Oklahoma Law Enforcement Retirement System v. Telefonaktiebolaget LM Ericsson

Background

This putative securities-fraud class action concerned allegations that Ericsson and several senior executive officers and directors made false or misleading statements and omissions about Ericsson’s financial performance, accounting practices, internal controls, and policies involving long-term service contracts. The alleged class period ran from April 24, 2013, through July 17, 2017. The plaintiffs asserted claims under Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934, and claims under Section 20(a) against individual defendants as alleged controlling persons.

The complaint identified four alleged business or accounting practices: entering into loss-leading contracts, underestimating contract costs, delaying recognition of costs, and recognizing revenue before contractual milestones or services were completed. The plaintiffs also challenged statements in Ericsson’s reports and investor communications, statements about internal controls, certifications under the Sarbanes-Oxley Act, and Ericsson’s failure to disclose the alleged practices and internal policies.

Defendants’ Motion

The defendants moved to dismiss under Federal Rules of Civil Procedure 9(b), 12(b)(2), and 12(b)(6). Rule 9(b) requires fraud allegations to be stated with particularity. Rule 12(b)(6) permits dismissal when a complaint does not plausibly state a claim. Rule 12(b)(2) concerns personal jurisdiction.

Because the case involved alleged securities fraud, the court also applied the heightened pleading requirements of the Private Securities Litigation Reform Act. The complaint had to state with particularity facts supporting a strong inference that each relevant defendant acted with scienter—that is, an intent to deceive, manipulate, or defraud, or sufficiently reckless conduct.

Court’s Analysis

The court first addressed allegations concerning Ericsson’s financial reporting and accounting practices. Regarding loss-leading and under-scoped contracts, the court held that the complaint did not adequately explain what reported financial data was supposedly falsified by inaccurate future projections. The financial information identified by the plaintiffs generally concerned past-period results, and the complaint did not sufficiently explain how those results were tainted by inaccurate estimates of future costs or profits.

The court also held that the plaintiffs did not adequately plead scienter. The allegations showed that some projects later became more expensive than initially expected, but did not identify information available when the contracts were entered that contradicted Ericsson’s estimates. The court characterized the theory as impermissible “fraud by hindsight.” Allegations about the internal “Feed the Gorilla” and “Bare Bone Tender Scoping” policies did not cure the problem because the complaint did not specifically identify contradictory information known when contracts were entered or show that the individual defendants directed those policies.

The court separately rejected the claims based on delayed cost recognition and premature revenue recognition. The plaintiffs did not identify a specific project for which Ericsson’s accounting violated the standards Ericsson had publicly described, or explain when particular costs became probable or why particular revenue-recognition decisions were improper. The allegations also did not adequately connect the accounting practices to knowledge by the individual defendants. The court further stated that the size of Ericsson’s later provision did not, by itself, create the required inference of scienter.

The court rejected other challenged statements for different reasons. Some were nonactionable corporate optimism or “puffery.” Some were forward-looking statements protected by the statutory safe harbor and cautionary language. One was an opinion that the plaintiffs did not adequately allege was dishonestly held, based on untrue facts, or misleading because of omitted information. Other statements lacked adequately pleaded facts showing falsity. The court also found that the allegations concerning internal controls and Sarbanes-Oxley certifications were too conclusory.

As to alleged omissions, the court stated that federal securities laws generally do not require disclosure of internal policies or violations unless a duty to disclose exists. The court did not decide whether certain trend and uncertainty disclosures were required because the plaintiffs’ failure to adequately plead scienter was independently fatal to those claims.

Disposition

The court granted the defendants’ motion under Rules 9(b) and 12(b)(6). It dismissed the plaintiffs’ Section 10(b) and Rule 10b-5 claims, and therefore dismissed the Section 20(a) control-person claim as well. The court did not reach the defendants’ other arguments, including the argument that the court lacked personal jurisdiction over individual defendant Carl Mellander.

The court granted the plaintiffs leave to amend and required any third amended complaint to be filed within thirty days. It stated that no further opportunities to amend would be given. The Clerk was directed to terminate the motion docketed as ECF No. 53.