CHRISTIAN v. BT GROUP PLC et al, Docket No. 2_17-cv-00497 (D.N.J. Jan 25, 2017), Court Docket
Multiple Documents Part Description 1 103 pages 2 Exhibit A 3 Exhibit B 4 Exhibit C 5 Exhibit D 6 Exhibit E 7 Exhibit F
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James E. Cecchi Donald A. Ecklund CARELLA, BYRNE, CECCHI, OLSTEIN, BRODY & AGNELLO, P.C. 5 Becker Farm Road Roseland, NJ 07068 (973) 994-1700
Liaison Counsel for Plaintiffs and the Putative Class
Samuel H. Rudman David A. Rosenfeld Alan I. Ellman ROBBINS GELLER RUDMAN & DOWD LLP 58 South Service Road, Suite 200 Melville, NY 11747 (631) 367-7100
Lead Counsel for Plaintiffs and the Putative Class
[Additional counsel appear on signature page.]
UNITED STATES DISTRICT COURT DISTRICT OF NEW JERSEY
JAMES CHRISTIAN, Individually and on ) No. 2:17-cv-00497-KM-JBC Behalf of All Others Similarly Situated, ) ) CLASS ACTION Plaintiff, ) ) vs. ) FOURTH AMENDED COMPLAINT FOR ) VIOLATIONS OF THE BT GROUP PLC, IAN LIVINGSTON, ) FEDERAL SECURITIES LAWS GAVIN E. PATTERSON, TONY ) CHANMUGAM, NICK ROSE, LUIS ) ALVAREZ, and RICHARD CAMERON, ) Defendants. ) DEMAND FOR JURY TRIAL )
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TABLE OF CONTENTS
Page
INTRODUCTION ...... 1
JURISDICTION AND VENUE ...... 6
PARTIES ...... 7
CLASS ACTION ALLEGATIONS ...... 11
SUBSTANTIVE ALLEGATIONS ...... 13
Throughout the Class Period, Defendants Were Aware of Problems with the Control Environment at BT Italy ...... 16
The Truth Begins to Emerge ...... 19
A BT Group Vice President Was Informed of Accounting Problems, Bullying and Pressure to Meet Difficult Bonus Targets at BT Italy in November 2015 ...... 25
Italian Prosecutors Named Defendants Alvarez and Cameron as Suspects in the Criminal Investigation ...... 30
BT Group Filed a Criminal Complaint Against Five Former Employees ...... 38
BT Group Faces an Italian Government Investigation ...... 39
BT Group Provided the Details of Its Financial Improprieties in the 2017 Annual Report ...... 40
Chanmugam Left BT Group Under Suspicious Circumstances ...... 43
BT Group Clawed Back the Pay of Defendants Patterson and Chanmugam ...... 43
MATERIALLY FALSE AND MISLEADING STATEMENTS MADE BY DEFENDANTS DURING THE CLASS PERIOD ...... 47
Fiscal Year 2013 False and Misleading Statements and Omissions ...... 47
Fiscal Year 2014 False and Misleading Statements and Omissions ...... 52
Fiscal Year 2015 False and Misleading Statements and Omissions ...... 55
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Page
Fiscal Year 2016 False and Misleading Statements and Omissions ...... 58
Fiscal Year 2017 False and Misleading Statements and Omissions ...... 60
BT GROUP’S FINANCIAL REPORTING DURING THE CLASS PERIOD WAS MATERIALLY FALSE AND MISLEADING AND VIOLATED IFRS ...... 62
BT Group’s £260 Million Charge Against Its 2017 Financial Results ...... 66
BT Group’s £268 Million Earnings Restatement of Its Financial Results Prior to 2017...... 68
BT Group’s Financial Misrepresentations Were Material ...... 75
BT Group’s Admissions that the Financial Statements It Issued During the Class Period Were Presented in Violation of Applicable Accounting Standards ...... 79
BT Group’s Admissions that Its Internal and Disclosure Controls Were Ineffective and that Defendants’ Certifications Were Materially False and Misleading...... 80
JACINTO CAVESTANY FURNISHED INFORMATION FOR THE ALLEGED MISSTATEMENTS ...... 86
ADDITIONAL SCIENTER ALLEGATIONS ...... 86
LOSS CAUSATION ...... 88
Applicability of Presumption of Reliance: Fraud-on-the-Market Doctrine ...... 89
COUNT I ...... 90
Violation of Section 10(b) of the Exchange Act and Rule 10b-5 Against BT Group ...... 90
COUNT II ...... 93
Violation of Section 10(b) of the Exchange Act and Rule 10b-5 Promulgated Thereunder Against the Individual Defendants ...... 93
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Page
COUNT III ...... 96
Violation of Section 20(a) of the Exchange Act Against the Individual Defendants...... 96
PRAYER FOR RELIEF ...... 98
JURY DEMAND ...... 98
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Lead Plaintiff PAMCAH-UA Local 675 Pension Fund and Plaintiff Clayton Hollister
(together, “Plaintiffs”), on behalf of themselves and on behalf of all others similarly situated, allege
the following based upon personal knowledge as to themselves and their own acts, and upon
information and belief as to all other matters based on the investigation conducted by their
attorneys, which included, among other things, the review and analysis of: (i) U.S. Securities and
Exchange Commission (“SEC”) filings by BT Group plc (“BT Group” or the “Company”);
(ii) transcripts of earnings calls with BT Group senior management; (iii) press releases, investor
presentations, and other information issued or disseminated by the defendants; (iv) news articles
and media coverage of the events giving rise to this action; and (v) research and reports by
securities and financial analysts.
The investigation of Plaintiffs’ attorneys is continuing, yet certain additional facts
supporting these allegations are known only to the defendants or are exclusively within their
custody or control. Plaintiffs believe that substantial evidentiary support will exist for the
allegations set forth herein after a reasonable opportunity for discovery.
INTRODUCTION 1. This federal securities class action is brought on behalf of all purchasers of BT
Group American Depositary Receipts (“ADRs”) between May 10, 2013 and January 23, 2017,
inclusive (the “Class Period”). The claims asserted are alleged against the Company and certain
of its current and former executive officers and/or directors and managers (together, “Defendants,”
as further defined below), and arise under Sections 10(b) and 20(a) of the Securities Exchange Act
of 1934 (the “Exchange Act”) and Rule l0b-5 promulgated thereunder.
2. This case arises from a massive accounting fraud at BT Group’s Italian business.
Defendants have now admitted that intentional misconduct occurred at BT Italia S.p.A. (“BT Italy”
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or “BT Italia”), where improper accounting practices and a complex set of improper sales,
purchase, factoring, and leasing transactions caused the Company’s financial statements to be
materially misstated for nearly a decade. As a result of the intentional misconduct, BT Group has
now conceded that its previously reported profits were overstated by £530 million (or
approximately $700 million)1 and has revised its historical financial statements to correct such
misstatements. Further, the Company’s internal controls over financial reporting – which
Defendants Ian Livingston, Gavin E. Patterson, and Tony Chanmugam personally designed and
evaluated, or caused to be designed and evaluated under their supervision – were falsely certified
as effective and containing no material weaknesses.
3. Contrary to these defendants’ sworn certifications, the Company’s internal controls
contained the following material weaknesses: (1) individuals in Italy colluded to override the
period-end financial controls and overstate results; (2) the Company’s monitoring controls, which
include the review of reconciliations, journals, results, and financial position, did not operate
effectively to identify the overstatement in a timely manner; and (3) the Company did not maintain
effective controls to prevent or detect the collusive circumvention or override of controls related
to BT Italy.
4. As a result, the Company terminated BT Italy’s Chief Executive Officer (“CEO”),
Chief Operating Officer (“COO”), and at least three other BT Italy employees. BT Group also
filed a criminal complaint with Italian prosecutors against those five executives. The CEO of BT
Group’s Global Services line of business (“BT Global Services”) and the President of BT Global
1 As of November 21, 2017, the date Plaintiffs filed the first Amended Complaint for Violations of the Federal Securities Laws (“First Amended Complaint”) (ECF No. 26), 1 British Pound was equal to 1.32 U.S. Dollars.
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Services in Continental Europe also abruptly left the Company in the wake of the accounting
scandal.
5. Defendant Patterson, BT Group’s CEO, sought to distance the Company’s
headquarters, stating that BT Italy executives “kept London in the dark” regarding the fraudulent
accounting practices. But BT Italy’s CEO disputes this and stated to Reuters in response that the
financial transactions were “verified and authorized by the parent company and by the audit units
and firms.” Indeed, other Company insiders told Reuters that it would be “‘impossible’ that
London had no way of realizing what was happening in Italy” and “that it would have been
practically impossible for an auditor not to realize that something was amiss.”
6. The financial fallout associated with the Company’s Italian scandal was telling,
with BT Group’s ADRs declining by more than 20%, enough to eviscerate some £8 billion in
market capitalization. Indeed, the magnitude of the diminution in the Company’s market value,
which is approximately 15 times greater than the £530 million profit overstatement itself,
demonstrates the significance of BT Group’s malfeasance.
7. As a result of the BT Italy fraud, BT Group dramatically slashed the compensation
of its top executives. Originally, it was cut to reflect the true amounts that would have been paid
absent the accounting fraud. Defendant Patterson’s total remuneration was cut from £5.28 million
in fiscal 2016 to £1.34 million in fiscal 2017. The total remuneration for Defendant Chanmugam,
BT Group’s Chief Financial Officer (“CFO”), was cut from £2.81 million in fiscal 2016 to
£258,000 in fiscal 2017. Then, in fiscal 2018, BT Group applied the malus provisions to all of
Chanmugam’s Deferred Bonus Plan (“DBP”) awards – not only those reflecting the amount
attributable to the revised financial performance – such that his DBP awards were reduced from
208,033 shares of BT stock to zero. The value of those shares was more than £800,000. Moreover,
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on information and belief, Chanmugam was either fired or preemptively quit in July 2016 in
connection with BT Group’s internal investigation of BT Italy.
8. The materiality of the fraudulent scheme is further demonstrated by
PricewaterhouseCoopers LLP (“PwC”), BT Group’s outside auditor during the Class Period,
which determined that the threshold for overall Company-level materiality was £130 million. BT
Group’s £530 million in adjustments due to the fraud at BT Italy far exceeds that threshold.
9. Indeed, the public disclosure of an alarming web of collusion and intentional
wrongdoing, which ranged from over-aggressive assumptions to off-balance sheet structures
designed to bring cash onto the balance sheet in time to meet targets, has shaken the market’s
confidence in BT Group management’s integrity, its representations about the Company’s reported
operating results, and its ability to manage the Company’s global operations, particularly because
it operates in 180 countries across the globe.
10. As detailed herein, BT Group’s Audit & Risk Committee (“Audit Committee”),
chaired by Defendant Nick Rose, was actually aware of sustained problems in the internal control
environment of BT Italy throughout 2013, 2014, 2015, and 2016, and cryptically reported the
existence of questionable practices in the Company’s annual reports, which Defendants reviewed
and approved. Despite this knowledge, Defendants Livingston, Patterson, and Chanmugam falsely
certified that BT Group’s internal controls were operating effectively while, in fact, a massive
financial fraud was on-going in Italy.
11. BT Group itself acknowledged that “at the start of 2016,” the Company received
reports of bullying cases at BT Italy, in response to which senior Human Resources officials visited
the Italian offices and investigated. Despite this undisclosed, adverse information concerning BT
Italy known to BT Group’s senior company representatives – in which they learned that the scope
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of problems in the control environment at BT Italy had expanded – on May 19, 2016, Defendant
Rose misleadingly stated in BT Group’s 2016 Annual Report: “We have continued to monitor our
operations in Italy and progress has been made to improve the control environment.”
12. Moreover, BT Group’s internal report of the accounting fraud at BT Italy, which
had been prepared by KPMG LLP (“KPMG”) in January 2017 but was never publicly disclosed,
revealed that “executives at BT global services did not sufficiently challenge numbers
submitted by Italian staff. Initial inquiries from London were ignored or met by responses that
were ‘not satisfactory’ or lacking in detail, it said, but global services staff often failed to
‘follow through’ to get answers.”
13. Defendants Alvarez and Cameron, respectively the CEO and CFO of BT Global
Services – BT Group’s largest revenue-producing line of business – set unrealistically high
earnings objectives that could not be met absent accounting manipulations. When BT Global
Services fell short of achieving these objectives, Alvarez, Cameron, and other BT Global Services
personnel directed financial accounting personnel in Italy to falsely inflate reported financial
results, exhorting them to “look for” and “find” ways to close such shortfalls in a way that has
been described by a former accounting expert for Milan prosecutors as “significant evidence” of
wrongful accounting. In fact, the report of Italy’s financial police reveals that Alvarez, Cameron,
and other BT Global Services personnel repeatedly asked financial accounting personnel in Italy
to “accommodate” their requests for specified amounts of additional profits that were needed to
eliminate shortfalls in previously announced estimates by suggesting “knowingly wrong
accounting practices,” including deferring the recognition of ordinary business expenses by
fraudulently recording them as assets.
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14. In addition, in November 2015, three BT Italy employees warned BT Global
Services’2 Vice President of Iberia and head of European sales about possible accounting problems
at BT Italy, bullying by BT Italy management, especially its then-CEO, and pressure to meet
difficult bonus targets.
15. Accordingly, the scienter of management-level executives of BT Group is imputed
to the Company.
16. BT Group also faces a government investigation. In connection with the admitted
fraud, the Italian law enforcement agency responsible for investigating financial crimes has been
conducting an investigation into the wrongful conduct at BT Group and has named Defendants
Alvarez and Cameron as suspects.
17. As a result of Defendants’ wrongful acts and omissions, Plaintiffs and other Class
members have suffered significant losses and damages.
JURISDICTION AND VENUE 18. 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 10b-5 promulgated thereunder [17 C.F.R.
§240.10b-5].
19. This Court has jurisdiction over this action pursuant to Section 27 of the Exchange
Act [15 U.S.C. §78aa], and 28 U.S.C. §1331.
20. Venue is properly laid in this District pursuant to Section 27 of the Exchange Act
and 28 U.S.C. §1391(b) and (c). The acts and transactions giving rise to the violations of law
complained of occurred in part in this District. The false and misleading statements were
2 As explained in detail below, BT Global Services is not a subsidiary of BT Group. Upon information and belief, it is one reporting level below the corporate level.
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disseminated in this District, and therefore the fraudulent conduct was carried out in part in this
District.
21. In connection with the acts and conduct alleged in this Complaint, Defendants,
directly or indirectly, used the means and instrumentalities of interstate commerce, including the
United States mails, interstate telephone communications, and the facilities of the New York Stock
Exchange (“NYSE”), a national securities exchange.
PARTIES 22. Lead Plaintiff PAMCAH-UA Local 675 Pension Fund3 purchased BT Group
ADRs, as set forth in the certification previously filed with the Court and incorporated herein by
reference, and was damaged thereby.
23. Plaintiff Clayton Hollister purchased BT Group ADRs, as set forth in the
certification attached hereto and incorporated herein by reference, and was damaged thereby.
24. Defendant BT Group is a multinational telecommunications services company that
offers fixed-line services, broadband, mobile and TV products and services, and networked
information technology (“IT”) services in the United Kingdom and across the world. The
Company is headquartered in London, United Kingdom. BT Group’s ADRs are traded on the
NYSE.4
3 PAMCAH-UA is an acronym for Plumbing & Mechanical Contractors Association of Hawaii- United Association.
4 BT Group’s fiscal year ends on March 31. By way of example, the twelve months beginning April 1, 2015 and ending March 31, 2016 are considered the Company’s fiscal year 2016.
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25. Defendant Ian Livingston (“Livingston”) was the Company’s CEO and a member
of BT Group’s Board of Directors (the “Board”) from 2008 until September 2013.5
26. Defendant Gavin E. Patterson (“Patterson”) was the Company’s CEO and a
member of the Board from September 2013 until January 2019.
27. Defendant Tony Chanmugam (“Chanmugam”) was BT Group’s Group Finance
Director6 and a member of the Board from 2008 until July 2016.
28. Defendant Nick Rose (“Rose”) has been the Chairman of BT Group’s Audit
Committee from 2012 to the present, and a member of the Audit Committee and the Board since
2011.
29. Defendant Luis Alvarez (“Alvarez”) was, from 2012 until May 2017, the CEO of
BT Group’s Global Services line of business and, in that position, oversaw the Company’s Italian
division. Alvarez was based in London. On May 11, 2017, the Company announced that Alvarez
left, or was leaving, BT Group. From at least fiscal year 2013 through fiscal year 2016, Alvarez
was a member of the Company’s Operating Committee, which BT Group describes as “the key
management committee and represents the ‘chief operating decision maker,’” with responsibility
for running BT Group’s business and delivering its strategy. The Operating Committee meets
weekly and, during the Class Period, was chaired by the Company’s CEO, Defendant Patterson.
5 To the extent alleged misstatements were made after Livingston left the Company, Plaintiffs do not claim that Livingston is liable for those misstatements. Likewise, to the extent alleged misstatements were made before a defendant joined the Company, Plaintiffs do not claim that defendant is liable for those misstatements.
6 Upon information and belief, the position of Group Finance Director at BT Group is equivalent to the position of CFO at most U.S. public companies.
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30. Defendant Richard Cameron (“Cameron”) was, from July 2014 until 2017, the CFO
of BT Global Services. Cameron was based in London and reported to Alvarez. As CFO of BT
Global Services, Cameron led approximately 850 people covering core finance functions globally
including commercial and new business finance. He was also responsible for a further 300 people
in non-finance roles including Global Services’ contract management centre of excellence, its
COO function and investment boards. In addition, Cameron served as the Deputy CFO of BT
Group. As Deputy CFO of BT Group, Cameron had responsibility for billing, revenue assurance,
finance shared service centres, regulatory finance, group commercial finance, and group financial
control. In addition, as Deputy Group CFO of BT Group, Cameron represented BT Group at the
Design Council. The Design Council is a sub-committee of the Operating Committee. It normally
meets monthly. It is collectively responsible for aligning BT Group’s capital investments in its
networks, systems, platforms and products so that they are directed towards achieving BT Group’s
overall purpose and strategy, serve the needs of all of its customers and are delivered in a cost-
effective manner.
31. Defendants Livingston, Patterson, Chanmugam, Rose, Alvarez, and Cameron are
referred to herein as the “Individual Defendants.” BT Group and the Individual Defendants are
referred to herein, collectively, as “Defendants.”
32. During the Class Period, Defendants, as senior executive officers and/or directors
of BT Group, were privy to confidential and proprietary information concerning BT Group, its
operations, finances, financial condition, and present and future business prospects. Because of
their positions with BT Group, Defendants had access to non-public information about the
Company’s business, finances, products, markets, and present and future business prospects via
internal corporate documents, conversations and connections with other corporate officers and
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employees, attendance at management and/or board of directors meetings and committees thereof
and via reports and other information provided to them in connection therewith. Because of their
possession of such information, Defendants knew or recklessly disregarded that the adverse facts
specified herein had not been disclosed to, and were being concealed from, the investing public.
33. The Individual Defendants made, participated in the making of, or had some direct
involvement in the making of, the statements alleged herein to be false and/or misleading.
34. Defendants are liable as direct participants in the wrongs complained of herein. In
addition, Defendants were “controlling persons” within the meaning of Section 20(a) of the
Exchange Act and had the power and influence to cause the Company to engage in the unlawful
conduct complained of herein. Because of their positions of control, Defendants were able to and
did, directly or indirectly, control the conduct of BT Group’s business.
35. Defendants, because of their positions with the Company, controlled and/or
possessed the authority to control the contents of BT Group’s reports, press releases, and
presentations to securities analysts, and through them, to the investing public. Defendants were
provided with copies of the Company’s reports and press releases alleged herein to be misleading,
prior to or shortly after their issuance and had the ability and opportunity to prevent their issuance
or cause them to be corrected. Thus, Defendants had the opportunity to commit the fraudulent acts
alleged herein.
36. As controlling persons of a publicly traded company whose stock was registered
with the SEC pursuant to the Exchange Act, and was traded on the NYSE and governed by the
federal securities laws, Defendants had a duty to promptly disseminate accurate and truthful
information with respect to BT Group’s financial condition and performance, growth, operations,
financial statements, business, products, markets, management, earnings, and present and future
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business prospects, and to correct any previously issued statements that had become materially
misleading or untrue, so that the market price of BT Group ADRs would be based upon truthful
and accurate information. Defendants’ misrepresentations and omissions during the Class Period
violated these specific requirements and obligations.
37. Each of the Defendants is liable as a participant in a fraudulent scheme and course
of business that operated as a fraud or deceit on purchasers of BT Group ADRs by disseminating
materially false and misleading statements and/or concealing material adverse facts. The scheme:
(i) deceived the investing public regarding BT Group’s business, operations, and the intrinsic value
of BT Group ADRs; and (ii) caused Plaintiffs and other members of the Class to purchase BT
Group ADRs at artificially inflated prices.
CLASS ACTION ALLEGATIONS 38. Plaintiffs bring this action as a class action pursuant to Federal Rules of Civil
Procedure 23(a) and 23(b)(3) on behalf of themselves and all purchasers, other than Defendants,
of BT Group ADRs during the Class Period (the “Class”).
39. Excluded from the Class are Defendants herein, members of the immediate families
of each of the Defendants, any person, firm, trust, corporation, officer, director, or other individual
or entity in which any Defendant has a controlling interest or which is related to or affiliated with
any Defendant, and the legal representatives, agents, affiliates, heirs, successors-in-interest or
assigns of any such excluded party.
40. The members of the Class are so numerous that joinder of all members is
impracticable. The precise number of Class members is unknown to Plaintiffs at this time, but is
believed to be in the thousands. In addition, the names and addresses of the Class members can
be ascertained from the books and records of BT Group or its transfer agent. Notice can be
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provided to such record owners by a combination of published notice and first-class mail, using
techniques and a form of notice similar to those customarily used in class actions arising under the
federal securities laws.
41. Plaintiffs will fairly and adequately represent and protect the interests of the
members of the Class. Plaintiffs have retained competent counsel experienced in class action
litigation under the federal securities laws to further ensure such protection and to prosecute this
action vigorously.
42. Plaintiffs’ claims are typical of the claims of the other members of the Class
because Plaintiffs’ and Class members’ damages arise from and were caused by the same false and
misleading representations and omissions made by or chargeable to Defendants. Plaintiffs do not
have any interests antagonistic to, or in conflict with, the Class.
43. A class action is superior to other available methods for the fair and efficient
adjudication of this controversy. Since the damages suffered by individual Class members may
be relatively small, the expense and burden of individual litigation make it virtually impossible for
Class members to seek redress for the wrongful conduct alleged. Plaintiffs know of no difficulty
that will be encountered in the management of this litigation that would preclude its maintenance
as a class action.
44. Common questions of law and fact exist as to all members of the Class and
predominate over any questions solely affecting individual members of the Class. Among the
questions of law and fact common to the Class are:
(a) whether the federal securities laws were violated by Defendants’ acts as
alleged herein;
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(b) whether statements made by Defendants during the Class Period were
materially false and misleading and/or omitted material information;
(c) whether the price of BT Group ADRs was artificially inflated during the
Class Period; and
(d) the extent of injuries sustained by the members of the Class and the
appropriate measure of damages.
SUBSTANTIVE ALLEGATIONS 45. Defendant BT Group, formerly known as British Telecom, describes itself as one
of the world’s leading providers of communications services and solutions, serving customers in
180 countries. Its principal activities include the provision of networked IT services globally;
local, national and international telecommunications services to its customers for use at home, at
work and on the move; broadband, TV and internet products and services; and converged fixed-
mobile products and services.
46. BT Group is organized around six customer-facing lines of business: (i) Global
Services; (ii) Consumer; (iii) EE; (iv) Business and Public Sector; (v) Wholesale and Ventures;
and (vi) Openreach. According to BT Group’s 2016 annual report, filed on May 19, 2016 with the
SEC on Form 20-F (the “2016 Annual Report”), BT Group’s lines of business sell its products and
services and put its strategy into action.
47. On information and belief, the following chart depicts BT Global Services within
the organizational structure of the Company (and includes the positions of the Individual
Defendants):
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BT GROUP CORPORATE Ian Livingston, CEO (2008-2013) Gavin Patterson, CEO (2013-January 2019) Tony Chanmugam, CFO (2008-2016) Nick Rose, Audit Committee Chairman (2012- present)
↑
BT GLOBAL SERVICES Luis Alvarez, CEO (2012-2017) Richard Cameron, CFO (2014-2017)
↑
BT EUROPE
↑
BT ITALY
48. For the year ended March 31, 2016, BT Global Services contributed 34% in
adjusted revenue to BT Group, the largest percentage of revenue contributed to BT Group from
among these six lines of business.7 BT Global Services provides technology consulting,
outsourcing, and communications systems for more than 10,000 organizations and governments
worldwide. Defendant Alvarez became CEO of BT Global Services in 2012. Defendant Cameron
became CFO of BT Global Services in 2014. On information and belief, Cameron became Deputy
CFO of BT Group around the same time. During the Class Period, Corrado Sciolla (“Sciolla”)
was president of BT Global Services in Continental Europe, which includes BT Italy.
49. BT Group’s lines of business are not subsidiaries of the Company. The 2016
Annual Report includes a list of the Company’s subsidiaries. Although there are ten subsidiaries
7 By contrast, Consumer was the next largest line of business, contributing 24% of the Company’s external revenue. In 2015, before BT Group added EE as its sixth line of business, BT Global Services generated 38% of BT Group’s external revenue.
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listed under the BT Global Services line of business, such as BT Global Services Limited and BT
Global Services Korea Limited, BT Global Services itself is not listed as a subsidiary.
50. BT Group itself is just a holding company that executes its strategy through several
lines of business, one of which is BT Global Services. According to the 2016 Annual Report, BT
Group is a holding company and “[o]ur lines of business sell our products and services and put our
strategy into action.” In describing “[h]ow we make money,” BT Group explained that “[t]he main
output of our business is our portfolio of communications products and services. We make money
by selling these in the UK and around the world through our customer-facing lines of business.”
51. That BT Group’s lines of business, including BT Global Services, are not
considered subsidiaries is further demonstrated by the presence on the Operating Committee of the
CEO of each line of business, including Defendant Alvarez, the CEO of BT Global Services.
52. In its 2016 Annual Report, BT Group described the Operating Committee, in
pertinent part, as follows:
This is our key management committee. It meets weekly and is chaired by the Chief Executive. Brief details of its members are set out on these pages.
The Operating Committee has collective responsibility for running our business and delivering our strategy.
It monitors the group’s financial, operational and customer service performance and has cross-business oversight of the lines of business.
It also reviews the group’s principal risks and considers the potential threats to, and opportunities for, the business. It:
• develops BT’s strategy and budgets for the Board’s approval;
• recommends to the Board capital expenditure and investment budgets;
• allocates resources across BT within plans agreed by the Board;
• prepares and delivers major programmes; and
• reviews the senior talent base and succession arrangements.
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53. Thus, on information and belief, BT Group’s lines of business, including BT Global
Services, are one reporting level below the corporate level.
54. BT Italy is the second-largest business telecommunication operator in the Italian
market and purportedly “one of the leading service providers [of] integrated IT and IT solutions
dedicated to businesses and public organizations” in Italy. Headquartered in Milan and employing
approximately 1,200 people in Italy, BT Italy came about following a string of mergers and tie-
ups that started between BT Group and local operators in the 1990s. BT Italy was formed in 1995
under the Albacom brand (becoming BT Italy in 2006). BT Italy supports customers in three main
areas: Digital Customers, Digital Business, and Digital Employee.
Throughout the Class Period, Defendants Were Aware of Problems with the Control Environment at BT Italy 55. By no later than the beginning of the Class Period, Defendants knew that BT
Group’s operations in Italy suffered from control problems. Since fiscal year 2013, the year ended
March 30, 2013, BT Group’s Audit Committee had been continually assessing the “control
environment” in Italy. Although Defendants opaquely referenced control problems at BT Italy in
the Company’s SEC filings, and despite the rampant fraud taking place at BT Italy at that time,
Defendants Livingston, Patterson, and Chanmugam nevertheless falsely certified the efficacy of
BT Group’s internal controls.
56. For example, in BT Group’s 2013 annual report, filed on May 23, 2013 with the
SEC on Form 20-F (the “2013 Annual Report”), Defendant Rose, Chairman of the Audit
Committee, noted that the Audit Committee had given particular focus to BT’s operations in Italy.
Rose stated, in pertinent part, as follows:
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Internal controls and risk management
We give risk management special attention and during the year we heard from each line of business CEO on the key risks in their part of the business, as well as the actions they are taking to address them. We aim to cover all significant risks to the group not just the financial risks. One of our meetings focused solely on risk at which the Chief Executive discussed the group’s enterprise-wide risk management processes, and the key risks facing the group as a whole. We reviewed the internal control requirements under the Code including the risk management processes. You can find details of the Board and our review of the group’s systems of internal control and risk management on page 95.
We received updates on security and resilience, cyber security, BT’s networks, major contracts, BT’s operations in Italy, customer data handling, litigation trends, as well as updates on major litigation and competition and regulation.8
57. In BT Group’s 2014 annual report, filed on May 22, 2014 with the SEC on Form
20-F (the “2014 Annual Report”), Defendant Rose highlighted the amount of attention that the
Audit Committee had been focusing on BT Group’s operations in Italy. Defendant Rose stated, in
pertinent part, as follows:
This year the Audit & Risk Committee paid special attention to several overseas locations that are important to BT Global Services, including Italy and Brazil, to data security and to the increasing cyber security threat. We have received detailed presentations from key personnel in each of these areas and reviewed management’s mitigation plans.
58. Defendant Rose pinpointed the problems in the control environment at BT Group’s
Italian operations as a source of concern for the Audit Committee. Defendant Rose stated, in
pertinent part, as follows:
I reported last year that the committee had given particular focus to BT’s operations in Italy. We have continued to monitor the position there and significant progress has been made to improve the control environment.
59. In BT Group’s 2015 annual report, filed on May 21, 2015 with the SEC on Form
20-F (the “2015 Annual Report”), Defendant Rose again highlighted the amount of attention that
8 Unless otherwise noted, emphasis is added throughout.
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the Audit Committee had been giving to BT Italy. Defendant Rose stated, in pertinent part, as
follows:
I reported last year that the committee had given particular focus to BT’s operations in Italy and Brazil. We have continued to monitor the position and significant progress has been made to improve the control environment. We continue to keep under review the current trends of security risks facing BT and the progress made to manage these risks.
60. Defendant Rose also explained that the Audit Committee had an annual work plan,
which, in fiscal year 2015, sought greater detail on the governance and control of the Company’s
operations in Italy. Defendant Rose stated, in pertinent part, as follows:
The committee has an annual work plan. This includes standing items that we consider regularly, in addition to any specific matters that need the committee’s attention and topical items on which we chose to focus. For example, in 2014/15 we asked management to provide us with greater detail on the governance and control in relation to the BDUK regional fibre deployment programme, the finance transformation programme, operations in Italy and Latin America and reports on customer data handling, data security and cyber security.
61. Underscoring the Company’s growing concerns with its Italian operations,
BT Group’s Chairman, Michael Rake, stated that the Board’s focus for fiscal year 2015 had been,
among other things, “a visit to BT’s business in Italy.” The Company explained that the Board of
Directors visited the Italy business – the only visit outside of the U.K. specified in the Annual
Report. The Company stated, in pertinent part, as follows:
We visited our Italy business, and while there we reviewed operational matters with senior managers, met with employees as well as customers, government officials and opinion leaders. We also visited Openreach to see customer service in action and spent time on site visits with our engineers.9
9 Openreach’s headquarters is located in London.
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62. In BT Group’s 2016 Annual Report, the Company again implicitly admitted that
the control environment at BT Italy suffered from unspecified problems. Defendant Rose stated,
in pertinent part, as follows:
We have continued to monitor our operations in Italy and progress has been made to improve the control environment. We continue to keep under review the current trends of security risks facing BT and the progress made to manage these risks.
63. In an analyst report dated June 9, 2016, HSBC Global Research noted the Audit
Committee’s unusual level of review of the Italy operations over the previous four years. The
HSBC analyst stated, in pertinent part, as follows:
The Board’s Audit Committee notes that the ‘Control environment’ in Italy remains under review. This has been under continual assessment since FY13, and no further detail has ever been provided. Other countries have been monitored, but none have had this sustained level of review.
64. This “sustained level of review” of BT Italy by the Audit Committee is even more
unusual in light of the fact that BT Italy contributed only approximately one percent to BT Group’s
EBITDA and employed only about one percent of BT Group’s total workforce.10 It is reasonable
to infer that the Audit Committee would not be so focused on such a small part of the Company
unless the Audit Committee recognized serious, unresolved control problems at BT Italy.
The Truth Begins to Emerge 65. On October 27, 2016, BT Group issued a press release announcing its financial
results for the fiscal second quarter, the period ending September 30, 2016. For the quarter, the
Company reported revenue of £6,007 million, EBITDA of £1,888 million, operating profit of
£1,019 million, profit before tax of £873 million, and adjusted earnings per share of 7.2p.
10 EBITDA is an acronym for earnings before interest, taxes, depreciation, and amortization.
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66. However, BT Group announced that the Company would have to take a write-down
of £145 million (or approximately $191 million) due to “certain historical accounting errors” at its
BT Italy division. In that regard, the press release stated, in pertinent part, as follows:
BT Italia investigation
Following allegations of inappropriate management behaviour in our BT Italia operations, we have conducted an initial internal investigation. This included a review of accounting practices during which we have identified certain historical accounting errors and reassessed certain areas of management judgement.
We have written down the value of items on the balance sheet by £145m. This is our current best estimate of the financial impact based on our internal investigation. The write down relates to balances that have built up over a number of years and our assessment is that the errors have not materially impacted the group’s reported earnings over the previous two years. The amount has been charged as a specific item in our results for the quarter. As a non-cash item in the period it does not impact normalised free cash flow.
A full investigation of these matters is ongoing and we have appointed external advisers to assist with this. Appropriate action will be taken as the investigation progresses.
Our outlook is not affected.
67. In reaction to these announcements, on October 27, 2016, the price of BT Group
ADRs fell $0.57 per ADR, or 2.4%, to close at $23.25 per ADR, on heavy trading volume.
However, the Company continued to conceal the true extent of its problems.
68. On January 24, 2017, the Company issued a press release announcing an update of
its investigation into its Italian business and on the Company’s outlook. While the October write-
down of Italian operations was only £145 million, an amount the Company said would not affect
its full-year financial targets, the Company increased the write down to £530 million (or
approximately $700 million), a nearly four-fold increase. Additionally, the Company stated that
it now did not expect revenue to grow for the next two years after earlier forecasting it would, and
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estimated 2016-2017 free cash flow at £2.5 billion, as much as £700 million below the original
forecast.
69. BT Group explained that its investigations had revealed that “the extent and
complexity of inappropriate behaviour in the Italian business were far greater than previously
identified” and had “revealed improper accounting practices and a complex set of improper sales,
purchase, factoring and leasing transactions,” resulting in the “overstatement of earnings in our
Italian business over a number of years.” The Company stated, in pertinent part, as follows:
Since [the October 27, 2016 press release] we have progressed the investigation, which has included an independent review by KPMG LLP of the accounting practices in our Italian operations and our own comprehensive balance sheet review. These investigations have revealed that the extent and complexity of inappropriate behaviour in the Italian business were far greater than previously identified and have revealed improper accounting practices and a complex set of improper sales, purchase, factoring and leasing transactions. These activities have resulted in the overstatement of earnings in our Italian business over a number of years.
The investigation into the financial position of our Italian business is now substantially complete. The adjustments identified have increased from the £145m announced in our half-year update to a total of around £530m. We are still evaluating what proportion of the total adjustments should be treated as prior year errors, and what proportion should be treated as the reassessment in the current year of management estimates. Work is also ongoing to establish how these adjustments should be reflected in BT Group’s financial statements for the current and previous periods in light of applicable accounting requirements.
In addition, we would expect the matters described above to result in a reduction in our Q3 adjusted revenue and adjusted EBITDA of around £120m, and in a reduction in Q3 normalised free cash flow of around £100m. For 2016/17 as a whole, relative to our prior outlook, we would expect a decrease in adjusted revenue of around £200m, in adjusted EBITDA of around £175m, and of up to £500m of normalised free cash flow due to the EBITDA impact and the one-off unwind of the effects of inappropriate working capital transactions. For 2017/18, we would expect a similar annual impact to adjusted revenue and adjusted EBITDA as in 2016/17, with the EBITDA impact flowing through to normalised free cash flow. An updated outlook for the Group reflecting the above and other matters is set out below.
The EBITDA contribution of the Italian business included in the Group’s reported EBITDA for the financial year ended 31 March 2016 was around 1%.
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The improper behaviour in our Italian business is an extremely serious matter, and we have taken immediate steps to strengthen the financial processes and controls in that business. We suspended a number of BT Italy’s senior management team who have now left the business. We have also appointed a new Chief Executive of BT Italy who will take charge on 1 February 2017. He will review the Italian management team and will work with BT Group Ethics and Compliance to improve the governance, compliance and financial safeguards in our Italian business.
Further, we are conducting a broader review of financial processes, systems and controls across the Group. The BT Group Remuneration Committee will consider the wider implications of the BT Italy investigation.
70. With regard to the Company’s investigation and subsequent write-down, Defendant
Patterson stated, in pertinent part, as follows:
We are deeply disappointed with the improper practices which we have found in our Italian business. We have undertaken extensive investigations into that business and are committed to ensuring the highest standards across the whole of BT for the benefit of our customers, shareholders, employees and all other stakeholders.
71. The same day, BT Group held a conference call with analysts and investors to
discuss its investigation into the Italian business. In response to a question concerning the nature
of the Company’s unwinding of improper working capital transactions, Simon Lowth, the
Company’s current Group Finance Director, explained how BT Italy employees had engineered
improper factoring transactions.11 Lowth stated, in pertinent part, as follows:
The majority component [of unwinding the improper working capital transactions] was to repay essentially working capital loans to factoring companies where loans had been taken against receivables and, indeed, had been taken to pay suppliers. Those working capital loans [were] clearly improper and we are unwinding them, and that is overwhelmingly the most significant contributor to the onetime cash unwind in the 2016/2017.
11 Factoring is a commercial transaction in which an entity transfers its trade receivables to a third party, generally a financial organization, to obtain cash on an immediate basis. According to the Financial Times, and as explained herein, BT Italy’s management obtained loans on existing receivables and used the amounts received therefrom to reduce the existing receivable balances without recording the loans that produced the cash it received.
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There are some additional smaller contributors in unwinding some of the improper transactions such as sale and leaseback transactions which we have identified.12 But the main component is to unwind the inappropriate improper working capital loans. So the beneficiaries, to be specific, are the factoring companies who had extended those loans.
72. In response to another question about the immense scale of improper factoring that
had been going on in the Italian business, Lowth stated, in pertinent part, as follows:
[T]here are some genuine and sensible business reasons why companies will, from time to time, factor some elements of receivables, and that is a practice that is common in Italy. And it is a practice that has been undertaken by BT Italia in the past. The practices that we note here, and that we are unwinding, are more extensive receivables factoring often against inappropriate customer bases and debt.
And, secondly, more material here I’m afraid, was the factoring activity against payables, in effect, taking out working capital loans in order to settle creditors. And that is not a practice that we would tolerate anywhere in BT.
73. During the conference call, Patterson and Lowth had an exchange with a securities
analyst concerning the surprising magnitude of the write-down to EBITDA, stating, in pertinent
part, as follows:
James Ratzer - New Street Research LLP - Analyst
So just trying to get my head again around the magnitude of the GBP175 million hit to EBITDA from Italy, given you’re disclosing that the business was doing around GBP65 million of EBITDA previously, I was just trying to [confirm], that’s almost a tripling of the EBITDA impact from the performance in 2015/2016. I’d just like to get a waterfall on why the impact to EBITDA is so big. . . .
Gavin Patterson - BT Group plc - CEO
Lots of questions there; let me see if I can pick off some of them. First of all our commitment to global services, it’s a very disappointing situation in Italy; I can’t
12 Generally, a “sale/leaseback,” or sale and leaseback transaction, is one in which the owner of a property sells an asset, typically real estate or equipment, and immediately leases that same property back from the buyer for a specified time period. Typically, a seller (here, BT Group) enters into a sale/leaseback transaction to generate cash flow from appreciated long-term assets and still retain the right of use. According to Reuters, and as explained herein, BT Group contrived sale-and-leaseback transactions to artificially inflate BT Italy’s sales and profit margins.
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underline that enough. It is a complex situation that involved a lot of people. It’s been going on for a number of years. It’s very, very disappointing.
That has taken a business that we thought was profitable but, in truth, has probably been unprofitable for a number of years. That’s why you’re seeing such a significant swing of GBP175 million. . . .
Simon Lowth - BT Group plc - Group Finance Director
Just to finish on the first part of your question, the EBITDA in Italy was slightly higher than the number you’d suggested, another GBP20 million, GBP30 million or so. And the impact of the GBP175 million is because the result of the improper accounting, the improper transactions, was to significantly understate the costs in the business, some of which was being capitalized and, therefore, not running through EBITDA. Other parts of it were simply costs that were not being accrued properly into the accounts.
The impact, therefore, is greater than the previously reported EBITDA.
74. Moreover, on January 24, 2017, in an article entitled “Dodgy Italian Job Savages
BT Earnings, Share Price Tanks,” LightReading, a communications-industry networking website,
reported that BT Group suspended a number of senior executives in Italy, including Gianluca
Cimini (“Cimini”), the former BT Italy CEO, and Stefania Truzzoli (“Truzzoli”), BT Italy’s COO,
and appointed a new CEO for BT Italy. On that same day, in an article entitled “BT European
Chief to Resign Over Italian Scandal,” the BBC reported that Corrado Sciolla, President of BT
Global Services – Continental Europe, was expected to resign shortly. Sciolla had previously been
CEO of BT Italy from 2006 until January 2013.
75. In reaction to these disclosures, on January 24, 2017, the price of BT Group ADRs
fell $5.05 per ADR, or approximately 21%, to close at $19.38 per ADR, on extremely heavy
trading volume.
76. On January 27, 2017, BT Group held an earnings conference call with analysts and
investors to discuss BT Group’s financial performance for the fiscal third quarter of 2017. During
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the call, Patterson stated: “EBITDA was down 78% reflecting the impact of Italy. That was taken
in the quarter. Excluding the Italian business, EBITDA was down 8%.”
77. On January 28, 2017, the U.K.’s Telegraph reported that a KPMG investigation
found that the misconduct at BT Italy had been going on for most of the past 10 years.
A BT Group Vice President Was Informed of Accounting Problems, Bullying and Pressure to Meet Difficult Bonus Targets at BT Italy in November 2015 78. On March 30, 2017, Reuters reported that in November 2015, three BT Italy
employees warned their Madrid-based supervisor, BT Global Services head of European sales
Jacinto Cavestany,13 about possible accounting problems at BT Italy. The source told Reuters that
he and two BT Italy colleagues had met Cavestany on the sidelines of a Company gathering in
Munich, Germany in November 2015. The three told Cavestany that they were worried something
was wrong with the unit’s financial results. The source told Reuters that the three mid-level Italian
managers expressed to Cavestany their “suspicions regarding the accounts” in Italy, and “raised
concerns regarding the activities of the Italian senior management.” They also complained to
Cavestany of bullying by local management, especially by then-BT Italy CEO Cimini, and
pressure to meet difficult bonus targets, the source said. The three employees complained to
Cavestany of a climate “of terror” created by Cimini. The source added that Cavestany had replied
that the three should help him to steer Cimini “in the right direction.”
79. In January 2017, however, BT Group claimed that it began an internal investigation
after receiving allegations in late summer 2016 of inappropriate behavior at BT Italy – almost a
year after the Munich meeting with Cavestany.
13 According to his LinkedIn profile, Cavestany has held the title “VP Iberia & Head of Sales Europe and Latam [Latin America] at BT Global Services” from January 2014 through the present.
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80. BT Group also said in response to Reuters’ questions that it had “received reports
of bullying cases at BT Italy at the start of 2016. Senior Human Resources officials visited the
Italian offices and investigated.”14
81. According to a person familiar with BT Group’s internal investigation, the probe –
codenamed Project Crane – began as an inquiry into bullying and interviewed about 40 employees.
It concluded that Italian management had been responsible for “bullying and inappropriate
behavior,” according to a one-page summary of the findings reviewed by Reuters.
82. Reuters reported that during or as a result of Project Crane, BT uncovered financial
irregularities, current and former employees of BT Group said. BT Group then hired KPMG to
look at the irregularities. Neither the Project Crane report nor the KPMG report has been released
publicly.
83. Despite this undisclosed, adverse information concerning BT Italy known to BT
Group’s senior company representatives at the time – in which they learned that the scope of
problems in the control environment at BT Italy had expanded – on May 19, 2016, Defendant
Rose misleadingly stated in BT Group’s 2016 Annual Report: “We have continued to monitor our
operations in Italy and progress has been made to improve the control environment.”
84. According to Reuters, the source involved in the Munich meeting, as well as four
current employees not involved in that meeting, “reconstructed according to their direct knowledge
and accounts by colleagues” certain details of how they say the deception worked. Ex. A at 2.
The five sources said a network of people at BT Italy had exaggerated revenues from certain BT-
14 See Exhibit A (attaching a certified translation of “ESCLUSIVA - BT Italia, nei bilanci dal “lavandino” alle “bifatture.” Primo Sos a novembre 2015,” published by Reuters on March 30, 2017). The article is also available at: https://it.reuters.com/article/topNews/idITKBN1711N4- OITTP (last visited October 1, 2018).
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installed phone lines, faked contract renewals and invoices, and invented bogus supplier
transactions in order to meet bonus targets and disguise the unit’s true financial performance. All
of these practices had been going on since at least 2013, they added. Reuters reported that two
sources familiar with a report prepared by KPMG as part of its independent review said KPMG
had found these same types of irregularities.
85. For example, BT Italy earned income from toll-free hotlines provided to corporate
clients. This income varied according to how much traffic a hotline carried: the busier the line,
the more money a client paid to BT Italy. According to four of the sources, client-account
managers exaggerated hotline traffic by misstating them in internal records. They did this in order
to meet aggressive internal targets and collect their bonuses, they added. Clients were unaware of
the deception and only paid revenues due on the actual traffic recorded, they said.
86. BT Italy’s purchasing office also colluded to mask the true state of the business,
making fake purchase orders to suppliers with no intention of receiving goods, four sources said.
No cash changed hands, but BT Italy would suddenly cancel the order and ask the supplier to issue
a credit note by way of a refund, these sources said. Some bogus credit notes were then sold to a
factoring company for cash, said one of the sources, a current client-account manager at BT Group.
87. One current employee said multiple internal accounting systems, a legacy of BT
Group acquisitions in Italy, enabled staff to inflate revenues by entering two duplicate invoices for
the same client. The genuine invoices were entered into one system and mailed to clients; the
duplicates went into another system, according to this source.
88. A source familiar with an investigation by Italian prosecutors said the accounts of
the former and current employees matched the prosecutors’ findings on the practice of faking
income.
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89. The deception took place in an atmosphere in which employees were criticized and
shouted at by a few top managers in front of colleagues for failing to meet targets, all five BT Italy
sources said. They said the pressure to hit targets rose after Cimini became the unit’s chief
executive in April 2013; he was formerly its CFO. For example, the current BT Italy client-account
manager said his 2016-17 goals, set early in 2016, required him to more than double overall
revenues from his clients. In a staff meeting in Milan, one eyewitness source said, Cimini spoke
about the need to meet targets and demonstrated how no employee was indispensable. He dipped
a finger into a glass of water and remarked: “What happens if I put my finger inside and take it
out? Absolutely nothing – the same if you left the company.”
90. Reuters’ March 30, 2017 article, whose title is translated as “EXCLUSIVE – BT
Italia, from the ‘sink’ to ‘double billing’ on its balance sheets. First Sos in November 2015,”
provides additional details of the fraud at BT Italy and the knowledge thereof of BT Group.
91. Reuters detailed the pressure at BT Italy to meet ever more difficult targets:
Two of the internal sources explain that the setting of ever more difficult targets also contributed to increasing the pressure to the limit. A BT Italia internal document seen by Reuters states that in 2013, a team of 10 sales employees was given a target of 41 million orders in one year. The BT ex-employee says that he is aware that just two years later, the annual target for a similar team of one of the largest Italian telephone companies was two million orders. Another of the sources, an account manager, states that in the last fiscal year ending March 31, his annual sales target increased by more than 100%.
92. According to the Reuters article, “[Defendant] Patterson . . . attributed
responsibility to a limited group of Italian managers who ‘kept London in the dark’ regarding the
fraudulent accounting practices. But the ex-CEO Gianluca Cimini responds that everything ‘was
verified and authorized by the parent company.’” Furthermore, according to Cimini, “the
financial transactions executed during my leadership (I recall that I became CEO only in 2013)
were properly verified and authorized by the parent company and by the audit units and firms.”
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93. Furthermore, according to the article, “[a]nother internal source adds that he
considers it ‘impossible’ that London had no way of realizing what was happening in Italy, noting
that the accounting software system at BT Italia is ‘open’ to the parent company and it is possible
to conduct checks by logging into the system at any time.”
94. Reuters cited an additional internal source, who described how BT Italy made
fictitious purchase orders in exchange for credit notes. According to the source, the fictitious
purchases were obvious to spot:
The latter source lastly claims that it would have been practically impossible for an auditor not to realize that something was amiss, as these purchases were all written in the same way, only changing the numbers and occasionally the supplier. What is more, says the source, both the purchase request as well as the purchase order and the cost acquisition were all performed by the same person in the finance department.
“You don’t even need to check the entire balance sheet, you just need to concentrate on the months of March and April each year,” adds the source, referring to the fact that the majority of the transactions were concentrated between the close and opening of the fiscal year.
95. Reuters described how BT Italy engaged in the risky practice of “sink” or factoring
trading, reporting as follows:
This is a practice to increase revenue, called “sink” by the BT Italia staff. In practice, a company makes itself a “box mover” between a creditor and a debtor and collects the receivable. It is not illegal, obviously, but it is risky, and one of the sources highlights how in recent years the use of this item has increased by 10 times on the BT Italia balance sheets. Another internal source notes that this item went from 2% of BT Italia’s annual revenue in the years prior to 2013 to more than 20% in the fiscal year from April 2015 to March 2016. This latter source adds that on more than one occasion, these transactions were recorded on the UK intranet by the person who had conducted them as commercial transactions with a margin of 50-60%, when the actual profit margin from the factoring trading was around 1.5%.
96. Reuters also explained that BT Italy was able to employ the accounting trick of
double or triple billing because it had dozens of different accounting IT systems, which was the
result of a reckless decision by BT Group that facilitated the fraud. Reuters’ source “highlight[ed]
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that the double or triple billing was rendered simpler by the fact that at BT Italia there were dozens
of different independent accounting software systems. This is because each one of the smallest
companies acquired by BT over the years has maintained its original software system.” “But,”
according to the source, “if there is no integrated system within the individual country units at
British Telecom, not just in Italy, it is a decision by BT London.”
97. Reuters cited a source who described a practice consisting of “inflating the value
of the orders that were recorded in the internal system and sent to London at the time of signing a
contract with a client,” as follows:
One of the four sources claims that one practice consisted of inflating the value of the orders that were recorded in the internal system and sent to London at the time of signing a contract with a client. This involved so-called “claims”. A salesperson executes a contract with a company and does not state its value, which is valued by the head of his or her team, then by the product manager, then by the heads of BT Italia and lastly sent to London. The parent company pays the bonuses if the orders reach or exceed the set target. The bonus is – for everyone – 50% of the fixed gross compensation. According to the source, in fiscal year 2015 claims were sent to the parent company for 300 million orders, which if true would translate into an actual figure of at least 10 times less. The source cited the examples of the numbers “199” and “800”, contracts that the telephone operator signs with the companies that intend to use these numbers. The earnings for the operator are measured by the minutes, generally a few cents (in euros) per minute, which the company pays to the operator based on a telephone minute counter. At the time of signing these contracts, according to the source, a value was stated, let’s use 10, which contributed toward reaching the total order target. No one, explains the source, then went to check, one year later, how much money was then truly recorded on the balance sheet, if 10 or 1. The fact that the orders were conspicuous was useful to Italy for reaching the bonuses, but it was obviously also a positive for London, according to the source, as the orders are one of the main items supporting the stock price.
Ex. A at 3.
Italian Prosecutors Named Defendants Alvarez and Cameron as Suspects in the Criminal Investigation 98. On February 13, 2019, Reuters reported that in a document prepared by Italian
prosecutors – and seen by Reuters – that “wraps up the preliminary investigation,” “prosecutors
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for the first time have named group executives as suspects in the case . . . Two of them were based
in London. The document also lists BT Italy as a subject of the investigation, no longer as a
damaged party.” The article is headlined: “Exclusive: BT executives knew of accounting fraud in
Italy unit – prosecutors,” Reuters, Feb. 13, 2019 (attached as Exhibit B at 1). The two London-
based “group executives” named as suspects in the criminal case are Defendants Alvarez and
Cameron.
99. Reuters reported, in pertinent part, as follows:
In the document, prosecutors name Luis Alvarez and Richard Cameron, respectively former chief executive and former chief financial officer of BT Global Services - one of the biggest divisions of BT Group - and Corrado Sciolla, formerly BT’s head of continental Europe, among an expanded list of 23 suspects. Alvarez and Cameron were based in London, while Sciolla was in Milan.
The three are accused of setting unrealistically high business targets and of complicity in false accounting at BT Italy, which formed part of the [BT] Global Services division, according to the document.
Exhibit B at 1.
100. Also on February 13, 2019, the U.K.’s Daily Telegraph reported that Alvarez,
Cameron, and Sciolla “all knew about falsely inflated sales figures at BT Italia, according [to]
documents issued by authorities in Milan.” Former BT bosses named as suspects in Italian fraud
scandal, Daily Telegraph, Feb. 13, 2019 (attached as Exhibit C at 3).
101. The Daily Telegraph noted that “[p]reviously only local executives had been named
by prosecutors, but Mr Alvarez and Mr Cameron were both based in London.” Id. Moreover, the
Daily Telegraph reported that “Mr Alvarez’s knowledge of wrongdoing in Italy previously came
under scrutiny when he cashed in £675,000 of BT shares in December 2016, after the company
had flagged up concerns but before the scale of the scandal had been uncovered and admitted to
investors.” Id. at 4.
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102. On April 23, 2019, Reuters reported that the “criminal investigation into accounting
fraud inside British Telecom’s Italian unit has uncovered more evidence of what prosecutors say
was the involvement of senior executives in artificially inflating the division’s financial
performance.” Exclusive: British Telecom’s Italian job had London roots, say investigators,
Reuters, Apr. 23, 2019 (attached as Exhibit D at 1).
103. Reuters reviewed emails seized by Italian financial police demonstrating that top
BT Global Services executives, including Cameron, were at the heart of the problem. Reuters
reported, in pertinent part, as follows:
Emails seized by the police and reviewed by Reuters show for the first time why Italian prosecutors allege that top BT employees were at the heart of the problem, contrary to the company’s assertions that managers at head office knew nothing about the misconduct.
“A series of emails between the top financial executives of BT Plc and managers of the (Italian) unit point to the existence of ‘insistent’ requests by the leadership of the parent company aimed at achieving ambitious economic targets, even using aggressive, anomalous and knowingly wrong accounting practices,” Italy’s financial police said in a 353-page report.
The report has not been made public and its contents have not previously been reported.
The report contains emails from Brian More O’Ferrall, currently finance director at BT Wholesale, the company’s business-to-business division, in which he asks colleagues in Italy to find ways of adjusting their accounts to boost profits.
At the time, O’Ferrall was chief financial officer (CFO) for BT Europe, the European part of Global Services, one of the company’s biggest businesses.
* * *
In the past, BT has blamed former executives in Italy for the bookkeeping irregularities, saying they had kept their bosses in London in the dark about what was going on[.]
Id.
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104. In the April 23, 2019 article, Reuters reiterated that Italian prosecutors named three
top BT executives among an expanded list of 23 suspects allegedly involved in the debacle, i.e.,
Alvarez, Cameron, and Sciolla; Brian More O’Ferrall (“O’Ferrall”) was not on that list. Reuters
reported that “[p]rosecutors are not investigating O’Ferrall because he was not on BT Italy’s board
and did not sign off on the division’s accounts in the four years, 2013-2016, under scrutiny,
according to a source familiar with the probe.” Id. at 2. This implies that Alvarez and Cameron
did sign off on BT Italy’s accounts and/or were on BT Italy’s board during the years under scrutiny.
105. Reuters stated that O’Ferrall was appointed chairman of BT Italy in February 2017,
taking up the post after an internal investigation was launched into the unit’s bookkeeping. He
stepped down from that role in November 2018. Id.
106. According to Reuters, the Italian financial-police report quoted emails from
O’Ferrall, stating, in relevant part, as follows:
In their report, Italy’s financial police reference an email dated Aug. 5, 2016, from O’Ferrall in which he says that [Richard] Cameron wanted operating profit to increase by 700,000 euros and suggests to Luca Sebastiani, then CFO at BT Italy, along with other colleagues across Europe, that they capitalize labor costs as a solution.
“All, I have an urgent request from Richard to find another €700K,” O’Ferrall wrote to Sebastiani and his counterparts in Germany, Benelux, France, Spain, Hungary as well as Simon Whittle, then finance manager, reporting and consolidation, at Global Services Europe.
“Please can you look at all opportunities and come back to me and Simon asap. Labour capitalization? Regards Brian,” says the email, whose subject line reads “Another €700K EBITDA needed in P4.”
P4 refers to the month of July.
* * *
Sebastiani’s lawyers, Giammarco Brenelli and Federico Riboldi, told Reuters the email was significant because “along with many others, it shows the constant and unrelenting pressure the parent company was putting on European subsidiaries with regards to accounting policies.”
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Sebastiani is among the 23 suspects in the case.
In another email, dated April 8, 2016 and sent to Sebastiani’s predecessor Alessandro Clerici and Rosa Ronda Andres, CFO for BT Global Services in Spain, O’Ferrall says he has received a request “to find another €1 million of capitalization for 15/16.
“Can either of you accommodate this? €500K each?” the e-mail says.
Id. at 2-3.
107. Reuters explained that “capitalizing costs is an accounting method that allows
companies to amortize a cost related to an asset over time as opposed to book it as an expense
in the income statement when the cost was incurred. The technique allows companies to
smooth out expenses over time, and therefore boost profits.” Id. at 3. Reuters quoted an
accounting expert who had seen the BT emails and opined that some of them constituted
“significant evidence” of wrongful accounting:
“You can’t capitalize labor costs to improve earnings ex post (after the event), just to boost your accounts,” said Gian Gaetano Bellavia, an accounting expert who has in the past worked as a consultant for the Milan prosecutors. He is not involved in the BT Italy investigation.
Bellavia said it was common for top executives of a parent company to ask managers of subsidiaries to “always do more.” But he said some of the BT emails, which Reuters showed him a copy of, constituted “significant evidence” of wrongful accounting.
* * *
The police report says the alleged accounting irregularities could have had an impact on the price of BT shares and this may justify adding market manipulation to the list of alleged crimes being investigated.
However, Milan prosecutors decided not to take this step on jurisdiction grounds, a source with direct knowledge of the probe said, since BT shares are listed in London and such allegations would have to be investigated by UK authorities.
Id. at 4.
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108. CommsRisk, a website that reports on the risks faced by electronic communications
providers and their customers, analyzed the developments that had been disclosed by Reuters
concerning Cameron and BT personnel and noted that “[w]rongly capitalizing operating costs is
one of the oldest tricks in the manual for dodgy accountants. . . . The Worldcom accounting
scandal also relied on the simple but deliberate misclassification of operating costs as a capital
investment.” Eric Priezkalns, “BT’s Itialian Fraud Allegedy Encouraged by UK Execs,”
COMMSRISK (Apr. 24, 2019) https://commsrisk.com/bts-italian-fraud-allegedly-encouraged-by-
uk-execs/.
109. Reuters also reported, in the Italian version of the same article published on
April 23, 2019, the contents of BT Italy CFO Sebastiani’s statements to the Italian prosecutor
regarding the involvement of the “parent company” in London, stating, in pertinent part, as
follows:
The statements of Luca Sebastiani, the former CFO of BT Italia, and some seized e-mails also helped to convince the Milan Prosecutor’s Office to involve three top global managers of British Telecom in the criminal investigation into alleged accounting irregularities of the Italian unit of the British Plc group.
This is what arises from some of the hundreds of pages of documents read by Reuters, which were filed for the availability of lawyers by the Public Prosecutor’s Office on 13 February 2019, as part of the closure of the investigation on allegations of false accounting, invoices for non-existent transactions and public procurement fraud involving 23 people on different counts and British Telecom Italia (MI:TLIT), pursuant to Law No. 231.
Sebastiani, who is also one of the 23 suspects, filed a 27-page brief in February 2018 and filed three interrogation records (from April, May and June of that year) with the Public Prosecutor, Silvia Bonardi. Therein, he argues, among other things, that “the organizational model was of the ‘matrix’ type, so that the parent company managed the different corporate functions hierarchically, and each had a European leader” while all accounting decisions were shared with London.
* * *
“All the main economic and financial transactions carried out by BT Italia were shared with the heads of the European Region (in particular the President for
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Europe Corrado Sciolla and the Europe CFO Europe Brian More O’Ferrall) and even further, with Luis Alvarez (Global Service CEO) and Richard Cameron (Global Service CFO)”, the former BT Italia CFO’s brief states.
* * *
“The head office of the parent company had known for years that there was a significant amount of uninvoiced positive income components (invoices to be issued) in BT Italia. This situation was in the interest of the group, we read in Sebastiani’s statements which, citing a series of filed internal documents, adds that “it is clear that the parent company is under constant pressure to obtain economic and financial results that are convenient for its purposes, perhaps adjusted by means of correction entries or adjustments.”
The former Italian CFO furthermore states, “not only was the British office informed, it has been aware of the critical nature of some issues for some time . . . so that the accounting items ‘invoices to be issued’ and ‘receivables’ were considered to be communicating vessels, whereby a decrease in one item corresponded to the increase in another.”
Exhibit E at 1-2 (attaching a certified translation of “Inchiesta BT Italia, ex Cfo ed email chiamano
in causa top management,” published by Reuters on April 23, 2019).
110. In the brief Sebastiani submitted to the Italian Public Prosecutor, he described a
capitalization of labor costs as a “maneuver contrary to accounting principles.” Id. at 2.
111. The Italian version of the April 23, 2019 Reuters article adds further commentary
from Gian Gaetano Bellavia (“Bellavia”), an “expert in Criminal Economic Law and technical
consultant to the judiciary and prosecution.” Ex. E at 3. Bellavia stated:
“The cost of labour cannot be capitalised ex post facto to improve profit, simply in order to inflate a budget.” In this case, they are saying that they need a certain figure and therefore suggest that capitalising costs would be a solution- said Bellavia (he is not involved in these proceedings). Ebitda provides an indication of a business’ earnings but should increase only on the basis of actual revenues. I can see from this second email that there is no underlying basis for this.”
Id.
112. In a series of emails dated September 2016 involving Sebastiani and Cimini, and
identified by the Italian financial police, O’Ferrall requested BT Italy to increase the earnings
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estimate for the fiscal year 2016/2017. In those emails, it is also stated that Cameron “is not willing
to accept anything less.” Ex. E at 3; see also Ex. D at 4. Although Bellavia said that the
aforementioned email concerning Cameron is “less problematic” than the others cited in the Italian
financial-police report because the “outlook is not always disclosed to the public, it often simply
reflects the feelings of management,” Ex. E. at 3, the email demonstrates the pressure that Cameron
personally exerted over BT Italy.
113. Separately, on April 27, 2019, the London-based Daily Mail reported that it had
reviewed BT Group’s internal report of the accounting fraud at BT Italy, which had been prepared
by KPMG in January 2017 but was never publicly disclosed. See British chiefs in firing line over
BT accounting fraud scandal in Italy, Daily Mail, Apr. 28, 2019 (attached as Exhibit F at 1).
According to the Daily Mail, the internal report “raises serious questions about how thoroughly
bosses in London scrutinised figures from BT Italia before the fraud was uncovered.” Id. The
news outlet reported, in pertinent part, as follows:
[The internal report] also revealed executives at BT global services did not sufficiently challenge numbers submitted by Italian staff. Initial inquiries from London were ignored or met by responses that were ‘not satisfactory’ or lacking in detail, it said, but global services staff often failed to ‘follow through’ to get answers.
Id. at 2.
114. A BT spokesman told the Daily Mail: “Based on KPMG’s recommendations,
and our own observations, we have taken steps to improve our controls both within Italy, and
at group level.” Id. at 3. Thus, BT Group tacitly admitted the veracity of the Daily Mail’s
reported facts concerning BT Global Services.
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BT Group Filed a Criminal Complaint Against Five Former Employees 115. On April 21, 2017, Reuters reported that BT Group itself filed a criminal complaint
with Italian prosecutors on March 21, 2017 over the accounting scandal, accusing several former
BT Italy executives and other employees of breaking company rules and unlawful conduct.
Reuters first saw the complaint, which typically is not a document that is made publicly available,
in mid-April. Reuters reported that the complaint was consistent with allegations of irregularities
and bullying that Reuters first made public on March 30, 2017.
116. As described by Reuters, BT Group’s complaint alleges misconduct against three
former senior executives of BT Italy and two other former employees. It alleges former BT Italy
CEO Cimini was responsible for grave violations of corporate governance rules in relation to
contracts and suppliers, and for using intimidating behavior when dealing with staff. It alleges
former COO Truzzoli manipulated results that were used to award staff bonuses and that she also
manipulated data that was communicated to BT Europe during the internal presentation of results.
117. The BT Group complaint also alleges former BT Italy CFO Luca Sebastiani failed
to report financial irregularities to his managers and also induced an employee responsible for
invoicing at BT Italy, Giacomo Ingannamorte (“Ingannamorte”), to issue fake invoices. It further
alleges Luca Torrigiani (“Torrigiani”), formerly responsible for government clients and other large
accounts in Italy, violated BT Group’s rules in the manner in which he chose suppliers and for
receiving a payment from an agent of BT Italy. The complaint said Cimini, Truzzoli, Sebastiani,
Ingannamorte, and Torrigiani were all fired.
118. In May 2017, Defendant Alvarez, CEO of BT Global Services, which includes the
Italy unit, left the Company. Alvarez had been in that role since October 2012 and with BT Group
since 1999.
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BT Group Faces an Italian Government Investigation 119. BT Group also faces a government investigation by the Guardia di Finanza, an
Italian law enforcement agency responsible for dealing with financial crimes. The Company’s
director of ethics and compliance, Gareth Tipton, met Italian magistrates in Milan in the second
half of February 2017, two sources with knowledge of the investigation told Reuters. BT Group
also gave prosecutors computer records collected during an internal investigation at the Italian unit
in late summer 2016, the sources said. In May 2017, the Guardia di Finanza raided BT Italy’s
office in Milan and seized boxes of documents. Italian authorities started interviewing former BT
employees in June 2017.
120. On July 1, 2017, the Financial Times reported that raids had been carried out in
May at key BT Group suppliers, including IBM, building products supplier ITF Srl and IT
company Var Group. According to the Financial Times, none of the suppliers raided in May is
under investigation but prosecutors have said that they are looking at whether some purported BT
Italy transactions involving them were fake. The Guardia di Finanza is scrutinizing a number of
transactions, including a so-called “leaseback” deal in 2015 between BT Italy, ITF, and a unit of
IBM, according to a person with direct knowledge of the investigation. Citing a person with “direct
knowledge” of Guardia di Finanza’s investigation, the Financial Times reported that BT Italy sold
equipment to ITF for approximately €32 million and ITF then sold the equipment to IBM, which
then leased the equipment back to BT Italy for approximately €36 million.15 The transaction
involved approximately 80,000 pieces of gear, including computers and servers. But BT Group
has not been able to locate serial numbers for all of the equipment, which has led Italian prosecutors
15 As of the date of the filing of the First Amended Complaint, 1 Euro was equal to 1.17 U.S. Dollars.
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to probe whether the entire transaction may have been fake. It is unclear why BT Group would
have pursued a deal in this way.
121. At the heart of the case, according to the Financial Times, Italian investigators are
scrutinizing the actions of Cimini, Truzzoli, and Ingannamorte, as well as other former employees
in the division. They are being investigated in connection with allegations of fraud, double billing,
fake contract renewals, inflated revenues, bogus transactions linked to bonus targets, and
concealment of BT Italy’s real financial performance, according to two people with direct
knowledge of the case.
122. As discussed in ¶¶98-99, on February 13, 2019, Reuters reported that in a document
prepared by Italian prosecutors that “wraps up the preliminary investigation,” “prosecutors for the
first time have named group executives as suspects in the case . . . Two of them were based in
London. The document also lists BT Italy as a subject of the investigation, no longer as a damaged
party.” Exhibit B at 1. In the document, prosecutors name Defendants Alvarez and Cameron
among an expanded list of 23 suspects. They are accused of setting unrealistically high business
targets and of complicity in false accounting at BT Italy, which formed part of the BT Global
Services line of business, according to the document.
BT Group Provided the Details of Its Financial Improprieties in the 2017 Annual Report 123. On May 25, 2017, BT Group filed its 2017 annual report with the SEC on Form
20-F (the “2017 Annual Report”), setting forth the details of the Company’s admissions associated
with its financial improprieties during the Class Period. The Company stated that adjustments
relating to the investigation of its Italian business amounted to £268 million for errors in prior
years, for which it revised prior periods, a specific-item charge of £245 million for changes in
accounting estimates, and a charge for investigation costs of £15 million. The Company also stated
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that correction of the full £268 million in the current year would materially misstate the current
year.
124. In the 2017 Annual Report, BT Group discussed the findings of its investigation of
BT Italy, stating, in pertinent part, as follows:
During the year we identified inappropriate behaviour in our Italian business. Our investigation identified collusion and override of controls within our Italian business and that our monitoring controls did not identify the circumvention and override, resulting in the misstatement of results going undetected for a number of years. As a result of our US listing we are required to make certain assessments of our controls as of 31 March 2017 for the purposes of Sarbanes-Oxley. Despite the remediation steps we took, the controls had not operated for sufficient time to allow assurance testing to confirm their effectiveness under Sarbanes-Oxley. We have therefore concluded for these purposes that our controls were ineffective as of 31 March 2017 due to a material control weakness with regard to our Italian business.
125. The Company also explained its response to the fraud identified during the
investigation. BT Group stated, in pertinent part, as follows:
BT Italy – our response
In response to the inappropriate behaviours we identified in our Italian business, we suspended a number of BT Italy’s senior management team who have now left the business. The president of our European operations has also left the business. We have appointed a new president of our European operations and a new CEO and CFO of BT Italy, from outside the Italian executive management team.
We appointed KPMG, with support and oversight from our Legal, Governance and Compliance function and Freshfields Bruckhaus Deringer, reporting directly to both the chair of the Audit & Risk Committee and BT Group chairman, to perform an independent investigation of the systems and controls relating to our Italian business. We also conducted a broader review of financial processes, systems and controls across the group. We are acting on both the recommendations of KPMG and our own observations and have taken steps to improve our controls within Italy. We have also taken steps to enhance our wider controls that monitor our overseas operations in our shared service centres, Global Services and at a group level.
* * *
The new CEO and CFO of BT Italy will continue to review the Italian management and finance teams and work with BT Group Ethics and Compliance to improve the governance, compliance and financial safeguards. Going forward, we will also continue to rotate senior management among countries to ensure an independently
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governed and rigorously controlled organisation throughout all parts of Global Services.
126. The Company also stated that its operating cash outflow of £245 million was £396
million worse than the previous year, as it had unwound the effects of improper working capital
transactions in its Italian business.
127. In the 2017 Annual Report, BT Group provided a summary of adjustments
reconciling the fiscal 2016 and fiscal 2015 financial years from previously published to the revised
position reflecting the three prior year revisions. The Company presented the adjustments to its
Group income statement as follows:
Italian business For the year ended As published adjustment Revised 31 March 2016 £m £m £m Revenue 19,042 (30 ) 19,012 Operating costs (15,307 ) (92 ) (15,399 ) Operating profit 3,735 (122 ) 3,613 Profit before tax 3,029 (122 ) 2,907 Profit for the period 2,588 (122 ) 2,466 Earnings per share – basic 29.9p (1.4 ) p 28.5 p Earnings per share – diluted 29.6p (1.4 ) p 28.2 p
Italian business For the year ended As published adjustment Revised 31 March 2015 £m £m £m Revenue 17,979 (11 ) 17,968 Operating costs (14,499 ) (67 ) (14,566 ) Operating profit 3,480 (78 ) 3,402 Profit before tax 2,645 (78 ) 2,567 Profit for the period 2,135 (78 ) 2,057 Earnings per share – basic 26.5p (1.0 ) p 25.5 p Earnings per share – diluted 26.1p (1.0 ) p 25.1 p
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Chanmugam Left BT Group Under Suspicious Circumstances 128. According to the 2017 Annual Report, Chanmugam retired from BT Group on July
13, 2016. Under the terms of his service contract, he continued to receive his salary and contractual
benefits until the end of his notice period, being March 31, 2017, i.e., the end of fiscal year 2017.
129. On information and belief, however, either BT Group forced out Chanmugam
during the course of its investigation of BT Italy in the summer of 2016, or he quit before BT
Group could do so itself.
130. According to the 2017 Annual Report, “in the summer of 2016” BT Group
“received a whistle-blower report of inappropriate behaviours in our Italian business.” The
Company then “instigated an investigation[.]” The timing of Chanmugam’s departure from BT
Group during the summer of 2016, when viewed in light of the Company’s claw-back of
Chanmugam’s bonuses twice – not only those reflecting the amount attributable to the revised
financial performance, but all of his DBP awards – (see below), raises a plausible inference that
Chanmugam was either fired or abruptly left the Company before his role in connection with the
BT Italy fraud was revealed.
131. Indeed, according to a January 26, 2017 article in The Financial Times, “questions
have also been raised over Tony Chanmugam, the former finance director, who quit BT days
before the alarm was raised. Mr. Chanmugam, BT’s chief financial officer for eight years from
2008 to 2016, was replaced by Simon Lowth in July last year. The whistleblower alerted
executives at around the same time.”
BT Group Clawed Back the Pay of Defendants Patterson and Chanmugam 132. As a result of the fraud emanating from BT Italy and reaching the upper echelons
of the Company, BT Group clawed back previously awarded bonuses (known as “malus”) and
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denied bonuses for the current year to the Company’s executive directors, including Defendants
Patterson and Chanmugam. In the 2017 Annual Report, Tony Ball, Chairman of the Company’s
Remuneration Committee, stated that this action ensured the restitution of overpayments to these
recipients and placed them in the same position they would otherwise have been in had the
awards been based on the revised results, as opposed to the results artificially inflated by fraud.
The Company stated, in pertinent part, as follows:
Application of malus due to Italian issues: In January we published revised results for 2014/15 and 2015/16 after our investigations into accounting irregularities in our Italian business. The [Remuneration] committee has recalculated the annual bonuses for the years in question and the outcome of vesting for the 2013 ISP to reflect the revised results. This clearly showed that the payouts based on the revised results would have been lower than those actually paid at the time.
The committee has therefore decided to exercise its discretion and apply the malus provisions in the Deferred Bonus Plan to reduce the number of shares under award, for the executive directors, plus the Operating Committee members who received payments under the bonus arrangements and/or the ISP, and for the company secretary. This action ensures the restitution of overpayments to these recipients and places them in the same position they would otherwise have been in had the awards been based on the revised results.
133. According to the 2017 Annual Report, Patterson’s total remuneration was cut from
£5.28 million in fiscal 2016 to £1.34 million in fiscal 2017. Chanmugam’s total remuneration was
cut from £2.81 million in fiscal 2016 to £258,000 in fiscal 2017.
134. The Company also applied the malus provisions in its Deferred Bonus Plan, causing
shares granted to Patterson and Chanmugam in 2014, 2015, and 2016 to lapse. The Company
stated, in pertinent part, as follows:
In January 2017 we published revised results for 2014/15 and 2015/16 as a result of our investigations into improper accounting practices in BT’s Italian business. The committee has recalculated the annual bonuses for the years in question and the outcome of the 2013 ISP award vesting to reflect the revised results. This showed that the payouts based on the revised results would have been lower than those actually paid at the time.
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The committee has therefore decided to exercise its discretion and apply the malus provisions in the Deferred Bonus Plan (DBP) to reduce the number of shares under award in recompense for payments and awards otherwise due under the annual bonus arrangements (for both cash and the deferred share element) and (where relevant) the ISP. These malus provisions will be applied in 2017/18 to previous awards made to the executive directors, plus the other Operating Committee members who received payments under the bonus arrangements and/or the ISP, and for the company secretary. This action ensures full restitution of the overpayments for the annual bonus (for the cash and the deferred share elements) and for the 2013 ISP award through the enforcement of the malus provisions in the DBP. This places the recipients in the same position they would otherwise have been in had the annual bonus and the ISP award been based on the revised results. The application of the malus provisions are calculated based on the share price at the original grant. For the cash element of the annual bonus, the calculation is based on the share price of the corresponding deferred share award.
The committee will keep under active review whether any additional employees’ awards should be adjusted. In addition, where employees have been dismissed or resigned due to the outcome of our investigations into the issues in Italy, shares and incentives have lapsed in full as a result.
The table below sets out the number of shares under the relevant DBP awards following the application of malus as explained above and as agreed by the committee. These shares will normally be transferred to participants at the end of the three-year deferred period if those participants are still employed by BT. Simon Lowth joined on 12 July 2016 and did not receive a bonus in 2016/17 for the 2015/16 financial year.
Shares Total Value of Shares under lapsed number shares lapsed award at following of award following 31 March application shares application Vesting Price at 2017 of malus remaining of malus date grant Gavin Patterson DBP 2014 138,952 7,243 131,709 £27,828 01/08/17 384.20p DBP 2015 105,028 15,867 89,161 £71,327 01/08/18 449.53p DBP 2016 90,964 59,339 31,625 £239,243 01/08/19 403.18p Total 334,944 82,449 252,495 £338,398
Former Director Tony Chanmugam DBP 2014 147,828 3,367 144,461 £12,936 01/08/17 384.20p DBP 2015 56,739 9,214 47,525 £41,420 01/08/18 449.53p DBP 2016 50,537 34,490 16,047 £139,057 01/08/19 403.18p Total 255,104 47,071 208,033 £193,412
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135. On May 24, 2018, BT Group filed its annual report on Form 20-F for fiscal year
2018 (the “2018 Annual Report”). In the 2018 Annual Report, BT Group disclosed that it again
determined to clawback compensation previously awarded to Chanmugam during the Class
Period, due to his role in connection with the admitted accounting irregularities that took place at
BT Italy.
136. According to the 2018 Annual Report, BT Group applied the malus provisions to
Chanmugam’s remaining DBP awards, such that his DBP awards were reduced from 208,033
shares of BT stock to zero. Based on Plaintiffs’ calculation, and confirmed in news reports, the
value of those shares was more than £800,000.16
137. BT explained why it applied the malus provisions in 2018 after having also done
so to Chanmugam in 2017, stating, in pertinent part, as follows:
Application of malus: As reported in 2017, following our investigations into accounting irregularities in our Italian business and publication of revised results for 2014/15 and 2015/16, the committee exercised its discretion to apply the malus provisions in the Deferred Bonus Plan to reduce the number of shares under award for certain participants. This was actioned in May 2017 and further detail is shown on page 166.
In addition, following further consideration regarding the impact of the accounting irregularities in our Italian business, the sanctions arising from Ofcom’s findings regarding the application of Deemed Consent in the Openreach business and the fact that both of these issues involved the finance function, the committee has decided to exercise its discretion to apply the malus provisions in respect of the remaining Deferred Bonus Plan awards of the former group finance director, Tony Chanmugam, given his role as head of the finance function, to reduce those awards to zero. In doing so the committee accepted that Tony Chanmugam was not personally implicated in or culpable for either issue.
16 Because BT said it would apply the malus provision in 2019, the exact value of Chanmugam’s lapsed shares is not listed in the 2018 Annual Report. Plaintiffs determined the value of Chanmugam’s lapsed shares based on information concerning Chanmugam’s remaining shares that was included in BT’s 2017 Annual Report.
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138. After applying the malus provisions to Chanmugam in 2017, BT Group presumably
would have left Chanmugam’s punishment as-is. But “following further consideration regarding
the impact of the accounting irregularities in [its] Italian business” in 2018, it is reasonable to infer
that BT Group believed that Chanmugam deserved a greater share of the blame for the accounting
fraud at BT Italy. Moreover, the size of the second clawback is significant because, in 2017, BT
clawed back only 47,071 shares from Chanmugam, whereas BT clawed back 208,033 shares in
2018. And despite BT’s self-serving statement that Chanmugam was not personally implicated in
or culpable for the Italian fraud, it is reasonable to infer that, based on its additional application of
malus, BT viewed his actions, at a minimum, as reckless.
MATERIALLY FALSE AND MISLEADING STATEMENTS MADE BY DEFENDANTS DURING THE CLASS PERIOD Fiscal Year 2013 False and Misleading Statements and Omissions 139. The Class Period begins on May 10, 2013. On that date, BT Group issued a press
release announcing its financial results for the fourth quarter and year end 2013, the period ending
March 31, 2013. For the year, the Company reported revenue of £18,253 million, EBITDA of
£6,181 million, operating profit of £3,338 million, profit before tax of £2,694 million, and adjusted
earnings per share of 26.6p. In the press release, BT Group’s CEO, Defendant Livingston,
commented on the results.
140. In reaction to these announcements, the price of BT Group ADRs rose $2.52 per
ADR on May 10, 2013, to $23.75 per ADR17 – an increase of 12%.
17 Share prices are adjusted for dividends.
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141. On May 23, 2013, the Company filed the 2013 Annual Report. With regard to BT
Group’s “Internal control over financial reporting,” the 2013 Annual Report stated, in pertinent
part, as follows:
Internal control over financial reporting
BT’s management is responsible for establishing and maintaining adequate internal control over financial reporting for the group including the consolidation process. Internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with IFRS [International Financial Reporting Standards]. Management conducted an assessment of the effectiveness of internal control over financial reporting based on the framework for internal control evaluation contained in the Revised Guidance for Directors on the UK Governance Code published by the Financial Reporting Council (the Turnbull Guidance).
Based on this assessment, management has concluded that at 31 March 2013, BT’s internal control over financial reporting was effective.
There were no changes in BT’s internal control over financial reporting that occurred during 2012/13 that have materially affected, or are reasonably likely to have materially affected, the group’s internal control over financial reporting. Any significant deficiency, as defined by the US Public Company Accounting Oversight Board (PCAOB), in internal control over financial reporting, is reported to the Audit & Risk Committee. PricewaterhouseCoopers LLP, which has audited the consolidated financial statements for 2012/13, has also audited the effectiveness of the group’s internal control over financial reporting under Auditing Standard No. 5 of the PCAOB.
142. The 2013 Annual Report included signed certifications by Defendants Livingston
and Chanmugam, representing that the financial information contained therein was accurate and
that the Company’s internal and disclosure controls were effective. Livingston’s and
Chanmugam’s certifications stated, in pertinent part, as follows:
I, [Defendant Livingston and Chanmugam], certify that:
1. I have reviewed this annual report on Form 20-F of BT Group plc;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements
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made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the company as of, and for, the periods presented in this report;
4. The company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the company and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the company’s internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting; and
5. The company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the company’s auditors and the audit committee of the company’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the company’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the company’s internal control over financial reporting.
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143. In the 2013 Annual Report, Defendant Rose, Chairman of the Audit Committee,
noted that the Audit Committee had given particular focus to BT’s operations in Italy. Rose stated,
in pertinent part, as follows:
Internal controls and risk management
We give risk management special attention and during the year we heard from each line of business CEO on the key risks in their part of the business, as well as the actions they are taking to address them. We aim to cover all significant risks to the group not just the financial risks. . . .
We received updates on security and resilience, cyber security, BT’s networks, major contracts, BT’s operations in Italy, customer data handling, litigation trends, as well as updates on major litigation and competition and regulation.
144. The statements referenced above in ¶¶139, 141-43 were materially false and
misleading when made because they misrepresented and/or failed to disclose the following adverse
facts, which were known to Defendants or recklessly disregarded by them:
(a) that the Company’s Italian business had overstated revenue, operating
profit, profit before tax, and earnings per share, and understated operating costs, for several years;
(b) that the Company engaged in, and continued to engage in, improper
accounting practices, which included a complex set of improper sales, purchase, factoring, and
leasing transactions;
(c) that the Company’s financial statements, and other financial information
included in the 2013 Annual Report, did not fairly present in all material respects the financial
condition and results of operations of the Company as of, and for, the periods presented in the
2013 Annual Report;
(d) that Livingston and Chanmugam failed to adequately design disclosure
controls and procedures, or failed to cause such disclosure controls and procedures to be designed
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under their supervision, to ensure that material information regarding the Company was made
known to them by others within the Company;
(e) that Livingston and Chanmugam failed to adequately design internal
controls over financial reporting, or failed to cause such internal controls over financial reporting
to be designed under their supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance
with International Financial Reporting Standards (“IFRS”);18
(f) that Livingston and Chanmugam failed to adequately evaluate the
effectiveness of the Company’s disclosure controls and procedures;
(g) that Livingston and Chanmugam failed to disclose to the Company’s
auditors and the Audit Committee the fraudulent activity of BT Italy’s senior management;
(h) that Livingston and Chanmugam falsely presented in the 2013 Annual
Report their conclusions about the effectiveness of the Company’s disclosure controls and
procedures;
(i) that the 2013 Annual Report did not fully comply with the requirements of
Section 13(a) or 15(d) of the Exchange Act;
(j) that the Company’s financial statements were not prepared in accordance
with IFRS or the Company’s own stated accounting policies, as detailed in ¶¶177-250; and
(k) that the Company’s internal controls were materially deficient, as detailed
in ¶241.
18 IFRS and Generally Accepted Accounting Principles (“GAAP”) are the two primary accounting frameworks used in the world today. IFRS is the accounting standard used in more than 110 countries, whereas GAAP is used in the United States.
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Fiscal Year 2014 False and Misleading Statements and Omissions 145. On July 25, 2013, BT Group issued a press release announcing its financial results
for the fiscal first quarter of 2014, the period ending June 30, 2013. For the quarter, the Company
reported revenue of £4,449 million, EBITDA of £1,440 million, operating profit of £743 million,
profit before tax of £595 million, and adjusted earnings per share of 5.9p. In the press release,
Livingston commented on the results.
146. On October 31, 2013, BT Group issued a press release announcing its financial
results for the fiscal second quarter of 2014, the period ending September 30, 2013. For the
quarter, the Company reported revenue of £4,491 million, EBITDA of £1,434 million, operating
profit of £757 million, profit before tax of £609 million, and adjusted earnings per share of 6.0p.
In the press release, Defendant Patterson, who became BT Group’s CEO on September 10, 2013,
commented on the results.
147. On January 31, 2014, BT Group issued a press release announcing its financial
results for the fiscal third quarter of 2014, the period ending December 31, 2013. For the quarter,
the Company reported revenue of £4,599 million, EBITDA of £1,537 million, operating profit of
£867 million, profit before tax of £722 million, and adjusted earnings per share of 7.3p. In the
press release, Patterson commented on the results.
148. On May 8, 2014, BT Group issued a press release announcing its financial results
for the fiscal fourth quarter and year end 2014, the period ending March 31, 2014. For the year,
the Company reported revenue of £18,287 million, EBITDA of £6,116 million, operating profit of
£3,421 million, profit before tax of £2,827 million and adjusted earnings per share of 28.2p. In
the press release, Patterson commented on the results.
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149. On May 22, 2014, the Company filed the 2014 Annual Report. With regard to BT
Group’s “Internal control over financial reporting,” the 2014 Annual Report stated, in pertinent
part, as follows:
Internal control over financial reporting
BT’s management is responsible for establishing and maintaining adequate internal control over financial reporting for the group. Internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with IFRS. Management conducted an assessment of the effectiveness of internal control over financial reporting based on the framework for internal control evaluation contained in the Revised Guidance for Directors on the UK Governance Code published by the Financial Reporting Council (the Turnbull Guidance).
Based on this assessment, management has concluded that at 31 March 2014, BT’s internal control over financial reporting was effective.
There were no changes in BT’s internal control over financial reporting that occurred during 2013/14 that have materially affected, or are reasonably likely to have materially affected, the group’s internal control over financial reporting. Any significant deficiency, as defined by the US Public Company Accounting Oversight Board (PCAOB), in internal control over financial reporting, is reported to the Audit & Risk Committee. PricewaterhouseCoopers LLP, which has audited the consolidated financial statements for 2013/14, has also audited the effectiveness of the group’s internal control over financial reporting under Auditing Standard No. 5 of the PCAOB.
150. The 2014 Annual Report included signed certifications by Defendants Patterson
and Chanmugam, similar to the certifications quoted in ¶142, representing that the financial
information contained therein was accurate and that the Company’s internal and disclosure
controls were effective.
151. In the 2014 Annual Report, Defendant Rose, Chairman of the Audit Committee,
noted the special attention that the Audit Committee had paid to BT’s operations in Italy. Rose
stated, in pertinent part, as follows:
This year the Audit & Risk Committee paid special attention to several overseas locations that are important to BT Global Services, including Italy and Brazil, to
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data security and to the increasing cyber security threat. We have received detailed presentations from key personnel in each of these areas and reviewed management’s mitigation plans.
* * *
I reported last year that the committee had given particular focus to BT’s operations in Italy. We have continued to monitor the position there and significant progress has been made to improve the control environment.
152. The statements referenced above in ¶¶145-51 were materially false and misleading
when made because they misrepresented and/or failed to disclose the following adverse facts,
which were known to Defendants or recklessly disregarded by them:
(a) that the Company’s Italian business had overstated revenue, operating
profit, profit before tax, and earnings per share, and understated operating costs, for several years;
(b) that the Company engaged in, and continued to engage in, improper
accounting practices, which included a complex set of improper sales, purchase, factoring, and
leasing transactions;
(c) that the Company’s financial statements, and other financial information
included in the 2014 Annual Report, did not fairly present in all material respects the financial
condition and results of operations of the Company as of, and for, the periods presented in the
2014 Annual Report;
(d) that Patterson and Chanmugam failed to adequately design disclosure
controls and procedures, or failed to cause such disclosure controls and procedures to be designed
under their supervision, to ensure that material information regarding the Company was made
known to them by others within the Company;
(e) that Patterson and Chanmugam failed to adequately design internal controls
over financial reporting, or failed to cause such internal controls over financial reporting to be
designed under their supervision, to provide reasonable assurance regarding the reliability of
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financial reporting and the preparation of financial statements for external purposes in accordance
with IFRS;
(f) that Patterson and Chanmugam failed to adequately evaluate the
effectiveness of the Company’s disclosure controls and procedures;
(g) that Patterson and Chanmugam failed to disclose to the Company’s auditors
and the Audit Committee the fraudulent activity of BT Italy’s senior management;
(h) that Patterson and Chanmugam falsely presented in the 2014 Annual Report
their conclusions about the effectiveness of the Company’s disclosure controls and procedures;
(i) that the 2014 Annual Report did not fully comply with the requirements of
Section 13(a) or 15(d) of the Exchange Act;
(j) that the Company’s financial statements were not prepared in accordance
with IFRS or the Company’s own stated accounting policies, as detailed in ¶¶177-250; and
(k) that the Company’s internal controls were materially deficient, as detailed
in ¶241.
Fiscal Year 2015 False and Misleading Statements and Omissions 153. On July 31, 2014, BT Group issued a press release announcing its financial results
for the fiscal first quarter of 2015, the period ending June 30, 2014. For the quarter, the Company
reported revenue of £4,354 million, EBITDA of £1,435 million, operating profit of £783 million,
profit before tax of £638 million, and adjusted earnings per share of 6.5p. In the press release,
Patterson commented on the results.
154. On October 30, 2014, BT Group issued a press release announcing its financial
results for the fiscal second quarter of 2015, the period ending September 30, 2014. For the
quarter, the Company reported revenue of £4,383 million, EBITDA of £1,450 million, operating
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profit of £832 million, profit before tax of £690 million, and adjusted earnings per share of 6.9p.
In the press release, Patterson commented on the results.
155. On January 30, 2015, BT Group issued a press release announcing its financial
results for the fiscal third quarter of 2015, the period ending December 31, 2014. For the quarter,
the Company reported revenue of £4,475 million, EBITDA of £1,567 million, operating profit of
£949 million, profit before tax of £814 million, and adjusted earnings per share of 8.0p. In the
press release, Patterson commented on the results.
156. On May 7, 2015, BT Group issued a press release announcing its financial results
for the fiscal fourth quarter and year end 2015, the period ending March 31, 2015. For the year,
the Company reported revenue of £17,851 million, EBITDA of £6,271 million, operating profit of
£3,733 million, profit before tax of £3,172 million, and adjusted earnings per share of 31.5p. In
the press release, Patterson commented on the results.
157. On May 21, 2015, the Company filed the 2015 Annual Report. With regard to BT
Group’s “Internal control over financial reporting,” the annual report stated, in pertinent part, as
follows:
Internal control over financial reporting
BT’s management is responsible for establishing and maintaining adequate internal control over financial reporting for the group. Internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with IFRS. Management conducted an assessment of the effectiveness of internal control over financial reporting based on the framework for internal control evaluation contained in the Revised Guidance for Directors on the UK Governance Code published by the Financial Reporting Council (the Turnbull Guidance).
Based on this assessment, management has concluded that at 31 March 2015, BT’s internal control over financial reporting was effective.
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There were no changes in BT’s internal control over financial reporting that occurred during 2014/15 that have materially affected, or are reasonably likely to have materially affected, the group’s internal control over financial reporting. Any significant deficiency, as defined by the US Public Company Accounting Oversight Board (PCAOB), in internal control over financial reporting, is reported to the Audit & Risk Committee. PricewaterhouseCoopers LLP, which has audited the consolidated financial statements for 2014/15, has also audited the effectiveness of the group’s internal control over financial reporting under Auditing Standard No. 5 of the PCAOB.
158. The 2015 Annual Report included signed certifications by Defendants Patterson
and Chanmugam, similar to the certifications quoted in ¶142, representing that the financial
information contained therein was accurate and that the Company’s internal and disclosure
controls were effective.
159. In the 2015 Annual Report, Defendant Rose again noted the particular focus that
the Audit Committee had been giving to BT Italy. Rose stated, in pertinent part, as follows:
The committee has an annual work plan. This includes standing items that we consider regularly, in addition to any specific matters that need the committee’s attention and topical items on which we chose to focus. For example, in 2014/15 we asked management to provide us with greater detail on the governance and control in relation to . . . operations in Italy[.]
* * *
I reported last year that the committee had given particular focus to BT’s operations in Italy and Brazil. We have continued to monitor the position and significant progress has been made to improve the control environment. We continue to keep under review the current trends of security risks facing BT and the progress made to manage these risks.
160. BT Group’s Chairman, Michael Rake, stated that the Board’s focus for fiscal year
2015 had been, among other things, “a visit to BT’s business in Italy.” The Company further
stated, in pertinent part, as follows: “We visited our Italy business, and while there we reviewed
operational matters with senior managers, met with employees as well as customers, government
officials and opinion leaders.”
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161. The statements referenced above in ¶¶153-60 were materially false and misleading
when made and/or failed to disclose material facts, which were known to Defendants or recklessly
disregarded by them, for the reasons set forth in ¶152 above.
Fiscal Year 2016 False and Misleading Statements and Omissions 162. On July 30, 2015, BT Group issued a press release announcing its financial results
for the fiscal first quarter of 2016, the period ending June 30, 2015. For the quarter, the Company
reported revenue of £4,278 million, EBITDA of £1,449 million, operating profit of £821 million,
profit before tax of £694 million, and adjusted earnings per share of 6.7p. In the press release,
Patterson commented on the results.
163. On October 29, 2015, BT Group issued a press release announcing its financial
results for the fiscal second quarter of 2016, the period ending September 30, 2015. For the
quarter, the Company reported revenue of £4,381 million, EBITDA of £1,442 million, operating
profit of £819 million, profit before tax of £706 million, and adjusted earnings per share of 6.9p.
In the press release, Patterson commented on the results.
164. On February 1, 2016, BT Group issued a press release announcing its financial
results for the fiscal third quarter of 2016, the period ending December 31, 2015. For the quarter,
the Company reported revenue of £4,594 million, EBITDA of £1,613 million, operating profit of
£1,021 million, profit before tax of £928 million, and adjusted earnings per share of 9.0p. In the
press release, Patterson commented on the results.
165. On May 5, 2016, BT Group issued a press release announcing its financial results
for the fiscal fourth quarter and year end 2016, the period ending March 31, 2016. For the year,
the Company reported revenue of £18,909 million, EBITDA of £6,580 million, operating profit of
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£3,950 million, profit before tax of £3,473 million, and adjusted earnings per share of 33.2p. In
the press release, Patterson commented on the results.
166. On May 19, 2016, the Company filed the 2016 Annual Report. With regard to BT
Group’s “Internal control over financial reporting,” the 2016 Annual Report stated, in pertinent
part, as follows:
Internal control over financial reporting
BT’s management is responsible for establishing and maintaining adequate internal control over financial reporting for the group. Internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with IFRS. Management conducted an assessment of the effectiveness of internal control over financial reporting based on the framework for internal control evaluation contained in the FRC Guidance on internal control (Turnbull), which is now reflected in the FRC Guidance on risk management, internal control and related financial and business reporting.
The scope of management’s assessment of the effectiveness of our internal control over financial reporting included all relevant operations, except for the operation of the subsidiary EE Limited, which we acquired in January 2016. This exclusion is in accordance with the SEC’s general guidance that an assessment of a recently acquired business may be omitted from our scope in the year of acquisition. EE Limited constituted 37% of total assets and 5% of the external revenue of the consolidated financial statements of the group for the year ended 31 March 2016.
Management has concluded that at 31 March 2016, BT’s internal control over financial reporting was effective.
There were no other changes in BT’s internal control over financial reporting that occurred during 2015/16 that have materially affected, or are reasonably likely to have materially affected, the group’s internal control over financial reporting. Any significant deficiency, as defined by the US Public Company Accounting Oversight Board (PCAOB), in internal control over financial reporting, is reported to the Audit & Risk Committee.
PricewaterhouseCoopers, which has audited the consolidated financial statements for 2015/16, has also audited the effectiveness of the group’s internal control over financial reporting under Auditing Standard No. 5 of the PCAOB.
167. The 2016 Annual Report included signed certifications by Defendants Patterson
and Chanmugam, similar to the certifications quoted in ¶142, representing that the financial
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information contained therein was accurate and that the Company’s internal and disclosure
controls were effective.
168. In the 2016 Annual Report, the Company again indicated that the control
environment at its Italian operations suffered from unspecified problems. Defendant Rose stated,
in pertinent part, as follows: “We have continued to monitor our operations in Italy and progress
has been made to improve the control environment. We continue to keep under review the current
trends of security risks facing BT and the progress made to manage these risks.”
169. The statements referenced above in ¶¶162-68 were materially false and misleading
when made and/or failed to disclose material facts, which were known to Defendants or recklessly
disregarded by them, for the reasons set forth in ¶152 above.
170. In addition, Defendant Rose’s statement in the 2016 Annual Report, referenced
above in ¶168, that “We have continued to monitor our operations in Italy and progress has been
made to improve the control environment,” was materially false and misleading when made and/or
failed to disclose material facts, which were known to Defendants or recklessly disregarded by
them, because, on information and belief, at the time the statement was made, BT Group: (i) had
already received new complaints of bullying at BT Italy, which is a high-risk indicator for fraud;
(ii) senior BT Group representatives had visited BT Italy and looked into the issue; and (iii)
progress was not being made to improve the control environment at BT Italy; rather, BT Group’s
senior company representatives had learned that the scope of problems in the control environment
at BT Italy had expanded.
Fiscal Year 2017 False and Misleading Statements and Omissions 171. On July 28, 2016, BT Group issued a press release announcing its financial results
for the fiscal first quarter of 2017, the period ending June 30, 2016. For the quarter, the Company
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reported revenue of £5,775 million, EBITDA of £1,818 million, operating profit of £963 million,
profit before tax of £802 million, and adjusted earnings per share of 6.6p. In the press release,
Patterson commented on the results.
172. The statements referenced above in ¶171 were materially false and misleading
when made because they misrepresented and/or failed to disclose the following adverse facts,
which were known to Defendants or recklessly disregarded by them:
(a) that the Company’s Italian business was overstating revenue, operating
profit, profit before tax, and earnings per share, and understating operating costs, over a number
of years;
(b) that the Company was engaging in improper accounting practices, which
included a complex set of improper sales, purchase, factoring, and leasing transactions; and
(c) that the Company’s internal controls were materially deficient, as detailed
in ¶241.
173. As detailed above in ¶¶65-75, Defendants disclosed information concerning the
alleged fraud on October 27, 2016 and January 24, 2017. In reaction to these corrective
disclosures, BT Group’s stock price declined by 2.4% and 20.7%, respectively, on extremely
heavy trading volume.
174. The market for BT Group ADRs was open, well-developed and efficient at all
relevant times. As a result of the materially false and misleading statements and omissions alleged
herein, BT Group ADRs traded at artificially inflated prices during the Class Period. Plaintiffs
and other members of the Class purchased or otherwise acquired BT Group ADRs relying upon
the integrity of the market price of BT Group ADRs and market information relating to BT Group,
and have been damaged thereby.
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175. During the Class Period, Defendants materially misled the investing public, thereby
inflating the price of BT Group ADRs, by publicly issuing false and misleading statements and
omitting to disclose material facts necessary to make Defendants’ statements, as set forth herein,
not false and misleading. Said statements and omissions were materially false and misleading in
that they failed to disclose material adverse information and misrepresented the truth about the
Company, its business and operations, as alleged herein.
176. At all relevant times, the material misrepresentations and omissions particularized
in this Complaint directly or proximately caused, or were a substantial contributing cause of, the
damages sustained by Plaintiffs and other members of the Class. As described herein, during the
Class Period, Defendants made or caused to be made a series of materially false and/or misleading
statements about BT Group’s financial performance and operations. These material misstatements
and omissions had the cause and effect of creating in the market an unrealistically positive
assessment of BT Group ADRs and its business, thus causing the Company’s shares to be
overvalued and artificially inflated at all relevant times. Defendants’ materially false and
misleading statements during the Class Period resulted in Plaintiffs and other members of the Class
purchasing the Company’s ADRs at artificially inflated prices, thus causing the damages
complained of herein.
BT GROUP’S FINANCIAL REPORTING DURING THE CLASS PERIOD WAS MATERIALLY FALSE AND MISLEADING AND VIOLATED IFRS 177. During the Class Period, Defendants repeatedly represented that BT Group’s
financial statements were fairly stated in conformity with IFRS. BT Group has now admitted that
the financial statements it issued to investors and filed with the SEC during the Class Period were
presented in violation of IFRS and were misstated.
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178. The International Accounting Standards Board’s (“IASB”) promulgates IFRS.
According to the IASB’s Conceptual Framework for Financial Reporting (the “Conceptual
Framework”), a “fundamental qualitative characteristic” of financial information is that it
“faithfully represent the phenomena that it purports to represent,” by among other things including
“all information necessary for a user to understand the phenomenon being depicted, including all
necessary descriptions and explanations.”
179. Here, however, BT Group’s own admissions, as well as the report of Italy’s
financial police associated with the criminal investigation into the accounting fraud within the
Company’s Italian business unit, make clear that, in violation of a most basic tenet of financial
reporting, Defendants Alvarez, Cameron, and BT Group engaged in a deliberate scheme to
repeatedly reverse engineer overstatements of the Company’s financial results during the Class
Period.
180. First, Defendants Alvarez and Cameron set unrealistically high earnings objectives
that could not be met absent accounting manipulations. Then, when BT Global Services fell short
of achieving these objectives, Alvarez, Cameron, and other BT Global Services personnel directed
financial accounting personnel in Italy to falsely inflate the Company’s actual financial results,
exhorting them to “look for” and “find” ways to close such shortfalls in a way that has been
described by a former accounting expert for Milan prosecutors as “significant evidence” of
wrongful accounting.
181. In fact, the report of Italy’s financial police reveals that Alvarez, Cameron, and
other BT Global Services personnel repeatedly asked financial accounting personnel in Italy to
“accommodate” their requests for specified amounts of additional profits that were needed to
eliminate shortfalls in previously announced estimates by suggesting “knowingly wrong
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accounting practices,” including deferring the recognition of ordinary business expenses by
fraudulently recording them as assets.
182. Defendants’ admission of their overstatement of BT Group’s Class Period financial
results associated with the investigation of the Italian business unit are set forth in the Company’s
2017 Annual Report filed with the SEC on Form 20-F (the “2017 Annual Report”) and came in
the form of two “adjustments.” The first adjustment was in the form of a £260 million charge to
BT Group’s 2017 financial results, principally due to an overstatement of assets and an
understatement of liabilities. The second adjustment was in the form of a £268 million earnings
restatement of BT Group’s financial results prior to 2017.
183. Thus, there can be no dispute that the financial statements BT Group filed with the
SEC and issued to investors, and Defendants’ statements concerning BT Group’s financial
performance during the Class Period, were materially false and misleading when made.
184. Compliance with applicable accounting standards is a basic fundamental obligation
of publicly traded companies. As set forth in Rule 4-01(a) of SEC Regulation S-X, “[f]inancial
statements filed with the [SEC] which are not prepared in accordance with [IFRS] will be
presumed to be misleading or inaccurate . . . .” 17 C.F.R. §210.4-01(a).
185. Prior to the issuance of the 2017 Annual Report, BT Group announced on October
27, 2016 the preliminary findings of its internal investigation into the accounting practices of its
Italian business unit and identified certain historical accounting errors requiring the write down of
balance sheet assets totaling £145 million.
186. Thereafter, on January 24, 2017, BT Group issued a press release announcing,
among other things, that: (i) the adjustments necessary to correct its prior financial reporting had
ballooned to approximately £530 million, an amount nearly four times greater than it had
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previously represented; (ii) the breadth of the Italian scandal was “far greater than previously
identified;” (iii) the adverse financial ramifications ensuing therefrom would last through 2018;
and (iv) a number of BT Italy’s senior management team were no longer employed with the
Company. The press release stated, in pertinent part, as follows:
[T]he extent and complexity of inappropriate behaviour in the Italian business were far greater than previously identified and have revealed improper accounting practices and a complex set of improper sales, purchase, factoring and leasing transactions. These activities have resulted in the overstatement of earnings in our Italian business over a number of years.
* * *
The adjustments identified have increased from the £145m announced in our half- year update to a total of around £530m.
* * *
In addition, we would expect the matters described above to result in a reduction in our Q3 adjusted revenue and adjusted EBITDA of around £120m, and in a reduction in Q3 normalised free cash flow of around £100m. For 2016/17 as a whole, relative to our prior outlook, we would expect a decrease in adjusted revenue of around £200m, in adjusted EBITDA of around £175m, and of up to £500m of normalised free cash flow due to the EBITDA impact and the one-off unwind of the effects of inappropriate working capital transactions. For 2017/18, we would expect a similar annual impact to adjusted revenue and adjusted EBITDA as in 2016/17, with the EBITDA impact flowing through to normalised free cash flow.
* * *
The improper behaviour in our Italian business is an extremely serious matter, and we have taken immediate steps to strengthen the financial processes and controls in that business. We suspended a number of BT Italy’s senior management team who have now left the business. We have also appointed a new Chief Executive of BT Italy who will take charge on 1 February 2017.
187. In addition to the foregoing admissions of misstatements of BT Group’s financial
results during the Class Period, BT Group has now admitted that, despite repeated representations
to the contrary during the Class Period, it did not maintain an effective system of internal control
over financial reporting. A material weakness is a deficiency, or a combination of deficiencies, in
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internal control over financial reporting, such that there is a reasonable possibility that a material
misstatement in an entity’s financial statements will not be prevented or detected on a timely basis.
188. As set forth in Section 13 of the Exchange Act, Defendants were responsible for
presenting BT Group’s business activities in a manner that accurately and fairly reflected its
transactions, and maintaining a system of internal accounting controls sufficient to provide
reasonable assurances that BT Group’s financial statements conformed to IFRS:
Every issuer which has a class of securities registered pursuant to section 12 of this title and every issuer which is required to file reports pursuant to section 15(d) of this title shall –
A. make and keep books, records, and accounts, which, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the issuer; [and]
B. devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that –
i. transactions are executed in accordance with management’s general or specific authorization;
ii. transactions are recorded as necessary (I) to permit preparation of financial statements in conformity with [IFRS] or any other criteria applicable to such statements, and (II) to maintain accountability for assets;
iii. access to assets is permitted only in accordance with management’s general or specific authorization; and
iv. the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences.
189. Thus, there can be no dispute that Defendants violated the provisions of Section 13
of the Exchange Act during the Class Period.
BT Group’s £260 Million Charge Against Its 2017 Financial Results 190. The 2017 Annual Report reveals the £260 million charge BT Group recorded
during the year ended March 31, 2017 associated with its financial improprieties in the Italian
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business unit consisted of: (1) an overstatement of assets and an understatement of liabilities in the
amount of £223 million; (2) an overstatement of revenue in the amount of £22 million; and
(3) investigation related costs in the amount of £15 million.
191. The IFRS Conceptual Framework defines an asset as a resource controlled by the
entity as a result of past events that are expected to provide future economic benefits to an entity
and a liability as a present obligation of the entity arising from past events, the settlement of which
is expected to result in an outflow from the entity of resources.
192. During the Class Period, Defendants caused BT Group to violate these basic tenets
of IFRS.
193. With respect to BT Group’s overstatement of assets, on January 24, 2017, the
Company held a conference call with investors to discuss the findings of its investigation into BT
Group’s financial improprieties. As detailed herein, during that conference call, Simon Lowth, the
Company’s Group Finance Director, stated, in pertinent part, “that the impact of the £175 million
is because the result of the improper accounting, the improper transactions, was to significantly
understate the costs in the business, some of which was being capitalized and, therefore, not
running through EBITDA.”
194. Thus, Lowth admitted that BT Group’s accounting scheme involved recording
ordinary business expenses as assets, rather than charging those business expenses against
earnings. In doing so, the recognition of such business expenses was deferred and BT Group’s
income was overstated.
195. Italy’s financial police issued an investigative report after the end of the Class
Period. The report noted that “[a] series of emails between the top financial executives of BT
[Group] Plc and managers of the (Italian) unit point to the existence of ‘insistent’ requests by
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the leadership of the parent company aimed at achieving ambitious economic targets, even using
aggressive, anomalous and knowingly wrong accounting practices.” Exhibit D at 1.
196. In particular, the report of Italy’s financial police identifies senior managers within
Global Services who directed accounting personnel within the Italian business unit to capitalize as
assets ordinary labor-related business expenses. For example, O’Ferrall, then the Chief Financial
Officer for BT Europe, BT Global Services’ European division, sent emails on August 5, 2016
coaxing senior accounting personnel within the Italian business unit to capitalize as assets
€700,000 of ordinary labor-related business expenses for the sole purpose of increasing the
operating income, stating, in pertinent part:
Subject: Another €700K EBITDA needed in P4 [July 2016].
All, I have an urgent request from Richard [Cameron, BT Global Services Chief Financial Officer] to find another €700K. . . . Please can you look at all opportunities and come back to me and Simon [Whittle, BT Global Services Europe Finance Manager] asap. Labour capitalization? Regards Brian.
197. Similarly, on April 8, 2016, O’Ferrall emailed Alessandro Clerici, then Chief
Financial Officer of BT Italy, and Rosa Ronda Andres, Chief Financial Officer of BT Global
Services in Spain, requesting that they “find another €1 million of capitalization for 15/16. Can
either of you accommodate this? €500K each?”
198. These above-noted facts demonstrate a scheme perpetrated by the most senior-level
managers within BT Global Services to intentionally overstate BT Group’s operating results
during the Class Period.
BT Group’s £268 Million Earnings Restatement of Its Financial Results Prior to 2017 199. BT Group has also admitted that the scheme to fraudulently inflate its operating
results was long-standing, resulting in multi-year financial misstatements that included both the
overstatement of reported revenue and the understatement of reported expenses.
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200. Specifically, BT Group has now admitted that the financial statements it issued to
investors and filed with the SEC on Forms 20-F for the years ended March 31, 2015 and March
31, 2016 were misstated. In addition, while BT Group has not corrected its financial statements
for the periods prior to the year ended March 31, 2015, it has admitted that the Company’s net
income prior to April 1, 2014 was overstated by a total of £64 million.
201. The corrections made by the Company to its previously issued financial statements
establish that BT Group, itself, has concluded that the financial statements it issued to investors
and filed with the SEC during the Class Period were materially misstated because IFRS states that
corrections of misstatements in prior-period financial statements need not be made when the effect
of applying them is immaterial. See, e.g., International Accounting Standard (“IAS”) 8,
Accounting Policies, Changes in Accounting Estimates and Errors.
202. Concerning the overstatement of revenue in BT Group’s previously issued financial
statements, IFRS, specifically IAS 18, Revenue, provides that revenue is to be recognized when it
is probable that future economic benefits will flow to the entity and those benefits can be measured
reliably. In addition, IFRS in IAS 11, Construction Contracts, requires that when the outcome of
a construction contract can be estimated reliably, contract revenue and contract costs associated
with the construction contract is to be recognized as revenue and expenses, respectively, by
reference to the stage of completion of the contract activity at the end of the reporting period.
When the outcome of a construction contract cannot be estimated reliably, revenue shall be
recognized only to the extent the recoverability of contract costs incurred is probable and contract
costs are to be recognized as an expense in the period in which they are incurred. When it is
probable that total contract costs will exceed the total contract revenue, the expected loss is
recognized as an expense immediately.
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203. In BT Group’s annual financial statements included in the Company’s Forms 20-F
filed with the SEC during the Class Period, Defendants falsely and misleadingly represented that
BT Group’s revenues were accounted for and reported in its financial statements in a manner
consistent with the requirements of IFRS, stating, in pertinent part, and in all material respects, as
follows:
Revenue
Revenue represents the fair value of the consideration received or receivable for communications services and equipment sales, net of discounts and sales taxes. Revenue is recognised when it is probable that the economic benefits associated with a transaction will flow to the group and the amount of revenue and associated costs can be measured reliably. The accounting for revenue sharing arrangements depends on the analysis of the facts and circumstances surrounding these transactions.
Where we act as an agent in a transaction, we recognise revenue net of directly attributable costs.
Services
Revenue arising from separable installation and connection services is recognised when it is earned, upon activation. Revenue from the rental of analogue and digital lines and private circuits is recognised on a straight line basis over the period to which it relates. Revenue from calls is recognised at the time the call is made over our network. Subscription fees, consisting primarily of monthly charges for access to broadband and other internet access or voice services, are recognised as revenue as the service is provided. Revenue from the interconnection of voice and data traffic between other telecommunications operators is recognised at the time of transit across our network.
Revenues from telephone service and internet access subscription fees as well as those from wholesale access revenues are recognised on a straight line basis over the period to which they relate. Revenue from calls is recognised at the time the call is made over the group’s network. Revenue from the interconnection of voice and data traffic between other telecommunications operators is recognised at the time of transit across the group’s network.
Equipment sales
Revenue from the sale of equipment is recognised when all the significant risks and rewards of ownership are transferred to the customer, which is normally the date the equipment is delivered and accepted by the customer.
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Long-term contractual arrangements
Revenue from long-term contractual arrangements, including fixed price contracts to design and build software solutions, is recognised based on the percentage of completion method. The stage of completion is estimated using an appropriate measure according to the nature of the contract such as the proportion of costs incurred relative to the estimated total contract costs, or other measures of completion such as the achievement of contract milestones and customer acceptance. In the case of time and materials contracts, revenue is recognised as the service is rendered.
Costs related to delivering services under long-term contractual arrangements are expensed as incurred except for an element of costs incurred in the initial contract set-up, transition or transformation phase, which is deferred and recorded within noncurrent assets. These costs are then recognised in the income statement on a straight line basis over the remaining contract term, unless the pattern of service delivery indicates a different profile is more appropriate. These costs are directly attributable to specific contracts, relate to future activity, will generate future economic benefits and are assessed for recoverability on a regular basis.
The percentage of completion method relies on estimates of total expected contract revenues and costs, as well as reliable measurement of the progress made towards completion. Unless the financial outcome of a contract can be estimated with reasonable certainty, no attributable profit is recognised. In such circumstances, revenue is recognised equal to the costs incurred to date, to the extent that such revenue is expected to be recoverable, or costs are accrued to bring the margin to nil. Recognised revenue and profits are subject to revisions during the contract if the assumptions regarding the overall contract outcome are changed. The cumulative impact of a revision in estimates is recorded in the period in which such revisions become likely and can be estimated. Where the actual and estimated costs to completion exceed the estimated revenue for a contract, the full contract life loss is recognised immediately.
204. These representations were materially false and misleading when made because, as
the Company has now admitted, BT Group recorded “improper sales,” which caused the financial
statements and the related financial representations issued by Defendants during the Class Period
to be materially misstated. These improperly recorded sales totaled £22 million, £30 million, and
£11 million during the years ended March 31, 2017, 2016 and 2015, respectively.
205. Concerning these improper sales transactions, on April 21, 2017, Reuters published
an article announcing that it had seen a criminal complaint filed by BT Group with Italian
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prosecutors accusing former Company executives in Italy of unlawful conduct. According to the
article, “[t]he Reuters investigation found that a network of people in BT Italy had exaggerated
revenues, faked contract renewals and invoices and invented bogus supplier transactions in order
to meet bonus targets and disguise the unit’s true financial performance,” and that such practices
had been occurring since “at least 2013.”
206. According to Reuters, the complaint alleges that the former BT Italy CEO, Cimini,
engaged in “grave violations of corporate governance rules in relation to contracts and suppliers,”
and the former BT Italy COO, Truzzoli, “manipulated [Company] results.”
207. These fraudulent activities, perpetrated by the most senior executives of BT
Group’s BT Global Services line of business, caused, as BT Group has now admitted, the
Company’s financial statements and financial disclosures issued by Defendants during the Class
Period to be materially false and misleading.
208. In addition to fraudulently inflating reported revenue, BT Group manipulated its
financial results during the Class Period by improperly accounting for receivables, payables, and
leasing transactions, which falsely and misleadingly understated reported expenses.
209. IFRS, specifically IAS 39, Financial Instruments; Recognition and Measurement
provides that receivables and payables are to be recognized in financial statements when an entity
becomes a party to a financial instrument contract. Generally, a company is required to remove
financial liabilities from its balance sheet when its obligation is extinguished, and remove financial
assets from its balance sheet when, among other things, its contractual rights to the asset’s cash
flows expire.
210. In addition, IFRS in IAS 17, Leases, provides that if a sale and leaseback transaction
results in a finance lease, any excess of sales proceeds over the carrying amount shall not be
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immediately recognized as income by a seller-lessee and should be deferred and amortized over
the lease term. If a sale and leaseback transaction results in an operating lease, and it is clear that
the transaction has an established fair value, any profit or loss shall be recognized immediately.
211. In BT Group’s annual financial statements included in the Company’s Forms 20-F
filed with the SEC during the Class Period, Defendants falsely and misleadingly represented that
BT Group’s receivables, payables, and leasing transactions were accounted for and reported in its
financial statements in a manner consistent with the requirements of IFRS, stating, in pertinent
part, and in all material respects, as follows:
Trade and other receivables
Trade and other receivables are initially recognised at fair value, which is usually the original invoiced amount, and are subsequently carried at amortised cost, using the effective interest method, less provisions made for doubtful receivables. Provisions are made specifically where there is evidence of a risk of non-payment, taking into account ageing, previous losses experienced and general economic conditions.
* * *
Trade and other payables
Financial liabilities within trade and other payables are initially recognised at fair value, which is usually the original invoiced amount, and subsequently carried at amortised cost using the effective interest method.
Loans and other borrowings
Loans and other borrowings are initially recognised at the fair value of amounts received net of transaction costs. Loans and other borrowings are subsequently measured at amortised cost using the effective interest method and, if included in a fair value hedge relationship, are re-valued to reflect the fair value movements on the hedged risk associated with the loans and other borrowings. The resulting amortisation of fair value movements, on de-designation of the hedge, is recognised in the income statement.
* * *
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Leases
The determination of whether an arrangement is, or contains, a lease is based on the substance of the arrangement and requires an assessment of whether the fulfilment of the arrangement is dependent on the use of a specific asset or assets and whether the arrangement conveys the right to use the asset.
Leases of property, plant and equipment where the group holds substantially all the risks and rewards of ownership are classified as finance leases. Finance lease assets are capitalised at the commencement of the lease term at the lower of the present value of the minimum lease payments or the fair value of the leased asset. The obligations relating to finance leases, net of finance charges in respect of future periods, are recognised as liabilities. Leases are subsequently measured at amortised cost using the effective interest method.
Leases where a significant portion of the risks and rewards are held by the lessor are classified as operating leases. Rentals are charged to the income statement on a straight line basis over the period of the lease.
212. These representations were materially false and misleading when made because, as
the Company has now admitted, the financial statements and the related financial representations
BT Group issued during the Class Period were misstated, in part, due to the reporting of “improper”
purchase, factoring, and leasing transactions, well as trade and other receivables and various
liabilities, including sales taxes. These improperly recorded transactions had the effect of
understating BT Group’s operating costs by £238 million, £92 million, and £67 million during the
years ended March 31, 2017, 2016 and 2015, respectively.
213. Concerning these improper transactions, on July 1, 2017, the Financial Times
published an article stating that the Guardia di Finanza, an Italian law enforcement agency
primarily responsible for dealing with financial crimes and drug smuggling, was scrutinizing the
propriety of a 2015 sales leaseback transaction between BT Italy, ITF, and a unit of IBM.
According to the Financial Times, citing a person with “direct knowledge” of Guardia di Finanza’s
investigation, BT Italy sold equipment to ITF for about €32 million and then leased the equipment
back for about €36 million. According to the Financial Times, BT Group has not been able to
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locate serial numbers for all of the equipment, leading Italian prosecutors to probe whether the
entire transaction may have been fake.
214. In addition, on January 24, 2017, Reuters published an article stating that
prosecutors in Milan opened an investigation into “false accounting and embezzlement” within the
Italian unit of BT Group.
215. Further, on March 30, 2017, Reuters reported that three different employees of BT
Group’s Italian unit warned their Madrid-based supervisor in November 2015 about possible
accounting problems at BT Italy, nearly one year before the Company first mentioned financial
irregularities at the division.
216. These fraudulent activities, perpetrated by the most senior executives of BT
Group’s BT Global Services line of business, caused the Company’s financial statements and
financial disclosures issued by Defendants during the Class Period to be materially false and
misleading.
BT Group’s Financial Misrepresentations Were Material 217. As noted herein, BT Group has now retroactively corrected the misstatements
contained in the financial statements that it issued to investors and filed with the SEC during the
Class Period. In doing so, BT Group determined that the financial statements it issued to investors
during the Class Period were materially misstated, because pursuant to IFRS, only material
misstatements in prior periods are to be corrected on a retroactive basis. See, e.g., IAS 8,
Accounting Policies, Changes in Accounting Estimates and Errors.
218. Thus, in light of their admissions, there can be no dispute that Defendants made
materially misleading financial representations about the Company’s operations, and that BT
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Group issued materially false and misleading financial statements and financial disclosures to
investors during the Class Period.
219. The quantitative impact of BT Group’s financial misrepresentations caused its pre-
tax income to be overstated by 4.2% and 3.0% during the years ended March 31, 2016 and March
31, 2015, respectively; its net income to be overstated by 5.0% and 3.8% during the years ended
March 31, 2016 and March 31, 2015, respectively, and its total comprehensive income to be
overstated by 4.6% and 5.3% during the years ended March 31, 2016 and March 31, 2015,
respectively.
220. During 2017, the quantitative impact associated with BT Group’s financial
malfeasance resulted in a £260 million charge against earnings. But for this £260 million charge
against earnings, BT Group’s pre-tax income during the year ended March 31, 2017 would have
been 11.1% greater.19
221. The quantitative impact of the Company’s financial improprieties on BT Group’s
Global Services segment was more even significant, causing the operating profit in that line of
business to be overstated by 214.0% and 371.4% during the years ended March 31, 2016 and
March 31, 2015, respectively. During the year ended March 31, 2017, the operating income of BT
Group’s Global Services segment would have been 438.0% greater absent the Company’s financial
improprieties detailed herein.
222. PwC, BT Group’s outside auditor during the Class Period, determined its own
standard of materiality for the Company’s financial statements as a whole. In the 2017 Annual
19 Plaintiffs are unable to assess the quantitative impact ensuing from the Company’s financial malfeasance on its 2017 income-tax expense. Accordingly, Plaintiffs have presented the percentage impact of the Company’s £260 million charge on its 2017 pre-tax income, rather than on its net, or after-tax, income.
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Report, PwC stated that the threshold for overall group materiality was £130 million. BT Group’s
£530 million in adjustments due to the fraud in the Italian operations clears that threshold easily.
223. Moreover, IASB’s Practice Statement 2, Making Materiality Judgements, provides
that intentional misstatements shall always be considered material.
224. Consistent with this view, the SEC in its Staff Accounting Bulletin No. 99 (“SAB
No. 99”), notes, in pertinent part, that:
[T]he staff believes that a registrant and the auditors of its financial statements should not assume that even small intentional misstatements in financial statements, for example those pursuant to actions to “manage” earnings, are immaterial.
225. SAB No. 99 explains that materiality in the context of financial information not
only includes an assessment of the magnitude of the misstatement in percentage terms, but also
requires an assessment of the factual context in which the user of financial statements would view
the financial information (referred to in accounting and auditing literature as “quantitative” and
“qualitative” factors).
226. Thus, SAB No. 99 notes, in pertinent part, that:
[M]agnitude by itself, without regard to the nature of the item and the circumstances in which the judgment has to be made, will not generally be a sufficient basis for a materiality judgment. [Footnotes omitted.]
227. Accordingly, SAB No. 99 states: “the staff believes that there are numerous
circumstances in which [financial] misstatements below 5% could well be material. Qualitative
factors may cause [financial] misstatements of quantitatively small amounts to be material.”
228. Consistent with this analysis, IFRS, in IAS 8, Accounting Policies, Changes in
Accounting Estimates and Errors, notes that materiality depends on the size and/or nature of an
omission or misstatement.
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229. Pursuant to SAB No. 99, among the considerations that may well render a
quantitatively small misstatement of a financial statement item material, include:
(a) whether the misstatement has the effect of increasing management’s
compensation – for example, by satisfying requirements for the award of bonuses or other forms
of incentive compensation;
(b) whether the misstatements were “part of an ongoing effort directed by or
known to senior management for the purposes of ‘managing’ earnings”;
(c) whether the misstatement involves concealment of an unlawful
transaction; and
(d) whether the misstatement concerns an important segment or portion of an
entity’s business.
230. Here, each of the aforementioned qualitative material factors contributed to the
materiality of the financial misstatements made by Defendants during the Class Period. As
detailed herein, the executives of BT Group’s Italian operations intentionally directed the
recording of unlawful transactions during the Class Period to, in part, increase management’s
compensation and inflate the operating performance of both the Company and its Global Services
segment.
231. Moreover, SAB No. 99 provides that the “volatility of the price of a registrant’s
securities in response to certain types of disclosures may provide guidance as to whether investors
regard quantitatively small misstatements as material.” When BT Global disclosed the financial
impact associated with its financial improprieties to the market, the price of its common stock
declined by 21% on January 24, 2017, wiping out £8 billion of its market capitalization.
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232. In addition, the plunge in BT Group’s share price following disclosure of the BT
Italy accounting scandal forced the Company to pay out £225 million to two shareholders,
Deutsche Telekom and Orange, who were issued a warranty as protection against a slump in BT
Group’s performance after they acquired their respective stakes in BT Group. Deutsche Telekom
and Orange became shareholders in BT Group after the Company reached a £12.5 billion cash and
shares deal to buy mobile company EE in 2015. As a result of the £225 million payout, BT’s
profits fell more than 40% in the first quarter of 2017.
BT Group’s Admissions that the Financial Statements It Issued During the Class Period Were Presented in Violation of Applicable Accounting Standards 233. Throughout the Class Period, BT Group’s Forms 20-F, signed by Defendant
Chanmugam, falsely and misleadingly represented that the Company’s financial reporting was
presented in accordance with IFRS, stating, in pertinent part, and in all material respects, as
follows:
These consolidated financial statements have been prepared in accordance with the Companies Act 2006, Article 4 of the IAS Regulation and International Accounting Standards (IAS) and International Financial Reporting Standards (IFRS) and related interpretations, as adopted by the European Union. The consolidated financial statements are also in compliance with IFRS as issued by the International Accounting Standards Board (the IASB). The consolidated financial statements are prepared on a going concern basis.
234. BT Group has now admitted that the foregoing were untrue statements of material
fact when made, stating, in pertinent part, as follows:
[O]ur investigations into our Italian business have revealed inappropriate behaviour and improper accounting practices. The improper practices included a complex set of improper sales, purchase, factoring and leasing transactions.
* * *
The prior years’ errors have resulted from profits, and therefore equity, being overstated for a number of years. These errors affected the Consolidated Group Balance Sheets and Consolidated Group Income Statements included in the Annual Report and Form 20-F for a number of years including the years ended 31 March
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2016 and 31 March 2015, and in each of the quarterly results announcements of those years.
235. The details of the Company’s admissions associated with its financial improprieties
during the Class Period are, for the most part, set forth in the 2017 Annual Report.
236. As noted in the 2017 Annual Report, the results of an investigation initiated by BT
Group found “inappropriate behaviour in our Italian business,” including the “collusion,
circumvention and override of controls” that resulted in “improper sales, purchase, factoring and
leasing transactions in our Italian business.”
BT Group’s Admissions that Its Internal and Disclosure Controls Were Ineffective and that Defendants’ Certifications Were Materially False and Misleading 237. Internal control over financial reporting is broadly defined as a process, effected by
an entity’s board of directors, management and other personnel, designed to provide reasonable
assurance that, among other things, the entity’s financial reporting is reliable and accurate.
238. Throughout the Class Period, BT Group’s Annual Reports filed with the SEC on
Form 20-F, signed by Chanmugam, repeatedly represented that BT Group’s management was
responsible for establishing and maintaining adequate internal control over the Company’s
financial reporting, stating, in pertinent part and in all material respects, as follows:
BT’s management is responsible for establishing and maintaining adequate internal control over financial reporting for the group. Internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with IFRS.
239. Item 15 of Form 20-F required that BT Group provide the information required by
Regulation S-K Item 308, Internal Control Over Financial Reporting [17 C.F.R. 229.308],
including, among other things, the assessment made by management concerning the effectiveness
of the Company’s internal control over financial reporting.
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240. Throughout the Class Period, Defendants falsely and misleadingly represented in
the Annual Reports that BT Group filed with the SEC on Form 20-F that its internal controls were
operating effectively when, as the Company has now admitted, they were not. Defendants stated,
in pertinent part, and in all material respects, as follows:
Management conducted an assessment of the effectiveness of internal control over financial reporting based on the framework for internal control evaluation contained in the FRC Guidance on internal control (Turnbull), which is now reflected in the FRC Guidance on risk management, internal control and related financial and business reporting.
* * *
Management has concluded that at 31 March [2015 and 2016], BT’s internal control over financial reporting was effective.
241. BT Group has now admitted that the foregoing statements were false and
misleading statements of material fact when made, stating, in pertinent part, as follows:20
[M]anagement has concluded that our internal control over financial reporting was not effective as of 31 March 2017 due to the material weakness described below.
Material Weakness in Internal Control over Financial Reporting
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our consolidated financial statements will not be prevented or detected on a timely basis.
Our Italian business is managed by a local management team within the Global Services line of business. Individuals in Italy colluded to override the period end financial close controls and overstate the results, and the monitoring controls which include the review of reconciliations, journals, results and financial position, did not operate effectively to identify the overstatement in a timely manner.
20 Throughout the Class Period, BT Group represented that there were no changes in the Company’s internal controls over financial reporting. Thus, it is reasonable to infer that BT Group’s internal controls over financial reporting were ineffective throughout the Class Period.
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The group did not maintain effective controls to prevent or detect the collusive circumvention or override of controls related to our Italian business. Specifically management has identified the following internal control deficiencies related to our Italian business and the failure to detect the circumvention or override of controls that together constitute a material weakness in the control environment (i) failure in the review of reconciliations (ii) failure in the review of journals and (iii) failure in our monitoring controls over the results and financial position of our Italian business.
This material weakness could result in a misstatement of the account balances and disclosures relating to our Italian business that would represent material misstatements in our annual consolidated financial statements that would not be prevented or detected.
242. Indeed, throughout the Class Period, Defendants knew that the control environment
associated with the Company’s business in Italy was such that it required “special attention.” For
example, in the 2014 Annual Report, Defendant Rose disclosed, in pertinent part, as follows:21
This year the Audit & Risk Committee paid special attention to several overseas locations that are important to BT Global Services, including Italy and Brazil. . . .
* * *
I reported last year that the [Audit] committee had given particular focus to BT’s operations in Italy. We have continued to monitor the position there and significant progress has been made to improve the control environment.
243. In the 2015 Annual Report, BT Group and Defendant Rose disclosed, in pertinent
part, as follows:
We visited our Italy business, and while there we reviewed operational matters with senior managers, met with employees as well as customers, government officials and opinion leaders.
* * *
21 According to the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), the control environment is the set of standards, processes, and structures that provide the basis for carrying out internal control across an organization.
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I reported last year that the [Audit] committee had given particular focus to BT’s operations in Italy and Brazil. We have continued to monitor the position and significant progress has been made to improve the control environment.
244. Similarly, in the 2016 Annual Report, despite that BT Group’s senior company
representatives had learned that the scope of problems in the control environment at BT Italy had
expanded, Defendant Rose disclosed, in pertinent part, as follows: “We have continued to monitor
our operations in Italy and progress has been made to improve the control environment.”
245. Disclosure controls and procedures are designed to ensure that information required
to be disclosed by SEC registrants pursuant to SEC rules and regulations is appropriately recorded,
processed, summarized and reported.
246. Item 15 of Form 20-F required BT Group to provide the information required by
Regulation S-K Item 307 of Regulation S-K, Disclosure Controls and Procedures [17 C.F.R.
229.307], including, among other things, the conclusions of its principal executive and financial
officers regarding the effectiveness of the Company’s disclosure controls and procedures.
247. Throughout the Class Period, Defendants falsely and misleadingly represented in
Annual Reports that BT Group filed with the SEC on Form 20-F that its disclosure controls were
operating effectively when, as the Company has now admitted, they were not, stating, in pertinent
part, and in all material respects, as follows:
The Chief Executive and Group Finance Director, after evaluating the effectiveness of BT’s disclosure controls and procedures as of the end of the period covered by this Annual Report & Form 20-F, have concluded that, as of that date, BT’s disclosure controls and procedures were effective to ensure that material information relating to BT was made known to them by others within the group.
The Chief Executive and Group Finance Director concluded that BT’s disclosure controls and procedures are also effective to ensure that the information the company is required to disclose in reports that it files under the Securities Exchange Act of 1934 (Exchange Act) is recorded, processed, summarised and reported within the time periods specified in the SEC’s rules and forms.
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248. The above-noted false and misleading representations set forth in BT Group’s
Annual Reports filed with the SEC on Form 20-F concerning its internal controls over financial
reporting and its disclosure controls were falsely and misleadingly certified by Defendants
Livingston, Patterson, and Chanmugam:
I, [Livingston/Patterson and Chanmugam], certify that:
1. I have reviewed this annual report on Form 20-F of BT Group plc;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the company as of, and for, the periods presented in this report;
4. The company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the company and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the company’s internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to
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materially affect, the company’s internal control over financial reporting; and
5. The company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the company’s auditors and the audit committee of the company’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the company’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the company’s internal control over financial reporting.
249. BT Group has now admitted that the foregoing statements were false and
misleading statements of material fact when made, stating in the 2017 Annual Report, in pertinent
part, as follows:
We have evaluated the effectiveness of our disclosure controls and procedures. Based upon that evaluation, our chief executive and group finance director concluded that as a result of the material weakness described below [see ¶240], as of 31 March 2017, our disclosure controls and procedures were not effective to provide reasonable assurance that information required to be disclosed by us in the reports that we file or furnish under the Exchange Act is recorded, processed, summarised and reported, within the time periods specified in the applicable rules and forms.
250. In the 2017 Annual Report, Defendants further disclosed that BT Group has taken
certain actions to help remediate the material deficiencies noted above, stating, in pertinent part,
as follows:
• We suspended a number of BT Italy’s senior management team (who have now left the business). The president of our European operations has also left the business. We have appointed a new president of our European operations and a new CEO and CFO of BT Italy from outside the Italian executive management team;
• We strengthened our monitoring controls and escalation mechanisms as they relate to our Italian business, including in relation to the reviews of reconciliations and journals;
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• We transferred the Italy customer billing activities to our group billing services function;
• We also are in the process of evaluating additional actions to remediate the material weakness and strengthen our internal control, governance and compliance environment, including increasing the resources and improving the capabilities of the controlling function and the audit function outside the UK, and further developing our integrated risk and assurance reporting processes; [and]
• We are also enhancing our controls and compliance programme to reinforce the importance of doing business in an ethical, disciplined and standardised way.
JACINTO CAVESTANY FURNISHED INFORMATION FOR THE ALLEGED MISSTATEMENTS 251. Jacinto Cavestany, BT Global Services’ Vice President of Iberia & Head of Sales
for Europe and Latin America and an even higher-ranking executive than the fired BT Italy
executives,22 is another senior management-level employee whose scienter is imputed to BT
Group. As Head of Sales for Europe, Cavestany, as his title suggests, would have furnished
information from sales and revenue from BT Italy for the alleged misstatements, and likely was in
part responsible for them. Moreover, the fraud involved improper sales at BT Italy, which
Cavestany was responsible to oversee. Accordingly, Cavestany’s scienter is imputed to BT.
ADDITIONAL SCIENTER ALLEGATIONS 252. As alleged herein, Defendants acted with scienter in that Defendants knew that the
public documents and statements issued or disseminated in the name of the Company were
materially false and misleading; knew that such statements or documents would be issued or
disseminated to the investing public; and knowingly and substantially participated or acquiesced
in the issuance or dissemination of such statements or documents as primary violations of the
federal securities laws. As set forth elsewhere herein in detail, Defendants, by virtue of their
22 As explained above, BT Italy reported to BT Global Services, and Cavestany supervised BT Italy employees.
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receipt of information reflecting the true facts regarding BT Group, their control over, and/or
receipt and/or modification of BT Group’s allegedly materially misleading misstatements, and/or
their associations with the Company which made them privy to confidential proprietary
information concerning BT Group, participated in the fraudulent scheme alleged herein.
253. Defendants Alvarez and Cameron set unrealistically high earnings objectives that
could not be met absent accounting manipulations. When BT Global Services fell short of
achieving these objectives, Alvarez, Cameron, and other BT Global Services personnel directed
financial accounting personnel in Italy to falsely inflate the Company’s actual financial results,
exhorting them to “look for” and “find” ways to close such shortfalls in a way that has been
described by a former accounting expert for Milan prosecutors as “significant evidence” of
wrongful accounting. The report of Italy’s financial police reveals that Alvarez, Cameron, and
other BT Global Services personnel repeatedly asked financial accounting personnel in Italy to
“accommodate” their requests for specified amounts of additional profits that were needed to
eliminate shortfalls in previously announced estimates by suggesting “knowingly wrong
accounting practices,” including deferring the recognition of ordinary business expenses by
fraudulently recording them as assets.
254. In addition, Defendant Alvarez sold shares in BT Group worth £674,500 in
December 2016, approximately one month after BT Group had initially raised concerns about
fraud in Italy but before the scale of the scandal had been disclosed. Alvarez retained 323,300
shares, worth £977,400 on January 25, 2017. News of Alvarez’s personal share sale emerged on
January 25, 2017.
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LOSS CAUSATION 255. During the Class Period, as detailed herein, Defendants engaged in a scheme to
deceive the market and a course of conduct that artificially inflated the price of BT Group ADRs
and operated as a fraud or deceit on purchasers of BT Group ADRs during the Class Period by
failing to disclose and misrepresenting the adverse facts detailed herein. As Defendants’ prior
misrepresentations and fraudulent conduct were disclosed and became apparent to the market, the
price of BT Group ADRs declined significantly as the prior artificial inflation came out of the
Company’s ADRs.
256. As a result of their purchases of BT Group ADRs during the Class Period, Plaintiffs
and the other Class members suffered economic loss, i.e., damages, under the federal securities
laws. Defendants’ false and misleading statements had the intended effect and caused BT Group
ADRs to trade at artificially inflated levels throughout the Class Period, reaching as high as $37.49
per ADR on November 19, 2015.
257. By concealing from investors the adverse facts detailed herein, Defendants
presented a misleading picture of BT Group’s business, products, and operations. When the truth
about the Company was revealed to the market, the price of BT Group ADRs fell significantly.
These declines removed the inflation from the price of BT Group ADRs, causing real economic
loss to investors who had purchased BT Group ADRs during the Class Period.
258. The declines in the price of BT Group ADRs after the corrective disclosures came
to light were a direct result of the nature and extent of Defendants’ fraudulent misrepresentations
being revealed to investors and the market. The timing and magnitude of the price declines in BT
Group ADRs negates any inference that the losses suffered by Plaintiffs and the other Class
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members were caused by changed market conditions, macroeconomic or industry factors, or
Company-specific facts unrelated to Defendants’ fraudulent conduct.
259. The economic loss, i.e., damages, suffered by Plaintiffs and the other Class
members was a direct result of Defendants’ fraudulent scheme to artificially inflate the price of
BT Group ADRs and the subsequent significant decline in the value of BT Group ADRs when
Defendants’ prior misrepresentations and other fraudulent conduct were revealed.
Applicability of Presumption of Reliance: Fraud-on-the-Market Doctrine 260. At all relevant times, the market for BT Group ADRs was an efficient market for
the following reasons, among others:
(a) BT Group ADRs met the requirements for listing, and were listed and
actively traded on the NYSE, a highly efficient, electronic stock market;
(b) as a regulated issuer, BT Group filed periodic public reports with the SEC
and the NYSE;
(c) BT Group regularly communicated with public investors via established
market communication mechanisms, including regular disseminations of press releases on the
national circuits of major newswire services and other wide-ranging public disclosures, such as
communications with the financial press and other similar reporting services; and
(d) BT Group was followed by securities analysts employed by major
brokerage firms who wrote reports that were distributed to the sales force and certain customers
of their respective brokerage firms. Each of these reports was publicly available and entered the
public marketplace.
261. As a result of the foregoing, the market for BT Group ADRs promptly digested
current information regarding BT Group from all publicly available sources and reflected such
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information in the prices of the securities. Under these circumstances, all purchasers of BT Group
ADRs during the Class Period suffered similar injury through their purchase of BT Group ADRs
at artificially inflated prices and a presumption of reliance applies.
COUNT I Violation of Section 10(b) of the Exchange Act and Rule 10b-5 Against BT Group 262. Plaintiffs repeat and reallege each and every allegation contained above as if fully
set forth herein.
263. During the Class Period, BT Group disseminated or approved the materially false
and misleading statements specified above, which it knew or recklessly disregarded were
misleading in that they contained misrepresentations and failed to disclose material facts necessary
in order to make the statements made, in light of the circumstances under which they were made,
not misleading.
264. BT Group: (a) employed devices, schemes, and artifices to defraud; (b) made
untrue statements of material fact and/or omitted to state material facts necessary to make the
statements not misleading; and (c) engaged in acts, practices, and a course of business which
operated as a fraud and deceit upon the purchasers of the Company’s ADRs during the Class
Period.
265. BT Group’s knowledge of the falsity of its public statements has several factual
bases.
266. BT Group admitted to intentional misconduct by at least five members of the senior
management of BT Italy, all of whom were fired by BT Group. BT Italy’s CEO stated that, rather
than BT Group being “kept in the dark” about BT Italy’s fraudulent accounting practices, the
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financial transactions were “verified and authorized by the parent company and by the audit units
and firms.”
267. BT Group’s Audit & Risk Committee was aware of sustained problems in the
control environment of the Company’s Italian operations. In fiscal years 2013, 2014, 2015, and
2016, the Audit & Risk Committee placed special emphasis on investigating these problems, yet
failed to: (1) put a stop to the rampant fraud that was taking place in BT Italy; and (2) disclose the
true extent of the problems, despite assuring investors, through the Company’s internal-control
certifications, that there were no material weaknesses in internal controls.
268. Defendants Alvarez and Cameron, respectively the CEO and CFO of BT Global
Services – BT Group’s largest revenue-producing line of business – set unrealistically high
earnings objectives that could not be met absent accounting manipulations. When BT Global
Services fell short of achieving these objectives, Alvarez, Cameron, and other Global Services
personnel directed financial accounting personnel in Italy to falsely inflate the Company’s actual
financial results, exhorting them to “look for” and “find” ways to close such shortfalls in a way
that has been described by a former accounting expert for Milan prosecutors as “significant
evidence” of wrongful accounting. The report of Italy’s financial police reveals that Alvarez,
Cameron, and other Global Services personnel repeatedly asked financial accounting personnel in
Italy to “accommodate” their requests for specified amounts of additional profits that were needed
to eliminate shortfalls in previously announced estimates by suggesting “knowingly wrong
accounting practices,” including deferring the recognition of ordinary business expenses by
fraudulently recording them as assets.
269. In November 2015, three BT Italy employees warned BT Global Services’ Vice
President of Iberia and head of European sales, Jacinto Cavestany, about possible accounting
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problems at BT Italy, bullying by BT Italy management, especially its then-CEO, and pressure to
meet difficult bonus targets.
270. As explained in ¶¶93-94, it would have been “impossible” for BT Group not to
notice that something was wrong with BT Italy’s accounting system and certain transactions.
271. Due to the foregoing, Defendants Livingston, Patterson, and Chanmugam had
access to information that contradicted their public statements and/or failed to check information
they had a duty to monitor, to the extent that:
(i) they had a statutory duty to monitor the Company’s internal
controls, and their failure to check information they had a duty to monitor constitutes recklessness;
(ii) they admittedly: (1) were personally responsible for establishing and
maintaining the Company’s internal controls over financial reporting; and (2) personally designed
such internal controls over financial reporting, or caused such controls over financial reporting to
be designed under their supervision;
(iii) as evidenced by the Company’s own admissions, the Company did
not maintain effective internal controls; and
(iv) they falsely certified the efficacy of the Company’s internal
controls.
272. Chanmugam left BT Group under suspicious circumstances and his bonuses were
clawed back twice.
273. BT Group itself acknowledged that “at the start of 2016,” the Company received
reports of bullying cases at BT Italy, in response to which senior Human Resources officials visited
the Italian offices and investigated. Despite this undisclosed, adverse information concerning BT
Italy known to BT Group’s senior company representatives – in which they learned that the scope
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of problems in the control environment at BT Italy had expanded – on May 19, 2016, Defendant
Rose misleadingly stated in BT Group’s 2016 Annual Report: “We have continued to monitor our
operations in Italy and progress has been made to improve the control environment.”
274. In addition, the Company committed significant violations of IFRS, and a
government investigation of the wrongful conduct at the Company is ongoing.
275. These facts create a strong inference that someone whose intent could be imputed
to BT Group acted with the requisite scienter.
276. As a direct and proximate result of BT Group’s wrongful conduct, Plaintiffs and
the Class have suffered damages in that, in reliance on the integrity of the market, they paid
artificially inflated prices for BT Group ADRs. Plaintiffs and the Class would not have purchased
BT Group ADRs at the prices they paid, or at all, if they had been aware that the market prices had
been artificially and falsely inflated by BT Group’s misleading statements.
COUNT II Violation of Section 10(b) of the Exchange Act and Rule 10b-5 Promulgated Thereunder Against the Individual Defendants 277. Plaintiffs repeat and reallege each and every allegation contained above as if fully
set forth herein.
278. During the Class Period, the defendants named herein disseminated or approved
the materially false and misleading statements specified above, which they knew or recklessly
disregarded were misleading in that they contained misrepresentations and failed to disclose
material facts necessary in order to make the statements made, in light of the circumstances under
which they were made, not misleading.
279. The defendants named herein: (a) employed devices, schemes, and artifices to
defraud; (b) made untrue statements of material fact and/or omitted to state material facts
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necessary to make the statements not misleading; and (c) engaged in acts, practices, and a course
of business which operated as a fraud and deceit upon the purchasers of the Company’s ADRs
during the Class Period.
280. The following facts, viewed holistically, establish the scienter of the defendants
named herein:
(a) senior management of BT Italy committed intentional misconduct;
(b) BT Group’s Audit & Risk Committee was aware of sustained problems in
the control environment of the Company’s Italian operations during fiscal years 2013, 2014, 2015,
and 2016, and reported their awareness of these problems in the Company’s Annual Reports,
which the defendants named herein reviewed and approved;
(c) Defendants Alvarez and Cameron set unrealistically high earnings
objectives that could not be met absent accounting manipulations. When BT Global Services fell
short of achieving these objectives, Alvarez, Cameron, and other BT Global Services personnel
directed financial accounting personnel in Italy to falsely inflate the Company’s actual financial
results, exhorting them to “look for” and “find” ways to close such shortfalls in a way that has
been described by a former accounting expert for Milan prosecutors as “significant evidence” of
wrongful accounting. In fact, the report of Italy’s financial police reveals that Alvarez, Cameron,
and other BT Global Services personnel repeatedly asked financial accounting personnel in Italy
to “accommodate” their requests for specified amounts of additional profits that were needed to
eliminate shortfalls in previously announced estimates by suggesting “knowingly wrong
accounting practices,” including deferring the recognition of ordinary business expenses by
fraudulently recording them as assets;
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(d) in November 2015, three BT Italy employees warned BT Group’s Vice
President of Iberia and head of European sales about possible accounting problems at BT Italy,
bullying by BT Italy management, especially BT Italy’s then-CEO, and pressure to meet difficult
bonus targets;
(e) BT Italy’s CEO stated that, rather than BT Group being “kept in the dark”
about BT Italy’s fraudulent accounting practices, the financial transactions were “verified and
authorized by the parent company and by the audit units and firms”;
(f) as explained in ¶¶93-94, it would have been “impossible” for BT Group not
to notice that something was wrong with BT Italy’s accounting system and certain transactions;
(g) Chanmugam left BT Group under suspicious circumstances and his bonuses
were clawed back twice;
(h) BT Group itself acknowledged that “at the start of 2016,” the Company
received reports of bullying cases at BT Italy, in response to which senior Human Resources
officials visited the Italian offices and investigated. Despite this undisclosed, adverse information
concerning BT Italy known to BT Group’s senior company representatives – in which they learned
that the scope of problems in the control environment at BT Italy had expanded – on May 19,
2016, Defendant Rose misleadingly stated in BT Group’s 2016 Annual Report: “We have
continued to monitor our operations in Italy and progress has been made to improve the control
environment”;
(i) due to the foregoing, the defendants named herein had access to information
contradicting their public statements and/or failed to check information they had a duty to monitor,
to the extent that:
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(i) they had a statutory duty to monitor the Company’s internal
controls, and their failure to check information they had a duty to monitor constitutes recklessness;
(ii) they admittedly: (1) were personally responsible for establishing and
maintaining the Company’s internal controls over financial reporting; and (2) personally designed
such internal controls over financial reporting, or caused such controls over financial reporting to
be designed under their supervision;
(iii) as evidenced by the Company’s own admissions, the Company did
not maintain effective internal controls; and
(iv) they falsely certified the efficacy of the Company’s internal
controls;
(j) the Company committed significant violations of IFRS; and
(k) a government investigation of the wrongful conduct at the Company is
ongoing.
281. As a direct and proximate result of the wrongful conduct committed by the
defendants named herein, Plaintiffs and the Class have suffered damages in that, in reliance on the
integrity of the market, they paid artificially inflated prices for BT Group ADRs. Plaintiffs and
the Class would not have purchased BT Group ADRs at the prices they paid, or at all, if they had
been aware that the market prices had been artificially and falsely inflated by Defendants’
misleading statements.
COUNT III Violation of Section 20(a) of the Exchange Act Against the Individual Defendants 282. Plaintiffs repeat and reallege each and every allegation contained above as if fully
set forth herein.
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283. During the Class Period, the Individual Defendants participated in the operation
and management of BT Group, and conducted and participated, directly and indirectly, in the
conduct of BT Group’s business affairs. Because of their senior positions, they knew the adverse
non-public information about BT Group’s false financial statements and materially weak internal
controls.
284. As officers and/or directors of a publicly owned company, the Individual
Defendants had a duty to disseminate accurate and truthful information with respect to BT Group’s
financial condition and results of operations, and to correct promptly any public statements issued
by BT Group that had become materially false or misleading.
285. Because of their positions of control and authority as senior officers, the Individual
Defendants were able to, and did, control the contents of the various reports, press releases and
public filings that BT Group disseminated in the marketplace during the Class Period concerning
BT Group’s results of operations. Throughout the Class Period, the Individual Defendants
exercised their power and authority to cause BT Group to engage in the wrongful acts complained
of herein. The Individual Defendants, therefore, were “controlling persons” of BT Group within
the meaning of Section 20(a) of the Exchange Act. In this capacity, they participated in the
unlawful conduct alleged which artificially inflated the market price of BT Group ADRs.
286. Each of the Individual Defendants, therefore, acted as a controlling person of BT
Group. By reason of their senior management positions and/or being directors of BT Group, each
of the Individual Defendants had the power to direct the actions of, and exercised the same to
cause, BT Group to engage in the unlawful acts and conduct complained of herein. Each of the
Individual Defendants exercised control over the general operations of BT Group and possessed
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the power to control the specific activities that comprise the primary violations about which
Plaintiffs and the other members of the Class complain.
287. By reason of the above conduct, the Individual Defendants are liable pursuant to
Section 20(a) of the Exchange Act for the violations committed by BT Group.
PRAYER FOR RELIEF WHEREFORE, Plaintiffs, on behalf of themselves and the Class, pray for judgment as
follows:
A. Determining that this action is a proper class action, and certifying Plaintiffs as
Class representatives under Rule 23 of the Federal Rules of Civil Procedure and Plaintiffs’ counsel
as Class counsel;
B. Awarding compensatory damages in favor of Plaintiffs and the other Class
members against all Defendants, jointly and severally, for all damages sustained as a result of
Defendants’ wrongdoing, in an amount to be proven at trial, including interest thereon;
C. Awarding Plaintiffs and the Class their reasonable costs and expenses incurred in
this action, including counsel fees and expert fees; and
D. Awarding such other relief as the Court deems just and proper.
JURY DEMAND Plaintiffs hereby demand a trial by jury.
DATED: August 16, 2019 CARELLA, BYRNE, CECCHI, OLSTEIN, BRODY & AGNELLO, P.C. Liaison Counsel for Plaintiffs and the Putative Class
By: /s/ James E. Cecchi JAMES E. CECCHI
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James E. Cecchi Donald A. Ecklund 5 Becker Farm Road Roseland, NJ 07068 (973) 994-1700
Liaison Counsel for Plaintiffs and the Putative Class Samuel H. Rudman David A. Rosenfeld Alan I. Ellman ROBBINS GELLER RUDMAN & DOWD LLP 58 South Service Road, Suite 200 Melville, NY 11747 (631) 367-7100
Lead Counsel for Plaintiffs and the Putative Class
Corey D. Holzer Marshall P. Dees HOLZER & HOLZER, LLC 200 Ashford Center North, Suite 300 Atlanta, GA 30338 (770) 392-0090
Additional Plaintiffs’ Counsel
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EXHIBIT A Case 2:17-cv-00497-KM-JBC Document 65-1 Filed 08/16/19 Page 2 of 12 PageID: 1554 DJ TRANSPERFECT
City of New York, State of New York, County of New York
I, Anders Ekholm, hereby certify that the document, "EXCLUSIVE - BT Italia, from the "sink" to "double billing" on its balance sheets. First Sos in November 2015" is, to the best of my knowledge and belief, a true and accurate translation from Italian into English.
Anders~- Ekholm-
Sworn to before me this September 28, 2018
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LANGUAGE AND TECHNOLOGY SOLUTIONS FOR GLOBAL BUSINESS THREE PARK AVENUE, 39TH FLOOR, NEW YORK, NY 10016 I T 212.689.5555 I F 212.689.1059 I WWW.TRANSPERFECT.COM OFFICES IN 90 CITIES WORLDWIDE Case 2:17-cv-00497-KM-JBC Document 65-1 Filed 08/16/19 Page 3 of 12 PageID: 1555
9/27/2018 EXCLUSIVE - BT Italia, from the “sink” to “double billing” on its balance sheets. First Sos in November 2015 By Reuters
EXCLUSIVE - BT Italia, from the “sink” to “double billing” on its balance sheets. First Sos in November 2015
® Reuters. BT Italia, from the “sink” to “double billing” on its balance sheets. First Sos in November 2015.
by Emilio Parodi
MILAN (Reuters) – From the “sink” to double billing, from triangulations with a limited group of suppliers to the overestimated value of orders to guarantee bonuses, in a work environment characterized by extremely strong pressure on staff and the setting of extremely high targets.
This is the picture painted to Reuters by five sources, four employees and an ex-official of British Telecom Italia (MI: TLIT), and which is confirmed by the initial findings of the criminal inquiry over the last three years into the BT subsidiary, which in October 2016 led the parent company to dismiss the former Italian heads after an internal audit, in January to cut the forecasts for revenue, profits and free cash flow for 2017 and 2018 and which led the CEO Gavin Patterson to cite “serious accounting irregularities in the Italian operations” with a “hole” of 530 million pounds exposed.
Patterson then attributed responsibility to a limited group of Italian managers who “kept London in the dark” regarding the fraudulent accounting practices. But the ex-CEO Gianluca Cimini responds that everything “was verified and authorized by the parent company”.
In addition, one of the sources told Reuters that already in November 2015, on the sidelines of a corporate meeting in Munich, three mid- level Italian managers expressed to their European superior their suspicions regarding the accounts and had complained of the climate “of terror” to which the employees in Italy were subject.
The source, who participated in the meeting, stated that the three raised concerns regarding the activities of the Italian senior management to Jacinto Cavestany, head of European Sales for BT. The response to the three, says the source, was the request to help the Italian management move in the right direction.
Cavestany, contacted by Reuters, stated through BT that he had “no recollection of these questions having been raised at the time” of the meeting in Munich. Reuters is unable to independently verify the entire account of the meeting on the sidelines of that corporate meeting.
Another internal source adds that he considers it “impossible” that London had no way of realizing what was happening in Italy, noting that the accounting software system at BT Italia is “open” to the parent company and it is possible to conduct checks by logging into the
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system at any time.
BT LONDON: I ONLY LEARNED OF THE IRREGULARITY IN THE SUMMER OF 2016.
British Telecom, in a statement sent in response to Reuters, states that it “learned of the financial irregularities after having received warnings of inappropriate conduct late in the summer of 2016”.
“This led us to conduct an initial investigation of the alleged conduct, as we announced in October. Additional investigations have revealed that the extent and complexity of the inappropriate conduct in the Italian operations was much vaster than what had initially emerged and found improper accounting practices as well as a complex set of improper sales, factoring and leasing transactions”.
“Separately, we received reports of bullying cases at BT Italy at the start of 2016. Senior Human Resources officials visited the Italian offices and investigated. BT does not tolerate bullying or violations of our policies and, as announced previously, a number of senior managers at BT Italy have consequently left the group”.
PUBLIC PROSECUTOR’S OFFICE OF MILAN REVIEWS THE PWC AUDITS
On January 24, the same day as the press release issued by the CEO Patterson, the Prosecutor’s Office of Milan opened an investigation into false balance sheets and misappropriation coordinated by the deputy prosecutor Fabio De Pasquale and by the public prosecutor Silvia Bonardi and conducted by the Tax Unit of the Italian Finance Police.
The investigators, say two sources with knowledge of the case, first obtained the report assigned by BT to KPMG, which allegedly evidenced the accounting irregularities and then the result of the internal audit compiled by the London inspectors, who arrived in Milan last summer for the alleged bullying cases.
In addition, the investigators obtained and are reviewing all reports prepared by the auditor Pricewaterhouse (PWC) starting in 2013, the year in which Cimini, who was among the directors dismissed by BT, became CEO, to understand how nothing ever emerged earlier. PWC has not released comments on this point.
BT London, a party potentially harmed by the alleged crimes, has currently not yet filed a formal complaint with the judicial authorities, say two sources with direct knowledge of the case. BT, contacted by Reuters, has not commented on this point.
THE ALLEGED TRICKS
The ex-manager of BT Italia and the four employees, whose experience ranges from finance to sales to procurement, have reconstructed, according to their direct knowledge and accounts by colleagues, essentially four instruments for accounting adjustments. Their account, say two sources with direct knowledge of the case, is generally confirmed by the KPMG report, which is still being drafted and which is still much less specific than the employees’ descriptions.
Fictitious purchases in exchange for credit notes.
In this way, say the five sources, BT Italia turns to a limited group of suppliers (two of the sources indicate four companies) and creates a fictitious purchase order without a request from any specific internal departments. The purchase order is recorded in the Capex. The supplier issues a credit note for an amount equal to the order (as if BT Italia had cancelled the purchase) and BT Italia puts it on the balance sheet to improve its EBIT, as it is never collected from the supplier. There is no true money but an adjustment of the balance sheet as needed. Reuters is unable to accurately determine if these suppliers were aware of this scheme. One of the sources also noted that in some cases, this credit note was assigned to another (factoring company), which paid BT a lower fee, but which in any case guaranteed an injection of liquidity. Later, obviously, says the source, disputes arose.
The advantage for the suppliers was to become habitual suppliers, say two of the sources. The others were in fact almost excluded from the list. The paradox, adds one of the internal sources, is that now the positions are reversed and the one who was always used initially is now on the blacklist, and vice-versa.
The latter source lastly claims that it would have been practically impossible for an auditor not to realize that something was amiss, as these purchases were all written in the same way, only changing the numbers and occasionally the supplier. What is more, says the source, both the purchase request as well as the purchase order and the cost acquisition were all performed by the same person in the finance department.
“You don’t even need to check the entire balance sheet, you just need to concentrate on the months of March and April each year”, adds the source, referring to the fact that the majority of the transactions were concentrated between the close and opening of the fiscal year.
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“Sink” or factoring trading.
This is a practice to increase revenue, called “sink” by the BT Italia staff. In practice, a company makes itself a “box mover” between a creditor and a debtor and collects the receivable. It is not illegal, obviously, but it is risky, and one of the sources highlights how in recent years the use of this item has increased by 10 times on the BT Italia balance sheets. Another internal source notes that this item went from 2% of BT Italia’s annual revenue in the years prior to 2013 to more than 20% in the fiscal year from April 2015 to March 2016. This latter source adds that on more than one occasion, these transactions were recorded on the UK intranet by the person who had conducted them as commercial transactions with a margin of 50-60%, when the actual profit margin from the factoring trading was around 1.5%.
Inflated orders.
One of the four sources claims that one practice consisted of inflating the value of the orders that were recorded in the internal system and sent to London at the time of signing a contract with a client. This involved so-called “claims”. A salesperson executes a contract with a company and does not state its value, which is valued by the head of his or her team, then by the product manager, then by the heads of BT Italia and lastly sent to London. The parent company pays the bonuses if the orders reach or exceed the set target. The bonus is – for everyone – 50% of the fixed gross compensation. According to the source, in fiscal year 2015 claims were sent to the parent company for 300 million orders, which if true would translate into an actual figure of at least 10 times less. The source cited the examples of the numbers “199” and “800”, contracts that the telephone operator signs with the companies that intend to use these numbers. The earnings for the operator are measured by the minutes, generally a few cents (in euros) per minute, which the company pays to the operator based on a telephone minute counter. At the time of signing these contracts, according to the source, a value was stated, let’s use 10, which contributed toward reaching the total order target. No one, explains the source, then went to check, one year later, how much money was then truly recorded on the balance sheet, if 10 or 1. The fact that the orders were conspicuous was useful to Italy for reaching the bonuses, but it was obviously also a positive for London, according to the source, as the orders are one of the main items supporting the stock price.
Double billing.
Two of the five internal sources lastly cited a final accounting trick. That is, according to the contingent balance sheet demands, an invoice to a client with a certain payment due date was recorded a second time, just changing something. Obviously, they say, the invoice was not resent to the client, who was left completely in the dark, and therefore was not collected. But simply put on the balance sheet. And then potentially converted into a provision or assignment of receivables.
One of the sources in particular explains that on the “double” invoice, to avoid the risk of the client truly being charged, it ended in a parallel accounting software system. Only that recently, says the source, this billing amount was increased so much that for any error in these “double” invoices it ended in factoring, with the result that some clients realized that the same invoice was allocated to them twice.
The same source highlights that the double or triple billing was rendered simpler by the fact that at BT Italia there were dozens of different independent accounting software systems. This is because each one of the smallest companies acquired by BT over the years has maintained its original software system. For example, says the source, I.net has SAP, while BT Italia has a different system. “But, if there is no integrated system within the individual country units at British Telecom, not just in Italy, it is a decision by BT London”, the source concludes.
“UNREACHABLE” TARGETS
Two of the internal sources explain that the setting of ever more difficult targets also contributed to increasing the pressure to the limit. A BT Italia internal document seen by Reuters states that in 2013, a team of 10 sales employees was given a target of 41 million orders in one year. The BT ex-employee says that he is aware that just two years later, the annual target for a similar team of one of the largest Italian telephone companies was two million orders. Another of the sources, an account manager, states that in the last fiscal year ending March 31, his annual sales target increased by more than 100%.
CIMINI: NOTHING ILLEGAL, EVERYTHING AUTHORIZED BY LONDON
The CEO at the time, with respect to the comments on alleged accounting irregularities, responded in an email to Reuters that he was not personally “aware of illegal conduct, nor do I have documents showing illegal conduct”.
“In addition – Cimini continues – the financial transactions executed during my leadership (I recall that I became CEO only in 2013) were properly verified and authorized by the parent company and by the audit units and firms”.
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BULLYING, THE CEO’S VERSION AND “PROJECT CRANE”
The avalanche that overtook BT Italia’s top management started from a snowball, consisting of the initial complaints regarding the corporate climate, which the internal management began receiving at the end of 2013, start of 2014. A snowball that gradually thickened until leading to the first warnings to the parent company, through an internal ethics phone line guaranteeing anonymity, in the first half of 2016. Warnings that led to the arrival of the inspectors from London last summer, which also led to the discovery of the alleged irregularities in the accounts and the dismissal of the top management.
All five internal sources consistently mention a highly aggressive escalation of conduct, with personal attacks in public, directed by the top management against subordinates, such that all use the expression “climate of terror”.
And all five cite various specific episodes in which the CEO Cimini appears.
“As it concerns the work environment, I can say in general that the last survey on the BT Italia corporate climate was among the best in Europe”, Cimini responds via email. “The bullying episodes that were reported are truly fantasies and lies, but clearly people invent and talk about what they don’t know when they think they’re protected by anonymity”.
The BT inspectors that arrived from London last summer collected statements from 40 people and prepared an internal audit report entitled “Project Crane”.
Two different sources with direct knowledge of the case stated that in the 42-page report, many episodes are cited in which the ex-CEO’s name appears. The report, one of the two sources confirms, concludes with the finding of cases of “bullying and inappropriate behavior” by the Italian management.
- Valentina Consiglio from Rome
- Paul Sandle, Kate Holton, Simon Jessup and Kirstin Ridley from London
- Agnieszka Flak from Milan
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Responsibility:
5/5 9/27/2018 ESCLUSIVA - BT Italia, nei bilanci dal "lavandino" alle "bifatture". Primo Sos a novembre 2015 Da Reuters Case 2:17-cv-00497-KM-JBC Document 65-1 Filed 08/16/19 Page 8 of 12 PageID: 1560 ESCLUSIVA - BT Italia, nei bilanci dal "lavandino" alle "bifatture". Primo Sos a novembre 2015
Reurers BT lt<1li.1. net bllam;1 lnl "l,Nanrllnn ·ilh "b1fatture" Pnnm ,:,om, n novr-,rnbr:, _l)15
di Emilio Parodi
MILANO (Reuters) - Dal "Javandino" alle doppie fatturazioni, dalle triangolazioni con un ristretto gruppo di fornitori al valore sovrastimato degli ordini per garantirsi i bonus, in un ambiente lavorativo caratterizzato da una fortissima pressione sullo staff e dall'imposizione di target elevatissimi.
E' ii quadro che tratteggiano a Reuters cinque fonti, quattro dipendenti e un ex funzionario di British Telecom Italia (Ml: TLIT ), e che viene confermato dai primi accertamenti dell'inchiesta penale, degli ultimi tre anni della controllata di BT, che hanno portato nell'ottobre 2016 la casa mad re ad allontanare gli ex vertici italiani dopo un audit interno, a tagliare a gennaio stime di ricavi, utili e free cash flow per ii 2017 e ii 2018 e a spingere ii Ceo Gavin Patterson a citare "gravi irregolarita contabili nelle attivita italiane" con un "buco" salito a 530 milioni di sterline.
Patterson ha in seguito attribuito la responsabilita a un ristretto gruppo di manager italiani che "ha tenuto all'oscuro Londra" delle pratiche contabili fraudolente. Ma l'ex AD Gianluca Cimini risponde che tutto "era verificato e autorizzato da casa madre".
lnoltre, una delle fonti ha detto a Reuters che gia nel novembre del 2015, a margine di un incontro aziendale a Monaco di Baviera, Ire manager di medic livello italiani avevano espresso al Joro superiore europeo i loro sospetti sui conti e avevano denunciato ii clima "di terrore" a cui i dipendenti erano sottoposti in Italia.
La fonte, che partecipo all'incontro, ha riferito che i tre sollevarono dubbi sulla gestione del top management italiano a Jacinto Cavestany, capo delle European Sales di BT. La risposta ai Ire, dice la fonte, fu la richiesta di dare una mano a far andare ii management italiano nella giusta direzione.
Cavestany, contattato da Reuters, ha fatto sapere, attraverso BT, di non aver "alcun ricordo che quelle questioni gli furono sollevate in occasione" del meeting di Monaco. Reuters non e in grado di verificare in modo indipendente l'intero resoconto dell'incontro a margine di quel meeting aziendale.
Un'altra fonte interna aggiunge di ritenere "impossibile" che Londra non avesse modo di accorgersi di quel che stava avvenendo in Italia, precisando che ii sistema informatico contabile di BT Italia e "aperto" per la casa madre ed e possibile effettuare controlli entrando nel sistema in file:///H :/180927%20 _ %20ESCLUS1VA %20-%20BT%201talia, %20nei%20bilanci%20dal%20_1avandino_%20alle%20_bifatture_. %20Primo%20Sos%2.. 1/ 5 9/27/2018 ESCLUSIVA - BT Italia, nei bilanci dal "lavandino" alle "bifatture". Primo Sos a novembre 2015 Da Reuters Case 2:17-cv-00497-KM-JBC Document 65-1 Filed 08/16/19 Page 9 of 12 PageID: 1561 qualunque momento.
BT LONDRA: SAPUTO DI IRREGOLARITA' SOLO IN ESTATE 2016
British Telecom , in una dichiarazione inviata in risposta a Reuters dice di essere "venuta a conoscenza delle irregolarita finanziarie dopo aver ricevuto delle segnalazioni di comportamento non consono nella tarda estate del 2016".
"Questo ci ha spinto a condurre una inchiesta iniziale delle presunte condotte come abbiamo annunciato in ottobre. Ulteriori indagini hanno rivelato che l'estensione e la complessita dei comportamenti non consoni nelle attivita italiane erano molto piu vaste di quel che era emerso in un primo tempo e hanno accertato pratiche contabili improprie cosi come un complesso insieme di vendite improprie, e transazioni di factoring e leasing".
"Separatamente, abbiamo ricevuto denunce di casi di mobbing a BT Italy all'inizio del 2016. Alli funzionari delle Risorse Umane hanno fatto visita alla sede italiana e hanno indagato. BT non tollera mobbing o infrazioni delle nostre policy e, come annunciato in precedenza, un numero di senior manager di BT Italy ha di conseguenza lasciato ii gruppo".
PM MILANO ESAMINANO REVISION! PWC
II giorno stesso della conferenza stampa del Ceo Patterson, ii 24 gennaio, la procura di Milano ha aperto un'inchiesta per falso in bilancio e appropriazione indebita coordinata dal procuratore aggiunto facente funzioni Fabio De Pasquale e dal pm Silvia Bonardi e condotta dal Nucleo Tributario della Gdf.
Gli investigatori, dicono due fonti a conoscenza del dossier, hanno prima acquisito ii report affidato da BT a Kpmg che avrebbe evidenziato le irregolarita contabili e poi ii risultato dell'internal audit compilato dagli ispettori londinesi arrivati a Milano nell'estate scorsa sui presunti casi di mobbing.
lnoltre gli inquirenti hanno acquisito e stanno esaminando tutti i rapporti redatti dal revisore Pricewaterhouse (PWC) a partire dal 2013, l'anno in cui divenne AD Cimini, fra i dirigenti allontanati da BT, per capire come mai nulla fosse emerso prima. PWC non ha rilasciato commenti sul punto.
BT Londra, eventuale parte lesa dei reati presunti, al momenta non ha presentato ancora una formale denuncia all'autorita giudiziaria, dicono due fonti a diretta conoscenza del dossier. BT, contattata da Reuters, sul punto non ha commentato.
I PRESUNTI TRUCCHI
L'ex manager di BT Italia e i quattro dipendenti, la cui esperienza va dal finance al sales al procurement. hanno ricostruito, secondo la loro conoscenza diretta e i racconti dei colleghi, essenzialmente quattro strumenti di aggiustamento dei conti. 11 loro racconto, dicono due fonti a diretta conoscenza del dossier, viene confermato per linee generali dal report di Kpmg, che e tuttavia ancora un draft e che ancora e molto meno specifico delle descrizioni dei dipendenti.
Acquisti fittizi in cambio note di credito.
Con questa modalita, dicono le cinque fonti, BT Italia si rivolge a un ristretto gruppo di fornitori(due delle fonti indicano quattro aziende) e faun ordine d'acquisto fittizio senza una richiesta di un qualche settore specifico interno. L'ordine d'acquisto viene inserito a capex. II fornitore emette una nota di credito di pari importo dell'ordine (come se BT Italia avesse disdetto l'acquisto) e BT Italia la mette a bilancio a miglioramento dell'Ebit, pur non riscuotendola mai dal fornitore. Non c'e denaro vero ma una sistemazione del bilancio a seconda delle necessita. Reuters non e stata in grado di determinare con esattezza se questi fornitori fossero consapevoli di questo schema. Una delle fonti ha inoltre precisato che in alcuni casi questa nota di credito sarebbe stata ceduta a qualcun altro (societa di factoring), che corrispondeva a BT un controvalore piu basso, ma comunque garantiva ingresso di liquidita. Poi ovviamente, dice la fonte, si instauravano contenziosi.
II vantaggio per i fornitori era diventare fornitori abituali, dicono due delle fonti. Gli altri erano di fatto quasi esclusi dalla lista. II paradosso, aggiunge una delle fonti interne, e che ora le posizioni si sono ribaltate e chi prima veniva utilizzato sempre, ora e nella black-list, e viceversa.
Quest'ultima fonte infine, sostiene che sarebbe stato praticamente impossibile per un controllore non accorgersi che qualcosa non andava perche questi acquisti erano scritti tutti nello stesso modo, cambiavano solo i numeri e di volta in volta ii fornitore. In piu , dice la fonte, sia richiesta d'acquisto, sia ordine d'acquisto sia acquisizione del costo erano fatte tutte dalla stessa persona, del settore finance.
"Non occorre nemmeno controllare tutto ii bilancio, basta concentrarsi sui mesi di marzo ed aprile di ogni anno", soggiunge la fonte, facendo riferimento al fatto che la maggior parte delle operazioni erano concentrate fra chiusura e apertura dell'anno fiscale. file:///H :/180927%20 _ %20ESCLUS1VA %20-%20BT%20lta1ia, %20nei%20bilanci%20dal%20 _lavandino_ %20alle%20_bifatture _. %20Primo%20Sos%2. . . 2/5 9/27/2018 ESCLUSIVA - BT Italia, nei bilanci dal "lavandino" alle "bifatture". Primo Sos a novembre 2015 Da Reuters Case 2:17-cv-00497-KM-JBC Document 65-1 Filed 08/16/19 Page 10 of 12 PageID: 1562 "Lavandino" o factoring trading.
E' una pratica per far salire ii fatturato, chiamata dallo staff di BT Italia, "lavandino". In pratica una azienda si pone come "box mover" fra un creditore e un debitore e rileva ii credito. Non e illegale, ovviamente, ma e rischioso, e una delle fonti sottolinea come negli ultimi anni l'incidenza di questa voce sia salita di 10 volte nei bilanci di BT Italia. Un'altra fonte interna precisa che questa voce e passata dal 2% del fatturato annuale di BT Italia negli anni precedenti al 2013 a oltre ii 20% nell'anno fiscale aprile 2015-marzo 2016. Quest'ultima fonte aggiunge che piu di una volta queste operazioni venivano registrate nel portale interno UK da chi le aveva condotte come operazioni commerciali con un margine anche del 50-60%, quando ii valore reale del margine di guadagno del factoring trading si aggira sull'1,5%.
Ordini gonfiati.
Una delle quattro fonti sostiene che una pratica consistesse nel gonfiare ii valore degli ordini che venivano registrati nel sistema interno e inviati a Londra alla firma del contralto con un cliente. Si tratta dei cosiddetti "claim". Un venditore chiude un contralto con un'azienda e ne dichiara ii valore, che viene avallato dal capo del suo team, poi dal product manager, poi dai vertici di BT Italia e infine inviato a Londra. La casa madre riconosce i bonus se gli ordini raggiungono o superano ii target fissato. II bonus e - per tutti - ii 50% della retribuzione fissa Jorda. Secondo la fonte, nell'anno fiscale 2015 sarebbero stati inviati alla casa madre claim per 300 milioni di ordini, che alla prova dei fatti si sarebbero tradotti in una cifra reale almeno 10 volte inferiore. La fonte ha citato gli esempi dei numeri "199" e "800", contratti che l'operatore telefonico sigla con le aziende che intendono avvalersi di questi numeri. II guadagno per l'operatore si misura sul minutaggio, in genere qualche centesimo di euro al minute, che l'azienda paga all'operatore sulla base di un contatore di minuti di telefonate. All'atto delle firma di questi contratti, secondo la fonte, veniva dichiarato un valore, poniamo 10, che contribuiva al raggiungimento del target totale di ordini. Nessuno, spiega la fonte, andava poi a controllare, un anno dopo, quanti sol di era no poi veramente entrati in bilancio, se 10 o 1. Che gli ordini fossero cospicui conveniva all'ltalia per ii raggiungimento dei bonus, ma era ovviamente anche un bene per Londra, secondo la fonte, perche gli ordini sono una delle voci principali che sostengono ii titolo in borsa.
Doppie fatture.
Due delle cinque fonti interne hanno infine citato un ultimo stratagemma cantabile. E cioe, a seconda delle esigenze contingenti di bilancio, una fattura a un cliente con un certo mese di competenza veniva registrata una seconda volta, combiando appena qualcosa. Ovviamente, dicono, la fattura non veniva recapitata al cliente, che ne restava completamente all'oscuro, e pertanto non veniva incassata. Ma semplicemente messa a bilancio. E poi eventualmente trasformata in accantonamento o cessione crediti.
Una delle fonti in particolare spiega che sulla fattura "doppia", per non correre ii rischio che venisse veramente caricata al cliente, finiva in un sistema cantabile informatico parallelo. Solo che negli ultimi tempi, dice la fonte, la mole di questa fatturazione era talmente aumentata che per errore qualcuna di queste fatture "doppie" era finita al factoring col risultato che alcuni clienti si resero conto che gli era stata attribuita due volte la stessa fattura.
La stessa fonte sottolinea che la doppia o tripla fatturazione era resa piu semplice dal fatto che in BT Italia ci sarebbero decine di diversi sistemi informatici contabili indipendenti. Questo perche ognuna delle societa piu piccole acquisite nel corso degli anni da BT ha mantenuto ii suo originario sistema informatico. Per esempio, dice la fonte, I.net ha ii Sap, mentre ii sistema principale di BT Italia e un altro. "Pero, se non c'e un sistema integrato all'interno delle singole country unit di British Telecom, non solo in quella italiana, e una decisione di BT Londra", conclude la fonte.
TARGET "IRRAGGIUNGIBILI"
Due delle fonti interne spiegano che a far aumentare la pressione al limite, contribuiva anche l'imposizione di obiettivi sempre piu ardui. In un documento interno di BT Italia vista da Reuters si legge che a un team di 10 dipendenti del settore sales era stato posto nel 2013 ii target di 41 milioni di ordini in un anno. L'ex dipendente di BT dice di essere a conoscenza che solo due anni dopa, l'obiettivo annuale per un analogo team di una delle maggiori compagnie telefoniche italiane era di due milioni di ordini. Un'altra delle fonti, un account manager, fa sapere che nell'ultimo anno fiscale che si conclude ii 31 marzo ii suo target annuale di fatturato e stato aumentato di oltre ii 100%.
CIMINI: NO ILLEGALITA', TUTTO AUTORIZZATO DA LONDRA
L'allora amministratore delegato, a proposito dei rilievi sulle presunte irregolarita contabili risponde in una mail a Reuters di non essere personalmente "a conoscenza di comportamenti illegali, ne ho documenti da cui risultano comportamenti illegali".
"lnoltre - continua Cimini - le operazioni finanziarie che sono state fatte durante ii mio mandato (ricordo che sono stato amministratore delegate soltanto dal 2013) sono state debitamente verificate e autorizzate da casa madre e dagli organi e societa di controllo".
file :///H :/180927%20_ %20ESC LU SIVA %20-%20BT%201tal ia, %20nei%20bilanci%20dal%20 _lavandino_ %20all e%20 _bifatture _.%20Primo%20Sos%2 .. . 3/5 9/27/2018 ESCLUSIVA- BT Italia, nei bilanci dal "lavandino" alle "bifatture". Primo Sos a novembre 2015 Da Reuters Case 2:17-cv-00497-KM-JBC Document 65-1 Filed 08/16/19 Page 11 of 12 PageID: 1563 IL MOBBING, LA VERSIONE DELL'AD E IL "PROJECT CRANE"
La valanga che ha investito ii top management di BT Italia era partita da una palla di neve costituita dalle prime lamentele sul clima in azienda che dalla base iniziarono ad arrivare alle gerarchie interne gia a fine 2013, inizio 2014. Palla di neve che si e via via ingrossata sino a condurre alle prime segnalazioni alla casa madre, attraverso una linea telefonica etica interna che garantisce l'anonimato, nella prima parte del 2016. Segnalazioni che hanno portato all'arrivo degli ispettori da Londra la scorsa estate, che ha condotto anche alla scoperta delle presunte irregolarita nei conti e all'allontanamento del top management.
Tutte e cinque le fonti interne, concordemente, parlano di una escalation di atteggiamenti molto aggressivi , con attacchi personali in pubblico, rivolti dal top management ai sottoposti, tanto che tutti utilizzano l'espressione "clima di terrore".
E tutti e cinque citano diversi episodi specifici, in cui compare la figura dell'AD Cimini.
"Per quel che riguarda l'ambiente di lavoro posso dire in generale che l'ultima survey sul clima aziendale di BT Italia era tra le migliori in Europa - ribatte per email Cimini - Gli episodi di mobbing che sono stati riportati sono vere e proprie fantasie e falsita, ma evidentemente le persone inventano e parlano di cio che non sanno quando pensano di essere protette dall'anonimato".
Gli ispettori di BT arrivati da Londra !'estate scorsa hanno raccolto le dichiarazioni di 40 persone e hanno redatto un rapporto di internal audit intitolato "Project Crane".
Due diverse fonti a diretta conoscenza del dossier hanno riferito che nel rapporto di 42 pagine sono citati molti episodi in cui compare ii nome dell'ex AD. II rapporto, conferma una delle due fonti, si conclude con l'accertamento di casi di "bullying and inappropriate behaviour" (mobbing e comportamento non consono) da parte del management italiano.
- Valentina Consiglio da Roma
- Paul Sandie, Kate Holton, Simon Jessup e Kirstin Ridley da Londra
- Agnieszka Flak da Milano
file:// /H :/180927%20_ %20ESC LUSIVA %20-%20BT%20lta1ia, %20nei%20bilanci%20dal%20_ lavandino_ %20alle%20 _ bifatture_. %20Primo%20Sos%2... 4/5 9/27/2018 ESCLUSIVA - BT Italia, nei bilanci dal "lavandino" alle "bifatture". Primo Sos a novembre 2015 Da Reuters Case 2:17-cv-00497-KM-JBC Document 65-1 Filed 08/16/19 Page 12 of 12 PageID: 1564 Responsabilita: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stock s, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are Indicative an d not appropriate for trading purposes. Therefore Fusion Media doesn ·t bear any responsibility for any trading losses you might incur as a result of using this data.
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file:///H :/180927%20_ %20ESCLUS1VA %20-%20BT%20lta1ia, %20nei%20bilanci%20dal%20_lavandino _ %20alle%20_bifatture _ . %20Primo%20Sos%2. .. 5/5 Case 2:17-cv-00497-KM-JBC Document 65-2 Filed 08/16/19 Page 1 of 3 PageID: 1565
EXHIBIT B
Case 2:17-cv-00497-KM-JBC Document 65-2 Filed 08/16/19 Page 2 of 3 PageID: 1566
Exclusive: BT executives knew of accounting fraud in Italy unit - prosecutors
reuters.com/article/us-bt-italy-exclusive/exclusive-bt-executives-knew-of-accounting-fraud-in-italy-unit- prosecutors-idUSKCN1Q216M MILAN (Reuters) - A preliminary criminal investigation into an accounting scandal at the Italian unit of British telecom firm BT has alleged that three top executives of the group were aware of bookkeeping fraud at the unit, according to a document prepared by Italian prosecutors.
FILE PHOTO: British Telecom (BT)'s headquarters is seen in central London, Britain May 10, 2018. REUTERS/Hannah McKay
The document, which wraps up the preliminary investigation, alleges that a network of people in BT Italy exaggerated revenues, faked contract renewals and invoices and invented bogus supplier transactions in order to meet bonus targets and disguise the unit’s true financial performance.
The closing of the preliminary probe is the final step before prosecutors press charges against the suspects. Under Italian law those under investigation now have three weeks to show why they should not be charged.
In the document, handed this week to parties involved in the investigation and seen by Reuters, prosecutors for the first time have named group executives as suspects in the case, though all three have left BT since the scandal surfaced. Two of them were based in London.
The document also lists BT Italy as a subject of the investigation, no longer as a damaged party.
In an emailed statement, BT said: “It would be inappropriate to comment on an ongoing criminal investigation.”
In the document, prosecutors name Luis Alvarez and Richard Cameron, respectively former chief executive and former chief financial officer of BT Global Services - one of the biggest divisions of BT Group - and Corrado Sciolla, formerly BT’s head of continental Europe, among an expanded list of 23 suspects. Alvarez and Cameron were based in London, while Sciolla was in Milan.
The three are accused of setting unrealistically high business targets and of complicity in false accounting at BT Italy, which formed part of the Global Services division, according to the document. 1/2 Case 2:17-cv-00497-KM-JBC Document 65-2 Filed 08/16/19 Page 3 of 3 PageID: 1567
A lawyer acting for the three could not be immediately reached for comment.
AUDITOR PROBE
The document also reveals that an Italian partner of BT’s auditor, PricewaterhouseCoopers, is under investigation over the scandal, which erupted in 2017 and led the group to write off 530 million pounds ($685 million).
In the document prosecutors allege Andrea Alessandri, who led the PwC team in charge of auditing BT Italia’s accounts, falsified the audit.
Reuters could not immediately contact Alessandri for comment. A PwC spokeswoman said the company had no immediate comment.
When the scandal broke in early 2017, BT’s then chief executive, Gavin Patterson, said that the company could not have detected the problem sooner as top managers in London were unaware. BT filed its own criminal complaint against several of BT’s Italian managers in 2017. It is contesting class-action lawsuits by shareholders who say the group misled investors and failed to promptly disclose the irregularities.
Prosecutors have also placed BT Italia under investigation. Under Italian law, a company can be deemed responsible for alleged crimes committed by its top executives.
BT said in January 2017 that Sciolla was leaving the company and in May 2017 announced the replacement of Alvarez. The company said on Wednesday Cameron had also left in 2017.
Patterson, who is not under investigation, stepped down on Jan. 31 this year. BT said it would not be possible to get a comment from him on the probe.
Britain’s accounting regulator said in June 2017 it would investigate audits by PwC of BT Group in the wake of the Italian scandal. PwC said at the time the British regulator’s annual review of its audit work, policies and procedures showed a continued trend of improvement in PwC’s work.
Additional reporting by Paul Sandle in London and Luca Trogni in Milan; Writing by Silvia Aloisi; Editing by Mark Bendeich and Pravin Char
Our Standards:The Thomson Reuters Trust Principles.
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EXHIBIT C
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› Business Former BT bosses named as suspects in Italian fraud scandal
BT Italia is up for sale in the wake of the scandal https://www.telegraph.co.uk/business/2019/02/13/former-bt-bosses-named-suspects-italian-fraud-scandal/ 1/8 8/15/2019 Case 2:17-cv-00497-KM-JBC FormerDocument BT bosses 65-3 named Filedas suspects 08/16/19 in Italian fraud Page scandal 3 of 9 PageID: 1570
By Christopher Williams, DEPUTY BUSINESS EDITOR Follow 13 FEBRUARY 2019 • 5:37PM
https://www.telegraph.co.uk/business/2019/02/13/former-bt-bosses-named-suspects-italian-fraud-scandal/ 2/8 8/15/2019 Case 2:17-cv-00497-KM-JBC FormerDocument BT bosses 65-3 named Filedas suspects 08/16/19 in Italian fraud Page scandal 4 of 9 PageID: 1571 hree former senior BT executives have been named by Italian prosecutors as suspects Tin a complex fraud that cost the company hundreds of millions of pounds in a development that brings the scandal inside its headquarters for the first time.
Luis Alvarez, the former chief executive of the international outsourcing arm Global Services; Richard Cameron, its chief financial officer; and Corrado Sciolla, who oversaw its operations on the continent, all knew about falsely inflated sales figures at BT Italia, according documents issued by authorities in Milan.
The full extent of the fraud was uncovered in January 2017 and sent BT into a tailspin as it was forced to write off the £530m book value of BT Italia.
The manipulations also wiped £700m from BT's cash flow over two years as it covered costs that had previously not been properly reported, disguising the true performance of the Italian business.
The allegations against Mr Alvarez, Mr Cameron and Mr Sciolla are part of the preliminary findings of a criminal investigation. Previously only local executives had been named by prosecutors, but Mr Alvarez and Mr Cameron were both based in London. A lawyer for the trio, who have not been charged, did not comment.
https://www.telegraph.co.uk/business/2019/02/13/former-bt-bosses-named-suspects-italian-fraud-scandal/ 3/8 8/15/2019 Case 2:17-cv-00497-KM-JBC FormerDocument BT bosses 65-3 named Filedas suspects 08/16/19 in Italian fraud Page scandal 5 of 9 PageID: 1572
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Mr Alvarez’s knowledge of wrongdoing in Italy previously came under scrutiny when he cashed in £675,000 of BT shares in December 2016, after the company had flagged up concerns but before the scale of the scandal had been uncovered and admitted to investors.
He is now part of a list of 23 suspects, first reported by Reuters, which also includes Andrea Alessandri, a PwC accountant who allegedly falsified BT Italia audits.
BT replaced PwC as its auditor of more than three decades in the wake of the scandal, amid boardroom anger that the Big Four firm had repeatedly failed to detect the fraud.
A spokesman for PwC, which is also under investigation by the UK's Financial Reporting Council for its audits of BT, declined to comment.
The scandal proved pivotal in a sharp decline in BT’s fortunes in the second half of chief executive Gavin Patterson's reign. He described BT Italia as “a case of lies built on lies” and was replaced at the start of this month by Philip Jansen, the former Worldpay boss. https://www.telegraph.co.uk/business/2019/02/13/former-bt-bosses-named-suspects-italian-fraud-scandal/ 4/8 8/15/2019 Case 2:17-cv-00497-KM-JBC FormerDocument BT bosses 65-3 named Filedas suspects 08/16/19 in Italian fraud Page scandal 6 of 9 PageID: 1573 Mr Patterson, who is not suspected of wrongdoing and forfeited his bonus a result the fraud (https://www.telegraph.co.uk/business/2018/04/30/former-bt-finance-chief-faces-500k-loss-italian-fraud/), had hoped to draw a line under it prior to his exit by agreeing a sale of BT Italia.
Gavin Patterson was replaced as BT chief executive last year
The unit, overhauled under new management, is being auctioned on BT’s behalf by Credit Suisse (https://www.telegraph.co.uk/business/2018/06/23/bt-offload-scandal-hit-italian-arm/), but the process is not expected to be completed until later this year.
The sale is due as part of partial break-up of Global Services, a division that has triggered multiple profit warnings and legal troubles since it was assembled via rapid takeover activity in the 2000s.
BT aims to reduce its risks by selling off physical networks around the world to focus on providing online services to large corporate clients.
Global Services is also suffering about a third of the 13,000 job cuts announced by Mr Patterson last year as he sought to restore the company’s finances.
Some BT investors remain angry about the company’s handling of the fraud and are pursuing the company for damages through the courts. It has already been forced to pay £225m in compensation to Deutsche Telekom and Orange, who became major shareholders though BT’s £12.5bn takeover of EE, for the slump in its valuation.
https://www.telegraph.co.uk/business/2019/02/13/former-bt-bosses-named-suspects-italian-fraud-scandal/ 5/8 8/15/2019 Case 2:17-cv-00497-KM-JBC FormerDocument BT bosses 65-3 named Filedas suspects 08/16/19 in Italian fraud Page scandal 7 of 9 PageID: 1574
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https://www.telegraph.co.uk/business/2019/02/13/former-bt-bosses-named-suspects-italian-fraud-scandal/ 8/8 Case 2:17-cv-00497-KM-JBC Document 65-4 Filed 08/16/19 Page 1 of 6 PageID: 1577
EXHIBIT D
Case 2:17-cv-00497-KM-JBC Document 65-4 Filed 08/16/19 Page 2 of 6 PageID: 1578
Exclusive: British Telecom's Italian job had London roots, say investigators
reuters.com/article/us-bt-italy-exclusive/exclusive-british-telecoms-italian-job-had-london-roots-say- investigators-idUSKCN1RZ0IQ MILAN (Reuters) - A criminal investigation into accounting fraud inside British Telecom’s Italian unit has uncovered more evidence of what prosecutors say was the involvement of senior executives in artificially inflating the division’s financial performance.
FILE PHOTO: A BT (British Telecom) company logo is pictured on the side of a convention centre in Liverpool northern England, April 9, 2016. REUTERS/Phil Noble
Emails seized by the police and reviewed by Reuters show for the first time why Italian prosecutors allege that top BT employees were at the heart of the problem, contrary to the company’s assertions that managers at head office knew nothing about the misconduct.
“A series of emails between the top financial executives of BT Plc and managers of the (Italian) unit point to the existence of ‘insistent’ requests by the leadership of the parent company aimed at achieving ambitious economic targets, even using aggressive, anomalous and knowingly wrong accounting practices,” Italy’s financial police said in a 353-page report.
The report has not been made public and its contents have not previously been reported.
The report contains emails from Brian More O’Ferrall, currently finance director at BT Wholesale, the company’s business-to-business division, in which he asks colleagues in Italy to find ways of adjusting their accounts to boost profits.
At the time, O’Ferrall was chief financial officer (CFO) for BT Europe, the European part of Global Services, one of the company’s biggest businesses.
O’Ferrall did not respond to Reuters’ requests for comment. BT declined to make O’Ferrall or group Chief Executive Philip Jansen available for interview.
“We cannot comment on ongoing legal proceedings,” spokesman Richard Farnsworth said.
In the past, BT has blamed former executives in Italy for the bookkeeping irregularities, saying they had kept their bosses in London in the dark about what was going on. The scandal required the company to take a 530 million pound charge in early 2017. For a timeline click on.
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In a complaint filed in April 2017 with Milan prosecutors against the conduct of its former managers, BT said the company itself was a victim of any fraud found to have taken place.
Italian prosecutors named three top BT executives among an expanded list of 23 suspects allegedly involved in the debacle, Reuters exclusively reported in February. O’Ferrall was not on that list.
Prosecutors are not investigating O’Ferrall because he was not on BT Italy’s board and did not sign off on the division’s accounts in the four years, 2013-2016, under scrutiny, according to a source familiar with the probe.
O’Ferrall was appointed chairman of BT Italy in February 2017, taking up the post after an internal investigation was launched into the unit’s bookkeeping. He stepped down from that role in November 2018.
Prosecutors in Milan allege that three former senior BT executives, Luis Alvarez, Richard Cameron and Corrado Sciolla, set unrealistically high business targets and were complicit in false accounting at BT Italy.
Alvarez and Cameron, were respectively the former chief executive and former chief financial officer of BT Global Services and Sciolla was the former head of continental Europe for BT. The three men, two of whom were based in London, left the company in 2017.
Reuters tried to contact Alvarez and Cameron via social media and email but they did not respond to those requests for comment. Sciolla declined to comment.
“AN URGENT REQUEST”
Allegations of fraudulent bookkeeping are part of a range of suspected wrongdoing at BT Italy. Italian prosecutors allege that a network of people at the unit exaggerated revenues, faked contract renewals and invoices and invented bogus supplier transactions in order to meet bonus targets and disguise the unit’s true financial performance.
The company has publicly disclosed that it uncovered a complex set of improper sales, leasing transactions and factoring at the division. Factoring is a way in which firms sell future income to financiers for cash.
Related Coverage
Timeline: BT bosses in spotlight in Italian accounting scandal
Several BT shareholders have filed a class-action lawsuit in the United States alleging the group misled investors and failed to promptly disclose the financial irregularities. BT has moved to have the case dismissed.
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In their report, Italy’s financial police reference an email dated Aug. 5, 2016, from O’Ferrall in which he says that Cameron wanted operating profit to increase by 700,000 euros and suggests to Luca Sebastiani, then CFO at BT Italy, along with other colleagues across Europe, that they capitalize labor costs as a solution.
“All, I have an urgent request from Richard to find another €700K,” O’Ferrall wrote to Sebastiani and his counterparts in Germany, Benelux, France, Spain, Hungary as well as Simon Whittle, then finance manager, reporting and consolidation, at Global Services Europe.
“Please can you look at all opportunities and come back to me and Simon asap. Labour capitalization? Regards Brian,” says the email, whose subject line reads “Another €700K EBITDA needed in P4.”
P4 refers to the month of July.
Reuters tried to reach Whittle via social media but he did not respond to requests for comment. The other finance officers O’Ferrall contacted did not respond to Reuters requests for comment.
Sebastiani’s lawyers, Giammarco Brenelli and Federico Riboldi, told Reuters the email was significant because “along with many others, it shows the constant and unrelenting pressure the parent company was putting on European subsidiaries with regards to accounting policies.”
Sebastiani is among the 23 suspects in the case.
In another email, dated April 8, 2016 and sent to Sebastiani’s predecessor Alessandro Clerici and Rosa Ronda Andres, CFO for BT Global Services in Spain, O’Ferrall says he has received a request “to find another €1 million of capitalization for 15/16.
“Can either of you accommodate this? €500K each?” the e-mail says.
Clerici and Andres did not comply with the request, according to a source familiar with the matter.
Andres did not respond to Reuters’ requests for comment. Clerici declined to comment. He is among the 23 suspects in the case.
Capitalizing costs is an accounting method that allows companies to amortize a cost related to an asset over time as opposed to book it as an expense in the income statement when the cost was incurred. The technique allows companies to smooth out expenses over time, and therefore boost profits.
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“You can’t capitalize labor costs to improve earnings ex post (after the event), just to boost your accounts,” said Gian Gaetano Bellavia, an accounting expert who has in the past worked as a consultant for the Milan prosecutors. He is not involved in the BT Italy investigation.
Bellavia said it was common for top executives of a parent company to ask managers of subsidiaries to “always do more.” But he said some of the BT emails, which Reuters showed him a copy of, constituted “significant evidence” of wrongful accounting.
“EBITDA measures how much a company is earning. But to go up it needs actual income.”
Bellavia said another email, dated September 2016, in which Sebastiani says he has been told that Cameron would not accept an earnings estimate for the fiscal year 2016/17 below a certain amount, was less problematic because it could be interpreted as an aspiration and not a forecast communicated to investors.
The police report says the alleged accounting irregularities could have had an impact on the price of BT shares and this may justify adding market manipulation to the list of alleged crimes being investigated.
However, Milan prosecutors decided not to take this step on jurisdiction grounds, a source with direct knowledge of the probe said, since BT shares are listed in London and such allegations would have to be investigated by UK authorities.
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Slideshow (2 Images) Britain’s Serious Fraud Office (SFO) which investigates and prosecutes complex and often multinational fraud and corruption, declined to comment on whether it was investigating BT.
Britain’s accounting regulator, the Financial Reporting Council (FRC), said it was continuing to investigate PricewaterhouseCoopers’ (PwC) audits of BT from 2015 to 2017. BT dropped PwC as its auditor in 2017.
A spokesman for the accounting firm said it would continue to cooperate fully with the FRC in its enquiries.
Additional reporting by Paul Sandle and Kirstin Ridley in London. Writing by Silvia Aloisi, editing by Carmel Crimmins.
Our Standards:The Thomson Reuters Trust Principles.
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EXHIBIT E
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Source Document Title Translated Document Title Source Lanouaoe Taraet Lanauaae lnchiesta BT Italia, ex lnchiesta BT Italia, ex Cfo Italian English Cfo ed email chiamano ed email chiamano in in causa top causa top management_ management_ Forex Forex Scam Scam Forum.pdf Forum EN.docx
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BT Italia inquiry, former CFO and email point to top management
Stock market | □ 23 April 2019
https://forexscamforum.com/inchiesta-bt-italia-ex-cfo-ed-email-chiamano-in-causa-top-management/[8/12/2019 9:54:25 AM]
I BT Italia inquiry, former CFO and email point to top management | Forex Scam Forum Case 2:17-cv-00497-KM-JBC Document 65-5 Filed 08/16/19 Page 4 of 12 PageID: 1586
by Emilio Parodi
MILAN(Reuters) - The statements of Luca Sebastiani, the former CFO of BT Italia, and some seized e-mails also helped to convince the Milan Prosecutor's Office to involve three former top global managers of British Telecom in the criminal investigation into alleged accounting irregularities of the Italian unit of the British Plc group.
This is what arises from some of the hundreds of pages of documents read by Reuters, which were filed for the availability of lawyers by the Public Prosecutor's Office on 13 February 2019, as part of the closure of the investigation on allegations of false accounting, invoices for non-existent transactions and public procurement fraud involving 23 people on different counts and British Telecom Italia (MI:TLIT), pursuant to Law No. 231.
Sebastiani, who is also one of the 23 suspects, filed a 27-page brief in February 2018 and filed three interrogation records (from April, May and June of that year) with the Public Prosecutor, Silvia Bonardi. Therein, he argues, among other things, that "the organizational model was of the 'matrix' type, so that the parent company managed the different corporate functions hierarchically, and each had a European leader" while all accounting decisions were shared with London.
Through various press releases, the statements of the former CEO Gavin Patterson, and especially the complaint/action brought as an interested party about two years ago by its lawyers, British Telecom claims on the contrary to be a victim of the Italian management’s conduct, of which it had not been made aware.
FORMER CFO: LONDON KNEW. BT DENIES THIS.
"All the main economic and financial transactions carried out by BT Italia were shared with the heads of the European
https://forexscamforum.com/inchiesta-bt-italia-ex-cfo-ed-email-chiamano-in-causa-top-management/[8/12/2019 9:54:25 AM]
I BT Italia inquiry, former CFO and email point to top management | Forex Scam Forum Case 2:17-cv-00497-KM-JBC Document 65-5 Filed 08/16/19 Page 5 of 12 PageID: 1587 Region (in particular the President for Europe Corrado Sciolla and the Europe CFO Europe Brian More O'Ferrall) and even further, with Luis Alvarez (Global Service CEO) and Richard Cameron (Global Service CFO)", the former BT Italia CFO’s brief states.
Sciolla, Alvarez and Cameron (the latter two were based in London at the time the events occurred) are among the 23 suspects. O'Ferrall, on the other hand, has not been investigated, judicial sources report, because, unlike the other three, he has never played a role on the Italian board of directors alongside his main position.
O’Ferrall was contacted by Reuters by email but did not respond to the request for a comment. Through its spokesperson Richard Farnsworth, BT replied that it could not comment on "ongoing legal proceedings."
Sciolla, Alvarez and Cameron, who have not been with BT since 2017, are awaiting the service of documents and have not yet officially appointed their defence lawyers. Alvarez and Cameron were contacted via email and social media by Reuters but did not reply. Sciolla did not comment.
"The head office of the parent company had known for years that there was a significant amount of uninvoiced positive income components (invoices to be issued) in BT Italia. This situation was in the interest of the group, we read in Sebastiani's statements which, citing a series of filed internal documents, adds that "it is clear that the parent company is under constant pressure to obtain economic and financial results that are convenient for its purposes, perhaps adjusted by means of correction entries or adjustments."
The former Italian CFO furthermore states, “not only was the British office informed, it has been aware of the critical nature of some issues for some time ... so that the accounting items 'invoices to be issued' and ‘receivables' were considered to be communicating vessels, whereby a decrease in one item corresponded to the increase in another."
THE EMAILS: "URGENT REQUEST FOR ANOTHER 700K"
Some e-mails are included in the documents filed by the Prosecutor's Office, in addition to the final report of the Guardia di Finanza [GdF-Italian Financial Police].
The investigators consider an email dated 5 August 2016 to be particularly important. In it, O'Ferrall makes an urgent request to Sebastiani and other CFOs of France, Germany, Benelux, Spain and Hungary by Cameron to find another EUR 700,000 (referring, writes the GdF, to an increase in EBITDA) and suggests a capitalization of labour costs, which Sebastiani in his brief calls a "maneuver contrary to accounting principles: "All, I have an urgent request from Richard to find another 700k euro. Please, can you look at all opportunities and come back to me and Simon asap. Labour capitalisation? Regards. Brian”.
None of the email recipients responded to Reuters' requests for comments. Sebastiani's lawyers, Giammarco Brenelli and Federico Riboldi, have told Reuters that they consider this email "significant, because, among other things, it shows the continuous pressure of the parent company on the European units, regarding the accounting principles.”
In another email dated 8 April 2016, O'Farrell sent to Sebastiani's predecessor, Alessandro Clerici, and to the Spanish CFO a request from a certain 'Rob' to increase capitalisation by one million, adding that Rob's intentions are to raise Ebitda. Asking if the two could do “500 each”.
https://forexscamforum.com/inchiesta-bt-italia-ex-cfo-ed-email-chiamano-in-causa-top-management/[8/12/2019 9:54:25 AM]
I BT Italia inquiry, former CFO and email point to top management | Forex Scam Forum Case 2:17-cv-00497-KM-JBC Document 65-5 Filed 08/16/19 Page 6 of 12 PageID: 1588 According to a source aware of the case, neither agreed to the request sent by e-mail.
The Spanish CFO did not respond to a request for comment from Reuters. Clerici, one of the 23 suspects, has denied any charge through his lawyer Roberto Loseng and is defending himself on the merits with the submission of a brief. He too did not comment on the email.
Brian's (identified as O’Farrell by the GdF) requests to increase the outlook to 106 are mentioned in a series of other e- mails in September 2016 between Sebastiani and the then Italy CEO Gianluca Cimini. In those emails, it is also stated that Richard (Cameron according to the GdF) "is not willing to accept anything less."
Gian Gaetano Bellavia, expert in Criminal Economic Law and technical consultant to the judiciary and prosecution, told Reuters to that the first two emails are "significant".
“The cost of labour cannot be capitalised ex post facto to improve profit, simply in order to inflate a budget.” In this case, they are saying that they need a certain figure and therefore suggest that capitalising costs would be a solution- said Bellavia (he is not involved in these proceedings). Ebitda provides an indication of a business’ earnings but should increase only on the basis of actual revenues. I can see from this second email that there is no underlying basis for this.”
Conversely, Bellavia concluded that the third e-mail appears to be "less problematic. The outlook is not always disclosed to the public, it often simply reflects the feelings of management."
THE GdF SUGGESTS MARKET ABUSE THE PUBLIC PROSECUTOR DISAGREES
Some legal sources indicate that the investigation was concluded without an indication that the company gained an advantage as a result of the involvement of the parent company's managers in BT’s alleged unlawful conduct. On the contrary, BT stated in the company's complaint that claiming it was in the black when it was actually in the red would have harmed the company by causing it to pay much higher taxes.
On the other hand, judicial sources indicate that the advantage, for the prosecution, would have been to remain on the market, [since] as a company with its accounts in order, [it would be] able to participate in tenders for public contracts.
There is, however, another assumed advantage, which has been voiced by the Guardia di Finanza in the concluding report it submitted, though the Public Prosecutor's Office did not follow up on it.
"The facts in question - the report reads - could have altered the value of the shares of the parent company BT Plc, listed on the London stock market, by including the crime of information manipulation, taking into account the plausible interference of accounting irregularities on the fairness of the information disclosed to the market by BT Plc itself”.
"It is considered that there may be a close causal link between the false information provided by BTI's financial statements, as a result of the accounting manipulations detected, and the impact on the value of BT Plc's shares’.”
The Guardia di Finanza states in its report that the assumption is viable as it concerns securities "admitted to trading" on a regulated market of a European Union member state.
However, the Public Prosecutor's Office was of a different opinion, and decided not to pursue this crime, because, as one source of information has pointed out, the security is listed in London and "at most it could have been up to the British
https://forexscamforum.com/inchiesta-bt-italia-ex-cfo-ed-email-chiamano-in-causa-top-management/[8/12/2019 9:54:25 AM]
I BT Italia inquiry, former CFO and email point to top management | Forex Scam Forum Case 2:17-cv-00497-KM-JBC Document 65-5 Filed 08/16/19 Page 7 of 12 PageID: 1589 authorities to deal with this aspect."
The Serious Fraud Office (SFO) did not wish to comment on whether it is conducting checks [on the matter].
Finally, legal sources point out that, the prosecution did not conduct a share price study even if only to verify this assumption. Moreover, the sources conclude that the hypothesised crime in question has not been taken into account by the Public Prosecutor's Office and will therefore have no practical consequences in Italy.
- Paul Sandle and Kirstin Ridley have collaborated from London
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ESCLUSIVA - Inchiesta BT Italia, ex Cfo ed email chiamano in causa top management
it.reuters.com/article/idITKCN1RZ0MR-OITTP
MILANO(Reuters) - Sono state anche le dichiarazioni dell’ex Cfo di Bt Italia Luca Sebastiani e alcune email sequestrate a convincere la Procura di Milano a coinvolgere tre ex top manager globali di British Telecom nell’inchiesta penale sulle presunte irregolarità contabili della unit italiana del gruppo britannico di tlc.
Lo si evince da alcune delle centinaia di pagine di documenti, che Reuters ha potuto leggere, depositati a disposizione degli avvocati lo scorso 13 febbraio dalla Procura nell’ambito della chiusura inchiesta con le ipotesi di reato di falso in bilancio, fatture per operazioni inesistenti e frode in pubbliche forniture che riguarda a vario titolo 23 persone e British Telecom Italia, per la legge 231.
Sebastiani, anch’egli fra i 23 indagati, ha depositato una memoria di 27 pagine nel febbraio 2018 e ha reso tre verbali di interrogatorio in aprile, maggio e giugno dello stesso anno, alla pm Silvia Bonardi, nei quali sostiene tra l’altro che “il modello organizzativo era del tipo ‘a matrice’, cosicché la capogruppo gestiva gerarchicamente le diverse funzioni aziendali, ognuna con un capo europeo” e che tutte le decisioni contabili venivano condivise con Londra.
British Telecom, attraverso diversi comunicati, le dichiarazione dell’ex Ceo Gavin Patterson, e soprattutto la denuncia-querela come parte offesa presentata circa due anni fa dai suoi legali, sostiene al contrario di essere vittima delle condotte del management italiano, delle quali non era stata messa a conoscenza.
EX CFO: LONDRA SAPEVA. BT NEGA
“Tutte le principali transazioni economiche e finanziarie operate da BT Italia erano condivise con i responsabili della Regione Europa (in particolare il presidente Europe Corrado Sciolla e il Cfo Europe Brian More O’Ferrall) e, ancor più, con Luis Alvarez (Ceo Global Service) e Richard Cameron (Cfo Global Service)”, si legge nella memoria dell’ex Cfo BT Italia.
Sciolla, Alvarez e Cameron (questi ultimi due all’epoca basati a Londra) risultano fra i 23 indagati. O’Ferrall invece non è stato indagato, riferiscono fonti giudiziarie, perché, al contrario degli altri tre, non ha mai affiancato ruoli nel cda italiano all’incarico principale.
O’Ferrall, contattato da Reuters via email, non ha risposto alla richiesta di un commento. BT, attraverso il portavoce Richard Farnsworth, ha risposto di non poter fare commenti “su procedimenti legali in corso”.
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Sciolla, Alvarez e Cameron, che non sono più in BT dal 2017, in attesa della notifica degli atti, non hanno ancora nominato ufficialmente i propri avvocati di fiducia. Alvarez e Cameron, contattati via email e social media da Reuters, non hanno risposto. Sciolla non ha commentato.
“La sede centrale della capogruppo conosceva da anni che sussisteva in BT Italia un consistente importo di componenti positivi di reddito non fatturati (fatture da emettere). Tale situazione era nell’interesse del gruppo”, si legge ancora nelle dichiarazioni di Sebastiani che, citando una serie di documenti interni depositati, aggiunge che “risulta evidente la costante pressione della capogruppo per ottenere risultati economici e finanziari di propria convenienza, magari aggiustati attraverso scritture di rettifica o assestamento”.
“Emerge infatti — continuano ancora le dichiarazioni dell’ex Cfo italiano — come la sede britannica non solo fosse informata, ma conoscesse da tempo le criticità di alcuni temi... per cui le voci di contabilità ‘fatture da emettere’ e ‘crediti’ erano considerati vasi comunicanti, in modo che alla diminuzione della prima posta corrispondesse l’aumento della seconda”.
LE EMAIL: “RICHIESTA URGENTE DI ALTRI 700K”
Fra i documenti depositati dalla procura, oltre alla relazione finale della Guardia di Finanza, ci sono anche alcune mail.
In particolare, viene considerata importante dagli investigatori un’email del 5 agosto 2016 in cui O’Ferrall avanza una richiesta urgente a Sebastiani e ad altri Cfo di Francia, Germania, Benelux, Spagna e Ungheria da parte di Cameron di trovare altri 700.000 euro (riferendosi, scrive la Gdf, a un aumento dell’Ebitda) e suggerendo una capitalizzazione del costo del lavoro, che Sebastiani nella sua memoria definisce una “manovra contraria ai principi contabili. “All, I have an urgent request from Richard to find another 700k euro. Please, can you look at all opportunities and come back to me and Simon asap. Labour capitalisation? Regards. Brian”.
Tutti i destinatari della email non hanno risposto alle richieste di commento avanzate da Reuters. I legali di Sebastiani, gli avvocati Giammarco Brenelli e Federico Riboldi, hanno dichiarato a Reuters di ritenere questa mail “significativa, perché, tra le altre, dimostra il continuo e pressante condizionamento della capogruppo sulle unit europee in ordine alle politiche di bilancio”.
In un’altra mail dell’8 aprile 2016, O’Farrell trasmette al predecessore di Sebastiani, Alessandro Clerici, e alla Cfo della Spagna una richiesta di un cero ‘Rob’ di aumentare di un milione le capitalizzazioni, aggiungendo che le intenzioni di Rob sono di innalzare l’Ebitda. Chiedendo se i due possano fare “500 a testa”.
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Entrambi, dice una fonte a conoscenza del dossier, non hanno accondisceso alla richiesta inviata per mail.
Lo Cfo spagnola non ha risposto alla richiesta di un commento da Reuters, Clerici, che è fra i 23 indagati, tramite il suo legale, avvocato Roberto Losengo, nega ogni addebito e si sta difendendo nel merito con la presentazione di una memoria, non ha commentato sulla mail.
In una serie di altre email del settembre 2016 fra Sebastiani e l’allora AD italiano Gianluca Cimini vengono citate le richieste di Brian (individuato dalla Gdf come O’Farrell) di aumentare l’outlook a 106, e dove si afferma che Richard (per la Finanza Cameron) “di meno non è disposto ad accettare”.
Gian Gaetano Bellavia, esperto di Diritto Penale dell’Economia e consulente tecnico di magistratura giudicante e inquirente, ha detto a Reuters di ritenere “significative” le prime due email.
“Non posso capitalizzare il costo del lavoro per migliorare il mio utile, ex post, a semplice beneficio del mio bilancio. Qui stanno dicendo che hanno bisogno di una certa cifra e quindi suggeriscono di mettere a capitale i costi — ha detto Bellavia, che non è coinvolto in questo procedimento — L’Ebitda poi è l’indice che dimostra se il business guadagna, ma aumenta sulla base di entrare reali. Da questa seconda mail capisco che non c’è un sottostante che lo dimostri”.
Bellavia ha concluso invece che la terza mail appare “meno problematica. Non è detto che l’outlook sia una comunicazione sociale, spesso è l’indicazione del sentiment del management”.
GDF SUGGERI’ IPOTESI MARKET ABUSE. NO DA PROCURA
Alcune fonti legali fanno sapere però che, riguardo alla posizione di Bt come persona giuridica indagata, e al coinvolgimento di manager della capogruppo, non è indicato nell’atto di chiusura inchiesta alcun presunto vantaggio che sarebbe derivato alla società dalle condotte illecite contestate. Anzi BT, si leggeva nella denuncia presentata dalla società, rappresentando di essere in utile quando invece era in perdita avrebbe subito un danno, pagando così molte più tasse.
Fonti giudiziarie invece indicano che il vantaggio, per l’accusa, sarebbe stato quello di restare sul mercato, come società con i conti in ordine, in grado di partecipare a gare per appalti pubblici.
C’è però un altro ipotetico vantaggio, che è stato inserito dagli uomini della Guardia di Finanza nella loro relazione finale depositata agli atti, ma non pereseguito invece dalla Procura.
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“I fatti in trattazione — si legge nella relazione — potrebbero aver alterato il valore del titolo della società controllante Bt Plc, quotata al mercato di Londra, integrando il reato di manipolazione informativa, tenuto conto della plausibile interferenza delle irregolarità contabili sulla correttezza delle informazioni diffuse al mercato dalla stessa BT Plc”.
“Si ritiene possa sussistere uno stretto nesso causale fra il quadro informativo falso offerto dai bilanci di BTI, per effetto delle manipolazioni contabili rilevate, e le ricadute sul valore del titolo di BT Plc”.
La Guardia di Finanza sostiene nella sua relazione che l’ipotesi è percorribile visto che riguarda titoli “ammessi alla negoziazione” in un mercato regolamentato di un Paese dell’Unione Europea.
Di diverso avviso è stata però la Procura, che ha deciso di non ipotizzare questo reato, perché, ha precisato una fonte a conoscenza del dossier, il titolo è quotato a Londra e “tutt’al più sarebbe potuto spettare alle autorità britanniche occuparsi di questo aspetto”.
Il Serious Fraud Office (Sfo) non ha voluto fare commenti alla domanda se stia facendo verifiche.
Fonti legali fanno infine notare che, da parte dell’accusa non è stato effettuato alcuno studio di corso azionario al fine anche solamente di verificare questa ipotesi. Per di più, concludono le fonti, l’ipotesi di reato in questione non è stata presa in considerazione dalla Procura, e quindi non avrà alcuna conseguenza pratica in Italia.
- hanno collaborato da Londra Paul Sandle e Kirstin Ridley
Sul sito www.reuters.it le altre notizie Reuters in italiano. Le top news anche su www.twitter.com/reuters_italia
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EXHIBIT F
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British chiefs in firing line over BT accounting fraud scandal in Italy
dailymail.co.uk/money/markets/article-6969797/British-chiefs-firing-line-BT-accounting-fraud-scandal- Italy.html April 28, 2019
BT bosses in London embroiled in a £500million accounting fraud scandal failed to challenge the accounts, an internal probe found.
There was a ‘serious breakdown of accounting processes and controls’ at the company’s Italian arm and a ‘loss of balance sheet integrity’, the review seen by the Mail found.
It raises serious questions about how thoroughly bosses in London scrutinised figures from BT Italia before the fraud was uncovered.
UK authorities needed to launch fresh investigations into the scandal, according to an expert
Last night an accounting expert said the UK authorities needed to launch fresh investigations into the scandal.
1/3 Case 2:17-cv-00497-KM-JBC Document 65-6 Filed 08/16/19 Page 3 of 4 PageID: 1597
It comes just days after police in Italy released an explosive report suggesting bosses in London urged staff in Italy to use ‘aggressive, anomalous and knowingly wrong accounting practices’.
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The company has consistently maintained that the accounting scandal was a local matter – despite the internal report being published in January 2017. The 2017 annual report, published four months later, said the fraud ‘was not identified by our monitoring controls’ and went ‘undetected for a number of years’.
Prem Sikka, a professor of accounting who has advised the Labour Party, said: ‘BT’s Italian subsidiary was submitting numbers to someone in London that whole time. The review raises questions which now need to be investigated by UK authorities.’
BT’s internal review of the Italian fraud scandal was produced by KPMG in January 2017 but was never published.
The findings resulted in a £530million write-down and a share slump that wiped £8billion off the company’s market value.
The report said staff at BT Italia sought to artificially inflate the subsidiary’s earnings with a complex web of fraudulent transactions. Italian staff made ‘misrepresentations’ to BT Group and its auditors at the time, PwC, it added.
But it also revealed executives at BT global services did not sufficiently challenge numbers submitted by Italian staff. Initial inquiries from London were ignored or met by responses that were ‘not satisfactory’ or lacking in detail, it said, but global services staff often failed to ‘follow through’ to get answers.
Prosecutors in Italy have brought charges against 23 individuals but reportedly will not bring charges of market manipulation against BT because it comes under UK jurisdiction. No British criminal probe has taken place. 2/3 Case 2:17-cv-00497-KM-JBC Document 65-6 Filed 08/16/19 Page 4 of 4 PageID: 1598
A BT spokesman said: ‘Based on KPMG’s recommendations, and our own observations, we have taken steps to improve our controls both within Italy, and at group level.’
3/3 CHRISTIAN v. BT GROUP PLC et al, Docket No. 2_17-cv-00497 (D.N.J. Jan 25, 2017), Court Docket
General Information
Court United States District Court for the District of New Jersey; United States District Court for the District of New Jersey
Federal Nature of Suit Securities/Commodities/Exchanges[850]
Docket Number 2:17-cv-00497
© 2019 The Bureau of National Affairs, Inc. All Rights Reserved. Terms of Service // PAGE 151