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BT Group Finds Deceptive Accounting at BT Italy Securities Class Action

"BT" and BT Group Logo on Side of Building

BT Group hinted in its public Securities and Exchange Commission (SEC) filings at problems at its Italian branch. However, the complaint for this class action alleges that the company did not disclose the problems with financial reporting at BT Italy, in violation of the Securities Exchange Act of 1934.

The class for this action is all buyers of BT Group American Depository Receipts (ADRs) between May 10, 2013 and January 23, 2017.

BT Group, formerly known as British Telecom, is a British multinational telecommunications company providing fixed-line services, broadband, mobile, and TV products and services, and networked IT services in the UK and in 180 countries worldwide. Its subsidiary, BT Italy, is part of the company’s Global Services line of business and the second-largest provider of business telecommunications in the Italian market.

During the class period, BT Group hinted at problems in BT Italy. For example, the company’s Form 20-F 2013 annual report said that the company had received “updates” on, among other things, “BT’s operation in Italy…”

Its 2014 annual report said that, during that year, “the Audit & Risk Committee paid special attention to several overseas locations … including Italy…” It cited problems in control and said, “We have continued to monitor the position there and significant progress has been made to improve the control environment.” 

In November 2015, according a later Reuters report, three BT Italy employees are reported to have met with a Madrid-based supervisor to complain of accounting problems, bullying, and pressure to meet difficult bonus targets, but according to the complaint, action appears to have been late in coming.

Only in October 2016 did the company begin to mention “inappropriate management behavior” in BT Italy. It took a write-down of over $190 million for “historical accounting errors” there, but added, “Our outlook is not affected.”

But on January 24, 2017, the end of the class period, the company issued a press release stating that “the extent and complexity of inappropriate behavior …  were far greater than previously identified” and included “improper accounting practices and a complex set of improper sales, purchase, factoring and leasing transactions.” It increased the write-down to roughly $700 million and said that it did not expect revenue growth in the next two years.

In a conference call, the company provided some details of the practices, such as “in effect, taking out working capital loans in order to settle creditors”, issuing double invoices, recorded in two different sets of books, and overstating results. It said that BT Italy was “a business we thought was profitable but, in truth, has probably been unprofitable for a number of years.”

At the revelations, the company’s ADR price fell, by about 21%.

BT Group filed a criminal complaint against five of its own former executives and now faces an Italian government investigation. 

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