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ROCKER MANAGEMENT v. LERNOUT & HAUSPIE SPEECH PRODUCTS

June 7, 2005.

ROCKER MANAGEMENT, L.L.C. ET AL., Plaintiffs,
v.
LERNOUT & HAUSPIE SPEECH PRODUCTS N.V. ET AL., Defendants.



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 tortious interference.

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.

  FACTS

  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. ¶ 32).

  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 recommendations.

  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 Especially Strong
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 region.
(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 ...

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