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December 6, 2004.

In re NTL INC. SECURITIES LITIGATION. This Document Relates to: All Cases.

The opinion of the court was delivered by: LEWIS KAPLAN, District Judge


Following the collapse of the Internet and technology boom, courts have been faced with numerous actions against telecommunication and other technology companies whose stock prices declined precipitously. This controversy involves one such former telecommunications giant, NTL, Inc. ("NTL"), a New York based corporation that provides telephone, cable television, Internet and broadband communications services in the United Kingdom, Ireland and parts of continental Europe.*fn1

  In the late 1990s, NTL pursued an aggressive growth strategy, largely financed by substantial debt. Defendants allegedly knew that this debt threatened NTL's financial condition, but represented otherwise in their public statements. Moreover, plaintiffs claim that NTL and its directors defrauded investors by failing to disclose material problems that undermined NTL's financial stability. By April 2002, the stock price had decreased to less than one dollar, and the company filed for bankruptcy. These securities fraud suits followed.

  I. The Pleadings

  A. The Class Complaint

  Plaintiffs in No. 02 Civ. 3013 ("Class Plaintiffs") purportedly represent a class of purchasers of NTL common stock and debt securities between August 2000 and November 2001 ("Class Period"). They sue NTL*fn2 and four individual defendants*fn3 under the Securities Exchange Act of 1934 (the "Exchange Act")*fn4 and Rule 10b-5 thereunder.*fn5

  The complaint alleges that NTL, beginning in 1993, pursued a strategy of growth through acquisition, acquiring eleven companies in 1998-2000.*fn6 The two largest of these acquisitions, Cable Wireless Communications ("ConsumerCo") and Cablecom, together cost over $16.5 billion. NTL issued debt securities to finance these acquisitions, resulting in debt of $15.1 billion by 2000.*fn7

  Throughout this period, NTL, like all public companies, communicated with the investing public through SEC filings, press releases and interviews. While some statements were purely factual, others expressed optimism about NTL's future or portrayed the company in a positive light. For example, defendant Knapp, the chief executive officer, commented in a July 18, 2001, press release, "[o]ur current operating results are very strong and we have always had great confidence in the future. In our upcoming presentation we will be describing how our increasingly strong performance will make our current funding sufficient for us to reach free cash flow positive by the end of 2003."*fn8 Nevertheless, NTL stock declined steadily throughout the Class Period from approximately $48 per share at the beginning to $1.60 per share on November 29, 2001.*fn9

  This for the most part is not a case involving outright falsehoods. Most of plaintiffs' allegations are to the effect that otherwise routine statements by NTL were materially misleading because defendants failed to disclose NTL's alleged internal problems in order to inflate NTL stock price. These alleged problems fall into two major categories, the allegations of which are premised entirely upon information and belief:*fn10 (1) difficulties in integrating acquired companies, and (2) problems with the customer base. In addition, plaintiffs in a few instances allege that defendants themselves made affirmative statements or are responsible for affirmative misstatements or material omissions made in third-party analyst reports.

  Plaintiffs sue NTL and the individual defendants both as primary violators of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder and as control persons under Section 20(a) of the Exchange Act.*fn11 The individual defendants move to dismiss.

  B. The Gordon Complaint

  Plaintiffs in No. 02 Civ. 7377 ("Gordon Plaintiffs") are individuals and a limited partnership that purchased or acquired NTL securities between January 12, 2000 and April 16, 2002 ("Applicable Period"). The defendants in the class action all are sued here as well save Stephen Carter.

  The second amended complaint ("Gordon Complaint") adopts the Class Complaint in its entirety and adds a few allegations.*fn12 It complains of several additional statements and makes additional allegations in support of its scienter allegation, the majority of which result from the personal relationship between Frederick Gordon and defendant Blumenthal.*fn13 For example, the Gordon Complaint alleges that defendants made additional misleading statements directly to Gordon.*fn14 It contains also additional allegations as to why statements were misleading.

  The Gordon Plaintiffs sue NTL and the individual defendants as primary violators under Section 10(b) of the Exchange Act, Rule 10b-5, and 17 C.F.R. § 229.303, and for common law fraud. The individual defendants are sued also as control persons under Section 20(a). All defendants, including NTL, move to dismiss the second amended complaint.

  II. Standard Governing Motions to Dismiss

  In deciding a Rule 12(b)(6) motion, the Court accepts as true all allegations in the complaint and draws all reasonable inferences in the plaintiff's favor.*fn15 Dismissal is inappropriate "unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief."*fn16 Although such motions are addressed to the pleadings, a district court may consider also the full text of documents partially quoted in the complaint where the documents are "integral" to it and relied upon by plaintiffs.*fn17 Accordingly, review of the exhibits attached to defendants' moving papers is appropriate.*fn18

  As this is a securities fraud case, the complaints must meet also the heightened pleading requirements of Rule 9(b) and the Private Securities Litigation Reform Act of 1995 ("PSLRA"). These have three particularly relevant effects here. First, the complaints must state the circumstances constituting fraud with particularity.*fn19 They "must: (1) specify the statements that the plaintiff contends were fraudulent, (2) identify the speaker, (3) state where and when the statements were made, and (4) explain why the statements were fraudulent."*fn20 Second, where an allegation regarding a misstatement or omission is made on information and belief, the PSLRA requires that "the complaint shall state with particularity all facts on which that belief is formed."*fn21 Finally, bald allegations of scienter will not suffice. Plaintiffs must "state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind."*fn22 The precise application of these standards is at the heart of these motions.

  III. Section 10(b) and Rule 10b-5 Claims

  In order to state a claim under Section 10(b) of the Exchange Act and Rule 10b-5, "a plaintiff must plead that the defendant, in connection with the purchase or sale of securities, made a materially false statement or omitted a material fact, with scienter, and that the plaintiff's reliance on the defendant's action caused injury to the plaintiff."*fn23 Scienter is "an intent to deceive, manipulate or defraud."*fn24

  A. Particularity Requirement

  Defendants argue that plaintiffs have failed to state the circumstances of the alleged fraud with the requisite particularity and have resorted instead to "puzzle pleading" — reproducing blocks of text from allegedly deceptive NTL statements without specifying which portions are misleading.*fn25 The Court disagrees. For the most part, the complaints specifically identify the date, publication and speaker*fn26 of each of the alleged misstatements or omissions.*fn27

  The particularity requirement demands also that plaintiffs sufficiently plead why the statements were fraudulent.*fn28 Plaintiffs attempt to do so by reciting detailed reasons after each alleged misstatement. For example, Class Plaintiffs claim that many statements were misleading because they failed to disclose that NTL was experiencing problems with integration of acquired companies, keeping churn rates low by under-reporting customer terminations, and maintaining nonpaying subscribers on subscriber lists. They allege that other statements were misleading because defendants misrepresented that the integration of ConsumerCo was proceeding smoothly or that NTL was fully financed when in fact there were integration and working capital problems. The Gordon Plaintiffs, for their part, claim that statements were misleading because defendants misrepresented their ability to meet EBITDA projections and satisfy credit agreements. To the extent that the complaints contain facts supporting the existence and materiality of these problems, they satisfy the particularity requirement.*fn29 It is to this that the Court now turns.

  B. NTL's Alleged Problems

  To support their claim that defendants' failure to disclose material problems made otherwise unobjectionable statements misleading, plaintiffs must allege an adequate basis for supposing that such problems actually existed. Where the allegations are premised upon information and belief, as is true of the majority,*fn30 the PSLRA requires that "the complaint . . . state with particularity all facts upon which the belief is formed."*fn31 This standard is satisfied where plaintiffs "plead with particularity sufficient facts to support [the alleged] beliefs."*fn32 The type of facts and particularity required are determined on a case-by-case basis.*fn33

  Whether plaintiffs have pleaded with particularity sufficient facts to support their beliefs involves two separate inquiries. First, are the specific factual allegations that the problems existed based on adequate sources? In other words, have plaintiffs sufficiently identified the sources upon which their beliefs are based, and are these sources likely to have known the relevant facts? Second, do plaintiffs' factual allegations permit an inference that NTL was experiencing material problems during the relevant times? In other words, the facts alleged must support not only an inference that problems actually existed, but also an inference that the alleged problems would have been material to the reasonable investor.*fn34

  1. Integration Problems

  The first category of alleged problems concerns NTL's ability to integrateits acquired companies, in particular its largest acquisition, ConsumerCo. Class Plaintiffs allege that NTL was experiencing significant difficulties in this regard based on the following subsidiary assertions: (1) employees at NTL and ConsumerCo refused to speak to one another, (2) NTL's customer service unit was unable to handle the expanded customer base, (3) NTL's billing systems were duplicative and uncoordinated following the acquisitions, and (4) Knapp admitted that NTL was having integration problems at an October 2000 meeting.*fn35

  The initial inquiry is whether these subsidiary factual allegations are premised upon adequate sources. Where plaintiffs rely on personal sources alone to support their allegations, as they do here, they need only describe the sources "with sufficient particularity to support the probability" that someone in the informant's position would possess the information alleged.*fn36

  Here, plaintiffs rely on former sales and marketing employees for the integration problem allegations, identifying each source by name or position at the company during the Class Period. Because it is likely that these sales and marketing employees would have been knowledgeable about customer service and integration problems, the allegations are adequately sourced.

  The question whether plaintiffs are justified by these subsidiary allegations in drawing the conclusion that the company was experiencing integration problems of such significance that they would have been important to a reasonable investor is another matter. The complaint, apart from largely rhetorical flourishes of indeterminate meaning,*fn37 contains little or no hard information concerning the extent or prevalence of the subsidiary "facts" relied upon. Claims of "frequent" failures to complete service appointments,*fn38 for example, are meaningless unless one knows what "frequent" means. Indeed, the only quantitative information regarding the impact of problems with customer service is reference to an NTL survey, the date of which is not given, that allegedly found an average on-hold time of 25 minutes and that over 35 percent of callers disconnected before reaching a customer service representative.*fn39 But the complaint contains no information that would permit determination of the significance of these two facts. There is no indication of the period over which the reported average hold time and disconnect rates were observed — an extremely busy night or weekend would be a matter of far less significance than a problem that persisted over weeks or months. Nor is any indication of what is normal in the operation of customer service call-in facilities. In the main, therefore, the Class Complaint fails adequately to allege facts that support their assertion, on information and belief, that substantial problems existed in integrating NTL's acquisitions.

  There is one exception. The complaint asserts, on the basis of an allegedly first hand report, that defendant Knapp told an October 2000 meeting of NTL managers that the company had accumulated excessive debt and was having difficulty integrating the acquired companies. He is quoted as having said that NTL was "in trouble . . . [and] have got to cut back" and as having instructed those present to keep the briefing confidential.*fn40 The Court therefore is persuaded that the complaint alleges enough to justify the conclusion that the company was experiencing material integration problems as early as October 2000.

  2. Subscriber Base Problems

  Plaintiffs allege a second major problem that NTL failed to disclose: its use of unfair or fraudulent practices that artificially inflated the company's subscriber base. According to the Class Complaint, NTL hyped its reported subscriber numbers by (1) refusing to allow customers to terminate accounts, (2) acquiring new customers by offering free installation or services and then billing for them nonetheless, (3) recruiting customers in low income areas and weakening credit requirements, and (4) including non-paying customers, such as those with free Internet service, on subscriber rolls.*fn41 According to a senior ...

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