL to engage in the wrongful conduct complained of herein. NTL controlled each of the Individual Defendants and all of its employees . By reason of such conduct, the Individual Defendants and NTL are liable pursuant to Section 20(a) of the
Exchange Act.
72 PRAYER FOR RELIEF
WHEREFORE, Lead Plaintiffs pray forjudgment as follows :
A. Declaring this action to be a proper class action pursuant to Rule 23 of the Federal
Rules of Civil Procedure ;
B. Awarding Lead Plaintiffs and the members of the Class compensatory damages;
C. Awarding Lead Plaintiffs and the members of the Class pre judgment and post- judgment interest, as well as their reasonable attorneys' fees, expert witness fees, and other costs ;
D. Awarding such other relief as this Court may deem just and proper.
73 JURY DEMAND
Lead Plaintiffs demand a trial by jury.
Dated: October 30, 2002
BERNSTEIN LIEBHARD & LIFSHITZ, LLP
By: Haber (JH-1738) el is L. Stem (FS-343 1) Matthew H. Hersch (MH-1830) 10 East 40th Street New York, NY 10016 Telephone : (212) 779-1414 Fax : (212) 779-321 8
MILBERG WEISS BERSHAD HYNES & LERACH LLP
By: Daniel B. Scotti (DS-4139) Cary L. Talbot (CT-4922) One Pennsylvania Plaza New York, NY 10119-1065 Telephone (212) 594-5300 Fax: (212) 868-1229
Co-lead Counsel for Lead Plaintiffs And the Class
74 CERTIFICATE OF SERVICE
The undersigned certifies that a copy of the attached Consolidated Amended Class Action
Complaint was caused to be served upon the following counsel of record in this action filed in thi s
Court, by hand delivery, this 30' day of October, 2002 :
Daniel B . Scotti, Michael S. Feldberg Cary L. Talbot James J. O'Brien MILBERG WEISS BERSHAD HYNES & SCHULTE ROTH & ZABEL LLP LERACH LLP 919 Third Avenue One Pennsylvania Plaza New York, NY 10022 New York, New York 10119-0165
JOAN DEVLIN FARRELL CI TIFtOATI0IY OF NASD .A P ARFa~_ ti~lurrTUti T .A
CIIEYNE FUND LP ("Plaiatif') declaim = 1 . Plaintiff bas revicwed a complaint and authorized its filing . 2_ Plaintiff did aot acquire the security that is th4 subject of this action at the direction of plaintiffs counsel or in order to participate in this privtta " action or any other litigation under the federal sccuritics laws . 3. Plaintiff is willing to serve as a roprc antalive party on behalf of the elnss, including providing testimony at depot-itinn and u-ial, if ncce nary . 4 . Plaintiff has made the following transaction(s) during the Class Pcaiod in the securities that are the subject of this action :
EM 9 'i ,"Zfiffi Price Per Std
See aitudicd 8chtdulc A.
5_ - During the three years prior to the dale of this Cartificafe, Plaintiff has not sought to serve or served as a representative party for a class in an action filed under the federal sectxrmes laws except as detailed below: In re Covad Sec. Ling., No. C-00-3 99 1 -YJti (N-D- Cal .)
6. The Plaintiff wi ll not accept any payment for serving as a representative party on behalf of the class beyond the Plaintiff's pro rata share of any recovery , cxecpt such reasonable costs and expenses (including lost
N_zC'~16P.S1C0_V.PL1~"rh~CER1S~'Ybc..~C7icyoa ?17Lca ?{~ wages) dirzctly relating to the rcpresennmon oaf the c1w as onlaed or approved bythecows T declare nndcr penaky of peajury thin the forgoing is true and co _ Bxccuted th is '31 day of 2002.
CHBYNE FUND LP
R}r_
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0511 DJ7001 8.760% Noeea dw May 15, 2008 10,000 1101.00 0511wi 001 8.75096 N ms due MY 1-5,2094 50,000 51(235 05/1012001 6.760% NOW due May 15,1008 10,000 $100.U 05$10/2001 6.730% NoSu due May 16. 2008 20,000 199.83 05/1012001 8750% Rol" doa May 15, 2008 30000 $101_1 4 08111/2001 G.T60% Nob* duo May 16, 2008 20.000 $61.0 0 0611 J2O01 8.75096 Not s due May 15.2008 15.000 $76.00 06110 O1 (.TWA Uol a duc M y 16.2000 10,000 7W .7 5 06!9812001 - 6.7500A Not= co 1 15 . 2008 10,000 $80.00 07116/)001 6.760% Notca'duo May 16, 2008 15.000 Gia.sa
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11110/2000 10,000 0763 111218000 10,000 t2~.D4 11(22!2000 15,600 i27.00
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Data TyperAn=ut of SaWs P&A mss Vc d t hsr T 1/0112000 - 36.000 94 ;-D;1 111032000 10.000 S42-B4 CLASS PERIOD: 08/09/00 . 11/29101 NTL, Inc . (NYSE :NLI) HOLD PRICE : $0 .3 5
PVRCHASE TRANSACTJ,QJ±S _.._.._ .._-_SAIES_TR9~lS.AQjJONS (1 ) SHARE PURCHASE SHARE SALES SHARES ESTIMATED ESTIMATED e.LAICULE .. .._...... 0 9T _. SHARES _ COST.TAMQU 1L__. ... .DAT,E, _, $.HAR ES. L'$1~.E AMOUNT_ HELD VALUE LOSSE S
Cheyne Capital
Common Stock 11/16/00 10,000 37 .4250 374,250 .00 11/01/00 10,000 43 .0278 430,278 .00 56,028 .0 0 11/21/00 10,000 29 .9375 299,375 .00 11/01/00 10,000 43 .0278 430,278 .00 130,903 .00 11/22/00 5,000 27,0000 135,000,00 11/01/00 5,000 43 .0278 215,139.00 80,139.0 0 11/22/00 10,000 27 .0000 270,000 .00 11/03/00 10,000 42 .9375 429,375 .00 159,375,0 0 Total Common Stock $426,445 .0 0
Bonds 05/09/01 50,000 100.0000 5,000,000 .00 05/10/01 50,000 102 .2500 5,112,500 .00 112,500 .00 05/09/01 10,000 100.0000 1,000,000 .00 05/10/01 10,000 101 .0000 1,010,000 .00 10,000 .00 05/09/01 . 20,000 100 .0000 2,000,000,00 05/10/01 20,000 101 .1250 2,022,500 .00 22,500.0 0 05/09/01 10,000 100.0000 1,000,000 .00 05/10/01 10,000 100 .3750 1,003,750 .00 3,750.0 0 05/09/01 20,000 100 .0000 2,000,000 .00 05/10/01 20,000 99 .8750 1,997,500 .00 (2,500 .00 ) 05/09/01 20,000 100 .0000 2,000,000 .00 06/11/01 20,000 81 .0000 1,620,000 .00 (380,000 .00 ) 05/09/01 15,000 100 .0000 1,500,000 .00 06/13/01 -15,000 76 .0000 1,140,000 .00 (360,000 .00) 05/09/01 5,000 100,0000 500,000.00 06/18/01 5,000 60.7500 303,750,00 (196,250 .00) 05/10/01 5,000 102 .5000 512,500 .00 06/18/01 5,000 60.7500 303,750,00 (208,750.00) 05/10/01 10,000 102,3750 1,023,750 .00 06/18/01 10,000 60.0000 600,000.00 (423,750,00) 05/10/01 15,000 102 .5000 1,537,500 .00 07/16/01 15,000 45 .5000 682,500,00 (855,000.00) Total Bonds ($2,277,500,02)
Total Cheyne Capital
TOTAL ESTIMATED LOSSES : ($1,851,055.00 )
(1) Sales have been applied to purchases on a FIFO basis . Osi=28 1 2002 18 :43 F.1-1 Z1277932 nEJr sTE1N LIE B " 000 2
CERTMICATJO2i OI NAIL I) Y1.AIYTCFfi 1'URSUA?1T TO FEAEI2AL SECURITIES LA,WVS
FLECK Ci-M .E . FIND L, (`Plaintiff"), dcclar e the following as to the claims assctlcd under the federal securities laws, that:
1 . Plaintiffhas rc-newcd the complaint filed in tlxiatnatter and has authorized the filing of a complaint based on similar allegations in a Tel-aced or amended complaint . Plaintiff remins Bernstein Liebhaid & Lilshitz, LLP and such oo-counsel it deems appropriate to associate with to pursue such action on a contingent fee basis-
Z_ Plaintiffdidnotpurchasethesecuritythatisthesubjectofthisoctionaf[- direction of Plaintiffs counsel or in order to participate in this Nrivute action .
3_ Plaintiff is willing to serve as a lead pinintiffeithct individually or as part of a group- A Lead plaintiff is a representative party who acts on behalfofothor class rnembe,s in directing the action, and whose duties may incluJt testifying at deposition and trial . J understand that the litigation is not settled, this is not a claim form, sad sharing in any recovery is not dependent upon execution of this Certification
a. Plaintiff's tr nraction(s) in the NTL,lrit.- security that is the subject of tbi~ action during the period 8/9100 and 11129101 are as foilo~* s : 1 No. of Shares Stock $ymbol Bu / ell pate Price Per. Shane
see attached list
rtcsac n.. ottsn- trssi.>.cti .ans on -y.rac cbtel of pipe . if ncccstNry _
5. During the three years prior to the date ofthia Certification, Pla-intiffhasnot sought to serve or served -is a representative party for the clnr-s in any action filed uudcr the federal sccucittes laws except as indicated here :
6- Plainttiffwil I not accept any payment for Hewing as a tYpresentutivu pity on behalf of the class beyond the Ytaintifi'r pro rata share of any recovery, or as ordered or approved by the court, including any award for reasonable costs and expenses (including lost wages) directly relating to the reprsaentation of the class .
I declare under penalty of perjury that the foregoing is true and correct .
Executed this 28th day of May, 2(fl7-
gDattltr
A FA TJ . M_E_ FUND I .P BY: Aaron h eeL
2 4 Greenwich Avtnur cs3
Grcepwich CT 06530 tare, tp
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ma A •p~F stStc r .~(C- slwn z`1„u:.iVblank cnlar.un« ..-ye
RX NO 77821 0002 05/30 /2002 THU 09 .02 ITX/ TRANSACTION SUMMARY Fleck T.LM..E Fund, LP From 08-09-00 To 11-29-0 1
Tra n Trad e Settl e Close S/ D S/ D Trade Code Security Date Date Quantity Meth- Tjpe Symbo l Amoun t
by NTLINCCOM 08-22- 00 08 - 25-00 18,500 caul cas h 841,750 .00 s1 NTLINCCOM 09-22- 00 09 - 27-00 15,624 h caul cas h 610,183 .93 si NTL INC COM 09-22-00 09-27-00 2,876 h caul cash 112,331 .6 4 by NTLINCCOM 01-09-01 01-12-01 44,290 caul cas h 1,292,794 .10 by NTL INCCOM 07-17- 01 07-20- 01 100,000 caul cash 584,000 .00 sl NTL INC COM 09-10-01 09-13-01 12,749 h caus cash 45,373 .8 9 sI NTLINCCOM 09-10-01 09- 13-01 1,250 h caus cash 4,448 .86 sl NTLINCCOM 09-10-01 09- 13-01 18,500 h taus cash 65,843-08. sl NTLINCCOM 09-10-01 09- 13-01 22,500 h cans cash 80,079.4 2 sl NTLINCCOM 09-10 - 01 09-13-01 44,290 Is cans cash 157,631 .88 sl NTLINCCOM 09-10-01 09-13-01 100,000 Is cans cash 355,908 .51 sl NTLINCCOM 09-10 -01 09-13 - 01 71! Is cans cash 2,530-2 9 by NTLINCCOM 11-21-01 11-27 - 01 50,000 cans cash 168,415 .0 0
Iepori run at 12 :06 :24 PM on Monday, May 20, 2002 NTL, Inc . BERNSTEIN LIEBHARD & LIFSHITZ, LLP Avg . Price :
Class Period : 8/9/00-11/29/0 1
PURCHAS E SALES SHARES ESTIMATED ESTIMATED - PLAINTIFF DAT E SHARES COST MA OJ N DATE SHARES C AMOUNT HELD VALUE LOSSES Fleck T.I,M .E. Fund, L.P . 8/22/00 18,500 841,75 0 9/22/00 15,62 4 610,184 11910 1 44,290 1,292 ,794,1 0 9/22/00 2,87 6 112,332 7/17/0 1 100,000 584,000 9/10/01 12,749 45,374 11/21/01 50,000 168,41 5 9/10/01 1,250 4,449 9/10/01 18,500 65,843 9/ 10/01 22,500 80,079 9/10/01 44,290 157,632 9/10/0! 100,00 0 355,909 9/10/01 71 1 2,530
Totals : 212,79 0 2,886,959 .10 218,50 0 1,434,331,50 1,432,302,6 0
Shares Purchased ; 212,790 Shares Sold : 218,500 Estimated Losses: 1,432,302 .60 3 of 8 DOCUMENTS
In re NTL INC. SECURITIES LITIGATION ; This Document Relates to All Case s
MASTER FILE 02 Civ. 3013 (LAK)
UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK
347 F. Supp. 2d15; 2004 U.S. Dist. LEXIS 24373; Fed. Sec. L. Rep. (CCH) P93,054
December 6, 2004, Decided December 7, 2004, File d
PRIOR HISTORY: In re NTL Inc. Sec. Litig., 2002 publication, and speaker of each of the alleged U.S. Dist. LEXIS 13914 (S.D.N.Y., July 31, 2002) misstatements and omissions . The court determined, inter alia, (1) the class complaint alleged enough to DISPOSITION : Defendants' motions to dismiss granted justify the conclusion that the corporation was in part and denied in part . experiencing material integration problems and (2) allegations permitted an inference that the corporation CASE SUMMARY : engaged in inappropriate behavior to inflate subscriber numbers.
PROCEDURAL POSTURE : Plaintiffs were purchasers OUTCOME : Defendants' motions to dismiss were of securities of defendant corporation, a former granted in part and denied in part . They were granted telecommunications giant . They sued under federal insofar as they complained of (1) statements contained in securities law, alleging the corporation pursued an certain paragraphs in the class complaint and the related aggressive growth strategy, largely financed by complaint; (2) the forward looking statements and substantial debt, and that the corporation knew this debt general expressions of optimism alleged in certain threatened its financial condition, but represented paragraphs in the complaints ; and (3) alleged violation of otherwise in public statements . The stock price decreased a federal securities regulation . The motions were denied to less than a dollar . Defendants moved to dismiss . in all other respects.
OVERVIEW: The complaints at issue had to meet the LexisNexis(R) Headnotes heightened pleading requirements of Fed. R. Civ. P. 9 and the Private Securities Litigation Reform Act. Most of the allegations were to the effect that otherwise routine COUNSEL : [**1] Jeffrey M . Haber, Felicia L . Stern, statements by the corporation were materially misleading BERNSTEIN LEIBHARD & LIFSHITZ, LLP . because defendants failed to disclose the corporation's alleged internal problems in 'order to inflate the stock Daniel B. Scotti, Cary L . Talbot, MILBERG WEISS price. These alleged problems fell into two major BERSHAD HYNES & LERACH, LLP, Attorneys for categories : (1) difficulties in integrating acquired Lead Plaintiffs in No . 02 Civ . 3013 . companies and (2) problems with the customer base . The court disagreed with defendants' contention that plaintiffs Robert Hermann, THACHER PROFFITT & WOOD, resorted to "puzzle pleading"--reproducing blocks of text LLP, Attorneys for Plaintiffs in No. 02 Civ . 7377. from allegedly deceptive corporate statements without specifying which portions were misleading . For the most Brooks R. Burdette, David K . Momborque tte, James J. part, the complaints specifically identified the date, O'Brien, SCHULTE ROTH & ZABEL, LLP, Attorneys Page 2 347 F. Supp. 2d 15, * ; 2004 U .S. Dist. LEXIS 24373, ** ; Fed. Sec. L. Rep. (CCH) P93,054 for Defendants, George S . Blumenthal, J. Barclay the Securities Exchange Act of 1934 (the "Exchange Knapp, John F . Gregg, and Stephen Carter . Act") n4 and Rule 10b-5 thereunder. n5
Joel W . Steinman, Julie Pechersky, KATTEN MUCHIN ZAVIS ROSENMAN, Attorneys for Defendant, George n2 NTL filed for Chapter 11 protection on S. Blumenthal . May 8, 2002 . Its plan of reorganization was confirmed by the bankruptcy court on September Seth M. Schwartz, SKADDEN, ARPS, SLATE, 5, 2002, and became effective on January 10, MEAGHER & FLOM, LLP, Attorneys for Defendant, 2003 . The successor entity is NTL Europe, Inc . NTL Europe, Inc ., formerly known as NTL Incorporated . The bankruptcy court ruled on May 23, 2003, that plaintiffs may pursue claims against NTL to the JUDGES: LEWIS A. KAPLAN, District Judge . extent of its available insurance coverage only . Mem. Decision, No. 02-41316 (ALG) (Bankr . OPINIONBY: LEWIS A. KAPLAN S.D.N.Y., May 23, 2003) ; see also Gordon Pl. Mem. 1 n.1 . OPINION: n3 George S . Blumenthal was chairman and [*191 MEMORANDUM OPINIO N treasurer ; J. Barclay Knapp was president and chief executive officer ; John F . Gregg was chief LEWIS A . KAPLAN, District Judge . financial officer ; and Stephen Carter was chief operating officer during the Class Period. Class Following the collapse of the Internet and Cpt. P 16 . technology boom, courts have been faced with numerous actions against telecommunication and other technology n4 15 U. S. C. § 78a et seq . companies whose stock prices declined precipitously. n5 17 C . § 240.10b-5 (2004) . This controversy involves one such former .F.R telecommunications giant, NTL, Inc . ("NTL"), a New York based corporation [**21 that provides telephone, The complaint alleges that NTL, beginning [**41 in cable television, Internet and broadband communications 1993, pursued a strategy of growth through acquisition, services in the United Kingdom, Ireland and parts of acquiring eleven companies in 1998-2000 . n6 The two continental Europe . nl largest of these acquisitions, Cable Wireless Communications ("ConsumerCo") and Cablecom, together cost over $ 16 .5 billion. NTL issued debt nl Consolidated Amended Class Action securities to finance these acquisitions, resulting in debt Complaint ("Class Cpt .") P 2. of $ 15.1 billion by 2000 . n7
In the late 1990s, NTL pursued an aggressive n6 Class Cpt . P 3 . growth strategy, largely financed by substantial debt . Defendants allegedly knew that this debt threatened n7 Id. P 5 . NTL's financial condition, but represented otherwise in their public statements . Moreover, plaintiffs claim that Throughout this period, NTL, like all public NTL and its directors defrauded investors by failing to disclose material problems that undermined NTL's companies, communicated with the investing public financial stability. By April 2002, the stock price had through SEC filings, press releases and interviews . While some statements were purely factual, others expressed decreased to less than one dollar, and the company filed for bankruptcy. These securities fraud suits followed . optimism about NTL's future or portrayed the company in a positive light . For example, defendant Knapp, the I. The Pleadings chief executive officer, commented in a July 18, 2001, press release, "our current operating results are very A. The Class Complaint strong and we have always had great confidence in the future. In our upcoming presentation we will be Plaintiffs in No. 02 Civ. 3013 ("Class Plaintiffs") describing how our increasingly strong performance will purportedly represent a class of purchasers of NTL make our current funding sufficient for us to reach free common stock and debt securities between August 2000 and November 2001 ("Class Period") . They sue NTL n2 cash [**51 flow positive by the end of 2003 ." n8 Nevertheless, NTL stock declined steadily throughout [**3J and four individual defendants n3 [*201 under the Class Period from approximately $ 48 per share at Page 3 347 F . Supp. 2d 15, * ; 2004 U .S. Dist. LEXIS 24373, ** ; Fed. Sec . L. Rep. (CCH) P93,05 4 the beginning to $ 1 .60 per share on November 29, 2001 directly to Gordon . n14 It contains also additional n9 allegations as to why statements were misleading .
n8 Id. P 124. n12 Gordon Cpt. P 50. See Rothman v. Gregor, 220 F.3d 81, 88 (2d Cir. 2000) ("For n9 Id. PP 70, 156. purposes of a motion to dismiss, we have deemed a complaint to include . . . any statements or This for the most part is not a case involving documents incorporated in it by reference ."). To outright falsehoods . Most of plaintiffs' allegations are to the extent the two complaints overlap and the the effect that otherwise routine statements by NTL were allegations in the Class Complaint are sufficient, materially misleading because defendants failed to the Court will not address those in the Gordon disclose NTL's alleged internal ,problems in order to Complaint. inflate NTL stock price. These alleged problems fall into n13 Gordon and Blumenthal allegedly were two major categories, the allegations of which are fraternity brothers in college and had both a premised entirely upon information and belief: nlO (1) friendship and a business relationship . Gordon difficulties in integrating acquired companies, and (2) Cpt. P 27 . problems with the customer base . In addition, plaintiffs in a few instances allege that defendants themselves n14 See id. PP 52, 74, 98, 103, 105, 112, made affirmative statements or are responsible for 114, 117-19, 121-24, 136. affirmative misstatements or material omissions made in third-party analyst reports . The Gordon Plaintiffs sue NTL and the individual defendants as primary violators under Section 10(b) of the Exchange Act, Rule IOb-5, and 17 C.F.R. § 229.303, nl0 Id. at preamble. and for common law fraud . The individual defendants are sued also [**8] as control persons under Section [**6] 20(a). All defendants, including NTL, move to dismiss Plaintiffs sue NTL and the individual defendant s the second amended complaint. both as primary violators of Section 10(b) of the H. Standard Governing Motions to Dismiss Exchange Act and Rule 10b-5 thereunder and as control persons under Section 20(a) of the Exchange Act. nl l In deciding a Rule 12(b)(6) motion, the Court The individual defendants move to dismiss . accepts as true all allegations in the complaint and draws all reasonable inferences in the plaintiffs favor . n15 Dismissal is inappropriate "unless it appears beyond nl l 15 U.S.C. § 78t(a). doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." n16 Although such motions are addressed to the B. The Gordon Complain t pleadings, a district court may consider also the full text of documents partially quoted in the complaint where the Gordon Plaintiffs") Plaintiffs in No. 02 Civ. 7377 (" documents are "integral" to it and relied upon by are individuals and a limited partnership that purchased plaintiffs. n17 Accordingly, review of the exhibits or acquired NTL securities between January 12, 2000 attached to defendants' moving papers is appropriate . and April 16, 2002 ("Applicable Period") . The nl8 defendants in the class action all are sued here as well save Stephen Carter. The second amended complaint ("Gordon n15 Levy v. Southbrook Int'l Invs ., Ltd., 263 Complaint ") adopts the Class Complaint in its entirety F.3d 10, 14 (2d Cir. 2001), cert. denied, 535 and adds a few allegations. n12 It complains of several U.S. 1054, 152 L. Ed. 2d 821, 122 S. Ct. 1911 additional [*211 statements and makes additional (2002) (citing Sheppard v. Beerman, 18 F3d allegations in suppo rt of its scienter allegation, the 147, 150 (2d Cir.1994)) . majority of which result from the personal relationship n16 Cohen v. Koenig, 25 F.3d 1168 (2d Cir. between Frederick Gordon and defendant Blumenthal. 1994) (quoting Conley v . Gibson, 355 U.S. 41, n13 For example , the Gordon Complaint alleges that 45-46, 2 L. Ed. 2d 80, 78 S. Ct. 99 (1957) . [**9] [**7] defendants made additional misleading statements Page 4 347 F . Supp. 2d 15, * ; 2004 U .S. Dist . LEXIS 24373, ** ; Fed. Sec. L. Rep. (CCH) P93,05 4
III. Section 10(b) and Rule IOb-5 Claims n17 San Leandro Emergency Med. Group In order to state a claim under Section 10(b) of the Profit Sharing Plan v. Philip Morris Cos ., 75 F. 3d Exchange Act and Rule 10b-5, "a plaintiff must plead 801, 808-09 (2d Cir. 1996) (district court did not that the defendant, in connection with the purchase or err in considering full text of press releases, wire sale of securities , made a materially false statement or service reports, newspaper articles, and annual omitted a material fact, with scienter, and that the company reports that were only partially quoted plaintiffs reliance on the defendant 's action caused injury in complaint) ; In re Livent, Inc. Sec . Litig., 78 F. to the plaintiff." n23 Scienter is "an intent to deceive, Supp. 2d 194, 218 n .6 (S.D.N.Y. 1999) manipulate or defraud." n24 ("According to the emerging rule in this Circuit, 'a district court may consider the full text of a document partially quoted'in the complaint where n23 Ganino v. Citizens Utils . Co., 228 F. 3d . . . Plaintiffs have notice of the document's 154, 161 (2d Cir. 2000); see San Leandro contents and the document is integral in drafting Emergency Med. Group Profit Sharing Plan, 75 the complaint."') (alteration in original) (citations F.3d at 808. omitted); see also Rothman, 220 F.3d at 88. n24 Ganino, 228 F.3d at 168 . n18 Defendants provide the full text of the majority of press releases, SEC filings and news articles partially quoted by plaintiffs in the A. Particularity Requiremen t complaints . Defendants argue that plaintiffs have failed to state the circumstances of the alleged fraud with the requisite As this is a securities fraud case, the complaints particularity and have resorted [**12] instead to "puzzle must meet also the heightened pleading requirements of pleading" -- reproducing blocks of text from allegedly Rule 9(b) and the Private Securities Litigation Reform deceptive NTL statements without specifying which Act of 1995 ("PSLRA"). [**10] These have three portions are misleading . n25 The Court disagrees. For particularly relevant effects here. First, the complaints the most part, the complaints specifically identify the must state the circumstances constituting fraud with date, publication and speaker n26 of each of the alleged particularity. n19 They "must: (1) specify the statements misstatements or omissions . n27 that the plaintiff contends were fraudulent, (2) identify the speaker, (3) state where and when the statements were made, and (4) explain why the statements [*221 n25 Consolidated Mem. Law in Support of were fraudulent." n20 Second, where an allegation Defendants Motions to Dismiss ("Class Def. regarding a misstatement or omission is made on Mem .") 16-19. information and belief, the PSLRA requires that "the complaint shall state with particularity all facts on which n26 Under the group pleading doctrine, that belief is formed ." n21 Finally, bald allegations of plaintiffs may "rely on a presumption that scienter will not suffice . Plaintiffs must "state with statements in 'prospectuses , registration particularity facts giving rise to a strong inference that statements, annual reports, press releases, or o ther the defendant acted with the required state of mind ." n22 group-published information,' are the collective The precise application of these standards is at the heart work of those individuals with direct involvement of these motions . in the everyday business of the company ." In re Oxford Health Plans, Inc., 187 F.R.D. 133, 142 (S.D.N.Y. 1999) (quoting In re Stratosphere n19 FED. R. CIV. P. 9(b) . Corp. Securities Litig., 1 F. Supp. 2d 1096, 1108 (D.Nev. 1998)) . This allows plaintiffs, to a n20 Novak v. Kasaks, 216 F. 3d 300, 306 (2d limited extent, to "circumvent the general Cir. 2000) (quoting Shields v. Citytrust Bancorp, pleading rule that fraudulent statements must be Inc., 25 F.3d 1124, 1128 (2d Cir. 1994)) . linked directly to the party accused of fraudulent n21 15 U.S.C. § 78u- 4(b)(1). [**11] intent" and remains available after enactment of the PSLRA . In re Keyspan Corp. Sec. Litig., 2003 U.S. Dist. LEXIS 26173, No. 01 CV 5852 (ARR), 2003 WL 21981806, at *13 n.3 (E.D.N.Y. n22 15 US. C. § 78u-4(b)(2). July 30, 2003) . Plaintiffs have alleged sufficiently Page 5 347 F . Supp. 2d 15, * ; 2004 U .S. Dist . LEXIS 24373, ** ; Fed. Sec. L. Rep. (CCH) P93,054
that each individual defendant was an insider insufficient basis to support allegations that with direct involvement in the daily affairs of the adverse trends existed during the class period) . company . Hence, for purposes of this motion, each individual defendant is responsible bears for statements in press releases, SEC filings and B. NTL's Alleged Problems [**151 annual reports even where the statement at issue To support their claim that defendants' failure to was made by another. [**13 ] disclose material problems made otherwise unobjectionable statements misleading, plaintiffs must allege an adequate basis for supposing that such problems actually existed . Where the allegations are n27 There are two exceptions where the premised upon information and belief, as is true of the Gordon Complaint fails the particularity majority, n30 the PSLRA requires that "the complaint . . requirement. First, it does not identify the . state with particularity all facts upon which the belief is publication of a statement by defendant Knapp in formed." n3I This standard is satisfied where plaintiffs March 2000 . Gordon Cpt. P 63. Second, it fails to "plead with particularity sufficient facts to support [the attribute one statement by Tamm, an NTL alleged] beliefs ." n32 The type of facts and particularity employee, to defendants . Id. P 98. required are determined on a case-by-case basis . n33
The particularity requirement demands also that plaintiffs sufficiently plead why the statements were n30 The Class Complaint is premised fraudulent. n28 Plaintiffs [*231 attempt to do so by entirely upon information and belief. Class Def. reciting detailed reasons after each alleged misstatement . Mem. 22; see Class Cpt. preamble. While parts of For example, Class Plaintiffs claim that many statements the Gordon Complaint are based on Gordon's were misleading because they failed to disclose that NTL personal knowledge, the majority is based on was experiencing problems with integration of acquired information and belief. See, e .g., Gordon Cpt. PP companies, keeping churn rates low by under-reporting 50, 98. customer terminations, and maintaining nonpaying n3l 15 U.S.C. § 78u-4(b)(1). subscribers on subscriber lists . They allege that other statements were misleading because defendants n32 Novak v. Kasaks, 216 F3d 300, 313-14 misrepresented that the integration of ConsumerCo was (2d Cir. 2000). Plaintiffs argue that they are not proceeding smoothly or that NTL was fully financed subject to the PSLRA's pleading requirement for when in fact there were integration and working capital information and belief, as their complaint is problems. The Gordon Plaintiffs, for their part, claim that based on an investigation of counsel . Plaintiffs statements [**14] were misleading because defendants Memorandum of Law in Opposition to Motion to misrepresented their ability to meet EBITDA projections Dismiss ("Class Pl. Mem.") 11 . This is incorrect . and satisfy credit agreements . To the extent that the See Rothman 220 F.3d at 89-90; Novak, 216 complaints contain facts supporting the existence and F. 3d at 312 . [**161 materiality of these problems, they satisfy the particularity requirement. n29 It is to this that the Court now turns. n33 In re Initial Pub. Offering Sec. Litig., 241 F. Supp. 2d 281, 358 (S.D.N.Y. 2003). n28 The fact that these allegations refer back to earlier paragraphs of the complaint for factual Whether plaintiffs have pleaded with particularity support does not render them insufficient . Where sufficient facts to support their beliefs involves two the complaints fail to allege even this basic separate inquiries. First, are the specific factual information, however, they fail the particularity allegations that the problems existed based on adequate requirement. Gordon Cpt. PP 43, 89, 137; Class sources? In other words, have plaintiffs sufficiently Cpt PP 138, 154, 164. identified the sources upon which their beliefs are based, n29 See In re Scholastic Corp. Sec. Litig., and are these sources likely to have known the relevant 252 F 3d 63, 73 (2d Cir. 2001); In re NBTY, Inc . facts? Second, do plaintiffs' factual allegations permit an Sec. Litig., 224 F. Supp. 2d 482, 491-94 inference that NTL was experiencing material problems (E.D.N. Y. 2002) (complaint failed to plead why during the relevant times? In other words, the facts statements were misleading where there was an alleged must support not only an inference that problems Page 6 347 F. Supp. 2d 15, * ; 2004 U .S. Dist. LEXIS 24373, ** ; Fed. Sec . L. Rep. (CCH) P93,054 actually existed, but also an inference that the alleged The question whether plaintiffs are justified by these problems would have been material to the reasonable subsidiary allegations in drawing the conclusion that the investor . n34 company was experiencing integration problems of such significance that they would have been important to a reasonable investor is another matter . The complaint, n34 A misstatement or omission is material apart from largely rhetorical flourishes of indeterminate if it would have been considered significant by a meaning, n37 contains little or no hard information reasonable investor in making investment concerning the extent or prevalence of the subsidiary decisions . Basic Inc ., v. Levinson, 485 U.S. 224, "facts" relied upon. Claims of "frequent" failures to 231, 99 L . Ed. 2d 194, 108 S. Ct. 978 (1988) . complete service appointments, n38 for example, are This depends upon whether a reasonable investor meaningless unless one knows what "frequent" [**19] would have an accurate and complete disclosure means. Indeed, the only quantitative information as altering the "total mix of information." Id. at regarding the impact of problems with customer service 231-32. is reference to an NTL survey, the date of which is not given, that allegedly found an average on-hold time of 25 [**171 minutes and that over 35 percent of callers disconnected before reaching a customer service representative . n39 [*241 1 . Integration Problems But the complaint contains no information that would The first category of alleged problems concerns permit determination of the significance of these two NTL's ability to integrate its acquired companies, in facts. There is no indication of the period over which the particular its largest acquisition , ConsumerCo. Class reported average hold time and disconnect rates were Plaintiffs allege that NTL was experiencing significant observed - an [*251 extremely busy night or weekend difficulties in this regard based on the following would be a matter of far less significance than a problem subsidiary assertions : ( 1) employees at NTL and that persisted over weeks or months . Nor is any ConsumerCo refused to speak to one another , (2) NTL's indication of what is normal in the operation of customer customer se rvice unit was unable to handle the expanded service call-in facilities. In the main, therefore, the Class customer base , (3) NTL' s billing systems were Complaint fails adequately to allege facts that support duplicative and uncoordinated following the acquisitions, their assertion, on information and belief, that substantial and (4) Knapp admitted that NTL was having integration problems existed in integrating NTL's acquisitions . problems at an October 2000 meeting . n3 5
n37 For example, Class Plaintiffs, on the n35 Class Cpt . PP 42-46, 58. basis of a statement attributed to a manager named Bailey, allege that employees from NTL and ConsumerCo "refused to speak to each The initial inquiry is whether these subsidiary other." Class Cpt. P 45. This statement, read factual allegations are premised upon adequate sources. literally, might be read as meaning that no one Where plaintiffs rely on personal sources alone to from either company ever spoke to anyone at the support their allegations, as they do here, they need only other, which is inconceivable . It could be describe the sources "with sufficient particularity to construed also, with equal fidelity to the words, support the probability" that someone in the informant's as meaning that one or two employees at NTL position would possess [**181 the information alleged . would not speak to one or two at ConsumerCo, n36 which probably would be meaningless . The only logical way to read it is as an assertion by Bailey that there was an indeterminate amount of ill will n36 Novak, 216 F3d at 314 . among some of the employees at the respective companies and that this impaired communication Here, plaintiffs rely on former sales and marketing to an indeterminate degree . [**20 1 employees for the integration problem allegations, identifying each source by name or position at the company during the Class Period . Because it is likely that these sales and marketing employees would have n38 Id. P 42(b) . been knowledgeable about customer service and n39 Id. PP 42-43 . integration problems, the allegations are adequately sourced. Page 7 347 F. Supp. 2d 15, *; 2004 U.S. Dist. LEXIS 24373, ** ; Fed. Sec. L. Rep. (CCH) P93,05 4
There is one exception. The complaint asserts, on n43 While the majority of allegations permit the basis of an allegedly first hand report, that defendant such an inference, the allegations that NTL Knapp told an October 2000 meeting of NTL managers employees were targeting low income customers that the company had accumulated excessive debt and and offering free trial services do not. The Class was having difficulty integrating the acquired companies . Complaint fails to allege that either of these He is quoted as having said that NTL was "in trouble . . . practices was uncommon in the se rvices industry [and] have got to cut back" and as having instructed or different from NTL's usual sales tactics . Cf. In those present to keep the briefing confidential . n40 The re Scholastic Corp. Sec. Litig., 252 F.3d at 73 Court therefore is persuaded that the complaint alleges (aggressive sales tactics du ring Class Period enough to justify the conclusion that the company was support factual allegation of company's experiencing material integration problems as early as decreasing profitability) . October 2000. The Class Plaintiffs are justified also in asserting that the failure to disclose this information was material . n40Id. P 58 . The extent of the overstatement of the customer base in these circumstances, which the complaint does not make 2. Subscriber Base Problems clear, is not alone [**23] dispositive of the materiality issue. The dishonesty inherent in manipulating customers Plaintiffs allege a second major problem that NTL to inflate reported results has independent [*26] : its use of unfair or fraudulent practices failed to disclose significance because it reflects on the integrity of that artificially inflated the company's subscriber base . management. n44 According to the Class Complaint, NTL hyped [**211 its reported subscriber numbers by (1) refusing to allow customers to terminate accounts, (2) acquiring new n44 See Ganino, 228 F.3d at 162; 2 LOUIS customers by offering free installation or services and LOSS & JOEL SELIGMAN, SECURITIES then billing for them nonetheless, (3) recruiting REGULATION 677 (3d ed. 1999); but see Acito customers in low income areas and weakening credit v. Imcera Group, 47 F.3d 47 (2d Cir. 1995) requirements, and (4) including non-paying customers, (deficiencies found in previous inspections such as those with free Internet service, on subscriber immaterial where affected only 1 percent of rolls. n4l According to a senior marketing executive said global company) . to be knowledgeable on the subject, NTL recorded "as many as 75,000 more subscribers than it actually had" during the Class Period . n42 3. Negative Cash -Flow of ConsumerCo The Gordon Complaint alleges that two statements . not sued upon in the Class Complaint were misleading n41 Id. PP 48-57 because, inter alia, defendants failed to disclose that n42 Id. P 48. ConsumerCo had become cash-flow negative by the time of the acquisition and was a deteriorating asset . n45 Here, the factual allegations supporting plaintiffs' belief come from statements of former sales employees n45 Gordon Cpt. PP 46-47, 52 . and former customers . The Class Complaint adequately describes these sources by their names or positions at the company, and it is likely that individuals in such The basis [**24] for this allegation is a statement positions would have access to the information reported . allegedly made by defendant Knapp directly to plaintiff Gordon . n46 The allegation therefore is adequately The majority of the factual allegations permit an sourced. inference that NTL engaged in inappropriate [**22] behavior to inflate subscriber numbers . n43 For example, refusing to allow customers to terminate their accounts n46 Id. P 115. and including non-paying subscribers on subscriber rolls, if that occurred, would have portrayed NTL as having more paying subscribers than it actually had . It cannot be said on a motion to dismiss that the cash flow status of ConsumerCo would not have been material to a reasonable investor in May 2000 . Hence, Page 8 347 F. Supp. 2d 15, * ; 2004 U.S . Dist. LEXIS 24373, ** ; Fed. Sec . L. Rep. (CCH) P93,05 4 plaintiffs have pleaded sufficiently that NTL's failure to have been made in earlier reports do not make out disclose the cash flow status of its largest acquisition was a claim of securities fraud."); In re Health Mgmt. a material omission . Sys., Sec. Litig., 1998 U.S. Dist. LEXIS 8061, No . 97 Civ. 1865 (HB), 1998 WL 283286, at *5 4. Other Alleged Problems (S.D.N.Y. June 1, 1998) ("Such allegations of The complaints allege a number of statements that fraud by hindsight are not actionable under the allegedly were misleading for reasons that do not fit so securities law ."). neatly into the preceding categories. But these claims are n52 Acito, 47 F.3d at 53 ("Defendants' lack not pleaded with the requisite particularity. All are of clairvoyance simply does not constitute examples of attempts to plead fraud by hindsight or are securities fraud."). purely conclusory. a. Fraud by Hindsight b. Insufficient Factual Support Plaintiffs argue that several statements were In some instances, the complaints argue that misleading because defendants failed to disclose that, statements were misleading by asserting, without inter alia, (1) work force reductions were not occurring support, that the opposite [**271 of the statement was as promised, n47 (2) NTL would [**251 not be able to true. For example, they allege that (1) statements meet EBITDA, revenue or additional subscriber attributed to Knapp in two August 10, 2000, Bloomberg projections without the use of fraudulent practices, n48 articles were misleading because he reportedly stated that (3) NTL's compliance with its loan covenants was NTL was "fully financed" when in fact it was not, n53 dependent upon its deceptive customer practices, n49 (2) NTL's November 2000 workforce reduction was and (4) Cablecom, an asset Knapp indicated the company motivated by the company's need to service its debt wished to sell in 2001, had no equity . n50 obligations and not the desire to eliminate duplications, as the company explained, n54 (3) NTL's former chief operating officer, Leigh Wood, left the company because n47 E.g., Gordon Cpt . PP 105,-119, 124. As management had lost confidence in her abilities and not defendants point out, NTL reduced its workforce because of marital difficulties, as Blumenthal told by approximately 4,680 jobs between 2000 and Gordon in May 2000, n55 and (4) the acquisition of 2001 . Gordon Reply Mem . 5-6. That workforce ConsumerCo did not improve NTL's operating results, as reductions did not reach initial projections and it claimed in its 2000 annual report . n56 that NTL reclassified some employees instead of firing them do not render the projections themselves misleading. n53 Class Cpt . PP 78-79, 80-81 . n48 Gordon Cpt. PP 45, 66, 74, 78, 90, 91, n54 Id. PP 94-95, 96-98 . 118, 122, 123, 131, 134, 136 ; Class Cpt. PP 122- 23 . n55 Gordon Cpt. P 121 . n49 Gordon Cpt . PP 103-04 . n56Id.P83. n50Id. PP 105, 112, 114, 123 . There is no factual support for any of these allegations in the complaints . A "conclusory allegation Neither complaint alleges sufficient facts to support that the opposite [**281 of a statement . . . is true, the assertions that material problems existed in most of without further factual elaboration, is insufficient ." n57 these respects at the times the statements complained of were made . [**26] For example, the Gordon Complaint alleges that NTL could not meet its EBITDA, revenue or n57 In re Health Mgmt. Sys., Inc. Sec. Litig., subscriber projections based solely upon the fact that 1998 U.S. Dist. LEXIS 8061, 1998 WL 283286, at NTL never met any of these projections. This is nothing *5. more than an effort to allege fraud by hindsight . n51 We have not [*271 yet come to the point that a lack of clairvoyance constitutes fraud . n5 2 5. Duty to Disclos e Even if material integration and subscriber base problems existed, defendants argue, they cannot form the n51 See Acito, 47 F.3d at 53 ("Mere basis for a securities fraud claim. These, they contend, allegations that statements in one report should Page 9 347 F . Supp. 2d 15, * ; 2004 U .S. Dist. LEXIS 24373, ** ; Fed. Sec . L. Rep. (CCH) P93,05 4 reflected only corporate mismanagement, the existence Ganino, 228 F.3d at 169-70 ; Rothman, 220 F.3d of which is not subject to a duty to disclose. n58 at 90.
a. Motive and Opportunity n58 Class De£ Mem . 27-28. In alleging motive and opportunity, plaintiffs must demonstrate the presence of "concrete benefits that could Santa Fe Industries, Defendants correctly assert that be realized by one or more of the false statements and . Green n59 and its progeny hold that allegations of Inc. v wrongful nondisclosures alleged" as well as "the means garden-variety corporate mismanagement are not and likely prospect of achieving concrete benefits by the actionable under the federal securities laws . Plaintiffs, in means alleged." n65 But "general allegations that the other words, may not bootstrap state-law fiduciary duty defendants acted in their economic self-interest are claims into securities law claims . n60 Nevertheless, once [**311 not enough." n66 Nor are allegations of motives a corporation [**291 speaks on a subject, it must speak "generally possessed by most corporate directors and truthfully and completely . n61 Hence, a failure to officers." n67 Accordingly, the Second Circuit has found disclose facts that amount to mismanagement may render insufficient as motives capable of grounding a fraud other statements misleading . Where the failure to allegation desires such as (1) maintaining a bond or disclose these facts involves an element of deception or credit rating, n68 (2) prolonging executive manipulation, a federal securities law claim may lie . n62 compensation, n69 (3) increasing executive compensation by inflating the value of a stock, n70 and (4) making the issuer appear profitable . n7 1 n59 430 U.S. 462, 51 L. Ed. 2d 480, 97 S. Ct. 1292 (1977) .
n60 E.g., Field v. Trump, 850 F.2d 938 (2d n65 Shields, 25 F.3d at 1130; see also Cir. 1988). Novak, 216 F. 3d at 307 . n61 In re Initial Public Offering Sec. Litig., n66 Ganino, 228 Fad at 170 . 241 F. Supp. 2d at 380. n67 Kalnit, 264 F3d at 139. n62 See Suez Equity Investors v. Toronto- n68 San Leandro Emergency Med. Group Dominion Bank, 250 F.3d 87, 99 (2d Cir. 2001). Profit Sharing Plan, 75 F.3d at 814. n69 Shields, 25 F.3d at 1130 . The essence of plaintiffs' claims here, to the extent they involve corporate mismanagement, is that the n70 Acito, 47 F.3d at 54 . failure to disclose NTL's internal problems rendered n71 Chill v. Gen. Electric Co., 101 F.3d statements that NTL did make misleading . Thus, they do 263, 268 (2d Cir. 1996). not rely on mismanagement per se but on alleged deception . Defendants' argument therefore lacks merit . b. Conscious Misbehavior and Recklessness C. Scienter The other permissible basis for the requisite [**32] 1. Pleading Requirements allegation of scienter is facts constituting strong circumstantial evidence of conscious misbehavior or Plaintiffs must "state with particularity [**301 facts recklessness . Conscious misbehavior encompasses giving rise to a strong inference that [*281 the defendant deliberately illegal conduct. n72 Recklessness, on the acted with the requisite state of mind." n63 This may be other hand, is conduct that is highly unreasonable and done "either (a) by alleging facts that defendants had "an extreme departure from the standards of ordinary both motive and opportunity to commit fraud, or (b) by care to the extent that the danger was either known to the alleging facts that constitute strong circumstantial defendant or so obvious that the defendant must have evidence of conscious misbehavior or recklessness." n64 been aware of it." n73 Allegations of defendants' knowledge of facts or access to contradictory information usually are sufficient to state a claim based n63 15 U.S.C. § 78u-4(b)(2) . on recklessness . n74 It is well established, however, that n64 Acito, 47 F.3d at 52 ; see also Kalnit v. "where plaintiffs contend defendants had access to Eichler, 264 F.3d 131, 138 (2d Cir. 2001); contrary facts, they must specifically identify the reports or statements containing this information ." n75 Whether Page 10 347 F. Supp. 2d 15, * ; 2004 U.S. Dist. LEXIS 24373, ** ; Fed. Sec. L. Rep. (CCH) P93,05 4 a complaint has "specifically identified" a report or plaintiffs failed to identify any reports providing statement is highly fact specific and should be defendants with contradictory information) . determined in light of the complaint as a whole . n76 [**34] [*291 2. NTL n72 Novak, 216 F. 3d at 308. a. Class Complain t n73 Id. (quoting Honeyman v. Hoyt (In re Carter-Wallace, Inc . Sec. Litig .), 220 F. 3d 36, 39 The Class Complaint is replete with allegations that (2d Cir. 2000) (citation omitted)). [**331 NTL knew of or recklessly disregarded the existence of the integration and subscriber base problems . n77 As for knowledge of the integration problems, the complaint bases its allegations of scienter on internal reports n78 n74 In re Scholastic Corp. Sec. Litig., 252 and studies n79 and the alleged statement by Knapp at F.3dat76. the October 2000 meeting. n80 There is no need to determine whether the complaint has specifically n75 Novak, 216 F.3d at 309. identified the internal reports and studies, as the n76 See, e.g. Rothman, 220 F.3d at 94 ; In allegation that defendant Knapp admi tted that NTL was re Oxford Health Plans, Inc.,187 F.R.D. at 139. experiencing integration problems in the October 2000 Where the information is exclusively within the meeting is sufficient to justify an inference of fraudulent opposing party's knowledge, pleading intent for pleading purposes based on a theo ry of requirements are somewhat relaxed . See Schlick conscious misbehavior or recklessness . v. Penn-Dixie Cement Corp., 507 F.2d 374, 379 (2d Cir. 1974) ("the rule relating to information and belief may be relaxed as to matters peculiarly n77 See, e .g., Class Cpt . PP 59 ("NTL staff within the opposing party's knowledge") . It is continuously informed upper management of unclear, however, exactly what plaintiffs must NTL's stagnant or declining subscriber base and allege in order to identify specifically repo rts chronic customer retention problems through showing that defendants had access to direct communications, meetings and in contradicto ry information . Compare In re regularly-prepared reports"), 60 ("John Harrison Scholastic Corp. Sec. Litig., 252 F.3d at 76 and others from NTL's Consumer Finance and (adequate pleading of scienter where complaint Financial Groups reported revenue decline on a detailed what defendants knew on a daily, weekly monthly basis to Faulkner. Faulkner forwarded and monthly basis); In re Nortel Networks Corp. that information to Defendants ."), 61 ("Defendant Sec. Litig., 238 F. Supp. 2d 613, 631-32 (S.D.N.Y. Blumenthal made frequent telephone calls from 2003) (pleading sufficient where plaintiffs the United States to NTL") . [**35 ] identified budgets received by defendants showing 20 percent lower purchases for the coming year ); In re Revlon , Inc. Sec. Litig., 2001 U.S. Dist. LEXIS 3265, No. 99 Civ. 10192 (SHS), n78 Class Cpt . P 60 . 2001 WL 293820, at *7 (S.D.N.Y. March 27, n79 Id. P 175 . 2001) (inference of fraudulent intent where complaint alleged weekly reports to defendants n80 Id. P 58 . detailing deteriorating inventory situation) ; In re Oxford Health Plans, Inc., 187 F.R.D. at 139 The allegations of NTL's knowledge or reckless (sufficient pleading of scienter where complaint disregard of subscriber base problems also are sufficient . identified report by date, author and substance); Plaintiffs argue that NTL management was aware of the with San Leandro Emergency Med. Group Profit alleged deceptive practices to increase artificially the Sharing Plan, 75 F.3d at 812 ("Plaintiffs' subscriber numbers . n8I While the complaint fails to unsupported general claim of the existence of describe who exactly it considers to have been in NTL confidential company sales reports that revealed management, the allegations permit the inference that the larger decline in sales is insufficient to some members of NTL's upper echelon, such as Sco tt survive a motion to dismiss ."); Vogel v. Sands Faulkner, the managing director of NTL' s consumer Bros. & Co., 126 F. Supp. 2d 730, 743 (S.D.N.Y. business unit, were aware of the practices of refusing to 2001) (insufficient pleading of scienter where allow NTL customers to terminate their accounts as well Page 1 1 347 F. Supp. 2d 15, * ; 2004 U .S. Dist. LEXIS 24373, ** ; Fed. Sec . L. Rep. (CCH) P93,05 4 as the impact of such practices on the churn rate . Conn. 1991); see Shields, 25 F.3d at 1130 ("to Moreover, while the complaint does not allege exactly allege a motive sufficient to suppo rt the inference who directed sales representatives to sign up customers, that optimistic but erroneous statements were knowing they would be unable to pay bills, it permits the fraudulently made, a plaintiff must do more than inference that some level of management directed this merely charge that executives aim to prolong the practice . benefits of the positions they hold."). 1*301 b. Gordon Complain t [**381 The Gordon Complaint alleges that NTL failed to (ii) Gordon Complain t disclose that its largest acquisition, ConsumerCo, had become cash-flow negative by the The Gordon Plaintiffs assert an additional motive on [**36] transaction's closing. Plaintiffs specifically the parts of defendants Knapp, Blumenthal and Gregg, identify the statement allegedly demonstrating NTL's arguing that an inflated stock price allowed the knowledge of this fact, as defendant Knapp allegedly individual defendants to engage in insider trading, admitted as much to plaintiff Gordon in a September especially the receipt and exercise of stock options by the 2001 conversation. n82 Defendants correctly argue that individual defendants . n85 But the allegation that the the statement only addresses what they knew in individual defendants received or exercised stock options September 2001 and not at the time of the alleged is insufficient in a case like this . There simply is no misstatements in May 2000 . Even so, it seems unlikely reason to infer fraud from the acquisition of shares by that NTL would not have known the financial status of insiders where the thrust of the alleged fraud is the its acquisition when the transaction concluded . This concealment of bad news, as such share acquisitions certainly permits, at this stage, a strong inference of would be contrary to the insiders' self interest. n86 fraudulent intent.
n85 Gordon Pl. Mem. 17-18. n81 Id. PP 51, 55, 56. n86 The Gordon Complaint alleges that n82 Gordon Cpt. P 115 . Knapp exercised options for a gain of $ 3 .9 million in 2000 . Gordon Cpt. P 87. The use of 3. Individual Defendants such language is consistent with two possibilities : (1) Knapp exercised options to buy at prices Plaintiffs argue that the complaints provide adequate aggregating $ 3 .9 million below the market as of support for their allegations of fraudulent intent on the the time of exercise, and (2) he exercised options part of the individual defendants by alleging facts to buy and then sold the shares thus acquired for showing both motive and opportunity and recklessness . a gain of $ 3 .9 million . The first possibility could a. Motive and Opportunity (i) Class Complaint not justify an inference of fraud for the reason given in the text. The second, on the other hand, The Class Complaint alleges that the individual would be consistent with a desire to sell shares in defendants were motivated [**37] to commit securities advance of disclosure of bad news. The Gordon fraud (i) to maintain access to capital markets, (ii) to Complaint, however, alleges that both abide by credit agreements, and (iii) to protect their Blumenthal and Knapp exercised options in 2000 compensation, which was heavily dependent on the for large gains and then carefully goes on to success of the integration efforts. n83 The first two allege that Blumenthal sold shares on April 10, allegations are insufficient for the reasons discussed 2000. Id. It makes no such allegation as to above. The Second Circuit has found the third alleged Knapp . In consequence, the only reasonable motive to be equally insufficient, as "incentive reading of the pleading insofar as it concerns compensation can hardly be the basis on which an Knapp's options is that the Gordon Plaintiffs are allegation of fraud is predicated." n84 Class Plaintiffs not alleging that Knapp sold . therefore have failed to allege the concrete and personal benefit required to properly allege motive. **39 [*31] The allegation that defendant Blumenthal n83 Class Pl . Mem. 19-20. sold 93,148 shares of NTL stock for $ 8 .34 million in April 2000 n87 is appears more troublesome , but only n84 Acito, 47 F. 3d at 54 (quoting Ferber v marginally so. While allegations of insider trading may Travelers Corp., 785 F. Supp. 1101, 1107 (D permit an inference of scienter , plaintiffs must allege Page 12 347 F. Supp. 2d 15, * ; 2004 U.S. Dist. LEXIS 24373, ** ; Fed. Sec. L. Rep. (CCH) P93,05 4 also that the insider trades were unusual. n88 Relevant article in the complaint is that it ran on August factors in determining whether insider trading activity is 25, 2002, and reported that "several of [NTL] unusual include the amount of profit, the percentage of directors together sold tens of millions of dollars defendant's holdings that were sold, and the number of of NTL stock." Id. P 20. The Gordon Complaint insiders who sold stock. n89 There is no per se rule, fails sufficiently to identify this article . however, that sale of a particular monetary amount or Regardless, the information in the article does not percentage of total holdings is unusual . n90 support an inference of unusual trading. Two of the other directors who engaged in trading sold 10 percent or less of their total holdings. Id. n87 Gordon Cpt. P 87. While plaintiffs refer There is no information as to when defendant to a sale of stock by Knapp in April 2000 in their Blumenthal allegedly sold $ 30 million of NTL opposition memorandum, there is no mention of shares or what proportion this represented of his such a sale in the Gordon ,Complaint . Gordon Pl . total holdings . [**41 1 Mem. 42. Instead, it is clear that the Gordon Plaintiffs are referring to defendant Knapp's alleged gain of $ 3 .9 million from the exercise of stock options in April 2000 . Gordon Cpt. P 87 . n93 See, e .g., San Leandro Emergency Med. Group Profit Sharing Plan, 75 F3d at 814 ("In In re Scholastic Corp. Litig., 252 F.3d n88 the context of this case, we conclude that the sale at 74; Rothman, 220 F.3d at 94; In re Interpublic of stock by one company executive does not give at *11 . [**40 1 Sec. Litig., 2003 WL 21250682, rise to a strong inference of the company's fraudulent intent."); Acito, 47 F.3d at 54 (sale of stock by one outside director insufficient to give rise to strong inference of intent to deceive n89 In re Scholastic Corp. Sec. Litig., 252 investing public). F.3d at 74- 75; Rothman, 220 F.3d at 94-95; Stevelman v. Alias Research , Inc., 174 F.3d 79, 85 (2d Cir. 1999); Acito, 47 F3d at 54. b. Conscious Misbehavior or Recklessnes s n90 In re Scholastic Corp. Sec. Litig., 252 Plaintiffs argue that the individual defendants knew F.3d at 75 . of or recklessly disregarded the existence of the integration problems, as well as the use of deceptive [*321 practices to inflate the perceived size of the The complaint alleges that Blumenthal received subscriber base . The Gordon Plaintiffs claim also that the options to purchase 7 .25 million shares on May 30, 2000 individual defendants knew of ConsumerCo's negative . n91 Apart alone, valued by NTL at up to $ 735 million cash-flow in May 2000 . The basic allegations are the from the April 2000 sale, there no allegation that same as those discussed above for NTL . The additional Blumenthal or any other individual defendant sold stock inquiry here is whether the facts alleged lead to an at any other time during the Applicable Period . n92 In inference of scienter on the part of each of the individual this context, Blumenthal's sale of 93,148 shares in April defendants . 2000 only weeks before exercising an option to buy 7 .25 million shares in the following month is not suggestive (i) Integration Problems of a desire to get rid of his holdings in advance of the Defendant Knapp's statement concerning integration . Accordingly, the allegation of disclosure of bad news [**42] problems at the October 2000 management Blumenthal's sale does not justify an inference of meeting is clear suppo rt for the proposition that he had scienter. n93 access to facts contradicting his public statements . While there is no allegation that the other individual defendants were present at this meeting, nearly one hundred top n9l Id. managers of NTL allegedly attended. This permits the n92 The Gordon Plaintiffs mention a New inference that the other individual defendants, all of York Times article that reported that defendant whom were involved in the daily management of the Blumenthal had sold an additional $ 30 million company, would have learned of information presented worth of stock during the Applicable Period and at such a large meeting even if they did not attend. n94 that other NTL directors not parties to this action sold NTL shares as well . Gordon Pl. Mem. 18 and n.9. The only mention of the New York Times Page 1 3 347 F. Supp. 2d 15, * ; 2004 U .S. Dist. LEXIS 24373, ** ; Fed. Sec. L. Rep. (CCH) P93,054
n94 Defendants argue that the Court cannot allegation that Blumenthal called NTL daily impute knowledge of facts contradicting NTL's provides no indication of what he was told about public statements based solely on their status as any of the alleged problems . To the extent any officers and directors . Class Def. Reply Mem. 9 . allegations do not provide even a general nature The Court agrees. The Class Complaint, however, of a report forwarded to NTL management (e .g., alleges more than the individual defendants' whether the numbers had declined), they are status - it alleges that all individual defendants insufficient. were involved in the daily operation of the company, that the president and chief executive The allegations of scienter for defendant Carter are officer knew there were integration problems, and sufficient as well. The Class Complaint refers to a that one hundred other top managers were told of conference call between NTL management and analysts the problems as well . Such allegations permit the in November 2001 . After the call, [**45] the customer inference that information shared with one marketing director allegedly asked defendant Carter how hundred top managers would have been shared he could reassure investors when he knew that NTL was with NTL's chief operating officer, chief financial not "going to be okay," to which defendant Carter officer and treasurer as well . allegedly responded, "what I tell [the analysts] is nine- tenths bullshit and one-tenth selected fact." n96 While [**43] this statement does not indicate what knowledge (ii) Subscriber Base Problems defendant Carter possessed about the alleged subscriber problems, it supports a strong inference that he did not Whether each individual defendant knew or believe what he told the analysts and that he was aware recklessly disregarded information about the alleged of some major internal problems . Thus, the Class fraudulent practices inflating the subscriber numbers is Complaint sufficiently pleads scienter for defendant less clear . There is no support for the allegations that any Carter as of November 2001 . n97 individual defendant knew of or recklessly disregarded the deceptive practices used by some employees to inflate artificially the subscriber numbers . For example, n96 Id. P 146. while the complaint alleges that Knapp and Blumenthal were telephoned to discuss the practice of refusing to n97 As Carter is a defendant in No. 02 Civ. allow customers to terminate accounts, defendants 3013 only, the scienter allegation as to him does correctly point out that the Class Complaint does not not relate to No. 02 Civ. 7377. allege that they were reached or what they were told. The complaints permit the inference, however, that The allegations of scienter with respect to the claims defendants Knapp and Blumenthal knew from internal based on failure to disclose subscriber base problems for reports that the number of paying subscribers was defendant Gregg are insufficient, even under the most declining and, thus, that any reported figures during this liberal interpretation of the Second Circuit's [**46] time were misleading . For the most part, the Class requirement that plaintiffs specifically identify reports Complaint has provided general information as to the containing contradictory information. The Class substance, frequency and authors of the internal reports. Complaint contains numerous allegations that reports For example, the complaint alleges that sales and were forwarded to Gregg . n98 Yet the Class Complaint marketing employees "informed upper management of fails to allege the content of these reports at even the NTL's stagnant or declining subscriber base and [**44] most general level. n99 The Gordon Complaint does not chronic customer retention problems through direct contain any additional allegations that defendant Gregg communications, meetings, and in-regularly-prepared knew or recklessly disregarded the subscriber base reports forwarded to Defendants Knapp and problems. Blumenthal." n95 Accordingly, the allegations permit the inference that defendants Knapp and Blumenthal knew that the reported subscriber base was increasing only by n98 See, e.g., Class Cpt. PP 59 ("Faulkner, a including non-paying subscribers in the released 1*331 managing director of NTL, personally met with figures. Such allegations are sufficient to overcome a representatives of NTL's various divisions, and motion to dismiss . forwarded their reports to management, including . . . Gregg"); 146 ("Based upon monthly reports that quantified the total number of subscribers n95 Id. P 59. Many other allegations of against those who were paying subscribers, scienter are insufficient . For example, the Page 1 4 347 F. Supp. 2d 15, * ; 2004 U .S. Dist . LEXIS 24373, ** ; Fed. Sec. L. Rep. (CCH) P93,05 4
Defendants knew that NTL's paying subscriber were statements of general optimism or were made by base was, in fact, shrinking."). third parties . ' n99 For example, an allegation that a 1. Optimistic Statements managing director of NTL met with Several of the remaining alleged misleading representatives of various divisions and statements are optimistic projections or positive forwarded reports to defendants, including Gregg, statements about the company's financial health . says nothing about what type of information was Defendants argue that these statements were mere contained in the report. Id. P 59. Other allegations puffery n103 or appropriately qualified forward-looking fail to address which department wrote the report statements. n104 and whether the report was even forwarded to defendant Gregg . Id. P 146. n103 Class Cpt. PP 69, 80, 94, 96, 106, 111, [**47] 124, 132, 144; Gordon Cpt . PP 52, 66 . (iii) Negative Cash-Flow ofConsumerCo n104 Class Cpt. PP 69, 71, 75, 92, 94, 96, Finally, the Gordon Plaintiffs argue that the 100-01, 106, 111, 115, 122, 132, 144 . individual defendants knew that ConsumerCo had become cash-flow negative, but failed to disclose that a. Puffery fact in two May 2000 statements concerning the acquisition . The allegation of scienter is certainly Vague expressions of optimism, or puffery, are sufficient for defendant Knapp, as he admitted his insufficient to support a claim for securities fraud . n105 knowledge to Gordon in September 2001 . But there Projections of future performance may be actionable simply is no basis for an inference of fraudulent intent on under Section 10(b) if they are [**49] worded as behalf of defendants Blumenthal or Gregg . Allegations guarantees or supported by specific facts or if the speaker that they should have known about ConsumerCo's does not reasonably believe them. n106 Corporate financial state based solely on their executive positions officials need not, however, present an overly gloomy are not enough to plead scienter. n100 Thus, the Gordon picture of current performance and future prospects, as Plaintiffs have failed to plead a securities fraud claim long as their statements are consistent with reasonably with respect to Blumenthal's statement to Gordon in May available data. n107 [*34] 2000. nlOl The pleadings, however, are sufficient under the group pleading doctrine with respect to all three individual defendants for the May 2000 press n105 Novak, 216 F 3d at 315 . release . n102 n106 In re International Business Machines Corp. Sec. Litig., 163 F.3d 102, 107 (2d Cir . n100 In re Sotheby's Holdings, Inc. Sec. 1998) . Litig., 2000 U.S. Dist. LEXIS 12504, No. 00 Civ. n107 Novak, 216 F.3d at 309. 1041 (DLC), 2000 WL 1234601, at *7 (S.D.N.Y. Aug 31, 2000) ('It is well established that boilerplate allegations that defendants knew or Defendants argue that several of the challenged should have known of fraudulent conduct based statements were nothing more than vague expressions of solely on their board membership or executive optimism regarding operating results or NTL's future in positions are insufficient to plead scienter .") general. For example , in August 2000, NTL issued a (listing cases) . [**48 ] press release conce rning its prior quarter's operating statistics in which Knapp reportedly stated, "we are extremely proud of this quarter's operating performance . . . . The second quarter was the most successful in our nl0l Gordon Cpt. P 52 . history . . . . We believe tremendous opportunities await us." n10 8 n102 Id. P 46.
N108 Class Cpt. P 69 . D. Alternate Grounds for Dismissa l Defendants argue that the majority of the alleged [**501 misleading statements are not actionable because they Page 1 5 347 F . Supp. 2d 15, *; 2004 U.S. Dist. LEXIS 24373, ** ; Fed. Sec. L. Rep. (CCH) P93,05 4
The Class Complaint allegations permit an inference the end of 2003, n114 (2) the company's plan to target that defendants had no reasonable basis for such positive additional subscribers, n115 and (3) projections of cost statements by November 2001, but no earlier. It was at savings or future earnings . nl 1 6 this time that NTL began reporting slowing revenue and subscriber growth and that defendant Carter allegedly admitted the company was misrepresenting existing facts nl13 15 U.S.C. § 78u-5(i) . to analysts. n109 That defendants allegedly had earlier n114 Class Cpt . PP 92, 106, 124, 144 . knowledge of declining revenue or subscriber numbers does not mean that they had no adequate basis for n115 Id. PP 69, 75, 111 . releasing optimistic statements . Thus, to the extent n116Id. PP 100. plaintiffs have alleged misstatements based on optimistic statements prior to November 2001, the statements are not actionable . Plaintiffs argue that these statements do not fall under the safe-harbor provision because they are not accompanied by the requisite cautionary language or 109 See, e.g., In re Keyspan Corp . Sec. identified as forward looking. That statements are not Litig., 2003 U.S. Dist. LEXIS 26173, 2003 WL accompanied by cautionary language or identified as 21981806, at *17 (optimistic statements not forward looking does not end the analysis, however . puffery where complaint permitted an inference Plaintiffs still must allege facts that permit the inference defendants knew statements misrepresented that defendants made the statements with actual existing facts); In re Xerox Corp . Sec. Litig., 165 knowledge of their falsity in order to remove forward- F. Supp. 2d 208, 218 (D . Conn. 2001) (not looking statements from the protection of the safe-harbor puffery where plaintiffs allege defendants made provision. optimistic statements "knowing they were The allegations [**53] in the Class Complaint fail contrary to the company's actual situation") . to permit such an inference before November 2001, when defendant Carter essentially admitted that he was [**51] misrepresenting existing facts to analysts . Hence, the [*35] b. Forward-Looking Statements majority of these statements are within the safe-harbor provision to the extent they are forward looking . n117 Under the safe-harbor provision of the PSLRA, a The one exception is defendant Knapp's statement on statement concerning projections or future plans November 7, 2001, that NTL would turn free-cash flow "generally does not give rise to a securities fraud claim if positive by the end of 2003 . nl 18 Plaintiffs have alleged either: (1) it is accompanied by meaningful cautionary sufficient facts supporting their claim that defendants language, or (2) the plaintiff fails to prove the statement knew at this time that any projections were based on a was made with actual knowledge that it was false or misrepresentation of existing facts . Hence, the statement misleading ." n110 It applies "to forward-looking does not merit the protection of the safe-harbor statements only and not to material omissions or provision. n11 9 misstatements of historical fact ." n1l1 Both oral and written communications may qualify for protection . n112 n117 See In re Keyspan Sec. Litig., 2003 U.S. Dist. LEXIS 26173, 2003 WL 21981806, at n110 In re Nortel Networks Sec . Litig., 238 *18. Those statements that contain both existing F. Supp. 2d at 629; see also 15 U.S.C. § 78u- facts, such as financial reports, and forward- 5(c) . looking language are protected only for those nl l l In re Complete Management Inc . Sec portions that are forward-looking. See In re Litig., 153 F. Supp. 2d 314, 340 (S.D.N.Y. 2001) . Vivendi Universal Sec . Litig., 2003 U.S. Dist. LEXIS 19431, 02 Civ . 5571 (HB), 2003 WL n112 15 U.S.C. § 78u-5(c) . 22489764, at *18 (S.D.N.Y. Nov. 3, 2003). n118 Class Cpt . P 144 . Forward looking statements include financial projections, descriptions of future plans or objectives of n119 That the statement was accompanied by management, and discussions of future economic [**52] cautionary language does not suffice to place it performance. n113 Here, defendants identify numerous under the safe harbor provision's protection . The statements as forward looking, including (1) expectations language itself was generic, warning that actual that the company would be "free cash flow positive" by Page 16 347 F. Supp. 2d 15, * ; 2004 U .S. Dist . LEXIS 24373, ** ; Fed. Sec. L. Rep. (CCH) P93,05 4
results may be "materially different" than the This "does not come close to the projections . n122 Class Pl . Mem . 28-29. While the Class cautionary language needed to render reliance on Complaint contains numerous statements by ." In re the misrepresentation unreasonable analysts, plaintiffs only allege that two of these Vivendi Universal Sec. Litig., 2003 U.S. Dist. were false and misleading . See Class Cpt. PP 90, LEXIS 19431, 2003 WL 22489764, at * 18 126. The remainder are included in the Class tted). (internal quotations omi Complaint to illustrate that analysts were absorbing the positive information released by [**54J defendants . Class Pl. Mem. 29. [**56 1 1*361 2. Statements by Securities Analysts Defendants argue also that they should not be responsible for statements made by "third-party n123 See, e.g., Novak, 216 F.3d at 314 . n120 securities analysts" during the Class Period (statements made by securities analysts were properly attributed to defendants for pleading purposes where plaintiffs identified the exact n120 Class Def. Mem. 40-41 . Defendants statements defendants made to analysts and on have not made this argument with respect to any what date, as well as provided an example of how allegedly misleading statements in the Gordon analysts released such information to the public) ; Complaint. Thus, this section deals with the Class In re Revlon, Inc. Sec. Litig., 2001 U.S. Dist. Complaint only . LEXIS 3265, 2001 WL 293820, at *9 (denying motion to dismiss with regard to Corporate officials may face liability "for false and misrepresentation to analyst where senior misleading information disseminated through analysts' company executives made statements directly to reports by alleging that the officials either: (1) analysts) . intentionally fostered a mistaken belief concerning a n124 The one exception is a July 26, 2001 material fact that was incorporated into reports, or (2) conference call with analysts where the Class ." n121 adopted or placed their imprimatur on the reports Complaint alleges defendant Knapp "tried to assuage concerns that the Company was carrying an unsustainable debt burden." Class Cpt. P 130. nl21 Novak, 216 F.3d at 314 (quoting There is no allegation, however, that such Elkind v. Liggett & Myers, Inc ., 635 F2d 156, assurances reached the public . 163-64 (2d Cir . 1980))(intemal quotations omitted). n125 For example, the Class Complaint alleges that based upon defendants public [**551 statements, "Chase Hambrecht & Quist Inc . issued an analyst report in which it initiated Class Plaintiffs here argue that defendant s coverage of NTL with a "Buy" rating . . . . The intentionally fostered mistaken beliefs that later were report praised NTL's "growth rates" and the incorporated into analysts' reports . n122 To impute supposed expansion of its customer base through analyst statements to defendants, the Class Complaint the signing up of customers for free Internet and must allege that analysts relied on specific information digital cable service." Id. P 90. The Class provided to them by defendants. n123 By this standard, Complaint claims defendants should be the complaint is clearly insufficient. While the complaint responsible for the statements in the CH&Q refers to some conference calls between defendants and report because such statements were misleading. analysts, it does not identify the exact statements Id.P91 . allegedly made by defendants, nor allege that these statements ever reached the public . n124 Instead, it [**571 appears that plaintiffs are trying to hold defendants responsible for a different group of analyst statements -- IV. Section 20(a) Claim - Control Person Liability those issued in response to defendants' public statements . Plaintiffs claim that each of the individual n125 To the extent defendants made misleading defendants is liable as a controlling person under Section statements to the public, they are already subject to 20(a) of the Exchange Act, which provides that "every liability . That analysts absorbed these statements does person who, directly or indirectly, controls any person not establish an independent basis of liability. liable under any provision of this chapter . . . shall also Page 17 347 F . Supp. 2d 15, * ; 2004 U.S. Dist. LEXIS 24373, ** ; Fed. Sec. L. Rep. (CCH) P93,05 4 be liable jointly and [*37] severally with and to the V. Additional Claims by Gordon Plaintiffs same extent as such controlled person to any person to The Gordon Complaint asserts two causes of action whom such controlled person is liable, unless the that are not included in the Class Complaint. First, the controlling person acted in good faith and did not Gordon Plaintiffs argue that NTL and the individual directly or indirectly induce the act or acts constituting defendants violated 17 C.F.R. § 229.303 by failing to the violation or cause of action ." n126 report to the SEC alleged negative trends with ConsumerCo's subscriber base . They make common law fraud claims against all defendants as well . n126 15 U.S.C. § 78t(a) (emphasis added). A . 17 C.F.R. § 229.303 The parties agree that the elements of Section 20(a) The Gordon Plaintiffs assert a claim against NTL liability include both a primary violation and the and the individual defendants for failure to comply with defendant's control over the primary violator . The part the reporting requirements governing SEC Form 10-Q . company on the question remains whether plaintiffs must Item 303 of SEC Regulation S-K requires management allege also culpable participation by the control person. to "describe any known trends or uncertainties that have This is an interesting question on which courts, had or that the registrant reasonably expects will have a [**58] both within and outside this circuit, are deeply material favorable or unfavorable impact on net sales or divided. n127 As the Court has concluded, in light of the revenues or income from continuing operations ." n128 group pleading doctrine, that the complaints state legally sufficient claims for relief against the individual defendants as primary violators, there is no present need n128 17 C.F.R. § 229.303(a)(3)(ii). to reach this question. Hence, the motion to dismiss the claims is denied without prejudice . Section 20(a) While a violation of Item 303, [**60 1 in some Defendants may raise the point anew if plaintiffs fail to circumstances , may give rise to a claim under Section establish a primary violation by any of the individual 10(b) of the Exchange Act, there is no private cause of defendants at trial . action for violation of Regulation S-K. n129 Thus, Gordon 1*381 Plaintiffs' claim for alleged violation of 17 C.F.R. § 229.303 is dismissed. n127 Compare Harrison v . Dean Witter Reynolds, Inc., 974 F.2d 873, 881 (7th Cir. 1992); Metge v. Baehler, 762 F.2d 621, 631 (8th n129 In re Quintel Entm 't Inc. Sec. Litig., 72 . denied sub nom, Metge v. Cir. 1985), cert F. Supp. 2d 283, 293 (S.D.N.Y. 1999); see also Bankers Trust Co., 474 U.S. 1057, 88 L. Ed. 2d Oran v. Stafford, 226 F.3d 275, 287 (3d Cir. . 798 (1986) ; Hollinger v. Titan 774, 106 S. Ct 2000); In re Sofamor Danek Group, Inc., 123 Capital Corp., 914 F.2d 1564, 1575 n.24 (9th F.3d 394, 402-03 (6th Cir. 1997); In re Boston ; Brown v. Enstar Group, Inc ., 84 F.3d Cir. 1990) Tech., Inc. Sec. Litig., 8 F. Supp. 2d 43, 49 (D . 393, 396 (11th Cir. 1996); In re IPO., 241 F. Mass . 1998). Gordon Plaintiffs do not assert Supp. 2d at 392-97; In re Interpublic Sec. Litig., otherwise, as they did not address the cause of In re WorldCorn, 2003 WL 21250682, at *15 ; action under 17 C.F.R. § 229.303 in their ., 294 F. Supp. 2d 392, No . 02 Civ. Inc. Sec. Litig opposition papers . 3288 (DLC), 2003 WL 21219049, at *18-20 (S.D.N.Y. May 19, 2003) ; Neubauer v . Eva- Health USA, Inc., 158 F.R.D. 281, 284 (S.D.N.Y. B. Common Law Fraud Claims 1994); with Rochez Bros. v. Rhoades, 527 F.2d 880, 890-91 (3d Cir. 1975); Carpenter v . Harris, The Gordon Complaint states also claims for Upham & Co ., 594 F.2d 388, 394 (4th Cir . common law fraud against all defendants . To the extent 1979); In re Globalstar Sec . Litig., 2003 U.S. that the Court has not dismissed the federal claims and Dist. LEXIS 22496, No . 01 Civ. 1748 (SHS), 2003 defendants challenge [**61] on jurisdictional grounds WL 22953163, at *12 (S.D.N.Y. Dec. 15, 2003); only, defendants' motion to dismiss the state law claims In re Oxford Health Plans, Inc . 187 F.R.D. at is denied. 142; In re Livent, Inc. Sec . Litig., 78 F. Supp. 2d VI Conclusio n at 222 . For the foregoing reasons, the motion of the [**591 individual defendants to dismiss the Class Complaint and Page 18 347 F. Supp. 2d 15, * ; 2004 U .S . Dist. LEXIS 24373, ** ; Fed. Sec. L. Rep. (CCH) P93,054 the motion of defendants to dismiss the Gordon 134 and Gordon Cpt. PP 52, 64, 66, 76, Complaint are disposed of as follows : 80, 82, 96, 100, 102, and (iii) alleged violation of 17 C.F.R. § (a) The motions are granted insofar as 229.303. they complain o f (i) the statements alleged in Class (b) The motions are denied in all other Cpt. PP 78, 82, 90, 94, 111, 118, 126-28, respects. 130, 135, 138, 150-52, 154, 164 and SO ORDERED . Gordon Cpt . PP 43, 45, 63, 74, 78, 83, 89, 98, 103, 105, 112, 114, 118-19, 121, 122, Dated: December 6, 2004 124, 137 , Lewis A. Kaplan (ii) the forward looking statements and general expressions of optimism United States District Judge alleged in Class Cpt . PP 69, 71, 75, 80, 92, 100-01, 106, 109, 115, 122, 124, 132,