UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported):
September 17, 2015 (September 16, 2015)
NET 1 UEPS TECHNOLOGIES, INC.
(Exact name of
registrant as specified in its charter)
Florida |
000-31203 |
98-0171860 |
(State or other jurisdiction |
(Commission |
(IRS Employer |
of incorporation) |
File Number) |
Identification No.) |
President Place, 4th Floor, Cnr. Jan
Smuts Avenue and Bolton Road
Rosebank, Johannesburg, South Africa
(Address of principal executive offices) (ZIP Code)
Registrants telephone number, including area code:
011-27-11-343-2000
Check the appropriate box below if the Form 8-K filing is
intended to simultaneously satisfy the filing obligation of the registrant under
any of the following provisions:
[ ] Written communications pursuant to Rule 425 under the
Securities Act (17 CFR 230.425)
[ ] Soliciting material pursuant to Rule 14a-12 under the
Exchange Act (17 CFR 240.14a-12)
[ ] Pre-commencement communications pursuant to Rule
14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
[ ] Pre-commencement communications pursuant to Rule
13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
Item 8.01. Other Events.
On September 17, 2014, Net1 issued a press release which
announced that the United States District Court for the Southern District of New
York (Court) has issued an opinion and order dismissing the purported class
action lawsuit brought against Net1, its Chief Executive Officer and Chief
Financial Officer on December 24, 2013. A copy of the press release is attached
as Exhibit 99.1. A copy of the Courts opinion and order is attached as Exhibit
99.2.
Item 9.01. Financial Statements and Exhibits.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned hereunto duly authorized.
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NET 1 UEPS TECHNOLOGIES, INC.
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Date: September 17, 2015 |
By: |
/s/ Serge C.P. Belamant |
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Dr. Serge C.P. Belamant |
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Chief Executive Officer and Chairman of |
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the Board |
Exhibit 99.1
Net1 Announces Dismissal of Class Action Lawsuit by U.S.
District Court
Johannesburg, September 17, 2015 Net 1 UEPS Technologies,
Inc. (NasdaqGS: UEPS; JSE: NT1) (Net1) today announced that the United States
District Court for the Southern District of New York has dismissed the purported
securities class action litigation originally filed on December 24, 2013,
against Net1, its Chief Executive Officer and its Chief Financial Officer.
We are pleased with the Courts decision and believe that its
opinion confirms our assertion that this case was without any merit, said Dr.
Serge C.P. Belamant, Net1s Chairman and Chief Executive Officer.
The Courts order allows the plaintiff to file a further
amended complaint on or before October 16, 2015, failing which the action may be
dismissed with prejudice.
About Net 1 UEPS Technologies, Inc.
(www.net1.com)
Net1 is a leading provider of alternative payment systems that
leverage its Universal Electronic Payment System (UEPS) or utilize its
proprietary mobile technologies. The Company operates market-leading payment
processors in South Africa and the Republic of Korea.
UEPS permits the Company to facilitate biometrically secure,
real-time electronic transaction processing to unbanked and under-banked
populations of developing economies around the world in an online or offline
environment. Net1s UEPS/EMV solution is interoperable with global EMV standards
that seamlessly enable access to all the UEPS functionality in a traditional EMV
environment. In addition to payments, UEPS can be used for banking, healthcare
management, payroll, remittances, voting and identification.
Net1s mobile technologies include its proprietary mobile
payments solution - MVC, which offers secure mobile-based payments, as well as
mobile banking and prepaid value-added services in developed and emerging
countries. The Company intends to deploy its varied mobile solutions through its
ZAZOO business unit, which is an aggregation of innovative technology companies
and is based in the United Kingdom.
Net1 has a primary listing on the NASDAQ and a secondary
listing on the Johannesburg Stock Exchange.
Forward-Looking Statements
This announcement contains forward-looking statements that
involve known and unknown risks and uncertainties. A discussion of various
factors that cause our actual results, levels of activity, performance or
achievements to differ materially from those expressed in such forward-looking
statements are included in our filings with the Securities and Exchange
Commission. We undertake no obligation to revise any of these statements to
reflect future events.
Net1 Investor Relations Contact
Dhruv Chopra
Head of Investor Relations
Phone: +1-917-767-6722
Email:
dchopra@net1.com
Exhibit 99.2
UNITED
STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK |
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RUHAMA
LIPOW, Individually and On Behalf of All Others Similarly Situated, |
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Plaintiff, |
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- against - |
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OPINION AND ORDER
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13 Civ. 9100 (ER) |
NET1 UEPS
TECHNOLOGIES, INC., SERGE CHRISTIAN P. BELAMANT, and HERMAN GIDEON KOTZE,
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Defendants. |
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Ramos, D.J.:
This case arises out of alleged violations of the Securities
Exchange Act of 1934 (the Exchange Act) by Net 1 UEPS Technologies (Net 1 or
the Company); Serge P. Christian Belamant, Net 1s co-founder, Chairman of the
Board, and Chief Executive Officer; and Herman Gideon Kotze, Net 1s Chief
Financial Officer, Treasurer, and Secretary (collectively, the Individual
Defendants). The Amended Complaint alleges that Net 1, Belamant and Kotze
(collectively, the Defendants) made material misstatements and/or omissions
relating to Net 1s attempts to secure contracts in South Africa, causing
certain of Net 1s financial statements and announcements to be materially false
and misleading, in violation of Sections 10(b) and 20(a) of the Exchange Act and
Securities and Exchange Commission (SEC) Rule 10b-5. Lead Plaintiff, Ruhama
Lipow, brings suit on behalf of a class of all those who purchased or otherwise
acquired Net 1 securities between January 18, 2012 through December 4, 2012 (the
Class Period), and sustained losses upon the revelation of alleged corrective
disclosures (the Class). Pending before this Court is Net 1s Motion to
Dismiss pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure.1 For the reasons set forth below, Net
1s motion to dismiss is GRANTED.
Net 1 is a Florida corporation with its principal executive
offices in Johannesburg, South Africa that provides financial transaction
processing services in emerging economies. Am. Compl. ¶¶ 17, 21. Net 1s common
stock trades on the NASDAQ Global Stock Market under ticker symbol UEPS.
Id.
Net 1 holds a non-exclusive license to the Universal Electronic
Payment System (UEPS), a social grant distribution technology. Id. ¶ 2,
21. Net 1 also develops and markets a transaction processing solution using Net
1s smart card-based alternative payment system for the unbanked and
under-banked populations of developing economies. Id. ¶ 21. Cash Payment
Services (CPS), a business unit of Net 1, distributes social welfare grants on
a monthly basis to recipients in South Africa by issuing them UEPS smart cards
that digitally store their biometric fingerprint and enables them to access
their grants securely. Id. ¶¶ 2, 21, 22. Prior to 2012, the South African
Social Security Agency (SASSA)3contracted
with Net 1 to
______________________________
1 As of the date
of this Order, the Individual Defendants have not been served.
2 The following factual background is based on the
allegations in the Amended Complaint, Doc. 21, which the Court accepts as true
for purposes of the instant motion. See Koch v. Christies Intl PLC, 699
F.3d 141, 145 (2d Cir. 2012). In addition, the Court considers documents
incorporated by reference, legally required public disclosure documents filed
with the SEC, any documents that Plaintiff relied upon in bringing the instant
action, and any documents the Court may take judicial notice of. See ATSI
Commcns, Inc. v. Shaar Fund, Ltd., 493 F.3d 87, 98 (2d Cir. 2007)
(citing Rothman v. Gregor, 220 F.3d 81, 88 (2d Cir. 2000)); see also
infra Section II.C.
3 SASSA, established in 2004 by the South African
Social Security Agency Act, is allegedly mandated to ensure the provisions of
comprehensive social security services against vulnerability and poverty within
the constitutional and legislative framework. Id. ¶ 23. distribute grants in five of the nine South African provinces.
Id. ¶ 24. SASSA contracted with AllPay
Consolidated Investment Holdings (Pty) Ltd (“AllPay”) to
distribute grants in the other four provinces. Id. ¶ 26. It is the
process by which Net 1 obtained the 2012 SASSA contract that underlies the
claims in this Amended Complaint.
2
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ii. |
The SASSA 2011 Tender
Process |
On April 15, 2011, SASSA initiated a tender process for a 10
billion ZAR4 ($947 million USD) contract to distribute social grants
to the nine provinces in South Africa. Id. ¶¶ 3, 27. According to
Plaintiff, the Bid Evaluation Committee (BEC) used a two stage process to
evaluate bids. Id. ¶ 28. First, the BEC assessed bids on the
merit of the technical solutions offered to fulfill the requirements of the
tender. Id. ¶ 28(c), (d). Bidders that met a minimum score of 70% were
selected to give an oral presentation. Id. ¶ 28(d). Second, after
the oral presentation, bidders with scores remaining at or above 70%, were
evaluated on financial and preference-point merit. Id. ¶ 28(f). A
separate Bid Adjudication Committee (BAC) then awarded the contract.
Id. ¶ 28(c).5
The request for proposals (RFP) used in the 2011 tender
process provided that all payments of social grants must be secured,
preferably, Biometric based[,] meaning, in the instant case, primarily
on the basis of the grant recipients fingerprints. Id. ¶ 29 (emphasis
original). SASSA allegedly clarified that while biometric authentication is
preferred, any other methods maybe acceptable if they meet the requirements
of para 3.3 . Id. ¶ 30 (emphasis original). Plaintiff alleges that
Paragraph 3.3 required only that the bidders explain how it would ensure that the right beneficiary received the right payment
but did not require biometric verification. Id.
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4 ZAR is the
abbreviation for the South African rand, the currency of South Africa.
5 The BEC and BAC consisted primarily of senior
government employees that were employed in government departments unrelated to
SASSA. Id.
3
Twenty one bidders, including CPS and AllPay, participated in
the 2011 tender process. Id. ¶ 32. CPS allegedly offered biometric
verification for all beneficiaries. Id. AllPays bid provided fingerprint
biometric verification for some, but not all, beneficiaries. Id. AllPay
allegedly provided an alternative non-biometric verification solution for these
beneficiaries. Id. Plaintiff alleges, on information and belief, that CPS
and AllPay either submitted their bids in advance of the bid deadline or,
alternatively, that SASSA was aware of AllPays and CPSs proposed bids. Id.
¶ 33. On June 10, 2011, five days prior to the bid deadline, SASSA issued
Bidders Notice 2. Id. Plaintiff contends that Bidders Notice 2 improperly
amended the RFP by changing the preference for biometric verification to a
requirement. Id. ¶¶ 4, 31, 33. Allegedly, CPS was the only bidder that
could satisfy the new requirement created by Bidders Notice 2. Id. ¶
34.
A member of the BEC raised the alleged unfairness of Bidders
Notice 2 in a BEC meeting on August 31, 2011. Id. at ¶ 35. According to
the meeting minutes, the BEC member allegedly stated that Bidders Notice 2
should never have been issued because it favored one Bidderpresumably CPSand
excluded the other twenty bidders. Id. As a result, the BEC allegedly
reviewed the submitted bids based on the original RFPs preference for
biometric verification. Id. ¶ 36. AllPay and CPS received scores above
70% and were invited to give oral presentations. Id. During or after the
oral presentations, the BEC allegedly reversed course again and applied the
standard in Bidders Notice 2s requiring biometric verification. Id. ¶
38. Accordingly, AllPays score decreased to 58.68% while CPSs score increased
to 82.44% . Id. All bidders but CPS were disqualified. Id. The BEC
recommended that CPS be awarded the contract and the BAC accepted the recommendation. Id. ¶
40. The tender was granted to CPS on January 17, 2012 and the contract between
CPS and SASSA was executed on February 3, 2012. Id.
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iii. |
Net 1s Allegedly Improper Efforts to Secure the SASSA
Contract |
Plaintiff alleges that Net 1 engaged in activities that
unfairly influenced the outcome of the SASSA tender process, thus creating a
substantial threat of regulatory scrutiny and/or invalidation of the contract.
Id. ¶ 42. Plaintiff points to four professional and/or personal
relationships involving parties related to CPS and SASSA that allegedly created
conflicts of interest in the tender process and contributed to SASSAs decision
to skew the RFP process in favor of CPS. Id. ¶ 43.
First, Plaintiff points to the involvement of Michael
Hulley (Hulley), who for an unidentified period of time had served as South
African President Jacob Zumas legal advisor and personal lawyer. Id. ¶
42(a). Plaintiff and Defendants contentiously dispute whether, before the 2011
tender, Hulley was retained by CPS or SASSA to advise them on settling the
lawsuits between the two parties. According to Plaintiff, before the 2011 tender
process, CPS allegedly retained Hulley in an effort to settle litigation
initiated by CPS against SASSA relating to an earlier SASSA tender process
canceled in 2008. Id. Once the 2011 tender process began, CPSs lawsuits
against SASSA were allegedly withdrawn and SASSA allegedly hired Hulley as an
advisor for the tender. Id. Plaintiff also contends upon information and
belief that CPS made payments to Hulley but does not specify who at CPS paid
Hulley or why these payments were made. Id. ¶ 5.
Conversely, Net 1 contends that Hulley advised SASSA,
not CPS, on settling CPSs lawsuits. See Def.s Mem. at 8. A
Mail & Guardian article attached by Net 1 to its Motion to Dismiss the Amended Complaint, states that Hulley played a
complex dual role in the [2011 tender] process, which apparently had him first
advising SASSA on how to settle a rash of law suits with [CPS] and then
switching to a new role in which he . . . provid[ed] commercial, financial, and
legal advice to the agency. Declaration in Support of Def.s Motion to Dismiss
(Hillebrecht Decl.) Ex. B. Belamant told Mail & Guardian that
Hulley was brought in before the tender in an attempt by SASSA to settle
lawsuits against it brought by CPS. Id. Belamant further described
Hulleys role on behalf of SASSA in the tender process as manag[ing] the
existing law suits between CPS and SASSA with a view to settling them. Id.
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Second, Plaintiff alleges that CPS made a conditional
offer of 20% of its SASSA contract to Mosomo Investment Holdings (Mosomo),6 a company that had extensive links to Tokyo
Sexwale, the Minister of the South African Department of Human Settlements.7 Am. Compl. ¶ 5, 42(b). Although the
Complaint is not entirely clear, two different linkages are described between
Minister Sexwale and the SASSA contract. First, according to Plaintiff,
Mosomo was run by an individualwho Plaintiff does not identify by namewho was
formerly the head of corporate finance at a companyalso not identified by
nameestablished by Minister Sexwale.Id. ¶ 42(b). Second, a director-general of
Minister Sexwales Department of Human Settlements, Thabane Zulu (Zulu), was a
member of the BAC for the 2011 tender. Id. The implication, presumably,
is that Minister Sexwale used the influence he had over the BAC through his
underling, Zulu, to steer the contract to Mosomo, a company run by another of
his underlings.
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6 As explained by
Net 1, the South African government requires companies to meet diversity
initiatives, including requiring that a certain percentage of a companys
ownership be by Black South Africans. Def.s Mem. at 8 n.5. Mosomo presumably
qualified as a company owned by Black South Africans.
7 The Department of Human Settlements is a
department within the government of South Africa dedicated to ensuring South
Africans have access to housing. See
http://www.dhs.gov.za/content/overview (last visited September 16, 2015).
6
Third, as reported in Mail & Guardian, Norman
Arendse, the chair of the BAC for the previous tender process canceled in 2008,
allegedly was offered an open chequebook bribe by someoneagain not identified
by Plaintiffclaiming to represent CPS. Id. ¶ 42(c). The Amended
Complaint does not allege when that offer was made or that Mr. Arendse played
any role in the 2011 tender process.
Fourth, an individual identified as Ms. Nhlapo, who
was alleged to have been a member of the BEC for the 2011 tender process,
purportedly failed to disclose that she previously sat on the board of an entity
called Reflective Learning Resources with an individual identified as Mr.
Yako, who was alleged to have been the director of one of CPSs business
partners. Id. ¶ 42(d). The CPS business partner for which Mr. Yako
purportedly served as director is not identified in the Amended Complaint.
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iv. |
Net 1s Allegedly False and Misleading
Statements |
Plaintiff asserts that Net 1s alleged misrepresentations began
when Net 1 announced SASSAs tender was awarded to CPS but failed to disclose
that Net 1 faced a material risk of regulatory scrutiny and invalidation of the
contract, on which Net 1 depended for a substantial portion of its revenue,
because Defendants failed to disclose in its announcements that (1) the criteria
for the RFP was changed days before the bidding deadline to ensure CPS was the
only qualified bidder, and (2) CPS engaged in conduct intended to improperly
influence SASSA and the bidding process. Id. ¶¶ 4, 45. According to
Plaintiff, Defendants statements, discussed in detail below, were materially
misleading as a result of their failure to disclose the above information.
Id.
On January 18, 2012, Net 1 issued a press release announcing
CPS received a Letter of Award from [SASSA] for the provision of payment
services for social grants in all of South Africas nine provinces for a period of five years and quoted
Belamant as saying [o]ur biometric UEPS/EMV technology has enabled us to
provide SASSA with a comprehensive, cost effective solution for the payment of
approximately fifteen million monthly grants to ten million recipients in rural
and urban areas Id. ¶ 44; Hillebrecht Decl. Ex. I. The same day, the
investment house Janney Montgomery Scott LLC issued a buy rating on Net 1 stock
at a price target of $15. Am. Compl. ¶ 46. A day later, on January 19, 2012,
Robert W. Baird & Co., another investment advisor, issued an outperform
rating for Net 1 stock at a price target of $12. Id.
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On February 6, 2012, in another press release, Net 1 announced
that CPS has signed a contract and service level agreement with [SASSA] in
terms of the award of the national payment tender as announced on January 17,
2012. Id. ¶ 47; Hillebrecht Decl. Ex. J.
On February 8, 2012, AllPay filed suit in the High Court (trial
level court) of South Africa against multiple parties including SASSA and CPS,
seeking to set aside the contract awarded to CPS. Am. Compl. ¶ 48; Hillebrecht
Decl. Ex. C. One day later, on February 9, 2012, Net 1 filed its quarterly Form
10-Q with the SEC for the period ending December 31, 2011, signed by Belamant
and Kotze. Am. Compl. ¶ 48; Hillebrecht Decl. Ex. F. In the 10-Q, Net 1
disclosed that on the previous day, February 8, 2012, AllPay filed an
application in the High Court of South Africa seeking to set aside the award
of the SASSA tender to [CPS] and that CPS was named as a respondent. Id.
Net 1 asserted that [a]s a respondent, we are entitled to oppose the
application, and we intend to do so but disclosed that [i]f AllPays challenge
is successful the contract could be set aside. Hillebrecht Decl. Ex. F. Net 1
also disclosed that [w]hen SASSA publicly announced the award of the tender to
us in January 2012, it stated that it had conducted the tender in accordance
with all relevant legislation. While we also believe this to be the case, we cannot predict when the proceeding will
be resolved or its ultimate outcome. Id. In the same 10-Q, Net 1 noted
that the contract with SASSA increased Nets 1 dependence on our pension and
welfare business while also reducing [its] operating margins, at least in the
near term and identified SASSA as its largest customer. Id.
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On May 10, 2012, Net 1 filed its quarterly Form 10-Q with the
SEC for the period ending March 31, 2012, signed by Belamant and Kotze. Am.
Compl. ¶ 49; Hillebrecht Decl. Ex. K. The May 10 Form 10-Q provided more details
on how the SASSA contract would be implemented. Id. The 10-Q also
reported that the High Court was scheduled to hear AllPays challenge to the
SASSA contract on May 29, 2012 with a decision expected a few weeks later.
Hillebrecht Decl. Ex. K. Net 1 explained in the 10-Q that any party may
seek leave to appeal the High Courts decision but, if leave is granted, the
appeals process could take several months. Id. In the same 10-Q, Net 1
disclosed that it paid certain of our executives and key employees special
bonuses of $5.4 million [USD] (ZAR $41.8 million) in recognition of their
contributions to the compilation of the successful SASSA tender, the development
of the new technologies and the support provided for the implementation of the
tender award. Am. Compl. ¶ 49; Hillebrecht Decl. Ex. K. On May 18, 2012, Janney
Montgomery Scott LLC reiterated its buy rating for Net 1 stock. Am. Compl. ¶ 51.
On August 23, 2012, Net 1 filed its quarterly Form 10-Q with
the SEC for the period ending June 30, 2012, signed by Belamant and Kotze.
Id. ¶ 52; Hillebrecht Decl. Ex. L. The August 23 Form 10-Q reported that
the High Court heard AllPays challenge at a hearing that took place from on May
29 through 31, 2012, and that Net 1 expected a decision to be reached during
the first quarter of fiscal 2013. Hillebrecht Decl. Ex. L. Net 1 reiterated the
appeals process and again disclosed that it cannot predict when the proceeding
will be resolved or its outcome. Id. The August 23 Form 10-Q also disclosed
that the SASSA contract has resulted in higher revenues from SASSA during the
fourth quarter of fiscal 2012. Am. Compl. ¶ 52.
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v. |
Disclosure of the High Courts
Decision |
On September 12, 2012, Net 1 issued a press release entitled
Net 1: Court Grants Leave to Appeal. Hillebrecht Decl. Ex. H. In the Press
Release, Net 1 disclosed that the High Court issued a decision on August 28,
2012, holding that the tender process followed by SASSA was illegal and
invalid, but that the award of the tender to CPS would not be set aside and
therefore remains valid. Id. The press release also disclosed that the
High Court granted CPS and SASSA leave to appeal the ruling that the tender
process was illegal and invalid and also granted AllPay leave to appeal the
ruling that the contract between SASSA and CPS should not be set
aside.8 Id. In the press release, Net 1 explained
that the appeal could take several months and that Net 1 cannot predict when
the proceeding will be resolved or its ultimate outcome. Id. Net 1
confirmed that the appeal process does not interrupt Net 1s right to continue
with the execution of the contract with SASSA. Id.
Plaintiff contends that Net 1s September 12, 2012 press
release was distributed only in South Africa. See Pl.s Oppn Mem. at 7.
Therefore, Plaintiff alleges that the first time Net 1 investors learned of the
High Courts decision that the SASSA tender process was illegal and invalid
was on November 8, 2012, two months after the August 28, 2012 decision was
issued, in Net 1s Form 10-Q for the period ending September 30, 2012. Am.
Compl. ¶ 54; Hillebrecht Decl. Ex. R. The November 8 10-Q stated that on August
28, 2012, the High Court ruled that our contract with SASSA remains valid and
will not be set aside [but that]: (1) the tender process conducted by SASSA was illegal and invalid; (2) the award of
the tender to us is not set aside; and (3) the CEO of SASSA and SASSA, together
with us, were ordered to pay costs. Hillebrecht Decl. Ex. R. Net 1 also
disclosed that SASSA and CPS were granted leave to appeal the ruling that the
tender process was illegal and invalid as well as the cost order and that
AllPay was also granted leave to appeal the ruling that the award of the tender
by SASSA to CPS should not be set aside. Id. The November 8 10-Q
reiterated that Net 1 could not predict when the appellate proceeding would be
resolved or its ultimate outcome. Id.
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8 The parties
appeals of the High Courts rulings were heard by the South African Supreme
Court of Appeal. Hillebrecht Decl. Ex. D. On March 27, 2013, the Court of Appeal
reversed the High Courts decision and found the tender process was proper.
Id.
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Plaintiff alleges that Net 1 shares fell from $8.87 to $8.39,
a decline of over 5% and on the following trading day declined to $8.25 . . .
and continued its descent thereafter, hitting $7.77 by the end of the month.
Am. Compl. ¶ 55. The Amended Complaint does not allege the exact date the
decline occurred. Id. In Plaintiffs Opposition to Net 1s Motion to
Dismiss, Plaintiff states that Net 1s stock price declined upon the November 8,
2012 disclosure and elaborated that [b]y the end of November, Nets [sic] stock
price had fallen to $7.77. Pl.s Oppn Mem. at 7 (citing Am. Compl. ¶ 55).
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vi. |
Disclosure of the Regulatory
Investigations |
On December 4, 2012, Net 1 filed a Form 8-K with the SEC
announcing that the U.S. Department of Justice (DOJ), the SEC, and the Federal
Bureau of Investigation (FBI) were investigating whether Net 1 committed any
criminal misconduct in connection with the SASSA tender process. Am. Compl. ¶
56. The 8-K states:
On November 30, 2012, we received a
letter from the U.S. Department of Justice, Criminal Division (the DOJ)
informing us that the DOJ and the Federal Bureau of Investigation have begun an
investigation into whether Net 1 UEPS Technologies, Inc. and its subsidiaries,
including their officers, directors, employees, and agents (collectively, Net
1) and other persons and entities possibly affiliated with Net 1 violated
provisions of the Foreign Corrupt Practices Act and other U.S. federal criminal
laws by engaging in a scheme to make corrupt payments to officials of the Government
of South Africa in connection with securing a contract with the South African
Social Security Agency to provide social welfare and benefits payments and also
engaged in violations of the federal securities laws in connection with
statements made by Net 1 in its SEC filings regarding this contract. On the same
date, we received a letter from the Division of Enforcement of the Securities
and Exchange Commission (the SEC) advising us that it is also conducting an
investigation concerning our company. The SEC letter states that the
investigation is a non-public, fact-finding inquiry.
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Id.; Hillebrecht Decl. Ex. A. Plaintiff alleges that Net
1 has spent $10 million defending the investigations. Am. Compl. ¶ 56.
On the same day, December 4, 2012, Net 1 shares allegedly
declined $4.62 per share, nearly 59%, and closed at $3.22 per share. Id.
¶ 57.
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vii. |
The Constitutional Courts Decision and Net 1s
Disclosure |
On November 29, 2013, the Constitutional Court ruled that the
tender process by which SASSA awarded the contract to CPS was constitutionally
invalid but suspended the declaration of invalidity pending a determination of
a just and equitable remedy. Id. ¶ 59. The Constitutional Court
explained that the Bidders Notice 2 reduced the number of viable bids to one,
rendering the process entirely uncompetitive and obviating any true, comparative
consideration of cost-effectiveness. Id. ¶ 60; Hillebrecht Decl. Ex. E.
The Constitutional Court also explained that:
deviations from fair process may
themselves all too often be symptoms of corruption or malfeasance in the
process. In other words, an unfair process may betoken a deliberately skewed
process. Hence insistence on compliance with process formalities has a
three-fold purpose: (a) it ensures fairness to participants in the bid process;
(b) it enhances the likelihood of efficiency and optimality in the outcome; and
(c) it serves as a guardian against a process skewed by corrupt influences
Am. Compl. ¶ 43.
12
Plaintiff alleges that the Constitutional Court issued a
scathing opinion in which it acknowledged evidence of CPS improper conduct; and
ruled that the SASSA tender process was constitutionally invalid due primarily
to the last minute RFP changes which violated regulatory procedure. Id.
¶ 10. Conversely, Net 1 contends that the Constitutional Court made no findings
that CPS acted unethically or corruptly. See Def.s Mem. at 9 n.7 (citing
Hillebrecht Decl. Ex. S).
On April 17, 2014, the Constitutional Court invalidated the
SASSA contract and ordered the South African government to open a new tender for
the distribution of social welfare grants. Am. Compl. ¶ 62; Hillebrecht Decl.
Ex. S. On the same day, Net 1 filed an 8-K announcing the Constitutional Courts
decision. Am. Compl. ¶ 62. According to Plaintiff, [o]n news of the
Constitutional Courts decision [Net 1s] shares fell $3.34, a one day decline
of over 28%. Id. ¶ 61. Plaintiff again fails to explicitly identify the
date of the decline.
On September 3, 2013, Daniel Elstein, individually and on
behalf of purchasers and those that otherwise acquired Net 1 securities between
August 27, 2009 and November 27, 2013, filed a Complaint against Net 1, Belamant
and Kotze. Doc. 1. On July 23, 2014, this Court denied Daniel Elsteins and
Ruhama Lipows motion to be appointed joint lead plaintiffs. Doc. 20. The Court
instead appointed Ruhama Lipow individually as the lead plaintiff. Id. On
September 22, 2014, Plaintiff filed an Amended Complaint against Net 1,
Belamant, and Kotze. Doc. 21. At a conference held before this Court on November
25, 2014, Net 1 was granted leave to file a Motion to Dismiss the Amended
Complaint. On January 16, 2015, Net 1 filed a Motion to Dismiss this action in
its entirety. Doc. 28.
13
A. |
Rule 12(b)(6) Motions to Dismiss: General Legal
Standard |
When ruling on a motion to dismiss pursuant to Federal Rule of
Civil Procedure 12(b)(6), the court must accept all factual allegations in the
complaint as true and draw all reasonable inferences in the plaintiffs favor.
Nielsen v. Rabin, 746 F.3d 58, 62 (2d Cir. 2014). The court is not
required to credit mere conclusory statements or threadbare recitals of the
elements of a cause of action. Ashcroft v. Iqbal, 556 U.S. 662, 678
(2009) (citing Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007));
see also id. at 681 (citing Twombly, 550 U.S. at 551). To survive
a motion to dismiss, a complaint must contain sufficient factual matter . . . to
state a claim to relief that is plausible on its face. Id. at 678
(quoting Twombly, 550 U.S. at 570). A claim is facially plausible when
the plaintiff pleads factual content that allows the court to draw the
reasonable inference that the defendant is liable for the misconduct alleged.
Id. (citing Twombly, 550 U.S. at 556). More specifically, the
plaintiff must allege sufficient facts to show more than a sheer possibility
that a defendant has acted unlawfully. Id. If the plaintiff has not
nudged [her] claims across the line from conceivable to plausible, [the]
complaint must be dismissed. Twombly, 550 U.S. at 570; Iqbal, 556
U.S. at 680.
The question in a Rule 12 motion to dismiss is not whether a
plaintiff will ultimately prevail but whether the claimant is entitled to offer
evidence to support the claims. Sikhs for Justice v. Nath, 893 F. Supp.
2d 598, 615 (S.D.N.Y. 2012) (quoting Villager Pond, Inc. v. Town of
Darien, 56 F.3d 375, 278 (2d Cir. 1995)). [T]he purpose of Federal Rule of
Civil Procedure 12(b)(6) is to test, in a streamlined fashion, the formal
sufficiency of the plaintiffs statement of a claim for relief without resolving
a contest regarding its substantive merits, and without regard for the weight
of the evidence that might be offered in support of Plaintiffs claims. Halebian v. Berv, 644 F.3d 122, 130 (2d Cir. 2011)
(quoting Global Network Commcns, Inc. v. City of New York, 458 F.3d 150,
155 (2d Cir. 2006)).
14
B. |
Heightened Pleading Standard under Rule 9(b) and the
PSLRA |
Beyond the requirements of Rule 12(b)(6), a complaint alleging
securities fraud must satisfy the heightened pleading requirements of the
Federal Rule of Civil Procedure 9(b) and the Private Securities Litigation
Reform Act of 1995 (PSLRA) by stating the circumstances constituting fraud
with particularity. See, e.g., ECA & Local 134 IBEW Joint
Pension Trust of Chicago v. JP Morgan Chase Co., 553 F.3d 187, 196 (2d Cir.
2009) (citing Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S.
308, 319-20 (2007)). Specifically, Rule 9(b) requires that a securities fraud
claim based on misstatements must identify: (1) the allegedly fraudulent
statements, (2) the speaker, (3) where and when the statements were made, and
(4) why the statements were fraudulent. See, e.g., Anschutz Corp. v.
Merrill Lynch & Co., Inc., 690 F.3d 98, 108 (2d Cir. 2012) (citing
Rombach v. Chang, 355 F.3d 164, 170 (2d Cir. 2004)). Put another way,
Rule 9(b) requires that a plaintiff set forth the who, what, when, where and
how of the alleged fraud. See U.S. ex rel. Kester v. Novartis Pharm.
Corp., 23 F. Supp. 3d 242, 251-52 (S.D.N.Y. 2014). Like Rule 9(b), the PSLRA
requires that securities fraud complaints specify each misleading statement,
set forth the reasons or factual basis for the plaintiffs belief that the
statement is misleading, and state with particularity facts giving rise to a
strong inference that the defendant acted with the required state of mind.
Dura Pharms., Inc. v. Broudo, 544 U.S. 336, 345 (2005) (quoting 15 U.S.C.
§§ 78u4(b)(1), (2)); see also, e.g., Slayton v. Am. Express, Co.,
604 F.3d 758, 766 (2d Cir. 2010).
15
When presented with a motion to dismiss pursuant to Rule
12(b)(6), the Court may consider documents that are referenced in the complaint,
documents that the plaintiffs relied on in bringing suit and that are either in
the plaintiffs possession or that the plaintiffs knew of when bringing suit, or
matters of which judicial notice may be taken. Silsby v. Icahn, 17 F.
Supp. 3d 348, 354 (S.D.N.Y. 2014) (citing Chambers v. Time Warner, Inc.,
282 F.3d 147, 153 (2d Cir. 2002)), affd sub nom., Lucas v. Icahn, No. 14
Civ. 1906, 2015 WL 3893617 (2d Cir. June 25, 2015) (summary order); see also
DiFolco v. MSNBC Cable L.L.C., 622 F.3d 104, 111 (2d Cir. 2010). To be
incorporated into the complaint by reference, the [c]omplaint must make a
clear, definite and substantial reference to the documents. Mosdos Chofetz
Chaim, Inc. v. Vill. of Wesley Hills, 815 F. Supp. 2d 679, 691 (S.D.N.Y.
2011) (internal quotation marks and citation omitted). The Court may also take
judicial notice of public disclosure documents that must be filed with the
Securities and Exchange Commission (SEC) and documents that both bear on the
adequacy of SEC disclosures and are public disclosure documents required by
law. Silsby, 17 F. Supp. 3d at 354 (citing Kramer v. Time
Warner, Inc., 937 F.2d 767, 773-74 (2d Cir. 1991)); see also In re Bank
of Am. AIG Disclosure Sec. Litig., 980 F. Supp. 2d 564, 569-70 (S.D.N.Y.
2013), affd, 566 Fed. Appx 93 (2d Cir. 2014) (summary order).
Net 1 attaches the South African High Court, Court of Appeal,
and Constitutional Court decisions, two press releases from Net 1, and an
article from the South African internet publication, Mails &
Guardian, to its motion to dismiss. See Hillebretch Exs. B, C, D, E,
I, J, S. The Amended Complaint cites and relies on the South African decisions,
see Am. Compl. ¶¶ 54, 59, 62, and thereby incorporates them by reference.
Judicial notice may also be taken of these decisions. See Global Network
Comms, Inc. v. City of New York, 458 F.3d 150, 157 (2d Cir. 2006) (A court may take judicial notice of a document filed in
another court not for the truth of the matters asserted in the other litigation,
but rather to establish the fact of such litigation and related filings.).
Thus, the Court will consider the South African courts decisions in deciding
the present motion. The January 18 and February 6, 2012 press releases from Net
1 are also cited to and relied on in the Amended Complaint, and thus, will also
be considered. Am. Compl. ¶¶ 44, 47; Hillebretch Exs. I, J. The Amended
Complaint also cites to and relies on the Mail & Guardian article
regarding Hulleys alleged involvement with SASSA and CPS, and is, therefore,
incorporated by reference. See Am. Compl. ¶ 42(a); see also Hillebrecht Decl. Ex. B. Lastly, the Amended Complaint also refers to various
Form 10-Qs and Form 8-Ks filed by Net 1 with the SEC. See Am. Compl.
¶¶ 7, 48, 49, 52, 54, 56, 62. Net 1 attaches excerpts of these and other
SEC forms, filed by Net 1 with the SEC but not referenced in the Amended
Complaint, to its motion to dismiss. See Hillebrecht Decl. Exs. A, F, K,
L, N, O, Q. This Court will consider documents filed with the SEC in deciding
the instant action. See Silsby, 17 F. Supp. 3d at 354.
16
Plaintiff and Net 1 both attach Google finance historical data
containing the daily closing share price for Net 1 during the class period to
their respective motions. Hillebrecht Decl. Ex. M; Declaration in Support of
Pl.s Opposition to Def.s Motion to Dismiss (Gross Decl.) Exs. A, B. Since
the Amended Complaint references the alleged decrease in stock price as a result
of Net 1s alleged misrepresentations and omissions, see, e.g.,
Am. Compl ¶ 16, these documents are also incorporated by reference.
Net 1 attaches two documents to its motion to dismiss that
Plaintiff contends are not part of the record: the August 28, 2012 Robert W.
Baird & Co. Research Report and the September 2012 Net 1 Press Release.
See Hillebrecht Decl. Exs. G, H; Pl.s Oppn Mem. at 3, 7. While a stock
rating issued by Robert W. Baird & Co. in January 2012 is referenced in the
Amended Complaint, see Am. Compl. ¶ 46, the August 28, 2012
research report is not. See Hillebrecht Decl. Ex. G. The September 2012
Press Release is also not referenced or relied on by the Amended Complaint. Id. Ex. H. However, [m]atters of which judicial notice can be taken
include press coverage establishing what information existed in the public
domain during periods relevant to the plaintiffs claims. Def.s Mem. at 3 n.3; see also In re Bank of Am. AIG Disclosure Sec. Litig., 980 F. Supp. 2d at
570 (the District Court simply took judicial notice of Appellees exhibits for
the purpose of establishing that the information in the various documents was
publicly available.) (citing Staehr v. Hartford Fin. Serv. Grp., Inc., 547 F.3d 406, 425-26 (2d Cir. 2008)). Accordingly, this Court may take judicial
notice of the August 28, 2012 research report and September 2012 Press
Release.
17
Section 10(b) of the Exchange Act prohibits using or employing,
in connection with the purchase or sale of any security . . . any manipulative
or deceptive device or contrivance, 15 U.S.C. § 78j(b), while SEC Rule 10b-5,
promulgated thereunder, creates liability for a person who makes any untrue
statement of a material fact or . . . omit[s] to state a material fact . . . in
connection with the purchase or sale of any security. In re OSG Sec.
Litig., 971 F. Supp. 2d 387, 397 (S.D.N.Y. 2013) (quoting 17 C.F.R. §
240.10b -5 (1951)). To state a private civil claim under Section 10(b) and Rule
10b-5, a plaintiff must plead that: (1) the defendant made a material
misrepresentation or omission, (2) with scienter, i.e., a wrongful state
of mind, (3) in connection with the purchase or sale of a security, and (4) that
the plaintiff relied on the misrepresentation or omission, thereby (5) causing
economic loss. Dura, 544 U.S. at 341-42; see also, e.g.,
Lattanzio v. Deloitte & Touche LLP, 476 F.3d 147, 153 (2d Cir. 2007);
Kalnit v. Eichler, 264 F.3d 131, 138 (2d Cir. 2001). Net 1 contends that
Plaintiff fails to adequately plead actionable omissions, a strong inference of scienter, and loss
causation, and therefore, the action must be dismissed. Def.s Mem. at 5, 15,
22.
18
A. |
Section 10(b): Scienter |
[W]hile § 10(b) has been described and may have been
contemplated as a catchall provision, what it catches must be fraud. In re Livent,
Inc. Noteholders Sec. Litig., 151 F. Supp. 2d 371, 413 (S.D.N.Y. 2001)
(quoting Chiarella v. U.S., 445 U.S. 222, 234-35 (1980)). Section 10(b) and Rule 10b-5 require plaintiffs to allege a
state of mind demonstrating an intent to deceive, manipulate or defraud, also known as scienter.
Ganino v. Citizens Utils. Co., 228 F.3d 154, 168 (2d Cir. 2000) (citing
Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193 n.12 (1976)); see
also, e.g., In re Philip Servs. Corp. Sec. Litig., 383 F. Supp. 2d
463, 469 (S.D.N.Y. 2004). To satisfy the PSLRAs pleading requirements for
scienter, a plaintiff must allege facts with particularity that would give rise
to a strong inference that the defendant acted with the required state of
mind. ECA, 553 F.3d at 198 (quoting 15 U.S.C. § 78u-4(b)(2)(A))
(internal quotation marks omitted). As Supreme Court precedent dictates, a
strong inference that a defendant acted with a certain intent is one that is
more than merely plausible or reasonableit must be cogent and at least as compelling as any
opposing inference of nonfraudulent intent. Tellabs, 551 U.S. at 314
(emphasis added). This inquiry goes beyond the ordinary Rule 9(b) framework and requires courts to consider not only inferences
urged by the plaintiff . . . but also competing inferences rationally drawn from the facts alleged.
Id.
A plaintiff may establish scienter by alleging facts that
either (1) show that the defendant had both the motive and opportunity to commit the alleged
fraud, or (2) constitute strong circumstantial evidence of conscious misbehavior or
recklessness. ECA, 553 F.3d at 198; see also Lerner v. Fleet Bank,
N.A., 459 F.3d 273, 290-91 (2d Cir. 2006). The relevant inquiry for the Court is whether all of the facts alleged, taken
collectively, give rise to a strong inference of scienter, not whether any
individual allegation, scrutinized in isolation, meets that standard. In re
Magnum Hunter Res. Corp. Sec. Litig., 26 F. Supp. 3d 278, 291-92 (S.D.N.Y.
June 23, 2014) (citing Tellabs, 551 U.S. at 322-23) (emphasis original); see also ECA, 553 F.3d at 198; Medis Inv. Grp. v. Medis Tech.,
Ltd., 586 F. Supp. 2d 136, 141 (S.D.N.Y. 2008) (In order to determine
whether a complaint has adequately pleaded scienter, a court should examine all
of the facts alleged collectively or holistically (without parsing individual
allegations), and take into account any inference concerning scientersupporting
or opposingwhich can be drawn from the complaint.), affd, 328 Fed.
Appx 754 (2d Cir. 2009) (summary order). According to the Supreme Court, the
critical inquiry is: [w]hen the allegations are accepted as true and taken
collectively, would a reasonable person deem the inference of scienter at least
as strong as any opposing inference? If so, then scienter has been adequately
pleaded. If not, the case may be dismissed. Medis Inv. Grp., 586 F.
Supp. 2d at 141 (citing Tellabs, 551 U.S. at 326).
19
When the defendant is a corporate entity . . . the pleaded
facts must create a strong inference that someone whose intent could be imputed
to the corporation acted with the requisite scienter. Teamsters Local 445
Freight Div. Pension Fund v. Dynex Capital Inc., 531 F.3d 190, 195 (2d Cir.
2008). The most straightforward way to raise such an inference for a corporate
defendant in most cases is to plead it for an individual defendant, however,
there may be some instances where a plaintiff may allege scienter as to a
corporate defendant without also alleging scienter as to an individual
defendant. Id.; Vining v. Oppenheimer Holdings Inc., No. 08 Civ.
4435 (LAP), 2010 WL 3825722, at *12 (S.D.N.Y. Sept. 29, 2010) (a plaintiff can
raise an inference of corporate scienter by establishing scienter on behalf of
an employee who acted within the scope of his employment.) (internal citation
omitted). A strong inference of corporate scienter may also be appropriate where a corporate
statement is so important and dramatic that it would have been approved by
corporate officials sufficiently knowledgeable about the company to know that
the announcement was false. In re Gentiva Secs. Litig., 932 F. Supp. 2d
352, 384 (S.D.N.Y. 2013) (citing Vining, 2010 WL 3825722, at *13).
20
|
i. |
Motive and Opportunity |
A complaint has sufficiently alleged motive and opportunity
to commit fraud if it pleads facts showing that the defendant benefited in
some concrete and personal way from the purported fraud. Van Dongen v.
CNinsure Inc., 951 F. Supp. 2d 457, 468 (S.D.N.Y. 2013) (quoting Novak v.
Kasaks, 216 F.3d 300, 307-08 (2d Cir. 2000)). While the opportunity to
commit fraud is generally assumed where the defendant is a corporation or
corporate officer, id. (collecting cases), general motives common to
most corporate officers do not constitute motive for the purpose of
establishing scienter. ECA, 553 F.3d at 198. Therefore, the desire for
the corporation to appear profitable and the desire to keep stock prices high to
increase officer compensation do not suffice to establish a motive. Van
Dongen, 951 F. Supp. 2d at 468 (citing Novak, 216 F.3d at 307). There
does not seem to be a dispute that the Individual Defendants, by virtue of their
positions at Net 1, had the opportunity to commit fraud. What is disputed,
however, is whether the Individual Defendants had the requisite motive.
21
Plaintiff alleges that the fact that Net 1 executives,
including Belamant and Kotze, received massive monetary awards for their roles
in securing the SASSA contract, establishes their motive to defraud investors
regarding the SASSA contract. See Pl.s Oppn Mem. at 16-17; Am.
Compl. ¶ 49; Hillebrecht Decl. Ex. K. However, incentive compensation can
hardly be the basis on which an allegation of fraud is predicated. ECA,
553 F.3d at 201 (citing Acito v. IMCERA Grp., Inc., 47 F.3d 47, 54 (2d
Cir. 1995)); Van Dongen, 951 F. Supp. 2d at 468 (citing Novak, 216 F.3d at 307). If scienter could be pleaded
solely on the basis that defendants were motivated because an inflated stock
price or improved corporate performance would increase their compensation,
virtually every company in the United States that experiences a downturn in
stock price could be forced to defend securities fraud actions. ECA, 553
F.3d at 201 (citing Acito, 47 F.3d at 54); In re Axis Holdings Ltd.
Secs. Litig., 456 F. Supp. 2d 576, 593-94 (S.D.N.Y. 2006) (the law is clear
that the desire of individual defendants to keep their jobs or increase their
compensation by artificially inflating stock price is not sufficient to
establish motive.); see also In re JP Morgan Chase Secs. Litig., 363 F.
Supp. 2d 595, 622 (S.D.N.Y. 2005) (finding allegations that the individual
defendants defrauded JPM Chase shareholders to receive multimillion-dollar
performance based bonuses were deficient, as they involve motives that are
generally possessed by most corporate directors and officers.). Moreover,
Defendants assert that part of the bonuses paid to the executives, including the
Individual Defendants, were paid in restricted stock that vested in February
2013. See Def.s Mem. at 17 n.12 (citing Hillebrecht Decl. Ex. Q). This
fact counsels against finding motive to defraud for two reasons. First,
Defendants accepted bonuses paid in part in stock despite the fact that the
tender process was allegedly improper, and therefore, subject to invalidation. Second, Defendants retained these shares. See In re MRU Holdings Sec.
Litig., 769 F. Supp. 2d 500, 516 (S.D.N.Y. 2011) (retention of shares . . .
[is] inconsistent with the allegation that [defendants] harbored information
that the Companys financial health was in grave jeopardy) (internal quotation
marks and citations omitted).
22
To get around this well settled principle, Plaintiff attempts
to characterize these bonuses as going beyond the usual financial incentive
arrangements of compensation based on the companys earnings, which courts
outside of the Second Circuit have found may be considered among other facts to show scienter. Pl.s Oppn Mem. at 16
(citing Aldridge v. A.T. Cross Corp., 284 F.3d 72, 83 (1st Cir. 2002) and
others).9 Plaintiff relies on only
two decisions from this district. See id. at 16 n.8. However, this
reliance is unavailing. The In re ITT Educational Services court never
decided whether the plaintiff adequately plead scienter. See In re ITT Educ.
Services, Inc. Sec. and Shareholder Derivatives Litig., 859 F. Supp. 2d 571,
581 (S.D.N.Y. 2012) (finding no well-plead actionable misstatements, it would
[therefore] be impossible for the Court to conclude that the Compliant
sufficiently alleges scienter.). The In re Wellcare Management Group, Inc.
Securities Litigation, 964 F. Supp. 632 (N.D.N.Y. 1997) decision is
similarly unhelpful to Plaintiff. Other courts in this Circuit have questioned
the decision in light of the Second Circuits decision in Acito. See
In re Donna Karan Int'l Secs. Litig., 97 Civ. 2011 (CBA), 1998 WL 637547, at
*19 (E.D.N.Y. Aug. 14, 1998) (To the extent that the Wellcare decision
can be understood to find a motive to commit fraud based solely upon the
existence of incentive compensation, it appears inconsistent with the Second
Circuits decision in Acito.). The In re Axis Capital Holdings court also explained that the Wellcare court noted that it could not
sustain the plaintiffs claims on the basis of motive if scienter rests solely
on the fact that individual defendants stood to benefit by way of employment
incentives, but nevertheless found motive sufficiently alleged because of other evidence of
fraudulent intent. 456 F. Supp. 2d at 594 (citing In re Wellcare
Mgmt. Grp. Inc. Secs. Litig., 964 F. Supp. at 639).
______________________________
9 Other courts in
this district have found that reliance on Aldridge v. A.T. Cross Corp., 284 F.3d 72 (1st Cir. 2002) is misplaced because the First Circuit, contrary to
controlling Second Circuit authority, deems self-interested motivation of
defendants in the form of saving their salaries or jobs evidence of scienter.
In re Omnicom Group, Inc. Sec. Litig., No. 02 Civ. 4483 (RCC), 2005 WL
735937 at *12 (S.D.N.Y. Mar. 30, 2005); see also Fadem v. Ford Motor Co.,
352 F. Supp. 2d 501, 525 (S.D.N.Y. 2005), affd, 157 Fed. Appx 398 (2d
Cir. 2005) (summary order). Moreover, Plaintiff makes no allegations similar to
those found in Aldridge, i.e., that Defendants were motivated to
engage in the alleged actions in order to save their jobs or the company.
23
Plaintiff also contends that she sufficiently alleges
Defendants motive to defraud because Defendants clearly . . . benefited from
expanding its customer base for marketing pay day loans and funeral policies
through the SASSA contract. See Pl.s Oppn Mem. at 26; Am. Compl. ¶ 25
(Net 1 brazenly admits in its SEC filings that one risk to losing the SASSA
contract is that its: business strategy relies on our ability to leverage the
social welfare recipient cardholder base to provide them with additional
financial and other services. If we cannot successfully do this, we may not be
able to grow our business and our financial performance could suffer.).
However, the desire for a corporation to expand its customer base is a generic
motive similarly possessed by most corporations, and thus, is insufficient to
plead scienter. See In re JP Morgan Chase Secs. Litig., 363 F. Supp. 2d
at 619, 621 (Generalized allegations of intent to maintain lucrative business
relationships and to establish new ones do not set forth a motive for scienter
purposes.).
Because Plaintiff alleges only generic motives possessed by
most, if not all, corporations, the Court does not find that Defendants
benefited in some concrete and personal way from the purported fraud. See
Van Dongen, 951 F. Supp. 2d at 468 (quoting Novak, 216 F.3d at 307).
Therefore, Plaintiff has failed to make a sufficient showing that the Individual
Defendants had a motive to commit fraud.
|
ii. |
Circumstantial Evidence |
An inference of scienter also may arise where a complaint
sufficiently alleges that the defendants engaged in deliberately illegal
behavior . . . knew facts or had access to information suggesting that their
public statements were not accurate . . . or . . . failed to check information
they had a duty to monitor. Novak, 216 F.3d at 311. In
order to establish scienter under the conscious misbehavior theory, Plaintiff
must show conduct by defendants that is at the least highly unreasonable and
which represents an extreme departure from the standards of ordinary care to the
extent that the danger was either known to the defendant or so obvious that the
defendant must have been aware of it. In re Initial Pub. Offering Sec.
Litig., 358 F. Supp. 2d 189, 216 (S.D.N.Y. 2004) (quoting Kalnit, 264
F.3d at 142) (internal quotation marks omitted). To the extent that plaintiffs
assert that defendants had access to contrary facts, the complaint must
specifically identify the reports or statements containing this information. Id. at 574-75 (citing Dynex, 531 F.3d at 196). Moreover,
[r]ecklessness in the scienter context cannot be merely enhanced negligence. In re JP Morgan Chase Sec. Litig., 363 F. Supp. 2d at 624; Medis Inv.
Grp., 586 F. Supp. 2d at 142 (To properly allege recklessness, the
plaintiff must plead a state of mind approximating actual intent, and not
merely a heightened form of negligence.) (citing Novak, 216 F.3d at
312). Where the plaintiff pleads scienter by conscious misbehavior or
recklessness rather than motive, the strength of the circumstantial allegations
must be correspondingly greater. Medis Inv. Grp., 586 F. Supp. 2d at
141-42 (citing Kalnit, 264 F.3d at 142); see also In re Bayou Hedge
Fund Litig., 534 F. Supp. 2d 405, 415 (S.D.N.Y. 2007) (noting that the
strength of the recklessness allegations must be greater than that of
allegations of garden-variety fraud, and the inference of recklessness
must be at least as compelling as any opposing inferences.) (emphasis
original).
24
The circumstantial evidence relied on by Plaintiff to establish
Defendants engaged in conscious misbehavior or acted with recklessness fall into
four categories: (1) Defendants positions at Net 1, (2) that the allegedly
false and misleading statements related to Net 1s core operations,10 (3) the DOJs and SECs investigations
into Net 1s activities in the 2011 tender process, and (4) information
disclosed in connection with the AllPay litigation. However, the first three of
these four categories cannot serve to independently establish scienter and the
fourth is insufficient as pled.
______________________________
10 As discussed infra, the core operations theory allows courts to draw an inference of
scienter where the misrepresentations and omissions allegedly made by defendants
were about their core operations. See In re Wachovia Equity Sec.
Litig., 753 F. Supp. 2d 326, 353 (S.D.N.Y. 2011). However, it is not clear
this theory has survived the passage of the PSLRA. Id. Here, Plaintiff
alleges that because Defendants misrepresentations and omissions are about the
SASSA contract, which Plaintiff contends is essential to Net 1s success, and
therefore, is properly categorized as part of Defendants core operations,
scienter may be inferred. Pl.s Oppn Mem. at 18.
25
Plaintiff claims that the Individual Defendants had knowledge
of the alleged materially false and misleading statements because of their
positions at Net 1, see Am. Compl. ¶ 75, and because the information at
issue went to the core of Net 1s business. Pl.s Oppn Mem. at 18. However, to
establish an inference of scienter, Plaintiff must do more than allege that the
Individual Defendants had or should have had knowledge of certain facts contrary
to their public statements simply by virtue of their high-level positions.
See In re Nokia Oyj (Nokia Corp.) Sec. Litig., 423 F. Supp. 2d
364, 406 (S.D.N.Y. 2006) (holding that generalized allegations that the
individual defendants knew, or should have known, that they were
misrepresenting material facts, based on their senior positions in the company
are insufficient to establish scienter); Johnson v. Siemens AG, No. 09
Civ. 5310 (JG) (RER), 2011 WL 1304267, at *15 (E.D.N.Y. Mar. 31, 2011) (finding
that the lead plaintiff could not allege that the defendants engaged in
deliberately illegal behavior simply by virtue of their high-level positions,
general responsibilities, and their access to inside information) (internal
citations omitted). Courts in this Circuit have long held that accusations
founded on nothing more than a defendants corporate position are entitled to no
weight. City of Brockton Retirement Sys. v. Avon Prod., Inc., No. 11 Civ. 4665 (PGG) 2014 WL 4832321, at *19
(S.D.N.Y. 2014); see also Bd. of Trustees of City of Ft. Lauderdale Gen.
Employees Ret. Sys. v. Mechel OAO, 811 F. Supp. 2d 853, 873 (S.D.N.Y.
2011), affd sub nom. Frederick v. Mechel OAO, 475 Fed. Appx 353 (2d
Cir. 2012) (Summary Order).
26
Similarly, the core operations theory at most constitutes
supplemental support for alleging scienter but does not independently
establish scienter. See New Orleans Employees Ret. Sys. v. Celestica,
Inc., 455 Fed. Appx 10, 14 n.3 (2d Cir. 2011) (summary order) (declining to
decide whether the fact that the alleged misrepresentations related to the
defendants core operations was sufficient on its own to establish scienter
but noting that the concept that allegations of a companys core operations . .
. can provide supplemental support for allegations of scienter, even if they
cannot establish scienter independently has support in the case law); see
also In re Wachovia Equity Sec. Litig., 753 F. Supp. 2d at 353 (the Court
considers core operations allegations to constitute supplementary but not
independently sufficient means to plead scienter.); Freudenberg v. E*Trade
Fin. Corp., 712 F. Supp. 2d 171, 201 (S.D.N.Y. 2010) (finding that the
plaintiffs adequately plead scienter where one of many allegations was that the
misstatements concerned the defendants core operations).11
______________________________
11 Net 1 contends
that the core operations doctrine has not survived the passage of the PSLRA.
See Def.s R. Mem. at 6; see also Shemian v. Research In Motion
Ltd., No. 11 Civ. 4068 (RJS), 2013 WL 1285779, at *18 (S.D.N.Y. 2013) (this
Court has carefully considered the continued viability of the core operations
inference in light of the PSLRAs heightened pleading requirement and found it
lacking); see also Johnson v. Sequans Commcns S.A., No. 11 Civ. 6341
(PAC), 2013 WL 214297, *17-18 (S.D.N.Y. 2013). The Second Circuit has not
determined the continued viability of the core operations theory since the
passage of the PSLRA in 1995 and courts within the Second Circuit have come to
conflicting decisions, with the majority finding that the core operations
doctrine may provide support for but not an independent basis of scienter.
See In re Wachovia Equity Sec. Litig., 753 F. Supp. 2d at 353 (The
seminal core operations case in the Second Circuit, Cosmas v. Hassett,
886 F.2d 8, 13 (2d Cir. 1989), preceded the PSLRA by six years, and post-PSLRA
decisions in other circuits have cast doubt on the strength of the core
operations inference.); see also In re Molycorp, Inc. Sec. Litig., No.
13 Civ. 5697 (PAC), 2015 WL 1097355, at *12 (S.D.N.Y. Mar. 12, 2015)
(appealed on August 17, 2015) (while the Second Circuit has expressed
some support for the idea that the core operations doctrine survived the
enactment of the PSLRA in some form, the majority approach has been to consider
such allegations as a supplementary but not independently sufficient means to
plead scienter.); In re Turquoise Hill Resources Ltd. Sec. Litig., No.
13 Civ. 8846 (LGS), 2014 WL 7176187, at *8 (S.D.N.Y. Dec. 16, 2014) (Courts in
this Circuit have observed, there is considerable doubt whether the core operations doctrine
survived enactment of the PSLRA [explaining that] allegations of a companys
core operations . . . can provide supplemental support for allegations of
scienter, [but] they cannot establish scienter independently.).
27
Plaintiff also relies on the existence of government
investigations into whether Net 1 engaged in criminal misconduct during the 2011
tender to bolster the strong inference of scienter. Pl.s Oppn Mem. at 19.
[W]hile the existence of an investigation alone is not sufficient to give rise
to a requisite cogent and compelling inference of scienter, it may be considered
by the Court as part of its analysis. In re Gentiva Secs. Litig., 932 F.
Supp. 2d at 380 (finding that the allegations viewed as a whole did not give
rise to a compelling inference of scienter); see also City of Brockton
Retirement Sys., 2014 WL 4832321, at *24 ([T]he existence of an
investigation alone is not sufficient to give rise to a requisite cogent and
compelling inference of scienter.); In re Bristol Myers Squibb Co. Sec.
Litig., 586 F. Supp. 2d 148, 168 (S.D.N.Y. 2008) (finding the allegation
that the Department of Justice launched an investigation into the Apotex
settlement negotiations was one of many allegations that established a strong
inference of scienter).
Accordingly, the only circumstantial evidence alleged by
Plaintiff that can form an independent basis to establish scienter is the
information revealed through the AllPay Litigation. However, Plaintiff in her
papers does not elaborate on what information was revealed through the AllPay
litigation. Plaintiff merely states that [t]he complaint particularizes
specific acts undertaken by Net 1 that cumulatively support an inference of
highly questionable conduct on the Companys part in its zeal to secure the
SASSA contract and cites to the Amended Complaint paragraph 43.12 Pl.s Oppn Mem. at 18-19. Despite
Plaintiffs failure to identify exactly what information was revealed by the AllPay
litigation, she argues that Defendants engaged in improper conduct intended to
influence the tender process and that this pattern of misconduct . . . gives
rise to a strong inference that Defendants knew or recklessly ignored that the
award of the contract was flawed, subject to reconsideration and ultimately
rebidding. Pl.s Oppn Mem. at 12; see also Am. Compl. ¶¶ 4, 45, 73.
______________________________
12 Paragraph 43 states that [u]pon information and
belief, the foregoing acts and relationships [the alleged conflicts of interest
listed in paragraph 42 and discussed infra] contributed to SASSAs
decision to skew the RFP process to insure that only Net 1 prevailed and quotes
the Constitutional Courts statement that deviations from fair process may
themselves all too often be symptoms of corruption or malfeasance in the
process. In other words, an unfair process may betoken a deliberately skewed
process. Hence insistence on compliance with process formalities has a
three-fold purpose: (a) it ensures fairness to participants in the bid process;
(b) it enhances the likelihood of efficiency and optimality in the outcome; and
(c) it serves as a guardian against a process skewed by corrupt influences.
28
Plaintiff contends that Net 1s key misrepresentation across
all of their statements is the failure to disclose the last minute change to
the bid process [through Bidders Notice 2] which irrevocably altered the
outcome and allegedly resulted in the amplified risk of regulatory scrutiny and
invalidation of the SASSA contract. Pl.s Oppn Mem. at 14. Plaintiff alleges
that Defendants knew that CPS would be the only bidder able to comply with
Bidders Notice 2s requirement for biometric verification, see Am. Compl.
¶ 34, for three reasons. First, Plaintiff alleges, and Defendants do not
dispute, that Defendants were aware of Bidders Notice 2 because any bidders
notice was allegedly required to be published. See Pl.s Oppn Mem. at
10. Second, Plaintiff relies on the fact that CPS allegedly hired
Hulleyalthough this fact is rigorously contested by Defendantsand therefore,
was aware of what Plaintiff characterizes as Hulleys improper role in the
tender process. Id. Third, Plaintiff contends that Defendants knew about
each of the alleged relationships, characterized as conflicts of interest,
involving the committees, the BAC and BEC, that awarded the SASSA contract.
Id. at 10-11 (citing Am. Compl. ¶¶ 42-47).
Am. Compl. ¶ 43.
29
Net 1 asserts that it only had an obligation to disclose
Bidders Notice 2 if it knowingly attempted, or was aware of an attempt, to amend
the RFP process in order to improperly benefit CPS to the detriment of the other
bidders. See Def.s Mem. at 2. However, according to Net 1, Plaintiffs
failure to sufficiently plead that Defendants were engaged in or aware of any
improper conduct is fatal to her claim that Defendants knew Bidders Notice 2
created a critical defect in the tender process and thus, obligated Net 1 to
disclose this information. See Def.s R. Mem. at 1, 4. Net 1 is correct.
Plaintiff fails to adequately allege that Defendants engaged in misconduct, or
that they knew or were reckless in not knowing that Bidders Notice 2 created a
critical defect in the 2011 tender process, and thus, Plaintiff fails to plead a
strong inference of scienter.
The alleged conflicts of interest regarding Hulley, the BAC,
and the BEC do not support an inference that Defendants were aware of Bidders
Notice 2s impact on the tender process. Plaintiff does not allege that
Defendants had access to or were aware of the substance of the other proposals
or knew whether other bidders were able to provide the biometric verification
allegedly required by Bidders Notice 2. Plaintiff only makes allegations
regarding SASSAs awareness, not Defendants, of the bidders proposals. See
Am. Compl. ¶ 3 (Just five days before the June 15, 2011 bid deadline, but
after bids had been submitted, SASSA amended the RFP to now require biometric
verification of all social grant beneficiaries prior to each payment, a
requirement it knew at the time that only CPS could satisfy.); id. ¶ 33
(SASSA issued Bidders Notice 2 on June 10, 2011. Though the deadline for bids
was June 15, 2011, on information and belief, CPS and AllPay had submitted their
bids in advance thereof (or alternatively, SASSA had access to information
regarding the different verification features offered in each bidders proposal).). Without this knowledge,
Defendants could not have known that CPS was the only bidder able to meet the
alleged new requirement of biometric verification. The alleged conflicts of
interest relied on by Plaintiff do not remedy this insufficiency, even if
Defendants were aware of these alleged conflicts.
30
First, according to Plaintiff, before the 2011 tender,
CPS allegedly brought in Hulley to advise it on how to settle its lawsuits
against SASSA related to the tender canceled in 2008.13 Am. Compl. ¶ 42(a). Allegedly, once
the 2011 tender process began, the litigation between CPS and SASSA stopped and
Hulley was hired by SASSA as an advisor on the 2011 tender, ultimately won by
CPS. Id. Plaintiffs allegations suggest that Hulley represented two
clients on two related but distinct matters. To the extent that Plaintiff
attempts to imply that Hulleys alleged advisory role to both SASSA and CPS
improperly influenced SASSA to award the contract to CPS and/or that CPS dropped
its litigation against SASSA in exchange for the 2011 tender being awarded to
CPS, these allegations alone are insufficient to make such a leap. Even taking
these inferences as true, Plaintiff fails to allege how this alleged conflict of
interest supports an inference that Defendants were aware that Bidders Notice 2
benefitted them above all of the other bidders.
Second, Net 1 announced a deal to transfer 20% of the
SASSA contract to Mosomo. Id. ¶ 42(b). According to Plaintiff, the
conflict of interest arose here because Mosomo is run by an individual (not
named by Plaintiff), that was the former head of corporate finance at a company
(also not named by Plaintiff) established by Sexwale and because Sexwales Human
Settlements director-general, Zulu, was allegedly a member of the 2011
tender BAC. Id. Net 1 is three steps removed from Zulu: (1) Net 1 awarded
20% of the SASSA contract to a company, Mosomo, (2) Mosomo is run by the former
head of corporate finance for a different company established by Sexwale, and
(3) Zulu was a member of the BAC for the 2011 tender. Id. These
allegations fail to establish that Defendants were aware of the alleged
connection between Net 1 and Zulu or, if known, that this connection was
improper. Moreover, these alleged conflicts of interest fail to satisfy Rule
9(b)s pleading requirement that plaintiffs set forth the who, what, when,
where and how of the alleged fraud. See U.S. ex rel. Kester v. Novartis
Pharm. Corp., 23 F. Supp. 3d at 251-52. Plaintiff does not identify the
individual running Mosomo, does not identify the company that the unidentified
individual running Mosomo previously worked for as the head of corporate
finance, and does not identify during what time period the unidentified
individual worked as the head of corporate finance at the unidentified company.
Most importantly, Plaintiff does not allege how this tenuous relationship was
improper and resulted in the alleged fraudulent omissions.
______________________________
13 Net 1 contends
that Hulley advised SASSA, not CPS, on the possibility of settling litigation
brought by CPS against SASSA. See Def.s Mem. at 8. However, even taking
Plaintiffs allegation as truethat Hulley was brought in by CPS to advise it on
settling its lawsuits against SASSAPlaintiff fails to sufficiently allege that
this relationship resulted in Defendants knowledge that the tender process was
improper and thus, may result in investigation and invalidation of the awarded
contract.
31
Third, the chair of the BAC for the previous tender
process canceled in 2008, Norman Arendse, allegedly was offered an open
chequebook bribe by someone claiming to represent CPS. Id. ¶ 42(c).
While improper if true, Plaintiff does not specify whether the alleged bribe was
offered in relation to the 2008 tender process, for which Arendse was the BAC
chair, or the 2011 tender process, which Arendse is not alleged to have any
involvement in. Id. There are also no allegations that the Individual
Defendants or anyone else at Net 1 or CPS involved in the 2011 tender were aware
of this alleged prior conduct. Here, as in the second alleged conflict of
interest, Plaintiff also fails to satisfy the heightened pleading requirement of
Rule 9(b). Plaintiff does not identify when the alleged bribe occurred or who
made the alleged bribe.
32
Fourth, Ms. Nhlapo, identified by Plaintiff as a member
of the BEC for the 2011 tender process, purportedly failed to disclose that she
previously sat on the board of Reflective Learning Resources with Mr. Yako, the
director of one of CPSs business partners. Id. ¶ 42(d). This alleged
conflict is even more tenuous than the others, as here, the alleged conflict of
interest involves a business partner of CPS, not CPS or Net 1. Plaintiff also
fails to allege that Defendants knew about this alleged conflict or that it was
improper.
These tenuous alleged conflicts fail to support an inference
that Defendants were aware of the effect of Bidders Notice 2 on the 2011 tender
process or caused Defendants to know or be reckless in not knowing that the
overall tender process was improper. In fact, in three of the four alleged
conflicts, Plaintiff fails to adequately allege that Defendants were aware of
the conflicts or, even if Defendants were aware, that these alleged conflicts
were improper.
Plaintiffs citation to the Constitutional Courts statement
that deviations from fair process may themselves all too often be symptoms of
corruption or malfeasance in the process, Pl.s Oppn Mem. at 19, does not
change the above analysis. Plaintiff fails to sufficiently plead a strong
inference that Defendants were aware of the deviations, and thus, had the intent
to defraud or mislead. Moreover, once Defendants became aware that the tender
process and its role in the tender process was being investigated, Defendant
disclosed this information. See Am. Compl. ¶¶ 48, 56; see also
Section III.B.ii.
Viewing the allegations holistically, the inference of scienter
is not as compelling as any opposing inference of nonfraudulent intent.
Tellabs, 551 U.S. at 314; In re Bristol Myers Squibb Co. Sec.
Litig., 586 F. Supp. 2d at 168. Plaintiffs sole independent basis for
alleging scienterinformation presented through the AllPay litigation
specifically that Defendants were aware of or engaged in conflicts of interest
and improperly attempted to influence SASSAfails to establish a strong inference of scienter. Evidence that may
provide supplemental support for finding scienter, therefore, also fails.
Specifically, Plaintiffs allegations that Defendants must have had actual
knowledge about the allegedly false and misleading statements because of their
positions at Net 1, and/or because the alleged misstatements and omissions
allegedly relate to Net 1s core operations cannot support an inference of
scienter where none exists. See In re Molycorp, Inc. Sec. Litig., 2015 WL
1097355, at *12. Similarly, the government investigations cannot bolster
allegations of scienter that do not exist, and, as currently plead, the
government investigations are just that, investigations. See In re Gentiva
Sec. Litig., 932 F. Supp. 2d at 363, 380 (finding no strong inference of
scienter alleged despite the fact that two government agencies were
investigating the defendants where no determination regarding whether to take
action or close the investigations had been made).
33
Net 1s long term investment in implementing the SASSA contract
also counsels against finding a strong inference of scienter. See Def.s
Mem. at 22; Hillebrecht Decl. Ex. F (Although we expect our revenues from our
new SASSA contract to increase . . . as we roll out our distribution service to
all beneficiaries in all nine provinces, we also expect to incur significant
increases in operating expenses. We will also be required to make significant
capital expenditures to build out our infrastructure across South Africa As a
result, despite the higher volumes of payments, as we implement the new
contract, these additional expenses are likely to result in lower operating
margins in our pension and welfare business, both in the short-term and perhaps
on a longer term basis.); Ex. R (Since inception of the implementation we have
incurred cumulative capital expenditures of $24.5 million.); see also In re
UBS AG Sec. Litig., No. 07 Civ. 11225 (RJS), 2012 WL 4471265, at *12
(S.D.N.Y. Sept. 28, 2012) (the mere fact that UBS made substantial investments
in mortgage-related securities, as alleged in the Amended Complaint, undercuts Plaintiffs ability to plead a
strong inference of scienter.), affd sub nom. City of Pontiac Policemen's
and Firemen's Retirement Sys. v. UBS AG, 752 F.3d 173 (2d Cir. 2014).
34
In sum, Plaintiffs allegations do not demonstrate that the
Defendants knew of and either consciously or recklessly disregarded the alleged
impropriety, the alleged amplified risk of investigation into the 2011 tender
process, and the resulting possibility that the contract may be invalidated.
Because the Amended Complaint does not raise a strong inference of scienter,
Plaintiffs §10(b) claim fails.
B. |
Section 10(b): Material Misstatements and
Omissions |
In order to survive a motion to dismiss, Plaintiffs must
establish that Defendants made a statement that was misleading as to a
material fact. Matrixx Initiatives, Inc. v. Siracusano, 131 S.
Ct. 1309, 1318 (2011) (quoting Basic Inc. v. Levinson, 485 U.S. 224, 238
(1988)) (emphasis in original). A violation of Section 10(b) and Rule 10b-5
premised on misstatements cannot occur unless an alleged material misstatement
was false at the time it was made. In re Lululemon Sec. Litig.,
14 F. Supp. 3d 553, 571 (S.D.N.Y. 2014), affd, 604 Fed. Appx 62
(2d Cir. 2015) (citing San Leandro Emergency Med. Grp. Profit Sharing Plan v.
Philip Morris Cos., Inc., 75 F.3d 801, 812-13 (2d Cir. 1996)) (emphasis in
original). The Second Circuit has repeatedly indicated that plaintiffs cannot
simply assert that a statement is falsethey must demonstrate with specificity
why . . . that is so. Rombach, 355 F.3d at 174.
Where the alleged violations of Section 10b and Rule 10b-5 are
based on allegations that the defendant omitted to state a material fact
necessary to make the statement . . . not misleading; the complaint shall
specify each statement alleged to have been misleading, the reason or reasons
why the statement is misleading. 15 U.S.C. §78u-4(b)(1)(B). [I]f an allegation regarding [a] statement or omission is made on
information and belief, the complaint shall state with particularity all facts
on which that belief is formed. Id.
35
A defendants silence is not misleading where no duty to
disclose exists. Basic, 485 U.S. at 239 n.17. A duty to disclose arises
whenever secret information renders prior public statements materially
misleading, not merely when that information completely negates the public
statement. In re Time Warner Inc. Sec. Litig., 9 F.3d 259, 268 (2d Cir.
1993). Disclosure of an item of information is not required, however, simply
because it may be relevant or of interest to a reasonable investor. Resnik
v. Swartz, 303 F.3d 147, 154 (2d Cir. 2002). A defendant does not have a
duty to accuse itself of wrongdoing or to disclose information where it is
equally available, widely reported, or so basic that any investor could be
expected to know it. Monroe Cnty. Employees Ret. Sys. v. YPF Sociedad
Anonima, 15 F. Supp. 3d 336, 349 (S.D.N.Y. 2014) (internal citations
omitted); In re Citigroup, Inc. Sec. Litig., 330 F. Supp. 2d 367, 377-78
(S.D.N.Y. 2004), affd sub nom. Albert Fadem Trust v. Citigroup, Inc.,
165 Fed. Appx 928 (2d Cir. 2006) (summary order). However, when a corporation
chooses to speakeven where it lacks a duty to speakit has a duty to be both
accurate and complete. Richman v. Goldman Sachs Grp., Inc., 868 F. Supp.
2d 261, 273 (S.D.N.Y. 2012) (citing Caiola v. Citibank, N.A., 295 F.3d
312, 331 (2d Cir. 2002)); In re ITT Educ. Services, Inc. Sec. and Shareholder
Derivatives Litig., 859 F. Supp. 2d at 575 (Rule 10b-5 imposes no duty to
disclose all material, nonpublic information, [but] once a party chooses to
speak, it has a duty to be both accurate and complete.). Even then, a defendant
must reveal only those facts, if any, that are needed so that what was revealed
would not be so incomplete as to mislead. Richman, 868 F. Supp. 2d at
273 (citing In re Bristol Myers Squibb Co. Sec. Litig., 586 F. Supp. 2d
at 160).
36
Plaintiff alleges that Net 1s statements in its January 18 and
February 6, 2012 press releases, its February 9 and May 10, 2012 Form 10-Qs, and
its August 23, 2013 Form 10-K were false and misleading because they failed to
disclose (1) the defective tender process resulting in CPS as the only viable
bidder, and (2) that CPS engaged in conduct intended to influence SASSA in the
bidding process.14 Am. Compl. ¶¶ 4,
44-53; see also Pl.s Oppn Mem. at 10. According to Plaintiff, this
created a material risk that the awarded contract could be, and ultimately was,
subject to regulatory scrutiny and invalidation. Pl.s Oppn Mem. at 10; see
also Am. Compl. ¶ 45. Plaintiff asserts that [h]aving chosen to trumpet the
benefits of the [SASSA contract] award and the benefits of implementation
thereof, Defendants were duty bound to disclose the commensurate risks as well.
Pl.s Oppn Mem. at 11. The issue is therefore, whether Net 1s statements
regarding the SASSA contract required Net 1 to provide additional information in
order to avoid misleading investors. See In re ITT Educ. Services,
Inc. Sec. and Shareholder Derivatives Litig., 859 F. Supp. 2d at 578-79.
|
i. |
Failure to Disclose Bidders Notice
2 |
As discussed supra at Section III.A.ii, Defendants fail
to adequately allege a strong inference that Defendants knew or were reckless in
not knowing that the bidding process improperly favored CPS. Accordingly, even
if the statements touting the award of the SASSA contract and its implementation were misleading, Plaintiff
fails to allege that Defendants intention in making those statements was to
mislead investors at that time. Plaintiff also fails to allege that at the time
Defendants made these statements, that the statements were inaccurate or
incomplete. Richman, 868 F. Supp. 2d at 273. The Amended Complaint does
not allege that Defendants were aware of the risks of investigation and
invalidation at the time the statements were made. Once Defendants became
aware of AllPays challenge to the 2011 tender and the potential impact of that
challenge, Net 1 disclosed the potential invalidation of the SASSA contract. See Am. Compl. ¶ 48.
______________________________
14 Despite the
statements in the Amended Complaint, Plaintiff explicitly states that she is
not seeking to hold Net 1 liable for failing to disclose its alleged
effort to improperly influence the 2011 tender process. See Pl.s Oppn
Mem. at 12. In Plaintiffs Opposition to Net 1s Motion to Dismiss, she states
that she is not asserting that the failure to disclose [Net 1s alleged effort
to improperly influence the bidding process] or to otherwise impugn its own
conduct in securing the SASSA contract, are actionable misstatements.
Id.; but see Am. Compl. ¶¶ 4, 45 (alleging that Net 1 failed to
disclose and hid from investors that CPS had engaged in conduct it intended
to improperly influence SASSA and the bidding process.). Plaintiff instead
contends that the allegations of Net 1s improper conduct establish a pattern
of misconduct which gives rise to a strong inference that Defendants knew or
recklessly ignored that the award of the contract was flawed, subject to
reconsideration and ultimately rebidding. Pl.s Oppn Mem. at 12. Plaintiff
also claims that Net 1 [b]y attributing the Companys success solely to
legitimate practices, . . . implicitly (and falsely) warranted that there were
no illegal practices contributing to that success. Id. at 11 (citing
In re Syncor Ints Corp. Sec. Litig., 239 Fed. Appx 318, 320 (9th Cir.
2007)).
37
|
ii. |
Failure to Disclose the Amplified Risk of Regulatory
Scrutiny and Potential Invalidation of the SASSA
Contract |
Plaintiffs contention that Net 1 was obligated, but failed, to
disclose that Net 1 faced a material risk of regulatory scrutiny and
invalidation of the contract fails for another reason, Am. Compl. ¶¶ 45, 47;
see also Pl.s Oppn Mem. at 11, namely that [d]efendants cannot be held
liable for failing to disclose what would have been pure speculation. In re
Par Pharm., Inc. Secs. Litig., 733 F. Supp. 668, 678 (S.D.N.Y. 1990)
(finding no generalized duty to disclose the potential impact of a bribery
scheme on a company, as the company was not obligated to speculate as to the
myriad of consequences, ranging from minor setbacks to complete ruin, that might
have befallen the company if the bribery scheme was discovered, disclosed or
terminated.). Therefore, where an outcome is merely speculative, the duty to
disclose does not attach. See Acito, 47 F.3d at 53 (finding no duty to
disclose negative consequences from a failed factory inspection where it was not
a foregone conclusion that consequences would materialize); Richman,
868 F. Supp. 2d at 273 (defendants [a]re not bound to predict as the imminent
or likely outcome of the investigations that indictments of [the company] and
its chief officer[s] would follow, with financial disaster in their train.)
(alternations in original); In re Axis Capital Holdings Ltd. Sec. Litig., 456 F. Supp.
2d at 586 (Assuming, arguendo, that an anticompetitive scheme was
adequately pled, defendants were under no duty to disclose the risk that
contingent commission agreements might be discontinued.); In re Marsh &
Mclennan Cos., Inc. Sec. Litig., 501 F. Supp. 2d 452, 471 (S.D.N.Y. 2006)
(With respect to a companys failure to disclose impending litigation, there is
no requirement to make disclosures predicting such litigation, absent an
allegation that the litigation was substantially certain to occur during the
relevant period.); In re Citigroup, Inc. Sec. Litig., 330 F. Supp. 2d at
377-78 (finding Citigroup was not required to make disclosures predicting such
litigation and litigation risks associated with its Enron-related,
analysis/investment banking and reporting activities); c.f. Pennsylvania
Public School Employees Ret. Sys. v. Bank of Am. Corp., 874 F. Supp. 2d
341, 348, 351-52 (S.D.N.Y. 2012) (finding the risk posed by mortgage electronic
registration system (MERS) was not speculative because courts had in fact
found problems with MERS and specifically found that mortgage holders and
servicers [like BOA] could not foreclose on mortgages transferred via MERS
because of issues involved with proving good title to the mortgage). Even
assuming arguendo that Defendants acted improperly, Plaintiff fails to
plead that it was more than mere speculation that (1) the tender process would
be investigated, and (2) that a potential investigation would result in the
invalidation of the SASSA contract. The procedural posture of the AllPay
litigation further supports the fact that the invalidation of the SASSA contract
was speculative. The South African High Court actually upheld the SASSA contract
despite finding the 2011 tender process invalid, as did the Court of
Appeal.15 See Hillebrecht Decl. Exs. C, D. The SASSA contract was invalidated by the
South African Constitutional Court, reversing the lower courts decisions, only
after over two years of litigation. Id. Ex. S.
______________________________
15 The Court of
Appeal reversed the High Courts finding that the tender process was invalid.
See Hillebrecht Decl. Ex. D.
38
Additionally, once these risks materialized, Net 1 made the
appropriate disclosures. On February 9, 2012, Net 1 filed a Form 10-Q with the
SEC stating that on February 8, 2012, AllPay filed an application in the High
Court of South Africa seeking to set aside the award of the SASSA tender and
warning that [i]f AllPays challenge is successful, the contract could be
set aside. Id. Ex. F (emphasis added). In the same Form 10-Q, Net 1
disclosed information regarding the 2011 tender process: [w]hen SASSA publicly
announced the award of the tender to us in January 2012, it stated that it had
conducted the tender in accordance with all relevant legislation. While we also
believe this to be the case, we cannot predict when the proceeding will be
resolved or its ultimate outcome. Id.16
With regard to the disclosure that the contract could be set
aside, Net 1 disclosed the exact risk at issuethat the SASSA contract may be
invalidated. Net 1 was not obligated to include additional details of AllPays
publicly-filed court pleadings. See Ross v. Lloyds Banking Group, PLC,
No. 11 Civ. 8530 (PKC), 2012 WL 4891759 at *9 (S.D.N.Y. Oct. 16, 2012) (finding
defendants disclosure that the entity at issue was reliant on government
funding to maintain liquidity was not misleading where the defendant did not
also disclose the specific type of government funding received), affd,
546 Fed. Appx 5 (2d Cir. 2013); Richman, 868 F. Supp. 2d at 273 (finding
a corporation only must reveal the facts that are needed so that what was
revealed would not be so incomplete as to mislead.); Monroe Cnty. Employees
Ret. Sys.,
______________________________
16 On November 8,
2012, in a Form 10-Q filed with the SEC, Net 1 disclosed, allegedly for the
first time, the High Courts decision finding the 2011 tender process invalid
and illegal. Am. Compl. ¶ 54. On December 4, 2012, Net 1 disclosed in a Form 8-K
filed with the SEC, that various U.S. regulatory agencies, the SEC, DOJ, and
FBI, were investigating whether Net 1 engaged in criminal misconduct in
connection with the 2011 SASSA tender process. Id. ¶ 56. Plaintiff does
not allege that these disclosures were materially false or misleading. 15 F. Supp. 3d at 349 (internal citations omitted)
(There is no duty to disclose information that is equally available to both
parties [or] that has been widely reported in readily available media.).
39
Regarding the disclosure that Net 1 believed SASSA conducted
the tender in accordance with all relevant legislation, Net 1 contends, and
Plaintiff does not dispute, that this statement is an opinion. Plaintiffs who
charge that a statement of opinion . . . is materially misleading, must allege
with particularity provable facts to demonstrate that the statement of opinion
is both objectively and subjectively false. Podany v. Robertson Stephens,
Inc., 318 F. Supp. 2d 146, 153-54 (S.D.N.Y. 2004) (internal citations and
quotations omitted); see also In re Time Warner Inc. Sec. Litig., 9 F.3d
at 266 (explaining that opinions may form the basis for a securities fraud
action where there are sufficient allegations to support the inference that the
defendants either did not have these favorable opinions . . . when they made the
statements or that the favorable opinions were without a basis in fact.). The
Supreme Court recently explained, in the context of a Section 11 action, that a
statement of opinion is not misleading just because external facts show the
opinion to be incorrect and is not necessarily misleading when an issuer
knows, but fails to disclose, some fact cutting the other way. See Omnicare,
Inc. v. Laborers Dist. Council Const. Indus. Pension Fund, 135 S.Ct 1318,
1328-29 (2015). The Court however noted that situations exist where an opinion
may be misleading, such as where a party makes a statement with knowledge that
the Federal Government was taking the opposite view. Id. at 1328. As
discussed supra at Section III.A.ii, Plaintiff does not adequately plead
that Net 1 was aware of or participated in the alleged wrongdoing that would
make its opinion that SASSA followed adequate protocols without a basis in
fact or show that Net 1 did not have this favorable opinion when the statement was made.17 Accordingly, Plaintiff also fails to state actionable misstatements or
omissions.
______________________________
17 Because the
Court finds Plaintiff does not sufficiently allege material misrepresentations
or omissions, the Court does not decide whether Net 1s statements constitute
forward-looking statements afforded safe harbor pursuant to the PSLRA. See In
re Nokia Oyj (Nokia Corp.) Sec. Litig., 423 F. Supp. 2d 364, 400 (S.D.N.Y.
2006) (describing the PSLRAs safe harbor provision) (citing 15 U.S.C. §
78u5(c)(1)(A)(i)).
40
C. |
Section 10(b): Loss
Causation |
Plaintiffs failure to adequately plead either scienter or a
misstatement or omission is dispositive. Thus, the Court need not reach the
issue of loss causation. See In re UBS AG Sec. Litig., 2012 WL 4471265,
at *22 (Because the issue of scienter . . . proves fatal to Plaintiffs Section
10(b) . . . the Court need not reach the UBS Defendants arguments regarding . .
. loss causation); Hutchinson v. Perez, No. 12 Civ. 1073 (HB), 2012 WL
5451258, at *8 (S.D.N.Y. Nov. 8, 2012) (Since the Court must dismiss the
Amended Complaint if Plaintiff fails to adequately plead scienter, I need not
reach loss causation or misleading statements and omissions under the
PSLRA.) amended, No. 12 Civ. 1073 (HB), 2013 WL 93171 (S.D.N.Y. Jan. 8,
2013); Footbridge Ltd. v. Countrywide Home Loans, Inc., No. 09 Civ.4050
(PKC), 2010 WL 3790810, at *22 (S.D.N.Y. Sept. 28, 2010) (I need not reach the
issue of whether the SAC alleges loss causation because the SAC fails to allege
a misstatement or that defendants acted with scienter.). Since loss causation
is premised on the assumption that a misstatement or omission concealed
something from the market, see Lentell v. Merrill Lynch & Co., 396
F.3d 161, 173 (2d Cir. 2005), Plaintiff cannot demonstrate loss causation where
they have failed to establish any such misrepresentation.
41
D. |
Section 10(b): The Individual
Defendants |
This Court has the power to dismiss a complaint against the
non-moving Individual Defendants, so long as it is exercised cautiously and on
notice. See Wachtler v. Cnty. of Herkimer, 35 F.3d 77, 82 (2d Cir. 1994)
(affirming the district courts dismissal of a claim against a defendant who
neither filed an appearance nor moved for dismissal since plaintiff was on
notice from motion of other defendants and had an opportunity to be heard);
see also Alki Partners, L.P. v. Vatas Holding GmbH, 769 F. Supp.
2d 478, 499 (S.D.N.Y. 2011) (dismissing §§ 10(b) and 20(a) claims against an
individual defendant who did not appear in the case or join in the other
defendants motions because the plaintiffs claims against him failed for the
same reasons they failed against the other defendants), affd sub nom. Alki
Partners, L.P. v. Windhorst, 472 Fed. Appx 7 (2d Cir. 2012) (summary
order). Although the Individual Defendants have not yet been served, Net 1s
motion put Plaintiff on notice of the grounds for dismissal and Plaintiff was
afforded an opportunity to respond. See Def.s Mem. at 1; Def.s R. Mem.
at 10 n.12 (While the Individual Defendants remain unserved and this motion is
being brought by Net 1, the AC should certainly be dismissed with prejudice as
against them in all respects.). Plaintiff has not established scienter on
behalf of the Individual Defendants, see supra at Section III.A.i, ii;
nor has Plaintiff demonstrated that the Individual Defendants were aware of or
participated in any improper conduct. See id. These deficiencies are
fatal to Plaintiffs §10(b) claims against Net 1 and the Individual Defendants
alike. Therefore, Plaintiffs § 10(b) claim against the Individual Defendants is
dismissed.
Plaintiff also brings claims against the Individual Defendants
under § 20(a) of the Exchange Act, which imposes liability on individuals who
control any person or entity that violates § 10. See Am. Compl. ¶¶ 82-87; see also 15 U.S.C. § 78t(a). To assert a prima facie case under Section
20(a), a plaintiff must show a primary violation by the controlled person and
control of the primary violator by the targeted defendant, and show that the
controlling person was in some meaningful sense a culpable participant in the
fraud perpetrated by the controlled person. Mechel, 811 F. Supp. 2d at
882 (quoting S.E.C. v. First Jersey Sec., Inc., 101 F.3d 1450, 1472 (2d
Cir. 1996)). Given that a control person liability claim under § 20(a) is
predicated on a primary violation of the securities laws, the control person
liability claims must be dismissed because Plaintiff has failed to allege a
primary violation under § 10(b). See Rombach, 355 F.3d at 178 (Because
we have already determined that the district court properly dismissed the
primary securities claims against the individual defendants, these secondary
claims must also be dismissed.); see also Mechel, 811 F. Supp. 2d at 859
n.4, 882 (dismissing §20(a) claims against individual defendants who resided in
Russia and had therefore not been served with the complaint nor joined the
companys motion to dismiss).
42
Net 1 requests that this Court dismiss Plaintiffs action with
prejudice. Def.s Mem. at 25; see also Def.s R. Mem. at 1, 10. Plaintiff
conversely requests that if the Court grants Net 1s Motion to Dismiss, that the
Court also grant Plaintiff leave to amend the Amended Complaint. Pl.s Oppn
Mem. at 23. Plaintiff, however, provides no explanation of how the complaint may
be amended in order to sufficiently state a claim under Section 10b and Rule
10b-5. Id.
Rule 15 of the Federal Rules of Civil Procedure instructs
courts to freely give leave to replead when justice so requires. FED. R.
CIV. P. 15(a)(2); see also Foman v. Davis, 371 U.S. 178, 182
(1962). The usual practice in this Circuit upon granting a motion to dismiss
is to permit amendment of the complaint. See Special Situations
Fund III QP, L.P. v. Deloitte Touche Tohmatsu CPA, Ltd., 33 F. Supp. 3d 401,
446-47 (S.D.N.Y. 2014) (citing Ronzani v. Sanofi S.A., 899 F.2d 195, 198
(2d Cir. 1990)). However, amendment is not warranted absent some indication as
to what appellants might add to their complaint in order to make it viable. Shemian v. Research In Motion Ltd., 570 Fed. Appx 32, 37 (2d Cir. 2014)
(summary order); Porat v. Lincoln Towers Community Ass'n, 464 F.3d 274,
276 (2d Cir. 2006) (Especially given that plaintiffs counsel did not advise
the district court how the complaints defects would be cured, upon all the
facts of this case we find no abuse of discretion and decline to remand for
repleading.). Nevertheless, where the possibility exists that the defect can
be cured, leave to amend at least once should normally be granted unless doing
so would prejudice the defendant. Laborers Local 17 Health and Ben. Fund v.
Philip Morris, Inc., 26 F. Supp. 2d 593, 605 (S.D.N.Y. 1998) (citing Oliver Schools, Inc. v. Foley, 930 F.2d 248, 253 (2d Cir. 1991)); see
also ATSI Comms., Inc., 493 F.3d at 108 (2d Cir. 2007) (noting that courts
typically grant plaintiffs at least one opportunity to plead fraud with greater
specificity when they dismiss under Rule 9(b) but denying leave to amend where
the plaintiff was already given that opportunity); Luce v. Edelstein, 802
F.2d 49, 56-57 (2d Cir. 1986) (Complaints dismissed under Rule 9(b) are almost
always dismissed with leave to amend.)). While Plaintiff has amended once as a
matter of right, Plaintiff has not been granted leave to
amend.18 See Ronzani, 899 F.2d at 198 (finding the
district court abused its discretion in dismissing the complaint without
granting leave to amend where the plaintiff had not previously been given leave
to amendalthough the original complaint was amended once pursuant to Rule 15( a) as a matter of course-and had offered to
amend the complaint). Because it is possible that Plaintiff can plead additional facts to remedy
the deficiencies identified in this opinion without prejudice to Defendants, Plaintiff is granted
leave to amend.
______________________________
18 At the
pre-motion conference the Court did not determine whether its dismissal, if
granted, would be final. Cf. Sinay v. CNOOC Ltd., No. 12 Civ. 1513 (KBF),
2013 WL 1890291, at *10 (S.D.N.Y. May 6, 2013) (dismissing complaint with
prejudice where, at pre-motion conference, court explicitly stated that any
ruling on pending motion to dismiss would be with prejudice),
aff'd, 554 Fed. Appx 40 (2d Cir. 2014) (summary order).
43
For the reasons set forth above, Net 1's motion to dismiss is GRANTED. Plaintiffs
Second Amended Complaint shall be filed, if at all, on or before October 16, 2015. The Clerk of
the Court is respectfully directed to terminate the motion, Doc. 28. 19
It is SO ORDERED.
Dated: September 16, 2015
New York, New York
![](exhibit99-2x46x1.jpg)
______________________________
19 The PSLRA requires the Court to "include in the record specific findings regarding compliance by each party and
each attorney representing any party with each requirement of Rule 11(b) of the Federal Rules of Civil Procedure as
to any complaint, responsive pleading, or dispositive motion." 15 U.S.C. § 78u-4(c)(1). Neither the claims nor
defenses were harassing or frivolous. All factual contentions had evidentiary support or were reasonably based on
belief or a lack of information. Furthermore, Net 1 did not affirmatively allege any improper conduct or move for
sanctions. In accordance with the PSLRA, the Court finds that the parties and counsel in this matter have complied
with Rule 11 (b).
44
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