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In re Cendant Corp. Securities Litigation

November 30, 1999


The opinion of the court was delivered by: William H. Walls, U.S.D.J.



This document relates to:


Walls, District Judge

This matter is before the Court on the motions of defendants Henry R. Silverman and Martin Edelman ("Individual Defendants") and defendant Cendant Corporation ("Cendant") to dismiss the complaint against them filed by Daystar Special Situations Fund, LP and Daystar LLC ("Daystar"). Having heard oral argument on November 23, 1999, defendants' motions are denied.

Factual Background *fn1

Cendant Corporation ("Cendant") was formed by the merger of CUC International, Inc. ("CUC") and HFS Incorporated ("HFS") on December 17, 1997. In the merger, holders of HFS common stock were issued shares of CUC common stock pursuant to a Registration Statement dated August 28, 1997 and a Joint Prospectus. Because CUC was the surviving corporation, CUC shareholders did not exchange their stock as part of the merger. CUC was renamed "Cendant" after the merger.

Daystar LLC is an investment management firm organized to manage certain assets of state pension funds, individuals, corporations and endowments. Daystar Special Situations Fund is a hedge fund organized under the laws of Delaware. Plaintiffs allege that on April 25, 1998, Michael Murr, a principal of Daystar, met with Martin Edelman, a director of Cendant. They claim that Edelman told Murr that Cendant's April 15, 1998 press release ("April press release") accurately disclosed the scope of the company's problems. Based on this statement, plaintiffs purchased 2,170,000 shares of Cendant common stock on April 27th and 28th. And, on May 1, 1998, plaintiffs assert that several Daystar principals met with Edelman and Henry R. Silverman, Cendant's Chief Executive Officer, who reassured them that the April press release was a correct statement as to the scope of the accounting irregularities. In particular, plaintiffs allege that Silverman stated "that he was in daily contact with the audit committee and that the full accounting report was immediately forthcoming and would confirm the amounts announced in the April 15 press release." Pl. Brf. at 17; Compl. ¶ 15. In reliance on these statements, the April press release and Cendant's first quarter earnings report issued in early May, plaintiffs purchased an additional 1,010,000 shares of Cendant common stock between May 4 and June 16, 1998.

Plaintiffs filed a complaint in the Southern District of New York which was transferred to this Court by order of the Judicial Panel on Multidistrict Litigation on August 30, 1999. Count I of Daystar's complaint asserts that defendants violated Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act"). In Count II, Daystar asserts that defendants committed common law fraud. Plaintiffs argue that defendants committed securities fraud and common law fraud when they reassured Daystar principals that the April 15th press release represented the full scope of the company's revenue overstatements. Plaintiffs argue that "the April 15th Press Release, subsequent statements regarding 1998 income, and the statements made directly to plaintiffs in their private meetings were false at the time they were made and that plaintiffs relied upon such statements." Pl. Brf. at 12. Plaintiffs point to Cendant's disclosures in July and August 1998, which estimated that the 1997 restatement would reduce net income by $.22 to $.28 per share, more than double the amount reported on April 15, 1998. Plaintiffs also state that the Report to the Audit Committee of the Board of Directors (the "Report"), released in August 1998, confirmed that the income overstatements were five times the amount reported in April 1998.

Defendant Cendant Corporation and the Individual Defendants move to dismiss plaintiffs' complaint. The defendants' sole argument in support of dismissal is that the complaint fails to satisfy the pleading requirements of Fed. R. Civ. P. 9(b) and the Private Securities Litigation Reform Act ("PSLRA"), 15 U.S.C. § 78u-4(b)(2). Defendants argue that plaintiffs do not and cannot allege facts that "would give rise to a strong inference that when the Individual Defendants met with plaintiffs, they knew that the [revenue] restatement would ultimately exceed the April 15 preliminary estimate." Def. Brf. at 1. They claim that "plaintiffs have relied upon boilerplate allegations of scienter" and that plaintiffs' theory of fraud is "based upon the unreasonable assumption that within a three month period, the Individual Defendants would (i) uncover and disclose the accounting irregularities at Cendant; (ii) lie to the plaintiffs about the scope of these irregularities; and (iii) subsequently recant that lie." Def. Brf. at 2.


A. Motion to Dismiss

On a motion to dismiss pursuant to Fed. R. Civ. P. 12(b)(6), the court is required to accept as true all allegations in the complaint, and all reasonable inferences that can be drawn therefrom, and to view them in the light most favorable to the non-moving party. See Oshiver v. Levin, Fishbein, Sedran & Berman, 38 F.3d 1380, 1384 (3d Cir. 1994). The question is whether the claimant can prove any set of facts consistent with his/her allegations that will entitle him/her to relief, not whether that person will ultimately prevail. Hishon v. King & Spalding, 467 U.S. 69, 73, 104 S. Ct. 2229, 2232, 81 L. Ed. 2d 59 (1984). While a court will accept well-plead allegations as true for the purposes of the motion, it will not accept legal or unsupported conclusions, unwarranted inferences, or sweeping legal conclusions cast in the form of factual allegations. See Miree v. DeKalb County, Ga., 433 U.S. 25, 27 n.2, 97 S. Ct. 2490, 2492 n.2, 53 L. Ed. 2d 557 (1977). Moreover, the claimant ...

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