United States District Court, D. New Jersey
June 7, 2005.
ROCKER MANAGEMENT, L.L.C. ET AL., Plaintiffs,
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 (KPMG Belgium)
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 ("KPMG US"), Paul
Behets, and SG Cowen Securities Corporation ("Cowen").*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 Defendant KPMG Belgium to
dismiss the Amended Complaint pursuant to Federal Rules of Civil
Procedure 12(b)(6), 9(b), and the doctrine of forum non
conveniens. For the reasons set forth below, KPMG Belgium'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 this
Motion are discussed herein, and, as noted, are taken from the
Plaintiff Rocker Management LLC ("Rocker Management") is a New
Jersey company that administers and manages Plaintiff hedge fund
Rocker Partners LP ("Rocker Partners"). (Am. Compl. ¶ 10).
Plaintiff Rocker Offshore Management Company, Inc. ("Rocker Offshore") is a New York corporation that
manages Plaintiff hedge fund Compass Holdings, Ltd. (Id.).
Defendant KPMG Belgium, a limited liability partnership
organized under the law of and doing business in Belgium, is a
public accounting firm and a member of KPMG International, a
Swiss Association. (Am. Compl. ¶¶ 23, 26).
Plaintiffs engaged in "short selling," which means identifying
and purchasing stock that they expect 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
Plaintiffs began to short sell Lernout & Hauspie Speech
Products N.V. ("L&H" or "the Company") stock in June 1998. (Am.
Compl. ¶¶ 6, 100). The price of L&H stock subsequently increased,
forcing Plaintiffs between December 1999 and March 2000 to
purchase stock at a loss to cover their own short positions.
(Id. ¶¶ 6, 104). Plaintiffs charge that the increase in L&H
stock prices was the result of fraud on the part of L&H and/or SG
Cowen. Plaintiffs further allege that the rise in L&H stock may
be attributed to certain financial statements issued by L&H for
the fiscal year 1998, which overstated L&H revenue. (Am. Compl.
¶¶ 51-52, 259). L&H's independent auditor was KPMG Belgium. On April 9, 1999, KPMG Belgium published its Independent
Auditor's Report on L&H's financial statements for the year
ending December 31, 1998 (Id. ¶ 51). KPMG Belgium allegedly
made several false statements in those certified financials.
First, financial statements falsely reported L&H's 1998 revenues.
KPMG Belgium itself withdrew its own certification in late 2000
and disclosed to the investing public that its financial
statements "should not be relied upon." (Id. ¶¶ 4, 123). L&H's
Audit Committee later acknowledged that the statements inflated
L&H's actual income by nearly $28 million (including by 24% and
23% in the last two quarters of 1998, respectively). Second, KPMG
Belgium represented that it conducted an "independent" audit,
thereby indicating that it had no financial interest or ties to
L&H management. In fact, the KPMG "global account partner" for
L&H who was responsible for overseeing the audit, Paul Behets,
took a position with a L&H-related entity shortly after
overseeing and certifying these falsified financials. (Id. ¶
267). Third, KPMG Belgium represented that "[w]e conducted our
audits in accordance with generally accepted auditing standards
in the United States." In fact, the financials violated many
important aspects of United States generally accepted accounting
principles ("U.S. GAAP"), including the backdating of contracts,
contracts entered into with related parties, and the existence of
side agreements releasing customers of their obligation to pay. (Id. ¶ 209-10). Finally, KPMG Belgium
represented that the financials were "free of material
misstatements," and that the financials "present fairly, in all
material respects, the financial position of Lernout & Hauspie
Speech Products, N.V.," when, in fact, they falsely inflated
L&H's revenue by almost $28 million. (Id. ¶ 52).
I. Forum Non Conveniens
KPMG Belgium moves to dismiss this case on the basis of forum
non conveniens, arguing that Belgium provides an adequate forum
and that "the balance of conveniences" suggests that a trial in
the United States would be "unnecessarily burdensome" for
Defendants and the Court.
This Court may dismiss an action on forum non conveniens
grounds when "an alternative forum has jurisdiction to hear the
case, and when trial in the chosen forum would `establish . . .
oppressiveness and vexation to the defendant . . . out of all
proportion to plaintiff's convenience,' or when the `chosen forum
[is] appropriate because of considerations affecting the Court's
own administrative and legal problems.'" Piper Aircraft Co. v.
Reyno, 454 U.S. 235, 241 (1981). There is a strong presumption
in favor of Plaintiffs' choice of forum. Id. at 255. Defendants
bear the burden of persuasion as to all elements of the forum non conveniens analysis. Lacey v. Cessna Aircraft Company,
932 F.2d 170, 180 (3d Cir. 1991).
This Court concludes that it should not exercise its discretion
to dismiss this case against KPMG Belgium on forum non conveniens
grounds. As explained below, the Court is not persuaded that
manifest unfairness will result from hearing the case in this
First to be determined is whether the Belgium forum is
"adequate" in the sense that defendant would be subject to
service of process there and whether the forum permits litigation
of the subject matter of the dispute. Piper Aircraft Co.,
454 U.S. at 255, n. 22. KPMG Belgium has submitted the Declaration of
Hans van Houtte to support its claim that Belgium is an adequate
forum for this litigation. The declaration notes that nine of the
defendants named in this action are Belgian and clearly subject
to service of process there. (van Houtte Decl. ¶¶ 5, 6). Van
Houtte goes on to state that the Belgian court would have
jurisdiction over all other defendants (English, Dutch, and
U.S.), as well. (Id. ¶ 6).
Plaintiffs counter that it is unlikely a Belgian court would
retain jurisdiction over the entire matter and over all
defendants, and then only if all the acts which were criminal in
nature took place in Belgium would that court retain
jurisdiction. (Pls.' Br. at 87-88.). Plaintiffs predict that, if
this case were brought in Belgium, there exists a potential for litigating against certain
defendants in Belgium and others in the United States. But this
portion of Plaintiffs' argument does not appear to be supported
by the declaration of Plaintiff's expert, Etienne Claes, and thus
cannot be accorded any weight.*fn3 In contrast, Defendant's
expert declaration states the Belgian courts would have
jurisdiction over all the parties in the case. (van Houtte Decl.
¶ 6). KPMG Belgium has thus made an uncontroverted showing that
Belgian courts would have jurisdiction over all parties.
Next to be determined is whether Belgium permits litigation of
the substance of this dispute. Plaintiffs point out, and KPMG
Belgium concedes, that Belgium does not provide a cause of action
identical to that provided by Rule 10b-5. Nonetheless, KPMG
Belgium asserts that the Companies Act of Belgium generally
encompasses Plaintiffs' cause of action and that Belgium has
before been held to provide an adequate forum for the resolution
of fraud claims, Calavo Growers of California v. Generali
Belgium, 632 F. 2d 963, 968 (2d Cir. 1980). Plaintiffs dispute whether Belgium permits litigation of this
sort. The Claes Declaration states that there is no equivalent
civil action that can be brought in Belgium and, more
specifically, that no cause of action in Belgium is comparable to
an action for securities fraud under United States securities
laws. (Claes Decl. § A). Plaintiffs further claim that they would
effectively be barred from bringing a claim for civil damages for
securities fraud. In addition, short sellers are apparently
disfavored in Belgium. (Claes Decl. § D).
The fact that the law of the foreign forum differs or is less
favorable to Plaintiffs is not conclusive in a forum non
conveniens analysis. What matters most is when the remedy
provided by the foreign forum is "so clearly inadequate or
unsatisfactory that it is no remedy at all." Piper Aircraft
Co., 454 U.S. at 252 n. 18, 254. It is unclear to what extent
Belgium would permit litigation of the substance of this dispute.
However, the Court is not persuaded that Plaintiffs would have no
remedy at all were this case to proceed in Belgium. Assuming that
Belgium is an adequate forum for this case to proceed, the Court
must look further to the balance of interest factors.
Private Interest Factors
The private interest factors to be considered in a forum non
conveniens analysis are (1) relative ease of access to sources of
proof; (2) the availability of compulsory process for attendance of unwilling witnesses; (3) the
cost of obtaining attendance of the willing witnesses; and (4)
all other practical problems that make trial of a case easy,
expeditious, and inexpensive. Gulf Oil Corp. v. Gilbert,
330 U.S. 501, 508 (1947).
As to accessing proof, KPMG Belgium urges that most of the
documents relating to KPMG Belgium's audits of L&H's financial
statements originated primarily in Belgium and are located there.
These include (1) L&H's license agreements and operational
documents; (2) L&H's accounting and financial books and records;
(3) KPMG Belgium's audit work papers; (4) documents held by Paul
Behets (now deceased), the engagement partner for the L&H audits
from 1991 to July 1999; and (5) the documents held by several
start-up companies allegedly used by L&H to inflate its revenues
and to avoid research and development expense.*fn4
As to witnesses, KPMG Belgium notes that key witnesses with
respect to the alleged fraud at L&H i.e., the founders and
former top management at L&H (Jo Lernout, Pol Hauspie, Carl
Dammekens, Gaston Bastiaens, and others) are all located in
Belgium. (Lievens Decl. ¶ 12). Some of those individuals are the subject of criminal investigation in Belgium and may be subject
to restraining orders that prohibit their departure from Belgium.
Plaintiffs counter that this matter spans multiple continents,
that evidentiary and witness problems are not limited to any
particular forum, and that the United States headquarters of L&H
is likely a source of evidence. About thirty boxes of documents
have been produced by Defendants to the SEC and to Plaintiffs in
the United States. Plaintiffs point out that alternative
arrangements for taking testimony can be made for Belgian
witnesses restricted from leaving the country and that several
defendants and witnesses in this action reside in or are located
in the United States.
This Court finds the balance of private factors weighs against
dismissing this case on forum non conveniens grounds. Keeping the
case here might pose difficulties in terms of witnesses,
documents, and other proof, but no more so than problems
attendant to any forum in which this case proceeds.
Public Interest Factors
The public interest factors also tilt in favor of retaining the
case against KPMG Belgium. These factors include (1) practical
difficulties of unnecessarily imposing upon a busy court the
obligation to hear a case more fairly adjudicated elsewhere; (2)
imposition on jurors called to hear a case that has no relation
to the community; and (3) familiarity of the court with applicable laws.
Gulf Oil Corp., 330 U.S. at 509.
The Court has invested considerable time in this case and does
not see a net gain in dismissing this case as to one defendant.
This case has a substantial relationship to the community and
thus does not pose an undue burden on jurors. There is of course
a national interest in maintaining the integrity of the
securities market in the United States and, here, aggrieved
Plaintiffs have ties to New Jersey. In addition, the case against
KPMG Belgium does not require this Court to apply any unfamiliar
foreign law. The same cannot be said of the Belgian courts were
this case to proceed there. The public factors decidedly weigh in
favor of hearing this case in this District.
None of the obstacles noted by KPMG Belgium are unique or
insurmountable so as to create "oppressiveness and vexation" to
KPMG Belgium "out of all proportion to [Plaintiffs']
convenience." Piper Aircraft Co., 454 U.S. at 241. Accordingly,
the Court declines to exercise its discretion to dismiss the case
against KPMG Belgium on forum non conveniens grounds.
II. Motion to Dismiss Pursuant to Federal Rule of Civil
A motion to dismiss pursuant to Federal Rule of Civil Procedure
12(b)(6) should be granted only if it "appears beyond doubt that
the plaintiff can prove no set of facts in support of his claim that would entitle him to
relief." In re Cybershop.com Sec. Litig., 189 F. Supp. 2d 214,
223 (D.N.J. 2002) (quoting Conley v. Gibson, 355 U.S. 41, 45-46
(1957)). When resolving a motion to dismiss, a district court
must accept all well-pleaded allegations in the complaint as
true, and view them in the light most favorable to the plaintiff.
Doug Grant, Inc. v. Greate Bay Casino Corp., 232 F.3d 173, 183
(3d Cir. 2000). However, the Court need not credit "bald
assertions" or "legal conclusions." Morse v. Lower Merion School
Dist., 132 F.3d 902, 906 (3d Cir. 1997).
A. Section 10(b) and Rule 10b-5 Claim
To state a claim pursuant to Rule 10b-5, Plaintiff must allege
that (1) the defendant made a misrepresentation or omission of a
material fact; (2) scienter motivated the defendant's
misrepresentation or omission; (3) the defendant made the
misrepresentation or omission in the context of a securities
purchase or sale; (4) the plaintiff relied upon defendant's
misrepresentation or omission; and (5) the plaintiff's reliance
proximately caused damages. In re Cybershop.com Sec. Litig.,
189 F. Supp. 2d at 224. Scienter may be pled by alleging facts
(1) that demonstrate "`a motive and opportunity to commit
fraud,'" or (2) that "constitute circumstantial evidence of
either reckless or conscious behavior." In re Advanta Corp. Sec.
Litig., 180 F.3d 525, 534-35 (3d Cir. 1999) (quoting Weiner v.
Quaker Oats Co., 129 F.3d 310, 318 n. 8 (3d Cir. 1997) (explaining
what remains sufficient after passage of the Private Securities
Litigation Reform Act ("PSLRA")).
A plaintiff alleging false or misleading statements or
omissions of material fact must meet the heightened pleading
requirements of both Rule 9(b) and the PSLRA. In re
Cybershop.com, 189 F. Supp. 2d at 225. Rule 9(b) requires that
allegations of fraud, and the circumstances constituting the
fraud, be pled with particularity. Id. While the particularity
requirement may be relaxed where factual information is
particularly within defendant's knowledge or control,
"boilerplate and conclusory allegations will not suffice." In re
Burlington Coat Factory Sec. Litig., 114 F.3d 1410, 1418 (3d
Federal Rule of Civil Procedure Rule 9(b) demands that a
plaintiff plead (1) a specific false representation [or omission]
of material fact; (2) knowledge by the person who made it of its
falsity; (3) ignorance of its falsity by the person to whom it
was made; (4) the intention that it should be acted upon; and (5)
that the plaintiff acted upon it to his damage. In re
Rockefeller Center Properties, Inc. Sec. Litig., 311 F.3d 198,
216 (3d Cir. 2002) (citing Shapiro v. UJB Fin. Corp.,
964 F.2d 272, 284 (3d Cir. 1992)). Rule 9(b) requires plaintiffs to
identify the source of the allegedly fraudulent misrepresentation
or omission. Id. (citing Klein v. General Nutrition Cos.,
Inc., 186 F.3d 338, 345 (3d Cir. 1999)). In short, "Rule 9(b) requires, at a minimum, that plaintiffs support their allegations
of securities fraud with all of the essential factual background
that would accompany `the first paragraph of any newspaper story'
that is, the `who, what, when, where and how' of the events at
issue." Id. at 217 (quoting In re Burlington,
114 F.3d at 1422).
The PSLRA imposes an additional "layer of factual
particularity" on allegations of securities fraud. In re
Rockefeller Center Properties, Inc. Secs. Litig.,
311 F.3d at 217-18. Under the PSLRA, a complaint alleging a Section 10(b)
violation is insufficient unless it "specifies each statement
alleged to have been misleading, the reason or reasons why the
statement is misleading, and, if an allegation regarding the
statement or omission is made on information and belief[,] . . .
state[s] with particularity all facts on which that belief is
formed." In re Cybershop.com, 189 F. Supp. 2d at 226 (citing
15 U.S.C. § 78u-4(b)(3)(A)). All allegations of scienter must be
supported by facts stated "with particularity" and must give rise
to a "strong inference" of scienter. In re Advanta Corp. Sec.
Litig., 180 F.3d at 535 (quoting 15 U.S.C. 78u-(b)(2)). As
noted, this can be accomplished by "(a) alleging facts to show
that defendants had both motive and opportunity to commit fraud,
or (b) by alleging facts that constitute strong circumstantial
evidence of conscious misbehavior or recklessness." Oran v.
Stafford, 226. F.3d 275, 288-89 (3d Cir. 2000). KPMG Belgium argues that Plaintiffs' federal securities law
claim against it should be dismissed for failure to specify which
conduct is attributable to KPMG Belgium; failure to allege that
KPMG Belgium's alleged misrepresentation caused the loss that
they claim to have suffered; and failure to adequately allege
that KPMG Belgium acted with scienter in making any
misstatements. Each of these arguments is addressed separately
KPMG Belgium asserts that the Amended Complaint fails to plead
fraud with particularity, as required by Federal Rule of Civil
Procedure 9(b), by not distinguishing between the separate KPMG
Defendants (KPMG Belgium, KPMG LLP, KPMG UK) or attributing the
wrongdoing to each defendant, individually. The Court agrees
that, at several points, the Amended Complaint lumps the conduct
of KPMG entities together by referring to "KPMG" and blurs the
allegations against each defendant. (See, e.g., Am. Compl. ¶¶
45, 85, 92, 101, 117, 154, 162, 190, 196, 199-206, 209-13, 215,
218, 223, 227-28, 230-36, 243, 251, 255, 293-95). That said, the
Amended Complaint makes clear that KPMG Belgium signed the L&H
1998 financial statements, thereby representing that those
statements accurately presented the financial condition of the
company. (Am. Compl. ¶¶ 24, 52). Those financials were admittedly
overstated in the amount of $28 million. KPMG Belgium's preparation and signing of
the audit report containing false information is sufficient to
trigger primary liability under the federal securities law claim
asserted against it.
2. Loss Causation
KPMG Belgium argues that Plaintiffs' claims are also defective
because they fail to allege that there was any causal
relationship between their December 1999-March 2000 decisions to
cover and the KPMG Belgium Auditor's Report issued in April 1999.
The argument goes that when Plaintiffs made their covering
purchases and suffered damages, the audit report had been issued
nine to eleven months earlier, involved financials that were more
than a year old, and thus could not have "substantially
contributed" to Plaintiffs' losses. KPMG Belgium further argues
that Plaintiffs do not allege that they relied on the audit
opinion in making their cover purchases.
"[T]he Federal Rules of Civil Procedure require only "a short
and plain statement of the claim showing that the pleader is
entitled to relief." Dura Pharmaceuticals, Inc. v. Broudo,
125 S. Ct. 1627, 1634 (2005) (citing Fed.R.Civ.P. 8(a)(2)). The
pleading rules "are not meant to impose a great burden on a
plaintiff." Id. (citing Swierkiewicz v. Sorema N.A.,
534 U.S. 506, 513-15 (2002)). Rather, the goal is simply for "a plaintiff
who has suffered an economic loss to provide a defendant with some indication of the loss and the
causal connection that the plaintiff has in mind."*fn5 Id.
The Court is satisfied that the allegations relating to
transaction causation in this short-selling context are
sufficient to withstand a motion to dismiss based on loss
causation. In the short-selling context, losses caused by
artificially inflated stock prices are incurred at the time of
cover. (This differs from the typical fraud-on-the-market
scenario where purchasers buy at a fraudulently inflated price
and then the stock subsequently drops once the truth is revealed
to the market.) Here, it is alleged that L&H stock climbed in
price during the period of December 1999 to March 2000 as a
direct result of the scheme that included the making and
publishing of fraudulent statements concerning falsified earnings
reports for 1998. The allegations also detail an unraveling of
the fraudulent scheme and an attendant drop in price of L&H
stock. (See, e.g., Am. Compl. ¶¶ 1-4).
Read in the light most favorable to short-selling Plaintiffs,
the inference to be drawn from the allegations of the Amended
Complaint is that the false financial statements artificially
inflated L&H stock, which, in turn, forced Plaintiffs to make
cover transactions and incur significant losses. Fact-intensive
issues related to causation and whether a given misstatement "substantially
contributed" to Plaintiffs' losses, Newton v. Merrill Lynch,
Pierce, Fenner & Smith, Inc., 259 F.3d 154, 177, 181 n. 24 (3d
Cir. 2001), are not properly resolved at this juncture.
Next, KPMG Belgium argues that the Amended Complaint fails to
plead facts sufficient to give rise to a "strong inference" of
scienter as to KPMG Belgium. The argument is basically one of
timing: many of the allegations concerning scienter on the part
of KPMG Belgium pertain to dates subsequent to the certification
of the audit report on April 9, 1999 and thus cannot give rise to
any inference that KPMG Belgium engaged in knowing or reckless
wrongdoing for purposes of reporting L&H's 1998 financials.
Plaintiffs respond that the 1998 financials were republished in
a January 2000 filing of a Form F-3 Registration statement with
the SEC. That statement incorporated by reference KPMG's
certification of the 1998 L&H financial statements. (Am. Compl.
For purposes of a Section 10(b) claim, a defendant's scienter
must of course temporally coincide with the allegedly false
statement. The Court accordingly will focus on the allegations
relating to scienter as to KPMG Belgium's certification of the 1998 financials.*fn6
The magnitude of any given misstatement or overstatement may
help support an inference of scienter. P. Schoenfeld Asset Mgmt.
LLC v. Cendant Corp., 142 F. Supp. 2d 589, 609 (D.N.J. 2001);
cf. McLean v. Alexander, 599 F.2d 1190, 1198 (3d Cir. 1979),
but magnitude alone will not suffice, see, e.g., Reiger v.
Price Waterhouse Coopers LLP, 117 F. Supp. 2d 1003, 1013 (S.D.
Cal. 2000) ("to avoid undermining the policies of the Reform Act
through reliance on hindsight and speculation, a court should not
infer an independent accountant's scienter based solely on the
magnitude of its client's fraud"); In re SCB Computer
Technology, Inc. Sec. Litig., 149 F. Supp. 2d 334, 357, 363
(W.D. Tenn. 2001) (magnitude of erroneous financial statement and
resulting restatement were insufficient to sustain finding that
auditor acted with scienter).
The restatement of L&H 1998 financials involved a 15% reduction
and nearly $28 million in reported revenue. (Am. Compl. ¶ 259).
This is a sizable reduction, notwithstanding that much larger
reductions (not relevant here) followed with the 1999 and 2000 L&H restatements.
There are additional factors that support scienter on the part
of KPMG Belgium. KPMG Belgium knew of a lack of adequate internal
controls at L&H, (Am. Compl. ¶¶ 235-41), had unfettered access to
and knowledge of L&H's confidential internal corporate and
financial information, and knew that L&H refused to record KPMG
Belgium's recommended adjustments to financial statements, (id.
¶ 247). It is also alleged that KPMG Belgium had motive and
opportunity to commit fraud in that substantial fees were earned
for non-audit services and that certain employees responsible for
auditing L&H benefitted directly from KPMG's relationship with
L&H in the form of subsequent employment relationships with L&H
entities, (id. ¶ 266).*fn7
As to internal controls, the Amended Complaint alleges that
KPMG Belgium knew that L&H's system of internal controls was
inadequate because L&H had failed to implement an internal audit
function. (Am. Compl. ¶¶ 235-41). At a meeting between KPMG
Belgium and the Audit Committee on May 4, 1998, KPMG Belgium
reported that the internal audit and internal control functions
of the Company needed to be strengthened. KPMG Belgium also informed
the audit committee that the Company must improve its financial
reporting for consolidated financial statements. (Id. ¶ 235).
Minutes of an April 12, 1999 Telephone Meeting of the Board of
Directors reveal that the Company had yet to establish an
internal audit function, (id. ¶ 237), and KPMG Belgium
continued to report that the Company's internal controls were
inadequate (id. ¶ 238). These allegations may be attributed to
KPMG Belgium in that Paul Behets, of KPMG Belgium, was the audit
partner on the L&H engagement through July 1999. (Id. ¶¶ 185,
There are also allegations that KPMG Belgium had full access to
information as to L&H's internal corporate and financial
information, (id. ¶¶ 204-05), thereby suggesting that KPMG
Belgium had reason to know of the fraud.
The alleged refusal of L&H to record KPMG Belgium's recommended
adjustments in the amount of $440,000 to its financial statements
is yet another factor suggesting that KPMG Belgium acted with
scienter. (Id. ¶ 247). At this procedural stage, the Court must
afford Plaintiffs the favorable inference that KPMG Belgium
should have suspected wrongdoing as a result of this refusal.
Further, there are allegations to suggest that KPMG Belgium had
motive and opportunity to commit fraud. Two KPMG Belgium
employees responsible for auditing L&H benefitted directly from the Company in the form of
lucrative employment relationships with entities related to L&H.
(Am. Compl. ¶ 266). Paul Behets, the engagement partner on the
1998 L&H audit, left KPMG Belgium in July 1999 to become the
chief executive officer of a foundation created by L&H known as
S.A.I.L. Trust. (Am. Compl. ¶ 267). S.A.I.L. Trust is alleged to
have held a one-third interest in FLV Managements, N.V., which,
in turn, was the manager of the FLV Fund, which was allegedly
audited by KPMG Belgium. (Id.). Chantal Hestdagh left KPMG
Belgium in 1998 to become CFO of LHIC, which is alleged to be on
of the "related parties" through which L&H funded its
unaffiliated customers. (Id. ¶ 268). While there is nothing
inherently wrong with a former auditor taking a job with a
client, the timing and circumstances of these departures, in
light of the other allegations discussed above, would suggest a
motive and opportunity to commit fraud.
This Court concludes that the aforementioned allegations, when
coupled with the grand scale of the restatement, are sufficient
to create a strong inference that KPMG Belgium acted with
scienter in certifying the 1998 L&H financials.
4. Republication of 1998 Financials and February 9, 2000 Press
Plaintiffs urge this Court to take into consideration KPMG
Belgium's duty to correct or withdraw its certification of the 1998 financials,
which it did not do until late 2000. See Wright v. Ernst &
Young, 152 F.3d 169, 177 (2d Cir. 1998) (discussing duty of
accounting firms to take reasonable steps to correct
misstatements). The argument goes that KPMG Belgium's
certification was republished in January 2000 and thereby served
to maintain the falsely inflated stock price of L&H. Plaintiffs
also rely on the statement of 1999 revenue figures announced in a
February 9, 2000 L&H press release. The Amended Complaint alleges
that KPMG Belgium compiled those revenue figures mentioned in the
press release. (Am. Compl. ¶ 92).
The alleged representation of L&H's 1998 Financials in January
2000 need not be addressed at this juncture, given the Court's
determination that the motions to dismiss will be denied.
The February 2000 press release relates to L&H's 1999 unaudited
financial results. KPMG Belgium is not alleged to have authored
the press release, (Am. Comp. ¶ 92), or even to have been
mentioned therein. Allegations that KPMG Belgium reviewed or
approved the press release, without more, are not sufficient to
render KPMG Belgium liable for making a material misstatement.
See Central Bank of Denver v. First Interstate Bank of
Denver, 511 U.S. 164, 191 (1994); Ziemba v. Cascade Int'l,
256 F.3d 1194, 1205-07 (11th Cir. 2001); Wright v. Ernst & Young LLP, 152 F.3d 169, 175 (2d Cir. 1998).
B. State Law Claims
The elements of a cause of action for tortious interference are
(1) a protected interest; (2) defendant's intentional
interference without justification; (3) a reasonable likelihood
that the benefit plaintiff anticipated from the protected
interest would have continued but for the interference; and (4)
resulting damage. Printing Mart-Morristown v. Sharp
Electronics, 116 N.J. 739 (1989).
KPMG Belgium challenges the sufficiency of the tortious
interference claims on the basis that there is no allegation that
KPMG Belgium knew who Plaintiffs were, much less that KPMG
Belgium intentionally interfered with their rights. See Woods
Corporate Assocs. v. Signet Start Holdings, Inc.,
910 F. Supp. 1019, 1032 (D.N.J. 1995). This argument is not persuasive. The
Amended Complaint alleges that in a scheme to "squeeze the
shorts," Defendants interfered with Plaintiffs' prospective
economic advantage in a manner that violated common morality. The
reasonable inference to be drawn from allegations concerning a
scheme purposely directed at "the shorts" is that Defendants knew
of Plaintiff short sellers. The Court will not dismiss the
tortious interference claims on this basis. KPMG Belgium will be
permitted to test the tortious interference claims during
For the foregoing reasons, KPMG Belgium's Motion to Dismiss the
federal securities claim and the pendent state law claims will be
According, IT IS on this 7th day of June 2005,
ORDERED that the Motion of Defendant KPMG Belgium to dismiss
the Amended Complaint pursuant to Federal Rules of Civil
Procedure 12(b)(6), 9(b), and the doctrine of forum non
conveniens is denied.