Securities Regulation Daily Statements of profitable growth and hidden flaws cost investors
Tuesday, June 9, 2020

Statements of profitable growth and hidden flaws cost investors

By R. Jason Howard, J.D.

Complaint sufficiently alleges company misled investors about IT infrastructure problems.

The New Jersey District Court has denied a motion to dismiss for failure to state a claim in a class action brought by lead plaintiff, the Conduent Institutional Investor Group, consisting of the Employees Retirement System of the Puerto Rico Electric Power Authority, the Oklahoma Firefighters Pension and Retirement System, the Plymouth County Retirement Association, and the Electrical Workers Pension Fund (Employees Retirement System of the Puerto Rico Electric Power Authority v. Conduent Inc. , June 5, 2020, Wigenton, S.).

Conduent. New Jersey-based Conduent "provides business processing services to commercial and government clients, including electronic toll collection" and, as alleged in the class action, overstated its progress in "modernizing the IT infrastructure supporting its electronic toll collection business" during the class period between February 21, 2018, and November 6, 2018, leading to inflated share prices that fell over 29 percent when the truth was revealed.

The amended complaint asserted violations of Section 10(b) and Rule 10b-5 of the Exchange Act and Section 20(a) of the Exchange Act. The defendants argued that the amended complaint failed to adequately plead a material misrepresentation or omission, scienter, and loss causation.

Misrepresentations and omissions. According to the complaint, Conduent, its CEO, and its CFO made material misrepresentations during earnings calls in discussing profitable growth and omitted from investors the known issues with the IT infrastructure and the service issues experienced by clients. The complaint also alleged that those issues caused the company to incur penalties and a loss of revenue. Additional information provided by a confidential witness bolstered the allegations in the complaint.

In reviewing the detailed allegations, along with other factual allegations, the court found that the lead plaintiff met the heightened burden under the Private Securities Litigation Reform Act and further found that the complaint sufficiently alleged "actionable and material misrepresentations" that did not qualify for safe harbor protection.

Scienter. On the issue of scienter, the court noted that the amended complaint included specific allegations that the CEO was aware of the IT problems and stated that it "seems implausible that Conduent’s CEO and CFO were not aware of the problems with its tolling platform" during the class period as Conduent’s tolling operations were identified as a "core" business segment and frequent outages had led to penalties incurred in the millions of dollars from the Texas Department of Transportation, the New Jersey Turnpike Authority, and the Florida Department of Transportation. The court also found that the allegations supported an inference of corporate scienter.

Loss causation. The court explained that the amended complaint alleged that on November 7, 2018, Conduent revealed that it missed third quarter revenue expectations, revised its revenue guidance for FY2018, and blamed the events on sub-optimal performance and its own sub-standard IT infrastructure. The CEO admitted that Conduent had been aware of the issues for some time. That, taken with the reference to analyst reports in the amended complaint which "noted vendor problems and IT infrastructure as two of Cvonduent’s issues and stated that the IT provider issues had likely been a problem for some time and could have been shared with investors earlier," was enough for the court to see a causal connection between the economic loss suffered and the alleged misrepresentations and/or omissions.

Conclusion. The court determined that the amended complaint sufficiently pleaded the elements of a Section 10(b) claim and denied the defendants’ motion to dismiss.

The case is No. 2:19-cv-08237-SDW-SCM.

Attorneys: Richard Levi Elem (Law Offices of Jan Meyer & Associates, P.C.) for Employees' Retirement System of the Puerto Rico Electric Power Authority. Israel Dahan (King & Spalding LLP) for Conduent, Inc.

Companies: Employees' Retirement System of the Puerto Rico Electric Power Authority; Conduent, Inc.

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