United States District Court, E.D. Kentucky, Northern Division, Covington
MEMORANDUM OPINION AND ORDER
William O. Bertelsman, United States District Judge.
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).
previously heard oral argument and taken this matter under
submission, the Court now issues the following Memorandum
Opinion and Order.
and Procedural Background
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).
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).
General Cable's Statements During the Class
General Cable's regular SEC filings.
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.” (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
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).
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).
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. (Id. ¶ 183).
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.
GC's disclosures of the FCPA violations.
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).
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).
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).
GC enters into settlements with the DOJ and SEC.
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).
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
(Doc. 75-12 at A-2-A-3).
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).
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
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.
Confidential Witness Accounts of the State of GC's
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).
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.).
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.
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.
Plaintiff's claim is not barred by the statute of
limitations since the facts, specifically facts relating to
scienter, were not discoverable before 2016.
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
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)).
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.
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.
GC maintains that information regarding scienter was
available to Plaintiff in 2014,  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.
Plaintiff failed to sufficiently state a valid claim under
§ 10(b) for any of the challenged statements.
The applicable standards for § 10(b) and ...