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, Paul Behets, and
SG Cowen Securities Corporation ("Cowen").*fn2 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 are the Motions of Defendant KPMG UK to
dismiss the Amended Complaint pursuant to Federal Rules of Civil
Procedure 12(b)(2),*fn3 12(b)(6), and 9(b). As discussed
more fully below, the Motion to dismiss the Amended Complaint
pursuant to Federal Rule of Civil Procedure 12(b)(2) will be
denied and the Motion to dismiss the Amended Complaint pursuant
to Federal Rules of Civil Procedure 12(b)(6) and 9(b) will be
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 are, as noted, taken from the Amended Complaint and supporting
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 UK (now a Limited Liability Partnership) is a
partnership organized under the laws of England and Wales.
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 ("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).
At times, the Amended Complaint uses "KPMG" to refer
collectively to KPMG Belgium, KPMG US, and KPMG UK. The following
allegations refer to KPMG UK: that "KPMG UK audited L&H's
financial statements with KPMG Belgium and KPMG [US]," (id. ¶
25); that KPMG UK "actively participated in the reviews and audit
of L&H's financial statements," (id. ¶ 184); and that "a KPMG
UK division called the US Capital Markets Group had vetted the
[L&H] audits before they were filed with the SEC," (id. ¶ 187).
In addition, the Amended Complaint alleges involvement in the L&H audits by Robert P.
McLamb, a reviewing partner who was "based in KPMG's US Capital
Markets Group or in KPMG US's Houston, Texas office" for the
relevant period. (Id.).
I. Motion to Dismiss for Lack of Personal Jurisdiction
Federal Rule of Civil Procedure 4(e) permits district courts to
exercise jurisdiction over non-resident defendants as authorized
by the laws of the state where the court resides. Fed.R. Civ.
P. 4(e);*fn5 Sunbelt Corp. v. Noble, Denton & Assocs.,
Inc., 5 F.3d 28, 31 (3d Cir. 1993); Provident Nat'l Bank v.
California Fed. Sav. & Loan Ass'n, 819 F.2d 434, 436 (3d Cir.
1987); Dent v. Cunningham, 786 F.2d 176, 175 (3d Cir. 1986).
New Jersey's long-arm rule permits the exercise of jurisdiction
to the fullest extent allowed under the Fourteenth Amendment to
the United States Constitution. N.J. Ct. R. 4:4-4(b)(1)
(permitting exercise of jurisdiction "consistent with due process
of law"); Charles Gendler & Co., Inc. v. Telecomm. Equip.
Corp., 102 N.J. 460, 469 (1986); Avdel Corp. v. Mecure, 58 N.J. 264, 268 (1971); see also Mesalic v.
Fiberfloat Corp., 897 F.2d 696, 698 (3d Cir. 1990); DeJames v.
Magnificence Carriers, Inc., 654 F.2d 280, 284 (3d Cir. 1981).
The Constitutional guarantee of Due Process limits federal
jurisdiction to shield "persons from the judgments of a forum
with which they have established no substantial ties or
relationship." General Elec. Co. v. Deutz Ag, 270 F.3d 144, 150
(3d Cir. 2001). Personal jurisdiction is thus appropriate only
when the defendant has "purposefully established `minimum
contacts' in the forum State." Burger King Corp. v. Rudzewicz,
471 U.S. 462, 474 (1985) (quoting Int'l Shoe Co. v. Washington,
326 U.S. 310, 316 (1945)); World-Wide Volkswagen Corp. v.
Woodson, 444 U.S. 286, 297 (1980) (personal jurisdiction rests
on conduct and connection with forum State such that defendant
"should reasonably anticipate being haled into court there").
Minimum contacts describe actions by which the defendant
"purposefully avails itself of the privilege of conducting
activities within the forum State," and thereby invokes "the
benefits and protections of its laws." Asahi Metal Indus. Co.,
Ltd. v. Superior Court of California, 480 U.S. 102, 109 (1987)
(quoting Burger King, 471 U.S. at 475); Remick v. Manfredy,
238 F.3d 248, 255 (3d Cir. 2001). In addition to adequate minimum
contacts, courts must determine that the exercise of personal
jurisdiction sought by the plaintiff would not offend "traditional notions of fair play and
substantial justice." Burger King, 471 U.S. at 476-77; Int'l
Shoe, 326 U.S. at 316; Remick, 238 F.3d at 255. The
sufficiency of the defendant's minimum contacts with the forum
state will therefore vary with the "quality and the nature of the
defendant's activity." Hanson v. Denckla, 357 U.S. 235, 253
A defendant may be subject to either the general or specific
jurisdiction of the forum state. Helicopteros Nacionales de
Colombia v. Hall, 466 U.S. 408, 414-15 (1984); Deutz,
270 F.3d at 150. Specific jurisdiction describes contacts that are
"purposefully directed" at a resident of the forum state, where
"the injury arises from or is related to those activities."
Deutz, 270 F.3d at 150 (discussing Burger King,
471 U.S. at 472). General jurisdiction exists when a defendant engages in
"continuous and systematic" contacts with the forum state,
whether or not the contacts are related to the injury giving rise
to the cause of action. BP Chems. Ltd. v. Formosa Chem. & Fibre
Corp., 229 F.3d 254, 259 (3d Cir. 2000). The greater reach of
general jurisdiction requires "significantly more than mere
minimum contacts," and the plaintiff seeking to exert general
jurisdiction must show that the defendant's contacts to the forum
are "continuous and substantial." Provident Nat'l Bank,
819 F.2d at 437 (citations omitted).
When a defendant challenges jurisdiction over his person, the
plaintiff has the burden to demonstrate that jurisdiction over the defendant
satisfies the requirements of Due Process. Deutz,
270 F.3d at 150; Carteret Sav. Bank, F.A. v. Shushan, 954 F.2d 141, 146
(3d Cir. 1992); Mellon Bank (East) PSFS, Nat'l Ass'n v. Farino,
960 F.2d 1217, 1223 (3d Cir. 1992). The Third Circuit has stated
that when a challenge to personal jurisdiction is raised, "the
plaintiff must sustain its burden of proof in establishing
jurisdictional facts through sworn affidavits or other competent
evidence," and "at no point may a plaintiff rely on the bare
pleadings alone." Time Share Vacation Club v. Atlantic Resorts,
Ltd., 735 F.2d 61, 66 n. 9 (3d Cir. 1984); see also Stranahan
Gear Co., Inc. v. NL Indus., Inc., 800 F.2d 53, 58 (3d Cir.
Where plaintiffs have not had the opportunity to conduct
jurisdictional discovery, plaintiffs need only make a prima
facie showing that the defendant is subject to personal
jurisdiction in the forum. See, e.g., Bryan v. Assoc.
Container Transp., 837 F. Supp. 633, 639 (D.N.J. 1993). Once
plaintiffs have "established a prima facie case of
jurisdiction, that suffices, regardless of any controverting
presentation by the moving party, to defeat the motion." LaRose
v. Sponco Mfg. Inc., 712 F. Supp. 455, 458 (D.N.J. 1989).
A. KPMG UK's Contacts with the United States
KPMG UK maintains that there is no basis for this Court to
assert general or specific jurisdiction over KPMG UK. According to the declaration
of KPMG UK's Senior Partner Michael Derek Vaughan Rake, KPMG UK
is a partnership organized under the laws of England and Wales.
KPMG UK maintains its principal place of business in London and
has no offices in the United States. (Declaration of Michael
Derek Vaughan Rake, April 8, 2002, ¶¶ 1, 3) ("Rake Decl."). KPMG
UK does not have an agent for service of process in the
United States. (Rake Decl. ¶ 3). On the premises of KPMG UK in London is
an entity known as U.S. Capital Markets Groups. The sole purpose
of that entity with respect to L&H was to assist KPMG Belgium on
technical issues concerning U.S. GAAP. (Rake Decl. ¶ 6).
KPMG UK is a dues-paying member of KPMG. KPMG UK does not own
and is not owned by KPMG. (Rake Decl. ¶ 4). KPMG does not perform
professional services, but instead distributes practice and other
voluntary guidelines that may be followed by member firms that
wish to use the KPMG name. A Membership Agreement and License
Agreement between KPMG UK and KPMG expressly provide that
"[n]othing contained herein shall be construed to place the
parties in the relationship of agents, partners or joint
venturers, and the Member Firm shall have no power to obligate or
bind [KPMG] or any other Member Firm in any manner whatsoever."
(Rake Decl. ¶ 4). KPMG holds itself out as a single, world-wide accounting firm.
For example, KPMG's global brochure states that its global
clients "have extraordinary needs that can be met only by global
advisers operating in a truly integrated fashion." (Hermann
Cert., Ex. 17). KPMG coordinates the provision of services to its
clients through three main operating regions: the Americas,
Europe/Middle East/Africa, and Asia Pacific. (Id.). KPMG offers
"client service teams [that] operate wherever . . . clients need
them," made up of KPMG employees from around the globe. (Hermann
Cert., Ex. 17). KPMG employees rotate on "international
assignments" through the more than 150 countries in which KPMG
has offices. Indeed, KPMG promotes its employees' ability to work
in different offices throughout the globe as an advantage to both
its employees and its clients. As KPMG puts it:
It may be a European carmaker that must align its
financial reporting to U.S. Generally Accepted
Accounting Principles in preparation for trading
shares on U.S. equity markets. . . . Whatever the
case, KPMG puts the right people with the right
skills in the places where our clients need them most
even if it's a world away.
B. Specific Jurisdiction
The Complaint alleges that L&H's independent auditor, Defendant
KPMG Belgium, issued unqualified audit opinions concerning L&H's
consolidated financial statements for the years 1998 and 1999 that falsely
stated that L&H's financial statements fairly presented the
financial position of L&H and were in conformity with US GAAP.
(Am. Compl. ¶¶ 6, 36, 60-61, 110, 115, 134, 136). The Complaint
further alleges that KPMG UK "audited L&H financial statements
with KPMG Belgium and KPMG LLP. (Id. ¶ 25). There are no
specific allegations in the Amended Complaint that KPMG UK issued
any audit opinions or made any statements connected to the L&H
audits. While, at times, the First Amended Complaint uses the
term "KPMG" to refer to both KPMG Belgium and KPMG UK, only one
substantive allegation is specific to KPMG UK, namely, that "a
special KPMG UK division called the U.S. Capital Markets Group
had vetted the [L&H] audits before they were filed with the SEC."
(Compl. ¶ 115). KPMG UK argues that the assertion that a division
of KPMG UK "vetted" a Belgian accounting firm's audits of a
Belgian company is insufficient to establish that KPMG UK
"purposefully established `minimum contacts'" in the
United States or that KPMG UK "`deliberately' ha[d] engaged in
significant activities" there that resulted in Plaintiffs'
alleged injuries. See Burger King, 471 U.S. at 474-76
(citation omitted); see also Weber v. Jolly Hotels,
977 F. Supp. 327, 331 (D.N.J. 1997) (stating that plaintiff must
"establish? with reasonable particularity sufficient contacts
between the defendant and the forum state") (quoting Mellon Bank (E.) PSFS Nat'l Ass'n v. Farino, 960 F.2d at 1223). KPMG
UK thus urges the Court to conclude that there is no specific
jurisdiction over KPMG UK. In any event, KPMG UK denies that any
KPMG UK partner or employee otherwise "vetted" the audits of L&H
for filing with the SEC. (Rake Decl. ¶ 6); see also Remick,
238 F.3d at 259 (dismissing complaint for lack of personal
jurisdiction where affidavits contradicted allegations in
Plaintiffs respond that KPMG UK which holds itself out as a
unified global accounting firm was specifically charged with
insuring L&H's compliance with U.S. GAAP for purposes of the
company's SEC filings and its reports to investors. Plaintiffs
contend that KPMG UK's direct participation in the preparation of
false financial statements to be filed with the SEC and press
releases to be published and disseminated to U.S. investors that
caused significant foreseeable effects in the United States
establishes sufficient contacts with the United States to subject
it to the jurisdiction of this Court. Plaintiffs further contend
that KPMG UK's conduct, although outside of the United States,
directly impacted the price of L&H stock on the NASDAQ exchange
in the United States. Plaintiffs tie KPMG UK's participation to
the conduct of Robert McLamb, a partner who worked during part of
the relevant period out of the U.S. Capital Markets Group in
London. The following specific contacts took place between KPMG
UK and the United States: 1. On July 8, 1998, KPMG UK sent an "Inter-Office Debit Note"
to KPMG Belgium in the amount of £64,750.00 for: "Professional
services rendered by the US Capital Markets Group for the period
from April 1998 to June 1998 in connection with various [Lernout
& Hauspie] SEC filings." (Hermann Cert., Ex. 3);
2. KPMG Belgium included KPMG UK's fees on its invoices to
Lernout & Hauspie. (Hermann Cert., Ex. 4);
3. Invoice noting that KPMG UK rendered "US Tax consulting
services" to Lernout & Hauspie. (Hermann Cert., Ex. 5);
4. KPMG UK participated in the drafting of April 7, 1999 L&H
press release announcing artificially inflated revenues and
provided financial information to be used therein by marking up
and commenting on an L&H press release from the prior quarter.
(Hermann Cert., Ex. 7);
5. L&H's press release regarding revenues and earnings for the
first quarter 1999 was sent to McLamb at KPMG UK for "review" and
"feed back" prior to being issued. (Hermann Cert., Ex. 8);
6. In 1999, KPMG UK participated in the preparation, review,
and revision of L&H's financial statements for the years ending
December 31, 1997 and 1998 and further consented to republication
in later filings with the SEC. (Am. Compl. ¶¶ 51-53, 73-75, 161,
162; Hermann Cert., Exs. 9-12); and
7. "Group Audit Instructions" issued by KPMG Belgium in June
1999 stated that the "SEC reviewing partner [sic] are Bob McLamb
of KPMG US Capital Markets Group London. . . ." (Hermann Cert.,
Ex. 13 at 5). Likewise, "Group Audit Instructions" for the
quarter ending September 30, 1999 stated that "US Capital Markets
Group will be involved in the review of the SEC reporting
issues." (Hermann Cert., Ex. 14).
Based on the foregoing contacts, the Court is satisfied that
there is specific jurisdiction over KPMG UK. "If a party performs
an act that he knows or has good reason to know will have effects in the forum, and if the
exercise of jurisdiction by that forum is not unreasonable, then
personal jurisdiction will lie. . . ." Reingold v. Deloitte
Haskins & Sells, 599 F. Supp. 1241, 1259 (S.D.N.Y. 1984)
(holding Australian accounting firm subject to jurisdiction for
claims arising out of audit report that firm "knew or should have
known" would be incorporated into a U.S. SEC filing); see also
Itoba Ltd. v. LEP Group Plc, 930 F. Supp. 36, 41 (D. Conn.
1996) (holding individual director defendant and UK citizen
subject to jurisdiction in the United States for claims arising
out of his approval of Form 20-F filed with SEC, where evidence
showed defendant wrote letter to Secretary of issuer stating
"Thank you also for Form 20-F which I have received and on which
I have no comment."). Here, Plaintiffs have established at least
a prima facie case that KPMG UK knew or should have known
that its input would be incorporated into a United States
securities filing. While the nature of the relationship between
KPMG UK and U.S. Capital Markets Group of London is not
altogether clear, it is undisputed that KPMG UK invoiced services
performed by KPMG partner McLamb for work on the L&H SEC filings.
(Hermann Decl., Exs. 3-5). Those invoices reflect that KPMG UK
performed work on L&H "SEC filings" and offered "U.S. tax
consulting services." (Hermann Decl., Exs. 3,5). KPMG UK clearly
knew that L&H was trading in the United States and knew of the
SEC's annual filing requirements. Since KPMG UK knew that L&H was
trading in the United States, it should also have known that L&H
shareholders and other United States investors would reasonably
rely on the filings. It follows that KPMG UK could reasonably
expect to be haled into court to answer for its conduct in
connection with the L&H filings. The exercise of jurisdiction
over KPMG UK on the basis of its participation in drafting and
reviewing press releases and financial statements is eminently
C. General Jurisdiction
For the sake of completeness, the Court also will address
whether general jurisdiction exists over KPMG UK. KPMG UK argues
that Plaintiffs have failed to set forth any facts demonstrating
that it engaged in "continuous and systematic" business
activities within the United States sufficient to support a
finding of general jurisdiction. See Helicopteros,
466 U.S. at 416; Remick, 238 F.3d at 255. Furthermore, KPMG UK maintains
that its association with KPMG Belgium, a distinct, legally
independent entity, cannot attribute to KPMG UK any conduct
alleged to have been undertaken by any other KPMG entity.
Plaintiffs counter that KPMG UK's marketing materials and
public statements reveal continuous and systematic contacts with
the United States that support general jurisdiction. KPMG UK
holds itself out to the world as part of an integrated global entity that provides services to its clients
worldwide, and often holds itself out as indistinguishable from
its U.S. counterparts. KPMG employees rotate between their UK and
U.S. offices, and serve together on "global teams" that identify
their members simply as "KPMG partners," without regard to their
national offices. Furthermore, Plaintiffs maintain that KPMG UK
conducts business in the United States of its own accord.
The Court is satisfied that KPMG UK has sufficient contacts
with the United States to support a finding of general
jurisdiction. This is due both to KPMG UK's relationship with
KPMG International and also KPMG UK's conduct of business in the
United States on its own. There can be no doubt that KPMG offices
are integral parts of a single global enterprise that conducts
business in the United States. That KPMG UK deliberately markets
and promotes itself as part of an integrated global network
severely undercuts its present attempt to divest itself of a
relationship with that network in order to defeat the exercise of
personal jurisdiction. See Sleigh Corp. v. Bureau Van Diik,
1996 WL 219638, at *3 (S.D.N.Y. May 1, 1996) ("Reaping the
benefit of this representation [of having a global network], BvD
Belgium cannot now disavow its connection to the same global
network for personal jurisdiction purposes."). Indeed, courts
have found jurisdiction over foreign entities on the basis of
globalization of services. See, e.g., First Am. Corp. v. Price Waterhouse LLP,
988 F. Supp. 353, 362 (S.D.N.Y. 1997), aff'd, 154 F.3d 16 (2d Cir. 1998)
(finding Price Waterhouse partnership in New York acted as agent
for purposes of personal jurisdiction over Price Waterhouse
partnership in United Kingdom).
Relatedly, KPMG UK's argument that there is no legal
relationship between it and KPMG International is unavailing. For
purposes of personal jurisdiction, a resident entity need not
bear an official agency relationship to the foreign defendants,
see Tuxxedo Network, Inc. v. Hughes Communications Carrier,
753 F. Supp. 514, 517 (S.D.N.Y. 1990), nor even any legal
relationship at all to the foreign defendant, Volkswagen de
Mexico, S.A. v. Germanischer Lloyd, 768 F. Supp. 1023, 1027
(S.D.N.Y. 1991); Price Waterhouse LLP, 988 F. Supp. at 362. Nor
is it a requirement that a foreign defendant exercise direct
control over the onshore agents. Palmieri v. Estefan,
793 F. Supp. 1182, 1194 (S.D.N.Y. 1992); Bialek v. Racal-Milgo, Inc.,
545 F. Supp. 25, 32 (S.D.N.Y. 1982). Moreover, there need be no
"financial or proprietary relationship" between the parties such
as a division of profits and losses. Intel Containers Int'l
Corp. v. Atlanttrafik Express Serv., Ltd., 116 F.R.D. 477, 481
(S.D.N.Y. 1987). But see In re Lernout & Hauspie Sec. Litig.,
230 F. Supp. 2d 152, 170 (D. Mass. 2002) (rejecting global entity
theory as a basis for liability to attach to KPMG UK for other
KPMG entities' acts and statements).
Price Waterhouse LLP decisions are directly on point and lend
support to the Court's finding of general jurisdiction over KPMG
UK. Price Waterhouse services its clients through a global
network consisting of international member offices. In instances
of an assignment requiring work to be done in another country, a
member office in that country undertakes the work on behalf of
the primary office and under the supervision of a global
engagement partner. See Price Waterhouse LLP,
988 F. Supp. at 361-62, 363; Price Waterhouse LLP, 182 F.R.D. at 57-58; Price
Waterhouse LLP, 1998 U.S. Dist. LEXIS 3936, at *9. Similarly,
KPMG's global network allows KPMG UK to offer services in the
United States to its global clients through the KPMG
United States offices that, without its close relationship to the
United States offices, KPMG UK itself would have to undertake in the
United States. The rationale employed in the Price Waterhouse
decisions is thus apt:
Although PW-UK and PW-US have denied any partnership,
and asserted that they exist as separate firms
bearing the same name, their coordinated activities
indicate an affiliation closer than that of unrelated
corporations. This affiliation may not amount to one
of parent and subsidiary, or common ownership, but it
lends its weight to a determination that personal
jurisdiction may be imposed over PW-UK based on its
activities in the United States conducted through
PW-US. Price Waterhouse LLP, 988 F. Supp. at 363.
KPMG UK also conducts business on its own in the United States.
KPMG UK advertises its close relationship with U.S. offices so as
to provide client services wherever and whenever needed and hosts
"a team of 20 staff in the U.S.A., . . . working alongside
company executives." (Hermann Cert., Ex. 21). KPMG UK also sends
its own employees to the United States as part of KPMG's
international rotation and global programs. (Hermann Cert., Ex.
17). KPMG UK also hosts U.S. GAAP briefing meetings "[t]ailored
primarily for the overseas operations of US companies."
(Hermann Cert., Ex. 25 (emphasis in original)). As for business
holdings, KPMG UK holds 60.4% of the shares of the
United Statesbased KPMG Corporate Finance LLC, (Hermann Cert., Exs. 21,
27), and has substantial equity interests in other U.S. based
corporations (Hermann Cert., Ex. 28).
The Court concludes that Plaintiffs have established a prima
facie case that KPMG UK is doing business in the United States to
a degree that renders it fair and reasonable for this Court to
exercise jurisdiction. Cf. Cromer Fin. Ltd. v. Berger,
137 F. Supp. 2d 452, 477-78 (S.D.N.Y. 2001) (holding Ernst & Young
Bermuda subject to general jurisdiction where it was, among other
things, actively involved in E&Y International network, received
two employees from U.S. offices as part of a Global Exchange Program, attributed 30% of its
business to multinational clients whose accounts were managed by
a "global account partner" some of whom were in the U.S., and had
clients who were audited in accordance with GAAP and who filed
financial statements with SEC).
II. Motion to Dismiss Pursuant to Federal Rules of Civil
Procedure 12(b)(6) and 9(b)
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.
A. Section 10(b) and Rule 10b-5 Claims
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)).
There is no aiding and abetting liability in Section 10(b)
actions. Central Bank of Denver v. First Interstate Bank of
Denver, 511 U.S. 164, 177 (1994).
KPMG UK 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) the
allegations against KPMG UK identify no misstatements or
omissions by KPMG UK and at most amount to aiding and abetting
liability, which is no longer actionable as to 10(b) claims; (2)
the claims fail to satisfy the heightened pleading requirements
of Rule 9(b) and the PSLRA because they lack the required
specificity as to KPMG UK; (3) the Amended Complaint fails to
allege that KPMG UK or any of its personnel acted with the
requisite scienter; and (4) the amended complaint does not allege
Plaintiffs counter that KPMG UK 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 UK allegedly passed information to KPMG Belgium
that was ultimately incorporated into L&H's financials.
Plaintiffs argue that KPMG UK's involvement is not "aiding and
abetting" liability and the 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. . . .'"); ¶¶
211-12 (McLamb's knowledge of improper recognition of revenue
with four supposed "customers"); and ¶ 227 (McLamb's knowledge of
a single, lump-sum payment from a third-party source, to pay
debts owed by several start-up "customers"). It is specifically
alleged that McLamb "actually prepared and provided certain
amounts and disclosures to L&H's 1998 financial statements." (Am.
Compl. ¶ 192).
There is no allegation that KPMG UK actually signed any of the
audit reports or was listed in L&H's financial disclosures as a
principal auditor. Many of the allegations that KPMG UK, via McLamb, knew of or reviewed
certain documents at most amount to aiding and abetting. However,
in ¶ 192, it is alleged that McLamb prepared certain parts of the
1998 financial statements. 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), held 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." In contrast, 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."). Plaintiffs point out and
Defendants do not dispute that the Third Circuit has not adopted
this 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).
The Court is persuaded that the "public attribution"
requirement espoused by the Second and Eleventh Circuits and
district courts in this Circuit should be applied here. Because
there is no allegation that the public would attribute misleading
statements to KPMG UK at the time Plaintiffs made their
investment decisions (presumably, to cover their short sales), it
is thus clear that KPMG UK was not publicly attributed 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).
However, even assuming that McLamb's alleged role in preparing
false statements were sufficient to trigger primary liability
under Rule 10b-5, the Court concludes that his participation is
not sufficient to trigger liability on the part of KPMG UK.
Defendants argue, with no substantive opposition from
Plaintiffs, that the allegations concerning McLamb are insufficient to trigger
liability on the part of KPMG UK for several reasons. First, the
Third Circuit does not recognize agency and respondeat superior
liability under Section 10(b). Rochez Bros., Inc. v. Rhoades,
527 F.2d 880, 883-86 (3d Cir. 1975); see also In re Prudential
Ins. Co. of Am. Sales Practices Litig., 975 F. Supp. 584, 612-13
(D.N.J. 1997). Second, even if the Third Circuit did recognize
such liability, McLamb's professional relationship with KPMG UK
is not at all clear from the Amended Complaint. There are no
allegations that McLamb was employed by KPMG UK, in an employee
or partner capacity, or that he was doing work for them. At most,
the allegations speak to his physical location at KPMG UK during
an unspecified time period. Plaintiffs' allegations that McLamb
"worked with L&H . . . from both the UK and US offices" (Am.
Compl ¶ 37) or was "based in" the US Capital Markets Group does
not make clear how it is that KPMG UK could be liable. Rather,
the allegations lapse into referring to KPMG as a global entity.
Plaintiffs argue that KPMG Defendants are a "single entity"
that effectively operate as one international auditing firm.
(E.g., Am. Compl. ¶¶ 182-84; Pls.' Omnibus Opp. Br. at 62
("[I]t is KPMG itself which holds itself out to the world as "One
Firm," with accountants in offices world wide available to assist
in servicing clients.")). This is contradicted by KPMG's website,
which states KPMG International is a Swiss Verein of which all
KPMG firms are members. Each member firm is a
separate and independent legal entity (none is a
parent, subsidiary or affiliate of another) and each
describes itself as such (e.g., "KPMG LLP, a U.S.
limited liability partnership, is a member of KPMG
International" or "KPMG LLP, the U.S. member firm of
(May 8, 2002 Meisels Decl., Ex. A).*fn6 Plaintiffs'
references to KPMG in the collective sense are simply too vague
to meet the particularity requirements of Rule 9(b). KPMG
entities are legally independent of each other, and affiliated
only by virtue of collaborative efforts and common membership.
Holding KPMG UK liable for misstatements by virtue of another
KPMG entity's action runs contrary to the particularity demanded
of this sort of securities claim.
Plaintiffs further argue that there were additional
misstatements in that the L&H 1998 financial statement was
republished in a 2000 Registration Statement and that KPMG was
involved in reporting record revenues for 1999 that were
described in a February 9, 2000 press release. Here again, these
statements are not publicly attributable to KPMG UK in any
meaningful way. Even if Plaintiffs' allegations were sufficient to allege
material misrepresentations or omissions on the part of KPMG UK,
the allegations still fail for lack of the requisite scienter, to
which the Court now turns.
The scienter threshold contemplates "`a mental state embracing
intent to deceive, manipulate or defraud.'" In re Ikon Office
Solutions Inc., 277 F.3d 658, 667 n. 7 (3d Cir. 2002) (quoting
Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193 n. 12 (1976)).
KPMG UK argues that the Amended Complaint fails to state a
claim against it because it does not meet the "exacting
threshold" that requires Plaintiffs to allege with particularity
facts giving rise to a strong inference of scienter, i.e.,
facts "establishing a motive and opportunity to commit fraud" or
"constitut[ing] circumstantial evidence of either reckless or
conscious behavior." In re Advanta, 180 F.3d at 534-35.
This Court finds the allegations insufficient to meet the
scienter requirement as to KPMG UK via US Capital Markets Group
or McLamb. The allegations informing the scienter inquiry are
generally attributed to a global "KPMG" entity, as opposed to
particular member entities. See, e.g., Am. Compl. ¶¶ 182-268.
The only scienter-type allegations specific to KPMG UK via McLamb
appear to be post-issuance of the audit opinion on June 30, 1999. (E.g., Am.
Compl. ¶¶ 211-13 (discussing January 5, 2000 email authored by
McLamb signaling knowledge that certain agreements were in direct
contravention of GAAP)). None of the allegations that Plaintiffs
urge in support of the scienter requirement relate to the period
preceding KPMG Belgium's certification of L&H 1998 financial
statements in April 1999, or their subsequent filing in June
1999. Also, none of the allegations relate to any revenue L&H
recorded in 1998. Accord Lernout & Hauspie Securities Litig.,
230 F. Supp. 2d at 169 (finding insufficient allegations
concerning scienter as to KPMG UK).
2. Loss Causation
KPMG UK further argues that the Amended Complaint does not
support "loss causation" because it does not "demonstrate that
the fraudulent conduct proximately caused or substantially
contributed to causing plaintiff's economic loss." Newton v.
Merrill Lynch, Pierce, Fenner & Smith, Inc., 259 F.3d 154, 177,
181 n. 24 (3d Cir. 2001). The argument basically goes that
numerous alleged intervening events render it "implausible" that
the audit opinion on the 1998 financial statements could amount
to a "substantial" factor in forcing Plaintiffs to cover their
short positions beginning in late December 1999 and continuing
through March 2000. Having already concluded that the allegations in the Amended
Complaint are not sufficient to allege a Section 10(b) claim
against KPMG UK, the Court need not resolve the issue of loss
causation. However, if it were to reach the issue, the Court
would hold that the Amended Complaint supports loss causation.
"[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."*fn7 Id. at 1634.
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 fraudon-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
B. State Law Claims
The Amended Complaint alleges state law claims against KPMG UK
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 dismissed the Section 10(b) claims
against KPMG UK, the Court will not exercise supplemental
jurisdiction over the remaining state law claims against KPMG UK. 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
For the foregoing reasons, KPMG UK's Motion to dismiss the
Amended Complaint for lack of personal jurisdiction will be
denied and its Motion to dismiss the Amended Complaint for
failure to state a claim will be granted.
Accordingly, IT IS on this 7th day of June 2005,
ORDERED that the Motion of Defendant KPMG UK to dismiss the
Amended Complaint pursuant to Federal Rule of Civil Procedure
12(b)(2) is denied; and it is further ORDERED that the Motion of Defendant KPMG UK to dismiss the
Amended Complaint pursuant to Federal Rules of Civil Procedure
12(b)(6) and 9(b) is granted.