The opinion of the court was delivered by: JOHN LIFLAND, Senior District Judge
MEMORANDUM AND ORDER (S.G. Cowen Securities Corporation)
Plaintiffs Rocker Management, LLC, Rocker Partners, LP, Rocker
Offshore Management Company, Inc., and Compass Holdings Ltd.
(collectively, "Rocker") have asserted claims under Sections
10(b) and 20(a) of the Securities Exchange Act of 1934 (the
"Exchange Act"), 15 U.S.C. §§ 78j(b), 78t(a), and Rule 10b-5,
17 C.F.R. § 240.10b-5, promulgated thereunder by the United States
Securities and Exchange Commission ("SEC"), against Defendants
Jozef Lernout, Pol Hauspie, Gaston Bastiaens, Carl Dammekens,
Allan Forsey, Ellen Spooren, Erwin Vandendriessche, Gerald
Calabrese,*fn1 Klynveld Peat Marwick Goerdeler
Bedrijfsrevisoren (a/k/a KPMG Bedrijfsrevisoren or KPMG Belgium),
KPMG International ("KPMG"), KPMG UK, KPMG LLP, Paul Behets, and
SG Cowen Securities Corporation ("Cowen") (collectively,
"Defendants").*fn2 Plaintiffs also bring state law claims
for tortious interference with prospective economic advantage,
conspiracy to tortiously interfere, and aiding and abetting
Before the Court is the Motion of Cowen to dismiss the Amended
Complaint for failure to state a claim under Federal Rules of
Civil Procedure 12(b)(6) and 9(b). For the reasons set forth
below, Cowen's Motion will be denied.
The facts of this case are described at length in the Court's
June 7, 2005 Memorandum and Order denying the motions to dismiss
on behalf of individual defendants Jozef Lernout, Pol Hauspie,
and Gaston Bastiaens. Allegations relevant to resolving the
present motion are discussed herein, and, as noted, are taken
from the Amended Complaint.
Lernout & Hauspie Speech Products N.V. ("L&H" or "the
Company"), formed in 1987 by Jo Lernout and Pol Hauspie, was a
Belgian-American company that specialized in speech recognition, text-to-speech
conversion, and digital speech compressions. (Am. Compl. ¶¶ 1,
12). L&H's stock was traded on American and European exchanges.
Since its initial public offering in 1995, L&H reported rapid
growth in its revenues due to its domination of its software
market, its acquisition of other companies, and its development
of revolutionary and "industry first" products. (Am. Compl. ¶
Following public announcements in late 1999 and the first
quarter of 2000 concerning both its reported revenues and its
products, in addition to "strong buy" recommendations from L&H's
investment banker, Cowen, and revenue compilations by KPMG, L&H's
stock price rose from less than $19 in late November 1999 to a
high of $72 in 2000 upwards of a 300% increase. (Am. Compl. ¶¶
2, 63). The increase in stock price is alleged to be the result
of a scheme of fraud and deception on the part of L&H together
with its related capital funds, officers and directors,
accountants, and investment bankers. The unveiling of that scheme
in the latter half of 2000, due to investigative reporting by the
Wall Street Journal, sent the stock price into a tailspin. The
exchanges then halted trading in the stock, and L&H sought refuge
in bankruptcy proceedings.
Plaintiffs began to short sell L&H stock in June 1998 (Am.
Compl. ¶¶ 6, 100). Short selling involves identifying and
purchasing stock expected to decline in price (Am. Compl. ¶¶ 5, 11). Profits result from borrowing
stock from various sources, selling that stock at current market
prices, purchasing shares of the stock at a lower price to
"cover" the original position, and then returning the stock to
the original source. (Id.). The rapid increase of L&H stock
forced Plaintiffs between December 1999 and March 2000 to
purchase stock at a loss to cover their own short positions. (Am.
Compl. ¶¶ 6, 104).
Cowen, a securities and investment banking firm, had a
long-standing business relationship with L&H. (Am. Compl. ¶¶ 28,
275). Cowen advised L&H on acquisitions of companies,
participated with L&H in the drafting of L&H press releases, and
"hyped" L&H's stock through certain analyst recommendations. (Am.
Compl. ¶ 275).
On September 15, 1998, Cowen issued an analyst report
recommending L&H stock as a "strong buy." The report touted L&H's
acquisition strategy as being "highly successful, measured in
both financial and strategic gains," and stated that L&H's
"acquisitions yield competitive advantage and yes, more profits."
The report also categorized L&H's purchase accounting methods as
conservative. (Am. Compl. ¶ 47).
Plaintiffs allege that Cowen advised L&H on its acquisitions of
companies, including Bumil, Dragon Systems, Inc., and Dictaphone.
(Id.). Cowen is alleged to have had access to information regarding L&H's revenues and
financial performance and thus knew, or recklessly disregarded,
that L&H's announced revenues were fraudulently overstated.
(Id.). That notwithstanding, Cowen echoed and disseminated
L&H's fraudulent claims of revenue growth and success in Asian
markets in the January 5, 2000 and February 10, 2000
On January 5, 2000, Cowen disseminated a report on L&H authored
by Robert Stone, recommending the stock as a "Strong Buy," and
raising its price target, despite commenting that earnings
estimates would be trimmed. The Report stated, in relevant part:
Technology and Solutions Unit Doing Well With
Telephony Deals in Asia In late December, LHSP
announced a number of deals to develop on-line
trading and automated dialogue systems for customers
including: Hyundai Securities, Samsung Securities, LG
Securities, Daishin Securities and Daewoo Securities.
It also announced a number of other Asian contracts
for speech technologies and TTS for applications such
as unified messaging.
After Endless Short Yammering In 1999, Shares
Testing New Highs On Strong 2000 Prospects In late
1998 and early 1999 a policy change at the SEC
prompted LHSP to restate results related to
write-downs of acquired R&D in process. The SEC
apparently raised no other issue with LHSP's
accounting practices, and many other companies that
had made acquisitions and followed then-common
accounting treatment were in the same situation.
However, some short sellers took advantage of the
resulting period of uncertainty, and the shares were
mostly range-bound throughout 1999 (although those
with the conviction to buy on dips did quite well).
Against the tide of a very weak market yesterday,
LHSP reached a new 52-week high. We believe that sufficient time has passed for
investors to begin regaining confidence and
recognizing that the stock is significantly
undervalued compared to its leadership position and
huge market potential.
More Disclosure Should Boost Confidence in
Estimates; Higher R&D May Trim EPS 10-12 Cents
LHSP is a complex company, with many products,
business units and end markets, and it has augmented
its growth and consolidated its market position via
numerous acquisitions. The results have been
impressive, with revenues growing by five fold, from
about $100MM in 1997 to our 2000 estimate of slightly
over $500MM. However, it has not been easy for
investors to understand all the moving parts.
(Am. Compl. ¶ 69). According to Plaintiffs, that analysis report
repeated false information regarding L&H's financial performance,
including alleged customer contracts with the named Korean
companies. That is so despite Cowen's supposed knowledge that L&H
revenues attributable to Asian markets were fraudulent.
Plaintiffs claim that Cowen had inside knowledge where, in
September 1999, it rendered a "fairness opinion" on the
consideration to be paid by L&H to purchase Bumil Information &
Communication Co. (later known as L&H Korea). Cowen
reviewed and considered such financial and other
matters . . . including, among other things: (1) a
draft of the Transaction Agreement, dated as of
August 31, 1999, as amended as of September 3, 1999
. . .; (ii) the Transaction Partner's [Bumil's]
audited financial statements for the fiscal years
ended December 31, 1996, 1997, and 1998, unaudited
financial statements for the first two fiscal
quarters ended June 30, 1999 and certain other
relevant financial and operating data prepared by
Transaction Partner [Bumil]; (iii) certain publicly
available information for the Company [L&H],
including each of the annual reports of the Company filed on
Form 20-F for each of the fiscal years ended December
31, 1996, 1997, and 1998, unaudited financial
statements for the first two fiscal quarters ended
June 30, 1999 filed on Form 6-K and certain other
relevant financial and operating data furnished to SG
Cowen by Company management; (iv) Wall Street
analysts reports, including projections contained
therein, for the Company (the "Company's Forecasts");
(v) certain internal financial analyses, financial
forecasts, reports and other information concerning
Transaction Partner prepared by the management of
Transaction Partner as revised and adjusted by the
management of the Company (the "Transaction Partner's
Forecasts"); (vi) discussions we have had with
certain members of the managements of each of the
Company and Transaction Partner concerning the
historical and current business operations, financial
conditions and prospects of the Company and
Transaction Partner and such other matters we deemed
relevant; . . . and (xi) such other information,
financial studies, analyses and investigations and
such other factors that we deemed relevant for the
purposes of this opinion.
(Am. Compl. ¶ 70).
On February 10, 2000, Cowen released another analyst report
making a "Strong Buy" recommendation. The recommendation stated,
in relevant part:
B4:99 Surge In Technology And Solutions, Asia
Strong Buy For New Target Of $95-100 In 12 Months
Revenue $110MM (% QQ) $8MM Above Our Estimate On
Surge in Asia Business Total revenues grew 44%
Y/Y, lead by 111% growth in Technology and Solutions,
to $56.4 MM (51% of total). The division signed a
record of 80 contracts for the quarter, including
numerous licenses for the new RealSpeak TTS engine
and telephony applications in the Asia Pacific
(Am. Compl. ¶ 95). That recommendation was premised on the
reported 1999 L&H revenue, the "surge in Asian business," and the execution of
"a record 80 contracts," especially in Asia. (Am. Compl. ¶ 96).
Plaintiffs allege that the reported revenues were fraudulently
overstated; there was ...