After three amendments, a complaint by Frontier Communications investors still failed to plead that Frontier made actionably false statements after it acquired Verizon assets.
The district court in Connecticut dismissed with prejudice a complaint over a telecom’s statements after it acquired some Verizon assets. Although, after multiple amendments, the complaint adequately alleged that Frontier Communications understated the number of customers experiencing service issues and that the defendants had the requisite scienter, its allegations of loss causation remained too tenuous to support a securities fraud claim (In re Frontier Communications, Corp. Stockholders Litigation, March 24, 2020, Bolden, V.).
In 2016 Frontier acquired the California, Texas, and Florida wireline operations of Verizon Communications. In contrast to the standard industry practice of gradually merging the companies’ equipment and accounts, Frontier used a "flash cut" method in which the assets were turned over in one transfer, without a phase-in period. According to the plaintiffs, Frontier played up the success of the transition when in fact the company was beset by service disruptions and ended up spending much more on the asset integration than it had anticipated. Frontier’s stock price fell when this news came out, and in 2018 it announced it was cancelling its dividend completely.
Falsity and materiality. The court dismissed the plaintiffs’ amended complaint in March 2019, but allowed further leave to amend. However, after three amendments, the court found the claims were still not viable and dismissed the case with prejudice. For example, the court had previously dismissed claims pinned on the defendants’ touts of "success" as inactionable puffery, and the defendants successfully argued that the plaintiffs had simply recast these allegations by replacing them with statements about "status" and "progress" that were equally incapable of objective verification. Statements about billing issues were also inactionable because the plaintiffs did not allege where the statements were made, did not allege with particularity why they were objectively false, and did not demonstrate their materiality to a reasonable investor. Other alleged misrepresentations and omissions depended on reports from former employees, but the plaintiffs failed to allege that those confidential informants had access to information sufficient to demonstrate falsity.
The plaintiffs did sufficiently allege that the defendants’ statements claiming that less than 1 percent of customers experienced service issues were verifiably false. The complaint alleged that Frontier overstated the number of acquired customers, thus diluting the percentage of affected customers. More significantly, the plaintiffs alleged that Frontier employees reported hundreds of thousands of customers experienced service disruptions, well beyond the 37,000 that would represent 1 percent of even the inflated customer total. The complaint also alleged with particularity that confidential informants had access to information that could enable them to provide estimates of customers experiencing disruptions, while the Frontier defendants had access to such data showing their statements to be false.
Scienter and loss causation. The plaintiffs’ success in alleging that the 1 percent figure was "wildly incorrect" also supported an inference of scienter, because it was at east as likely as not that the understated figure derived either from mathematical manipulation or from reckless disregard for the truth. However, the court’s analysis of loss causation came out in the defendants’ favor. The defendants’ corrective disclosures referred to the acquisition in general, but none related specifically to the extent of service disruptions following the flash cut. The plaintiffs did not allege that the defendants ever made a correction to their 1 percent statements or that such a disclosure directly contributed to the plaintiffs’ loss.
The case is No. 17-cv-1617.
Companies: Frontier Communications Corp.
MainStory: TopStory FraudManipulation GCNNews ConnecticutNews
Interested in submitting an article?
Submit your information to us today!Learn More
Securities Regulation Law Daily: Breaking legal news at your fingertips
Sign up today for your free trial to this daily reporting service created by attorneys, for attorneys. Stay up to date on securities regulation legal matters with same-day coverage of breaking news, court decisions, legislation, and regulatory activity with easy access through email or mobile app.