United States District Court, S.D. New York
OPINION AND ORDER
M. FURMAN, UNITED STATES DISTRICT JUDGE.
Telefonaktiebolaget LM Ericsson (“Ericsson”) is a
Swedish company that provides hardware and services for
telecommunications networks. In this putative securities
fraud class action, investors allege that Ericsson and
several of its senior executive officers and directors made
false and misleading statements and omissions about the
company's financial performance, accounting practices,
internal controls, and policies related to certain long-term
service contracts. Defendants now move, pursuant to Rules
9(b), 12(b)(2), and 12(b)(6) of the Federal Rules of Civil
Procedure, to dismiss the Second Amended Complaint. For the
reasons that follow, Defendants' motion pursuant to Rules
9(b) and 12(b)(6) is GRANTED.
following facts are taken from the Second Amended Complaint
(the “Complaint”), documents it incorporates by
reference, and matters of which the Court may take judicial
notice, including public disclosure documents that Ericsson
was required to file by law. See, e.g., Silsby
v. Icahn, 17 F.Supp.3d 348, 354 (S.D.N.Y. 2014).
is a public company, incorporated and headquartered in Sweden
and traded on the NASDAQ, that “provides networking
hardware and services to telecommunications companies, like
cellular phone providers, around the world.” ECF No. 52
(“SAC”), ¶ 2. At least two-thirds of its
business “involves providing services to customers
through large, multi-year contracts.” Id.
Ericsson's services include “designing, building,
and operating” communications networks, collectively
referred to as “Managed Services.” Id.
¶ 4. During the Class Period - from April 24, 2013, to
July 17, 2017 - Ericsson maintained more than three hundred
Managed Services contracts, accounting for roughly 12% of its
net sales in 2017. Id. ¶¶ 1, 4.
connection with its long-term service contracts, Ericsson
allegedly engaged in four business and accounting practices
relevant here. First, Ericsson entered into long-term
“loss-leading contracts” - contracts that
“Ericsson entered into with the understanding that they
were going to lose money, ” but undertook anyway
“to gain market share.” Id. ¶ 137.
A former employee who served as the Chief Operating Officer
of Managed Services during the Class Period knew of at least
twenty-four such long-term service contracts. Id.
¶ 8. Loss-leading contracts were encouraged by an
internal policy begun in 2016 known as “Feed the
Gorilla, ” which “prioritized signing contracts
at any cost above prudent risk management and scoping,
” without “worry[ing] about” whether
project costs ultimately exceeded revenues. Id.
¶¶ 17-18, 129, 269. Loss-leading contracts were
also incentivized through commissions paid upfront to sales
employees. Id. ¶ 118.
Ericsson underestimated - or “under-scoped” - the
costs of long-term service contracts in order to win project
bids. Id. ¶¶ 9-11. Ericsson did this by
accepting “open-ended commitment[s]” to fulfill
any service needs that arose and failing to accurately
estimate such costs. Id. ¶ 9. For example, in
2012, Ericsson estimated that its costs for a project at
Grand Central Terminal would be $5-6 million, when in fact
the costs grew to $157 million by March 2018. Id.
¶ 11. Ericsson's initial estimate failed to account
for service needs such as “install[ing] different
antennas, and finally an entire ‘new line.'”
Id. ¶ 115. Ericsson was forced to shoulder the
additional costs without compensation. Id. Ericsson
allegedly encouraged its employees to scope contracts
“as ‘slim and lean' as possible”
through a “corporation-wide initiative” called
“Bare Bone Tender Scoping.” Id. ¶
151. The program continued “at least into 2014.”
the Complaint alleges that Ericsson delayed recognizing costs
that it incurred by “pushing” them onto the
accounting books for later financial quarters. Id.
¶ 13. Account Vice Presidents advocated for this
practice, and it was common, for example, in service
contracts with Verizon and AT&T. Id. ¶ 114.
One former project manager at Ericsson explained that
“Ericsson would bill AT&T for projects in advance
but wait until the project was completed before recognizing
the costs.” Id. ¶ 123. According to
another former employee, the practice was known to “top
management, ” including Ericsson's U.S. Chief
Executive Officer and Chief Financial Officer (neither of
whom is named as a Defendant here). Id. ¶ 114.
Publicly, however, Ericsson represented that
“losses” were accounted for as they arose.
Id. ¶¶ 6, 97-98, 123.
Plaintiffs assert that Ericsson prematurely recognized
revenues in its accounting. For example, pursuant to a
service contract with AT&T, Ericsson was required to
reach certain completion milestones, but Ericsson
“would get AT&T to sign off on a milestone - prior
to actually reaching the milestone - in order to internally
record the revenue.” Id. ¶ 155. A former
project finance manager also reported that Ericsson would
recognize revenue before Ericsson had sent an invoice to
other customer. Id. ¶ 154. Publicly, however,
Ericsson represented that revenues were recognized
“when the services have been provided, generally pro
rata over the contract period.” Id. ¶
allege that, without disclosing these four practices,
Ericsson regularly reported its financial results.
Id. ¶¶ 186-87. Ericsson also made a
variety of affirmative statements related to its contracts,
accounting practices, and internal controls. For example, in
its 2014 Annual Report, Ericsson represented that about 75%
of its managed services contracts were in the
“optimization phase, ” which had a
“beneficial effect on earnings and cash flow.”
Id. ¶ 215(d). As noted, Ericsson also
repeatedly asserted that losses were accounted for when they
became “probable” and that revenue was
“recognized when services have been provided, generally
pro rata over the contract period.” E.g.,
id. ¶¶ 95, 104.
17, 2016, a Swedish newspaper called Svenska
Dagbladet published an article reporting that Ericsson
was using “aggressive accounting techniques, ”
including prematurely recognizing revenue to the point that
“revenue from existing contracts had been so fully
recognized that these contracts are now virtually empty -
i.e., that most of the long-term contracts had
already been accounted for as sales.” Id.
¶ 156. Ericsson published an official denial of the
article's allegations on July 18, 2016. Id.
¶ 21. Ericsson's Chief Financial Officer at the
time, Defendant Jan Frykhammar, also denied the allegations
during a conference call with investors on July 19, 2016.
Id. ¶ 160. Nevertheless, Ericsson's stock
price dropped from $7.77 on July 18, 2016, to $7.08 on July
19, 2016. Id. ¶ 159.
March 28, 2017, Ericsson announced that a “provision,
” or write-down of asset value, of between seven and
nine billion Swedish krona (corresponding to between $900
million and $1.16 billion) was expected in its first quarter
financial report. Id. ¶ 23. During a conference
call on that date, Defendants Börje Ekholm (then
Ericsson's President and Chief Executive Officer) and
Carl Mellander (then Ericsson's Chief Financial Officer)
explained to investors that a “few, ”
“specific and certain” large contracts had
encountered “negative developments, which could be
lower [sic] expected revenues or higher costs to complete
those projects . . . due to specific events during the first
quarter.” Id. ¶¶ 23, 162-64. Ekholm
insisted that the issues were “isolated.”
Id. ¶ 163. Still, the Complaint alleges that
“the market began to understand that these provisions
were necessitated by Ericsson taking on unprofitable
contracts and then letting those unprofitable contracts pile
up on its books.” Id. ¶ 165. By the close
of business on March 28, 2017, Ericsson's share price
fell from $6.69 to $6.45. Id. ¶ 161.
April 25, 2017, Ericsson released its quarterly results for
the first quarter of 2017, including a provision of 8.4
billion Swedish krona (about $1.08 billion). Id.
¶ 166. Ericsson explained that the provision was the
result in part of “additional project costs . . . which
due to recent negative developments are not expected to be
covered by future project revenues.” Id.
During conference calls that day, Ekholm further stated that
“we have contracts today that are not profitable,
” and Mellander admitted that “some of those
projects . . . could have been scoped in a better way.”
Id. ¶¶ 167, 171. Finally, to the extent
relevant here, on July 18, 2017, Ericsson released its
results for the second quarter of 2017, and reported
“continued declining sales and increasing
losses.” Id. ¶ 174. Specifically,
Ericsson disclosed that forty-two contracts accounting for
$892 million in revenue in 2016 would have to be
“exit[ed], renegotiate[d], or transform[ed].”
Id. Ekholm again admitted during conference calls
that “part of it is, of course, we could have scoped
the contract better.” Id. ¶ 178(b). In
addition, Ericsson warned that there was an “increased
risk of further market and customer project adjustments,
which would have a negative impact on results,
estimated” at three to five billion Swedish krona.
Id. ¶ 175. Ericsson's share price fell that
day from $7.28 to $6.07. Id. ¶ 176.
April 5, 2018, Plaintiffs filed this lawsuit, alleging that
Defendants violated Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934 (the “Exchange
Act”), 15 U.S.C. §§ 78j(b), 78t(a), and Rule
10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5.
reviewing a motion to dismiss, the Court accepts all
well-pleaded factual allegations in the Complaint as true and
draws all reasonable inferences in favor of the nonmoving
party. See Gamm v. Sanderson Farms, Inc., 944 F.3d
455, 462 (2d Cir. 2019). The Court will not dismiss any
claims pursuant to Rule 12(b)(6) unless the plaintiff has
failed to plead sufficient facts to state a claim to relief
that is facially plausible, see Bell Atlantic Corp. v.
Twombly, 550 U.S. 544, 570 (2007) - that is, a claim
that contains “factual content that allows the court to
draw the reasonable inference that the defendant is liable
for the misconduct alleged, ” Ashcroft v.
Iqbal, 556 U.S. 662, 678 (2009). More specifically, a
plaintiff must allege facts showing “more than a sheer
possibility that a defendant has acted unlawfully.”
Id. A complaint that offers only “labels and
conclusions” or “a formulaic ...