In In re VEON Ltd. Securities Litigation, No. 15-cv-08672 (ALC), 2017 BL 330225 (S.D.N.Y. Sept. 19, 2017), the United States District Court for the Southern District of New York denied in part and granted in part VEON Ltd.’s (“VEON”) and current and former executives’ (collectively, “Defendants”) motion to dismiss for failure to state a claim in putative class action brought by Westway Alliance Corp. on behalf of all of those who purchased VEON securities between December 2, 2010 and November 3, 2015 (collectively, “Plaintiffs”). Based on VEON’s admitted bribery in Uzbekistan, Plaintiffs allege violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934.

Between 2005 and 2012, it is alleged that VEON made or attempted to make millions of dollars in improper payments to Uzbekistan’s President’s daughter to secure certain 3G frequencies, obtain telecommunication assets, and access the Uzbek market. Allegedly, VEON’s executives disguised these payments as legitimate transactions. On March 12, 2014, VEON filed a Form 6-K disclosing it was under investigation by the Securities Exchange Commission (“SEC”) for its operations in Uzbekistan. In 2016, VEON entered into a deferred prosecution agreement with the United States Department of Justice, and pleaded guilty to charges against the company for conspiracy to violate the anti-bribery, books and records, and the internal controls provisions of the Foreign Corrupt Practices Act (“FCPA”). Furthermore, VEON admitted it failed to implement and enforce adequate internal accounting controls and did not have a proper anticorruption compliance program. Plaintiffs alleged that VEON’s conduct resulting in the FCPA violations led to material misstatements and omissions in its SEC filings in violation of Sections 10(b) and 20(a). Defendants argued Plaintiffs failed to allege any actionable misstatements, scienter, or loss causation pursuant to Section 10(b).

Under Section 10(b) and Rule 10b-5, a court may find a material misrepresentation or omission actionable in a financial statement when a company has failed to disclose an uncharged, unadjudicated wrongdoing where the failure would make other disclosures materially misleading. A court may find scienter when a plaintiff alleges facts sufficient to create a strong inference the statements would have been approved by corporate officials sufficiently knowledgeable about the company to know the statements were misleading. To establish loss causation, a plaintiff must provide a defendant with some indication of loss, and the causal connection between the misconduct alleged and the economic harm. Finally, under Section 20(a) control persons can be found liable for the fraud of the entities they control.

The court found the Defendants’ disclosure of reasons for VEON’s increased revenue in its SEC filings was actionable because it excluded the impact of the bribes. Additionally, VEON’s statement that all owners of telecommunications networks had equal rights and enjoy equal protection guaranteed by the law was misleading because VEON admitted to bribery. Finally, the court found that some of VEON’s statements about internal controls were actionable because Defendants were aware VEON’s internal controls were not effective when they made statements to the contrary. On the other hand, the court dismissed Plaintiff’s claims alleging inaccuracies in VEON’s revenue reporting, its disclosures regarding governmental authorities, and its failure to follow internal controls. In regard to the element of scienter, the court found the allegations that executives understood how bribery would impact VEON’s financial statements and took steps to obscure it allowed the court to reasonably infer scienter. The court also determined that only individuals who sold their shares after VEON’s Form 6-K disclosure on March 12, 2014 could show loss causation. Finally, the court denied dismissal of the Section 20(a) claims because some Section 10(b) claims remained.

Accordingly, the court denied in part and granted in part Defendants’ motion to dismiss.

The primary materials for this case may be found on DU Corporate Governance website.