Finding that investors had failed to properly allege fraud, a federal judge has dismissed a securities fraud suit against Comcast Corp. that accused the company of making false statements about its projected growth throughout 2007 despite knowing that it faced rising capital expenditures and slowing growth of subscribers due to increased competition.
In Marilyn Clark, et al. v. Comcast Corp., Chief U.S. District Judge Harvey Bartle III of the Eastern District of Pennsylvania found that the proposed class of investors failed to back up their claims that Comcast executives were aware of the falsity of their bullish statements at the time they made them.
"Plaintiffs do not identify specific documents that would contain facts or figures indicating that any of the 'undisclosed true facts' were true or known to the defendants, much less any other details about the content of those documents," Bartle wrote.
Instead, Bartle found, the allegations in the suit were limited to a "barebones sketch" of how budget and subscriber data documents are purportedly compiled and reviewed at Comcast.
As a result, Bartle concluded that the plaintiffs failed to satisfy the requirements of either the Private Securities Litigation Reform Act or Rule 9(b) of the Federal Rules of Civil Procedure, which calls for "particularized" allegations when pleading fraud.
Bartle quoted a 2004 decision from the 3rd U.S. Circuit Court of Appeals in California Public Employees' Retirement System v. Chubb Corp. that said: "Cobbling together a litany of inadequate allegations does not render those allegations particularized in accordance with Rule 9(b) or the PSLRA."
Similarly, Bartle found that, for the investors suing Comcast, their "failure to identify the specific documents on which they rely is fatal to their ability to meet the pleading requirements."
Under Chubb , Bartle said, "reliance upon alleged documents which are undated, unquoted, undescribed, and unattached amounts to nonspecific allegations, at best."
The ruling is a victory for attorneys Alva Mather; Colleen Flynn Shanahan, Laura E. Krabill; M. Norman Goldberger, and Matthew A. White of Hangley Aronchick Segal & Pudlin in Philadelphia, who represented Comcast, along with attorneys Michael P. Carroll, Antonio J. Perez-Marques and Jonathan D. Martin of Davis Polk & Wardwell in New York.
Bartle took the rare step of dismissing the case "with prejudice," saying the plaintiffs didn't deserve another chance to amend the suit because it had already been amended once after Comcast filed a motion to dismiss the original complaint.
"Plaintiffs are represented by sophisticated counsel who represented to the court that they are 'firms which have substantial experience in the prosecution of shareholder and securities class actions.' ... Under these circumstances, wherein defendants have already had to defend against two complaints in the matter, allowing the plaintiffs a third bite at the pleading apple would result in prejudice to the defendants," Bartle wrote.
The ruling is a major setback for a plaintiffs team from four firms led by attorneys Laura M. Andracchio, Douglas R. Britton, Susan G. Taylor, Sarah R. Holloway, David A. Rosenfeld and Douglas R. Britton of Coughlin Stoia Geller Rudman & Robbins in San Diego, along with Bernard M. Gross and Deborah R. Gross of the Law Offices of Bernard M. Gross in Philadelphia; Paul Warner of The Warner Law Firm in Houston; and Jeffrey P. Fink, Felipe J. Arroyo and Arshan Amiri of Robbins Umeda & Fink in San Diego.
Coughlin Stoia spokesman Dan Newman declined to comment on the ruling except to say, "We're carefully evaluating the opinion and considering several options for moving forward."
In the suit, investors alleged Comcast executives made a series of positive statements in the early months of 2007 that promised significant growth in subscribers and revenue but that the truth about the company's true financial prospects began to surface later in the year, culminating in a plunge in the stock price after Comcast revised its outlook.
According to the suit, Comcast announced on Dec. 4, 2007, that it expected just 6 million new subscriptions, down from a previous estimate of 6.5 million, and that growth of revenue from its cable television business would be 11 percent, not 12 percent, or about $265 million less than expected.
At the same time, Comcast said it expected a $300 million increase in capital expenditures, from $5.7 billion to $6 billion -- a 5 percent increase.
In response to the news, the suit alleged, the price of Comcast stock fell 12.3 percent on heavy trading volume of 117.2 million shares, wiping out $5.23 billion in market capitalization in one day.
The suit alleged that Comcast was aware of the trends that led to its December announcement long before the company went public, and that two executives who had made bullish statements in conferences with industry analysts -- Chief Executive Officer Brian Roberts and Chief Operating Officer Stephen Burke -- sold significant quantities of their own stock while the price was inflated.
In May 2007, the suit said, Roberts sold $9.4 million of his holdings at prices near Comcast's record highs, despite previously saying he was "continuing to buy" Comcast stock. The following month, the suit said, Burke followed suit and sold $6.4 million of his Comcast stock.
In doing so, the suit said, both executives abandoned the practice they had followed in the prior two years by selling off their holdings in midyear instead of waiting until the end of the year to sell.
The bullish statements began in February 2007, the suit said, when Comcast issued a press release that said the company expected cable revenue to grow "at least 12 percent" and 6.5 million new subscribers -- a 30 percent increase from the 5 million new subscribers added in 2006.
In a conference call with analysts, Burke said "the momentum that we have built in '06 is going to accelerate," the suit said.
But the suit alleged that the executives knew their estimates were inflated because millions of subscribers had signed on in 2006 for the "Triple Play" -- a bundle consisting of telephone, video and Internet services that was discounted to $99 per month for the first year -- and that the company was facing intense competition from AT&T and Verizon which were offering similar discounts.
As a result, the suit said, Comcast "saw tens of thousands of subscribers defect to its competition" in 2007.
The suit also alleged that "this exodus of customers was exacerbated by Comcast's horrific customer service."
Despite knowing of those trends, the suit alleged that Roberts told Bloomberg TV in April 2007 that "right now, it's all clicking -- the business is on fire."
And in May 2007, the suit said, Roberts declared that "the Triple Play is driving incredible operating momentum and we see that accelerating as it continues to roll out."
Comcast continued to make bullish statements, the suit said, despite intensifying competition from Verizon, which had teamed up with DirecTV to offer free satellite services for one year with its phone and Internet services, and a partnership between AT&T and EchoStar.
The suit said AT&T, Verizon and satellite providers "continued to see increasing subscriber levels" while Comcast watched its cable penetration decline in the second quarter of 2007.
In July and again in October, the suit alleged, Comcast stock dropped in price as the company began to acknowledge that it would not be able to meet its February estimates.
But the suit alleged the full truth about Comcast's slowing growth didn't go public until December when it officially revised its 2007 outlook.
Now Bartle has ruled that the plaintiffs' allegations fell short of the requirements for pleading fraud because the plaintiffs cannot point to any documents that would prove their claim that the Comcast executives were aware of the falsity of their positive statements.
"Plaintiffs appear to be relying exclusively on documentary evidence as the source of their allegations of fraud, as they make no mention of any confidential or other personal sources," Bartle wrote.
For their allegations that competition steadily increased throughout the first three quarters of 2007, causing Comcast to lose subscribers, Bartle found that the suit "cites to no sources at all."
Instead, Bartle said, the suit "documents various instances" in which Roberts, Burke and other Comcast executives "acknowledged that competition in their business had increased."
Likewise, Bartle said, the plaintiffs failed to "cite to any source to uphold their bare allegation that the expiration of the Triple Play promotional rate among some customers caused many subscribers to leave or forced Comcast to continue to offer the promotional rate to other customers."
Such a lack of documentation, Bartle said, "is a fatal omission."
