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
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
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.
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.*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
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.
A. 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.
B. Statute of Limitations
KPMG US argues that Plaintiffs' Section 10(b) claim asserted
against it should be dismissed as time-barred. Claims brought
under Section 10(b) or Rule 10b-5 must be filed "within one year
after the discovery of the fact constituting the violation and
within three years after such violation." Lampf, Pleva,
Lipkind, Prupis & Petigrow v. Gilbertson, 501 U.S. 350, 364 (1991).
Inquiry notice is the standard for determining when the one-year
limit begins to run, i.e., when the fraud was or should have
been discovered. In re NAHC, Inc. Securities Litigation,
306 F.3d 1314, 1325 (3d Cir. 2002). Under that standard, the
limitations period begins to run when a plaintiff "discovered or
in the exercise of reasonable diligence should have discovered
the basis for [his] claim against the defendant." Del Sontro v.
Cendant Corp., 223 F. Supp. 2d 563, 571 (D.N.J. 2002) (internal
quotations omitted). It is an objective standard that governs
when the limitations period begins to run. In re Prudential Ins.
Co. of Am. Sales Practices Litig., 975 F. Supp. 584, 599 (D.N.J.
Plaintiffs' allegations against KPMG US are based on its
alleged participation in the 1998 audit work reported in the
April 9, 1999 audit opinion. KPMG argues that, at the latest, the
one-year statute of limitations on a Section 10(b) claim against
KPMG US began to run on December 7, 2000, the date Plaintiffs
filed their Original Complaint against, among others, KPMG
Belgium. KPMG US maintains that it was not until more than one
year later and more than three years after any alleged violation
by KPMG US that Plaintiffs asserted a Section 10(b) claim against
KPMG US argues that because the audit work can only have
occurred prior to the issuance of the April 9, 1999 report by KPMG Belgium, the
alleged wrongdoing by KPMG US could only have occurred more than
three years before Plaintiffs commenced suit against it, on April
8, 2002. Thus, according to KPMG US, Plaintiffs failed to assert
their Section 10(b) claim against KPMG US within three years of
the alleged violation of the securities laws or within one year
of discovery of the violation.
Plaintiffs respond that the alleged violation occurred in the
April 9, 1999 audit report and, therefore, suit was filed within
the requisite three-year period. The Court agrees. The April 9,
1999 audit report constitutes the misstatement and Plaintiffs
brought suit within three years of that date. Although Plaintiffs
did not file any claims against KPMG US until April 8, 2002,
which is more than one year after their original Complaint, they
claim that they did not discover evidence of its role in the
scheme until they received thirty-three boxes of documents that
L&H had produced to the SEC in late February 2002. (Hermann Cert.
in Opp. to Defs.' Motions to Dismiss, Exs. A, B). Thus, according
to Plaintiffs, their adding KPMG US as a defendant on April 8,
2002 was both within one year of discovery and within three years
of KPMG US's statement at issue the April 9, 1999 certification
of L&H financials.
The Court is not inclined to dismiss the action against KPMG US
on the basis of statute of limitations at this juncture. It is not
readily apparent from the face of the Amended Complaint that
Plaintiffs failed to commence this action within the statute of
limitations. See Rycoline Prods., Inc. v. C&W Unlimited,
109 F.3d 883, 886 (3d Cir. 1997) ("[I]f a statute of limitations bar
is not apparent on the face of the complaint, then it may not
afford the basis for a dismissal of the complaint under Rule
12(b)(6)."). To the contrary, it appears that Plaintiff did bring
suit within three years of the violation. Whether Plaintiffs knew
or had reason to know of the involvement of KPMG US more than one
year before they filed suit is disputed between the parties and
not properly resolved on a motion to dismiss.
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
The particularity requirement of 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)).
KPMG US challenges the viability of the federal securities law
and common law claims brought against it. It argues that the
Section 10(b) claims should be dismissed because (1) there are no allegations that either
Plaintiffs or the market relied on any statement by KPMG US such
that Plaintiffs can satisfy the reliance prong of a Section 10(b)
claim; (2) the allegations against KPMG US identify no
misstatements or omissions by KPMG US and at most amount to
aiding and abetting liability, which is not actionable as to
10(b) claims; (3) Plaintiffs' "one firm" theory of liability runs
afoul of Federal Rule of Civil Procedure 9(b) and the PSLRA; and
(4) Plaintiffs' pendent state law claims are deficient.
This Court's analysis of reliance in the short selling context
is governed by Zlotnick v. Tie Communications, 836 F.2d 818 (3d
Cir. 1988). The Third Circuit has held that short sellers are not
entitled to the presumption of reliance because, unlike typical
investors who rely on the market to reflect the true value of
stock, short sellers operate on the assumption that the market is
not efficient. See id. at 823 ("[T]he short seller is not
injured because he knew of or depended on the misrepresentation;
he is injured because others investing in the stock so relied.").
Nonetheless, the short seller might be able to prove "actual
indirect reliance." This can be done by demonstrating a change in
investment strategy and actual reliance on the `integrity' of the
inflated market price at the time of cover or, as Plaintiffs
allege in this case, that a rise in stock price increased the
risk of loss beyond acceptable levels, which caused one to enter into a cover
transaction. See id. at 824.
KPMG US argues that Plaintiffs have failed to allege actual
indirect reliance on the audit opinion, which is the only
misstatement to which KPMG US is connected. The audit opinion was
published eight months before Plaintiffs' first alleged cover
purchase in December 1999, and then republished in a January 7,
2000 Form F-3 Registration Statement that L&H filed with the SEC.
The republication occurred during the period of time that
Plaintiffs covered their short positions.
The Court is satisfied that, under Zlotnick, Plaintiffs
adequately plead reliance by alleging that a drastic rise in
stock price, occasioned by a fraudulent scheme that included
overstated financials, increased their risk of loss beyond
acceptable levels so as to cause them to make cover purchases.
See id. At the motion to dismiss stage, the Court must afford
Plaintiffs all favorable inferences with respect to those
allegations. Whether Plaintiffs will ultimately succeed in
demonstrating reliance/causation in light of timing and other
factors is not to be resolved at this juncture.
Plaintiffs allege that KPMG US participated in the audits and
revenue compilation via McLamb, who was responsible for ensuring the
compliance of L&H financial reports with the United States GAAP
rules. McLamb is alleged to be a KPMG SEC reviewing partner,
based in the KPMG-UK division called the US Capital Markets
Group, who worked extensively on the L&H audit and review. KPMG
US allegedly passed information to KPMG Belgium that was
ultimately incorporated into L&H's financials.
KPMG US argues that Plaintiffs' claims against it are barred
under Central Bank of Denver, N.A. v. First Interstate Bank of
Denver, N.A., 511 U.S. 164, 191 (1994), in which the Supreme
Court of the United States held that Section 10(b) does not
create a private cause of action for aiding and abetting
liability. In so holding, the Court rejected a "substantial
assistance" standard for aiding and abetting claims under Section
KPMG US emphasizes that there is no allegation that it actually
signed any of the audit reports or was listed in L&H's financial
disclosures as a principal auditor. It further argues that many
of the allegations that KPMG US, via McLamb, knew of or reviewed
certain documents at most suggest aiding and abetting liability.
The Amended Complaint alleges that McLamb prepared certain
parts of the 1998 financial statements. (Am. Compl. ¶ 192).
Whether McLamb's "preparation" of parts of the 1998 financial statements is
sufficient to trigger primary liability is a close call. Judge
Saris in In re Lernout & Hauspie Securities Litig.,
230 F. Supp. 2d 152, 168 (D. Mass. 2002), reasoned that "[a]bsolving an
auditor who prepares, edits, and drafts a fraudulent financial
statement knowing it will be publicly disseminated simply because
an affiliated auditor with which it is working under a common
trademark is the one to actually sign it, would stretch Central
Bank's holding too far." However, some circuits have held that
for primary liability to attach, the public must be able to
attribute a misleading statement to the secondary actor at the
time it is issued. See, e.g., Wright v. Ernst & Young LLP,
152 F.3d 169, 175 (2d Cir. 1998) ("[A] secondary actor cannot
incur primary liability under the Act for a statement not
attributed to that actor at the time of its dissemination . . .
that is, in advance of the investment decision."); Ziemba v.
Cascade Int'l, 256 F.3d 1194, 1205 (11th Cir. 2001) ("Following
the Second Circuit, we conclude that . . . the alleged
misstatement or omission upon which a plaintiff relies must have
been publicly attributable to the defendant at the time that the
plaintiff's investment decision was made."). But see In re
Software Toolworks Inc. Sec. Litig., 50 F.3d 615, 628 n. 3 (9th
Cir. 1994) (holding that an accountant who has a "significant
role in drafting and editing" a materially false and misleading
statement may be held primarily liable under § 10(b)); In re
ZZZZ Best Sec. Litig., 864 F. Supp. 960, 970 (C.D. Cal. 1994)
(permitting Section 10(b) liability of auditor who had
"intricate" involvement in the making of misstatements, even
though statements were not reasonably attributable to auditor).
Plaintiffs point out and Defendants do not dispute that the
Third Circuit has not adopted the public attribution requirement,
although some district courts in this circuit appear to have done
so. See, e.g., Copland v. Grumet, 88 F. Supp. 2d 326, 332-33
(D.N.J. 1999) (following Wright); In re IKON Office Solutions,
Inc. Sec. Litig., 131 F. Supp. 2d 680, 685 n. 5 (E.D. Pa. 2001)
(same). Plaintiffs urge this Court to conclude that the allegedly
false statements made by McLamb and passed along for publication
are sufficient to state a Section 10(b) claim. (Am. Compl. ¶ 188
("Conversion of Local to US GAAP has been reviewed by Bob McLamb
and Digby Wirtz, audit partners of US Capital Markets London
Office. . . . All US reporting issues have been cleared with KPMG
US Capital Markets Group London.'"); ¶ 193 ("`key issues were
discussed and conclusions reached in agreement with advice from
the US Capital Markets Group in London. . . . KPMG personnel from
all participating offices involved reviewed the revenue
recognition. . . .'")). And, as noted, it is specifically alleged
that McLamb "actually prepared and provided certain amounts and
disclosures to L&H's 1998 financial statements." (Am. Compl. ¶ 192).
KPMG US is not directly connected to the audit opinion of L&H's
1998 financial statements when it was KPMG Belgium that issued
and signed the audit opinion. (Am. Compl. ¶¶ 24, 52, 293).
Indeed, Plaintiffs concede that "the public record did not
establish KPMG US's involvement" at the time they relied on the
alleged misrepresentations at issue in this case. (Pls.' Opp. at
73).*fn5 Even with the allegation that McLamb prepared and
provided "certain amounts" to the 1998 L&H financial statements,
this Court finds the allegations insufficient to allege primary
liability for making a material misstatement under Section 10(b).
At most, McLamb's involvement with regard to the 1998 financials
amounts to review, assistance, and participation, all of which
culminated in KPMG Belgium's issuance of the audit opinion.
McLamb's conduct can only be categorized as preparatory, which is
insufficient to trigger primary liability under § 10(b).
"One Firm" Theory
There are several references in the Amended Complaint to the
actions and knowledge of a collective "KPMG" entity. (See,
e.g., Am. Compl. ¶¶ 182, 189). Plaintiffs urge this Court to allow them to proceed on a "one
firm theory," i.e., that "KPMG" holds itself out to the world
as one firm with accountants in offices world-wide. The Court
declines to adopt that approach.
Here, the materials cited to in the Amended Complaint make
clear that the international KPMG organization is an association
of distinct offices/companies. The KPMG International 1999 Annual
Report described KPMG International as a "Swiss association with
member firms in 159 countries that perform the professional
services described in this report."*fn6 (KPMG International
1999 Annual Rpt. at 32). The Report also indicates that the KPMG
International balance sheet "represents composite information of
the separate member firms of KPMG International and is combined
here solely for presentation purposes. KPMG itself is a
non-operating association." (Id. at 31).
The lumping together of KPMG offices under one "KPMG" reference
offends the particularity requirements embodied in Rule 9(b) and
the PSLRA and is insufficient to rescue the deficiencies in the
allegations concerning misstatements attributable to KPMG US.
C. State Law Claims The Amended Complaint alleges state law claims against KPMG US
for tortious interference with prospective economic advantage
(Count V), conspiracy to engage in tortious interference (Count
VI), and aiding and abetting tortious interference (Count VII)
under state law. Having concluded that the Section 10(b) claims
asserted against KPMG US should be dismissed, the Court will not
exercise supplemental jurisdiction over the remaining state law
claims against it. Where underlying federal claims providing the
Court with original jurisdiction have been dismissed, a federal
court has discretion to decline to exercise supplemental
jurisdiction over the remaining state law claims.
28 U.S.C. § 1367(a), (c). Moreover, the Third Circuit has recognized that
"where the claim over which the district court has original
jurisdiction is dismissed before trial, the district court must
decline to decide the pendent state claims unless considerations
of judicial economy, convenience, and fairness to the parties
provide an affirmative justification for doing so." Hedges v.
Musco, 204 F.3d 109, 123 (3d Cir. 2000) (citations omitted).
There appearing to be no such considerations here, the Court will
decline to exercise jurisdiction over the tortious interference
and conspiracy claims.
For the foregoing reasons, all claims asserted against KPMG US
will be dismissed.
According, IT IS on this 7th day of June 2005,
ORDERED that the claims of Plaintiffs Rocker Management, LLC
and Rocker Offshore Management Company, Inc. are dismissed for
lack of standing; and it is further
ORDERED that the Amended Complaint is dismissed as against
Defendant KPMG US.