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Doshi v. General Cable Corp.

United States District Court, E.D. Kentucky, Northern Division, Covington

April 30, 2019



          William O. Bertelsman, United States District Judge.

         In the present matter, Plaintiff, acting on behalf of a putative class of individuals or entities who purchased or otherwise acquired General Cable's common stock during the Class Period, alleges that Defendant General Cable, Defendant Gregory B. Kenny, and Defendant Brian J. Robinson violated § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) and Rule 10-b5 promulgated thereunder, 17 C.F.R. § 240.10b-5. Plaintiff also alleges that Defendants Kenny and Robinson violated § 20(a) of the Exchange Act. The defendants filed respective motions to dismiss all claims brought against them. (Docs. 75, 76, 77).

         Having previously heard oral argument and taken this matter under submission, the Court now issues the following Memorandum Opinion and Order.

         Factual and Procedural Background

         1. General Cable

         General Cable (“GC”) is a wire and cable manufacturer based primarily in Highland Heights, Kentucky. The individual defendants-Gregory Kenny and Brian Robinson-served as GC's Chief Executive Officer and Chief Financial Officer, respectively, during the Class Period. (Doc. 69 ¶¶ 31-32). In addition to its North American endeavors, GC has extensive international operations and it derives a large percentage of its revenues from these overseas divisions. (Id. ¶ 60). The relevant foreign subsidiaries were in Portugal, Angola, Thailand, China, and Egypt. (Id. ¶¶ 34-38).

         In the early 2010s, GC began to realize that, through certain foreign entities, GC committed several violations of the Foreign Corrupt Practices Act (“FCPA”). In December of 2012, certain GC executives- which purportedly included Defendant Robinson-received an Internal Audit report that identified excessive payments to a particular agent in Angola. (Id. ¶¶ 148, 154). The report also recommended that GC establish a global policy for using agents and sales representatives, but GC failed to take any subsequent action on this matter until the fall of 2013 when it conducted an onsite review. (Id. ¶ 157). After this onsite review, GC reported its findings to the SEC and DOJ in January of 2014. (Id. ¶ 163). This prompted investigations by both departments that culminated in settlements between GC and the DOJ and SEC, respectively, in December of 2016. (Id. ¶¶ 170, 173). These settlements revealed the extensive nature of the FCPA-related issues, and GC admitted to knowing that certain subsidiaries had been acting in violation of the FCPA since 2011. (Id. ¶ 146).

         2. General Cable's Statements During the Class Period

         a. General Cable's regular SEC filings.

         The Class Period for this action runs from February 23, 2012, to February 10, 2016. (Id. at 1). In compliance with SEC regulations, GC filed regular reports throughout the class period, which were signed by Kenny and Robinson. (Id. ¶¶ 175, 178, 192, 194, 202, 204, 211). In these filings, GC routinely informed investors of risks that were associated with its overall business. For example, in its 2011 Form 10-K-filed on the starting date of the Class Period-GC included a section appropriately titled “Risk Factors” in which it stated that it is “subject to a number of risk factors listed below[] which could have a material adverse affect on [its] financial condition.”[1] (Doc. 75-16 at 3). GC identified the listed risk factors as “all of the known material risks and uncertainties that they know to exist” but cautioned that additional, unknown risks may also impair its business. (Id.).

         One of the risk factors was that certain foreign and U.S. laws applied to their international operations, including the FCPA. GC stated that “[a]lthough we have implemented policies and procedures designed to ensure compliance with these laws, there can be no assurance that our employees, contractors and agents will not take actions in violation of our policies, particularly as we expand our operations through organic growth and acquisitions.” (Id. at 13). This statement was repeated in every Form 10-K and Form 10-K/A that was filed during the Class Period, and was also incorporated by reference in every Form 10-Q and Form 10-Q/A during this time. (Doc. 69 ¶ 76). GC had regularly repeated this statement in its Forms 10-K since at least December of 2007 (Id. ¶ 176).

         GC also explained specifically that it is subject to risks that come with doing extensive international business. This included conducting operations in countries that are at “higher risk of being targets of economic and political destabilization, international conflicts, restrictive actions by foreign governments, nationalizations or expropriations, changes in regulatory requirements, the difficulty of effectively managing diverse global operations, terrorist activities, adverse foreign tax laws and the threat posed by potential pandemics in countries that do not have the resources necessary to deal with such outbreaks.” (Id. ¶ 177) (emphasis in original). These risks, per GC, are particularly heightened in certain countries, including Angola, Thailand, and India. (Id.). These statements were repeated in the same SEC filings as the statement regarding GC's FCPA program. (See id. ¶¶ 178, 193-94, 203-04, 212-13).

         GC also included a certification on its 2011 Form 10-K that related to the effectiveness of its internal controls over financial reporting. GC claimed the management had evaluated the effectiveness of the internal control over financial reporting and “concluded that internal control over financial reporting was effective as of December 31, 2011.” (Id. ¶ 179). This was included in the 2012 Form 10-Qs for the first and second quarters. (Id. ¶ 180). Lastly, there were additional certifications which were required under Section 302 of the Sarbanes Oxley Act of 2002 that related to defendants Kenny and Robinson as CEO and CFO, respectively. These certifications made extensive assurances as to the disclosure controls and reliability of financial reporting.[2] (Id. ¶ 183).

         Through publication, republications, and incorporations by reference, these statements-with one exception-were repeated by GC throughout the Class Period. The exception is GC's statement that management had evaluated the effectiveness of the internal control over financial reporting and found it effective; it was issued on February 23, 2012, and repeated only on March 30, 2012, and June 29, 2012. (Id. ¶¶ 179-80).

         b. GC's disclosures of the FCPA violations.

         In August of 2014, GC disclosed publicly that it had alerted the DOJ and SEC to the potential FCPA violation in Angola. (Id. ¶ 164). GC followed up in September in a separate disclosure and also revealed that it was reviewing certain payments in its Thailand and India operations for possible FCPA “implications.” (Id. ¶ 165). In order to address flaws that it had discovered in its FCPA program, GC stated that it was implementing screening processes for international sales agents. (Id. ¶ 224). Following the September disclosure, GC's stock prices fell more than 10%. (Id. ¶ 19).

         In October, GC announced that it was divesting its Asia Pacific and African operations. (Doc. 69 ¶ 20). According to a conference call conducted the following day, GC made this decision in order to better focus on its core operations in other parts of the world. (Id. ¶ 167). In this same call, Robinson updated the callers on the SEC and DOJ investigations by stating that GC had undergone extensive reviews and was making improvements to strengthen their FCPA compliance program. (Doc. 75-10). GC's stock fell 6% the following day. (Doc. 69 ¶ 232).

         GC's final relevant disclosure was issued on February 10, 2016. There, GC announced that the FCPA investigation was substantially completed and it updated the amount of profits that would likely be disgorged as an outcome of this investigation. (Id. ¶ 169). However, it also revealed that there were other suspicious transactions with FCPA implications that may require an additional profit disgorgement of, potentially, $33 million. (Id. ¶ 169). Following this final disclosure, GC's stock fell 31.61% on February 11, 2016. (Id. ¶ 238).

         c. GC enters into settlements with the DOJ and SEC.

         Despite GC's disclosures to investors regarding FCPA-related issues, the extent of the FCPA violations was not fully revealed until it entered into separate settlements with the DOJ and the SEC. On December 22, 2016, GC entered into a Non-Prosecution Agreement (“NPA”) with the DOJ in which it admitted that it committed several FCPA violations from 2003 through 2015. (Id. ¶ 39). GC also entered into a Cease-and-Desist Order (“CDO”) with the SEC, which detailed the same FCPA violations. (Id. ¶ 42). Most relevant here are certain admissions that GC made regarding its FCPA compliance program in these documents, specifically the NPA. (See, e.g., id. ¶¶ 40, 77, 84-85, 122).

         The NPA states that:

GC, acting through certain executives and employees . . . knew that certain of its foreign subsidiaries used certain third-party agents and distributors to make corrupt payments to foreign officials in order to obtain and retain business in certain countries. Nonetheless, GC knowingly and willfully failed to implement and maintain an adequate system of internal accounting controls designed to detect and prevent corruption or otherwise illegal payments by its agents.[3]

(Doc. 75-12 at A-2-A-3).

         The NPA also reveals that a certain high-level executive became aware of potential FCPA violations in Thailand in 2011, and “General Cable took no further action and did not take any steps to implement adequate internal accounting controls.” (Id. at A-6 - A-7). The NPA acknowledges that GC has enhanced its program and “engaged in extensive remedial measures” to prevent this sort of activity from happening again. (Id. at 2). GC also agreed to “adopt new or [] modify existing internal controls, compliance codes, policies, and procedures” to maintain an effective system. (Id. at B-1).

         The CDO is similar. The SEC found that GC had a Code of Ethics that prohibited these sorts of payments and explicitly stated that the FCPA applied to GC and its employees. (Doc. 75-13 at 3). It also found that this same code required all transactions to comply with “federal securities laws that required GCC to maintain books, records, and accounts that accurately and fairly reflect transactions, and a system of internal accounting controls designed to provide reasonable assurances that GCC's financial statements will be accurate and complete.” (Id.).

         Despite this, the SEC found that GC failed to adequately train its employees in order to ensure compliance with the FCPA. (Id.). This resulted in a highly ineffective program: many of GC's foreign subsidiaries had no internal accounting controls through which they could safely work with third-party entities and some employees were generally unaware that the FCPA even applied to their operations. (Id. at 3-4). It also details specifically how the FCPA compliance program failed in Angola where there were no additional internal accounting controls implemented until months after the initial red flags were raised. (Id. at 4-5). Similarly, the SEC acknowledges that GC has extensively improved its system.

         d. Confidential Witness Accounts of the State of GC's Compliance Program.

         Plaintiff dedicates a substantial amount of his Amended Complaint to several accounts from confidential witnesses (“CWs”) who were employed at GC during the Class Period or in the years immediately preceding the Class Period. (Doc. 69 ¶¶ 43-54). The most prominent confidential witnesses are CW 1 and CW 2. CW 1 was hired in 2012 to be Vice President of Internal Audit at GC and was in that position during the Class Period. (Id. 43, 93). CW 1 reported, at least partially, to Robinson. (Id. ¶ 43). CW 1 was hired in the third quarter of 2012 supposedly in order to fix GC's “broken” Internal Audit department. (Id. ¶ 93, 96). CW 2 was a manager in Internal Audit during the Class Period, and reported directly to the Vice President of Internal Audit-who would seemingly be CW 1. (Id. ¶ 44). Many other CWs were auditors for GC, with only some working as auditors during the Class Period. (Id. ¶¶ 45-48). According to these CWs, GC had extraordinarily inefficient policies and procedures for ensuring compliance with the FCPA. CW 1 explained that GC did not provide adequate FCPA-specific training and resources to its Internal Audit department. (Id. ¶¶ 104-05). GC also failed to conduct formalized global risk assessments, which help companies design and implement systems meant to address specific identified risks. (Id. ¶¶ 113, 115). Per multiple CWs-including CW 2-GC did not test its compliance with the FCPA, either, which would have helped it discover weaknesses and violations. (Id. ¶¶ 116, 118).

         As part of CW 2's responsibilities, CW 2 conducted onsite visits at foreign subsidiaries. (Id. ¶ 44). CW 2 recounted incidents from these foreign subsidiaries that should have alerted GC to potential FCPA-compliance issues. CW 2 stated that many of GC's ROW subsidiaries were “difficult to work with and very defensive” when they had to work with Internal Audit. (Id. ¶ 149). CW 2 discovered an internal memorandum in the ROW division that stated that “auditors were ‘not your friends' and ‘only give the auditors what they ask for.'” (Id. ¶ 151). At some undisclosed time, CW 2 also found an email that also seemed to contain a plot from a South African operation to conceal the true reason that an Internal Control accountant was in South Africa. (Id. ¶ 152). CW 2 brought this to Robinson's attention but said that, while Robinson told CW 2 to “calm down” and that he would get to the bottom of it, CW 2 never heard from Robinson about the incident again. (Id.).

         CW 1 also alleged that Robinson was regularly informed of supposed inefficiencies and needs for improvement. (Id. ¶ 93). Allegedly, CW 1 informed Robinson of many concerns regarding GC's “deficient FCPA compliance program” but Robinson was “nonrespons[ive]” to these concerns. (Id. at ¶ 95). While CW 1 offers no specific allegations as to Kenny's knowledge, CW 1 believed that “Kenny simply relied on Robinson when it came to issues such as compliance.” (Id. at ¶ 96). The CWs overall create a picture that GC's management was largely unreceptive to efforts to improve its compliance program. (Id. ¶¶ 94-97). The reason for this, according to CW 1, seemed to be that “since there had been no FCPA violation uncovered to date, the Company's FCPA compliance must be sufficient. (Id. ¶ 94). CW 1 alleged that this “head in the sand” mentality was inconsistent with the level of exposure GC faced through its international operations. (Id. ¶ 94). As the NPA and CDO revealed, the program had many deficiencies that allowed multiple violations to occur.

         3. Procedural History

         An original complaint against GC, Kenny, and Robinson for alleged violations of federal securities laws was filed in January of 2017 in the Southern District of New York. (Doc. 1). Pursuant to 28 U.S.C. § 1404(a), the parties agreed to transfer venue to the Eastern District of Kentucky. (Doc. 9). Once a lead plaintiff was appointed by this Court, (Doc. 56), Lead Plaintiff then filed an Amended Complaint in January of 2018. (Doc. 69). Defendants thereafter filed respective motions to dismiss all claims brought against them. (Docs. 75, 76, 77). Defendants each attack the merits of Plaintiff's claims, and GC also asks that this matter be dismissed for being untimely.


         1. Plaintiff's claim is not barred by the statute of limitations since the facts, specifically facts relating to scienter, were not discoverable before 2016.

         Defendant GC[4] argues that Plaintiff's claims are untimely since the factual allegations regarding the ineffective system and the apparent risks were all available to Plaintiff by the end of 2014, including facts related to Defendants' scienter. (Doc. 75 at 19-21). However, GC fails to recognize the extent to which Plaintiff relies on the factual findings revealed in the NPA and CDO-specifically for support in his allegations regarding scienter.

         Section 10(b) claims have two-year statutes of limitations. 28 U.S.C. § 1658(b)(1). The period does not begin to run until the “plaintiff did discover or a reasonably diligent plaintiff would have ‘discover[ed] the facts constituting the violation.'” Merck & Co., Inc. v. Reynolds, 559 U.S. 633, 653 (2010) (alteration in original). The starting point is thus not when the plaintiff would have begun investigating but when they would have actually discovered the facts. Id. Scienter is one of the facts constituting a 10(b) violation- hence plaintiffs need to be able to discover facts supporting their scienter claim. Nolfi v. Ohio Ky. Oil Corp., 675 F.3d 538, 547 (6th Cir. 2012). “Storm warnings” that indicate something is wrong in the company's representations are not enough. See Id. A fact is “discovered” once a reasonably diligent plaintiff would have enough information to adequately plead the facts in a complaint. Akbar v. Bangash, No. 15-cv-12688, 2017 WL 4334912, at *4 (E.D. Mich. July 11, 2017) (citing City of Pontiac Gen. Emps. Ret. Sys. v. MBIA, Inc., 637 F.3d 169, 175 (2d Cir. 2011)).

         Even if GC were correct in claiming that Plaintiff could have discovered the truth regarding the deficiencies in GC's program in 2014, it is hard to see how Plaintiff had sufficient facts to plead scienter at that time. Throughout this entire Class Period, GC repeatedly offered assurances that it had a system in place and effective internal controls over its reporting. There is nothing in these disclosures to reveal that GC was not as surprised as anyone else to learn of the flaws that lead to these violations.

         It was not until December of 2016 that Plaintiff could plead with any particularity that GC was aware of issues related to its program. In the NPA specifically, GC admitted that it knew it had an ineffective and inadequate FCPA compliance program. As stated in the NPA, GC knew that it had employees making illegal payments and it “knowingly and willfully failed to implement and maintain an adequate system of internal accounting controls designed to detect and prevent corruption or otherwise illegal payments by its agents.” (Doc. 75-12 at A-3). Further, it “knowingly and willfully failed to address these known weaknesses.” (Id.). While Plaintiff also relies on an assortment of confidential witnesses, the NPA specifically provides insight into GC's state of mind and this information was wholly unavailable to Plaintiff prior to December 2016.

         While GC maintains that information regarding scienter was available to Plaintiff in 2014, [5] this argument is undercut by Plaintiff's reliance on the admissions found in the NPA. (Doc. 69 ¶ 187, 246, 249-52). Prior to this settlement, Plaintiff had little to no evidence to support any scienter allegation. Thus, Plaintiff was largely unable to plead his claim with any particularity prior to 2016 and GC's argument that this claim is barred by the statute of limitations therefore fails.

         2. Plaintiff failed to sufficiently state a valid claim under § 10(b) for any of the challenged statements.

         a. The applicable standards for ยง 10(b) and ...

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