Ericsson Forecasts Wrong, Not Fraudulent: 2nd Circ.

By Nick Malinowski

Law360, New York (October 09, 2009) -- A federal appeals court has affirmed a district court decision in favor of Ericsson LM Telephone Co., ruling that inaccurate statements made by executives about the telecommunications manufacturer's financial future were not a willful attempt to defraud investors as the plaintiffs in the consolidated class action had argued.

A three-judge panel of the U.S. Court of Appeals for the Second Circuit found that the plaintiffs' contention that remarks made by Ericsson’s CEO Carl-Henric Svanberg during an analysts and investors conference in 2007 were intentionally misleading because he provided a rosy forecast when he knew the results of the upcoming quarter would be much worse, were taken out of context and that the district court judge had not erred in dismissing the fraud claims because the plaintiffs failed to prove willfulness.

The complaint was short on facts supporting allegations of a reckless disregard for the truth and relied solely on the asserted inaccuracy of Svanberg's statements, which when provided the appropriate context, were only “slightly inaccurate,” according to the ruling.

“The statements were made in the context of an informal back-and-forth with analysts — partially in response to questions that were themselves imprecise and potentially ambiguous,” the ruling said.

“We have found that they were not misleading. Even if we were mistaken in that conclusion, when the statements are viewed in the context of the questions asked and of the information that the defendants provided alongside their assailed descriptive language, the inference of falsity is tenuous at most, and the inference of recklessness to be drawn therefrom is not compelling,” the ruling continued.

Representatives for the plaintiffs did not respond to requests for comment Friday.

Individual and corporate investors sued Ericsson in October 2007, alleging that Svanberg and CFO Henrick Sundstrom “materially misstated the company’s operating condition and future business prospects” during the conference, causing Ericsson securities to trade at inflated prices as a result.

A month after the September conference, the Swedish company revised its earnings expectations, causing a 24 percent decline in the stock's value.

The district court parsed the transcript of the presentation that contained the allegedly fraudulent statements promising strong third-quarter results and found that the plaintiffs claims were founded more on misunderstanding than defendants’ misdeeds.

While the defendants said they expected Ericsson to continue to do well and outperform its competition, those statements are, without greater factual support, “simply expressions of confidence in the viability of Ericsson’s future business which do not give rise to a securities violation,” the district court said.

Elsewhere in the presentation, the plaintiffs mistook statements made by the defendants to be indications of future growth; in actuality, those statements often referred to projects from the first half of 2007, or addressed distant goals, according to the opinion.

While Ericsson’s positive outlook contradicted the predictions made by its primary competitors, namely Alcatel-Lucent and Nokia-Siemens, the optimistic statements do not give rise to an inference of scienter, especially in an industry where, depending on market share, one company’s fortunes may rise as rivals’ decline, the district court said.

Representatives for Ericsson declined to comment on the case further than what they had presented in court documents.

The plaintiffs are represented by Murray Frank & Sailer LLP and Coughlin Stoia Geller Rudman & Robbins LLP.

Ericsson is represented by Paul Weiss Rifkind Wharton & Garrison LLP.

The case is Steinberg v. Ericsson LM Telephone Co. et al., case number 09-cv-0134, in the U.S. Court for Appeals for the Second Circuit.

--Additional reporting by Sam Howard