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ROCKER MGMT., L.L.C. v. LERNOUT & HAUSPIE SPEECH PRODUCTS N.V.

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, 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 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 are, as noted, taken from the Amended Complaint and supporting affidavits/declarations.*fn4

  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 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 ("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.).

  ANALYSIS

  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 (1958).

  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. 1986).

  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 ...

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