IN RE EBIX, INC. SECURITIES LITIGATION
IN RE: EBIX, INC. SECURITIES LITIGATION.
Civil Action No. 1:11-CV-02400-RWS.
United States District Court, N.D. Georgia, Atlanta Division.
September 28, 2012.
ORDERRICHARD W. STORY, District Judge.
This case comes before the Court on Defendants' Motion to Dismiss Consolidated Amended Complaint [28-1]. After reviewing the record, the Court enters the following Order.
BackgroundThis is a consolidated securities class action. Plaintiffs bring claims under §§ 10(b) and 20(a) of the Securities Exchange Act of 1934 (hereinafter "Exchange Act"), 15 U.S.C. §§ 78j(b) and 78t(a), and Securities and Exchange Commission (hereinafter "SEC") Rule 10b-5, 17 C.F.R. § 240.10b-5, promulgated thereunder. Plaintiffs represent all persons who purchased or otherwise acquired Ebix, Inc. common stock between May 6, 2009 and June 30, 2011 (the "Class Period"). Defendants are Ebix, Inc., Robin Raina (Chief Executive Officer of Ebix during the Class Period), and Robert Kerris (Chief Financial Officer of Ebix during the Class Period).
I. Summary of Factual Allegations
Plaintiffs, in their Consolidated Amended Complaint (hereinafter "CAC") [22], allege Ebix, Inc. and Defendants Raina and Kerris (hereinafter "Individual Defendants") made a series of statements that misled investors and artificially increased the value of Ebix securities in violation of §§ 10(b) and 20(a) of the Exchange Act and SEC Rule 10b-5. The facts discussed below come entirely from Plaintiffs' CAC and are taken as true. Ebix supplies software and e-commerce solutions to the insurance and financial industries. Plaintiffs allege that Defendants made materially misleading statements regarding Ebix's foreign tax strategy, internal controls, and organic growth rate in violation of federal securities laws. Defendants' misrepresentations in these areas resulted in overstatement of Ebix's net income and dilution of earnings per share. According to Plaintiffs, the truth about these aspects of Ebix's business was revealed to the market on March 24, 2011 in a research report published by Seeking Alpha (a blog covering stock market news and financial analysis) and carried by Bloomberg. That day, Ebix share prices fell 25.8% (to $22.52, down from an intraday, class period high of $30.35). On June 30, 2011, Bloomberg disclosed that former shareholders of a company acquired by Ebix had sued Ebix. That article reiterated much of the information published by the Seeking Alpha blog three months earlier. On that date, stock prices fell further — to $19.05, down 6% from an intraday high of $20.93.
1. The COSO Report was issued in September 1992. According to the CAC, Gene rally Accepted Auditing Standards ("GAAS") are based on the internal control framework set out in the COSO Report. [22] at 30 n. 9.
2. "Rollup" companies are those that purchase many smaller, related companies in order to create economies of scale and reduce costs. Between 2008 and 2010, according to the CAC, Ebix acquired eleven companies, several of which were based abroad. [22] at 15-18.
3. This language regarding analyzing accounts receivable appears in every quarterly and annual report filed by Defendants during the Class Period except the third quarter report in 2009.
4. This language regarding evaluation of Ebix's internal controls is also included in successive filings during the Class Period.
5. This is particularly problematic given that auditing firms previously hired by Ebix had identified serious concerns with Ebix's internal controls. These concerns are addressed more fully below in the discussion on scienter.
6. There is no per se rule requiring securities fraud complaints to name confidential sources. "The weight to be afforded to allegations based on statements proffered by a confidential source depends on the particularity of the allegations made in each case, and confidentiality is one factor that courts may consider. Confidentiality, however, should not eviscerate the weight given if the complaint otherwise fully describes the foundation or basis of the confidential witness's knowledge, including the position(s) held, the proximity of the offending conduct, and the relevant time frame." Mizzaro, 544 F.3d at 1240. Here, when relying on statements of confidential witnesses, the CAC identifies the position(s) and responsibilities of the witnesses, their term of employment, and the witness' direct observations of the offending conduct.
7. When Defendant Raina responded to the Barron's article, he represented that "receivables in India are now down to $2 million." However, Ebix had purchased derivative instruments "to hedge the intercompany receivables originated by our Indian subsidiary," which Defendants valued at $23.7 million in the second quarter of 2011. [22] at 51-52.
8. Allegations concerning conduct occurring before the Class Period are not fatal to Plaintiffs' claims regarding scienter. See In Re Friedman's Inc. Secs. Litig., 385 F.Supp.2d 1345, 1366 (N.D. Ga. 2005) (Duffey, J.).
9. An individual defendant's certification of a company's financial statements "is only probative of scienter if the person signing the certification was severely reckless in certifying the accuracy of the financial statements." Garfield v. NDC Health Corp., 466 F.3d 1255, 1265 (11th Cir. 2006). This requirement is satisfied "if the person signing the certification had reason to know, or should have suspected, due to the presence of glaring accounting irregularities or other `red flags,' that the financial statements contained material misstatements or omissions. Id. Here, "red flags" existed before and during the Class Period. Defendants knew that KPMG and BDO found significant problems with Ebix's internal controls. Additionally, Defendants were alerted to problems during the Class Period by internal sources.
10. While alleged GAAP or GAAS violations do not alone create a strong inference of recklessness, when combined with a "drastic overstatement of accounts" or other "red flags," there may be enough to establish the requisite level of scienter. Garfield, 466 F.3d at 1268-70; see also In Re Friedman's, 385 F. Supp. 2d at 1361 ("Relevant facts are the magnitude of the accounting error, whether the defendants had prior notice of the error, and whether the defendants played any role in calculating and disseminating the financial statement.") (internal citations omitted). The amount of unpaid receivables from Ebix U.S. vis-a-vis revenue of the Indian subsidiaries raises a serious accounting red flag. And Defendants were aware of other red flags regarding Ebix's tax strategy and income tax provisions. In 2003, KPMG identified a "reportable condition" with regard to "the lack of a complete understanding of the Company's tax positions and related accounts." [22] at 20. Then in 2004, BDO identified as a "significant deficiency" a "lack of documentation to support the Company's income tax provisions and related accounts." [22] at 22.