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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

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"),*fn2 Paul Behets, and SG Cowen Securities Corporation ("Cowen").*fn3 Plaintiffs also assert 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 US to dismiss the Amended Complaint pursuant to Federal Rules of Civil Procedure 12(b)(6) and 9(b). For the reasons set forth below, the Motion of Defendant KPMG US will be granted.

  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 this motion are discussed herein, and, as noted, are taken from the Amended Complaint.

  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.*fn4 (Id.).

  Defendant KPMG US is a public accounting firm based in the United States and a member of KPMG International, a Swiss Association and one of the world's leading financial service providers. (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 source. (Id.).

  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 Defendant 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 ("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).

  At times, the Amended Complaint uses "KPMG" to refer collectively to KPMG Belgium, KPMG US, and KPMG UK. As to KPMG US, Plaintiffs base their Section 10(b) claim on KPMG Belgium's audit report on L&H's 1998 financial statements. (Am. Compl. ¶¶ 26, 51-53, 101, 293). The Amended Complaint alleges that Robert P. McLamb, a KPMG partner who worked from both the UK and US offices, id. ¶ 37, "worked extensively on the L&H audits and reviews" during the relevant time period, id. ¶ 187. However, there are no allegations that KPMG US issued any audit opinions of its own or made any statements connected to the L&H audits.

  DISCUSSION

  A. Motion to Dismiss Pursuant to Federal Rule of Civil Procedure 12(b)(6)

  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. ...


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