United States District Court, Southern District of New York
November 2, 2001
IN RE TURKCELL ILETISIM HIZMETLER, A.S. SECURITIES LITIGATION.
The opinion of the court was delivered by: Buchwald, District Judge.
MEMORANDUM AND ORDER
This is a class action brought on behalf of those who
purchased the American Depository Shares issued by defendant
Turkcell Iletisim Hizmetleri A.S. ("Turkcell") in an initial
public offering in July 2000. Plaintiff class alleges violations
of sections 11 and 15 of the Securities Act of 1933. The
defendants include Turkcell, its underwriters, Goldman Sachs
International, Morgan Stanley & Co. International Limited,
Credit Suisse First Boston (Europe), Lehman Brothers
International AG London, and UBS AG, its Chief Executive
Officer, Cuneyt Turktan, and its Chief Financial Officer Ekrem
Tokay. Now pending is the defendants' joint motion to dismiss
the claims, pursuant to Fed.R.Civ.P. 12(b)(6). For the reasons
discussed below, the motion is granted in part and denied in
This complaint stems from alleged omissions in a Prospectus
issued by Turkcell, a mobile communications service provider in
Turkey, in connection with an initial public offering of
American Depository Shares in July 2000. The Prospectus was
filed with the SEC on or about June 26, 2000, and became
effective on or about July 10, 2000.
Plaintiffs make two distinct claims. First, they allege that
defendants failed to
disclose material information regarding the rate at which
customers were disconnected from the service (the "churn rate"),
a key factor for evaluating mobile phone companies.
Specifically, Turkcell's Prospectus states that its churn rate
was 0.3% for the three months ending on March 31, 2000.
Plaintiffs allege that the Prospectus omitted the fact that
Turkcell's churn rate did not include subscribers whose service
had been disconnected but with respect to whom Turkcell had not
yet completed the legal process accompanying disconnection.
According to a Morgan Stanley Dean Witter report, at a meeting
with stock analysts on September 20, 2000, Turkcell allegedly
stated that there were up to 700,000 customers who had been
disconnected but as to whom Turkcell had not yet completed the
accompanying legal process and who had, therefore, not been
included in Turkcell's calculation of its churn rate.
Plaintiffs second allegation concerns Turkcell's failure to
include financial statements for the quarter ending June 30,
2000. The Prospectus contained audited financial statements for
the fiscal years ending December 31, 1997, 1998, and 1999. It
also contained unaudited financial statements for the quarters
ending March 31, 1999, and March 31, 2000. Plaintiffs allege
that this data showed a series of increases in operating income
through the first quarter of 2000. On August 11, 2000, Turkcell
released financial results for the first half of 2000, which
showed that operating income fell by 9% from the first quarter
of 2000 to the second quarter of 2000.
Plaintiffs initially filed suit on November 22, 2000, and the
various class actions were consolidated on March 8, 2001. By
letter dated May 4, 2001, defendants sought leave to move to
dismiss the complaint and set forth their proposed arguments. On
May 23, 2001, the Court sent a letter to counsel confirming
plaintiffs' advice to chambers that they would not seek to amend
their complaint in response to the motion to dismiss. This Court
heard oral arguments on defendants' motion to dismiss on October
I. Standard on a Motion to Dismiss
For purposes of a motion to dismiss, we are required to accept
as true the factual assertions in the complaint. Zinermon v.
Burch, 494 U.S. 113, 118, 110 S.Ct. 975, 108 L.Ed.2d 100
(1990); Charles W. v. Maul 214 F.3d 350, 356 (2d. Cir. 2000).
Additionally, for purposes of a Fed.R.Civ.P. 12(b)(6) motion, a
complaint is deemed to include any statements or documents
incorporated in it by reference, Rothman v. Gregor,
220 F.3d 81, 88 (2d Cir. 2000), Cosmas v. Hassett, 886 F.2d 8, 13 (2d
Cir. 1989), as well as publicly disclosed documents required
that have been filed with the SEC. Rothman, 220 F.3d at 88;
Cortec Industries, Inc. v. Sum Holding L.P., 949 F.2d 42,
47-48 (2d Cir. 1991).
II. Applicability of the Rule 9(b) Heightened Pleading
As a threshold issue, defendants assert that the Fed.R.Civ.P.
9(b) heightened pleading standard for fraud claims applies to
this complaint and that, therefore, plaintiffs must plead their
claims with particularity. The case law is unclear as to whether
claims under section 11 of the Securities Act must allege facts
with particularity, or whether they are subject to the more
liberal standards of Fed.R.Civ.P. 8(a)(2). There are numerous
decisions in this district that have found that, where section
11 claims sound in fraud, the heightened pleading requirements
of Rule 9(b) apply. See In re Complete Management Inc.,
153 F. Supp.2d 314, 340 (S.D.N.Y. 2001); In re N2K Inc. Securities
Litigation, 82 F. Supp.2d 204, 210 n. 10 (S.D.N.Y. 2000). But
see In re AnnTaylor Stores Securities Litigation, 807 F. Supp. 990,
1003 (S.D.N.Y. 1992) (stating that "courts have long held
that Rule 9(b) does not apply to a Section 11 claim."). The
Second Circuit has not yet ruled on this issue, in fact
expressly reserving any discussion of it. See In re N2K Inc.
Securities Litigation, 202 F.3d 81 n. 1 (2d Cir. 2000).
In this case, we need not determine whether section 11 claims
that sound in fraud require satisfaction of the heightened
pleading requirements of Rule 9(b). At oral argument, plaintiffs
argued that, if the Court found that Rule 9(b) applied, it
should also find that they have alleged the who, what, when, and
where, and why of their claim, notwithstanding the apparent
admission in their brief that "[d]efendants are correct that the
Complaint does not plead fraud with particularity." See Luce v.
Edelstein, 802 F.2d 49, 54 (holding that Rule 9(b) requires
that plaintiff specify the time, place, speaker, and content of
the alleged fraudulent statement). We are persuaded that
plaintiffs have plead with sufficient particularity, so that we
need not reach the issue of whether Rule 9(b) a plies to section
III. Defendants Failure to Disclose Disconnected Customer
Totals in Prospectus
Section 11 of the Securities Act requires the disclosure of
all material information. The question, then, is whether
Turkcell's alleged misstatements are material. An omitted fact
is deemed material if it would have "significantly altered the
`total mix' of information made available." TSC Industries,
Inc. v. Northway, Inc., 426 U.S. 438
, 449, 96 S.Ct. 2126, 48
L.Ed.2d 757 (1976). See also Kronfeld v. Trans World Airlines,
Inc., 832 F.2d 726
, 731 (applying the Northway materiality
standard to section 11 claims).
Plaintiffs allege that defendants omitted material information
about an increase in Turkcell's churn rate. They allege that the
defendants omitted any mention of the customers who had been
disconnected but as to whom Turkcell had not yet completed the
legal process accompanying disconnection. The complaint further
alleges that, if the 700,000 subscribers who had their service
cut off were included in the churn total, the rate in the
Prospectus would have been 11%, rather than 0.3%. Given the
Prospectus' statement that the acquisition cost was $60 per
subscriber, this increased churn could have cost Turkcell $42
million to replace the disconnected customers, more than 10% of
their reported net income for 1999. Furthermore, according to
the September 20 Morgan Stanley report, defendants admitted that
the churn rates provided in the Prospectus were calculated
differently than other mobile communications providers because
they did not include the disconnected customers at issue here,
even though the Prospectus compared Turkcell's churn rate to
that of other providers. Disclosure of the pending
disconnections and the incomparability of Turkcell's reported
churn rate with other carriers would likely have affected the
"total mix" of information available to investors.
Defendants initially argue that the allegedly misleading
information in the Prospectus is forward-looking and is
therefore subject to the "bespeaks caution" doctrine. Courts
have held that meaningful cautionary language can render
omissions or misrepresentations immaterial. In re Donald J.
Trump Casino Sec. Litig., 7 F.3d 357, 371 (3d Cir. 1993)
(stating that "when an offering document's forecasts, opinions
or projections are accompanied by
meaningful cautionary statements, the forward-looking statements
will not form the basis for a securities fraud claim if those
statements did not affect the `total mix' of information the
document provided investors."). But plaintiffs persuasively
argue that the statements at issue about churn were not forward
looking at all. The issue is not whether Turkcell failed to
predict the increase in churn, but rather whether it omitted
material information about its churn rate at the time it issued
the Prospectus. The September 20 Morgan Stanley analyst report
indicates that 200,000 subscribers had been disconnected in the
quarters before the Offering. Because the statements are alleged
to be inaccurate at the time they were made, the forward-looking
statement doctrine cannot apply, and we make no decision as to
whether Turkcell's cautionary language was adequate to warrant
the "bespeaks caution" exemption. See In re Oxford Health Plans
Sec. Litig., 187 F.R.D. 133, 141 (S.D.N.Y. 1999) (stating that
the bespeaks caution doctrine does not apply to a defendant's
failure to disclose existing and historical material facts).
Defendants also claim that the complaint fails to allege that
the various defendants had any knowledge of the increased churn
rate. This argument is flawed. Section 11 does provide a due
diligence defense for underwriters, but the burden of proof for
the defense is on the defendants. The plaintiffs need not allege
that defendants breached their duty of due diligence. Moreover,
plaintiffs need not plead defendants' knowledge as there is no
scienter requirement in section 11. See Herman & MacLean v.
Huddleston, 459 U.S. 375, 382, 103 S.Ct. 683, 74 L.Ed.2d 548
Plaintiffs have sufficiently alleged a material omission in
Turkcell's prospectus to withstand a motion to dismiss.
Therefore, defendants' motion to dismiss the churn claim is
IV. Defendants Failure to Include Second Quarter Results in
Plaintiffs also allege that Turkcell failed to disclose its
financial results for the period ending June 30, 2000, in its
Prospectus, which became effective on July 10, 2000. They claim
that Turkcell was under a duty to include this information in
the Prospectus because its omission made the Prospectus false
There are only two circumstances under which issuers must
update the financial information provided in a prospectus.
First, SEC Regulation S-X mandates that financial statements
that are more than 135 days old as of the effective date must be
updated. 17 C.F.R. § 210.3-12(a). Second, courts have mandated
disclosure of interim financial information when the interim
results represent an "extreme departure from the range of
results which could be anticipated based on currently available
information." Shaw v. Digital Equipment Corp., 82 F.3d 1194,
1210 (1st Cir. 1996).
Plaintiffs have not adequately alleged either of these two
scenarios. They do not dispute that the financial statements in
the Prospectus were less than 135 days old. They also make no
showing that the 9% drop in operating income meets the Shaw
standard. Plaintiffs' reliance on Baffa v. Donaldson, Lufkin &
Jenrette, 999 F. Supp. 725 (S.D.N.Y. 1998), is inapplicable in
this case. In Baffa, the court, with very little discussion,
cited allegations that defendants knew of information, regarding
"large financial losses" at the time the Prospectus became
effective, to deny a motion to dismiss. Id., at 728. Here,
there are no losses whatsoever at issue.
The Shaw standard also requires that plaintiffs allege that
defendants know of the material nonpublic information at issue.
82 F.3d at 1210. While plaintiffs are correct that section 11
claims do not generally require a showing of scienter, Shaw
does, in effect, require such a showing. Furthermore, Item 303
of Regulation S-K requires that the company disclose "known
trends" in its management discussion and analysis section, where
plaintiffs arguably demand that the disclosure take place.
17 C.F.R. § 229.303(a)(3)(ii). The complaint fails to allege that
there "trends" or that they were "known" as of the date the
Prospectus became effective.
Plaintiffs cite a 9% drop in Turkcell's operating income from
the first quarter to the second quarter, noting that this was
the first time that operating income for Turkcell had fallen.
Plaintiffs allege a decline in Turkcell's operating income, but
not in any other financial indicator. We cannot see how the
small decline in operating income represents an extreme
departure from the expected range of results presented by
Turkcell's Prospectus, particularly given the reluctance of
courts to require companies to release results before, or within
days of, the end of fiscal quarters. The disclosure structure
set out by the SEC and the case law recognizes how unworkable
and potentially misleading a system of instantaneous disclosure
out the normal reporting periods would be. Moreover, acceptance
of plaintiffs position would require the immediate release of
data without the benefit of reflection or certainty provided by
the traditionally recognized reporting periods. Therefore,
defendants' motion to dismiss the second quarter results claim
For the reasons discussed above, defendants' motion to dismiss
is granted in part and denied in part. The parties are hereby
requested to appear on November 19, at 3:00 p.m. for a
IT IS SO ORDERED.
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