In re Pareteum Securities Litigation
- Alvin Hellerstein
- 1:19-cv-09767
- U.S. District Court · Southern District of New York
- 39
In re Pareteum Securities Litigation, Judge Hellerstein denied defendants’ motions to dismiss securities claims, allowing the class action to proceed.
The ruling allowed the Lead Plaintiff’s securities claims against Pareteum Corporation, the Individual Defendants, Dawson James Securities Inc., and Squar Milner to proceed past the motion-to-dismiss stage. It also required defendants to answer the operative complaint within 30 days.
What happened
In In re Pareteum Securities Litigation, investors alleged that Pareteum Corporation and several officers, an underwriter, and an auditor made misleading statements about the company’s revenue, growth, backlog, financial controls, credit facility, and financial reports. The claims covered securities purchases during the alleged class period and offerings connected to Pareteum’s acquisition of iPass and a later stock-and-warrant offering.
The defendants argued that the complaint did not adequately identify false statements, show that the individual defendants intended to mislead investors or acted recklessly, establish that a lead plaintiff bought shares connected to the later offering, or show that auditor Squar Milner made an actionable false statement. The court had already ruled that the complaint adequately alleged materially misleading statements by several defendants and addressed these remaining issues.
Judge Hellerstein held that the complaint adequately alleged the required intent or recklessness for the exchange-law claims, plausibly alleged that a plaintiff’s shares were connected to the later offering, and adequately alleged that Squar Milner’s audit opinion could be misleading. He denied defendants’ motions to dismiss and ordered them to answer the complaint within 30 days.
The detailed version
- In re Pareteum Securities Litigation · No. 1:19-cv-09767
- Alvin Hellerstein
- Aug. 11, 2021
Background
The Lead Plaintiff, Pareteum Shareholder Investor Group, brought securities claims on behalf of purchasers and acquirers of Pareteum securities during the alleged class period from December 14, 2017, through October 21, 2019. The defendants were Pareteum Corporation; Robert H. Turner, Edward O’Donnell, Victor Bozzo, and Denis McCarthy; Dawson James Securities Inc.; and Squar Milner.
The complaint alleged that Pareteum and its officers overstated revenue, revenue growth, contractual backlog, backlog-to-revenue conversion, and the company’s financial condition. It also alleged that the company made misleading statements about its financial reporting, internal controls, credit facility, and growth. The complaint asserted claims under Section 10(b) of the Securities Exchange Act of 1934 and related control-person provisions, as well as claims under Sections 11, 12(a)(2), and 15 of the Securities Act of 1933 concerning Pareteum’s acquisition of iPass and a $40 million secondary offering of stock and warrants.
Pareteum later announced that it would restate its financial statements for 2018 and the first half of 2019 because certain revenue had been recognized prematurely or inaccurately. The company estimated that the restatement would reduce reported revenue by approximately $9 million for 2018 and approximately $24 million for the first half of 2019.
Issues Before the Court
The defendants moved to dismiss the amended complaint under the pleading rules. At oral argument, the court ruled that the complaint adequately alleged materially false or misleading statements involving five categories: reported revenue and revenue growth; revenue recognition, generally accepted accounting principles compliance, internal controls, and financial reporting; backlog; the credit facility; and company growth.
The court reserved three issues for decision:
- Whether the complaint adequately alleged scienter—an intent to deceive or recklessness close to intentional misconduct—for the Exchange Act claims.
- Whether the complaint adequately alleged that a lead plaintiff purchased shares traceable to the secondary offering, as required to bring the Section 11 claims connected to that offering.
- Whether the complaint adequately alleged that Squar Milner made a materially false or misleading statement that could support Section 11 liability.
Exchange Act Claims
The court held that the complaint adequately alleged scienter. The allegations that Pareteum and its officers wanted to inflate the company’s stock price, raise money, support acquisitions, or obtain compensation were not enough by themselves because those motives are common to corporate officers and companies. But the court found stronger circumstantial evidence when considering the allegations together.
The individual officers were senior company officers who made or signed statements reporting substantial increases in revenue and backlog. At the same time, the company’s auditors had identified inadequate and ineffective internal controls over financial reporting. Seven months later, Pareteum announced that its financial statements could no longer be relied upon and that its reported revenue would be reduced substantially. The court also considered the timing of the terminations or removals of McCarthy, O’Donnell, and Turner around the restatement announcement. Taken together, these allegations supported a strong inference of scienter at the pleading stage.
The court therefore denied Turner’s, McCarthy’s, and O’Donnell’s motion to be dismissed from the complaint. The opinion’s conclusion states more broadly that defendants’ motions to dismiss were denied.
Securities Act Claims
For the Section 11 claims concerning the secondary offering, the court held that the complaint adequately alleged traceability. A member of the Lead Plaintiff group, Keith Moore, allegedly purchased Pareteum stock on September 20, 2019, the day the offering closed. The complaint alleged that the trading volume that day was much higher than the average volume during the preceding week and that Moore bought at a price within that day’s trading range and close to the offering price. The court found these allegations plausible and sufficient at the motion-to-dismiss stage.
The court also held that the allegations against Squar Milner were sufficient. An auditor’s opinion is not automatically actionable merely because later events show that financial statements were incorrect. But an auditor’s opinion may support liability if the auditor did not honestly hold the stated belief, included an embedded materially false fact, or omitted information needed to keep the opinion from misleading ordinary investors.
The complaint alleged that Squar Milner allowed its March 18, 2019, audit opinion to be used in connection with the later secondary offering without adequately addressing whether intervening events had undermined the reliability of the company’s financial reporting. The complaint pointed to the company’s disclosed internal-control weaknesses, rapid reported growth, short-seller reports questioning the backlog and revenue, the company’s decision to stop using backlog as a key performance measure, and the later restatement. The court found those allegations sufficient at the pleading stage and denied Squar Milner’s motion to dismiss.
Disposition
Judge Alvin K. Hellerstein ordered that defendants’ motions to dismiss were denied. He ordered defendants to file an answer to the operative complaint within 30 days, directed the parties to appear for a case-management conference on September 30, 2021, and directed the Clerk to terminate the listed open motions. The order did not determine whether the defendants were ultimately liable; it allowed the pleaded claims to continue beyond the dismissal stage.
Read the full 39-page opinion on CourtListener, the free public archive maintained by the Free Law Project.