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In re CenturyLink Sales Practices and Securities Litigation

United States District Court, D. Minnesota

July 30, 2019

IN RE CENTURYLINK SALES PRACTICES AND SECURITIES LITIGATION This Document Relates to CIVIL File No. 18-296 (MJD/KMM)

          Patrick E. Gibbs, Douglas P. Lobel, David A. Vogel, Sarah M. Lightdale, and Lauren Gerber Lee, Cooley LLP; and William A. McNab and David M. Aafedt, Winthrop & Weinstine, P.A.; Counsel for Defendants CenturyLink, Inc., Glen F. Post, III, R. Stewart Ewing, Jr., David D. Cole, Karen Puckett, Dean J. Douglas, and G. Clay Bailey.

          Michael D. Blatchley, John C. Browne, and Michael Mathai, Bernstein Litowitz Berger & Grossmann LLP; Keith S. Dubanevich, Timothy S. DeJong, and Keil M. Mueller, Stoll Berne Lokting & Shlachter P.C.; Special Assistant Attorneys General and Counsel for Lead Plaintiff the State of Oregon by and through the Oregon State Treasurer and the Oregon Public Employee Retirement Board, on behalf of the Oregon Public Employee Retirement Fund, Plaintiff Fernando Vildosola and Lead Counsel for the Class; and Richard A. Lockridge, Gregg M. Fishbein, and Kate M. Baxter-Kauf, Lockridge Grindal Nauen P.L.L.P., Liaison Counsel for Lead Plaintiff the State of Oregon by and through the Oregon State Treasurer and the Oregon Public Employee Retirement Board, on behalf of the Oregon Public Employee Retirement Fund and Plaintiff Fernando Vildosola.

          MEMORANDUM OF LAW & ORDER

          Michael J. Davis United States District Judge

         I. INTRODUCTION

         This matter is before the Court on Defendants' Motion to Dismiss under Rule 12(b)(6). [Docket No. 154] The Court heard oral argument on June 7, 2019.

         For the reasons that follow, the Court denies the motion in its entirety.

         II. BACKGROUND

         A. Factual Background

         The Class Period runs from March 1, 2013 to July 12, 2017. ([Docket No.143] Consolidated Securities Class Action Complaint (“Compl.”) at 2.)

         1. Defendants

         a) CenturyLink, Inc.

         Defendant CenturyLink, Inc. (“CenturyLink”) is the country's third-largest telecommunications company with 50, 000 employees and millions of customers. (Gibbs Ex. 4, 2016 CenturyLink Form 10-K at 3; Gibbs Ex. 5, 2017 CenturyLink Form 10-K at 4, 19.) From 2013 through 2017, CenturyLink's annual revenues were approximately $18 billion. (Gibbs Ex. 1, 2013 CenturyLink Form 10-K at 4; Gibbs Ex. 2, 2014 CenturyLink Form 10-K at 3; Gibbs Ex. 3, 2015 CenturyLink Form 10-K at 3; Gibbs Ex. 4, 2016 CenturyLink Form 10-K at 4; Gibbs Ex. 5, 2017 CenturyLink Form 10-K at 5.) During this time, the consumer segment accounted for approximately one-third of CenturyLink's annual revenues. (Gibbs Ex. 1, 2013 CenturyLink Form 10-K at 6; Gibbs Ex. 2, 2014 CenturyLink Form 10-K at 5; Gibbs Ex. 3, 2015 CenturyLink Form 10-K at 5; Gibbs Ex. 4, 2016 CenturyLink Form 10-K at 6; Gibbs Ex. 5, 2017 CenturyLink Form 10-K at 7.)

         b) Executive Defendants

         At all relevant times, Defendant Glen F. Post, III was the CEO, President, and a director of CenturyLink. (Compl. ¶ 29.)

         At all relevant times, Defendant R. Stewart Ewing, Jr. was CenturyLink's CFO and Executive Vice President. (Id. ¶ 30.)

         At all relevant times, Defendant David D. Cole was Executive Vice President and Controller of CenturyLink. (Id. ¶ 31.) During the Class Period, he served as CenturyLink's principal accounting officer. (Id.)

         From 2009 through October 2014, Defendant Karen Puckett was CenturyLink's Executive Vice President and COO. (Id. ¶ 32.) From November 2014 until she left CenturyLink in August 2015, Puckett served as CenturyLink's President of Global Markets. (Id.) During the Class Period, Puckett was the highest-ranking executive with direct oversight of the consumer segment sales division. (Id.)

         Defendant Dean J. Douglas took over Puckett's role. (Id. ¶ 33.) He began his employment at CenturyLink as President of Sales and Marketing in February 2016, and later became President of Enterprise Markets. (Id.)

         During the Class Period, Defendant G. Clay Bailey was CenturyLink's Senior Vice President and Treasurer. (Id. ¶ 34.) During that time, he also served as a spokesperson for CenturyLink, including in investor conference calls and presentations. (Id.) In 2015, Bailey became Senior Vice President of Operations Transformation. (Id.) In that role, Bailey oversaw a team devoted to “bringing [] a better customer experience” to CenturyLink's customers. (Id.)

         Bailey, Cole, Douglas, Ewing, Post, and Puckett are collectively known as the “Executive Defendants.”

         c) Other CenturyLink Management

         During the Class Period, CenturyLink operated 18 call centers. (Compl. ¶ 60.) Each call center was managed by a Call Center Director, and each Call Center Director reported to Linda Olsen, CenturyLink's Vice President of Consumer Contact Centers. (Id.) Olsen reported to Defendant CEO Post. (Id.)

         Kathy Victory was CenturyLink's Senior Vice President of Consumer Sales & Care. (Id. ¶ 100.) Kathy Flynn was Vice President of Human Resources. (Id. ¶ 102.)

         2. Plaintiffs

         Lead Plaintiff the State of Oregon by and through the Oregon State Treasurer and the Oregon Public Employee Retirement Board, on behalf of the Oregon Public Employee Retirement Fund, (“Oregon”) operates and oversees public funds for the benefit of retired public employees. (Compl. ¶ 26.) The Oregon Public Employee Retirement Fund is a state pension fund for retired public employees. (Id.) It had $77 billion in assets under management as of April 30, 2018. (Id.) Oregon purchased CenturyLink securities during the Class Period. (Id.)

         Plaintiff Fernando Alberto Vildosola is trustee for the AUFV Trust U/A/D 02/19/2009. (Id. ¶ 27.) AUFV Trust U/A/D 02/19/2009 purchased CenturyLink's 7.60% Senior Notes due September 15, 2039 during the Class Period. (Id.)

         3. Class Period Allegations

         According to Plaintiffs, for a number of years, CenturyLink engaged in systemic “cramming” of customer accounts, by adding services to customers' accounts without authorization, deceiving customers about the prices they would be charged, and misquoting prices by failing to disclose that “bundles” included fees for optional services that the customers did not need or authorize. (Compl. ¶¶ 44, 64.) CenturyLink potentially overbilled 3.5 million customers, representing over half of its broadband subscribers and one-third of its 12 million wireline subscribers. (Id. ¶¶ 65, 178.)

         CenturyLink imposed unachievable quotas on sales employees (from sales representatives to call center supervisors, managers, and directors) and terminated sales employees who did not meet them. (Compl. ¶¶ 63, 77.) The pressure from these quotas caused customer service employees to engage in widespread cramming. (Id.) The customer service department employed “retention specialists, ” who were incentivized to minimize refunds, required to meet sales quotas, and strictly limited in how much they could reimburse customers. (Id. ¶¶ 84-86.) CenturyLink made it difficult for customers to challenge overcharges by deleting call recordings before the customer received the first “real” bill, while requiring customers to prove misquotes. (Id. ¶ 87.)

         CenturyLink's cramming practices were documented and monitored by the Executive Defendants through monthly reports detailing thousands of complaints by the FCC, state agencies, and others. (Compl. ¶¶ 96-99, 103.) The reports showed that cramming complaints were “very common and widespread, ” and Post, Puckett, and Victory complained that the number of complaints was “too high” and thought that the team compiling the data had overstated the numbers. (Id. ¶ 105.) When the team verified the numbers and provided recommendations on how to reduce cramming, the Executive Defendants ignored them because they were not willing to sacrifice revenues. (Id. ¶¶ 105, 107-08.)

         During the Class Period, Defendants told investors that CenturyLink's sales practices were aboveboard and represented that it would never “plac[e] or record[] an order for our products and services for a customer without that customer's authorization.” (Compl. ¶ 151.) Defendants claimed that CenturyLink's revenue growth in its consumer and small business segments was due to its focus on customer needs through its call centers, bundling service packages, and other strategies. (Id. ¶¶ 58-61.) These representations were important to investors because investors were concerned with CenturyLink's ability to generate dependable cash flows in the face of customers abandoning traditional wireline telephone services that were the historical core of CenturyLink's business. (Id. ¶¶ 55-56.) The representations were false because, in fact, CenturyLink's revenues were materially increased by cramming. (Id. ¶¶ 93, 192.) CenturyLink routinely added services to customer accounts without authorization, lied to customers about the prices they would be charged, and systematically misquoted the prices of contracts, particularly by failing to disclose that “bundled” packages included fees for optional services that the customer did not need or authorize. (Id. ¶¶ 63-64, 88-94.) CenturyLink's strategy was to “keep the price point low but add fees.” (Id. ¶ 70.) One-third to one-half of CenturyLink customers were overcharged (id. ¶¶ 65, 178), and cramming was happening “all day, every day” “in every state” (id. ¶¶ 89, 96, 105, 107). (See also id. ¶¶ 103, 108 (providing that CenturyLink internally substantiated between 50 and 80% of customer overbilling complaints).)

         In 2014, Defendants internally acknowledged that cramming was a problem and attempted to secretly reduce it. (Compl. ¶¶ 109-10.) At that point, over half of all sales employees were being written up each month for failing to meet the monthly sales quota. (Id. ¶ 78.) CenturyLink's human resources team developed a new “behavioral coaching” system that focused less on “metrics” and, instead, judged sales employees on how many customers they helped, whether they resolved all of the customers' issues, and whether they provided good customer service; under this system, supervisors, not sales employees, were held responsible for meeting quotas. (Id. ¶¶ 111, 114.) After implementing the new system, the number of customer complaints declined; however, reducing cramming led to an abrupt decline in sales. (Id. ¶¶ 111, 114.) After the decline in sales, Defendants quickly returned to the old quota system that encouraged cramming. (Id. ¶ 112-14.) At the end of the third quarter of 2015, the policies encouraging cramming had been reinstated, and CenturyLink's revenues increased. (Id. ¶ 117.)

         CenturyLink created a false explanation for its fluctuating revenues. (Compl. ¶ 115.) Defendants publicly stated that its revenues were weaker in the fourth quarter of 2014 and the first quarter of 2015 due to credit tightening, organizational realignment, and a new focus on “higher value customers.” (Id. ¶¶ 115, 213-18.) They then stated that revenues had rebounded by the third quarter of 2015 due to its strategy of pursuing “higher value bundled sales and select pricing increases” and of “attracting more high-value customers, ” rather than admitting that the return to extensive cramming drove growth. (Id. ¶ 117.)

         In or before March 2016, the Arizona Attorney General began an investigation into allegations that CenturyLink had engaged in deceptive billing practices. (Compl. ¶ 132.) It found that CenturyLink had engaged in numerous deceptive billing practices. (Id.) In April 2016, CenturyLink agreed to settle the lawsuit for $150, 000 and a promise to take certain measures to prevent consumers from being improperly charged. (Id. ¶ 133-35.) CenturyLink did not disclose the Arizona Attorney General investigation or settlement in any SEC filing or other public release. (Id. ¶ 137.) Weeks later, CenturyLink reported favorable results in its consumer segment, which had been bolstered by the improper sales practices identified by the Arizona Attorney General. (Id. ¶ 139.) Douglas claimed that CenturyLink's strategies had been successful in signing up customers who were “less precluded to churn” and generated “higher ARPU [average revenue per user].” (Id. ¶ 140.) He asserted that CenturyLink, unlike its competitors, did not charge unwanted fees. (Id. ¶¶ 140, 220.)

         In May 2016, the Minnesota Attorney General issued a civil investigative demand to CenturyLink after receiving many consumer complaints of deceptive practices. (Compl. ¶ 141.) In October 2016, CenturyLink employee Heidi Heiser, who had repeatedly raised concerns about CenturyLink's fraudulent business practices to her supervisors, asked Post, through an online message board, “why customers were being given multiple accounts and being billed for things they did not ask for.” (Id. ¶ 146.) Two days later, Heiser was suspended and then fired for blowing the whistle. (Id. ¶ 147.)

         On Friday, June 16, 2017, Bloomberg reported on Heiser's whistleblower lawsuit against CenturyLink, that she was fired after raising concerns about cramming with Post, and that she alleged that CenturyLink had charged many millions of dollars in unauthorized fees. (Compl. ¶¶ 152-53.) That day, CenturyLink stock dropped 5% on heavy volume, and analysts attributed the decline to the cramming revelations in Heiser's lawsuit. (Id. ¶¶ 154-56.) On Monday, June 19, 2017, Bloomberg reported on a consumer class action lawsuit on behalf of “potentially millions” of CenturyLink customers alleging billing misconduct that had been filed the day before, which caused CenturyLink's stock to fall by 1.4% that day. (Id. ¶¶ 158, 160.) On July 12, 2017, news reports disclosed that the Minnesota Attorney General had filed a fraudulent billing lawsuit against CenturyLink based on a year-long investigation that provided detail concerning CenturyLink's sales and billing practices and their financial impact. (Id. ¶¶ 163-68.) In response to this news, CenturyLink's stock fell 3.23% on extremely high volume. (Id. ¶¶ 169-71.)

         Many of the allegations in the Complaint are based on statements from twenty anonymous former employees (“FEs”), including former call center representatives, a financial analyst, managers, a human resources director, and a regional president. (See, e.g., Compl. ¶¶ 38, 69, 70, 71, 102.)

         4. Post-Class Period Allegations

         In October 2017, CenturyLink entered into a stipulated consent order with the Minnesota Attorney General in which it agreed to reform its sales practices in Minnesota. (Compl. ¶ 173.)

         In December 2017, CenturyLink announced the results of an internal investigation, which found, among other things, that its promotions misled customers who did not receive discounts that they were offered. (Id. ¶ 174.)

         On March 6, 2018, Post, who had previously announced his intention to remain CEO until January 1, 2019, announced that he would retire in May 2018. (Id. ¶ 177.)

         B. Procedural History

         On June 25, 2018, Lead Plaintiff Oregon and Plaintiff Vildosola filed a Consolidated Securities Class Action Complaint against Defendants CenturyLink and the Executive Defendants. [Docket No. 143] The Complaint alleges: Count 1: Violations of Section 10(b) of the Exchange Act and Rule 10b-5 Promulgated Thereunder (against Defendants CenturyLink, Post, Ewing, Cole, Puckett and Douglas); and Count 2: Violations of Section 20(a) of the Exchange Act (against Defendants Post, Ewing, Cole, Puckett, Douglas and Bailey). Defendants have now filed a motion to dismiss the Complaint. [Docket No. 154]

         III. ...


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