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IN RE PSS WORLD MEDICAL, INC. SECURITIES LIT.
250 F.Supp.2d 1335 (2002)
United States District Court, M.D. Florida, Jacksonville Division.
August 1, 2002.
Lastly, because for the above reasons the Plaintiffs have failed to properly allege a violation of Section 10(b) of the Securities and Exchange Act, the Defendants contend that the Plaintiffs cannot maintain an action against the Individual Defendants under Section 20(a) of the Act. Id. at 29-30; Theoharous, 256 F.3d at 1227; In re Sunterra, 2002 WL 480620 at *26; Holmes, 166 F.Supp.2d at 1382. Because the Plaintiffs have failed to describe any wrongful acts with the required level of specificity, particularly with respect to Defendant Dell, the Defendants urge this Court to dismiss the claims against the Individual Defendants. See also In re Towne Svcs., 184 F.Supp.2d at 1328; In re JDN Realty Corp., 182 F.Supp.2d at 1249. B. The Plaintiffs' Response The Plaintiffs counter the Defendant's Motion by arguing that the Amended Complaint specifically sets forth material financial amounts that were overstated or misrepresented by the Defendants, and that the Defendants' violations of GAAP fraudulently inflated the value of the company's stock that later collapsed, causing the Plaintiffs injury. (Dkt. 40, pp. 3-6; Dkt. 29, Ex. A). The Plaintiffs claim that the fraudulent statements made by the Defendants regarding each financial quarter involved, detailed above, more than adequately allege GAAP violations that involved material amounts, causing an inflation of PSSI's stock price that would constitute securities fraud. (Dkt.40, pp. 3-6). Moreover, the Plaintiffs strenuously argue that the Amended Complaint adequately pleads scienter to withstand the Motion to Dismiss. In essence, the Plaintiffs claim that their allegations that the Defendants had the motive to inflate PSSI's stock price to entice a potential buyer for the company, and that the company
"cooked its books" in order to achieve the necessary reporting results, which ultimately led to the termination of the merger with Fisher and the firing of key officers, are more than sufficient allegations of scienter. Id. at 7-8. Furthermore, the Plaintiffs state that they have sufficiently alleged that such improprieties, which artificially inflated PSSI's stock price and ultimately led to the Plaintiffs' injuries, occurred under the direction and participation of the Individual Defendants. Id. at 8-11. The Plaintiffs allege that the Individual Defendants, as controlling officers of PSSI, were involved in drafting, producing, reviewing and disseminating the false and misleading statements highlighted above, as well as directing PSSI personnel to engage in GAAP violations and other improprieties. Id. In addition, the Plaintiffs contend that the "group pleading doctrine" applies to cover the allegations against all Individual Defendants based on the collective actions of PSSI's officers in the dayto-day management and control of the company. Id. at 16-17; In re Checkers Sec. Litig.,858 F.Supp. 1168, 1178 (M.D.Fla.1994); In re Sunbeam Sec. Litig.,89 F.Supp.2d 1326, 1341 (S.D.Fla. 1999). Accordingly, the Plaintiffs contend that these allegations are sufficient to satisfy the intent or "severe recklessness" scienter pleading requirements of the Federal Rules and the PSLRA. Contrary to the Defendants' argument, the Plaintiffs claim that the safe harbor for so-called "forward looking" statements does not apply to the statements which form the basis of the Amended Complaint. In the Plaintiffs' view, the statements at issue reflect current reported financial results for PSSI, and as such they are not "forward looking." (Dkt.40, pp. 18-19). Because the Plaintiffs are claiming these current financial results were fraudulent and in violation of GAAP, they allege that the Defendants are not protected by any safe harbor, even given the purported inclusion of "boilerplate cautionary language" in the statements. Id.; In re Sunbeam, 89 F.Supp.2d at 1341; In re Donald J. Trump Casino, 7 F.3d at 371 (3d Cir. 1993). Plaintiffs also dispute the Defendants' contention that they must name their confidential sources who provided the information that formed the basis of the allegations in the Amended Complaint, arguing that Rule 9(b) and federal courts do not require specific disclosure of such sources. See, e.g., In re Paradyne Networks, Inc. Sec. Litig.,197 F.Supp.2d 1349 (M.D.Fla. 2002); In re Hamilton Bancorp., Inc. Sec. Litig.,194 F.Supp.2d 1353, 1358 (S.D.Fla. 2002); In re Towne Svcs., 184 F.Supp.2d at 1316-18. Although the Eleventh Circuit has not explicitly ruled on this issue, according to the Plaintiffs the seminal case Novak v. Kasaks,216 F.3d 300 (2nd Cir. 2000), adopted by a number of federal courts, explicitly holds that such specific identification of confidential sources is not required by the federal rules or the PSLRA. See also In re Theragenics Corp., 105 F.Supp.2d at 1355; Holmes, 166 F.Supp.2d at 1362. As such, the Plaintiffs claim that they have "alleged in detail information about the sources of the facts alleged that is more than sufficient to establish their credibility and reliability," and therefore the Amended Complaint should not be dismissed on this ground. (Dkt.40, p. 21).2
1. The Individual Defendants are Patrick C. Kelly, founder and longtime Chief Executive Officer of PSSI, Frederick E. Dell, former Chief Executive Officer of PSSI, and David A. Smith, former Executive Vice President and Chief Financial Officer of PSSI and the company's current Chief Executive Officer. All three Individual Defendants owned significant shares of PSSI stock during the Class Period, but it is not alleged that they sold any of their shares during the Class Period. 2. The confidential sources in the Plaintiffs' Amended Complaint are described as formerly holding a variety of positions within the company, including several physician sales branch managers, physician sales leaders, operations managers, physician sales representatives, controllers, accountants, and customer service representatives. During oral argument, the Plaintiffs' counsel argued that more than twenty people throughout the country were interviewed in preparation for drafting the complaint, all of whom claimed the company "cooked the books" and pressured its employees to create financial results that were better than the actual revenue earned by PSSI. 3. The Defendants claim that based on the language of its opening paragraph, the entire Amended Class Action Complaint is based on "information and belief" with no factual support by the Plaintiffs, but the Court finds this contention to be without merit. Instead, the opening paragraph specifically states that the Plaintiffs are making their allegations "upon personal knowledge as to their own acts and upon the investigation conducted by their counsel, which included, among other things, a review of the public announcements made by the defendants, Securities and Exchange Commission (`SEC') filings, press releases, media reports, discussions with consultants and others in the industry regarding PSS World Medical, Inc.... and interviews of former employees of the Company ..." (Dkt.29, p. 1).
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