In re VEON Ltd. Securities Litigation

Background

Lead Plaintiff Westway Alliance Corp. brought a proposed class action against VEON Ltd. under Section 10(b) of the Securities Exchange Act and Securities and Exchange Commission Rule 10b-5. The proposed class consisted of people who purchased VEON securities between December 2, 2010, and November 3, 2015. The opinion states that VEON is a multinational telecommunications company headquartered in the Netherlands and incorporated in Bermuda, with securities traded in the United States on the NASDAQ. The complaint also named certain current and former VEON executives, but the court had dismissed the individual defendants in an earlier order.

The complaint relied heavily on VEON’s 2016 deferred prosecution agreement with the United States Department of Justice. In that agreement, VEON pleaded guilty to criminal charges involving the Foreign Corrupt Practices Act and agreed to pay more than $460 million in penalties. The complaint alleged that VEON made or attempted improper payments connected to its efforts to operate in Uzbekistan, including payments through Takilant Limited, a company owned by Gulnara Karimova. It also alleged that VEON disguised payments in its records, lacked adequate anti-corruption and accounting controls, and made misleading statements about its business, internal controls, and compliance program.

The complaint further alleged that VEON’s disclosures about investigations and potential liability were followed by declines in the price of its American Depository Receipts. The current motion concerned the Second Amended Complaint. VEON moved to dismiss under Federal Rule of Civil Procedure 12(b)(6), which tests whether a complaint states a legally sufficient claim.

Section 10(b) claim and duty to disclose

To state a securities-fraud claim under Section 10(b) and Rule 10b-5, a plaintiff must allege a material misstatement or omission, scienter, a connection with the purchase or sale of securities, reliance, and loss caused by that reliance. Because the claim alleged fraud, the complaint also had to satisfy heightened pleading standards under Federal Rule of Civil Procedure 9(b) and the Private Securities Litigation Reform Act.

Westway argued that VEON had concealed material information about its ineffective internal controls, disguised bribe payments, and false accounting entries. Westway also argued that VEON violated a Securities and Exchange Commission regulation concerning internal controls and that a reasonable investor was entitled to know about the problems.

The court rejected the claim because Westway had not shown that VEON had a duty to disclose the alleged omissions before VEON first addressed its internal-control issues in its June 2011 Form 20-F. The court explained that materiality and the existence of a disclosure duty are separate questions. A company does not have to disclose every piece of information that might matter to a reasonable investor. A duty generally arises when a statute or regulation requires disclosure, or when a company’s prior statement would be misleading without additional information.

The court concluded that the regulation cited by Westway, 17 C.F.R. § 240.13a-15, concerns controls and procedures for reliable financial reporting but does not create the disclosure requirement Westway asserted. The court therefore held that Westway had not established a duty to disclose before the June 2011 Form 20-F and granted VEON’s motion to dismiss.

Standing and lead plaintiff

Westway argued that it still had standing even if the alleged omissions were not actionable. The court disagreed. Because it had found no material omissions, the court concluded that there was no longer a live controversy between Westway and VEON. The court stated that a named plaintiff in a proposed class action must have standing to assert both the plaintiff’s own claim and the proposed class claims. Because the action had not yet been certified as a class action, the unnamed proposed class members could not preserve the case after Westway’s claim became moot.

The Second Amended Complaint identified Sherman Steele, Leonard Karpwich, and Stan Sinitsa as additional plaintiffs. Rather than end the lead-plaintiff selection process, the court reopened it. The court allowed those three plaintiffs, as well as certain other eligible movants described in the opinion, to seek appointment as lead plaintiff.

Disposition

The court granted VEON’s motion to dismiss, dismissed Lead Plaintiff Westway from the action, and reopened the lead-plaintiff selection process. The opinion does not state that the dismissal was with or without prejudice. It set April 8, 2021, as the deadline for lead-plaintiff motions, May 6, 2021, for VEON’s opposition, and May 12, 2021, for replies.