Solomon v. Sprint Corporation

Background

Isaac Solomon and Francine Canion brought a proposed class action against Sprint Corporation and individual defendants Michael Combes, Andrew Davies, Marcelo Claure, and Tarek Robbiati. They alleged violations of Section 10(b) of the Securities Exchange Act and Securities and Exchange Commission Rule 10b-5, which generally prohibit material securities fraud. They also asserted a Section 20(a) control-person claim against the individual defendants.

The allegations concerned statements Sprint made before its 2020 merger with T-Mobile. Plaintiffs alleged that Sprint overstated its postpaid net additions—its net increase in customers who paid after receiving service—and failed to disclose that the figures included free lines, non-phone devices, and customer migrations that did not represent new customers. Plaintiffs also alleged that Sprint made misleading statements about its internal controls and financial reporting related to the federal Lifeline program. That program provides discounted phone or internet service to qualifying consumers, and Sprint allegedly received reimbursements for accounts that were ineligible or should have been removed from the program.

Defendants moved to dismiss the amended complaint. They argued that plaintiffs had not adequately alleged false or misleading statements, the required mental state for securities fraud, or a connection between the alleged fraud and plaintiffs’ losses.

Court’s analysis

The court held that plaintiffs plausibly alleged that Sprint’s public statements about postpaid net additions were misleading. Although some individual disclosures were technically accurate, the court found that Sprint’s overall presentation could have created a misleading impression of continued growth while company insiders allegedly knew that postpaid additions were declining. The court also held that plaintiffs adequately pleaded the required mental state—knowledge or recklessness—for the postpaid-additions allegations, based in part on differences between information presented internally to Sprint’s Board and statements made publicly.

The court also found that plaintiffs adequately alleged that Sprint’s statements about the Lifeline program and related financial reporting were false or misleading. However, plaintiffs did not adequately plead the required mental state for those claims. The court found that an older statement by an unnamed senior lawyer about a systemic failure did not sufficiently connect Sprint’s earlier internal-control problems to the Lifeline issues identified later. The court likewise found insufficient allegations of the required mental state for the claims based on the related financial statements.

The court dismissed claims based on statements expressing optimism about Sprint’s future performance, competitive position, or ability to operate without the merger. It treated those statements as nonactionable “puffery”—general optimism that cannot be proven true or false in the way required for a securities-fraud claim.

The court held that plaintiffs adequately pleaded loss causation, meaning a connection between the alleged fraud and their claimed losses, because the complaint alleged stock-price declines after corrective disclosures. The court also denied dismissal of the Section 20(a) control-person claim because at least some Section 10(b) claims remained viable.

Disposition

The court granted in part and denied in part defendants’ motion to dismiss. The claims were dismissed only to the extent they relied on the nonactionable optimistic statements or on the allegations for which plaintiffs had not adequately pleaded the required mental state, including the Lifeline internal-control and related financial-statement allegations. Claims concerning Sprint’s reporting and public statements about postpaid net additions remained, and the case was allowed to proceed on those claims. Defendants were directed to answer by April 8, 2022.