contingent on the SEC's clearance of its registration statement and that
the SEC's independent decision to strictly enforce its rules and require
a re-audit broke the chain of causation. Next, the defendants claim that
the re-audit did not cause the postponement, "because the clearance was
delayed in any event by the SEC's review of other issues relating to
Emcore." PWC Br. at 10 n. 7. And finally, they allege that, though the
SEC finally approved Emcore's application in May 1999, Emcore did not
proceed with its public offering until the following month. Id.
The defendants' analysis cannot now overcome the allegations of the
amended complaint. Emcore alleges that defendants' disclosure of
independence violations, coupled with their refusal to consent to
incorporation of past audit opinions, pushed the SEC filing date from
February 2 to February 4, 1999. More significantly, the SEC determined
during its clearance process that PWC's audit was deficient because of
the independence violations, and required Emcore to obtain reaudited
financial statements for 1998, by another auditor. Id. ¶ 76. Emcore
was not able finally to amend its registration statement until June 9,
1999. Id. ¶ 78. This narrative leads to the conclusion that Emcore
has standing to bring its RICO claims.
Focusing on the causal link between defendants' alleged racketeering
acts and plaintiffs injuries, see Shearin v. E.F. Hutton Group, Inc.,
885 F.2d 1162 (3rd Cir. 1989), overruled on other grounds, Beck v.
Prupis, ___ U.S. ___, ___, 120 S.Ct. 1608, 1613, 146 L.Ed.2d
561 (2000), the court reads the complaint to allege that Emcore would
earlier have been able to secure a re-audit absent defendants' acts of
misrepresentation and concealment. In short, the court can, and must on a
motion to dismiss, infer that the defendants' actions postponed Emcore's
public offering. See Am. Compl. ¶ 67. (Of course, on a motion to
dismiss, the court can and does not credit the defendants' vague
assertion that the SEC had other nonaudit-related concerns about Emcore
which delayed the clearance process.) PWC Br. at 10 n. 7. Here, Emcore's
alleged injuries were not derivative, but direct. See Spitzer v.
Abdelhak, No. 98-6475, 1999 WL 1204352 (E.D.Pa. Dec.15, 1999); cf.
Callahan, 182 F.3d at 262 n. 16.
Additionally, defendants do not dispute the link between their alleged
actions, Emcore's economic injury in paying for a useless audit, and
Emcore's need to pay another accounting firm to redo PWC's work.
Plaintiffs audit expenses were an obvious direct injury and provide an
alternate basis for this holding.
The defendants' motion to dismiss Emcore's federal and state RICO
claims for lack of standing is denied.
III. Pleading Predicate Acts
To plead a violation of 18 U.S.C. § 1962(c), Emcore must allege: 1)
the conduct 2) of an enterprise 3) through a pattern 4) of racketeering
activity. Sedima, 473 U.S. at 496, 105 S.Ct. 3275 (quoted in Rehkop v.
Berwick Healthcare Corp., 95 F.3d 285, 289 (3rd Cir. 1996)). Defendants
seek to dismiss Emcore's substantive federal and state RICO claims
(Counts I, II and IV) because plaintiff failed to plead each defendant's
participation in at least two "predicate acts" of racketeering activity.
*fn2 See Banks v. Wolk, 918 F.2d 418, 421 (3rd Cir. 1990); State v.
Ball, 141 N.J. 142, 163, 661 A.2d 251 (N.J. 1995). They claim first that
Emcore has fallen short, both substantively and under Fed.R.Civ.P. 9(b),
of identifying actionable predicate offenses. Further, defendants argue
that plaintiff failed to attribute specified fraudulent acts to each
named defendant, but has instead impermissibly "lumped them
together." In response, Emcore relies on the federal doctrine of notice
pleading, see Fed.R.Civ.P. 8, and the fulsome allegations of the amended
Plaintiff grounds the challenged counts in allegations of federal mail
fraud, 18 U.S.C. § 1341, and wire fraud, 18 U.S.C. § 1343. These
violations constitute predicate offenses under federal RICO,
18 U.S.C. § 1961 (1), and the state law, N.J.S.A. 2C:41-1(2)
(incorporating by reference federal list of racketeering activities). To
allege mail or wire fraud, plaintiff must describe: 1) the existence of a
scheme to defraud, 2) the use of the mails or wires in furtherance of the
fraudulent scheme,*fn3 and 3) culpable participation by the defendants. See
U.S. v. Pearlstein, 576 F.2d 531, 534 (3rd Cir. 1978); U.S. v. Hannigan,
27 F.3d 890, 892 (3rd Cir. 1994); see also United States v. Frey,
42 F.3d 795, 797 (3rd Cir. 1994) (noting parallelism between mail and
wire fraud statutes).
"To be part of the execution of [mail] fraud . . . the use of the mails
need not be an essential element of the scheme. It is sufficient for the
mailing to be `incident to an essential part of the scheme,' or `a step
in [the] plot.'" Schmuck v. United States, 489 U.S. 705, 710-11, 109
S.Ct. 1443, 103 L.Ed.2d 734 (1989) (citations omitted). Further, the
Third Circuit notes that even "completely `innocent' mailings" (those
that contain no false information) can satisfy the mailing element. Kehr
Packages, Inc. v. Fidelcor, Inc., 926 F.2d 1406, 1415 (3rd Cir. 1991)
(quoting Schmuck v. United States, 489 U.S. 705, 715, 109 S.Ct. 1443, 103
L.Ed.2d 734 (1989)); see also Tabas v. Tabas, 47 F.3d 1280, 1295 n. 18
(3rd Cir. 1995). Thus, "[a] scheme or artifice to defraud `need not be
fraudulent on its face, but must involve some sort of fraudulent
misrepresentations or omissions reasonably calculated to deceive persons
of ordinary prudence and comprehension.'" Kehr Packages, 926 F.2d at 1415
(quoting Pearistein, 576 F.2d at 535).
The amended complaint contains, inter alia, the following allegations:
A. Defendant PWC Partners*fn4
• Professional accounting standards as expressed by SEC
regulations, the New Jersey Administrative Code, the American Institute
of Certified Public Accountants ("AICPA") and Generally Accepted
Accounting Standards ("GAAS") mandate that accountants be "independent
in the performance of professional services." "According to the AICPA,
an accounting firm is not independent if, during the period of a
professional engagement or at the time of expressing an opinion, a
member of the accounting firm has any direct or material indirect
financial indirect interest in the client." ¶¶ 23, 25-27.
• In early December 1997 after the Price Waterhouse/Coopers &
Lybrand merger was announced, Emcore's Chief Financial Officer Tom
Werthan telephoned Coopers audit partner Brendan Dougher to verify that
PWC could continue to act as Emcore's independent auditors after the
merger. Dougher claimed that all Price Waterhouse partners owning
Emcore stock would divest their Emcore holdings before the merger, that
both Coopers and Price Waterhouse were "taking all steps necessary to
ensure PWC's independence," and that PWC would in fact be independent
with respect to Emcore. ¶ 30.
• Defendant PWC partners including Cameron, Driscoll, Farrell and
Lindegren exercised warrants to purchase additional Emeore stock at
approximately $4 per share (significantly below market prices) both
before and after announcement
of the merger, and as late as January 1998. ¶¶ 28-33, 45. In January
1998, PWC partner Farrell telephoned Werthan to discuss his ownership
of Emcore stock. He suggested that Emcore should "do something" to
"make whole" the Price Waterhouse partners who were required to dispose
of their holdings in Emcore, and would thus recognize taxable gains.
¶ 33. Farrell did not dispose of his shares after that
conversation, but instead exercised 8,000 warrants to, purchase more
Emcore stock on January 30, 1998. Id. Werthan received "similar phone
calls" from other, unspecified PWC partners until he informed Dougher
that such calls were not appropriate. ¶ 34.
• On July 1, 1998, the day the merger was consummated, "some or all
of the PWC Partners" owned an aggregate 140,000 shares of Emcore common
stock. ¶¶ 36-37.
• In September 1998, soon after PWC began its audit of Emcore's
1998 financial statements, Dougher responded to another phone call from
Werthan by repeating his representation that PWC was in compliance with
applicable independence regulations. ¶¶ 38, 40, 44. However,
plaintiff alleges, defendant PWC partners including Schiro, Adams,
Biggs, Cameron, Driscoll, Farrell, Kovacs, Lindegren and Maas still
held Emcore stock during this period. ¶ 41.
• And on January 8, 1999, Dougher attended an "all hands"
organizational meeting of Emcore to prepare for the planned February 2
SEC filing. He did not then disclose that PWC's 1998 audit had violated
independence rules. ¶ 47.
• On January 29, 1999, Dougher informed Werthan by phone that PWC
had not been independent during its 1998 audit of Emcore, and that
certain PWC partners continued to hold Emeore stock to the present
date. ¶ 53.
• On February 4, 1999, Dougher phoned Emcore's outside counsel to
inform her that all of the PWC partners had finally disposed of their
Emcore stock. ¶ 59. On February 8, Dougher mailed a letter to
Emcore's Audit Committee which represented that the PWC partners had
disposed, of their Emcore holdings "on or before February 3, 1999."
¶ 61. Plaintiff alleges that, though many PWC partners sold their
Emcore holdings between February 2-4, 1999, see ¶¶ 56-58, defendants
Lindegren and Maas did not divest their Emcore stock until mid-March
1999. ¶ 75.
• The SEC's Settlement Order of January 14, 1999 reported the
Commission's findings that PWC had repeatedly violated the independence
rules of SEC regulations and GAAS. Am. Compl. Exh. A. The SEC required
PWC to perform an internal investigation of all independence
violations, supervised by an independent firm, and to report any
additional violations to the Commission and the audit client involved.
• In response, PWC partners self-reported over 8,000 independence
violations, involving approximately 600 clients. Almost half of PWC's
partners reported at least one such violation. ¶ 85. However,
despite a warning from the SEC that criminal penalties might result
from false reporting, the SEC found that 77.5% of PWC partners selected
during a random sample failed to report at least one independence
violation. ¶¶ 81, 87.
• In September 1998, when PWC began the Emcore audit, Emcore common
stock was priced at $7.00 per share. ¶ 42. By early February 1999,
when most partners divested their holdings, Emcore was trading at a
high of $24.25 per share. ¶¶ 56-58.*fn5
The PWC partners characterize these allegations as insufficient under
Fed. R.Civ.P. 12(b)(6): "Purchasing, owning or selling Emcore stock . .
. does not constitute mail or wire fraud." PWC Br. at 12. Further, they
contend that the telephone calls to Werthan by Farrell and other unnamed
partners allegedly suggesting that Emcore "make them whole" did not
involve misrepresentations, and thus are not legally cognizable. PWC Br.
The court disagrees. Though the plaintiff has not alleged that the PWC
partners personally and affirmatively misrepresented their ownership of
Emcore stock, Emcore's allegations about the extent, timing and
profitability of these defendants' holdings, and Dougher's repeated
inaccurate assurances to the contrary, raise the inference that either
the defendant partners or PWC itself chose to actively conceal material
facts. This inference is strengthened by plaintiffs allegations that,
according to the SEC, many PWC partners failed to report accurately their
holdings despite the threat of criminal sanctions. The court finds it
appropriate to allow plaintiff discovery on the issue of the partners'
knowledge of and involvement in these nondisclosures. Concerning the
phone conversations between the partners and Werthan, the court repeats
that even "innocent" use of the wires can base an actionable fraud
claim; plaintiff need allege only that the interstate phone calls were "a
step in [the] plot." Kehr Packages, 926 F.2d at 1415; Schmuck, 489 U.S.
at 710-11, 109 S.Ct. 1443. Here Emcore persuasively argues that the
partners could not have continued to misrepresent their independence, and
buy and sell shares of Emcore, without use of the interstate wires and
mails. Emcore Br. at 37.
The PWC partners' motion to dismiss for failure to allege predicate
acts is denied.
B. The PWC Partnership
Emcore makes the following charges against PWC, most of which concern
PWC partner Dougher and outside counsel Robert McCaw of Wilmer Cutler &
Pickering in Washington, D.C.:
• In October 1998, Dougher mailed or caused to be mailed to Emcore
an engagement letter relating to the 1998 audit, by which PWC agreed to
perform its audit "in accordance with generally accepted auditing
standards." ¶ 43. In December 1998, after the audit had been
completed, PWC signed and mailed to Emcore its audit letter, which
purportedly enclosed a "report of independent accountants" for an audit
conducted "in accordance with generally accepted accounting stardards."
• In response to direct inquiries by Werthan, Dougher repeatedly
represented that PWC would serve, and had served, as an independent
auditor, and that the partnership would take all steps necessary to
ensure independence. ¶¶ 30, 34, 40. Yet, "Dougher was well aware of
the investments the PWC Partners had made in Emcore over the years."
• In early December 1997, soon after the merger announcement, PWC
partner Cameron requested and received by fax from Emcore a list of
Price Waterhouse partners who had invested in Emcore as limited
partners in 1984. ¶¶ 19, 31. In January 1999, after the SEC
Settlement Order was entered, PWC partner Dougher again requested and
received from Werthan the same list by fax. ¶ 53.
• As said, on February 4, 1999 by phone and February 8 by letter,
Dougher informed Emcore's counsel and Audit Committee that all of the
PWC partners had disposed of their Emcore stock on or before February
3, 1999. ¶¶ 59, 61.
• Dougher conducted other actions on behalf of PWC that are
described above: In January 1999, he attended an Emcore
meeting to plan for the upcoming public offering but failed to disclose
independence violations. ¶ 47. And in February of that year, he
repeatedly represented to plaintiff by letter and in person that the
SEC would waive PWC's non-compliance with respect to Emcore—and
that the SEC had so indicated to PWC. ¶¶ 63-65.
• On March 4, 1999, McCaw told Emcore's outside counsel during a
phone conversation that the SEC viewed the independence violations as
an "enforcement issue," not an "issuer re-audit issue": in other
words, that the SEC was considering how to punish PWC, not Emcore.
• On March 15, 1999, PWC's in-house counsel Ricciardi and McCaw by
phone informed Dougher and Emcore's outside counsel that PWC had
scheduled a meeting with the SEC for the next day. Ricciardi and McCaw
explained that the meeting was merely an "enforcement meeting" relating
to the SEC Settlement Order, and that it did not directly concern
Emcore. When Emcore's counsel asked to attend the meeting, Ricciardi
and McCaw rejected the request as "unprofessional" and threatened to
resign as Emcore's auditors if Emcore insisted on attending. ¶ 71.
• During its own meeting with the SEC on March 19, 1999, Emcore was
informed that the SEC's March 16 meeting with PWC had concerned Emcore
exclusively. Further, the SEC told Emcore that it would not waive, "and
had never indicated to PWC that it would waive," PWC's non-compliance
with the independence rules in Emcore's case. ¶ 74.
• Emcore fired PWC in May 1999. On June 8, 1999, the day before
Emcore planned to file the last amendment to its registration
statement, PWC through Dougher demanded that Emcore release PWC from
all liability related to the 1998 audit, and told Werthan that without
such release, PWC would not sign its consent for Emcore to incorporate
PWC's 1996 and 1997 financial statements into the registration
statement. Emcore objected through counsel; PWC withdrew the threat
that same day. ¶ 77. Again in December 1999, PWC refused to consent
to incorporation of Coopers' 1997 financial statements into Emcore's
1999 Form 10-K, allegedly in an attempt to force Emcore to dismiss the
present lawsuit. As a result, Emcore was forced to have its 1997
financial statements re-audited by Deloitte. ¶¶ 91-92.
PWC objects that plaintiff has not alleged that Dougher or McCaw had
knowledge that any of the alleged misrepresentations was false or
possessed the requisite intent to deceive Emcore. PWC Br. at 16. Arguing
that its many statements simply became inaccurate after the fact, PWC
relies on authority that "fraudulent intent to breach a promise cannot be
inferred merely from nonperformance." W.E. Darin Constr. Enterprises,
Inc. v. Detroit Coke Co.,