NOT PRECEDENTIAL

UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT ____________

No. 20-2106 ______

PAMCAH-UA LOCAL 675 PENSION FUND; CLAYTON HOLLISTER, Appellants v.

BT GROUP PLC; IAN LIVINGSTON; GAVIN E. PATTERSON; TONY CHANMUGAM; NICK ROSE; LUIS ALVAREZ; RICHARD CAMERON ____________

On Appeal from the United States District Court for the District of New Jersey (D.C. No. 2-17-cv-00497) District Judge: Honorable Kevin McNulty ____________

Submitted Pursuant to Third Circuit LAR 34.1(a) March 5, 2021 ____________

Before: KRAUSE, PHIPPS, and FUENTES, Circuit Judges.

(Filed: August 5, 2021) ___________

OPINION* ___________

* This disposition is not an opinion of the full Court and pursuant to I.O.P. 5.7 does not constitute binding precedent. PHIPPS, Circuit Judge.

In this putative class action, two investors – a pension fund and an individual – sue

BT Group along with several of its officers and directors for federal securities fraud. The

investors allege that BT Group, a multinational telecommunications company formerly

known as British Telecom, overstated profits for several years due to fraudulent

accounting at one of its subsidiaries, BT Italy. They bring claims under Sections 10(b)

and 20(a) of the Securities Exchange Act of 1934, see 15 U.S.C. §§ 78j(b), 78t(a), and

Securities and Exchange Commission Rule 10b-5, see

.10b–5.

But securities fraud is not easy to allege: the Private Securities Litigation Reform

Act imposes a heightened pleading standard for such claims. Under that statute, a

complaint must “state with particularity facts giving rise to a strong inference that the

defendant acted with the required state of mind.” 15 U.S.C. § 78u-4(b)(2)(A); see also

id. § 78u-4(b)(1) (requiring the pleading to specify “each statement alleged to have been

misleading [and] the reason or reasons why the statement is misleading”). That required

state of mind is scienter – the intent to deceive, manipulate, or defraud either knowingly

or recklessly. See In re Hertz Glob. Holdings Inc.,

(3d Cir. 2018);

Institutional Invs. Grp. v. Avaya, Inc.,

(3d Cir. 2009). Thus,

allegations must support an inference of scienter that is “more than merely plausible or

reasonable—it must be cogent and at least as compelling as any opposing inference of

nonfraudulent intent.” Tellabs, Inc. v. Makor Issues & Rts., Ltd.,

(2007).

2 In exercising subject-matter jurisdiction over this case, see 15 U.S.C. § 78aa;

, the District Court dismissed the investors’ fourth amended complaint

for failure to state a claim for relief because their allegations of scienter did not meet the

heightened pleading standard. The investors filed a timely notice of appeal, invoking this

Court’s appellate jurisdiction. See

.

On appeal, the investors defend the sufficiency of their scienter allegations on two

grounds. First, they contend that the allegations as to the Chairman of BT Group’s Audit

Committee, Nick Rose, support a strong inference that he acted with scienter, and they

seek to impute his mental state to BT Group. Second, the investors argue that their

allegations regarding executives at BT Global Services and BT Italy, two other

components of the BT Group corporate family, also support a strong inference of

scienter. The investors then seek to impute the alleged mental states of those executives

to BT Group by urging this Circuit to adopt the so-called ‘corporate scienter doctrine.’

See, e.g., In re Omnicare, Inc. Sec. Litig.,

, 474–76 (6th Cir. 2014). On de

novo review, see City of Edinburgh Council v. Pfizer, Inc.,

(3d Cir.

2014), we reject the investors’ arguments and will affirm the judgment of the District

Court.

I.

The investors claim that BT Group overstated profits for several years, and when it

eventually reported its profits accurately, its share price fell. BT Group’s financial

statements reported profits from BT Italy and included notations that BT Group was

3 examining the control environment at BT Italy. In an October 2016 press release, BT

Group identified prior overstatements of profits of approximately £145 million due to

“certain historical accounting errors” stemming from inappropriate management behavior

at BT Italy. Fourth Am. Compl. ¶ 66 (JA265). Later, through a January 2017 press

release, BT Group announced that the overstatement of profits had exceeded £530

million. After those revelations of accounting fraud, BT Group’s publicly traded

American Depositary Receipts (ADRs) lost more than 20% of their value (or

approximately £8 billion in market capitalization). But to state a claim for securities

fraud, the investors’ allegations must give rise to a strong inference that BT Group made

those false financial statements with scienter.

II.

Several of the investors’ allegations support an inference that Rose, the Chairman

of BT Group’s Audit Committee, made various assertions with scienter in BT Group’s

financial statements. As far back as 2013, the Audit Committee had concerns about BT

Italy. And BT Group’s SEC filings from 2013 and 2014 reported that the Audit

Committee was monitoring internal controls and risk management at BT Italy. The

investors also allege that in November 2015, BT Italy employees told a BT Global

Services executive about accounting irregularities. They further allege that the Audit

Committee knew in 2016 of a culture of bullying at BT Italy. Even with that cumulative

alleged knowledge, BT Group’s financial statements reported improvements in the

control environment at BT Italy in 2014, 2015, and 2016.

4 The problem for the investors is that their allegations also support the inference

that BT Group intended to detect and prevent fraud. For example, at the Audit

Committee’s request, BT Group’s Board of Directors visited BT Italy to review

operations and meet with various personnel. BT Group also investigated the reports of

workplace bullying at BT Italy. In addition, BT Group repeatedly disclosed concerns

about BT Italy to the SEC, and it reported monitoring and investigating that situation and

responding to internal complaints. Finally, BT Group voluntarily disclosed its prior

inaccurate reporting, including the 2016 announcement of an approximately £145 million

write-down for historical accounting errors at BT Italy, and the 2017 follow-up

announcement that the write-down totaled £530 million. In sum, the investors offer

several allegations supporting an inference that Rose acted with scienter, but those

allegations are comparatively weaker than the contrary inference that he did not. See

Tellabs,

.

III.

The investors’ remaining allegations of scienter similarly fail. The allegations

regarding executives at two other components of the BT Group corporate family – BT

Global Services and BT Italy – do not give rise to a strong inference of scienter.

In attempting to allege scienter for executives at BT Global Services, one of BT

Group’s lines of business, the investors rely on foreign news articles. As amended, the

complaint alleges that Italian prosecutors investigated and charged those executives, CEO

Luis Alvarez and CFO Richard Cameron, for complicity in false accounting at BT Italy.

5 But the investors do not allege the crimes charged, the facts supporting the charges, or the

extent (if any) to which the Italian charges implicate BT Group’s securities filings in the

United States at the time of the charged conduct. The investors also rely on other news

articles quoting email correspondences. But they do not allege that Alvarez or Cameron

sent, received, or even knew about those emails. Nor do those emails mention Alvarez at

all. Instead, they concern Cameron’s financial goals for the company. Through a third

party, those emails report that Cameron wanted operating profit to increase by €700,000,

that he suggested capitalizing labor costs as a solution, and that he would not accept an

earnings estimate for an upcoming fiscal year below a certain amount. Additional articles

quoting BT Italy executives include the executives’ statements that they shared all

economic and financial transactions with Alvarez and Cameron. Taken cumulatively,

while also accounting for the vagueness of some allegations as well as the attenuation

inherent in the second- and third-hand nature of some of the other allegations, the

pleading is at most consistent with an intent to commit financial statement fraud. But that

does not suffice under the ordinary pleading standard of plausibility, much less the

heightened standard imposed by the Private Securities Litigation Reform Act. See Bell

Atl. Corp. v. Twombly,

(2007) (explaining “[t]he need at the pleading

stage for allegations plausibly suggesting (not merely consistent with) [liability]”); GSC

Partners, 368 F.3d at 239. Thus, even if the mental states for the BT Global Services

executives could be imputed to BT Group (an issue not addressed today), these

allegations would not support a claim for securities fraud.

6 The allegations regarding executives at BT Italy fall short, too. Those executives,

CEO Giancarlo Cimini and CFO Luca Sebastiani, worked at BT Italy, a subsidiary of BT

Group. But “parent companies are not, merely by dint of ownership, liable for the acts of

their subsidiaries.” Fried v. JP Morgan Chase & Co.,

, 595 n.2 (3d Cir.

2017). Even if our circuit embraced the corporate scienter doctrine, the investors would

still need to plead that BT Group participated in BT Italy’s alleged fraud – for example,

through a cover-up. See Rahman, 736 F.3d at 246. Here, the investors make no such

allegations.

***

Because the investors failed to plead that BT Group acted with scienter, they do

not state a claim under Section 10(b). And that shortcoming forecloses their derivative

claim under Section 20(a). See Avaya,

. Accordingly, we will affirm the

judgment of the District Court dismissing the fourth amended complaint.

7