346 F. Supp. 3d 389
S.D. Ill.2018Background
- B Communications Ltd. (BComm), an Israeli holding company listed in the U.S., owns a controlling stake in Bezeq, Israel’s largest telecom operator. Plaintiffs are a putative class of investors who bought BComm shares between March 18, 2015 and September 6, 2017.
- In 2015 Bezeq purchased Eurocom’s controlling stake in satellite-TV provider Yes, agreeing to fixed cash consideration plus up to NIS 170 million in contingent payments tied to Yes’s 2015–2017 cumulative free cash flow.
- Plaintiffs allege Eurocom and its controlling shareholder, Shaul Elovitch (also BComm’s controlling shareholder and chairman), manipulated Yes’s 2015–2016 free cash flow (e.g., delaying supplier payments) to trigger advance contingent payments, enriching Eurocom at Bezeq’s expense.
- Plaintiffs identify four categories of allegedly misleading BComm SEC statements: reported free cash flow figures (which incorporated Bezeq/Yes figures), descriptions of Bezeq’s purportedly independent subcommittee, BComm’s Code of Ethics statements, and certifications about internal disclosure/reporting controls.
- The Israeli Securities Authority investigated the Bezeq-Eurocom deal and recommended criminal indictments; the investigation and press reports caused declines in Bezeq’s and BComm’s stock prices.
- BComm moved to dismiss the Section 10(b)/Rule 10b-5 claim against it (or alternatively to stay the civil case pending Israeli criminal proceedings). The Court granted dismissal in part (some statements) and denied in part, and denied the stay.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether specific SEC statements were materially false or misleading | BComm’s filings misreported free cash flow (because they incorporated Yes/Bezeq figures), mischaracterized the independence/rigor of Bezeq’s subcommittee, falsely touted the Code of Ethics, and certified adequate controls while omitting material facts. | Many statements were non-actionable (puffery, innocuous descriptions, or vague certifications); plaintiffs fail to plead materiality or particularized control deficiencies. | Court: Free cash flow figures and the March 18, 2015 subcommittee exhibit were plausibly misleading. Code of Ethics statements and broad certifications about disclosure/controls were not actionable. |
| Whether plaintiffs pleaded scienter as to BComm | Elovitch (controlling shareholder) knew of and participated in the misconduct; his knowledge/scienter should be imputed to BComm. | The officers who signed filings (CEO/CFOs) lacked particularized allegations of knowledge; scienter of Elovitch should not be imputed because his actions benefited Eurocom, not BComm, and he did not prepare the filings. | Court: Allegations create a strong inference of scienter as to Elovitch and his scienter can be imputed to BComm; but scienter is not adequately pleaded as to the specific signing officers. Claim survives limited to free cash flow figures and the March 18, 2015 subcommittee statement. |
| Whether the complaint satisfies heightened pleading rules for securities fraud (Rule 9(b) and PSLRA) | Complaint specifies the statements, speakers, dates, and reasons they were misleading, and pleads facts supporting a strong inference of scienter (control, manipulation, stock sales). | Allegations about knowledge are conclusory as to signing officers; many challenged statements are non-actionable puffery or unsupported allegations about controls. | Court: Pleading suffices for the surviving categories (free cash flow; March 18 exhibit) under Rule 9(b) and PSLRA given imputable scienter of Elovitch; other categories fail. |
| Whether the court should stay the civil case pending Israeli criminal proceedings | Stay is needed to avoid interference with Israeli criminal investigation and prevent witnesses invoking privileges or being unavailable; comity favors pause. | No indictment issued; stay would impose indefinite delay and prejudice plaintiffs; speculative benefit given uncertain overlap and no representations from Israeli authorities to this Court. | Court: Denied stay. Lack of indictment and speculative prejudice to plaintiffs outweigh potential benefits; defendants may renew if circumstances materially change. |
Key Cases Cited
- Matrixx Initiatives, Inc. v. Siracusano, 563 U.S. 27 (2011) (materiality and duty to disclose when statements would be misleading in context)
- Basic Inc. v. Levinson, 485 U.S. 224 (1988) (materiality standard — information that would alter the ‘total mix’ of available information)
- Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (2007) (PSLRA scienter standard: inference must be cogent and at least as compelling as opposing inference)
- Ganino v. Citizens Utils. Co., 228 F.3d 154 (2d Cir. 2000) (materiality at motion-to-dismiss stage)
- Teamsters Local 445 Freight Div. Pension Fund v. Dynex Capital Inc., 531 F.3d 190 (2d Cir. 2008) (corporate scienter may be pleaded by imputing individual actors’ intent)
- S. Cherry St., LLC v. Hennessee Grp. LLC, 573 F.3d 98 (2d Cir. 2009) (recklessness standard in securities context)